<PAGE> 1
Filed Pursuant to
Rule 424(b)(4)
Registration No. 333-4600
1,750,000 SHARES
FORCENERGY INC
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
All of the shares offered hereby are being sold by certain former
shareholders of Ashlawn Energy, Inc. ("Ashlawn"), who received the shares of
Common Stock as consideration for the Company's acquisition of Ashlawn (the
"Selling Stockholders"). The Company will not receive any proceeds from the
sale of the shares by the Selling Stockholders.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
The Common Stock is listed on the Nasdaq National Market under the Symbol
"FGAS". On June 13, 1996, the last reported sales price for the Common Stock
on the Nasdaq National Market was $14 1/4 per share.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-
SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Initial Public Underwriting Proceeds to
Offering Price Discounts (1) Selling Stockholders
-------------- ------------- --------------------
<S> <C> <C> <C>
Per Share .. . . . $14.125 $0.42 $13.705
Total(2) .. . . . $24,718,750 $735,000 $23,983,750
</TABLE>
- ----------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting".
(2) The Selling Stockholders have granted to the Underwriter an option for 30
days to purchase up to an additional 250,000 shares of Common Stock at the
initial public offering price per share, less the underwriting discounts,
solely to cover over-allotments. If such option is exercised in full, the
total initial public offering price, underwriting discounts and proceeds to
the Selling Stockholders will be $28,250,000, $840,000 and $27,410,000,
respectively. See "Underwriting".
-------------------------
The shares offered hereby are offered by the Underwriter, subject to
receipt and acceptance by it and subject to its right to reject any order in
whole or in part. It is expected that certificates for the shares will be
ready for delivery in New Orleans, Louisiana on or about June 20, 1996.
HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED
-------------------------
The date of this Prospectus is June 14, 1996.
<PAGE> 2
FORCENERGY INC
GULF OF MEXICO PROPERTIES
Description of Pictures -- Map -- Coast of Texas, Louisiana, Mississippi and
part of Alabama. Shows in green land and cities of Houston, Texas and Lafayette
and New Orleans, Louisiana. Shows in light blue the Shelf area offshore, in
medium blue the Flextrend area offshore and in darker blue the Deepwater area
offshore. Traces the boundaries of and states the names for offshore areas,
including: Galveston Island Area, High Island Area, West Addition, East Cameron
Area, Vermilion Area, South Marsh Island Area, Eugene Island Area, Ship Shoal
Area, South Timbalier. Ewing Bank Area, South Palto, Grand Isle, West Delta
Area, South Pass Area, Main Pass Area, Chandeleur Area, East Addition, Viosca
Knoll and Mississippi Canyon. Lease blocks in which the Company has interest
are marked with triangles and footnoted as such. Operated and non-operated
lease blocks are differentiated by the color of the triangles.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, included
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes that the Underwriter's over-allotment option will not
be exercised. In addition, unless otherwise specified, all numbers of shares
and per share amounts have been restated to reflect the conversion and
reclassification of each outstanding share of common stock of the Company into
98.337 shares of Common Stock, par value $.01 per share, ("Common Stock")
effected immediately prior to the Company's initial public offering in August
1995 (the "Initial Public Offering"). Investors should carefully consider the
information set forth under "Risk Factors." Oil and gas industry terms used in
this Prospectus are defined in "Glossary of Oil and Gas Terms."
THE COMPANY
Forcenergy Inc ("Forcenergy" or the "Company") is an independent oil and
gas company engaged in the development, exploration, acquisition and production
of domestic oil and natural gas properties. The Company has experienced
significant growth in the last five years, primarily through the acquisition of
working interests in producing properties in the Gulf of Mexico. At December
31, 1995, the Company had net proved reserves of 365 Bcfe, 71% of which were
located in the Gulf of Mexico. Approximately 60% of the Company's net proved
reserves on such date were natural gas and approximately 69% of proved reserves
were classified as proved developed. The Company operates approximately 79% of
its Gulf of Mexico production.
Strategy. The Company's business strategy is to increase its reserves and
cash flow through the development, exploration and exploitation of its existing
producing properties in the shallow waters (less than 350 feet) of the Gulf of
Mexico. Management believes that the Company's acquisitions to date have
positioned it for such growth through a program of development and selective
exploratory drilling. The Company emphasizes the use of 3-D seismic and
computer-aided exploration technology together with geologic and engineering
studies of its properties to evaluate and prioritize drilling prospects.
Focusing drilling activities on producing properties in a relatively
concentrated area in the Gulf of Mexico permits the Company to utilize its base
of geological, engineering and production experience in the region to maximize
drilling success and to minimize finding and development costs. The Company
plans to continue to pursue acquisitions of working interests in producing
properties that offer further development potential as well as providing
operating synergies with existing properties.
Quality of Asset Base; Drilling Prospects. The Company holds interests in
or rights to 51 lease blocks in federal and state waters in the Gulf of Mexico,
including a 100% working interest in 26 lease blocks and a 50% or greater
working interest in 12 other lease blocks. The Company believes it has
assembled a three to five year inventory of development, exploitation and
exploratory drilling opportunities in the Gulf of Mexico on acreage held by
production. Most of the properties comprising this inventory are located in
fields which have prolific production histories and which the Company believes
will yield significant additional reserves through the application of modern
exploration and development technologies. The Company is pursuing the
development of these offshore properties through a combination of development
drilling, recompletions and workovers and exploratory drilling. During 1995,
the Company successfully drilled seven of nine exploratory wells and ten of ten
development wells in the Gulf of Mexico and undertook eight recompletions and
24 workover projects resulting in initial net production increases of 4,392
Bbls/d of oil and 27,496 Mcf/d of gas. The Company plans to drill 19
development wells, eight of which have been successfully completed, and
undertake 14 recompletions and 16 workover projects on its properties in the
Gulf of Mexico during 1996. In addition, ten exploratory wells have been
scheduled during the year to provide the Company with exposure to higher risk,
higher potential prospects. Two of these wells have been successfully
completed. The Company anticipates that approximately $70 million of its $88
million 1996 capital expenditure budget will be spent on these offshore
projects, not including acquisition expenditures.
Control of Operations and Costs. The Company prefers to operate its
offshore properties in order to more effectively manage production performance
while controlling operating expenses and the timing and amount of capital
expenditures. Forcenergy operates 78 structures and 188 wells in the Gulf of
Mexico. Management
3
<PAGE> 4
believes that the operating expertise and experience of its personnel in the
Gulf of Mexico have been instrumental in its ability to significantly enhance
and improve production rates and cash flow with minimal additional costs. A
significant portion of the drilling prospects the Company expects to pursue
during the next three to five years are accessible from existing production
facilities operated by the Company. This base of operations will enable the
Company to reduce its per unit operating costs if higher production volumes are
realized. As a result of these factors, the Company improved its lease
operating expense from $.86 per Mcfe of production in 1994 to $.70 per Mcfe of
production in 1995.
Technology. The Company uses advanced technology in its exploration and
development activities in order to reduce drilling risks and finding costs and
to more effectively prioritize drilling prospects based on return potential.
The Company has acquired 3-D seismic surveys on 50 offshore lease blocks and
currently has 390 square miles of 3-D seismic data and 1,540 linear miles of
2-D seismic data on its offshore properties. The Company has six
geologists/geophysicists with average industry experience of 16 years and has
invested in five Landmark geophysical stations for use in interpreting 3-D
seismic data. The ability to obtain 3-D seismic data for offshore properties
at reasonable costs has enabled the Company to identify multiple development
and exploratory prospects in mature producing fields which were not identified
through earlier technologies.
Recent Acquisitions. During 1995, the Company spent an aggregate of
approximately $92.1 million for working interests in 15 different fields that
added 121.9 Bcfe of net proved reserves to its reserve base at an average cost
of $.76 per Mcfe. Approximately $81.6 million of such expenditures were for
interests in 10 properties located in the Gulf of Mexico.
In March 1995, the Company acquired working interests in the South Marsh
Island 136/137 Field and the northern half of South Marsh Island 106 from
Conoco, Inc. (the "Conoco Acquisition") for consideration of $24.5 million. In
April 1995, the Company acquired all the remaining working interests in the
northern half of South Marsh Island 106. The foregoing acquisitions were
particularly attractive because both fields are adjacent to fields in which the
Company holds 100% working interests. The Company had an active drilling
program in Block 106 in 1995 and will have at least one rig in the block for
all of 1996. See "Business -- 1995 Drilling Program."
In August 1995 in conjunction with the Initial Public Offering, the Company
acquired all of the outstanding capital stock of Ashlawn Energy, Inc.
("Ashlawn") a privately held Company with substantial working interests in the
South Pass 24 Field, Vermilion 28 Field and Ship Shoal 26 Field (the "Ashlawn
Acquisition"). The purchase price for the Ashlawn Acquisition consisted of
3,000,000 shares of Common Stock, $3.3 million in cash and the assumption of
$5.7 million in debt. All of the assumed debt was repaid with the proceeds of
the Initial Public Offering. All of the shares included in this offering are
being sold by the former stockholders of Ashlawn. The Company conducted an
active drilling program on these properties in 1995 and expects to continue to
pursue additional development projects on the properties in 1996. See
"Business -- 1996 Offshore & Gulf Coast Drilling Activity".
In November 1995, the Company acquired an approximate 50% working interest
in certain leases in the Howard Glasscock/Snyder fields in Howard County, Texas
from Saga Petroleum, Inc. for approximately $3.9 million. The Company's 1996
capital budget includes $1.9 million for its pro rata share of drilling
injection wells to initiate a waterflood recovery project in the field.
In December 1995, the Company acquired, by purchase and simultaneous swap
in two transactions, an approximate 50% working interest in the Vermilion 261
Field (increasing its total working interest ownership in the field to 75%) and
a 100% working interest in the Vermilion 262 Field for $830,000 in cash and the
exchange of the Company's interest in the Eugene Island 24 Field it acquired in
February 1995.
In late 1995, the Company acquired a 100% working interest in the Vermilion
Block 380 Field, located offshore Louisiana, from Texaco Exploration and
Production, Inc. for approximately $650,000. Effective December 1995, the
Company also acquired a 100% working interest in the West Cameron 630 Field,
located
4
<PAGE> 5
offshore Louisiana and an approximately 51.7% working interest in the Comite
Field in East Baton Rouge Parish, Louisiana from Exxon Corporation for
approximately $3.9 million.
As is customary in the oil and gas industry, the Company from time to time
submits bids on oil and gas properties. The Company currently has executed
purchase and sale agreements with two parties for the acquisition of properties
in the Gulf of Mexico and West Texas for consideration of approximately $11.2
million and $3.6 million, respectively. Such agreements are subject to the
completion of satisfactory due diligence by the Company including title and
environmental due diligence. There can be no assurance that any of such
transactions will be consummated.
Onshore Properties. The Company also owns working and royalty interests in
approximately 1,328 producing oil and gas wells in over 147 fields in the Rocky
Mountain, Gulf Coast, Southwest and Appalachian regions of the United States.
Management believes that the Company's stable reserve base of long-lived,
primarily non-operated, onshore properties complements the Company's Gulf of
Mexico operations by providing an additional source of cash flow which requires
limited management involvement. The Company's onshore properties accounted for
approximately 29% of net proved reserves at December 31, 1995. During 1995,
the Company expended approximately $4.0 million in capital on its onshore
properties, including $3.7 million for drilling and recompletion activities.
Principal Securityholders. Approximately 49.5% of the Company's Common
Stock is held by Forcenergy AB ("FAB"), the B shares of which are listed on the
Stockholm (Sweden) Stock Exchange. The Forss family beneficially owns a 48.8%
voting interest in FAB. Pursuant to an agreement among FAB, the Company and
the holders of the Company's 7% Exchangeable Subordinated Notes (the
"Subordinated Notes") and the size of the Company's Board of Directors is fixed
at no more than eight persons to consist of (i) two designees of FAB, (ii)
three designees of the holders of the Subordinated Notes (the "Note Holders"),
(iii) the Company's Chief Executive Officer and (iv) two independent directors
nominated by FAB and acceptable to the Note Holders. See "Security Ownership
of Certain Beneficial Owners and Management," "Management -- Voting Agreement"
and "Description of Capital Stock -- Exchangeable Subordinated Notes."
THE OFFERING
<TABLE>
<S> <C>
Selling Stockholders . . . . . . . . . . . . . . . Certain former stockholders of Ashlawn Energy, Inc.,
a privately held oil and gas company acquired by the
Company in August 1995.
Common Stock offered by the Selling
Stockholders . . . . . . . . . . . . . . . . . . 1,750,000 shares
Common Stock to be outstanding after this
Offering . . . . . . . . . . . . . . . . . . . . 18,260,447 shares (1)
NASDAQ National Market symbol . . . . . . . . . . . "FGAS"
Use of Proceeds . . . . . . . . . . . . . . . . . . The Company will not receive any proceeds from the
sale of shares by the Selling Stockholders.
</TABLE>
- ----------
(1) Does not include (i) 2,343,047 shares of Common Stock issuable upon
exchange of the Subordinated Notes and (ii) 2,242,124 shares of Common
Stock issuable pursuant to outstanding options and warrants held by the
Note Holders, management and others. See "Management -- Value of
Unexercised Stock Options," "Description of Capital Stock -- Exchangeable
Subordinated Notes" and "-- Warrants."
5
<PAGE> 6
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents certain historical and pro forma financial
data as of and for each of the periods indicated. The historical financial
data for the years ended December 31, 1993, 1994 and 1995 have been derived
from the audited financial statements of the Company. The financial data for
the three months ended March 31, 1995 and 1996 are derived from the Company's
unaudited financial statements which, in the opinion of management, include all
adjustments (which consist only of normal recurring adjustments) necessary for
a fair presentation of the financial position and results of operations of the
Company for such interim periods. The following information should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Pro Forma Financial Information" and the Financial
Statements of the Company and those relating to certain property acquisitions
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA(1)
-------------
YEAR ENDED THREE MONTHS
YEAR ENDED DECEMBER 31, DECEMBER 31, ENDED MARCH 31,
--------------------------------------- ------------- -----------------
1993 1994 1995 1995 1995 1996
-------- -------- --------- ------------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and gas sales . . . . . . . . $ 49,652 (2) $ 58,354 (2) $ 72,147 $ 80,156 $ 16,925 $ 28,342
Other . . . . . . . . . . . . . . 441 (2) 388 (2) 494 521 114 126
-------- -------- --------- ------- -------- ---------
50,093 58,742 72,641 80,677 17,039 28,468
-------- -------- --------- ------- --------- --------
Expenses:
Lease operating . . . . . . . . . 16,632 23,744 24,507 27,103 6,235 8,736
Depreciation, depletion and
amortization . . . . . . . . . . . 19,889 24,572 31,295 34,317 7,786 11,556
Production taxes . . . . . . . . . 1,560 1,701 1,868 2,420 416 724
General and administrative, net . 3,166 6,463 5,670 5,770 1,274 1,790
-------- -------- --------- -------- -------- --------
Total operating expenses . 41,247 56,480 63,340 69,610 15,711 22,806
-------- -------- --------- ------- -------- --------
Income from operations . . . . . . . 8,846 2,262 9,301 11,067 1,328 5,662
Interest and other income (loss) . . 545 789 (561) (561) 126 111
Interest expense, net of amounts
capitalized . . . . . . . . . . . . . (6,192) (9,529) (11,668) (9,431) (3,069) (2,874)
-------- -------- --------- ------- -------- --------
Income (loss) before income taxes . . 3,199 (6,478) (2,928) 1,075 (1,615) 2,899
Income tax provision (benefit) . . . 2,337 (2,403) (1,075) 418 (601) 1,081
Minority interest . . . . . . . . . . 107 -- -- -- -- --
-------- -------- --------- ------- -------- --------
Net income (loss) (3) . . . . . . . . $ 755 $ (4,075) $ (1,853) $ 657 $ (1,014) $ 1,818
======== ======== ========= ======== ======== ========
Net income (loss) per share (3) . . . $ (.50) $ (.14) $ .04 $ (.11) $ .10
======== ========= ======== ======== ========
UNAUDITED PRO FORMA DATA (3):
Income before income taxes, including
minority
interest . . . . . . . . . . . . . $ 3,092
Income tax provision . . . . . . . . 1,207
--------
Net income . . . . . . . . . . . . . $ 1,885
========
Net income per share . . . . . . . . $ .29
========
Weighted average number of shares
outstanding . . . . . . . . . . . . 6,520 8,188 12,910 18,250 9,040 18,260
</TABLE>
- ---------------------
(1) Gives effect to (i) the Conoco Acquisition, the Ashlawn Acquisition and
other acquisitions by the Company prior to the Company's initial public
offering in August 1995, (ii) the application of the net proceeds of the
initial public offering and (iii) incremental general and administrative
expenses associated with being a public company, as if such transactions
had been consummated at January 1, 1995.
(2) Natural gas liquid revenues have been reclassified from plant processing
and other revenues to oil and gas sales for consistent presentation with
1995 revenues.
(3) Prior to September 14, 1993, the Company was exempt from United States
federal and certain state income taxes as a result of its partnership
status. The unaudited pro forma data reflects the income tax expense that
would have been recorded had the Company not been exempt from paying such
income taxes. Net income per share data is described as unaudited pro
forma because of the Company's former partnership status.
6
<PAGE> 7
SUMMARY OIL AND GAS RESERVE DATA
The following table summarizes the estimates of the Company's pro forma net
proved oil and gas reserves as of the dates indicated and the present value
attributable to these reserves at such dates. The reserve and present value
data as of December 31, 1995 for the onshore properties have been estimated by
Netherland, Sewell & Associates, Inc., independent petroleum engineering
consultants. The reserve and present value data as of December 31, 1995 for
the offshore properties have been estimated by Collarini Engineering Inc.,
independent petroleum engineering consultants. The reserve estimates and
present value data as of December 31, 1994 have been audited by Netherland,
Sewell & Associates, Inc. and such data and estimates as of December 31, 1993
and 1994 were prepared by Collarini Engineering Inc. and Joe C. Neal &
Associates, independent petroleum engineering consultants. For additional
information relating to the Company's oil and natural gas reserves, see "Risk
Factors - Uncertainty of Reserve Information and Future Net Revenue Estimates,"
"Business - Oil and Gas Reserves" and the Supplemental Information on Oil and
Gas Producing Activities in Note 16 of the Notes to the Financial Statements of
the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Proved Reserves:
Oil (Mbbls) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,776 11,310 24,458
Natural gas (Mmcf) . . . . . . . . . . . . . . . . . . . . . . . . . . 138,862 172,122 218,052
Total (Mmcfe) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203,518 239,982 364,800
Present value of future net revenues before income taxes (000s) (1) . . $197,965 $171,391 $540,901
Standardized measure of discounted future net cash flows (000s) (2) . . $159,173 $152,627 $406,956
</TABLE>
- ----------
(1) The present value of future net revenues attributable to the Company's
reserves was prepared using constant prices as of the calculation date,
discounted at 10% per annum on a pre-tax basis.
(2) The standardized measure of discounted future net cash flows represents the
present value of future net revenues after income tax discounted at 10%.
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
PRO FORMA (1)
-------------
YEAR ENDED THREE MONTHS
YEAR ENDED DECEMBER 31, DECEMBER 31, ENDED MARCH 31,
----------------------------------- ------------ ---------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Production:
Liquids (Mbbls) (3) . . . . . . . 1,425(2) 1,753(2) 2,343 2,690 853
Natural gas (Mmcf) . . . . . . . . 12,025 17,121 21,112 22,325 6,092
Total (Mmcfe) . . . . . . . . . . 20,575 27,639 35,170 38,465 11,210
Average sales prices:
Liquids (per Bbl) (3) . . . . . . $ 16.65 $ 15.04 $ 16.46 $ 16.56 $ 16.88
Natural gas (per Mcf) . . . . . . 2.16 1.87 1.59 1.59 2.29
Expenses (per Mcfe):
Lease operating . . . . . . . . . $ .81 $ .86 $ .70 $ .70 $ .78
Production taxes . . . . . . . . . .08 .06 .05 .06 .06
Depreciation, depletion and .96 .88 .88 .89 1.03
amortization . . . . . . . . . . . .15 .23 .16 .15 .16
General and administrative, net .
</TABLE>
- ----------
(1) Gives effect to the Ashlawn Acquisition, the Conoco Acquisition and other
acquisitions by the Company prior to the Offering in 1995 as if such
transactions had been consummated as of January 1, 1995.
(2) Includes certain natural gas liquid volumes reclassified to conform with
1995 classifications.
(3) Includes crude oil, condensate and natural gas liquids.
7
<PAGE> 8
RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider the
risk factors set forth below, as well as the other information contained in
this Prospectus before purchasing the shares of Common Stock offered hereby.
VOLATILITY OF NATURAL GAS AND OIL PRICES
Revenues generated from the Company's operations are highly dependent upon
the price of, and demand for, oil and natural gas. Historically, the markets
for oil and natural gas have been volatile and are likely to continue to be
volatile in the future. Prices for oil and natural gas are subject to wide
fluctuations in response to relatively minor changes in the supply of and
demand for oil and natural gas, market uncertainty and a variety of additional
factors that are beyond the control of the Company. These factors include the
level of consumer product demand, weather conditions, domestic and foreign
governmental regulations, the price and availability of alternative fuels,
political conditions in the Middle East, the foreign supply of oil and natural
gas, the price of foreign imports and overall economic conditions. It is
impossible to predict future oil and natural gas price movements with any
certainty. Declines in oil and natural gas prices may materially adversely
affect the Company's financial condition, liquidity and results of operations.
Lower oil and natural gas prices also may reduce the amount of the Company's
oil and natural gas that can be produced economically. In order to reduce its
exposure to price risks in the sale of its oil and natural gas, the Company
enters into hedging arrangements from time to time. The Company's hedging
arrangements apply to only a portion of its production and provide only limited
price protection against fluctuations in the oil and natural gas markets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - General" and "Business - Marketing and Customers."
The Company uses the full cost method of accounting for its investment in
oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved oil and natural
gas reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the
present value (using a 10% discount rate) of estimated future net cash flow
from proved oil and natural gas reserves, and the lower of cost or fair value
of unproved properties after income tax effects, such excess costs are charged
to operations. Once incurred, a write-down of oil and natural gas properties
is not reversible at a later date even if oil or natural gas prices increase.
While the Company has never been required to write-down its asset base,
significant downward revisions of quantity estimates or declines in oil and gas
prices from those in effect on December 31, 1995 which are not offset by other
factors could result in a write-down for impairment of oil and gas properties.
REPLACEMENT OF RESERVES
In general, the volume of production from oil and gas properties declines
as reserves are depleted. The rate of decline depends on reservoir
characteristics, and varies from the steep decline rate characteristic of Gulf
of Mexico reservoirs, where the Company has a significant portion of its
production, to the relatively slow decline rate characteristic of the
long-lived fields in the Rocky Mountain, Gulf Coast, Southwest and Appalachian
regions. Except to the extent the Company acquires properties containing
proved reserves or conducts successful development and exploration activities,
or both, the proved reserves of the Company will decline as reserves are
produced. The Company's future oil and natural gas production is, therefore,
highly dependent upon its level of success in finding or acquiring additional
reserves. The business of exploring for, developing or acquiring reserves is
capital intensive. To the extent cash flow from operations is reduced and
external sources of capital become limited or unavailable, the Company's
ability to make the necessary capital investment to maintain or expand its
asset base of oil and natural gas reserves would be impaired. In addition,
there can be no assurance that the Company's future development, acquisition
and exploration activities will result in additional proved reserves or that
the Company will be able to drill productive wells at acceptable costs.
8
<PAGE> 9
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES
There are numerous uncertainties inherent in estimating oil and natural gas
reserves and their estimated values, including many factors beyond the control
of the producer. The reserve data set forth in this Prospectus represents only
estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact manner. Estimates of economically recoverable oil and gas reserves and
of future net cash flows necessarily depend upon a number of variable factors
and assumptions, such as historical production from the area compared with
production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions concerning future oil and gas prices,
future operating costs, severance and excise taxes, development costs and
workover and remedial costs, all of which may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of oil and natural gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net cash flows expected therefrom prepared by different
engineers or by the same engineers at different times may vary substantially
and such reserve estimates may be subject to downward or upward adjustment
based upon such factors. Actual production, revenues and expenditures with
respect to the Company's reserves will likely vary from estimates, and such
variances may be material. See "Business - Oil and Gas Reserves."
The present values of estimated future net cash flows referred to in this
Prospectus should not be construed as the current market value of the estimated
oil and natural gas reserves attributable to the Company's properties. In
accordance with applicable requirements of the Commission, the estimated
discounted future net cash flows from proved reserves are generally based on
prices and costs as of the date of the estimate, whereas actual future prices
and costs may be materially higher or lower. Actual future net cash flows also
will be affected by factors such as the amount and timing of actual production,
supply and demand for oil and natural gas, curtailments or increases in
consumption by gas purchasers and changes in governmental regulations or
taxation. The timing of actual future net cash flows from proved reserves, and
their actual present value, will be affected by the timing of both the
production and the incurrence of expenses in connection with development and
production of oil and gas properties. In addition, the calculation of the
present value of the future net revenues using a 10% discount as required by
the Commission, is not necessarily the most appropriate discount factor based
on interest rates in effect from time to time and risks associated with the
Company's reserves or the oil and gas industry in general.
EFFECTS OF LEVERAGE
At March 31, 1996, the Company had total debt of approximately $144.5
million. Effective April 26, 1996, the Company renegotiated its senior secured
credit facility (the "Senior Credit Facility") to provide for a commitment of
$195 million, with a current borrowing base of $175 million. At April 30,
1996, the Company had availability of approximately $59.9 million under the
Senior Credit Facility. The Company's level of indebtedness has several
important effects on its operations, including (i) the covenants contained in
the Senior Credit Facility and the Subordinated Note agreements require the
Company to meet certain financial tests, and other restrictions limit its
ability to borrow additional funds or to dispose of assets and may affect the
Company's flexibility in planning for, and reacting to, changes in business
conditions and (ii) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes may be impaired. Moreover, future
acquisition or development activities may require the Company to alter its
capitalization significantly. These changes in capitalization may significantly
alter the leverage of the Company or, in the case of the issuance of additional
equity securities, may be dilutive to holders of Common Stock. The Company's
ability to meet its debt service obligations and to reduce its total
indebtedness will be dependent upon the Company's future performance, which
will be subject to general economic conditions and to financial, business and
other factors affecting the operations of the Company, many of which are beyond
its control. There can be no assurance that the Company's future performance
will not be adversely affected by such economic conditions and financial,
business and other factors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" and Note 4 to the Company's Financial Statements.
9
<PAGE> 10
CONTROL BY PRINCIPAL SECURITYHOLDERS
The Company's principal stockholder, FAB, owns approximately 49.5% of the
outstanding shares of Common Stock. FAB is a publicly traded Swedish company
with two classes of stock, A shares and B shares. There are 1,000,000
outstanding A shares, each of which is entitled to one vote per share, and
13,392,000 outstanding B shares, each of which is entitled to 1/10th of a vote
per share. The B shares of FAB are listed on the Stockholm Stock Exchange.
The Forss family and its affiliates owned all 1,000,000 A shares and 1,559,133
B shares of FAB as of May 31, 1996. Accordingly, the Forss family has a 49.4%
voting interest and a 17.8% economic interest in FAB. Under Swedish law, new
issues of FAB securities are subject to preferential rights of existing
stockholders which gives the Forss family the ability to maintain voting
control over FAB in the event of future stock issuances.
The Company, FAB, Wictor Forss and the Note Holders are parties to a voting
agreement (the "Voting Agreement") pursuant to which such persons agree to
maintain the size of the Board of Directors at no more than eight members,
designate all eight nominees to the Board of Directors and vote their shares of
Common Stock to elect such nominees. The Voting Agreement provides that (i)
FAB has the right to designate two nominees, (ii) the Note Holders have the
right to designate three nominees, (iii) the Chief Executive Officer of the
Company must be nominated to serve as a director and must be Stig Wennerstrom
or another person acceptable to the Note Holders and (iv) two independent
directors be nominated by FAB subject to approval by the Note Holders. The
Voting Agreement, as amended, provides that the independent director nominees
for the Company's 1996 annual meeting have no previous affiliation with FAB.
The Voting Agreement terminates on the earliest to occur of (i) September 15,
2003, (ii) the date on which FAB, certain of its transferees and their
respective affiliates own less than 10% of the outstanding shares of Common
Stock, and (iii) the date upon which less than $5 million aggregate principal
amount of the Subordinated Notes remain outstanding and the Note Holders own
less than 5% of the outstanding shares of Common Stock. The Voting Agreement
is binding upon transferees of the Forss family who acquire an interest in FAB
representing 10% or more of the outstanding shares of Common Stock. As a
result of FAB's holdings of Common Stock and the Voting Agreement, after
consummation of the Offering, FAB and the Note Holders will remain in the
position to control the election of the entire Board of Directors of the
Company and FAB will be able to determine the outcome of most matters requiring
the vote of the Company's stockholders. FAB has granted the Note Holders an
irrevocable proxy solely with respect to the voting of shares of Common Stock
held by FAB for the election of directors. The proxy is exercisable solely for
the purpose of electing members of the Board of Directors in accordance with
the terms of the Voting Agreement and expires upon termination of the Voting
Agreement. See "Security Ownership of Certain Beneficial Owners and
Management" and "Description of Capital Stock - Exchangeable Subordinated
Notes."
CERTAIN PROVISIONS OF THE SUBORDINATED NOTES
The Subordinated Notes are exchangeable into an aggregate of 2,343,047
shares of Common Stock, which would be equal to approximately 12.8% of the
Common Stock currently outstanding. The Subordinated Notes currently bear
interest at 7% per annum and mature on September 15, 2000. In the event that
the Company does not complete a public offering of shares of its Common Stock
that meets the definition of a "Qualified Public Offering" prior to September
15, 1998, and the Note Holders do not otherwise exchange their Subordinated
Notes for Common Stock, the Note Holders will be entitled to an additional
interest payment at maturity sufficient to provide such holders with a 13%
compounded annual rate of return over the seven years that the Subordinated
Notes are outstanding. A "Qualified Public Offering" is generally a public
offering of Common Stock with respect to not less than 2% of the outstanding
shares at a price of not less than $21.76 per share. Neither the Initial
Public Offering nor this offering satisfy the definition of a Qualified Public
Offering. Accordingly, the Company is currently accruing interest on the
Subordinated Notes at 13%. The future cost of such a payment to the Company
would be up to approximately $20.4 million. The Company has the option at
maturity to pay the full principal amount of the Subordinated Notes and such
additional interest payment in cash or shares of Common Stock with a value
equal to the cash payment that would be otherwise due at maturity, subject to a
cash make-whole provision equal to the difference between cash proceeds of the
sale of such stock (if sold within 30 days of issuance) and the amount of
principal and interest due. The Company
10
<PAGE> 11
cannot exercise its option to require the Note Holders to exchange the
Subordinated Notes into Common Stock prior to maturity unless a Qualified
Public Offering is completed and certain other conditions are met.
In the event of a "change of control" of the Company, the Note Holders may
elect to accelerate the maturity of the Subordinated Notes and the Company will
be obligated to pay the Note Holders an amount equal to the greater of (i)
149.65% of the outstanding principal amount thereof, or (ii) an amount adequate
to provide such Note Holders a 15% annual compounded rate of return through the
payment date. A "change of control" generally is deemed to occur when a person
or group other than FAB or the Forss family acquires 33-1/3% or more of the
outstanding shares of Common Stock or there is a sale of all or substantially
all of the Company's assets. See "Description of Capital Stock - Exchangeable
Subordinated Notes."
In the event the Note Holders exercise their demand registration rights
with respect to the Common Stock, the Company is prohibited from issuing any
shares of Common Stock in a private or public transaction, other than the
issuance of Common Stock in a private acquisition, until the earlier of (i) in
the case of an underwritten public offering, 90 days after the consummation
thereof or (ii) in the case of a non-underwritten offering, 90 days after the
effective date of the registration statement related to such offering. See
"Description of Capital Stock - Voting and Holdback Agreement."
LIMITED HISTORY OF OPERATING OIL AND GAS PROPERTIES
Although the Company and its predecessors have been engaged in the oil and
gas business since 1982, the Company commenced operating offshore properties in
1993 and consequently has a limited history of conducting such operations. The
Company has had a successful operating record since 1993, but there can be no
assurance as to its future financial or operating success.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company makes, and will continue to make, substantial capital
expenditures for the development, exploration, acquisition and production of
oil and natural gas reserves. Historically, the Company has financed these
expenditures primarily with proceeds from bank borrowings, the sale of the
Subordinated Notes, sales of Common Stock and cash generated by operations.
The Company incurred capital expenditures of $144.7 million during 1995 and
plans to incur capital expenditures, not including expenditures for
acquisitions, of approximately $88 million in 1996. Management believes that
the Company will have sufficient cash provided by operating activities and
borrowings under the Senior Credit Facility to fund planned capital
expenditures in 1996. If revenues decrease as a result of lower oil and gas
prices or operating difficulties, the Company may have limited ability to
expend the capital necessary to undertake or complete its 1996 drilling
program. There can be no assurance that additional debt or equity financing or
cash generated by operations will be available to meet these requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
DRILLING RISKS
Drilling involves numerous risks, including the risk that no commercially
productive natural gas or oil reservoirs will be encountered. The cost of
drilling, completing and operating wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a variety of
factors, including unexpected drilling conditions, pressure or irregularities
in formations, equipment failures or accidents, adverse weather conditions and
shortages or delays in the delivery of equipment. The Company's future
drilling activities may not be successful and, if unsuccessful, such failure
will have an adverse effect on the Company's future results of operations and
financial condition.
11
<PAGE> 12
ACQUISITION RISKS
The Company's rapid growth in recent years has been largely the result of
acquisitions of producing properties. The Company expects to continue to
evaluate and pursue acquisition opportunities which are available on terms
management considers favorable to the Company. The successful acquisition of
producing properties requires an assessment of recoverable reserves, future oil
and gas prices, operating costs, potential environmental and other liabilities
and other factors beyond the Company's control. Such assessments are
necessarily inexact and their accuracy inherently uncertain. In connection
with such an assessment, the Company performs a review of the subject
properties that it believes to be generally consistent with industry practices.
Such a review, however, will not reveal all existing or potential problems nor
will it permit a buyer to become sufficiently familiar with the properties to
fully assess their deficiencies and capabilities. Inspections may not always
be performed on every platform or well, and structural and environmental
problems are not necessarily observable even when an inspection is undertaken.
The Company is generally not entitled to contractual indemnification for
pre-closing liabilities, including environmental liabilities, and generally
acquires interests in the properties on an "as is" basis.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the services of its founder, Stig
Wennerstrom, and certain other senior management personnel. The loss of the
services of Mr. Wennerstrom and other senior management personnel could have a
material adverse effect on the Company's operations. The Company has entered
into an employment agreement with Mr. Wennerstrom. The Company believes that
its success is also dependent upon its ability to continue to employ and retain
skilled technical personnel. See "Management - Employment Agreement of Chief
Executive Officer."
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company's business is regulated by certain local, state and federal
laws and regulations relating to the exploration for, and the development,
production, marketing, pricing, transportation and storage of, oil and natural
gas. The Company's business is also subject to extensive and changing
environmental and safety laws and regulations governing plugging and
abandonment, the discharge of materials into the environment or otherwise
relating to environmental protection. As with any owner of property, the
Company is also subject to cleanup costs and liability for hazardous materials,
asbestos or any other toxic or hazardous substance that may exist on or under
any of its properties. In addition, the Company is subject to changing and
extensive tax laws, and the effect of newly enacted tax laws cannot be
predicted. The implementation of new, or the modification of existing, laws or
regulations, including amendments to the Oil Pollution Act of 1990 or
regulations which may be promulgated thereunder, could have a material adverse
effect on the Company. See "Business - Abandonment Costs," "- Regulation" and
"- Environmental Matters."
ABSENCE OF DIVIDENDS ON COMMON STOCK
The Company currently intends to retain its cash for the operation and
expansion of its business, including development, exploration and acquisition
activities. The terms of both the Senior Credit Facility and the agreements
relating to the Subordinated Notes contain restrictions on the payment of
dividends to holders of Common Stock. Accordingly, the Company's ability to
pay dividends will depend upon such restrictions and the Company's results of
operations, financial condition, capital requirements and other factors deemed
relevant by the Board of Directors. See "Dividend Policy," "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources," "Description of Capital Stock - Exchangeable
Subordinated Notes" and Note 4 to the Company's Financial Statements.
12
<PAGE> 13
COMPETITION
The oil and gas industry is highly competitive. The Company encounters
competition from other oil and gas companies in all areas of its operations,
including the acquisition of producing properties. The Company's competitors
include major integrated oil and natural gas companies and numerous independent
oil and natural gas companies, individuals and drilling and income programs.
Many of its competitors are large, well-established companies with
substantially larger operating staffs and greater capital resources than the
Company's and which, in many instances, have been engaged in the energy
business for a much longer time than the Company. Such companies may be able
to pay more for productive oil and natural gas properties and exploratory
prospects and to define, evaluate, bid for and purchase a greater number of
properties and prospects than the Company's financial or human resources
permit. The Company's ability to acquire additional properties and to discover
reserves in the future will be dependent upon its ability to evaluate and
select suitable properties and to consummate transactions in a highly
competitive environment.
OPERATING RISKS OF OIL AND GAS OPERATIONS
The oil and gas business involves certain operating hazards such as well
blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or
well fluids, fires, formations with abnormal pressures, pollution, releases of
toxic gas and other environmental hazards and risks, any of which could result
in substantial losses to the Company. The Company's offshore operations also
are subject to the additional hazards of marine operations, such as severe
weather, capsizing and collision. The availability of a ready market for the
Company's oil and natural gas production also depends on the proximity of
reserves to, and the capacity of, oil and gas gathering systems, pipelines and
trucking or terminal facilities. In addition, the Company may be liable for
environmental damages caused by previous owners of property purchased and
leased by the Company. As a result, substantial liabilities to third parties
or governmental entities may be incurred, the payment of which could reduce or
eliminate the funds available for development, acquisitions or exploration, or
result in the loss of the Company's properties. In accordance with customary
industry practices, the Company maintains insurance against some, but not all,
of such risks and losses. The Company does not carry business interruption
insurance. The occurrence of such an event not fully covered by insurance
could have a material adverse effect on the financial condition and results of
operations of the Company.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Amended Certificate of Incorporation and Bylaws and the
Delaware General Corporation Law contain provisions that may have the effect of
discouraging unsolicited takeover proposals for the Company. These provisions,
among other things, restrict the ability of stockholders to take action by
written consent, require the approval of the holders of 75% of the Common Stock
to approve certain business combinations with "interested stockholders"
(excluding shares owned by the interested stockholder), authorize the Board of
Directors to designate the terms of and issue new series of preferred stock,
limit the personal liability of directors and impose additional restrictions on
business combinations with certain interested parties. In addition, the
Subordinated Notes are redeemable at a substantial premium in the event of a
change of control. See "Description of Capital Stock - Certain Provisions of
the Company's Charter and Bylaws and Delaware Law" and "- Exchangeable
Subordinated Notes."
SHARES ELIGIBLE FOR FUTURE SALE
The Selling Stockholders have agreed not to dispose of any shares of Common
Stock for a period of one year from the date of this Prospectus without the
consent of the representatives of the Underwriters. As of the expiration of a
lockup period that expired on May 29, 1996, as provided for in a separate
registration rights agreement between the Company and FAB, a total of 9,040,486
currently outstanding shares of Common Stock held by FAB became eligible for
resale, subject to the volume and other limitations of Rule 144 under the
Securities Act, or pursuant to the exercise of demand registration rights. FAB
has waived its registration rights in connection with this Offering. The
Subordinated Notes are exchangeable for an aggregate of 2,343,047 shares of
Common Stock. The Note Holders have certain demand and piggyback registration
rights with respect such shares. The Note Holders have waived their
registration rights in connection with this
13
<PAGE> 14
Offering. In addition, there are 2,242,124 shares of Common Stock issuable
pursuant to outstanding options and warrants held by the Note Holders,
management and others, all of which are covered by demand or piggyback
registration rights or will be issued pursuant to a registration statement on
Form S-8 and become freely tradeable.
No prediction can be made as to the effect, if any, that future sales of
shares or the availability of shares for sale will have on the market price for
Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market, or the perception of the availability of
shares for sale, could adversely affect the prevailing market price of the
Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities. See "Shares Eligible for Future Sale."
In addition to the potentially depressing effect sales of currently
outstanding shares of Common Stock could have on the market price for such
shares, unusual sales activity in FAB's B Shares on the Stockholm Stock
Exchange could exert additional downward pressure on such market price.
14
<PAGE> 15
THE COMPANY
GENERAL
Forcenergy is an independent oil and gas company engaged in the
development, exploration, acquisition and production of domestic oil and
natural gas properties. The Company has experienced significant growth in the
last five years, primarily through the acquisition of producing properties in
the Gulf of Mexico. At December 31, 1995 the Company had net proved reserves
of 365 Bcfe, 71% of which were located in the Gulf of Mexico. Approximately
60% of the Company's net proved reserves on such date were natural gas and
approximately 69% were classified as proved developed.
At the 1996 Annual Meeting of Stockholders held on May 23, 1996, the
Stockholders of the Company approved a proposal to amend the Company's Amended
and Restated Certificate of Incorporation to effect a change in the name of the
Company from "Forcenergy Gas Exploration, Inc." to "Forcenergy Inc".
The Company's principal executive offices are located at 2730 SW 3rd
Avenue, Suite 800, Miami, Florida 33129-2237 and its telephone number is (305)
856-8500. Unless the context otherwise requires, the terms "Company" or
"Forcenergy" as used in this Prospectus mean Forcenergy Inc and its predecessor
entities.
RELATIONSHIP WITH FORCENERGY AB
The Company was incorporated in Delaware in August 1993 to succeed by
merger in September 1993 to the ownership of the oil and gas properties of its
predecessor, Forcenergy Partners, L.P. ("Forcenergy Partners"). Forcenergy
Partners was a limited partnership in which FAB was a 97% limited partner and a
corporation wholly owned by Stig Wennerstrom, the Company's President and Chief
Executive Officer, was the 3% general partner. In connection with the
foregoing merger, Mr. Wennerstrom received shares in FAB and cash. Forcenergy
Partners and its predecessors had been engaged in the domestic oil and gas
business since 1982. See "Related Party Transactions."
Prior to the Initial Public Offering in August 1995, all of the outstanding
shares of Common Stock of the Company were owned by FAB. FAB currently owns
approximately 49.5% of the outstanding shares of Common Stock. FAB is a
publicly-traded Swedish company with two classes of stock, A shares and B
shares. Each of the 1,000,000 outstanding A shares is entitled to one vote per
share, and each of the 13,392,000 outstanding B shares is entitled to 1/10th of
a vote per share. The B shares of FAB are listed on the Stockholm Stock
Exchange. The Forss family and its affiliates owned all 1,000,000 A shares and
1,559,133 B shares as of May 31, 1996. Accordingly, the Forss family has a
49.4% voting interest and a 17.8% economic interest in FAB. Under Swedish law,
new issues of FAB securities are subject to preferential rights of existing
stockholders, which gives the Forss family the ability to maintain voting
control over FAB in the event of future stock issuances. See "Management -
Voting Agreement" and "Security Ownership of Certain Beneficial Owners and
Management."
USE OF PROCEEDS
The Company will not receive any proceeds from the offering of shares by
the Selling Stockholders.
DIVIDEND POLICY
The Company currently intends to retain its cash for the operation and
expansion of its business, including development, exploration and acquisition
activities. The terms of both the Senior Credit Facility and the Subordinated
Notes contain restrictions on the payment of dividends to holders of Common
Stock. Accordingly, the Company's ability to pay dividends will depend upon
such restrictions and the Company's results of operations, financial condition,
capital requirements and other factors deemed relevant by the Board of
Directors. See Note 4 to the Company's Financial Statements.
15
<PAGE> 16
MARKET FOR AND RECENT
PRICES OF COMMON STOCK
Forcenergy's Common Stock is traded on the Nasdaq National Market under the
symbol "FGAS". The following table sets forth, for the periods indicated, the
range of closing high and low sale prices of the Common Stock as reported by
the Nasdaq Stock Market. The Company commenced trading on the Nasdaq National
Market on July 28, 1995; therefore no public market existed for the Common
Stock prior to that date. On June 13, 1996, the last reported sale price of
the Common Stock was $14 1/4.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C> <C>
1995 Third Quarter (commencing July 28, 1995) . . . . . . . . . . . . . . $11.38 $10.00
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.50 $ 9.25
1996 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.69 $10.50
Second Quarter (through June 13, 1996) . . . . . . . . . . . . . . $15.50 $11.63
</TABLE>
At May 1, 1996, the Company had fourteen shareholders of record of its
Common Stock. The Company estimates that there are approximately 700
beneficial owners of Common Stock.
16
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements of the Company and the related Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-----------------
(IN THOUSANDS)
<S> <C>
Long-term debt (including current maturities) . . . . . . . . . . . . . . . . . . $105,089
7% Exchangeable Subordinated Notes (1) . . . . . . . . . . . . . . . . . . . . . 39,444
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized; no shares
issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . ---
Common Stock, $.01 par value, 50,000,000 shares authorized; 18,260,447 shares
issued and outstanding (2) . . . . . . . . . . . . . . . . . . . . . . . 183
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . 163,378
Accumulated deficit, since September 14, 1993 . . . . . . . . . . . . . . . (6,782)
--------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 156,779
--------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . $301,312
========
</TABLE>
- ----------
(1) Includes $34 million in aggregate principal amount payable upon maturity
and approximately $5.4 million in deferred interest.
(2) Does not include (i) 2,343,047 shares of Common Stock issuable upon
exchange of the Subordinated Notes and (ii) 2,242,124 shares of Common
Stock issuable pursuant to outstanding options and warrants to purchase
Common Stock held by management and others. See "Management," "Description
of Capital Stock - Exchangeable Subordinated Notes," "- Warrants" and
"Related Party Transactions."
17
<PAGE> 18
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for the
Company as of and for each of the periods indicated. The financial data as of
and for each of the four years in the period ended December 31, 1994 are
derived from the financial statements of the Company audited by Price
Waterhouse LLP, independent accountants. The financial data as of and for the
year ended December 31, 1995 is derived from the financial statements of the
Company audited by Coopers & Lybrand L.L.P., independent accountants. The
financial data for the three months ended March 31, 1995 and 1996 are derived
from the Company's unaudited financial statements which, in the opinion of
management, include all adjustments (which consist only of normal recurring
adjustments) necessary for a fair presentation of the financial position and
results of operations of the Company for such interim periods. The following
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- -------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and gas sales . . . . . . . . . . . . . $12,680 $24,937 $49,652 $58,354 $72,147 $ 16,925 $28,342
Other . . . . . . . . . . . . . . . . . . . 337 475 441 388 494 114 126
------- ------- ------- ------- ------- -------- -------
13,017 25,412 50,093 58,742 72,641 17,039 28,468
------- ------- ------- ------- ------- -------- -------
Expenses:
Lease operating . . . . . . . . . . . . . . 4,091 7,769 16,632 23,744 24,507 6,235 8,736
Depreciation, depletion and amortization . . 4,216 8,014 19,889 24,572 31,295 7,786 11,556
Production taxes . . . . . . . . . . . . . . 280 606 1,560 1,701 1,868 416 724
General and administrative, net. . . . . . . 1,947 2,523 3,166 6,463 5,670 1,274 1,790
------- ------- ------- ------- ------- -------- -------
Total operating expenses . . . . . . . . 10,534 18,912 41,247 56,480 63,340 15,711 22,806
------- ------- ------- ------- ------- -------- -------
Income from operations . . . . . . . . . . . . 2,483 6,500 8,846 2,262 9,301 1,328 5,662
Interest and other income (loss) . . . . . . . 525 197 545 789 (561) 126 111
Interest expense, net of amounts capitalized. . (233) (2,303) (6,192) (9,529) (11,668) (3,069) (2,874)
------- ------- ------- ------- ------- -------- -------
Income (loss) before income taxes . . . . . . . 2,775 4,394 3,199 (6,478) (2,928) (1,615) 2,899
Income tax provision (benefit) (1) . . . . . . - - 2,337 (2,403) (1,075) (601) 1,081
Minority interest . . . . . . . . . . . . . . 83 132 107 - - -
------- ------- ------- ------- ------- -------- -------
Net income (loss) . . . . . . . . . . . . . . $ 2,692 $ 4,262 $ 755 $(4,075) $(1,853) $ (1,014) $ 1,818
======== ======== ======= ======= ======= ======== =======
Net income (loss) per share . . . . . . . . . $ (.50) $ (.14) $ (.11) $ .10
======== ======= ======== =======
UNAUDITED PRO FORMA DATA (1):
Income before income taxes, including
minority interest . . . . . . . $ 2,692 $ 4,262 $ 3,092
Income tax provision . . . . . . . . $ 1,027 $ 1,639 $ 1,207
-------- -------- -------
Net income . . . . . . . . . . . . . $ 1,665 $ 2,623 $ 1,885
======== ======== =======
Net income per share . . . . . . . . $ .26 $ .41 $ .29
======== ======== =======
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING . . . . . . . . . . . . . . . 6,451 6,451 6,520 8,188 12,910 9,040 18,260
<CAPTION>
December 31, March 31,
------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- --------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Property, plant and equipment, net . . $59,691 $112,441 $152,659 $186,241 298,832 316,227
Total assets . . . . . . . . . . . . . 71,154 127,684 187,786 220,287 335,090 354,179
Total debt . . . . . . . . . . . . . . 7,922 75,758 127,234 131,646 130,729 144,533
Stockholders' equity . . . . . . . . . 48,612 45,252 43,336 71,061 154,961 156,779
</TABLE>
- ------------
(1) Prior to September 14, 1993, the Company was exempt from United States
federal and certain state income taxes as a result of its partnership
status. The pro forma data reflects the income tax expense that would have
been recorded had the Company not been exempt from paying such income
taxes. Net income per share data for 1991, 1992 and 1993 is described as
unaudited pro forma because of the Company's former partnership status.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding of the
Company's historical financial position and results of operations for each year
of the three-year period ended December 31, 1995 and the unaudited three-month
periods ended March 31, 1995 and 1996. The Company's historical financial
statements and notes thereto included elsewhere in this Prospectus contain
detailed information that should be referred to in conjunction with the
following discussion.
GENERAL
Forcenergy was organized in September 1993 to succeed by merger to the
ownership of oil and gas properties held by Forcenergy Partners. Forcenergy
Partners and its predecessors commenced oil and gas operations in 1982 and
focused primarily on non-operated working interests in onshore properties.
Since 1990, the Company has primarily focused its activities on acquiring Gulf
of Mexico offshore properties and has completed 21 acquisitions of offshore or
Gulf Coast properties at a total cost of $190.8 million. At December 31, 1995,
the Company had net proved reserves of 365 Bcfe, 71% of which were offshore and
69% of which were classified as proved developed.
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for natural gas, oil and
condensate, which are dependent upon numerous factors beyond the Company's
control, such as economic, political and regulatory developments and
competition from other sources of energy. The energy markets have historically
been very volatile, and future decreases in oil and gas prices could have a
material adverse effect on the Company's financial position, results of
operations, quantities of oil and gas reserves that may be economically
produced and access to capital.
The Company uses the full cost method of accounting for its investment in
oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved oil and natural
gas reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the
present value (using a 10% discount rate) of estimated future net cash flow
from proved oil and natural gas reserves, and the lower of cost or fair value
of unproved properties, such excess costs are charged to operations. Once
incurred, a write-down of oil and natural gas properties is not reversible at a
later date even if oil or natural gas prices increase. While the Company has
never been required to write-down its asset base, significant downward
revisions of quantity estimates or declines in oil and gas prices from those in
effect on December 31, 1995 which are not offset by other factors could result
in a writedown for impairment of oil and gas properties.
The Company utilizes forward sales contracts and commodity swaps for
portions of its oil and gas production to achieve more predictable cash flows
and to reduce its exposure to fluctuations in oil and gas prices. As of May 1,
1996, the Company had entered into future sales and swap contracts as a hedge
against possible price declines that effectively fixed sales prices on
approximately 74% of the Company's estimated oil production for the remainder
of the year and for approximately 59% of the Company's estimated net natural
gas production for the remainder of 1996, at $18.00 per barrel and $2.03 per
Mcf, respectively. The Company accounts for its commodity swaps as hedging
activities and, accordingly, gains or losses are included in oil and gas
revenues for the period the production was hedged. See Note 11 to the
Company's Consolidated Financial Statements.
For accounting purposes, the Company accrues interest on the Subordinated
Notes at 13% per annum, however the current cash interest expense of such
Subordinated Notes is 7%. The difference is reflected in the Company's cash
flow statement as deferred interest. See "-- Liquidity and Capital Resources."
Revenues from natural gas production are recorded using the sales method,
net of royalties and net profits interests. When sales volumes exceed the
Company's entitled share, an over-produced imbalance
19
<PAGE> 20
occurs. To the extent the over-produced imbalance exceeds the Company's share
of the remaining estimated proved natural gas reserves for a given property,
the Company records a liability. Management does not believe that the Company
has any material over-produced gas imbalances.
At December 31, 1995, the Company had an aggregate of $39.2 million of net
operating loss carryforwards for federal income tax purposes which are subject
to annual limitations on utilization. Future income tax liabilities and the
impact of the alternative minimum tax will vary depending upon the number of
wells drilled, intangible drilling costs incurred and other investments in oil
and gas properties by the Company. See Note 6 to the Company's Financial
Statements.
RESULTS OF OPERATIONS
PRODUCTION DATA
The following table sets forth the Company's historical oil and natural gas
production data during the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -------------------
1993 1994 1995 1995 1996
---------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Production:
Liquids (Mbbls)(1) . . . . . . . . . . . . . . 1,425 1,753 2,343 499 853
Natural gas (MMcf) . . . . . . . . . . . . . . 12,025 17,121 21,112 5,772 6,092
Total (MMcfe) . . . . . . . . . . . . . . . . 20,575 27,639 35,170 8,766 11,210
Average sales prices:
Liquids (per Bbl) . . . . . . . . . . . . . . $ 16.65 $ 15.04 $ 16.46 $ 16.36 $ 16.88
Natural gas (per Mcf) . . . . . . . . . . . . 2.16 1.87 1.59 1.52 2.29
Expenses (per Mcfe):
Lease operating . . . . . . . . . . . . . . . $ .81 $ .86 $ .70 $ .71 $ .78
Production taxes . . . . . . . . . . . . . . . .08 .06 .05 .05 .06
Depreciation, depletion and amortization . . . .96 .88 .88 .89 1.03
General and administrative . . . . . . . . . . .15 .23 16 .15 .16
</TABLE>
- ----------
(1) Includes crude oil, condensate and natural gas liquids.
COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
Operating and Net Income. Operating income increased 338% from the $1.3
million reported in the first quarter of 1995 to $5.7 million for the first
quarter of 1996. Net income increased by $2.8 million, from a $1.0 million
loss reported for the first quarter of 1995 to the $1.8 million reported for
the comparable period of 1996. The improvement in both operating income and
net income/loss was attributable primarily to higher production and higher
realized oil and gas prices.
Production. The Company's net oil and gas production increased by 28%, on
an Bcfe basis, from the 8.8 Bcfe produced in the first quarter of 1995 to the
11.2 Bcfe produced in the comparable period of 1996. The higher production was
attributable to new production from properties acquired in 1995 and from
successful drilling and workover programs in late 1995 and in the first quarter
of 1996. Net oil production increased 71% from 499 Mbbls produced in the first
quarter of 1995 to 853 Mbbls produced in the same period of 1996. Net gas
production rose 6% from 5.8 Bcf produced in the first quarter of 1995 to 6.1
Bcf for the same period in 1996.
Revenues. Revenue for the first quarter increased by 68%, from the $17.0
million reported in the first quarter of 1995 to $28.5 million in the
comparable quarter of 1996, primarily due to higher production volumes and
higher net realized oil and gas prices. Average net realized liquids prices
rose from $16.36 per barrel in
20
<PAGE> 21
the first quarter of 1995 to $16.88 per barrel in the first quarter of 1996, a
3% increase. Average net realized gas prices increased 51% from $1.52 in the
first quarter of 1995 to $2.29 per Mcf in the first quarter of 1996.
Lease Operating Expenses. Lease operating expenses rose from $6.2 million
reported in the first quarter of 1995 to $8.7 million for the first quarter in
1996. The increase in costs relates primarily to the addition of new fields
acquired during 1995 and to nonrecurring workover repairs and maintenance
activities incurred in early 1996. On an equivalent Mcf produced basis,
expenses increased from $.71 in the first quarter of 1995 to $.78 in the first
quarter of 1996 primarily because of the repair and maintenance activities.
Depreciation, Depletion and Amortization ("DD&A"). DD&A increased from the
$7.8 million in the first quarter of 1995 to $11.6 million in the first quarter
of 1996. The increase was attributable to higher production and an increase in
the DD&A rate from $.89 in the 1995 first quarter to $1.03 in the same period
of 1996.
General and Administrative Costs. General and administrative costs
increased from $1.3 million in the first quarter of 1995 to $1.8 million for
the same period in 1996 primarily because of the overall growth of the Company
in the latter half of 1995 and the increased costs associated with being a
newly public company. However, on an equivalent unit of production basis the
expenses remained relatively constant at $.16 per Mcfe in the first quarter of
1996 compared to $.15 per Mcfe in the first quarter of 1995.
Interest Expense. Interest expense, net of amounts capitalized, declined
6% from $3.1 million in the first quarter of 1995 to $2.9 million in the first
quarter of 1996. The decrease in interest expense relates primarily to lower
rates on the Company's Senior Credit Facility.
Income Tax Provision (Benefit). The provision for income taxes increased
to $1.1 million in the first quarter ended March 31, 1996 from a benefit of
$0.6 million in the first quarter of 1995 because of the improvement in results
of operations.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1995
Operating and Net Income. Operating income increased 304%, from $2.3
million in 1994 to $9.3 million in 1995. The Company's net loss for 1994 was
$4.1 million compared with a net loss for 1995 of $1.9 million. These
improvements were attributable to higher oil and gas production and lower per
unit lease operating costs.
Production. Forcenergy's total net equivalent production increased to 35.2
Bcfe in 1995, 28% more than the 27.6 Bcfe produced in 1994, due primarily to
the acquisition of additional offshore properties in late 1994 and in early
1995 and the addition of new production attained from the successful 1995
drilling program. See "Business - 1995 Drilling Program". Net oil production
increased by 34%, from 1,753 Mbbls in 1994 to 2,343 Mbbls in 1995 and net gas
production increased by 23% from 17.1 Bcf in 1994 to 21.1 Bcf in 1995.
Revenues. Total revenues increased 24% from $58.7 million in 1994 to $72.6
million in 1995, primarily because of the higher volume of oil and gas
produced, which in turn resulted from acquisitions closed during 1995 and from
the Company's successful drilling program. Oil revenues for the year increased
by 46% from $26.3 million in 1994 to $38.4 million in 1995. Average net
realized oil prices of $16.46 per barrel in 1995 were 9% higher than the $15.04
per barrel received in 1994. Gas revenues rose from $31.9 million in 1994 to
$33.6 million in 1995 or 5%; however, average net realized gas prices declined
to $1.59 per Mcf in 1995, 15% below the $1.87 average received in 1994.
Lease Operating Expenses. Lease operating expenses increased by $763,000,
or 3%, from 1994 to 1995 because of the addition of new properties; however, on
a per Mcfe produced basis, costs declined 19% from $.86 per Mcfe in 1994 to
$.70 per Mcfe in 1995. This decline in the per unit cost was attributable to
the Company's success in adding new production through development of new
reserves from existing properties and facilities and through acquiring new
properties that provide operating synergies with existing properties.
21
<PAGE> 22
Depletion, Depreciation and Amortization ("DD&A"). Total DD&A increased
27% from $24.6 million during 1994 to $31.3 million during 1995, primarily as a
result of higher production volumes in 1995 as the DD&A rate was substantially
the same for both years.
General and Administrative. General and administrative expenses declined
12% from $6.5 million incurred in 1994 to $5.7 million in 1995. The costs for
1994 reflected higher third-party engineering and consulting fees associated
with several acquisition possibilities that never materialized. Additionally,
the Company billed more general and administrative expenses, as provided for in
joint operating agreements, to joint interest owners in 1995 due to the
increased drilling activity.
Interest Expense. Interest expense, net of amounts capitalized, increased
23% from $9.5 million in 1994 to $11.7 million in 1995. This increase was
primarily attributable to the acquisition related increases in the Company's
debt levels prior to the repayment of a portion of that debt with proceeds from
the Initial Public Offering and amortization of debt issuance costs associated
with the Company's $8.0 million bridge loan that was repaid in 1995.
Interest and Other Income. Interest and other income (loss) reflected a
net charge of $561,000 in 1995 compared with income of $789,000 in 1994. The
1995 charge included a non-cash adjustment to certain balance sheet items
associated with activities in previous years. Interest income was $454,000 in
1994 compared to $474,000 in 1995.
Income Tax Provision (Benefit). The income tax benefit decreased from $2.4
million in 1994 to $1.1 million in 1995, due to the improvement in the results
of operations.
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND DECEMBER 31, 1994
Operating and Net Income. Income from operations decreased by 74% from
$8.8 million in 1993 to $2.3 million in 1994. The decline in income from
operations is primarily the result of a decline in the average realized prices
for oil and gas sales and the incurrence of additional operating and
administrative costs as the Company undertook full operations of additional
Gulf of Mexico properties. Net income was $0.8 million in 1993 as compared to
a net loss of $4.1 million in 1994.
Production. The Company's production increased 34% from 20.6 Bcfe in 1993
to 27.6 Bcfe in 1994, primarily as a result of the acquisitions of properties
and higher volumes in the second half of 1994 due to the Company's 1994
development program. Oil production volume of 1,753 Mbbls in 1994 increased by
23% as compared to 1993 production volume of 1,425 Mbbls. Gas production of
17.1 Bcf in 1994 increased by 42% as compared to 1993 production of 12.0 Bcf.
Revenues. Total revenues increased 17% from $50.1 million in 1993 to $58.7
million in 1994. Oil sales increased by 11% from $23.8 million in 1993 to
$26.3 million in 1994. Average net realized oil prices of $16.65 in 1993
decreased by 9% to $15.04 in 1994. Gas sales increased by 23% from $25.9
million in 1993 to $31.9 million in 1994. Average net realized gas prices
declined 13% from $2.16 in 1993 to $1.87 in 1994. The increase in volumes
primarily reflects the acquisition of offshore properties and increases in
production during the second half of 1994 as a result of the Company's
development program.
Lease Operating Expenses. Lease operating expenses increased by $7.1
million or 43% in 1994 as compared to 1993 due to the addition of new offshore
fields acquired in late 1993 and 1994. On an Mcfe basis, lease operating
costs increased by 6% from $.81 in 1993 to $.86 in 1994. This per unit
operating cost increase is primarily the result of increased offshore facility
maintenance on properties acquired during 1994 and increased costs associated
with supplemental bonding requirements for offshore properties, which costs
were incurred prior to the benefit of any development activities on such
properties.
Depletion, Depreciation and Amortization. Total DD&A increased by $4.7
million or 24% from $19.9 million in 1993 to $24.6 million in 1994. The
increase in total DD&A in 1994 is primarily attributable to
22
<PAGE> 23
increased production added by acquisitions. DD&A per Mcfe declined 8% from
$.96 in 1993 to $.88 in 1994 due to the acquisition of additional proved
reserves at a lower cost per Mcfe.
General and Administrative. General and administrative expenses increased
from $3.2 million in 1993 to $6.5 million in 1994. This increase was primarily
the result of increased engineering and support staff for the New Orleans
office which was opened in March 1993 and increased legal and consulting costs
incurred to evaluate potential offshore property acquisitions.
Interest Expense. Interest expense, net of amounts capitalized, increased
by 53% from $6.2 million in 1993 to $9.5 million in 1994. This increase is
attributable to additional borrowings for acquisition financing combined with
an increase in market interest rates in 1994 under the Senior Credit Facility,
inclusion of a full year's interest expense for the Subordinated Notes and a
full year's amortization of debt issuance costs associated with the Senior
Credit Facility and the Subordinated Notes in 1994.
Income Tax Provision (Benefit). The provision for income taxes decreased
by $4.7 million from a provision of $2.3 million in 1993 to a benefit of $2.4
million in 1994 due to a pre-tax loss of $6.5 million in 1994 and the FASB 109,
"Accounting for Income Taxes" deferred tax adjustment of $2.4 million recorded
in 1993. This one time adjustment was made to reflect the book and tax timing
differences for assets and liabilities existing on September 14, 1993 as a
result of merger transactions which converted Forcenergy Partners, the
Company's predecessor, into a taxable U.S. corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions, capital
expenditures and working capital requirements from cash flow from operations,
bank borrowings and private and public placements of debt and equity
securities. The Company's primary sources of funds for each of the past three
years and the quarters ended March 31, 1995 and 1996 are reflected in the
following table (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1993 1994 1995 1995 1996
----------- ----------- ---------- ---------- ---------
<S> <C> <S> <S> <S> <S>
Net cash provided by operating activities . . . . . . . $ 19,473 $ 22,433 $ 28,574 9,281 13,361
Net borrowings under the Senior Credit Facility . . . . 28,881 6,872 (2,957) 22,440 13,034
Proceeds from issuance of Subordinated Notes . . . . . 34,000 -- -- -- --
Proceeds from issuance of Common Stock . . . . . . . . 2,200 31,800 55,753 -- --
Proceeds from Bridge Loan . . . . . . . . . . . . . . . -- -- 8,000 8,000 --
</TABLE>
In the first three months of 1996, the Company generated approximately
$13.4 million in cash from operations and borrowed, net of repayments,
approximately $13.0 million under its Senior Credit Facility. The Company's
cash flow from operations has increased significantly during 1996 because of
higher average oil and gas prices and the additional production from acquired
properties and development drilling. Net borrowings decreased for the quarter
ended March 31, 1996 compared to the same quarter in 1995 primarily due to the
borrowings for a major acquisition in early 1995.
The Company had negative working capital of $11.8 million and $11.0 million
at December 31, 1995 and March 31, 1996, respectively. The negative working
capital at March 31, 1996 and the end of 1995 was attributable to delays in the
receiving, and processing vendor invoices during the Company's 1995 drilling
program. In addition, two acquisitions with December 1995 effective dates were
closed in early January 1996, therefore, the portion of the consideration that
remained to be paid at December 31, 1995 was accrued as a current liability and
was reflected as accrued acquisition obligations on the balance sheet.
Total capital expenditures were $58.2 million and $144.7 million during
1994 and 1995, respectively. The Company's capital expenditure budget for 1996
is approximately $88 million of which $28.8 million was
23
<PAGE> 24
expended in the first quarter of 1996 and includes development costs planned
for recently acquired properties and costs associated with identification and
evaluation of exploration prospects on those properties. Forcenergy will
continue to evaluate its capital spending plans throughout the year. Actual
levels of capital expenditures may vary significantly due to a variety of
factors, including drilling results, oil and gas prices, industry conditions
and outlook, future acquisitions of properties and the availability of capital.
Though the 1996 capital budget does not incorporate any acquisitions, the
Company will continue to selectively seek acquisition opportunities for proved
reserves where it believes development and exploration potential exists. The
Company would fund acquisitions through a combination of cash flow from
operations, borrowings under its credit facility, additional borrowing
facilities or the issuance of debt or equity securities.
In December 1995, the Company amended its Senior Credit Facility to extend
its maturity date and to lower borrowing rates on amounts advanced under the
facility. The termination date on the revolving credit loan was extended to
December 31, 1997, at which time the outstanding amount becomes a term loan
with future annual principal payments, as a percentage of the principal balance
outstanding at the time of conversion to the term loan, of 36% in 1998, 30% in
1999, 23% in 2000 and 11% in 2001. The term loan matures on June 30, 2001.
Effective April 29, 1996, the Company renegotiated the Senior Credit Facility
to provide for a commitment of $195 million with a current borrowing base of
$175 million. At April 30, 1996, the Company had $59.9 million available under
the facility. The borrowing base is subject to redetermination semi-annually
based on revised reserve estimates.
Borrowings under the Senior Credit Facility bear interest, at the Company's
option, at either the prime rate or LIBOR plus 1.375%. Interest on the prime
loans are due quarterly and interest on the LIBOR loans are due at the end of
the designated interest period. The Senior Credit Facility is secured by
substantially all of the Company's oil and gas properties. The Senior Credit
Facility contains certain covenants of the Company, including maintenance of
minimum tangible net worth, certain financial ratios and certain restrictions
on liens.
Revenues generated from operations are highly dependent upon the price of,
and demand for, oil and natural gas. Historically, the markets for oil and
natural gas have been volatile and are likely to continue to be volatile in the
future as prices are subject to wide fluctuations in response to relatively
minor changes in the supply of and demand for oil and natural gas, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. These uncontrollable factors include, but are not limited to, the
level of consumer product demand, weather conditions, domestic and foreign
governmental regulations, the price and availability of alternative fuels and
political and economic conditions in the Middle East and Canada that can affect
the supply and price of foreign oil and natural gas. It is impossible to
predict future oil and natural gas price movements with any certainty. Declines
in oil and natural gas prices may materially adversely affect the Company's
financial condition, liquidity and results of operations. Lower prices also may
reduce the amount of reserves that can be produced economically as well as
limit the ability to continue to exploit and develop the existing reserve base.
On March 1, 1995, the Company entered into an $8 million bridge loan.
Borrowings under the bridge loan were used to repay $4.9 million of
indebtedness under the Senior Credit Facility and to pay $3.1 million in
connection with the acquisition of producing properties in April 1995. Amounts
outstanding under the bridge loan were repaid with a portion of the proceeds of
the Initial Public Offering.
In August 1995, the Company completed its Initial Public Offering and
received net proceeds of $55.7 million. In addition to repaying borrowings
under the bridge loan, the Company used the proceeds from the initial Public
Offering to complete the acquisition of Ashlawn and to repay a portion of the
Senior Credit Facility.
Management believes that cash flow from operations and available borrowings
under the Senior Credit Facility will be adequate to meet future liquidity
needs, including satisfying the Company's financial obligations and funding its
capital program. If revenues decrease as a result of lower oil or gas prices
or operating difficulties, re-evaluation of a portion of the 1996 capital
budget could be required.
24
<PAGE> 25
BUSINESS
OVERVIEW
Forcenergy is an independent oil and gas company engaged in the
development, exploration, acquisition and production of domestic oil and
natural gas properties. The Company has experienced significant growth in the
last five years, primarily through the acquisition of producing properties in
the Gulf of Mexico. At December 31, 1995, the Company had net proved reserves
of 365 Bcfe, 71% of which were located in the Gulf of Mexico. Approximately
60% of the Company's net proved reserves on such date were natural gas and
approximately 69% of proved reserves were classified as proved developed. The
Company operates approximately 79% of its Gulf of Mexico production.
STRATEGY
The Company's business strategy is to increase its reserves and cash flow
through the development, exploration and exploitation of its existing producing
properties in the shallow waters (less than 350 feet) of the Gulf of Mexico.
Management believes that the Company's acquisitions to date have positioned it
for such growth through a program of development and selective exploratory
drilling. The Company emphasizes the use of 3-D seismic and computer-aided
exploration technology together with geologic and engineering studies of its
properties to evaluate and prioritize drilling prospects. Focusing drilling
activities on producing properties in a relatively concentrated area in the
Gulf of Mexico permits the Company to utilize its base of geological,
engineering and production experience in the region to maximize drilling
success and to minimize finding and development costs. The Company plans to
continue to pursue acquisitions of working interests in producing properties
that offer further development potential as well as providing operating
synergies with existing properties.
OPERATIONS
Quality of Asset Base; Drilling Prospects. The Company holds interests in
or rights to 51 lease blocks in federal and state waters in the Gulf of Mexico,
including a 100% working interest in 26 lease blocks and a 50% or greater
working interest in 12 other lease blocks. The Company believes it has
assembled a three to five year inventory of development, exploitation and
exploratory drilling opportunities in the Gulf of Mexico on acreage held by
production. Most of the properties comprising this inventory are located in
fields which have prolific production histories and which the Company believes
will yield significant additional reserves through the application of modern
exploration and development technologies. The Company is pursuing the
development of these properties through a combination of development drilling,
recompletions and workovers and exploratory drilling. During 1995, the Company
successfully drilled seven of nine exploratory wells and ten of ten development
wells in the Gulf of Mexico and undertook eight recompletions and 24 workover
projects resulting in initial net production increases of 4,392 Bbls/d of oil
and 27,496 Mcf/d of gas. The Company plans to drill 19 development wells,
eight of which have been successfully completed, and undertake 14 recompletions
and 16 workover projects on its properties in the Gulf of Mexico during 1996.
In addition, ten exploratory wells have been scheduled during the year to
provide the Company with exposure to higher risk, higher potential prospects.
Two of these wells have been successfully completed. The Company anticipates
that approximately $70 million of its $88 million 1996 capital expenditure
budget will be spent on these offshore projects, not including acquisition
expenditures.
Control of Operations and Costs. The Company prefers to operate its
offshore properties in order to more effectively manage production performance
while controlling operating expenses and the timing and amount of capital
expenditures. Forcenergy operates 78 structures and 188 wells in the Gulf of
Mexico. Management believes that the operating expertise and experience of its
personnel in the Gulf of Mexico have been instrumental in its ability to
significantly enhance and improve production rates and cash flow with minimal
additional costs. A significant portion of the drilling prospects the Company
expects to pursue during the next three to five years are accessible from
existing production facilities operated by the Company. This base of
operations will enable the Company to reduce its per unit operating costs if
higher production volumes are
25
<PAGE> 26
realized. As a result of these factors, the Company improved its lease
operating expense from $.86 per Mcfe of production in 1994 to $.70 per Mcfe of
production in 1995.
Technology. The Company uses advanced technology in its exploration and
development activities in order to reduce drilling risks and finding costs and
to more effectively prioritize drilling prospects based on return potential.
The Company has acquired 3-D seismic surveys on 50 offshore lease blocks and
currently has 390 square miles of 3-D seismic data and 1,540 linear miles of
2-D seismic data on its offshore properties. The Company has six
geologists/geophysicists with average industry experience of 16 years and has
invested in five Landmark geophysical stations for use in interpreting 3-D
seismic data. The ability to obtain 3-D seismic data for offshore properties
at reasonable costs has enabled the Company to identify multiple development
and exploratory prospects in mature producing fields which were not identified
through earlier technologies.
Recent Acquisitions. During 1995, the Company spent an aggregate of
approximately $92.1 million for working interests in 15 different fields that
added 121.9 Bcfe of net proved reserves to its reserve base at an average cost
of $.76 per Mcfe. Approximately $81.6 million of such expenditures were for
interests in 10 properties located in the Gulf of Mexico. Set forth below is a
listing of the more significant acquisitions completed in 1995.
In February 1995, the Company acquired a 12.5% working interest in South
Marsh Island Block 149, an 8% working interest in the Eugene Island Block 24
fields and a 100% working interest in the Donahue No. 2 well in the Abbeville
Field from Sonat, Inc. for approximately $2.9 million. The acquisition of the
working interest in South Marsh Island Block 149 increased the Company's
ownership in the field to 100%. Improved operating techniques instituted by
the Company on the Donahue well resulted in an increase in daily net production
from 210 barrels at the time of the acquisition to approximately 312 barrels
per day at year-end.
In March 1995, the Company acquired an average working interest of 85% in
the Livingston Field from Amoco Production Company and others for approximately
$2.8 million. The Livingston Field is a Wilcox waterflood field located
approximately 45 miles west of New Orleans, Louisiana.
The Company also acquired in March 1995 working interests in the South
Marsh Island 136/137 Field and the northern half of South Marsh Island Block
106 from Conoco, Inc. for approximately $24.5 million. In April 1995, the
Company acquired all of the remaining working interests in the northern half of
South Marsh Island 106 from Texaco Trading Corporation, and in August purchased
an additional 12.67% working interest in the 136/137 field from Apache
Corporation (increasing its total ownership in the field to 67.25%). The
foregoing acquisitions were particularly attractive because both fields are
adjacent to fields in which the Company holds 100% working interests. The
Company had an active drilling program in Block 106 in 1995 and will have at
least one rig in the block for all of 1996. See "1995 and 1996 Offshore and
Gulf Coast Drilling Activity."
Simultaneously with the closing of its Initial Public Offering, the Company
acquired all of the outstanding capital stock of Ashlawn, a privately-held
company with substantial working interests in the South Pass 24 Field,
Vermilion 28 Field and Ship Shoal 26 Field (the "Ashlawn Acquisition"). The
purchase price for the Ashlawn Acquisition consisted of 3,000,000 shares of
Common Stock, $3.3 million in cash and the assumption of $5.7 million in debt.
All of the assumed debt was repaid with the proceeds of the Initial Public
Offering. All of the shares included in this offering are being sold by the
former stockholders of Ashlawn. The Company conducted an active drilling
program on these properties in 1995 and expects to continue to pursue
additional development projects on the properties in 1996. See "-- 1995 and
1996 Offshore and Gulf Coast Drilling Activity".
In November 1995, the Company acquired an approximate 50% working interest
in certain leases in Howard Glasscock/Snyder fields in Howard County, Texas
from Saga Petroleum, Inc. for approximately $3.9 million. The Company's 1996
capital budget includes $1.9 million for its pro rata share of drilling
injection wells to initiate a waterflood recovery project in the field.
26
<PAGE> 27
In December 1995, the Company acquired, by purchase and simultaneous swap
in two transactions, an approximate 50% working interest in the Vermilion 261
Field (increasing total ownership in the field to 75%) and a 100% working
interest in the Vermilion 262 Field for $830,000 in cash and the exchange of
the Company's interest in the Eugene Island 24 Field it acquired in February
1995. In late 1995, the Company acquired a 100% working interest in the
Vermilion Block 380 Field, located offshore Louisiana, from Texaco Exploration
and Production, Inc. for consideration of approximately $650,000.
Effective December 1995, the Company acquired a 100% working interest in
the West Cameron 630 Field, located offshore Louisiana and an approximately
51.7% working interest in the Comite Field in East Baton Rouge Parish,
Louisiana from Exxon Corporation for approximately $3.9 million.
As is customary in the oil and gas industry, the Company from time to time
submits bids on oil and gas properties. The Company currently has executed
purchase and sale agreements with two parties for the acquisition of properties
in the Gulf of Mexico and West Texas for consideration of approximately $11.2
million and $3.6 million, respectively. Such agreements are subject to the
completion of satisfactory due diligence by the Company including title and
environmental due diligence. There can be no assurance that any of such
transactions will be consummated.
GULF OF MEXICO PROPERTIES
Since January 1, 1990, the Company has acquired working interests in 51
Gulf of Mexico and Gulf Coast blocks. The Company owns a 100% working interest
in 26 of these blocks and operates 37 of the producing properties. The
following table lists the working interest, net proved reserves and the
operator for the Company's 14 largest offshore properties, comprising
approximately 67% of the Company's total net proved reserves, as of December
31, 1995:
<TABLE>
<CAPTION>
NET PROVED RESERVES AT
DECEMBER 31, 1995
-----------------------------
AVERAGE
WORKING OIL GAS TOTAL
FIELD INTEREST (MBBLS) (MMCF) (MMCFE) OPERATOR
- ----------------------------------------------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
South Marsh Island Block 106/115 . . . . . . . 100% 4,326 12,659 38,615 Company
South Marsh Island 6 Field Complex . . . . . . 100% 1,423 18,504 27,042 Company
Ship Shoal 230 Field, Block 219 . . . . . . . . 100% 973 10,615 16,453 Company
West Cameron 205 Field . . . . . . . . . . . . 100% 96 11,564 12,140 Company
Ship Shoal 26 Field . . . . . . . . . . . . . . 100% 299 8,872 10,666 Company
Chandeleur 25 Field . . . . . . . . . . . . . . 100% - 9,819 9,819 Company
High Island A 467 Field . . . . . . . . . . . . 100% 51 7,867 8,173 Company
High Island A-280 Field . . . . . . . . . . . . 100% 22 5,319 5,451 Company
South Timbalier 72 Field . . . . . . . . . . . 100% 626 1,561 5,317 Company
Grand Isle 76 Field . . . . . . . . . . . . . . 96% 139 8,133 8,967 Company
Vermilion 262 Field, Block 261 and 262 . . . . 77% 903 6,076 11,494 Company
South Pass 24 Field . . . . . . . . . . . . . . 67% 7,254 10,817 54,341 Third Party
South Marsh Island 137 Field, Blocks 136/137 . 67% 708 16,451 20,699 Company
East Cameron 14 Field . . . . . . . . . . . . . 50% 374 12,692 14,936 Company
</TABLE>
1995 AND 1996 OFFSHORE AND GULF COAST DRILLING ACTIVITY
During 1995 and 1996 the Company continued to focus on increasing reserves
and cash flow by targeting exploratory prospects on recently acquired
properties, developed in most cases through the use of 3-D seismic data. Total
capital spent in the 1995 drilling program was approximately $51.8 million,
including capitalized internal costs of $3,660,000 with 57.5 Bcfe of proved
reserves added at an average cost of $.90 per Mcfe. For the year, the Company
successfully drilled seven of nine exploratory wells and ten of ten development
wells in its offshore drilling program. Capital spending in 1995 for offshore
projects was approximately $45.7 million, including $1.5 million for the
acquisition of additional 3-D seismic data on offshore
27
<PAGE> 28
lease blocks. The Company has incurred $40.0 million in capital expenditures
as of April 30, 1996 including $1.4 million in capitalized internal costs.
Additionally, the Company has spent $1.0 million on geological and geophysical
costs including 3-D seismic data. The current budget for 1996 is estimated at
$88.0 million of which $70.0 million is targeted for the Gulf of Mexico. The
following is a brief description of properties where significant activity has
occurred during 1995 and 1996, all of which were operated by the Company. The
working interest ownership of the Company is noted in parenthesis.
South Marsh Island Block 106 North (SMI 106 N/2) and Block 106 South (SMI
106 S/2) (100% average working interest). The Company acquired its working
interests in these fields (accounted for as separate fields) in a series of
acquisitions from 1993 to 1995. An aggressive drilling program was initiated
on these fields in 1995 as two development wells and four exploratory wells
were successfully completed in SMI 106 S/2 and two exploratory wells were
completed in SMI 106 N/2. During the first quarter of 1996 one development
well and one exploratory well were drilled and completed on SMI 106 S/2.
Initial production tests from these two wells totaled 805 BOPD (Bbls of oil per
day) and 2,350 (MCFPD) (Mcf of gas per day), net to the Company. This activity
increased total net production at SMI 106 S/2 to 1,180 BOPD and 6,100 MCFPD by
the end of March 1996. Subsequent to the first 1996 quarter, the Company
completed another development well on SMI 106 N/2 which has begun producing at
initial rates of 512 BOPD and 230 MCFPD. This new production brings total net
production at SMI 106 N/2 to 1,250 BOPD and 2,700 MCFPD as of May 1996. Total
production net to the Company in the SMI Block was 2,430 BOPD and 8,800 MCFPD
compared with average net rates of 475 BOPD and 1,600 MCFPD at the beginning of
1995. The Company currently plans to drill at least five more development
wells in the SMI 106 N/2 area.
East Cameron 14 Field (50% average working interest). A development well
was completed in the first quarter of 1996 with production beginning in May at
an initial rate of 3,090 MCFPD, net to the Company, increasing total net
production in this field to 125 BOPD and 4,160 MCFPD. The well encountered
reserves in seven other zones. The Company is currently evaluating plans for
additional drilling in the field.
South Pass 24 Field (approximate 67% average working interest). Subsequent
to the Ashlawn merger, and during 1995 the Company drilled four development
wells and undertook two workovers and recompletions in its effort to exploit
the anticipated potential of this field. During the first quarter of 1996 four
development wells were drilled, three of which have been completed. Initial
production tests from the three completed wells totaled 172 BOPD and 338 MCFPD,
net to the Company. In addition, three workovers were performed increasing net
production by another 203 BOPD and 605 MCFPD. These 1995 and 1996 activities
increased total net production in this field to 2,105 BOPD and 2,373 MCFPD by
the end of March 1996 compared with net production of 891 BOPD and 501 MCFPD at
acquisition. The Company currently plans to drill five more development wells,
two exploratory wells and perform eleven workovers/recompletions during the
balance of 1996. Under Louisiana law, new wells permitted prior to June 30,
1996, or wells which have been shut in for more than two years and which are
permitted prior to that date, will qualify for a five year exemption from the
state severance tax of 12.5% on the value of oil production sold and $.07 per
Mcf on the volume of gas products sold during the five years following June 30,
1996.
West Cameron 205 Field (100% average working interest). The Company
acquired its working interest in West Cameron Blocks 205, 206 and 212 in a
series of acquisitions during 1990 through 1992. During 1995 the Company
drilled a dry exploratory test well in this field. Future drilling in this
field is currently being evaluated.
Ship Shoal 230 Field, Block 219 (100% working interest). One development
well has been drilled to date. Completion operations were finalized in April
1996 and production from this well began in May at initial rates of 346 BOPD
and 2,100 MCFPD net to the Company. This increased total net production in
this field to 1,200 BOPD and 7,800 MCFPD. The Company expects to begin a
multi-well development and exploitation program in this field during 1997.
High Island 467 Field (100% working interest). Drilling of the first
exploratory well of a planned three well program began during the first quarter
of 1996. This well was completed in May with initial production rates of 41
BOPD and 4,473 MCFPD net to the Company. This brings total net production in
this field to 50 BOPD
28
<PAGE> 29
and 5,300 MCFPD. The Company plans to drill two more wells, one development
and one exploratory, in the field during 1996.
In addition to the above discussed activity the Company plans to drill five
exploratory wells and perform nine workovers/recompletions in the South Marsh
Island 6 Field Complex in which the Company has a 100% working interest.
ONSHORE PROPERTIES
Forcenergy owns working and royalty interests in approximately 1,328
producing oil and gas wells in 147 fields in the Rocky Mountain, Gulf Coast,
Southwest and Appalachian regions of the United States. Management believes
that the long life reserves in these primarily non-operated, onshore properties
complements the Gulf of Mexico reserve base by providing a source of relatively
stable cash flow that require limited management involvement. Onshore
properties accounted for approximately 29% of net proved reserves at December
31, 1995. During 1995, the Company expended approximately $4.0 million in
capital on its onshore properties, including $3.7 million for drilling and
recompletion activities. The following is a summary of the Company's most
significant onshore properties:
Altamont/Bluebell Field. The Altamont/Bluebell Field is located in
Duchesne and Uintah Counties, Utah. The Company owns working interests ranging
from less than 1% to 27.9% (average approximately 7%) in approximately 250
active wells and has overriding royalty interests in another 190 wells. The
Company also owns a 8.125% working interest in the Altamont natural gas
processing plant. As of January 1, 1996, Forcenergy's net production,
including gas plant liquids, was approximately 530 Bbls/d and 1,410 Mcf/d.
Estimated net proved reserves as of December 31, 1995 were 1,139 Mbbls and
3,136 MMcf. In 1995 the Company participated in its share of a field
development and workover program, of which Forcenergy's net share was $270,000.
The Company expects a similar development and work schedule for 1996.
Whitney Canyon Field. Forcenergy owns working interests ranging from 14.1%
to 18.9% in three wells in this Uintah County, Wyoming field and a 3.02%
working interest in the Whitney Canyon Gas Processing Plant. The Company's
share of total sales from processed gas and condensate and plant liquids
currently averages 160 Bbls/d and 1,800 Mcf/d. Net proved reserves as of
December 31, 1995 for the Company's Whitney Canyon wells and share of the
processing plant are estimated at 283 Mbbls and 13,106 MMcf. Additional wells
are expected to be connected in 1996 to Whitney Canyon along a recently
installed extension of the gathering system which currently processes gas from
the Yellow Creek field located approximately 35 miles south of the plant.
Mercy Field. The Company and partners acquired working interests in three
additional wells in this San Jacinto County, Texas field during 1995. These
shallow wells are scheduled to be deepened in 1996 to further develop the gas
pays from which current production is derived. The Company owns a 28.3%
working interest in one well and a 40.0% interest in the nine remaining field
wells. As of December 31, 1995, Forcenergy's net production averaged 130
Bbls/d and 1,980 Mcf/d. Net proved reserves as of December 31, 1995 were 278
Mbbls and 4,470 MMcf. A planned 12,000 foot Wilcox development well will spud
during 1996. The operator has also identified two additional exploratory
prospects for 1997.
Western Pennsylvania/West Virginia. Since 1989 the Company has
participated in several exploratory drilling programs targeting the Oriskany
formation in the Appalachia regions of western Pennsylvania and West Virginia.
The Company's working interests in these program wells range from 2.5% to 50%.
To date, the programs have included 32 wells, 28 of which have been successful.
Production as of January 1, 1996 was 3,800 Mcf/d of which the Company's share
is 425 Mcf/d. Net proved reserves for the Company's Oriskany programs, as of
December 31, 1995, were 4,131 MMcf.
Howard Glasscock/Snyder Field. During 1995 the Company acquired an
approximate 50% non-operated working interest position in the Howard
Glasscock/Snyder Field located in Howard County, Texas. The field will be
further developed through waterflood operations. As of December 31, 1995, the
Company's net proved reserves were estimated at 1,784 Mbbls. Current daily
production from primary recovery methods is
29
<PAGE> 30
350 Bbls of oil per day, of which the Company's share is 130 Bbls. The
operator has commenced the waterflood program which will include the drilling
of 21 water-injection wells, reactivating 15 shut-in production wells and
upgrading those facilities. Water injection is expected to commence mid-1996
and peak response from the waterflood is expected in 1997.
ADDITIONAL FUTURE PROJECTS
In addition to the activity described above, the Company has identified a
substantial inventory of additional development, exploratory, workover and
recompletion projects on existing properties which it may undertake over the
next three to five years. Many of these projects are currently being reviewed
by the Company's geologists and geophysicists utilizing 3-D seismic data
acquired in 1994 and 1995.
OIL AND GAS RESERVES
The following table summarizes the estimates of the Company's historical
net proved reserves as of December 31, 1995 and the present values attributable
to those reserves on such date using constant prices and operating costs as of
the valuation date, discounted at a rate of 10% per annum, in accordance with
Securities and Exchange Commission ("Commission") guidelines. The reserve data
and present values as of December 31, 1995 for the onshore properties have been
estimated by Netherland, Sewell & Associates, Inc., independent petroleum
engineering consultants. The reserve data and present values as of December
31, 1995 for the offshore properties have been estimated by Collarini
Engineering Inc., independent petroleum engineering consultants. (See Note 16
to The Company's Financial Statements)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1995
------------------
<S> <C>
NET PROVED RESERVES:
Oil (Mbbls) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,458
Natural gas (MMcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218,052
Total (MMcfe) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364,800
Present value of future net revenues before income taxes (thousands) . . . . . . . . . $540,901
Standardized measure of discounted future net cash flows (thousands)(1) . . . . . . . . $406,956
</TABLE>
- ----------
(1) The standardized measure of discounted future net cash flows represents the
present value of future net revenues after income taxes discounted at 10%.
In accordance with applicable requirements of the Commission, estimates of
the Company's proved reserves and future net revenues are made using sales
prices estimated to be in effect as of the date of such reserve estimates and
are held constant throughout the life of the properties (except to the extent a
contract specifically provides for escalation). Estimated quantities of proved
reserves and future net revenues therefrom are affected by oil and gas prices,
which have fluctuated widely in recent years. There are numerous uncertainties
inherent in estimating oil and natural gas reserves and their estimated values,
including many factors beyond the control of the producer. The reserve data
set forth in this Prospectus represents only estimates. Reservoir engineering
is a subjective process of estimating underground accumulations of oil and
natural gas that cannot be measured in an exact manner. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, estimates
of different engineers, including those used by the Company, may vary. In
addition, estimates of reserves are subject to revision based upon actual
production, results of future development and exploration activities,
prevailing oil and gas prices, operating costs and other factors, which
revisions may be material. Accordingly, reserve estimates are often different
from the quantities of oil and natural gas that are ultimately recovered and
are highly dependent upon the accuracy of the assumptions upon which they are
based. The Company's estimated proved reserves have not been filed with or
included in reports to any federal agency.
30
<PAGE> 31
DRILLING ACTIVITY
The following table sets forth the drilling activity of the Company on its
properties for the twelve month periods ended December 31, 1993, 1994, 1995 and
the three-month period ended March 31, 1996:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- ----------------
1993 1994 1995 1996
------------- ------------- ------------- ---------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OFFSHORE DRILLING ACTIVITY:
Development:
Oil . . . . . . . . . . . . . . 2 0.6 1 1.0 8 5.9 5 4.1
Gas . . . . . . . . . . . . . . 2 --(1) 5 3.7 2 1.7 -- --
Non-productive . . . . . . . . . -- -- 1 1.0 -- -- 1 1.0
-- --- -- --- -- --- -- ---
Total . . . . . . . . . . . 4 0.6 7 5.7 10 7.6 6 5.1
== === = === == === == ===
Exploratory:
Oil . . . . . . . . . . . . . . -- -- -- -- 5 5.0 1 1.0
Gas . . . . . . . . . . . . . . -- -- 1 0.3 2 1.5 -- --
Non-Productive . . . . . . . . . 2 0.7 -- -- 2 2.0 -- --
-- --- -- --- -- --- -- ---
Total . . . . . . . . . . . 2 0.7 1 0.3 9 8.5 1 1.0
== === == === == === == ===
ONSHORE DRILLING ACTIVITY:
Development:
Oil . . . . . . . . . . . . . . 25 2.0 9 0.5 2 0.1 5 2.5
Gas . . . . . . . . . . . . . . 6 2.4 4 1.7 -- -- -- --
Non-productive . . . . . . . . . -- -- -- -- -- -- -- --
-- --- -- --- -- --- -- ---
Total . . . . . . . . . . . 31 4.4 13 2.2 2 0.1 5 2.5
== === == === = === == ===
Exploratory:
Oil . . . . . . . . . . . . . . -- -- -- -- -- -- -- --
Gas . . . . . . . . . . . . . . 3 0.9 4 0.2 1 0.5 -- --
Non-productive . . . . . . . . . 3 0.9 4 2.8 3 2.0 1 1.0
-- --- -- --- -- --- -- ---
Total . . . . . . . . . . . 6 1.8 8 3.0 4 2.5 1 1.0
== === == === == === == ===
</TABLE>
(1) The Company has less than a 1% working interest in each of these wells.
PRODUCTIVE WELLS
The following table sets forth the number of productive oil and gas wells
in which the Company owned a working interest at March 31, 1996:
<TABLE>
<CAPTION>
TOTAL PRODUCTIVE
WELLS
----------------
GROSS NET
----- ------
<S><C> <C> <C>
Oil . . . . . . . . . . . . . . . . . . . . 813 312.1
Gas . . . . . . . . . . . . . . . . . . . . 971 242.4
----- -----
Total . . . . . . . . . . . . . . . . . 1,784 554.5
===== =====
</TABLE>
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections. The Company has
14 wells that are completed in more than one producing horizon; those wells
have been counted as single wells.
31
<PAGE> 32
ACREAGE DATA
The following table sets forth the approximate developed and undeveloped
acreage in which the Company held a leasehold, mineral or other interest at
March 31, 1996. Undeveloped acreage includes leased acres on which wells have
not been drilled or completed to a point that would permit the production of
commercial quantities of oil and gas, regardless of whether or not such acreage
contains proved reserves.
<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES
------------------- --------------------
GROSS NET GROSS NET
-------- ------- --------- -------
<S> <C> <C> <C> <C>
Offshore(1) . . . . . . . . . . . . . . . . 195,901 140,326 20,127 8,205
Onshore . . . . . . . . . . . . . . . . . . 608,699 55,521 134,535 37,987
------- ------ ------- ------
Total . . . . . . . . . . . . . . . . 804,600 195,847 154,662 46,192
======= ======= ======= ======
</TABLE>
(1) Offshore includes acreage in federal waters and state waters of coastal
South Louisiana.
MARKETING AND CUSTOMERS
The Company sells substantially all of its natural gas to unaffiliated
entities under short-term contracts (maximum of one year in duration) at
pricing based on current spot market indexes. A minor portion of the Company's
gas production is committed to be processed through gas plants. Crude oil and
condensate is typically sold at the wellhead on month-to-month contracts at
posted field prices, plus a slight premium, in the area where production
occurs. Approximately 8% of the Company's daily oil production is subject to
agreements with the Company's predecessors in the properties whereby these
predecessors have the right to purchase that production at prices less than
might otherwise be obtained.
Most of the Company's production is transported through gas gathering
systems and oil and gas pipelines which are not owned by the Company.
Transportation space on such gathering systems and pipelines is occasionally
limited and at times unavailable due to repairs or improvements being made to
such facilities or due to such space being utilized by other gas with priority
transportation agreements. Forcenergy's access to transportation options can
also be affected by regulation of intrastate and interstate gas transportation.
In an attempt to promote competition, the Federal Energy Regulatory Commission
("FERC") has issued a series of orders which have altered significantly the
marketing and transportation of natural gas (See "Government Regulation"). The
effect of these orders to date has been to enable producers such as the Company
to market their natural gas production to purchasers other than the interstate
pipelines located in the vicinity of their producing properties. While the
Company has not experienced any inability to market its production, if
transportation space is restricted or is unavailable, the Company's cash flow
could be adversely affected.
During 1995 and 1994, certain purchasers of the Company's production
purchased in excess of 10% of the value of the Company's oil and gas sold by
the Company; however, based on the current demand for oil and natural gas, the
Company does not believe the loss of any of these purchasers would have a
material adverse effect on the Company (See Note 13 to the Company's Financial
Statements).
The Company utilizes forward sales contracts and commodity swaps for
portions of its current oil and gas production to achieve more predictable cash
flows and to reduce its exposure to fluctuations in oil and gas prices. The
remaining portion of current production has not been hedged so as to provide
the Company the opportunity to benefit from increases in prices on that portion
of the production, should price increases materialize. As of May 1, 1996, the
Company had entered into future sales and swap contracts as a hedge against
possible price declines that effectively fixed sales prices on approximately
74% of the Company's estimated net oil production for the remainder of the year
and for approximately 59% of the Company's estimated net natural gas production
for the remainder of 1996, at $18.00 per barrel and $2.03 per Mcf,
respectively. For this purpose, this estimated net production for the
remainder of the year assumes that current production rates will continue for
the rest of the year; however, in reality, the Company anticipates that
32
<PAGE> 33
production will be added through its capital program. All of these
arrangements are settled on a monthly basis. The Company accounts for its
commodity swaps as hedging activities and, accordingly, gains or losses are
included in oil and gas revenues for the period the production was hedged.
(See Note 11 to the Company's Financial Statements.)
ABANDONMENT COSTS
The Company is responsible for the costs associated with the plugging of
wells, the removal of facilities and equipment and site restoration on its oil
and gas properties, pro rata to its working interest. The Company provides
for expected future abandonment liabilities by accruing for such costs as a
component of depletion, depreciation and amortization as the properties are
produced. As of December 31, 1995, total undiscounted abandonment costs
estimated to be incurred through the year 2006 were approximately $48 million
for properties in federal and state waters. For onshore properties, salvage
values received for equipment are usually sufficient to offset the abandonment
costs. Estimates of abandonment costs and their timing may change due to many
factors including actual drilling and production results, inflation rates, and
changes in environmental laws and regulations. No significant abandonment
costs are anticipated to be incurred in 1996.
The Minerals Management Service ("MMS") requires lessees of Outer
Continental Shelf ("OCS") properties to post performance bonds in connection
with the plugging and abandonment of wells located offshore and the removal of
all production facilities. Operators in the OCS waters of the Gulf of Mexico
are also currently required to post an area wide bond of the lesser of $3
million, or $500,000 per producing lease. The Company currently has obtained
additional supplemental bonding on its offshore leases as required by the MMS.
Under certain circumstances, the MMS has the authority to suspend or terminate
operations on federal leases for failure to comply with applicable bonding
requirements or other regulations applicable to plugging and abandonment. Any
such suspensions or terminations of the Company's operations could have a
material adverse effect on the Company's financial condition and results of
operations.
TITLE TO PROPERTIES
As is customary in the oil and natural gas industry, the Company makes only
a cursory review of title to farmout acreage and to onshore undeveloped oil and
natural gas leases upon execution of the contracts. Prior to the commencement
of drilling operations, a thorough title examination is conducted and curative
work is performed with respect to significant defects. The Company performs
complete reviews of title to federal and state offshore lease blocks prior to
acquisition. To the extent title opinions or other investigations reflect
material title defects, the seller of the property, rather than the Company, is
typically responsible for curing any such title defects at its expense. If the
Company were unable to remedy or cure any title defect of a nature such that it
would not be prudent to commence drilling operations on undeveloped properties,
the Company could suffer a loss of its entire investment in the property. The
Company has obtained title opinions on substantially all of its producing
properties and believes that it has satisfactory title to such properties in
accordance with standards generally accepted in the oil and gas industry.
Substantially all of the Company's oil and natural gas properties are and will
continue to be mortgaged to secure borrowings under the Senior Credit Facility.
COMPETITION
Forcenergy encounters competition from other oil and gas companies in all
phases of its operations, including the acquisition of producing properties.
Competitors include major integrated oil and natural gas companies, numerous
independent oil and natural gas companies, individuals and drilling and income
programs. Many competitors are large, well-established companies with
substantially larger operating staffs and greater capital resources than the
Company's and which, in many instances, have been engaged in the energy
business for a much longer time. Such companies may be able to pay more for
productive oil and natural gas properties and exploratory prospects and to
define, evaluate, bid for and purchase a greater number of properties and
prospects than the Company's financial or human resources permit. Forcenergy's
ability to acquire additional properties and to discover reserves in the future
will be dependent upon its ability
33
<PAGE> 34
to evaluate and select suitable properties and to consummate transactions in a
highly competitive environment.
OPERATING RISKS OF OIL AND GAS OPERATIONS
The oil and gas business involves certain operating hazards such as well
blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or
well fluids, fires, formations with abnormal pressures, pollution, releases of
toxic gas and other environmental hazards and risks, any of which could result
in substantial losses to the Company through the loss of hydrocarbons,
pollution claims, personal injury suits and damage to properties of the Company
and others. The Company's offshore operations also are subject to the
additional hazards of marine operations, such as severe weather, capsizing and
collision that can cause substantial damage to facilities, and possible
business interruption. The availability of a ready market for the Company's
oil and natural gas production also depends on the proximity of reserves to,
and the capacity of, oil and gas gathering systems, pipelines and trucking or
terminal facilities. Additionally, the Company may be liable for environmental
damages caused by previous owners of property purchased or leased by the
Company. As a result, substantial liabilities to third parties or governmental
entities may be incurred, the payment of which could reduce or eliminate the
funds available for development, acquisitions or exploration, or result in the
loss of the Company's properties. In accordance with customary industry
practices, Forcenergy maintains insurance against some, but not all, of such
risks and losses. The Company does not carry business interruption insurance.
The occurrence of an event not fully covered by insurance could have a material
adverse effect on the financial condition, results of operations and cash flow
of the Company.
GOVERNMENT REGULATION
The Company's drilling, production and transportation and marketing
operations are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells, and
regulating the location of wells, the surface use and restoration of properties
upon which wells are drilled and the plugging and abandonment of wells.
Regulations also can limit production rates, require capital for environmental
compliance and affect the transportation and marketing of hydrocarbons.
Certain operations the Company conducts are on federal oil and gas leases,
which the MMS administers. The MMS issues such leases through competitive
bidding. These leases contain relatively standardized terms and require
compliance with detailed MMS regulations and orders pursuant to the Outer
Continental Shelf Lands Act ("OCSLA") (which are subject to change by the MMS).
For offshore operations, lessees must obtain MMS approval for exploration plans
and development and production plans prior to the commencement of such
operations. In addition to permits required from other agencies (such as the
Coast Guard, the Army Corps of Engineers and the Environmental Protection
Agency), lessees must obtain a permit from the MMS prior to the commencement of
drilling. The MMS has promulgated regulations requiring offshore production
facilities located on the OCS to meet stringent engineering and construction
specifications, and has recently proposed additional safety-related regulations
concerning the design and operating procedures for OCS production platforms and
pipelines. The MMS also has issued regulations restricting the flaring or
venting of natural gas, and has recently proposed to amend such regulations to
prohibit the flaring of liquid hydrocarbons and oil without prior
authorization.
In November 1995, the MMS issued a notice of proposed rulemaking in which
it proposed to amend its regulations governing the calculation of royalties and
the valuation of natural gas produced from federal leases. The principle
feature in the amendments, as proposed, would establish an alternative
market-index based method to calculate royalties on certain natural gas
production sold to affiliates or pursuant to non-arm's-length sales contracts.
The MMS proposed this rulemaking to facilitate royalty valuation in light of
changes in the gas marketing environment. The MMS has recently announced its
intention to reconsider the proposal and reopen the comment period. The
Company cannot predict what action the MMS will take on these matters, nor can
it predict at this stage of the rulemaking proceeding how the Company might be
affected if amendments to the regulations are adopted.
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<PAGE> 35
The FERC regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of natural gas produced by the Company,
as well as the revenues received by the Company for sales of such production.
Since the mid-1980s, the FERC has issued a series of orders, culminating in
Order Nos. 636, 636-A and 636-B ("Order 636"), that have significantly altered
the marketing and transportation of natural gas. Order 636 mandates a
fundamental restructuring of interstate pipeline sales and transportation
service, including the unbundling by interstate pipelines of the sales,
transportation, storage and other components of the city-gate sales services
such pipelines previously performed. One of FERC's purposes in issuing the
orders is to increase competition within all phases of the natural gas
industry. Order 636 and subsequent FERC orders on rehearing have been appealed
and are pending judicial review. Because these orders may be modified as a
result of the appeals, it is difficult to predict the ultimate impact of the
orders on the Company and its natural gas marketing efforts. Generally, Order
636 has eliminated or substantially reduced the interstate pipelines'
traditional role as wholesalers of natural gas, and has substantially increased
competition and volatility in natural gas markets. While significant
regulatory uncertainty remains, Order 636 may ultimately enhance the Company's
ability to market and transport its natural gas, although it may also subject
the Company to greater competition and more restrictive pipeline imbalance
tolerances and greater associated penalties for violation of such tolerances.
The FERC also regulates rates and service conditions for interstate
transportation of crude oil, liquids and condensate, which can affect the
revenues the Company receives from the sale of these products. Effective
January 1, 1995, the FERC adopted regulations establishing an indexing system
for transportation rates for oil pipelines, which generally indexes such rates
to inflation. These regulations, which could increase the cost of transporting
crude oil, liquids and condensate by pipeline, have been appealed and are
pending judicial decision. Because the regulations are subject to review, the
Company cannot predict the ultimate effect of the orders on the Company.
Legislation affecting the oil and gas industry is under constant review for
amendment or expansion by Congress, the FERC, state regulatory bodies and the
courts. The Company cannot predict when or if any such proposals might become
effective, or their effect, if any, on the Company's operations. The natural
gas industry historically has been very heavily regulated; therefore, there is
no assurance that the less stringent regulatory approach recently pursued by
the FERC and Congress will continue indefinitely into the future. The
regulatory burden on the oil and natural gas industry increases the Company's
cost of doing business and, consequently, affects its profitability and cash
flow. In as much as such laws and regulations are frequently expanded, amended
or reinterpreted, the Company is unable to predict the future cost or impact of
complying with such regulations
ENVIRONMENTAL MATTERS
The Company, as an owner or lessee and operator of oil and gas properties,
is subject to federal, state and local laws and regulations governing the
discharge of materials into, and the protection of, the environment. These
laws and regulations may require the acquisition of a permit before drilling
commences, restrict the types, quantities and concentration of various
substances that can be released into the environment in connection with
drilling and production activities, limit or prohibit drilling activities on
certain lands lying within wilderness, wetlands and other protected areas, and
impose substantial liabilities for pollution resulting from the Company's
operations. Stricter standards in environmental legislation may be imposed in
the oil and gas industry in the future, such as proposals made in Congress and
at the state level from time to time that would reclassify certain oil and
natural gas exploration and production wastes as "hazardous wastes" and make
the reclassified wastes subject to more stringent and costly handling, disposal
and clean-up requirements. The impact of any such changes, however, would not
likely be any more burdensome to the Company than to any other similarly
situated company involved in oil and gas exploration and production.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons who are considered to be responsible for the release of a "hazardous
substance" into the environment. These persons include the owner or operator
of the disposal site or sites where the
35
<PAGE> 36
release occurred and companies that disposed or arranged for disposal of the
hazardous substances. Under CERCLA, such persons may be subject to joint and
several liability for the costs of cleaning up the hazardous substances, for
damages to natural resources, and for the costs of certain health studies.
Furthermore, it is not uncommon for neighboring landowners and other third
parties to file claims for personal injury and property damage allegedly caused
by hazardous substances or other pollutants released into the environment.
In addition, the U.S. Oil Pollution Act establishes strict liability for
owners of offshore facilities that are the site of a release of oil into
"waters of the United States" (a term that includes the Gulf of Mexico) and the
Act presently requires owners of offshore facilities to demonstrate that they
have $150 million in insurance coverage or other sources of funds available to
cover costs that might be incurred by governmental authorities in responding to
an oil spill. Congress is presently considering amendments to the Oil
Pollution Act that would reduce the level of "financial responsibility"
required by the Act to $35 million.
The Company maintains insurance coverages which it believes are customary
in the industry although it is not fully insured against many environmental
risks. Although the Company has not experienced any material adverse effect
from compliance with environmental requirements, nor is it aware of any
environmental claims existing at December 31, 1995, there is no assurance that
this will continue in the future.
EMPLOYEES
As of April 30, 1996, the Company had 141 full time employees, 29 of whom
are located at the Company's headquarters in Miami, Florida and 112 of whom are
located at the Company's regional offices in New Orleans, Lafayette and
Intracoastal City, Louisiana and Denver, Colorado. Most of such regional
employees work offshore in the Gulf of Mexico. None of Forcenergy's employees
are represented by a labor union.
OFFICES
The Company currently leases approximately 12,600 square feet of office
space in Miami, Florida, where its principal offices are located, approximately
900 square feet in Denver, Colorado, approximately 17,900 square feet in New
Orleans, Louisiana and approximately 666 square feet in Lafayette, Louisiana.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings, other
than ordinary routine litigation incidental to its business, that management
believes would not have a material adverse effect on its financial condition or
results of operations.
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<PAGE> 37
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert Issal . . . . . . . . . . . 50 Chairman of the Board
Stig Wennerstrom . . . . . . . . . 53 President, Chief Executive Officer and Director
J. Russell Porter . . . . . . . . . 34 Vice President - Corporate Development
John A. Brush . . . . . . . . . . . 41 Vice President - Land and Marketing, General Counsel, Secretary
Harry F. Hufft . . . . . . . . . . 45 Vice President - Exploration and Production
E. Joseph Grady . . . . . . . . . . 43 Vice President, Treasurer and Chief Financial Officer
Eric Forss . . . . . . . . . . . . 30 Director
Arnold L. Chavkin . . . . . . . . . 44 Director
Kevin S. Penn . . . . . . . . . . . 34 Director
Bruce L. Burnham . . . . . . . . . 62 Director
William F. Wallace . . . . . . . . 56 Director
</TABLE>
Robert Issal has been Chairman of the Board of Directors of the Company
since May 1994 and has been a director since the Company's inception in
September 1993. Mr. Issal has been Chairman of FAB since May 1994 and served
as Vice Chairman of FAB from April 1992 to April 1994. From 1988 through 1991,
Mr. Issal was President and Chief Executive Officer of Forsheda AB, a Swedish
public company, and from 1991 through 1994 served as President of Abstracta AB.
Since 1994, Mr. Issal has served as Chairman and President of Rejmyre Belysning
AB Sweden, a Swedish lighting manufacturer.
Stig Wennerstrom has been President and Chief Executive Officer of the
Company since its inception in September 1993. Prior to the formation of the
Company, Mr. Wennerstrom was the President and Chief Executive Officer of
Forcenergy Inc, the general partner of Forcenergy Partners. FGE managed
Forcenergy Partners as its general partner (FAB was the sole limited partner of
Forcenergy Partners) from its inception in 1989 until FGE and Forcenergy
Partners were merged into the Company in September 1993.
J. Russell Porter is Vice President - Corporate Development of the Company.
Mr. Porter joined the Company as Vice President - Financial Planning & Analysis
in April 1994 and served in that capacity until being promoted to his current
position in October 1995. From January 1992 until joining the Company, Mr.
Porter held the position of Vice President in the Natural Resources Group of
Internationale Nederlanden (U.S.) Capital Corporation in New York. From July
1990 to December 1991, Mr. Porter was an Associate in the Energy Group at
Manufacturers Hanover and Chemical Bank.
John A. Brush is Vice President - Land and Marketing, General Counsel,
Secretary of the Company. Mr. Brush joined the Company as Vice President-Land
and General Counsel in November 1993 and served in that capacity until being
appointed to his current position in November 1995. Prior to joining the
Company, Mr. Brush was Manager of Contract Administration with Apache
Corporation from April 1992 to June 1993 and was employed by Hamilton Brothers
Oil Company from July 1985 to January 1992 in various positions.
Harry F. Hufft is Vice President - Exploration and Production of the
Company and has responsibilities for all Gulf of Mexico and Gulf Coast
operations. Prior to joining the Company in December 1993, Mr. Hufft held
various positions within Graham Royalty Ltd. from December 1989 to November
1993, serving as President from September 1991 until the sale of the company.
From 1972 to November 1989, Mr. Hufft held various positions with Tenneco Oil
Exploration and Production, Inc., serving as manager of the Central Gulf and
Rocky Mountain regions as well as manager of acquisitions.
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<PAGE> 38
E. Joseph Grady is Vice President, Treasurer and Chief Financial Officer of
the Company. Prior to joining the Company in October 1995, Mr. Grady held
various financial management positions within Southdown, Inc. and its
subsidiaries since 1980. Most recently Mr. Grady was Director of Finance for
Southdown Environmental Systems, Inc. from January 1991 until he joined the
Company.
Eric Forss has been a director of the Company since June 1994. Mr. Forss
has been President of FAB since May 1991. Prior to serving as President, Mr.
Forss had been Vice President of FAB from May 1990 through April 1991. Mr.
Forss has served as a director on the Board of FAB since May 1994.
Arnold L. Chavkin has been a director of the Company since its inception in
1993. Mr. Chavkin has been a General Partner of Chase Capital Partners
(formerly Chemical Venture Partners) since January 1992 and has served as the
president of Chemical Investments, Inc. since March 1991. Prior to March 1991,
Mr. Chavkin was a member of Chase Manhattan (formerly Chemical) Bank's merchant
banking group and a member of its corporate finance group since 1986. Mr.
Chavkin serves as a director on the boards of Reading & Bates Corporation,
American Radio Systems, Inc., American Recreation Company Holdings,
CruisePhone, Inc., Bell Sports Corporation, Centennial Security, Inc., SMG,
Inc., TruVision Cable, Inc. and U.S. Silica Company.
Kevin S. Penn has been a director of the Company since its inception in
1993. Since October 1995, Mr. Penn has served as Managing Director of A.C.
Israel Capital Co. Inc. Mr. Penn was Executive Vice President of First Spring
Corporation from September 1991 to October 1995. From April 1991 to September
1991, Mr. Penn was Director, Financial Planning and Analysis for Primerica
Corporation. From 1987 to 1990, Mr. Penn was a principal with the leveraged
buyout firm of Adler & Shaykin. Mr. Penn has served as a director on the Board
of T-Chem Products, Inc. since June 1992.
Bruce L. Burnham has served as President of The Burnham Group, a privately
held consulting and marketing firm formed by Mr. Burnham shortly after retiring
from Dayton's Department Stores in 1984. From 1981 to 1984, Mr. Burnham served
as Chairman and Chief Executive Officer of Dayton's Department Stores in
Minneapolis, Minnesota. From 1979 to 1980, Mr. Burnham was President and Chief
Executive Officer of Bonwit Teller in New York City. From 1978 to 1979, Mr.
Burnham was President and Chief Operating Officer of Jordan Marsh. He serves
on the boards of Paxson Communications Corporation, Financial Benefit Group,
Inc. and J.B. Rudolph, Inc.
William F. Wallace currently is an advisory member of the Beacon Alliance
of the Beacon Group, a private investment and advisory partnership. Prior to
joining the Beacon Alliance in early 1996, Mr. Wallace was Vice Chairman of
Barrett Resources/Plains Petroleum Company and President and Chief Operating
Officer of Plains Petroleum Company. Prior to joining Plains Petroleum Company
in 1994, Mr. Wallace spent a combined total of 23 years with Texaco, Inc., the
last seven of which he served as Regional Vice President.
Members of the Board of Directors are elected each year at the Company's
annual meeting and serve until their successors are duly elected and qualified
or their earlier resignation or removal. Officers serve at the discretion of
the Board of Directors. There is currently a vacancy on the Board of Directors
which may be filled by the Note Holders pursuant to the Voting Agreement.
VOTING AGREEMENT
The Company, FAB, Wictor Forss and the Note Holders are parties to the
Voting Agreement pursuant to which such persons agree to maintain the size of
the Board of Directors at no more than eight members, designate all eight
nominees to the Board of Directors and vote their shares of Common Stock to
elect such nominees. The Voting Agreement provides that (i) FAB has the right
to designate two nominees, (ii) the Note Holders have the right to designate
three nominees, (iii) the Chief Executive Officer of the Company must be
nominated to serve as a director and must be Stig Wennerstrom or another person
acceptable to the Note Holders and (iv) two independent directors will be
nominated by FAB subject to approval by the Note Holders. The Voting
Agreement, as amended, provides that the independent director nominees for the
Company's 1996 annual meeting have no previous affiliation with FAB. Mr.
William F. Wallace and Mr. Bruce L. Burnham were
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<PAGE> 39
nominated by FAB for election at the 1996 Annual Meeting of Stockholders to
serve as independent directors. For so long as each of the Brinson Group and
FS Energy Associates, L.P. own at least 50% of the Subordinated Notes
originally purchased by it, or shares of Common Stock issuable in exchange
therefor, each such Note Holder is entitled to designate one of the three Note
Holder nominees to the Board of Directors. Pursuant to the Voting Agreement,
the formation of board committees requires the unanimous approval of the Board
of Directors. The Voting Agreement terminates on the earliest to occur of (i)
September 15, 2003, (ii) the date on which FAB, certain of its transferees and
their respective affiliates own less than 10% of the outstanding shares of
Common Stock, and (iii) the date upon which less than $5 million aggregate
principal amount of the Subordinated Notes remain outstanding and the Note
Holders own less than 5% of the outstanding shares of Common Stock. The Voting
Agreement is binding upon transferees of the Forss family who acquire shares
equal to 10% or more of the outstanding shares of Common Stock. FAB has
granted the Note Holders an irrevocable proxy solely with respect to the voting
of shares of Common Stock held by FAB for the election of directors. The proxy
is exercisable solely for the purpose of electing members of the Board of
Directors in accordance with the terms of the Voting Agreement and expires upon
termination of the Voting Agreement.
COMMITTEES
The Company's Board of Directors has established Executive, Audit and
Compensation Committees. The Executive Committee consists of Messrs.
Wennerstrom, Forss and Chavkin. The Audit Committee consists of Messrs. Issal,
Wallace and Burnham , all of whom are non-employee directors of the Company.
The Audit Committee meets separately with representatives of the Company's
independent auditors and with representatives of senior management in
performing its functions. The Audit Committee reviews the general scope of
audit coverages, the fees charged by the independent auditors, matters relating
to the Company's internal control systems, and other matters related to audit
functions.
The Compensation Committee consists of Messrs. Issal and Penn, both of whom
are non-employee directors of the Company. The Compensation Committee
administers the Company's stock option plans, and in this capacity makes all
option grants or awards to Company employees, including executive officers,
under such plans. In addition, the Compensation Committee is responsible for
making recommendations to the Board of Directors with respect to the
compensation of the Company's Chief Executive Officer and its other executive
officers, and is responsible for the establishment of policies dealing with
various compensation and employee benefit matters for the Company.
EMPLOYMENT AGREEMENT OF CHIEF EXECUTIVE OFFICER
In connection with the formation of the Company, Mr. Stig Wennerstrom and
the Company entered into an employment agreement effective as of September 14,
1993 (the "Employment Agreement") pursuant to which Mr. Wennerstrom serves as
President and Chief Executive Officer of the Company.
The Employment Agreement, as amended in May 1995, provides for Mr.
Wennerstrom to receive total salary, including bonus, of $600,000 through
December 31, 1995. Effective January 1, 1996, Mr. Wennerstrom will be entitled
to receive a salary of $533,333, which amount will be increased by $33,333 in
each of 1997 and 1998 and be subject to annual cost of living increases
thereafter. In addition, Mr. Wennerstrom will be entitled to receive a
$150,000 bonus, payable with his salary for the year 1996 and each subsequent
year; provided that the Company may require him to return this bonus for any
year in which the Company fails to attain predetermined cash flow targets. The
Employment Agreement also provides that the Company will maintain certain life
insurance policies on the life of Mr. Wennerstrom, payable to a beneficiary
selected by Mr. Wennerstrom. The term of the Employment Agreement extends to
December 31, 1998 and thereafter until December 31, 2001 for "rolling"
three-year periods that can be terminated upon 36 months' prior notice;
provided that the term can be ended upon 12 months' notice given after January
1, 2002.
The Employment Agreement is subject to early termination by the Company for
cause or upon the death or incapacity of Mr. Wennerstrom. The Employment
Agreement is subject to early termination by Mr. Wennerstrom for cause. If the
Employment Agreement is terminated without cause by the Company or
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<PAGE> 40
with cause (including certain changes in control of the Company) by Mr.
Wennerstrom, the Company is obligated to pay Mr. Wennerstrom a termination fee
of three times the amount of Mr. Wennerstrom's annual includible compensation.
The Employment Agreement, as amended, also provides, for the benefit of the
Note Holders, that Mr. Wennerstrom cannot be removed as the Company's President
and Chief Executive Officer without the consent of five of the Company's eight
directors.
DIRECTOR COMPENSATION
Members of the Board of Directors of the Company, other than those
directors who are employees of the Company, receive a fee of $5,000 per year
and $1,250 per board meeting attended for their services as directors, subject
to a maximum of $10,000 per year per director. Members of the Board of
Directors of the Company who are employees of the Company do not receive a fee
for their services as directors or members of committees.
1995 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
The Forcenergy Inc 1995 Nonemployee Director Stock Option Plan (the
"Director Option Plan") provides for the grant of options to acquire Common
Stock, to be granted to each director who is not and has never been an employee
of the Company (an "Eligible Director"). The purposes of the Director Option
Plan are to attract and retain the services of experienced and knowledgeable
outside directors of the Company and to provide an incentive for such outside
directors to increase their proprietary interest in the Company's long-term
success and progress. The Director Option Plan covers an aggregate of 150,000
shares of Common Stock (subject to adjustments in the event of stock dividends,
stock splits, and certain other events). Each of the options granted under the
Director Option Plan will be non-qualified stock options.
On August 2, 1995, each Eligible Director received an option to purchase
5,000 shares of Common Stock at an exercise price of $10.10 per share. In
addition, newly elected or appointed directors will receive on the date of such
director's election or appointment an option to purchase 5,000 shares of Common
Stock at an exercise price equal to the fair market value of the Common Stock
on the date of grant. On the date of any subsequent annual meetings of
stockholders prior to the termination of the Director Option Plan, each
Eligible Director who is continuing in office will automatically receive an
option to purchase an additional 1,000 shares of Common Stock at an exercise
price equal to the fair market value of the Common Stock on the date of grant.
Total shares issued under options per director cannot exceed 15,000.
Options granted to current Eligible Directors under the Director Option
Plan at the time of the Initial Public Offering are fully vested. Initial
grants to new directors will vest in 33.33% increments on each of the first
through third anniversary of the date of grant so long as the Eligible Director
has served on the Board during the entire year in which such increment vests.
Options granted annually to directors will vest six months from date of grant.
Each option granted under the Director Option Plan will expire in all cases ten
years from the date the option is granted. Except as described below and
except in certain circumstances including a merger or consolidation with
another corporation or the sale of substantially all of the Company's assets,
no option will be exercisable as to any shares as to which the continuous
service requirement has not been satisfied. If an option holder ceases to be a
director of the Company for cause or voluntarily (other than by reason of
mandatory retirement) not at the request of the Board, the option may be
exercised (to the extent that the option has vested) within the three month
period following the date of cessation (if otherwise within the option period),
but not thereafter. If an option holder becomes disabled or dies while a
director of the Company, such option may be exercised in full within 12 months
after the date the option holder becomes disabled or dies (if otherwise within
the option period). If an option holder ceases to be a director of the Company
for any reason other than those listed in the two preceding sentences, the
option may be exercised in full within three months after the date of cessation
(if otherwise within the option period), but not thereafter. If an option
holder dies within the three-month period after ceasing to be a director of the
Company, such option may be exercised (to the extent such option was
exercisable by the option holder at the time of his death) within 12 months
after the date of death (if otherwise within the option period).
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<PAGE> 41
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation provided by the Company in 1995 and 1994 to its Chief Executive
Officer and each other person serving as an executive officer during 1995 and
1994 who earned $100,000 or more in combined salary and bonus during such year
(collectively, the "Named Executive Officers").
1995 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
CMPENSATION
AWARDS
------
SECURITIES
UNDERLYING
ANNUAL STOCK
COMPENSATION(1) OPTIONS
--------------- (NUMBER OF ALL OTHER
NAME AND PRINCIPAL POSITION DATE SALARY BONUS SHARES) COMPENSATION
--------------------------- ---- -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Stig Wennerstrom, President and Chief 1995 $600,000 $ -- 492,943 $73,683 (2)
Executive Officer . . . . . . . . . . . . 1994 350,000 250,000 -0- 73,393 (2)
John A. Brush, Vice President--Land and 1995 130,800 -- 123,337 1,080 (3)
Marketing, and General Counsel . . . . . 1994 111,667 -- -- 1,665 (3)
E. Joseph Grady, Vice President, 1995 34,773 -- 75,000 ---
Treasurer and Chief Financial Officer(4) 1994 -- -- --
Harry F. Hufft, Vice President -- 1995 175,300 42,500 25,000 2,310 (3)
Exploration and Production . . . . . . . 1994 175,000 42,500 -- 2,185 (3)
J. Russell Porter, Vice President 1995 194,800 50,000 75,000 2,310 (3)
--Corporate Development . . . . . . . . . 1994 130,385 -- 98,337 1,685 (3)
Harold Simon, Former Vice 1995 295,006 -- 25,000 9,364 (5)
President--Finance, Secretary and 1994 147,332 -- -- 9,368 (5)
Treasurer . . . . . . . . . . . . . . . .
</TABLE>
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus reported for each executive officer.
(2) Includes $71,373 in premiums paid by the Company for life insurance
policies on the life of, and payable to a beneficiary selected by, Mr.
Wennerstrom. Also includes employer matching contributions of $2,310 and
$2,020 under the Company's 401(k) Plan for 1995 and 1994, respectively.
(3) Employer matching contributions under the Company's 401(k) Plan.
(4) Mr. Grady joined the Company as Vice President, Treasurer and Chief
Financial Officer on October 23, 1995.
(5) Includes $8,000 in premiums paid by the Company for life insurance policies
on the life of, and payable to a beneficiary selected by, Mr. Simon. Also
includes employer matching contributions of $1,368 under the Company's
401(k) Plan. Mr. Simon resigned from his position with the Company
effective as of January 31, 1996 and all of his stock options were canceled
prior to his departure.
1993 STOCK OPTION PLAN
In September 1993, the Company adopted the Forcenergy Inc 1993 Stock Option
Plan for Officers and Key Employees (the "1993 Option Plan"). The 1993 Option
Plan is intended, among other things, to provide officers and key employees
with incentives to further the growth, development and financial success of the
Company. The aggregate number of shares of Common Stock which may be issued
under the 1993 Option Plan is 983,370 shares. Options on 882,278 shares are
currently outstanding under the 1993 Option Plan, subject to vesting
requirements, at exercise prices ranging from $10.10 to $14.51 per share.
Options granted under the 1993 Option Plan include both incentive stock options
and non-qualified stock options. The exercise price of each option cannot be
initially granted at or repriced to a level less than the fair market value of
a share of the Common Stock on the date of grant or repricing. The 1993 Option
Plan provides for adjustment of the number of shares and the exercise price (or
type of shares in certain circumstances) upon the occurrence of extraordinary
transactions, mergers, consolidations, dividends or distributions of Common
Stock or rights thereto and certain other dilutive and antidilutive events.
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<PAGE> 42
The 1993 Option Plan is administered by the Compensation Committee of the
Board of Directors, each member of which is a "disinterested person" as defined
in Rule 16b-3 pursuant to the Exchange Act. The Committee administers and
interprets the 1993 Option Plan in accordance with its provisions and has the
power to designate which employees receive options, and the number, terms and
conditions of such options.
1995 STOCK OPTION PLAN
On May 11, 1995, the Company adopted the Forcenergy Inc 1995 Stock Option
Plan (the "1995 Option Plan"). The 1995 Option Plan is intended to provide key
employees with an opportunity to acquire a proprietary interest in the Company
and additional incentive and reward opportunities based on the profitable
growth of the Company and to aid the Company in attracting and retaining
outstanding personnel. The 1995 Option Plan provides for the granting of
options (either incentive stock options within the meaning of Section 422(b) of
the Code, or options that do not constitute incentive stock options
("nonqualified stock options")), restricted stock awards, stock appreciation
rights, performance awards, and phantom stock awards, or any combination
thereof. The 1995 Option Plan covers an aggregate of 1,016,630 shares of
Common Stock (subject to certain adjustments in the event of stock dividends,
stock splits and certain other events), of which options to purchase 899,880
shares of Common Stock are currently outstanding subject to vesting
requirements, at exercise prices ranging from $10.00 to $14.51. See - Stock
Option Grants in 1995 for a listing of options granted to the Named Executive
Officers during 1995. No more than 500,000 shares of Common Stock, subject to
adjustments, may be issued pursuant to grants made under the 1995 Option Plan
to any one employee in any one year. The limitation set forth in the preceding
sentence will be applied in a manner which permits compensation generated in
connection with the exercise of options, stock appreciation rights and, if
determined by the Compensation Committee, restricted stock awards to constitute
"performance-based" compensation for purposes of Section 162(m) of the Code.
The 1995 Option Plan is administered by the Compensation Committee. The
Compensation Committee has the power to determine which employees will receive
an award, the time or times when such award will be made, the type of the award
and the number of shares of Common Stock to be issued under the award or the
value of the award. Only persons who at the time of the grant are employees of
the Company or of any subsidiary of the Company are eligible to receive grants
under the 1995 Option Plan.
401(K) PLAN
The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan") for
its employees. Under the 401(k) Plan, eligible employees are permitted to
defer receipt of up to 15% of their compensation (subject to certain
limitations imposed under the Code). The 401(k) Plan provides that a
discretionary match of employee deferrals may be made by the Company in cash.
Pursuant to the 401(k) Plan, the Company has currently elected to match $.25
for each $1.00 of employee deferral, not to exceed 5% of an employee's salary,
subject to limitations imposed by the Internal Revenue Service. The amounts
held under the 401(k) Plan are invested among various investment funds
maintained under the 401(k) Plan in accordance with the directions of each
participant. Salary deferral contributions under the 401(k) Plan are 100%
vested. Matching contributions vest after an employee completes one year of
service with the Company. Participants or their beneficiaries are entitled to
payment of vested benefits upon termination of employment.
EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted the Forcenergy Inc Employee Stock Purchase Plan
(the "Stock Purchase Plan"), which permits Company employees (other than the
Chief Executive Officer) who work full time (or part time for at least 20 hours
per week and more than five months per year) to acquire Common Stock at a
discount from its fair market value through payroll deductions. Up to 100,000
shares of Common Stock may be purchased under the Stock Purchase Plan.
For each six-month period beginning on January 1 or July 1 during the term
of the Stock Purchase Plan, unless the Board determines otherwise, the Company
will offer to each eligible employee the opportunity to purchase Common Stock.
Employees may elect to participate prior to the start of a period and may elect
to
42
<PAGE> 43
have from two to ten percent of their compensation withheld. The Stock
Purchase Plan allows withdrawals, terminations and reductions in amounts being
deducted. The purchase price will be 85% of the lesser of the fair market
value of Common Stock on (i) the first day of the period or (ii) the last day
of the period. No employee may purchase Common Stock under the Stock Purchase
Plan valued at more than $25,000 (or such other maximum as may be prescribed
from time to time under the Code) for each calendar year in accordance with the
provisions of the Code.
Participants have purchased 9,961 shares under the Stock Purchase Plan as
of December 31, 1995.
STOCK OPTION GRANTS IN 1995 AND 1996
During 1995, the Company granted options to purchase 281,230 shares of
Common Stock under the 1993 Option Plan and options to purchase 692,551 and
232,329 shares of Common Stock under the 1995 Option Plan during 1995 and 1996,
respectively. The options granted to Mr. Wennerstrom were the only options
granted to a Named Executive Officer in 1996. All options granted in 1995 and
1996 have ten year terms. The following table sets forth certain information
with respect to such options granted to the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SH) DATE
- --------------------------------------------- ---------------- -------------- --------- -----------
<S> <C> <C> <C> <C>
Stig Wennerstrom . . . . . . . . . . . . . . 492,943 (1) 50.62 $ 10.10 2005
224,329 (1) 96.56 10.50 2006
J. Russell Porter . . . . . . . . . . . . . . 75,000 (3) 7.70 (2) 2005
Harry Hufft . . . . . . . . . . . . . . . . . 25,000 (3) 2.57 10.10 2005
Harold Simon . . . . . . . . . . . . . . . . 25,000 (4) 2.57 10.10 2005
John A. Brush . . . . . . . . . . . . . . . . 123,337 (5) 12.67 (5) 2005
E. Joseph Grady . . . . . . . . . . . . . . . 75,000 (3) 7.70 10.00 2005
</TABLE>
(1) Mr. Wennerstrom was granted (i) in 1995 options to purchase 232,061 shares
of Common Stock under the 1993 Option Plan which were fully vested on the
date of grant, (ii) in 1995 options to purchase 260,882 shares under the
1995 Option Plan, all of which vested on the date of grant, and (iii)
options to purchase 224,329 shares under the 1995 Option Plan which were
granted during 1996 and which vest over a three-year period.
(2) Mr. Porter was granted options to purchase 50,000 shares at $10.00 per
share and options to purchase 25,000 shares at $10.10 per share.
(3) All options granted to such Named Executive Officers were granted under the
1995 Option Plan and vest 33.33% on each of the third through fifth
anniversaries of the date of grant.
(4) Mr. Simon resigned from the Company effective January 31, 1996, and his
options were canceled prior to his departure.
(5) Mr. Brush was granted (i) options to purchase 98,337 shares of Common
Stock, 49,169 of which were granted under the 1993 Option Plan and have an
exercise price of $12.02 per share and 49,168 of which were granted under
the 1995 Option Plan and have an exercise price of $14.51 per share and all
of which vest 33.33% on each of the first through third anniversaries of
the date of grant and (ii) options to purchase 25,000 shares of Common
Stock under the 1995 Option Plan with an exercise price equal to $10.10
which vest on each of the third through fifth anniversaries of the date of
grant.
43
<PAGE> 44
VALUE OF UNEXERCISED STOCK OPTIONS
The following table contains certain information concerning the value of
unexercised options at December 31, 1995. No stock options were exercised in
1995.
<TABLE>
<CAPTION>
DECEMBER 31,1995
--------------------------------------------------------------
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS (1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------------------- ------------------------- -------------------------
<S> <C> <C>
Stig Wennerstrom . . . . . . . . . 695,130 / 202,187 $443,647 / 0
J. Russell Porter . . . . . . . . . 30,484 / 142,853(2) 0 / $72,500
Harry Hufft . . . . . . . . . . . . 39,827 / 83,510(2) 0 / $22,500
John A. Brush . . . . . . . . . . . 0 / 123,337(2) 0 / $22,500
E. Joseph Grady . . . . . . . . . . 0 / 75,000 0 / $75,000
Harold Simon(3) . . . . . . . . . . 50,547 / 75,546(2) 0 / $22,500
</TABLE>
(1) Effective as of May 11, 1995, Mr. Wennerstrom was granted options to
purchase 232,061 shares under the 1993 Option Plan and 260,882 shares under
the 1995 Option Plan all at an exercise price of $10.10, all of which were
fully vested on the date of grant. Of the 404,374 options granted to Mr.
Wennerstrom prior to such date at an exercise price of $14.51 per share,
202,187 were repriced at an exercise price of $12.02 per share and the
dates on which such options vest were amended such that 50% of such options
are exercisable on each of the first and second anniversaries of the date
such options were repriced. Mr. Wennerstrom, the Company's President and
Chief Executive Officer, has been granted piggyback registration rights in
connection with options granted to him under the 1993 Option Plan and the
1995 Option Plan. See "Shares Eligible for Future Sale." Mr. Wennerstrom
also has the right to require the Company to purchase any shares of Common
Stock he owns as a result of the exercise of his stock options at the then
current market price of the Common Stock and any unexercised stock options
at the excess of the fair market value of the Common Stock over the option
price, upon (i) a termination of Mr. Wennerstrom's employment, (ii) the
maturity of, or Mr. Wennerstrom's inability to obtain, financing to
exercise his stock options and (iii) any expiration of Mr. Wennerstrom's
right to exercise his stock options.
(2) Effective as of May 11, 1995, each of Messrs. Porter, Hufft, Simon and
Brush were granted options to purchase 25,000 shares of Common Stock at an
exercise price of $10.10, and which vest on each of the third through fifth
anniversaries of the date of grant. On such date, 50% of each such
officer's existing options were repriced at an exercise price of $12.02 per
share and exercisable over the longer of (i) the original vesting schedule
or (ii) 50% on each of the first and second anniversaries of the date such
options were repriced. The Company has the right to repurchase shares of
Common Stock acquired through the exercise of these options upon the
officer's termination of employment with the Company for any reason.
(3) Mr. Simon resigned from the Company effective January 31, 1996 and his
options were canceled prior to his departure.
The following table updates certain information concerning the value of
unexercised options at April 30, 1996. No stock options were exercised in
1996. Exercisable options include vested options and options which are
exercisable within 60 days from April 30, 1996.
<TABLE>
<CAPTION>
APRIL 30,1996
--------------------------------------------------------------
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS (1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------------------- ------------------------- -------------------------
<S> <C> <C>
Stig Wennerstrom . . . . . . . . . 796,222 / 325,422 $2,122,636 / $985,316
J. Russell Porter . . . . . . . . . 56,217 / 117,120 $32,452 / $362,420
Harry Hufft . . . . . . . . . . . . 64,411 / 58,926 $48,678 / $146,176
John A. Brush . . . . . . . . . . . 28,683 / 94,654 $24,340 / $ 82,764
E. Joseph Grady 0 / 75,000 0 / $300,000
</TABLE>
(1) During 1996 Mr. Wennerstrom was granted options to purchase 224,329 shares
which vest over three years under the 1995 Option Plan at an exercise price
of $10.50 per share.
44
<PAGE> 45
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Issal and Penn.
Mr. Issal is the Chairman of the Board of FAB and the Company. FAB owns 49.5%
of the outstanding shares of Common Stock of the Company.
RELATED PARTY TRANSACTIONS
Prior to the Company's formation, the Company's business was operated by
Forcenergy Partners, a limited partnership in which FAB was a 97% limited
partner and a company owned by Stig Wennerstrom was the 3% general partner.
The Company was formed in August 1993 to succeed to the assets and business of
Forcenergy Partners through a merger (the "Merger") with Forcenergy Partners
and the corporate general partner owned by Mr. Wennerstrom. In connection with
the Merger, Mr. Wennerstrom received $2.2 million in cash and 325,000 B shares
of FAB for his shares of the general partner. Mr. Wennerstrom also received
$192,000, the general partner's share of Forcenergy Partners' undistributed
profits, and FAB received distributions from Forcenergy Partners of
approximately $6.2 million in respect of such undistributed profits, including
a $2 million non-interest bearing, unsecured note of the Company. In March
1994, the Company paid the note issued to FAB in connection with the Merger.
In conjunction with the formation of the Company, Mr. Stig Wennerstrom and
the Company entered into the Employment Agreement effective as of September 14,
1993 and amended as of May 18, 1995 pursuant to which Mr. Wennerstrom serves as
President and Chief Executive Officer of the Company. See "Management -
Employment Agreement" for a description of the Employment Agreement.
Forcenergy Partners paid management fees of $280,500 to its general
partner, a corporation owned by Mr. Wennerstrom, for investment, operations,
finance and administrative services in 1993.
On May 25, 1995, the Company entered into an agreement and plan of merger
with Ashlawn. Pursuant to the agreement, the Company issued 3,000,000 shares
of unregistered Common Stock with a market value of $30 million based on the
Initial Public Offering price of $10.00 per share, to the Ashlawn stockholders
(including Messrs. William A. Hines and William M. Hines) and granted the
Ashlawn stockholders certain demand registration rights with respect to those
shares. The Company also paid to the Ashlawn stockholders approximately $3.3
million in cash and assumed approximately $5.7 million of Ashlawn's debt. All
of the Ashlawn debt assumed was repaid with the proceeds of the Company's
August 2, 1995 Initial Public Offering. The Ashlawn Acquisition was closed
concurrently with the Initial Public Offering.
The Company leases its principal offices in Miami, Florida from an
affiliate of the Forss family, who collectively own 49.4% of the voting
interest in FAB. The terms of the lease include current monthly payments of
$23,612, subject to a yearly escalation not to exceed 6%, and a term of five
years, expiring in November 1998. The Company made payments under such lease
of $175,000, $246,000 and $272,000 in 1993, 1994, and 1995. Annual increases
in lease payments primarily are attributable to the Company's increase in the
amount of leased space. The Company believes that the lease terms are
comparable to those terms which could be obtained from an unaffiliated third
party.
In connection with the Company's issuance of the Subordinated Notes, the
Company entered into the Voting Agreement with FAB, Wictor Forss and the
holders of the Subordinated Notes pursuant to which FAB and the holders of the
Subordinated Notes are entitled to approve and designate all of the Company's
directors and are required to vote their shares of Common Stock in accordance
with such designations. The Voting Agreement and Note Exchange Agreement
further provide that FAB and its affiliates shall be restricted from selling
any equity securities of the Company during specified periods. See
"Description of Common Stock - Voting and Holdback Agreement."
In May 1994, the Company issued 2,355,892 shares of Common Stock to FAB in
a private placement resulting in net proceeds of $31.8 million to the Company.
45
<PAGE> 46
On May 12, 1994, in connection with the Company's sale of Common Stock to
FAB, the Company granted options to the holders of the Subordinated Notes pro
rata in proportion to their holdings of Subordinated Notes to purchase 317,629
shares of Common Stock at an exercise price of $18.18 per share. In connection
with the Initial Public Offering, the Company reduced the exercise price for
such options to $15.76 per share and extended the term of the options to
September 15, 2000.
In connection with Mr. Wennerstrom's currently outstanding stock options,
the Company has granted certain piggy back registration rights and a put option
on the value of all such options and the Common Stock acquired through the
exercise of such options, including 1995 option grants. See "- Value of
Unexercised Stock Options.
The Company paid legal fees of $118,000 and $78,000 to the law firm in
which Mr. Ekdahl is a partner for legal services in 1993 and 1995,
respectively.
The Company has a consulting arrangement with Wictor Forss, the former
Chairman of the Board of the Company and FAB, whereby Mr. Forss currently
receives $10,000 per month in exchange for consulting services. The
arrangement may be terminated by either party upon 60 days notice. The Company
believes that Mr. Forss' prior years of service to the Company as a board
member enable him to provide business and financial advice to the Company at a
reasonable cost. The Company does not believe that it could obtain such
services from an unaffiliated third party.
46
<PAGE> 47
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 1, 1996
concerning the persons known by the Company to be beneficial owners of more
than five percent of the Company's outstanding Common Stock, the members of the
Board of Directors of the Company, the Named Executive Officers listed in the
Summary Compensation Table above and all directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
----------------------------
NAME OF BENEFICIAL OWNER (1)(2) SHARES PERCENT
- ------------------------------- -------------- ------------
<S> <C> <C>
Forcenergy AB (1)(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,040,486 49.5%
William A. Hines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,440,000 7.9
William M. Hines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,440,000 7.9
The Crabbe Huson Group, Inc. (3) . . . . . . . . . . . . . . . . . . . . . 1,173,300 6.4
The Crabbe Huson Special Fund, Inc. (3) . . . . . . . . . . . . . . . . . . 916,900 5.0
Chase Equity Associates (4) . . . . . . . . . . . . . . . . . . . . . . . . 787,553 4.1
FS Energy Associates, L.P.(5) . . . . . . . . . . . . . . . . . . . . . . . 626,041 3.3
Brinson Partners, Inc. (6) . . . . . . . . . . . . . . . . . . . . . . . . 547,786 2.9
A.C. Israel Enterprises, Inc. (4) . . . . . . . . . . . . . . . . . . . . . 83,255 *
Stig Wennerstrom (7)(8) . . . . . . . . . . . . . . . . . . . . . . . . . . 939,222 4.9
Harry Hufft (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,246 *
J. Russell Porter (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,852 *
John A. Brush . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,588 *
E. Joseph Grady . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- *
Eric Forss (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,045,486 49.5
Robert Issal (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 *
Bruce L. Burnham (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . -- *
William F. Wallace (7) . . . . . . . . . . . . . . . . . . . . . . . . . . -- *
Goran Ekdahl (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 *
Bengt Wicksen (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 *
Arnold L. Chavkin (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . 787,553 4.1
Kevin S. Penn (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 709,296 3.7
All Executive Officers and Directors as a group 11,648,243 56.2%
(10 persons) (4)(6)(7)(8) . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
- --------------------
* Less than 1%.
(1) Except as otherwise noted, each stockholder has sole voting and investment
power with respect to the shares beneficially owned. FAB has granted an
irrevocable proxy to the Note Holders to vote its shares solely in
connection with the election of directors pursuant to the provisions, and
for the term, of the Voting Agreement. See "Description of Capital Stock
-- Voting and Holdback Agreement." The Voting Agreement and Note Exchange
Agreement further provide that FAB and its affiliates were restricted from
selling any equity securities of the Company prior to May 29, 1996.
Thereafter, FAB has certain demand registration rights with respect to its
shares. FAB has waived its registration rights in connection with this
offering.
(2) The address of Forcenergy AB, Messrs. Forss, Wicksen, Ekdahl and Issal is
Birger Jarlsgatan, 73-75, Box 19040, S104, 32 Stockholm, Sweden. The
address of Messrs. Wennerstrom, Simon, Hufft, Porter, Brush and Grady is
2730 SW 3rd Avenue, Suite 800, Miami, Florida 33129. The address of
Messrs. Hines and Hines is 3636 North Causeway Blvd., Suite 300, New
Orleans, Louisiana 70002. FAB has waived its registration rights in
connection with this offering. The address of Mr. Burnham is 2011 Fisher
Island Drive, Fisher Island, FL 33109. The address of Mr. Wallace is 30036
Snowbird Lane, Evergreen, CO 80439.
(3) The Crabbe Huson Special Fund, Inc., an investment company, directly owns
916,900 shares of Common Stock. It shares voting and dispositive power
with its investment advisor, The Crabbe Huson Group, Inc., represented by
Mr. James E. Crabbe. Mr. Crabbe has voting and dispositive power over the
shares owned by the Crabbe Huson Special Fund, Inc. The Crabbe Huson
Group, Inc. also shares voting and dispositive power with approximately ten
investors for whom it serves as investment advisor. The investors directly
own 256,400 shares of the Company. In total, the investment company and
investors own 1,173,300 shares of the Company. The Crabbe Huson Group,
47
<PAGE> 48
Inc. does not directly own any shares of the Company. The address of The
Crabbe Huson Group, Inc. and the Crabbe Huson Special Fund, Inc. is 1215 W.
Morrison, Suite 1400, Portland, Oregon 97204. Information relative to the
holdings of the Crabbe Huson Special Fund, Inc. and The Crabbe Huson Group,
Inc. is based upon a Schedule 13G dated February 13, 1996 filed with the
Securities and Exchange Commission.
(4) Of the shares indicated as owned by Chase Equity Associates, 689,132 are
shares issuable pursuant to a right of exchange under the Subordinated
Notes and 98,421(including 5,000 shares granted pursuant to the Directors
Plan) are shares issuable upon exercise of options owned by Chase Equity
Associates and are included because of Mr. Chavkin's affiliation with Chase
Equity Associates. Chase Equity Associates is a limited partnership, the
general partner of which is Chase Capital Partners, an affiliate of Chase
Manhattan Bank. The address of Mr. Chavkin and Chase Capital Partners is
380 Madison Avenue, 12th Floor, New York, New York 10017. Mr. Chavkin
disclaims beneficial ownership of these shares within the meaning of Rule
13d-3 under the Exchange Act.
(5) Of the shares indicated owned by A.C. Israel Enterprises, Inc. and Mr.
Penn, 68,913 are issuable to A.C. Israel Enterprises, Inc. pursuant to a
right of exchange under the Notes, 9,342 are issuable upon exercise of
options and are included because of Mr. Penn's affiliation with A.C. Israel
Capital Co., Inc., a subsidiary of A.C. Israel Enterprises, Inc., and 5,000
are options granted to Mr. Penn pursuant to the Director's Plan. The
address of A.C. Israel Capital Co., Inc. and Mr. Penn is 65 East 55th
Street, 32nd Floor, New York, New York 10022. Of the shares indicated
owned by FS Energy Associates, L.P. and Mr. Penn, 551,305 are issuable to
FS Energy Associates, L.P. pursuant to a right of exchange under the
Subordinated Notes and 74,736 are issuable upon exercise of options and are
included because of Mr. Penn's affiliation with FS Energy Associates, L.P.
Mr. Penn has a 3.25% profit interest in the Notes held by FS Energy
Associates, L.P. Mr. Penn disclaims beneficial ownership of these shares
within the meaning of Rule 13d-3 under the Exchange Act. The general
partner of FS Energy Associates, L.P. is Mr. Guido Goldman. The address
of FS Energy Associates, L.P., Mr. Goldman is 499 Park Avenue, 26th Floor,
New York, New York 10022.
(6) Of the shares indicated owned by Brinson Partners, Inc., 19,326, 118,500
and 344,566 are issuable to the Brinson MAP Venture Capital Fund III ("MAP
VC Fund"), Brinson Venture Capital Fund III, L.P. ("Direct Fund") and the
Virginia Retirement System ("VRS"), respectively, pursuant to a right of
exchange under the Subordinated Notes; and 2,620, 16,064 and 46,711 are
shares issuable to the MAP VC Fund, Direct Fund and VRS, respectively, upon
exercise of options. Brinson Partners, Inc. has voting and dispositive
power over the shares issuable under the Subordinated Notes and the options
of record through its wholly-owned subsidiary, The Brinson Trust Company as
Trustee of MAP VC Fund and in its capacity as General Partner of the Direct
Fund. In addition, Brinson Partners, Inc. has voting and/or dispositive
power over the shares issuable under the Subordinated Notes and options
owned by VRS pursuant to agreements between Brinson Partners, Inc. and VRS.
The address of Brinson Partners, Inc. is Suite 114, 209 South LaSalle
Street, Chicago, Illinois 60604. Brinson Partners, Inc. is indirectly
controlled by Swiss Bank Corporation. The address of Swiss Bank
Corporation is Aeschenplatz 6, CH-4002, Basel, Switzerland.
(7) The shares beneficially owned by Messrs. Wennerstrom, Porter, Brush, Hufft,
Burnham and Wallace consist of 796,222, 56,217, 28,683, 56,217, 0 and 0
shares, respectively, that may be acquired by such persons within 60 days
through the exercise of stock options. The shares owned by the executive
officers and directors as a group include 937,339 shares that may be
acquired by such persons within 60 days through the exercise of stock
options. Of the shares beneficially owned by Mr. Porter, 1,000 shares are
owned by his wife.
(8) The 9,040,486 shares indicated as beneficially owned by Mr. Forss are owned
directly by FAB and are included because of Mr. Forss's affiliation with
FAB. The Forss family beneficially owns 1,000,000 A shares and 1,559,133 B
shares of FAB (representing a 49.4% voting interest in FAB); Mr.
Wennerstrom beneficially owns 853,300 B shares; Mr. Issal beneficially owns
70,000 B shares; Mr. Ekdahl beneficially owns 10,000 B shares; Mr. Wicksen
beneficially owns 150,000 B shares. Mr. Forss disclaims beneficial
ownership of the shares of Common Stock of the Company owned by FAB within
the meaning of Rule 13d-3 under the Exchange Act.
(9) Messrs. Ekdahl and Wicksen did not stand for re-election and were not
re-elected to the Board of Directors at the Company's Annual Meeting of its
Stockholders on May 23, 1996.
48
<PAGE> 49
SELLING STOCKHOLDERS
The following table sets forth certain information regarding each of the
Selling Stockholders.
<TABLE>
<CAPTION>
Name Ownership Before Offering Ownership After Offering(1)
- ------------------------- ------------------------- Shares to ---------------------------
Shares Percent be Sold Shares Percent
------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
William A. Hines 1,440,000 7.9 821,000 619,000 3.4
William M. Hines 1,440,000 7.9 821,000 619,000 3.4
Louis F. Gilbert 120,000 ---(2) 108,000 8,000 ---(2)
</TABLE>
- ----------
(1) If the Underwriter's over-allotment option is exercised in full, Messrs.
William A. Hines and William M. Hines will sell a total of 946,000 and
946,000 shares, respectively, and will own 494,000 and 494,000 shares,
representing 2.7% and 2.7% of the outstanding shares of Common Stock,
respectively.
(2) Less than 1%.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock, par value $0.01 per
share. The following summary is qualified in its entirety by reference to the
Company's Amended and Restated Certificate of Incorporation which is filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters submitted to a vote of common
stockholders and do not have cumulative voting rights. Holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared by
the Board of Directors out of funds legally available therefore, subject to any
preferential dividend rights of holders of outstanding Preferred Stock. See
"Dividend Policy." Upon the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after payment of all debts and other
liabilities, subject to the prior rights of any outstanding shares of Preferred
Stock. Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
stockholders, to cause shares of Preferred Stock to be issued in one or more
series, with the numbers of shares of each series to be determined by it. The
Board of Directors is authorized to fix and determine variations in the
designations, preferences, and relative, participating, optional or other
special rights (including, without limitation, special voting rights to receive
dividends or assets upon liquidation, rights of conversion into Common Stock or
other securities, redemption provisions and sinking fund provisions) between
series and between the Preferred Stock or any series thereof and the Common
Stock, and the qualifications, limitations or restrictions of such rights; and
the shares of Preferred Stock or any series thereof may have full or limited
voting powers, or be without voting powers.
Although the Company has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of Preferred Stock might
impede a business combination by including class voting rights that would
enable the holders to block such a transaction; or such issuance might
facilitate a business combination by including voting rights that would provide
a required percentage vote of the stockholders. In addition, under certain
circumstances, the issuance of Preferred Stock could adversely affect the
voting power of the holders of the Common Stock.
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Although the Board of Directors is required to make any determination to issue
such stock based on its judgment as to the best interests of the stockholders
of the Company, the Board of Directors could act in a manner that would
discourage an acquisition attempt or other transaction in that some or a
majority of the stockholders might believe to be in their best interest or in
which stockholders might receive a premium for their stock over the then market
price for such stock. The Board of Directors does not at present intend to
seek stockholder approval prior to any issuance of currently authorized stock,
unless otherwise required by law or the regulations of the exchange on which
its Common Stock is listed.
WARRANTS
In connection with the offering of the Subordinated Notes, Donaldson,
Lufkin & Jenrette Securities Corporation was granted warrants to purchase
98,337 shares of the Company's Common Stock at an exercise price of $14.51 per
share. The warrants are currently exercisable and have an expiration date of
September 14, 1998. To date, none of these warrants have been exercised.
EXCHANGEABLE SUBORDINATED NOTES
The Company has issued an aggregate principal amount of $34 million in
Subordinated Notes which mature on September 15, 2000, pursuant to the Note
Purchase Agreement among the Company and the Note Holders. Interest accrues on
the Subordinated Notes at a rate of 7% per annum, payable semi-annually in
arrears. Principal of the Subordinated Notes is payable upon maturity. If the
Company has not consummated a Qualified Public Offering (as defined below)
prior to September 15, 1998, two years before the maturity date of the
Subordinated Notes, and the Subordinated Notes are not otherwise exchanged into
Common Stock, the holders of the Subordinated Notes will be entitled to an
additional payment on the maturity date of an amount sufficient to provide the
Note Holders with a compounded annual rate of return of 13% from the issuance
date of the Subordinated Notes. The Company is currently accruing interest on
the Subordinated Notes at 13%. The Subordinated Notes are subordinate to the
Senior Credit Facility. The Company is subject to various covenants pursuant
to the Note Purchase Agreement, including restrictions on other debt, liens,
issuance of preferred stock, and the sale of certain assets, maintenance of
certain minimum working capital, tangible net worth and fixed charge coverage
ratios, restrictions on affiliated transactions, compensation and limitations
on the amount of dividends paid. The Company may pay the principal amount plus
accrued interest on the Subordinated Notes at maturity in shares of Common
Stock, subject to a cash make-whole provision equal to the difference between
the cash proceeds of the sale of such stock (if sold within 30 days after the
stock is issued) and the amount of principal and interest due.
Each of the holders of the Subordinated Notes may elect at any time to
exchange all or a portion of its Subordinated Notes into such number of shares
of the Company's Common Stock determined by dividing the amount of outstanding
principal of the Subordinated Notes to be exchanged by the exchange price of
$14.51, subject to certain adjustments; provided that no such amount to be
exchanged may be less than the lower of (i) $5 million and (ii) all of such
Note Holder's remaining Subordinated Notes. The number of shares of Common
Stock issuable upon exchange of the Subordinated Notes is subject to adjustment
for various dilutive events, including certain stock issuances. As of the date
of this Prospectus, the Subordinated Notes were exchangeable for approximately
2,343,047 shares of the Company's Common Stock.
Under certain circumstances, the Company may require the Note Holders to
exchange all (but not less than all) of the then outstanding Subordinated Notes
into such number of freely tradeable shares of the Company's Common Stock
determined by dividing the amount of total outstanding principal of the
Subordinated Notes by the exchange price of $14.51, subject to certain
adjustments (the "Call Option"). The Company may only elect to exercise the
Call Option upon the consummation of a "Qualified Public Offering" of Common
Stock. A "Qualified Public Offering" is defined as an offering of not less
than 2% of outstanding shares at a price of not less than $21.76 per share;
provided that immediately following the consummation of such offering at least
20% of the fully diluted then outstanding shares of Common Stock with an
aggregate market value of at least $40 million are freely tradeable without
restriction under the Securities Act. The Note Holders constituting 75% of the
aggregate principal amount outstanding of the Subordinated Notes may elect
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to require that the Company exercise the Call Option at any time prior to
maturity regardless of whether a Qualified Public Offering has been
consummated.
The Note Holders may at their election require that the Company prepay the
Subordinated Notes upon the occurrence of a "change of control." A "change of
control" under the Note Purchase Agreement occurs if: (i) any person or two or
more persons acting as a group acquire beneficial ownership (within the meaning
of Rule 13d-3 of the Commission under the Securities Exchange Act of 1934, as
amended, and including holding proxies to vote for the election of directors)
of 33 1/3% or more of the outstanding shares of voting Common Stock without the
consent of the Note Holders holding more than 75% of the principal amount of
the outstanding Subordinated Notes and except pursuant to an exchange of the
Subordinated Notes or in connection with a public offering of securities
registered pursuant to the Securities Act; or (ii) there is a sale of all or
substantially all of the assets of the Company or a distribution of assets of
the Company upon a dissolution, winding up, liquidation or reorganization of
the Company.
Upon the occurrence of a "change of control," the Note Holders may elect to
require the Company to redeem the Subordinated Notes at the greater of (i)
149.65% of their outstanding principal amount plus accrued interest and (ii) an
amount sufficient to provide the holders with a compounded annual rate of
return of 15% on the outstanding principal amount of the Subordinated Notes.
The Note Holders are entitled, under certain circumstances, to certain
demand and piggyback registration rights with respect to the Common Stock into
which their Subordinated Notes have been exchanged pursuant to the Note
Exchange Agreement. The holders of no less than 25% of the outstanding
principal amount of the Subordinated Notes may require the Company to effect
two registrations of the shares of Common Stock issuable upon the exchange of
the Subordinated Notes upon the earlier to occur of (i) June 30, 1996 and (ii)
the consummation of an initial public offering. The Note Holders have waived
such registration rights in connection with the Offering. See "Shares Eligible
for Future Sale."
Pursuant to the Subordinated Notes, so long as no event of default is in
existence after giving effect to such dividends, the Company may declare and
pay dividends to its stockholders during any fiscal year in an aggregate amount
that may not exceed the lesser of (i) the excess of (a) 60% of the Company's
net income before income taxes and non-cash extraordinary items for the
immediately preceding fiscal year over (b) all income taxes incurred by the
Company during the immediately preceding fiscal year and actually paid, and
(ii) a permitted dividend ceiling which equals $6.1 million in 1995 and
increases by 10% each year; provided that after giving effect to the dividend,
the ratio of future net revenues to total debt on the date of such distribution
is greater that 2 to 1.
On May 12, 1994, in connection with the Company's sale of Common Stock to
FAB, the Company granted options to the holders of the Subordinated Notes pro
rata in proportion to their holdings of Subordinated Notes to purchase 317,629
shares of Common Stock at an exercise price of $18.18 per share. In connection
with the Initial Public Offering, the Company reduced the exercise price for
such options to $15.76 per share and extended the term of the options to
September 15, 2000.
VOTING AND HOLDBACK AGREEMENT
The Company, FAB, Wictor Forss and the Note Holders are parties to the
Voting Agreement pursuant to which such persons agree to maintain the size of
the Board of Directors at no more than eight members, designate all eight
nominees to the Board and vote their shares of Common Stock for such nominees.
The Voting Agreement provides that (i) FAB has the right to designate two
nominees, (ii) the Note Holders have the right to designate three nominees,
(iii) the Chief Executive Officer of the Company must be nominated to serve as
a director and shall be Stig Wennerstrom or another person acceptable to the
Note Holders and (iv) two independent directors be nominated by FAB subject to
the approval of the Note Holders. The Voting Agreement provides that as long
as each of FS Energy Associates, L.P. and the Brinson Group holds at least 50%
of the Subordinated Notes (or shares of Common Stock issued in exchange
therefor) originally purchased by such holder, each such holder shall be
entitled to designate one of the three Note Holder nominees to the Board of
Directors. The Voting Agreement, as amended, provides that the independent
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director nominees for the Company's 1996 annual meeting have no previous
affiliation with FAB. In connection with the 1996 annual meeting, FAB
nominated Bruce L. Burnham and William F. Wallace. The Note Holders may not
vote any securities of the Company that they own to remove any director
nominated by FAB without the prior consent of FAB. FAB has granted an
irrevocable proxy to the Note Holders to vote its shares of Common Stock solely
in connection with the election of directors pursuant to the provisions, and
for the term, of the Voting Agreement. Pursuant to his Employment Agreement,
Stig Wennerstrom cannot be removed as the Company's President and Chief
Executive Officer without the consent of five of the Company's eight directors.
Without the prior written consent of the holders of a majority of the
shares of Common Stock issuable upon the exchange of the Subordinated Notes,
FAB and Wictor Forss are not permitted to sell any equity securities of the
Company to non-affiliates during (i) the period beginning from the date a
registration statement is filed in connection with a registration of the
Company of its securities pursuant to registration rights being exercised under
the Note Exchange and Registration Rights Agreement and ending 300 days after
the closing date of each underwritten offering made pursuant to such
registration statement and (ii) the period beginning on the date the Company
provides written notice to the holders of the Subordinated Notes of its
exercise of the Call Option through and ending on the date on which the closing
of the exchange under the Call Option occurs.
The Voting Agreement terminates on the earliest to occur of: (i) September
15, 2003, (ii) the date on which FAB and its affiliates beneficially own less
than 10% of the then outstanding voting Common Stock and (iii) the date on
which less than $5 million aggregate principal amount of the Subordinated Notes
is outstanding and the Holders of the Subordinated Notes own less than 5% of
the then outstanding shares of voting Common Stock of the Company.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS AND DELAWARE LAW
Certain provisions of the Certificate and Bylaws are intended to enhance
the likelihood of continuity and stability in the Board of Directors of the
Company and in its policies, but might have the effect of delaying or
preventing a change in control of the Company and may make more difficult the
removal of incumbent management even if such transactions could be beneficial
to the interests of stockholders. Set forth below is a summary description of
such provisions:
Number of Directors; Filling Vacancies; Removal . The Company's Bylaws
provide that the number of directors of the Company shall be eight, which may
be increased or decreased by the Board of Directors of the Company. The Board
of Directors of the Company, acting by a majority of the directors then in
office, may fill any vacancy or newly created directorship. However, the
Voting Agreement generally permits the party that designated a director to
nominate a replacement for a vacancy in that office. See "- Voting and
Holdback Agreement."
Stockholder Actions and Meetings. The Company's Certificate provides that
all actions required or permitted to be taken by the stockholders of the
Company may be taken only at a duly held annual or special meeting of the
stockholders. The Company's Bylaws provide that special meetings of
stockholders may be called only by the President or by a majority of the
directors.
The Company's Certificate requires a supermajority vote of the stockholders
for certain "interested stockholder" transactions. An "interested stockholder"
is any person who (i) is the beneficial owner of shares of capital stock of the
Company having 5% or more of the votes of the outstanding capital stock
entitled to vote, (ii) is an affiliate of the Company or was an affiliate
within the last two years and at any time was the beneficial owner of 5% or
more of the votes of the outstanding shares of capital stock entitled to vote
or (iii) is an assignee of any shares of the voting capital stock of an
interested stockholder, excluding shares transferred pursuant to a public
offering.
The affirmative vote of 75% of the outstanding shares of capital stock that
are entitled to vote in the election of directors, excluding shares held by the
interested stockholder and its affiliates, are required for:
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(i) any merger or consolidation of the Company or its subsidiary with an
interested stockholder or a corporation which is an affiliate of such
interested stockholder, (ii) sales, pledges or other dispositions to an
interested stockholder or its affiliate of assets of the Company or its
subsidiary having a fair market value of $10 million or more, (iii) the
issuance or transfer by the Company to an interested stockholder or its
affiliate of securities of the Company or any of its subsidiaries having a fair
market value of $10 million or more, (iv) adoption of a plan or proposal for
the liquidation or dissolution of the Company on behalf of any interested
stockholder or its affiliate, or (v) any reclassification of securities or
recapitalization of the Company or merger or consolidation of the Company and
any of its subsidiaries which has the effect of increasing the proportionate
share of the outstanding shares of any equity or convertible securities of the
Company or any subsidiary which are owned by an interested stockholder or its
affiliate.
The supermajority voting restriction does not apply to business
combinations which (i) have been approved by a majority vote of the
disinterested directors, (ii) provide all holders of Common Stock with certain
"fair price" protection as set forth in the Certificate and (iii) meet certain
other conditions.
Anti-takeover Provisions. Delaware law permits and the Certificate grants
the Company's Board broad discretionary authority to adopt any and all
anti-takeover measures approved by it in response to any proposal to acquire
the Company, its assets or more than 15% of its outstanding capital stock.
Measures to be adopted could include a shareholder rights plan or by-law
provisions requiring super-majority shareholder approval of acquisition
proposals.
Limitation on Personal Liability of Directors. Delaware law authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
director's fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors must exercise an informed business
judgment based on all material information reasonably available to them.
Absent the limitations authorized by Delaware law, directors are accountable to
corporations and their stockholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Delaware
law enables corporations to limit available relief to equitable remedies such
as injunction or rescission. The Certificate of the Company limits the
liability of directors of the Company to the Company or its stockholders (in
their capacity as directors but not in their capacity as officers) to the
fullest extent permitted by Delaware law. Specifically, directors of the
Company will not be personally liable for monetary damages for breach of a
director's fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation Law, or (iv) for any transaction from
which the director derived an improper personal benefit.
The inclusion of this provision in the Certificate may have the effect of
reducing the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefited the Company and its stockholders.
The Company's Bylaws provide indemnification to the Company's officers and
directors and certain other persons with respect to certain matters, and the
Company has entered into indemnification agreements with the Company's officers
providing for indemnification with respect to certain matters.
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder unless (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder become
an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide
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employees with the rights to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer); or (iii)
following the transaction in which such person become an interested
stockholder, the business combination was approved by the board of directors of
the corporation and authorized at a meeting of the stockholders by the
affirmative vote of the holders of two-thirds of the outstanding voting stock
of the corporation not owned by the interested stockholder. Under Section 203,
the restrictions described above also do not apply to certain business
combinations proposed by an interested stockholder following the announcement
or notification of one of certain extraordinary transactions involving the
corporation and a person who had not been an interested stockholder during the
previous three years or who become an interested stockholder with the approval
of a majority of the corporation's directors, if such extraordinary transaction
is approved or not opposed by a majority of the directors who were directors
prior to any person becoming an interested stockholder during the previous
three years or were recommended for election or elected to succeed such
directors by a majority of such directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has 18,260,447 shares of Common Stock outstanding. The shares
sold in the Initial Public Offering are freely tradeable without restriction or
further registration, except for shares owned by "affiliates" of the Company
(as such term is defined under the Securities Act) which may be sold subject to
the resale limitations of Rule 144 promulgated under the Securities Act ("Rule
144"). The 9,040,486 outstanding shares owned by FAB constitute "restricted
securities" within the meaning of Rule 144. After expiration of a lockup
period on May 29, 1996 as provided for in a separate registration rights
agreement between the Company and FAB, such shares became eligible for resale,
subject to the volume and other limitations of Rule 144, or pursuant to the
exercise of demand registration rights. In connection with the Initial Public
Offering, the Company and FAB entered into a registration rights agreement (the
"FAB Registration Rights Agreement"). Pursuant to the FAB Registration Rights
Agreement, FAB has two demand registration rights at the Company's expense and
certain piggyback registration rights. FAB has waived its registration rights
in connection with the offering made hereby.
Generally, Rule 144 provides that a person (or persons whose shares are
aggregate) who has beneficially owned "restricted" securities for at least two
years, including a person who may be deemed an "affiliate" of the Company, as
the term "affiliate" is defined under the Securities Act, is entitled to sell
in "brokers' transactions" or in transactions directly with a "market maker",
within any three-month period, a number of shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume of the Common Stock on any national securities exchange
and/or over-the-counter market during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain notice requirements and
the availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed an "affiliate" of the
Company would be entitled to sell such shares under Rule 144 without regard to
the volume, public information, manner of sale or notice provisions and
limitations described above, once a period of at least three years has elapsed
since the later of the date the shares were acquired from the Company or from
an "affiliate" of the Company.
In connection with the Ashlawn Acquisition, the Company issued 3,000,000
shares of Common Stock to the three shareholders of Ashlawn. The shares issued
to the Ashlawn shareholders are "restricted securities" within the meaning of
Rule 144. The Company gave such holders two demands, as well as piggyback
registration rights with respect to such shares. This offering is being made
under such demand registration rights. The Selling Stockholders have agreed
not to dispose of any shares of Common Stock for a period of one year from the
date of this Prospectus.
The Subordinated Notes are exchangeable at any time for an aggregate of
2,343,047 shares of Common Stock. Under the provisions of Rule 144, the Note
Holders will be deemed to have acquired beneficial ownership of such shares of
Common Stock in September 1993. In addition, the Company granted options
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to the Note Holders in May 1994 to purchase an additional 317,629 shares of
Common Stock at $18.81 per share. In connection with the Initial Public
Offering, the Company reduced the exercise price for such options to $15.76 per
share and extended the term of the options to September 15, 2000. The Note
Holders have demand and piggyback registration rights with respect to the
shares of Common Stock issuable in exchange for the Subordinated Notes or upon
the exercise of such options. Holders of not less than 25% in aggregate
principal amount of the Subordinated Notes may require the Company to effect up
to two registrations of such shares of Common Stock at the Company's expense.
The Noteholders have waived their registration rights in connection with this
Offering.
The Company has granted options to purchase 882,278 shares of Common Stock
to its employees pursuant to the 1993 Stock Option Plan and options to purchase
924,880 shares under the 1995 Stock Option Plan. All shares of Common Stock
underlying these options were registered pursuant to a registration statement
on Form S-8 filed in December 1995. Accordingly, such shares will be freely
tradeable by holders who are not affiliates of the Company and, subject to the
volume and manner of sale limitations of Rule 144, by holders who are
affiliates of the Company. Mr. Stig Wennerstrom, who holds options to purchase
1,121,646 shares of Common Stock, has certain piggyback registration rights
with respect to the shares of Common Stock issuable to him upon the exercise of
such options. See "Management - 1993 Option Plan."
Donaldson, Lufkin & Jenrette Securities Corporation and its affiliates hold
warrants to purchase 98,337 shares of Common Stock at an exercise price of
$14.51 per share. The Company has granted certain piggyback registration
rights with respect to the shares issuable upon the exercise of such warrant.
No prediction can be made as to the effect, if any, that future sales of
shares or the availability of shares for sale will have on the market price for
Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market, or the perception of the availability of
shares for sale, could adversely affect the prevailing market price of the
Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") among the Selling Stockholders, the Company and
Howard, Weil, Labouisse, Friedrichs Incorporated (the "Underwriter"), the
Selling Stockholders have agreed to sell to the Underwriter and the Underwriter
has agreed to purchase from the Selling Stockholders 1,750,000 shares of Common
Stock.
Under the terms and conditions of the Underwriting Agreement, the
Underwriter is committed to take and pay for all of the shares of Common Stock
offered hereby, if any are taken.
The Underwriter proposes to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at
such price less a concession of $.25 per share. After the shares of Common
Stock are released for sale to the public, the offering price and other selling
terms may from time to time be varied by the Underwriter.
The Selling Stockholders have granted the Underwriter an option exercisable
for 30 days after the date of this Prospectus to purchase up to an aggregate of
250,000 additional shares of Common Stock solely to cover over-allotments, if
any.
The Selling Stockholders have agreed that during the period beginning from
the date of this Prospectus and continuing to and including the date one year
after the date of this Prospectus not to offer, sell, contract to sell or
otherwise dispose of any securities of the Company which are substantially
similar to the shares of Common Stock or which are convertible or exchangeable
into securities which are substantially similar to the shares of Common Stock,
without the prior written consent of the Underwriter.
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The Underwriter has informed the Company and the Selling Stockholders that
the Underwriter does not expect sales to accounts over which the Underwriter
exercises discretionary authority to exceed five percent of the total number of
shares of Common Stock offered by them.
The Company and the Selling Stockholders agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock offered
hereby are being passed upon for the Company by Vinson & Elkins L.L.P.,
Houston, Texas, and for the Underwriters by Andrews & Kurth L.L.P., Houston,
Texas.
EXPERTS
The financial statements of the Company as of December 31, 1995 and for the
year ended December 31, 1995, included in this prospectus have been so included
in reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The financial statements of the Company as of December 31, 1994 and for
each of the two years in the period ended December 31, 1994; and the historical
statement of revenues and direct operating expenses of the Conoco properties
for each of the two years in the period ended December 31, 1994 included in
this Prospectus have been so included in reliance on the reports of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The financial statements of Ashlawn as of December 31, 1994 and 1993 and
for each of the three years in the period ended December 31, 1994 included in
this Prospectus have been so included in reliance on the report of LaPorte,
Sehrt, Romig and Hand APAC independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The estimates of the Company's net proved oil and natural gas reserves
included herein as of January 1, 1996 have been prepared by Collarini
Engineering Inc. and Netherland, Sewell & Associates, Inc. and by Collarini
Engineering, Inc. and Joe C. Neal & Associates as of January 1, 1995 and 1994.
The reserve estimates prepared by such firms as of January 1, 1995 have also
been audited by Netherland, Sewell & Associates, Inc.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended. The Company has filed with the Commission a
Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act, with respect to the offer and sale of Common Stock pursuant to
this Prospectus. This Prospectus, filed as a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement or the exhibits and schedules thereto in accordance with
the rules and regulations of the Commission and reference is hereby made to
such omitted information. Statements made in this Prospectus concerning the
contents of any contract, agreement or other document filed as an exhibit to
the Registration Statement are summaries of the terms of such contract,
agreement or document and are not necessarily complete. Reference is made to
each such exhibit for a more complete description of the matters involved and
such statements shall be deemed qualified by such reference. The Registration
Statement and the exhibits and schedules thereto filed with the Commission may
be inspected, without charge, and copies may be obtained at prescribed rates,
at the public reference facility maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission at 7 World Trade Center, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. For further
information pertaining to the Common Stock offered by this Prospectus and the
Company, reference is made to the Registration Statement.
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GLOSSARY OF OIL AND GAS TERMS
The definitions set forth below shall apply to the indicated terms as used
in this Prospectus. All volumes of natural gas referred to herein are stated
at the legal pressure base of the state or area where the reserves exist and at
60 degrees Fahrenheit and in most instances are rounded to the nearest major
multiple.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Bbl/d. One Bbl per day.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Completion. The installation of permanent equipment for the production of
oil or gas, or in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
Developed acreage. The number of acres which are allocated or assignable
to producing wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Dry hole or well. A well found to be incapable of producing hydrocarbons
in sufficient quantities such that proceeds from the sale of such production
exceed production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or gas reserves
not classified as proved, to find a new reservoir in a field previously found
to be productive of oil or gas in another reservoir or to extend a known
reservoir.
Farm-in or farm-out. An agreement whereunder the owner of a working
interest in an oil and gas lease assigns the working interest or a portion
thereof to another party who desires to drill on the leased acreage.
Generally, the assignee is required to drill one or more wells in order to earn
its interest in the acreage. The assignor usually retains a royalty or
reversionary interest in the lease. The interest received by an assignee is a
"farm-in" while the interest transferred by the assignor is a "farm-out."
Field. An area consisting of single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells, as the case may be,
in which a working interest is owned.
Horizontal drilling. A drilling technique that permits the operator to
contact and intersect a larger portion of the producing horizon than
conventional vertical drilling techniques and can result in both increased
production rates and greater ultimate recoveries of hydrocarbons.
Liquids. Crude oil, condensate and natural gas liquids.
Mbbls. One thousand barrels of crude oil or other liquid hydrocarbons.
57
<PAGE> 58
Mbbls/d. One thousand barrels of crude oil or other liquid hydrocarbons
per day.
Mcf. One thousand cubic feet.
Mcf/d. One thousand cubic feet per day.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of
six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas
liquids.
MMbbls. One million barrels of crude oil or other liquid hydrocarbons.
MMBtu. One million Btus.
MMcf. One million cubic feet.
MMcf/d. One million cubic feet per day.
MMcfe. One million cubic feet equivalent, determined using the ratio of
six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas
liquids.
Net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells.
Oil. Crude oil and condensate.
Present value. When used with respect to oil and gas reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using
prices and costs in effect as of the date indicated, without giving effect to
non-property related expenses such as general and administrative expenses, debt
service and future income tax expenses or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed producing reserves. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
Proved developed nonproducing reserves. Proved developed reserves expected
to be recovered from zones behind casing in existing wells.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required from recompletion.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
58
<PAGE> 59
Royalty interest. An interest in an oil and gas property entitling the
owner to a share of oil or gas production free of costs of production.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
Updip. A higher point in the reservoir.
Working interest. The operating interest which gives the owner the right
to drill, produce and conduct operating activities on the property and a share
of production.
Workover. Operations on a producing well to restore or increase
production.
59
<PAGE> 60
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FORCENERGY INC:
Unaudited Pro Forma Statement of Operations for the Year ended December 31, 1995 F-2
Financial Statements:
Report of Coopers & Lybrand L.L.P., Independent Accountants . . . . . . . . . . . . F-4
Report of Price Waterhouse LLP, Independent Accountants . . . . . . . . . . . . . . . . F-5
Balance Sheet as of December 31, 1994, 1995 and March 31, 1996 . . . . . . . . . . . . . F-6
Statements of Operations for the Years Ended December 31, 1993, 1994, 1995 and F-7
the three-month periods ending March 31, 1995 and 1996 . . . . . . . . . . . . . . . .
Statements of Stockholders' Equity for the Years Ended December 31, 1993, F-8
1994, 1995 and the three-month period ending March 31, 1996 . . . . . . . . . . . . .
Statements of Cash Flows for the Years Ended December 31, 1993, 1994, 1995 F-9
and the three-month periods ending March 31, 1995 and 1996 . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
Supplemental Information on Oil and Gas Producing Activities (Unaudited) . . . . . . . . F-25
CONOCO PROPERTIES:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-31
Historical Statement of Revenues and Direct Operating Expenses for the Years
Ended December 31, 1993 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32
Notes to Historical Statement of Revenues and Direct Operating Expenses . . . . . . . . . . F-33
ASHLAWN ENERGY, INC.:
Financial Statements:
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-36
Balance Sheets as of December 31, 1993 and 1994 . . . . . . . . . . . . . . . . . . . . F-37
Statements of Income for the period of inception (January 8, 1992) to December 31,
1992, for the Years Ended December 31, 1993 and 1994 and for the seven month period F-38
ended July 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Changes in Stockholders' Equity for the Period from Inception
(January 8, 1992) to December 31, 1992 and for the Years Ended December 31, 1993 and
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-39
Statements of Cash Flows for the period from Inception (January 8, 1992) to December 31,
1992 and for the Years Ended December 31, 1993 and 1994 and for the seven month period F-40
ended July 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-41
</TABLE>
F-1
<PAGE> 61
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(Unaudited)
PRO FORMA FINANCIAL INFORMATION
On March 3, 1995, the Company completed the acquisition of offshore oil and
gas properties for a net purchase price of $24.5 million from Conoco. On
August 2, 1995, the Company completed a plan of merger with Ashlawn. The
consideration for the Ashlawn Acquisition was approximately $3.3 million in net
cash, common stock of the Company with an indicated market value of $30.0
million based on the initial public offering price and the assumption of $5.7
million of Ashlawn debt. During 1995 the Company also acquired oil and gas
properties from SONAT Exploration Company ("Sonat"), Amoco Production Company
("Amoco") and Texaco Exploration and Production, Inc. ("Texaco") for a combined
purchase price of $8.8 million. The Company used the purchase method to
account for these transactions.
The unaudited pro forma statement of operations for the year ended December
31, 1995 assumes the Conoco Acquisition, the other property acquisitions by the
Company during 1995, the Ashlawn Acquisition and gives effect to the
application of the net proceeds of the Initial Public Offering as if such
transactions had been consummated at January 1, 1995. The unaudited pro forma
statement of operations includes certain adjustments to the historical
statement of operations of the Company to give effect to the acquisition of the
oil and gas properties and estimated administrative cost increases due to
becoming a public entity.
The pro forma statement of operations does not purport to be indicative of
the results of operations of the Company had such transactions occurred on the
dates assumed, nor is the pro forma statement necessarily indicative of the
future results of operations of the Company. The pro forma statement should be
read together with the Financial Statements of the Company, including the Notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Ashlawn Pro Forma Adjustments
Forcenergy Conoco Energy, Inc. Other ------------------------- Pro Forma
Historical Acquisition(1) Historical(2) Properties(3) Acquisitions Offering Combined
---------- ------------- ------------- ------------- ------------ -------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales . . . . . . $ 72,147 $ 1,283 $ 6,126 $ 600 $ -- $ -- $ 80,156
Other . . . . . . . . . . . . 494 0 27 0 -- -- 521
---------- ------------- ------------- ------------- ------------ -------- --------
Total revenues . . . . . 72,641 1,283 6,153 600 -- -- 80,677
Operating Expenses:
Lease operating . . . . . . . 24,507 293 2,070 233 -- -- 27,103
Depreciation, depletion and
amortization . . . . . . . 31,295 -- 699 -- 2,323 -- 34,317
Production taxes . . . . . . 1,868 -- 509 43 -- -- 2,420
General and administrative,
net . . . . . . . . . . . . 5,670 -- 621 -- (621)(5) 100 5,770
---------- ------------- ------------- ------------- ------------ -------- --------
Total operating expenses 63,340 293 3,899 276 1,702 100 69,610
---------- ------------- ------------ ------------- ------------ -------- --------
Income (loss) from operations . 9,301 990 2,254 324 (1,702) (100) 11,067
Interest and other income
(loss) . . . . . . . . . . (561) -- -- -- -- -- (561)
Interest expense, net . . . . . (11,668) -- (183) -- (188)(7) 2,608 (9,431)
---------- ------------- ------------- ------------- ------------ -------- --------
Income (loss) before income
taxes . . . . . . . . . . (2,928) 990 2,071 324 (1,890) 2,508(8) 1,075
Income tax provision (benefit) (1,075) -- -- -- 558(9) 935(9) 418
---------- ------------- ------------- ------------- ------------ -------- --------
Net income (loss) . . . . . . . $ (1,853) $ 990 $ 2,071 $ 324 $ (2,448) $ 1,573 $ 657
========== ============= ============= ============= ============ ======== ========
Net income (loss) per share . . $ (0.14) $ .04
========== ========
Weighted average shares
outstanding . . . . . . . . . 12,910 18,250
</TABLE>
(1) The Forcenergy Historical results of operations reflect oil and gas
revenues and direct operating expenses for the Conoco Acquisition from the
acquisition date, March 3, 1995, through December 31, 1995. The pro forma
results of operations for "Conoco Acquisition" reflects the oil and gas
revenues and direct operating expenses for these properties from January 1,
1995 to the acquisition date.
F-2
<PAGE> 62
(2) This column represents the historical results of operations of Ashlawn for
the period from January 1, 1995 to July 31, 1995.
(3) The Forcenergy Historical results of operations reflect oil and gas
revenues and direct operating expenses for Other Properties from their
respective acquisition dates, February 2, 1995 for properties acquired from
Sonat, April 26, 1995 for properties acquired from Texaco and March 14,
1995 for properties acquired from Amoco, through December 31, 1995. The
Other Properties column reflects the historical oil and gas revenues and
direct operating expenses for these properties from January 1, 1995 to
their acquisition dates.
(4) Adjustment to reflect the depreciation, depletion and amortization of oil
and gas properties, using the full cost method, based on the Company's 1995
historical rate per equivalent mcf of production.
(5) No additional general and administrative expense has been incurred as a
result of the Ashlawn Acquisition.
(6) Historical general and administrative costs for the seven months ended
July 31, 1995 have been adjusted by estimated incremental general and
administrative expenses associated with the Company becoming a publicly
traded entity.
(7) Adjustment to reflect increased interest expense on $42.1 million of
borrowings incurred in connection with the Conoco Acquisition and the
acquisition of other properties by the Company during 1995, net of
interest capitalization.
(8) Adjustment to reflect the repayment of $57.7 million in debt including a
portion of the Senior Credit Facility and additional debt assumed in
connection with the acquisition of oil and gas properties from Texaco.
(9) Adjustment to income tax expense to reflect the combined results of
operations.
F-3
<PAGE> 63
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Forcenergy Inc
We have audited the accompanying balance sheet of Forcenergy Inc (formerly
known as Forcenergy Gas Exploration, Inc.) as of December 31, 1995 and the
related statements of operations, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Forcenergy Inc as of December
31, 1995 and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Miami, Florida
February 27, 1996
F-4
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Forcenergy Inc
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Forcenergy Inc (formerly known as
Forcenergy Gas Exploration, Inc.) at December 31, 1994 and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above. We have not audited the financial statements of
Forcenergy Inc for any period subsequent to December 31, 1994.
PRICE WATERHOUSE LLP
Houston, Texas
June 1, 1995, except as to
Note 1 which is as of
July 6, 1995
F-5
<PAGE> 65
FORCENERGY INC
(FORMERLY KNOWN AS FORCENERGY GAS EXPLORATION, INC.)
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- -----------------------
1996 1995 1994
----------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 101 $ 2,996 $ 3,188
Accounts receivable, net . . . . . . . . . . . . . . . . . . 18,634 16,338 11,373
Other current assets . . . . . . . . . . . . . . . . . . . . 8,528 5,986 5,773
------------ ---------- ----------
Total current assets . . . . . . . . . . . . . . . . 27,263 25,320 20,334
------------ ---------- ----------
Investment in surety bonds, at cost . . . . . . . . . . . . . . . 6,205 6,164 7,830
------------ ---------- ----------
Property, plant and equipment, at cost, full cost method, net of
accumulated depletion, depreciation and amortization . . . . . 316,227 298,832 186,241
------------ ---------- ----------
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 4,484 4,774 5,882
------------ ---------- ----------
$ 354,179 $ 335,090 $ 220,287
============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 19,607 $ 17,811 $ 5,813
Other accrued liabilities . . . . . . . . . . . . . . . . . 18,641 15,000 9,076
Accrued acquisition obligations . . . . . . . . . . . . . . -- 4,284 --
------------ ---------- ----------
Total current liabilities . . . . . . . . . . . . . 38,248 37,095 14,889
------------ ---------- ----------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 144,533 130,729 131,646
------------ ---------- ----------
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 14,619 12,305 2,691
------------ ---------- ----------
Commitments and Contingencies (Note 12)
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued or outstanding . . . . . . . . . . . -- -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
18,260,447 and 9,040,486 issued and outstanding at December
31, 1995 and 1994, respectively . . . . . . . . . . . . . . 183 183 91
Capital in excess of par value . . . . . . . . . . . . . . . 163,378 163,378 77,717
Accumulated deficit, since September 14, 1993 . . . . . . . (6,782) (8,600) (6,747)
----------- ---------- ----------
Total stockholders' equity . . . . . . . . . . . . . 156,779 154,961 71,061
------------ ---------- ----------
$ 354,179 $ 335,090 $ 220,287
============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 66
FORCENERGY INC
(FORMERLY KNOWN AS FORCENERGY GAS EXPLORATION, INC.)
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR ENDED DECEMBER 31,
ENDED MARCH 31, -----------------------------------
1996 1995 1995 1994 1993
--------- ---------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales . . . . . . . . . . . . . . $ 28,342 $ 16,925 $ 72,147 $ 58,354 $ 49,652
Other . . . . . . . . . . . . . . . . . . . . 126 114 494 388 441
--------- ---------- ---------- --------- ----------
28,468 17,039 72,641 58,742 50,093
--------- ---------- ----------- --------- ----------
Expenses:
Lease operating . . . . . . . . . . . . . . . 8,736 6,235 24,507 23,744 16,632
Depletion, depreciation and amortization . . . 11,556 7,786 31,295 24,572 19,889
Production taxes . . . . . . . . . . . . . . . 724 416 1,868 1,701 1,560
General and administrative expense . . . . . . 1,790 1,274 5,670 6,463 3,166
--------- ---------- ---------- --------- ----------
22,806 15,711 63,340 56,480 41,247
---------- ----------- ---------- --------- ----------
Income from operations . . . . . . . . . . . . . . 5,662 1,328 9,301 2,262 8,846
Interest and other income (loss) . . . . . . . . . 111 126 (561) 789 545
Interest expense, net of amounts capitalized . . . (2,874) (3,069) (11,668) (9,529) (6,192)
--------- ---------- ---------- --------- ----------
Income (loss) before income taxes . . . . . . . . . 2,899 (1,615) (2,928) (6,478) 3,199
Income tax provision (benefit) . . . . . . . . . . 1,081 (601) (1,075) (2,403) 2,337
Minority interest . . . . . . . . . . . . . . . . . -- -- -- -- 107
--------- ---------- ---------- --------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . $ 1,818 $ (1,014) $ (1,853) $ (4,075) $ 755
========= =========== ========== ========= ==========
Net income (loss) per share . . . . . . . . . . . . $ .10 $ (.11) $ (.14) $ (.50)
======== ========== ========== =========
Weighted average number of common shares 18,260 9,040 12,910 8,188
========= ========== ========== =========
outstanding . . . . . . . . . . . . . . . . . . . .
Unaudited pro forma data (Note 6):
Income before income taxes . . . . . . . . . . $ 3,092
Income tax provision . . . . . . . . . . . . . 1,207
----------
Net income . . . . . . . . . . . . . . . . . . $ 1,885
==========
Net income per share . . . . . . . . . . . . . $ .29
==========
Weighted average number of common shares . . . 6,520
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 67
FORCENERGY INC
(FORMERLY KNOWN AS FORCENERGY GAS EXPLORATION, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
CAPITAL IN DEFICIT SINCE
COMMON STOCK EXCESS OF SEPTEMBER 14,
SHARES AMOUNT PAR VALUE 1993 TOTAL
---------- ---------- ------------ ----------- ------------
(IN THOUSANDS, EXCEPT SHARES)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 . . . . . . . . . 6,450,650 $ 65 $ 45,187 $ $ 45,252
Distributions . . . . . . . . . . . . . . . (8,418) (8,418)
Contributions . . . . . . . . . . . . . . . 2,200 2,200
Purchase of minority interest . . . . . . 233,944 2 3,545 3,547
Net loss . . . . . . . . . . . . . . . . . 3,427 $ (2,672) 755
---------- ---------- ------------ ----------- ------------
BALANCE, DECEMBER 31, 1993 . . . . . . . . 6,684,594 67 45,941 (2,672) 43,336
Issuance of common stock . . . . . . . . . 2,355,892 24 31,776 31,800
Net loss . . . . . . . . . . . . . . . . . (4,075) (4,075)
---------- ---------- ------------ ----------- -------------
BALANCE, DECEMBER 31, 1994 . . . . . . . . 9,040,486 91 77,717 (6,747) 71,061
Issuance of common stock . . . . . . . . . 9,219,961 92 85,661 85,753
Net loss . . . . . . . . . . . . . . . . . (1,853) (1,853)
---------- ---------- ------------ ----------- -------------
BALANCE, DECEMBER 31, 1995 . . . . . . . . 18,260,447 183 163,378 (8,600) 154,961
Net income (unaudited) . . . . . . . . . . 1,818 1,818
---------- ---------- ------------ ----------- -------------
BALANCE, MARCH 31, 1996 (unaudited) . . . . 18,260,447 $ 183 $ 163,378 $ (6,782) $ 156,779
========== ========== ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 68
FORCENERGY INC
(FORMERLY KNOWN AS FORCENERGY GAS EXPLORATION, INC.)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
---------------------- ----------------------------------
1996 1995 1995 1994 1993
--------- ---------- --------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 1,818 $ (1,014) $ (1,853) $ (4,075) $ 755
--------- ---------- --------- -------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization . . . . . . . . . . . 11,794 8,027 32,516 25,480 20,386
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 1,081 (601) (1,075) (2,403) 2,337
Deferred interest . . . . . . . . . . . . . . . . . . . . . . . 770 510 2,040 2,040 595
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41) (39) (194) (167) (196)
(Increase) decrease in accounts receivable . . . . . . . . . . (2,296) (107) (4,965) 1,097 (3,412)
Increase in other current assets . . . . . . . . . . . . . . . (2,543) 409 (63) (1,637) (3,032)
Increase in other assets . . . . . . . . . . . . . . . . . . . 53 56 (113) (668) (5,005)
Increase in accounts payable . . . . . . . . . . . . . . . . . 891 840 3,688 2,181 2,167
(Decrease) increase in other accrued liabilities . . . . . . . 1,834 1,200 (1,407) 585 4,878
--------- ---------- --------- -------- -----------
11,543 10,295 30,427 26,508 18,718
--------- ---------- --------- -------- -----------
Net cash provided by operating activities . . . . . . . . . . . 13,361 9,281 28,574 22,433 19,473
--------- ---------- --------- -------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of oil and gas properties . . . . . . . . . . . . -- (29,981) (41,462) (13,778) (36,623)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . (26,078) (4,421) (36,913) (44,391) (16,748)
Payment of accrued capital cost . . . . . . . . . . . . . . . . (4,284) -- -- -- --
Purchase of surety bonds . . . . . . . . . . . . . . . . . . . -- (170) (1,020) -- (8,815)
Sale of surety bonds . . . . . . . . . . . . . . . . . . . . . -- -- 2,730 -- --
Bond escrow proceeds . . . . . . . . . . . . . . . . . . . . . -- -- -- 2,855 --
Purchase of minority interest . . . . . . . . . . . . . . . . . -- -- -- -- (2,200)
Proceeds from sale of assets . . . . . . . . . . . . . . . . . 1,072 -- 803 16 1,242
--------- ---------- --------- -------- -----------
Net cash used in investing activities . . . . . . . . . . . . . (29,290) (34,572) (75,862) (55,298) (63,144)
--------- ---------- --------- -------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under senior credit facility . . . 13,034 22,440 (2,957) 6,872 28,881
Proceeds from issuance of subordinated notes . . . . . . . . . -- -- -- -- 34,000
Principal payments on short-term debt . . . . . . . . . . . . . -- -- -- (4,500) (780)
Bridge loan proceeds . . . . . . . . . . . . . . . . . . . . . -- -- 8,000 -- --
Repayment of bridge loan . . . . . . . . . . . . . . . . . . . -- -- (8,000) -- --
Repayment of acquisition debt . . . . . . . . . . . . . . . . . -- -- (5,700) -- --
Repayment of term loan facility . . . . . . . . . . . . . . . . -- -- -- -- (14,000)
Distributions to partners . . . . . . . . . . . . . . . . . . . -- -- -- -- (6,418)
Issuance of common stock, net . . . . . . . . . . . . . . . . . -- -- 55,753 31,800 2,200
--------- ---------- --------- -------- -----------
Net cash provided by financing activities . . . . . . . . . . . 13,034 22,440 47,096 34,172 43,883
--------- ---------- --------- -------- -----------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . (2,895) (2,851) (192) 1,307 212
--------- ---------- --------- -------- -----------
CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . 2,996 3,188 3,188 1,881 1,669
--------- ---------- --------- -------- -----------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . $ 101 $ 337 $ 2,996 $ 3,188 $ 1,881
========= ========== ========= ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 69
FORCENERGY INC
(FORMERLY KNOWN AS FORCENERGY GAS EXPLORATION, INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Forcenergy Inc (formerly known as Forcenergy Gas Exploration, Inc.), a
Delaware Corporation (the "Company"), is an independent oil and gas company
engaged in the development, exploration, acquisition and production of domestic
oil and natural gas properties. The Company was originally founded as a
privately held corporation ("old FGE") in 1982 by the current President and
Chief Executive Officer of the Company. In 1989, "old FGE" entered into a
limited partnership agreement, as general partner and owner of a 3% partnership
interest, with Forcenergy AB ("FAB"), a Swedish corporation, forming Forcenergy
Partners, L.P., a Delaware limited partnership (the "Partnership"). On August
16, 1993, a wholly- owned subsidiary of FAB was formed and on September 14,
1993, that subsidiary succeeded to FAB's 97% interest in the Partnership and
acquired by merger "old FGE's" 3% interest in the Partnership. The newly
formed Delaware corporation retained the name of Forcenergy Inc.
The transaction between the Company and FAB has been reflected in the
accompanying financial statements as a reorganization of entities under common
control whereby the historical basis of assets and liabilities of the
Partnership are carried forward as the recorded basis for the Company. The
acquisition by merger of "old FGE's" 3% general partner interest has been
accounted for as the purchase of a minority interest. The accompanying
financial statements for periods prior to September 14, 1993 reflect the entire
operations of the Partnership with the general partner's 3% interest shown as
minority interest. The accompanying financial statements reflect a retroactive
adjustment to stockholders' equity to reflect the transaction between the
Company and FAB.
On July 28, 1995, 6,210,000 shares of the Company's stock were issued
pursuant to the Company's initial public offering. The proceeds from the
initial public offering were $55.7 million, net of underwriting and other
offering costs of $6.4 million.
INTERIM FINANCIAL STATEMENTS
The financial statements for the three-months ended March 31, 1996, and all
related footnote information for that period, are unaudited and reflect all
normal and recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position, operating results
and cash flows for the interim periods.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
CASH/CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company
maintains cash deposits with a single financial institution. At certain times,
these deposits may exceed federally insured limits.
F-10
<PAGE> 70
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ACCOUNTS RECEIVABLE
Accounts receivable relate primarily to sales of oil and gas production and
amounts due from joint interest partners for expenditures made by the Company
on behalf of such partners. The Company reviews the financial condition of
potential purchasers and partners prior to signing sales or joint interest
agreements. At December 31, 1995 and 1994, the allowance for doubtful accounts
was $50,000 and $0, respectively. The Company requires certain forms of
financial assurance from its most significant customers.
INVESTMENT IN SURETY BONDS
Investment in surety bonds are classified as held-to-maturity and represent
government securities purchased and pledged pursuant to supplemental bonding
requirements for offshore properties. The securities are carried at amortized
cost, which approximates market.
OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting for oil and gas
properties whereby all productive and non- productive exploration, development
and acquisition costs incurred for the purpose of finding oil and gas reserves
are capitalized. Such capitalized costs include lease acquisition, geological
and geophysical work, delay rentals, drilling, completing and equipping oil and
gas wells, together with internal costs directly attributable to property
acquisition, exploration and development activities. No gains or losses are
recognized upon the sale or other disposition of oil and gas properties, except
in unusually significant transactions.
The Company provides for expected future abandonment liabilities by
amortizing such costs as a component of depletion, depreciation and
amortization over the expected lives of the properties. At December 31, 1995,
total undiscounted abandonment costs estimated to be incurred through the year
2006, net of estimated salvage values, for properties in federal and state
waters were approximately $48 million, approximately $8.4 million of which has
been accrued through depletion. For onshore properties, salvage values
received for equipment are usually sufficient to offset the abandonment costs.
Under the Securities and Exchange Commission's full cost accounting rules,
the Company reviews the carrying value of its oil and gas properties each
quarter. Under full cost accounting rules, capitalized costs of oil and gas
properties, net of deferred tax reserves, may not exceed the present value of
estimated future net revenues from proved reserves, discounted at 10 percent,
plus the lower of cost or fair market value of unproved properties, as adjusted
for related tax effects. Application of this rule generally requires pricing
future production at the unescalated oil and gas prices in effect at the end of
each fiscal quarter and requires a permanent write-down of capitalized costs if
the "ceiling" is exceeded, even if prices declined for only a short period of
time. At December 31, 1995, the value of the Company's oil and gas reserves
and unproved properties for purposes of the ceiling limitation calculation
exceeded capitalized costs, based on prices in effect on the reserve valuation
date. While the Company has never been required to write-down its asset base,
future significant downward revisions of quantity estimates or declines in oil
and gas prices from those in effect on January 1, 1996 that are not offset by
other factors could result in a one-time non-cash charge to earnings. During
the first quarter of 1996, natural gas prices declined from those being
received as of the reserve valuation date; however, valuing reserves at prices
being received as of March 31, 1996 would not result in the capitalized cost
ceiling being exceeded.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121 ("SFAS No. 121") regarding accounting for
the impairment of long-lived assets. The Company is required to adopt SFAS No.
121 in 1996; however its provisions are not applicable to the Company's oil and
gas assets as they are accounted for under the full cost method of accounting.
The effect
F-11
<PAGE> 71
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
of adopting SFAS 121 for non-oil and gas properties is not material; however,
its provisions are not applicable to the Company's oil and gas assets as they
are accounted for under the full cost method of accounting.
A substantial portion of the Company's oil and gas properties are located
in the Gulf of Mexico.
OFFICE EQUIPMENT
Depreciation of office furniture, fixtures and equipment is computed using
an accelerated depreciation method over the useful lives of the assets, which
range from five to seven years.
DEFERRED FINANCING COSTS
Included in other assets at December 31, 1995 and 1994 are debt issuance costs
of $6,345,000 and $6,216,000, respectively, relating to the senior credit
facility and the subordinated notes. These costs are amortized over the terms
of the senior credit facility and the subordinated notes. Accumulated
amortization at December 31, 1995 and 1994 was $2,868,000 and $1,929,000,
respectively.
REVENUE RECOGNITION
Revenues from oil and natural gas production are recorded using the sales
method, net of royalties and net profits interests. When the Company's share
of sales volumes exceed, or are less than, the Company's entitled share of
production based on the net revenue interest attributable to its working
interest, an imbalance occurs. Under the sales method of revenue recognition,
the net over/under-produced volumes are not recorded as a liability, or
receivable, respectively. The underproduced party later takes sales volumes in
excess of its entitled share of future production to eliminate the imbalance.
To the extent an imbalance exceeds the remaining estimated proved oil and
natural gas reserves for a given property, the Company records a liability or,
in the case of a receivable consideration is given to contractual support and
collectibility before recording. At March 31, 1996 and December 31, 1995, the
Company's net imbalance position was not material.
During 1995 and 1994, the Company maintained a hedging program on a portion
of its estimated future production to provide a certain minimum level of cash
flow from its sales of crude oil and natural gas (See Note 11). Any hedging
gains or losses under these contracts are recognized in revenue upon settlement
of hedged production, which is settled monthly.
INCOME TAXES
Prior to September 14, 1993, there was no income tax provision related to
the Partnership's operations as the Partnership was not a tax-paying entity.
Upon the formation of the Company on September 14, 1993, the Company became
subject to corporate income taxes.
The Company follows the asset and liability approach to account for income
taxes. Under this method, deferred taxes are recognized for temporary
differences between the book and tax basis of assets and liabilities. These
temporary differences are measured using applicable enacted tax rates and
provisions of enacted tax laws.
EARNINGS PER SHARE
Earnings per share is calculated on the weighted average number of shares
outstanding during each period for common stock, and when dilution exceeds 3%
common stock equivalents. The dilution effect of
F-12
<PAGE> 72
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
common stock equivalents is less than 3%, for the quarter ended March 31, 1996
and the year ended December 31, 1993 and they are anti-dilutive for all other
periods present.
Supplemental earnings per share for the year ended December 31, 1995 is
$.01 per share. Supplemental earnings per share reflects what primary earnings
per share would have been had the initial public offering of common stock
occurred at January 1, 1995 and had the proceeds been used to retire certain of
the Company's long-term debt.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures relating to current operations are expensed or
capitalized, as appropriate, depending on whether such expenditures provide
future economic benefits. Liabilities are recognized when the expenditures are
considered probable and can be reasonably estimated. Measurement of
liabilities is based on currently enacted laws and regulations, existing
technology and undiscounted site-specific costs. Generally, such recognition
coincides with the Company's commitment to a formal plan of action.
COMMON STOCK CONVERSION AND SPLIT
Effective July 6, 1995, the Company increased in the authorized number of
shares of common and preferred stock to 50,000,000 and 5,000,000, respectively,
and reclassified and converted each share of Class A Common Stock and Class B
Common Stock into 98.337 shares of Common Stock.
RECLASSIFICATIONS
Certain minor reclassifications have been made to the Company's first
quarter 1995 and 1994 and 1993 financial statements to conform them to
classifications used in the 1995 annual financial statements.
NOTE 2 -- ACQUISITIONS AND MERGERS
1993 ACQUISITION
On November 2, 1993, the Company acquired certain offshore oil and gas
properties for an acquisition price of $20.1 million from WHK, Inc., et. al.
The acquisition has been accounted for as a purchase and the results of
operations of the properties acquired are included in the Company's results of
operations effective November 2, 1993.
The following pro forma statement of operations information has been
prepared to give effect to the acquisition of properties from WHK, Inc., et.
al, as if such transaction had occurred at July 1, 1993. Information prior to
July 1, 1993 is not available. The historical results of operations have been
adjusted to reflect (i) revenues and expenses attributable to the properties,
(ii) the difference between the WHK, Inc., et. al, properties' historical
depreciation, depletion and amortization and such expense calculated based on
the value allocated to the acquired assets, (iii) the increase in interest
expense associated with the debt incurred in the WHK, Inc., et. al,
acquisition, and (iv) the increase in income taxes giving retroactive effect to
the merger. Management does not believe the pro forma amounts purport to be
indicative of the results of operations that would have been reported had the
acquisition occurred as of the dates indicated below, or that may be reported
in the future (in thousands, except per share amounts).
F-13
<PAGE> 73
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31, 1993
--------------------
(UNAUDITED)
--------------------
<S> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,801
Income from operations . . . . . . . . . . . . . . . . . . . . . $ 7,903
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 520
Net income per share . . . . . . . . . . . . . . . . . . . . . . $ 0.08
</TABLE>
1994 ACQUISITIONS
On September 15, 1994, the Company acquired certain offshore oil and gas
properties for a cash acquisition price of $5.6 million from Ashlawn Energy,
Inc. The acquisition has been accounted for as a purchase and the results of
operations of the properties acquired are included in the Company's results of
operations effective September 15, 1994.
On February 2, 1994, the Company acquired certain offshore oil and gas
properties for a cash acquisition price of $6.6 million from GLG Energy, L.P.
The acquisition has been accounted for as a purchase and the results of
operations of the properties acquired are included in the Company's results of
operations effective February 2, 1994.
1995 ACQUISITIONS
The Company completed 12 acquisitions during 1995 at an aggregate cost of
approximately $92.1 million. The two most significant acquisitions are
discussed below, including pro forma results of operations for the Company
assuming the acquisitions had been completed on January 1, 1994. The aggregate
effect of other acquisitions on the results of operations of the Company for
the periods presented was not material.
On March 3, 1995, the Company acquired certain offshore oil and gas
properties from Conoco, Inc. ("Conoco") for a cash acquisition price of $24.5
million. The acquisition has been accounted for as a purchase and the results
of operations of the properties acquired are included in the Company's results
of operations effective March 3, 1995.
On August 2, 1995, the Company completed a plan of merger with Ashlawn
Energy, Inc. ("Ashlawn"). The consideration for the acquisition of Ashlawn was
approximately $3.3 million in net cash, common stock of the Company with an
indicated market value of $30.0 million, based upon the initial public offering
price and the assumption of $5.7 million of Ashlawn debt. The net assets
acquired consisted primarily of oil and gas properties. This transaction was
accounted for as a purchase and the results of operations of the properties
acquired are included in the Company's results of operations effective August
2, 1995.
The following pro forma statement of operations information has been
prepared to give effect to the Conoco transaction and the acquisition of
Ashlawn as if such transactions had occurred on January 1, 1994. The
historical results of operations have been adjusted to reflect (i) revenues and
expenses attributable to the properties, (ii) the difference between the
properties' historical depletion, depreciation, and amortization and such
expense calculated based on the value allocated to the acquired assets, (iii)
the increase in interest expense associated with the debt incurred, and (iv)
the increase in income taxes giving retroactive effect to the mergers.
Management does not believe the pro forma amounts purport to be indicative of
the results of operations that would have been reported had the acquisitions
occurred at the dates indicated below or that may be reported in the future (in
thousands, except per share amounts).
F-14
<PAGE> 74
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
----------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ------------------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . $80,050 $76,553
Income from operations . . . . . . . . . . . . $11,024 $ 5,777
Net loss . . . . . . . . . . . . . . . . . . . $ (889) $(2,728)
Net loss per share . . . . . . . . . . . . . . $ (0.07) $ (0.33)
</TABLE>
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
Investments in property, plant and equipment were as follows at December
31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Oil and Gas Properties:
Proved . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 343,378 $ 215,781
Unproved . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,057 26,650
---------- ---------
382,435 242,431
Office Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 2,738 1,934
Less: accumulated depletion, depreciation and amortization . . . . (86,341) (58,124)
---------- ---------
Net Property, Plant and Equipment . . . . . . . . . . . . . . . . .$ 298,832 $ 186,241
========== =========
</TABLE>
Depreciation, depletion and amortization for oil and gas properties for the
years ended December 31, 1995, 1994 and 1993 was, $30.8 million, $24.4 million
and $19.7 million, respectively. Depreciation, depletion and amortization
rates per Mcfe of hydrocarbons produced (using a Bbl-to-Mcf conversion factor
of 1 to 6) for the years ended December 31, 1995, 1994 and 1993 were $.88, $.88
and $.96, respectively.
Included in property, plant and equipment are capitalized internal costs of
$1.1 million, $951,000 and $916,000 for the years ended December 31, 1995, 1994
and 1993, respectively, relating to oil and gas property acquisition,
exploration and development costs.
During the years ended December 31, 1995, 1994 and 1993 the Company
capitalized interest of $2.6 million, $1.5 million and $357,000, respectively,
on expenditures made in connection with exploration and development projects on
significant unproved properties that are not subject to current depreciation,
depletion or amortization. Interest is capitalized only for the period that
activities are in progress to bring the properties to their intended use.
The following sets forth the composition of capitalized costs excluded from
the depletion, depreciation, and amortization base at December 31, 1995, 1994
and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Property Acquisition . . . . . . . . . . . . . . . . . $ 30,394 $ 22,012 $ 9,560
Development Costs . . . . . . . . . . . . . . . . . . . 4,916 2,752 1,095
Interest Capitalized . . . . . . . . . . . . . . . . . 3,747 1,886 357
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,057 $ 26,650 $ 11,012
========== ========== ==========
</TABLE>
At December 31, 1995, approximately 94% of excluded costs relate to
offshore activities in the Gulf of Mexico and the remainder relates to domestic
onshore activities. The inclusion of these costs in the depletion,
F-15
<PAGE> 75
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
depreciation and amortization computation will be at the point in time that it
is determined that proved reserves do or do not exist on the applicable
properties.
NOTE 4 -- DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------- ----------------------
1996 1995 1994
------------- ---------- ----------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C>
Senior Credit Facility . . . . . . . . . . . . . . $ 105,089 $ 92,054 $ 95,011
Subordinated Notes . . . . . . . . . . . . . . . . 39,444 38,675 36,635
------------- ---------- -----------
$ 144,533 $ 130,729 $ 131,646
============= ========== ===========
</TABLE>
SENIOR CREDIT FACILITY
The Company has entered into a senior credit facility with a maximum loan
amount of $120 million and a borrowing base of $120 million at December 31,
1995, subject to certain financial and operational criteria. The borrowing
base is subject to redetermination semi-annually based on revised reserve
estimates. The loan is collateralized by substantially all of the Company's
oil and gas properties. Effective December 1, 1995, the senior credit facility
was amended to extend the maturities of related borrowings on a revolving basis
through December 31, 1997 and to reduce borrowing rates under the facility.
Future annual principal payments, as a percentage of the principal balance
outstanding at the time of conversion to the term loan, will be 36% in 1998,
30% in 1999, 23% in 2000, and 11% in 2001. The term loan matures on June 30,
2001. During 1995, advances, at the Company's option, bore interest at either
the prime rate plus a variable percentage ranging from .25% to .75% or LIBOR
plus a variable percentage ranging from 2% to 2.5%, based on the Company's
leverage ratio. Effective December 1, 1995, under the amended facility,
advances, at the Company's option, bear interest at either the prime rate or
LIBOR plus 1.375%. Interest on prime loans is due quarterly, while interest on
LIBOR loans is due the earlier of quarterly, or the end of each designated
interest period.
At December 31, 1995, the Company had drawn down $92.1 million under the
facility and an additional $7.0 million of availability was committed to
outstanding letters of credit issued under the facility. The Company had
available funds pursuant to this agreement of $20.9 million at December 31,
1995. Commitment fees on the unused portion of the facility are due quarterly
at an annual rate of 0.5%.
Effective April 26, 1996 the Company renegotiated its senior credit
facility to provide for a total commitment of $195 million, with a current
borrowing base of $175 million. At April 30, 1996, the Company had
approximately $59.9 million available under the renegotiated senior credit
facility.
SUBORDINATED NOTES
The Company has issued an aggregate principal amount of $34 million in
subordinated notes which mature on September 15, 2000. Cash interest accrues
on the subordinated notes at a rate of 7% per annum, payable semi-annually in
arrears. However, if the Company has not consummated a "Qualified Public
Offering" (as defined below) prior to September 15, 1998, two years before the
maturity date of the subordinated notes and the holders of subordinated notes
do not otherwise exchange these notes for common stock, the holders of the
subordinated notes will be entitled to an additional payment on the maturity
date of an amount sufficient to provide the holders with a compounded annual
rate of return of 13%. For accounting purposes, the Company is accruing
interest on these subordinated notes at 13%. Deferred interest on the
subordinated notes was $4,675,000 and $2,635,000 at December 31, 1995 and 1994,
respectively. Principal
F-16
<PAGE> 76
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
of the subordinated notes is payable upon maturity. The subordinated notes are
subordinate to the senior credit facility. The Company may pay the principal
amount plus accrued interest on the subordinated notes at maturity in shares of
common stock, subject to a cash make-whole provision equal to the difference
between the cash proceeds of the sale of such stock (if sold within 30 days
after the stock is issued) and the amount of principal and interest due.
Each of the holders of the subordinated notes may elect at any time to
exchange all or a portion of its subordinated notes into such number of shares
of common stock determined by dividing the amount of outstanding principal of
the subordinated notes to be exchanged by the exchange price of $14.51, subject
to certain adjustments; provided that no such amount to be exchanged may be
less than the lower of (i) $5 million and (ii) all of such note holder's
remaining subordinated notes. The number of shares of common stock issuable
upon exchange of the subordinated notes is subject to adjustment for various
dilutive events, including certain stock issuances.
Under certain circumstances, the Company may require the holders to
exchange all (but not less than all) of the then outstanding subordinated notes
into such number of freely tradable shares of common stock determined by
dividing the amount of total outstanding principal of the subordinated notes by
the exchange price of $14.51, subject to certain adjustments (the "Call
Option"). The Company may only elect to exercise the Call Option upon the
consummation of a "Qualified Public Offering" of common stock. A "Qualified
Public Offering" is defined as an offering at a price of not less than $21.76
per share; provided that immediately following the consummation of such
offering at least 20% of the fully diluted then outstanding shares of common
stock with an aggregate market value of at least $40 million are freely
tradable without restriction under the Securities Act. The note holders
constituting 75% of the aggregate principal outstanding amount of the
subordinated notes may elect to require that the Company exercise the Call
Option regardless of whether a Qualified Public Offering has been consummated.
The note holders may at their election require that the Company prepay the
subordinated notes upon the occurrence of a "change of control." A "change of
control" under the Note Purchase Agreement occurs if: (i) any person or two or
more persons acting as a group, other than FAB or the Forss family, acquire
beneficial ownership (within the meaning of Rule 13d-3 of the Commission under
the Securities Exchange Act of 1934, as amended, and including holding proxies
to vote for the election of directors) of 33 1/3% or more of the outstanding
shares of voting common stock without the consent of the note holders holding
more than 75% of the principal amount of the outstanding subordinated notes and
except pursuant to an exchange of the subordinated notes or in connection with
a public offering of securities registered pursuant to an exchange of the
subordinated notes or in connection with a public offering of securities
registered pursuant to the Securities Act; (ii) there is a sale of all or
substantially all of the assets of the Company or a distribution of assets of
the Company upon a dissolution, winding up, liquidation or reorganization of
the Company; or (iii) there is a "change of control" as defined in the senior
credit agreement.
Upon a "change of control," the holders may elect to require the Company to
redeem the subordinated notes at the greater of (i) 149.65% of their
outstanding principal amount plus accrued interest and (ii) an amount
sufficient to provide the holders with a compounded annual rate of return of
15% on the outstanding principal amount of the subordinated notes. The
contemplated initial public offering does not constitute a "change of control"
under these provisions.
The noteholders are entitled, under certain circumstances, to certain
demand and piggyback registration rights with respect to common stock into
which their subordinated notes have been exchanged pursuant to a registration
rights agreement. The holders of no less than 25% of the outstanding principal
amount of the subordinated notes may require the Company to effect two
registrations of the shares of common stock
F-17
<PAGE> 77
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
issuable upon the exchange of the subordinated notes upon the earlier to occur
of (i) June 30, 1996 or (ii) the consummation of an initial public offering.
The senior credit facility and subordinated notes contain certain covenants
which include maintenance of a minimum tangible net worth, certain financial
ratios, restrictions on asset sales, affiliated transactions and compensation
and certain limitations on dividends and additional debt or liens. The Company
is in compliance with these covenants, or has received waivers in the event of
non-compliance.
The Company's aggregate long-term debt maturities for each of the next five
calendar years are estimated to be as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . --
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . --
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . $33,139
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 27,616
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 59,847
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . 10,127
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 130,729
=======
</TABLE>
NOTE 5 -- RELATED PARTY TRANSACTIONS
The Partnership paid management fees of $280,500 to its general partner,
"old FGE," for investment, operations, finance and administrative services in
1993.
The Company paid during 1995 and 1993 legal fees of $78,000 and $118,000,
respectively, to the law firm of one of its directors.
In 1993, the Company paid a dividend to FAB in the form of an unsecured and
non-interest bearing $2.0 million note. Such note was paid in 1994.
The Company leases its principal offices in Miami, Florida from an
affiliate of the Forss family, who collectively own a majority voting interest
in FAB, which owns approximately 49.5% of the Company. The terms of the lease
include current monthly payments of approximately $24,000 and a remaining term
of approximately three years. The Company made payments under such lease for
increasing amounts of office space of $272,000, $246,000 and $175,000 for the
years ended December 31, 1995, 1994 and 1993.
On May 12, 1994, the Company issued 2,355,892 shares of its common stock to
FAB for cash consideration, less offering costs, of $31,800,000.
The Company has a consulting arrangement with Wictor Forss, whereby Mr.
Forss currently receives $10,000 per month in exchange for consulting services.
NOTE 6 -- INCOME TAXES
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," on September 15, 1993 as a
result of the merger transactions which effectively converted the Partnership
into a taxable United States (U.S.) corporation (see Note 1). For tax
F-18
<PAGE> 78
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
purposes, the merger was considered to be a tax-free reorganization.
Accordingly, the historical tax basis of the combined net assets of the merged
companies has not changed. The Company provided for a one-time deferred tax
provision of $2,422,000 for the temporary differences between the book and tax
basis of the combined net assets of the Company.
The Company's provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
----------- ------------ ------------
Deferred: (IN THOUSANDS)
<S> <C> <C> <C>
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (980) $ (2,082) $ 2,024
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . (95) (321) 313
------------ ------------ -----------
Total provision (benefit) for income taxes . . . $ (1,075) $ (2,403) $ 2,337
============ ============ ===========
</TABLE>
The Company's deferred income tax liabilities (assets) at December 31,
1995, 1994 and 1993 are composed of the following differences between financial
and tax reporting (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Capitalized costs and write-offs . . . . . . . . . . . . . . $ 28,659 $ 16,865 $ 7,786
Net operating loss carry forwards . . . . . . . . . . . . . . (14,610) (13,191) (2,470)
Deferred interest deductions . . . . . . . . . . . . . . . . (1,744) (983) (222)
----------- ------------ ------------
Deferred tax liability . . . . . . . . . . . . . . . . . . . $ 12,305 $ 2,691 $ 5,094
=========== ============= =============
</TABLE>
The Company has no deferred tax asset valuation allowance at December 31,
1995, 1994 or 1993.
A reconciliation of the federal statutory income tax rates to the Company's
effective rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
Income taxes at federal statutory rates . . . . . . . . . . . . . . 34.0% 34.0% 34.0%
State income tax, less federal benefit . . . . . . . . . . . . . . 3.3 3.3 3.3
Partnership income for the eight and one-half months
ended September 14, 1993, approximately $3,427,000
is not taxable . . . . . . . . . . . . . . . . . . . . . . . . . - - (39.9)
Cumulative temporary differences in oil and gas properties
at date of conversion to U.S. corporation . . . . . . . . . . . . - - 75.7
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.6) (0.2) -
----- ---- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.7% 37.1% 73.1%
===== ==== =====
</TABLE>
At December 31, 1995, 1994 and 1993 the Company had a net operating loss
carryforward ("NOL") for tax purposes of $39,168,000, $35,365,000 and
$6,621,000, respectively. The Company's NOLs expire as follows: $6,621,000 in
2008, $32,485,000 in 2009 and $62,000 in 2010. The Company's initial public
offering of its common stock resulted in a change of ownership under Section
382 of the Internal Revenue Code of 1986, as amended, and will cause an annual
limitation in the utilization of the Company's NOLs. The Company has
determined that the annual limitation for utilization of its NOLs as a result
of Section 382 will be approximately $4.5 million.
F-19
<PAGE> 79
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
PRO FORMA PROVISION FOR INCOME TAXES
Effective with the September 14, 1993 merger transactions, the Company is
no longer treated as a partnership for United States federal income tax
purposes. Accordingly, the statement of operations includes a pro forma
adjustment for income taxes which would have been recorded if the Company had
been a corporation, based on tax laws in effect, for the year ended December
31, 1993.
The pro forma income tax provision is as follows:
<TABLE>
<S> <C>
Current . . . . . . . . . . . . . . . . . . . . . . . . $ --
Deferred . . . . . . . . . . . . . . . . . . . . . . . 1,207
-------
$ 1,207
=======
</TABLE>
A reconciliation of the Company's pro forma United States income tax
provision computed by applying the statutory United States federal income tax
rate of 34% to the Company's pro forma income (loss) before income taxes is
presented in the following table:
<TABLE>
<S> <C>
Income taxes at federal statutory rate . . . . . . . . . 34.0%
State income tax, less federal benefit . . . . . . . . . 3.3
Other, net . . . . . . . . . . . . . . . . . . . . . . . 1.7
-----
39.0%
=====
</TABLE>
NOTE 7 -- LEASES
The following is a schedule by calendar year of future minimum rental
payments, covering primarily office space, required under operating leases with
a term in excess of one year:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 592
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 730
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 683
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 447
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 410
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,862
=======
</TABLE>
Total rental expense for operating leases was $419,000, $362,000 and
$221,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
At December 31, 1995, approximate future minimum lease payments under
capitalized lease obligations were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 462
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 219
-------
Total minimum lease payments . . . . . . . . . . . . . . 681
Amounts representing interest . . . . . . . . . . . . . . (88)
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 593
=======
</TABLE>
F-20
<PAGE> 80
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Office equipment at December 31, 1995 and 1994, includes $1,083,000 and
$516,000, respectively, of equipment under leases that have been capitalized.
Accumulated depreciation and amortization for such equipment was $215,000 and
$63,000 at December 31, 1995 and 1994, respectively.
NOTE 8 -- STOCKHOLDERS' EQUITY
REGISTRATION RIGHTS
Under the agreement and plan of merger with Ashlawn, the Company granted
certain registration rights to the Ashlawn shareholders pursuant to which the
Company would, upon demand by the former Ashlawn shareholders, undertake to
accomplish a secondary offering for purposes of allowing the Ashlawn
shareholders to sell at public auction, all or a portion of the common stock of
the Company issued pursuant to the merger.
On October 10, 1995, the Company entered into a registration rights
agreement with Forcenergy AB whereby the Company agreed to undertake in the
future, upon demand by FAB, a secondary offering for purposes of allowing FAB
to sell at public auction all or a portion of the common stock of the Company
held by FAB.
SHAREHOLDERS' VOTING AGREEMENT
The Company, FAB, Wictor Forss and the holders of the Subordinated Notes
("Noteholders") are parties to a voting agreement (the "Voting Agreement")
pursuant to which such persons agree to maintain the size of the Board of
Directors at no more than eight members, designate all eight nominees to the
Board of Directors and vote their shares of common stock to elect such
nominees. The Voting Agreement provides that (i) FAB has the right to
designate two nominees, (ii) the Noteholders have the right to designate three
nominees, (iii) the Chief Executive Officer of the Company must be nominated to
serve as a director and must be Stig Wennerstrom or another person acceptable
to the Noteholders and (iv) two independent directors be nominated by FAB
subject to approval by the Noteholders. The Voting Agreement, as amended,
provides that the independent director nominees for the Company's 1996 annual
meeting will have no previous affiliation with FAB.
The Voting Agreement terminates on the earliest to occur of (i) September
15, 2003, (ii) the date on which FAB, certain of its transferees and their
respective affiliates own less than 10% of the outstanding shares of common
stock, or (iii) the date upon which less than $5 million aggregate principal
amount of the Subordinated Notes remain outstanding and the Noteholders own
less than 5% of the outstanding shares of common stock. As a result, FAB and
the Noteholders are in the position to control the election of the entire Board
of Directors of the Company and FAB is able to determine the outcome of most
matters requiring the vote of the Company's stockholders.
NOTE 9 -- STOCK OPTION AND PURCHASE PLANS
EMPLOYEE OPTION PLANS
At December 31, 1995, the Company had 2,000,000 shares of common stock
reserved for issuance under stock option plans to officers and key employees,
with 1,675,921 options granted to date. The exercise price for all option
grants is the fair market value of the stock at the date of grant. The
outstanding options have varying vesting periods, expire at various dates
through the year 2005, and are exercisable at prices ranging
F-21
<PAGE> 81
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
from $10.00 to $14.51 per share, with an aggregate exercise price of $19.5
million. At December 31, 1995, 817,885 options were exercisable.
The following table summarizes the change in stock options for the 1993,
1994 and 1995 years and the number of options outstanding at each year end.
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
------------ -----------------
<S> <C> <C>
Outstanding at January 1, 1993 . . . . . . . . . - -
Granted . . . . . . . . . . . . . . . . . . . . . 638,256 $ 12.02 to 14.51
Outstanding at December 31, 1993 . . . . . . . . 638,256 12.02 to 14.51
Granted . . . . . . . . . . . . . . . . . . . . . 98,337 12.02 to 14.51
Canceled . . . . . . . . . . . . . . . . . . . . (34,452) 14.51
----------- -----------------
Outstanding at December 31, 1994 . . . . . . . . 702,141 12.02 to 14.51
Granted . . . . . . . . . . . . . . . . . . . . . 973,780 10.00 to 14.51
----------- -----------------
Outstanding at December 31, 1995 . . . . . . . . 1,675,921 $ 10.00 to 14.51
=========== =================
</TABLE>
DIRECTORS AND OTHERS
In May 1995, the Company adopted the 1995 Non-Employee Director Stock
Option Plan (the "1995 Director Plan"). A total of 150,000 shares have been
authorized for the 1995 Director Plan. Under the terms of the 1995 Director
Plan, all existing directors were granted options on 5,000 shares of common
stock with an exercise price of $10.10 per share, and immediate vesting. New
directors will be issued options on 5,000 shares of common stock with an
exercise price equal to the prevailing fair market value at the time of
issuance, with vesting over a three year period. Thereafter, on an annual
basis, each director will receive options on 1,000 shares at an exercise price
equal to the fair market value at the date of grant, with vesting after six
months. Each individual director will be limited to options on a maximum of
15,000 shares under the 1995 Director Plan. The outstanding options expire ten
years after date of grant.
On May 12, 1994, the Company granted options to the holders of the
Subordinated Notes to purchase 317,629 shares of common stock at an exercise
price of $15.76 per share. These options are currently exercisable and expire
on September 15, 2000.
In addition to the stock option plan, all outside directors receive $5,000
per year plus $1,250 per meeting, with such compensation limited to $10,000 per
year.
WARRANTS
The placement agent for the Subordinated Notes offering was granted
warrants to purchase 98,337 shares of common stock with an exercise price of
$14.51 per share. These warrants expire on September 14, 1998. No warrants
were exercised during 1995 or 1994.
EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted the Forcenergy Employee Stock Purchase Plan (the
"Stock Purchase Plan"), which will permit full-time Company employees (or part
time for at least 20 hours per week and at least five months per year) to
acquire common stock at a small discount from its fair market value through
payroll deductions. Up to a maximum 100,000 shares of common stock may be sold
to participants under the Stock Purchase Plan. As of December 1995, a total of
9,961 shares had been purchased by participants in the plan.
F-22
<PAGE> 82
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, ("SFAS No. 123"). SFAS No. 123 is a new standard of accounting for
stock-based compensation and establishes a fair value method of accounting for
awards granted after December 31, 1995 under stock compensation plans. SFAS
No. 123 encourages, but does not require, companies to adopt the fair value
method of accounting in place of the existing method of accounting for
stock-based compensation whereupon compensation costs are recognized only in
situations where stock compensation plans award intrinsic value to recipients
at the date of grant. Companies that do not adopt the fair value method of
accounting prescribed in SFAS No. 123 must, nonetheless, make annual pro forma
disclosures of the estimated effects on net income and earnings per share as if
the fair value method had been used. The Company is currently determining what
effects, if any, SFAS No. 123 may have on its financial position and results
of operations.
NOTE 10 -- EMPLOYEE 401 (K) PLAN
The Company maintains the FGE Employee 401 (k) Plan for the benefit of all
full-time employees. This plan provides a tax deferred contribution by the
Company of 25% of the participants' current year contributions to the extent
that such contribution does not exceed 5% of total annual compensation.
Participants vest in the contributions made by the Company after one year of
service. Total pre-tax contributions per employee are limited each year by the
Internal Revenue Service. During 1995, 1994 and 1993, the Company incurred
approximately $32,000, $27,000 and $22,000, respectively, of compensation
expense related to this plan.
NOTE 11 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to reduce its exposure to changing commodity
prices. Commodity swap agreements are utilized to hedge oil and gas prices for
varying time periods. The swap agreements contain an element of credit risk
and price risk. The Company attempts to minimize the extent of credit risk by
limiting the counterparties to major banks or significant industry
participants. Any hedging gains or losses under these contracts are recognized
in revenue upon settlement of hedged production. Since 1994, the Company has
entered into a number of oil and gas swap arrangements with oil and gas
purchasers and industry trading companies. Under these agreements, monthly
settlements are based on the differences between the price specified in the
instrument and the settlement price of certain oil and gas futures contracts
quoted on the New York Mercantile Exchange ("NYMEX"). In instances where the
applicable settlement price is less than the price specified in the contract,
the Company receives a settlement based on the difference and in instances
where the applicable settlement price is higher than the specified prices, the
Company pays an amount based on the difference. The Company utilizes these
forward sales contracts and commodity swaps for portions of its current oil and
gas production to achieve more predictable cash flows and to reduce its
exposure to fluctuations in oil and gas prices. The Company recognized an
increase of $117,000 in oil and gas sales during 1995 and a decrease of
$151,000 in oil and gas sales for 1994 as a result of these agreements.
At the balance sheet date, the Company had only one swap contract in place,
an oil swap that effectively fixed the price on 1,500 barrels of oil production
per day through February 1996 production at $17.64 per barrel. However, during
the first quarter of 1996, through March 15, 1996, the Company entered into
additional future sales and swap contracts that effectively fixed prices on
approximately 57% of the Company's estimated net oil production for the
remainder of the year and for approximately 64% of the Company's estimated net
natural gas production for the remainder of 1996, at $17.74 per barrel and
$2.01 per Mcf, respectively. For this purpose, this estimated net production
for the remainder of the year assumes that current production rates will
continue for the rest of the year; however, in reality, the Company anticipates
that production will be added through its capital program, thereby providing
additional unhedged production that
F-23
<PAGE> 83
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
could be sold at market prices in effect at that time. The Company accounts for
its commodity swaps as hedging activities and, accordingly, gains or losses are
included in oil and gas revenues for the period the production was hedged.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
During September 1994, the Company entered into an agreement with a vendor
for the purchase of 3-D seismic surveys over the subsequent 48 months, with a
commitment of $3,600,000. Approximately 25% of that commitment has been met at
December 31, 1995.
The Company is involved in various litigation matters arising in the normal
course of business. Management and legal counsel's assessment is that none of
these matters is anticipated to have a material adverse affect on the financial
position or results of operations of the Company.
NOTE 13 -- SIGNIFICANT CUSTOMERS
The following table reflects sales to oil and gas purchasers who accounted
for more than 10% of the Company's total oil and gas revenues (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
W&T Offshore, Inc. . . . . . . . . . . . $ - $ - $ 5,038
Coast Energy Group . . . . . . . . . . . 21,155 7,662 -
Mobil Oil Corp. . . . . . . . . . . . . . 7,930 11,767 8,012
</TABLE>
Based on the current demand for oil and gas, management believes that the
loss of any of these purchasers would not have a material adverse effect on the
financial position of the Company.
NOTE 14 -- FINANCIAL INSTRUMENTS
The following table reflects the financial instruments for which the fair
value differs from the carrying value of such financial instrument in the
Company's balance sheets (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Investment in surety bonds . . . . . . . . . . . . . . $ 6,164 $ 6,343 $ 7,830 $ 7,122
Liabilities:
Long term debt . . . . . . . . . . . . . . . . . . . . $ 130,729 $ 140,103 $ 131,646 $ 152,929
</TABLE>
The fair value of the Company's investment in surety bonds is based on
independent quoted market prices. Investments in surety bonds classified as
held-to-maturity mature on dates ranging from 1999 through 2002. The fair
value of the Company's fixed-rate long-term debt is based on current borrowing
rates available for financing with similar terms and maturities.
F-24
<PAGE> 84
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 15 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
A summary of non-cash investing and financing activities relating to the
Ashlawn acquisition is as follows (in thousands):
<TABLE>
<S> <C>
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,000
Deferred income taxes recognized . . . . . . . . . . . . . . . . . . . . . . . . 10,689
Assumption of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,700
============
Total included in oil and gas properties . . . . . . . . . . . . . . . . $ 46,389
============
</TABLE>
At March 31, 1996 and December 31, 1995 the Company had accrued additions
to oil and gas properties in the amount of $18,353,000 and $15,641,000,
respectively, resulting in a net non-cash investment in oil and gas properties
amounting to $2,712,000 and $15,641,000 during the quarter ended March 31, 1996
and for the year ended December 31, 1995, respectively.
In 1993, the Company paid a dividend to FAB in the form of an unsecured and
non-interest bearing $2.0 million note. The note was repaid in 1994.
In 1993, the Company purchased the minority interest of "old" FGE through
the issuance of 233,944 shares of common stock with an estimated fair market
value of $3,547,000.
The Company paid interest costs of $3,540,000, $2,348,000, $10,065,000,
$8,512,000 and $4,965,000 for the three months ended March 31, 1996 and 1995
and the years ended December 31, 1995, 1994 and 1993, respectively.
NOTE 16 -- SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
COST INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
Presented below are costs incurred in petroleum property acquisition,
exploration and development activities (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
Acquisition of properties:
Proved properties . . . . . . . . . . . . . . . . . . . $ 75,836 $ 10,437 $ 27,188
Unproved properties . . . . . . . . . . . . . . . . . . 16,300 3,341 9,435
Exploration costs . . . . . . . . . . . . . . . . . . . 6,264 3,834 1,933
Development costs . . . . . . . . . . . . . . . . . . . 45,485 39,525 14,243
---------- ---------- -----------
Total . . . . . . . . . . . . . . . . $ 143,885 $ 57,137 $ 52,799
========== ========== ===========
</TABLE>
F-25
<PAGE> 85
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
The following table presents total capitalized costs of proved and unproved
properties and accumulated depletion, depreciation and amortization related to
oil and gas producing operations (thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Proved properties . . . . . . . . . . . . . . . . . . . . . . $ 343,378 $ 215,781 $ 169,534
Unproved properties . . . . . . . . . . . . . . . . . . . . . 39,057 26,650 16,415
---------- --------- ---------
$ 382,435 $ 242,431 $ 185,949
Accumulated depletion, depreciation and amortization . . . . (85,251) (57,481) (33,872)
---------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 297,184 $ 184,950 $ 152,077
========== ========= =========
</TABLE>
Of the capitalized cost of unproved properties at December 31, 1995,
$15,828,000, $6,617,000, $8,788,000 and $7,824,000 were incurred in 1995, 1994,
1993 and years prior to 1993, respectively. The Company anticipates evaluating
these properties over the next three to five years as it continues its property
exploitation and development program.
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The results of operations from oil and gas producing activities, which do
not include revenues associated with the production and sale of sulfur and
processing fees for third party gas, and excluding corporate overhead and
interest costs are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,147 $ 58,354 $ 49,652
Production costs . . . . . . . . . . . . . . . . . . . . . (26,375) (25,445) (18,192)
Depreciation, depletion and amortization . . . . . . . . . (30,830) (24,572) (19,889)
Income tax expense . . . . . . . . . . . . . . . . . . . . (5,573) (3,110) (1,259)
----------- ------------ -----------
Results of operations for petroleum producing activities . $ 9,369 $ 5,227 $ 10,312
============ ============ ===========
Average sales prices:
Oil (per Bbl) . . . . . . . . . . . . . . . . . . . . . . . $ 16.46 $ 15.04 $ 16.65
Gas (per Mcf) . . . . . . . . . . . . . . . . . . . . . . . $ 1.59 $ 1.87 $ 2.16
</TABLE>
Income tax expense for the results of operations only gives effect to the
Company's tax status beginning September 15, 1993. There was no tax expense
for the period January 1, 1993 to September 14, 1993.
RESERVE QUANTITIES (UNAUDITED)
Estimates of proved reserves of the Company and the related standardized
measure of discounted future net cash flow information are based on the reports
of independent petroleum engineers. The Company's proved reserves for onshore
properties have been estimated by Netherland, Sewell and Associates, Inc.,
independent reservoir engineering consultants, for the estimated reserves as of
January 1, 1996 and by Joe C. Neal and Associates, independent reservoir
engineering consultants, as of January 1, 1995 and 1994. Estimates of offshore
reserves as of January 1, 1996, 1995 and 1994 were made by Collarini
Engineering, Inc., independent reservoir engineering consultants. There are
numerous uncertainties inherent in estimating oil and natural gas reserves and
their estimated values, including many factors beyond the control of the
producer. The reserve data set forth herein represents only estimates.
Reservoir engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact
manner. Estimates of economically recoverable oil and gas reserves and of
future net cash flows necessarily
F-26
<PAGE> 86
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
depend upon a number of variable factors and assumptions, such as historical
production from the area compared with production from other producing areas,
the assumed effects of regulations by governmental agencies and assumptions
concerning future oil and gas prices, future operating costs, severance and
excise taxes, development costs and workover and remedial costs, all of which
may in fact vary considerably from actual results. For these reasons,
estimates of the economically recoverable quantities of oil and natural gas
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery, and estimates of the future net cash flows
expected therefrom prepared by different engineers or by the same engineers at
different times may vary substantially and such reserve estimates may be
subject to downward or upward adjustment based upon such factors. Actual
production, revenues and expenditures with respect to the Company's reserves
will likely vary from estimates, and such variances may be material.
The present value of estimated future net cash flows included herein should
not be construed as the current market value of estimated oil and natural gas
reserves attributable to the Company's operations. In accordance with the
applicable requirements of the Securities and Exchange Commission (the
"Commission"), the estimated discounted net cash flows from proved reserves are
generally based on current prices and costs as of the date of the estimate,
whereas actual future prices and costs may be materially higher or lower.
Current prices in effect as of the valuation date incorporated the estimated
effects of hedging agreements in place as of the valuation date, and for the
period the agreements will be in effect. As of the reserve valuation date, the
Company had two swap agreements in place: 1) 1,500 barrels of oil per day
through February 29, 1996 were hedged at a fixed price of $17.64 per barrel,
and 2) effective January 1, 1996 through the period ending April 30, 1996
(extendible through December 31, 1996 at the option of the other party), 2,000
barrels per day of oil production were hedged at a fixed price of $18.65 per
barrel. Actual future cash flows will also be affected by factors such as the
amount and timing of actual production, supply and demand for oil and natural
gas, curtailments or increases in consumption by purchasers and changes in
governmental regulation or taxation. The timing of actual future net cash
flows from proved reserves, and their actual present value, will be affected by
the timing of both production and the incurrence of expenses in connection with
development and production of oil and gas properties. In addition, the
calculation of the present value of the future net revenues using a 10%
discount as required by the Commission, is not necessarily the most appropriate
discount factor based on interest rates in effect from time to time and the
risk associated with the Company's reserves or the oil and gas industry in
general.
The Company's estimates of its proved reserves and proved developed
reserves of oil and gas as of December 31, 1993, 1994 and 1995 and the changes
in its proved reserves are as follows:
<TABLE>
<CAPTION>
OIL GAS
(MBBL) (MMCF)
--------- ----------
<S> <C> <C>
1993
Proved developed and undeveloped:
Beginning of year . . . . . . . . . . . . . . . . 9,368 110,589
Production . . . . . . . . . . . . . . . . . . . . (1,425) (12,025)
Purchases of minerals-in-place . . . . . . . . . . 2,395 23,264
Extensions and discoveries . . . . . . . . . . . . 213 2,930
Sales of minerals-in-place . . . . . . . . . . . . --- (76)
Revisions to previous estimates . . . . . . . . . 225 14,180
--------- ----------
End of year . . . . . . . . . . . . . . . . . . . 10,776 138,862
========= ==========
Proved developed:
Beginning of year . . . . . . . . . . . . . . . . 7,172 90,997
========= ==========
End of year . . . . . . . . . . . . . . . . . . . 8,121 101,653
========= ==========
</TABLE>
F-27
<PAGE> 87
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<S> <C> <C>
1994
Proved developed and undeveloped:
Beginning of year . . . . . . . . . . . . . . . . 10,776 138,862
Production . . . . . . . . . . . . . . . . . . . . (1,753) (17,121)
Purchases of minerals-in-place . . . . . . . . . . 898 23,775
Extensions and discoveries . . . . . . . . . . . . 2,431 19,392
Sales of minerals-in-place . . . . . . . . . . . . (3) (1)
Revisions to previous estimates . . . . . . . . . (1,039) 7,215
------- --------
End of year . . . . . . . . . . . . . . . . . . . 11,310 172,122
======= ========
Proved developed:
Beginning of year . . . . . . . . . . . . . . . . 8,121 101,653
======= ========
End of year . . . . . . . . . . . . . . . . . . . 9,035 125,468
======= ========
1995
Proved developed and undeveloped:
Beginning of year . . . . . . . . . . . . . . . . 11,310 172,122
Production . . . . . . . . . . . . . . . . . . . . (2,343) (21,112)
Purchases of minerals-in-place . . . . . . . . . . 10,691 57,786
Extensions and discoveries . . . . . . . . . . . . 6,018 21,344
Sales of minerals-in-place . . . . . . . . . . . . (467) (5,586)
Revisions to previous estimates . . . . . . . . . (751) (6,502)
------- --------
End of year . . . . . . . . . . . . . . . . . . . 24,458 218,052
======= ========
Proved developed:
Beginning of year . . . . . . . . . . . . . . . . 9,035 125,468
======= ========
End of year . . . . . . . . . . . . . . . . . . . 16,050 154,705
======= ========
</TABLE>
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data indicate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves which can
be expected to be recovered through existing wells with existing equipment and
operating methods.
Revisions to previous estimates for each year of the three year period
ended December 31, 1995 were primarily the result of property performance
revisions.
F-28
<PAGE> 88
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
------------ ------------ -------------
<S> <C> <C> <C>
Future cash inflows . . . . . . . . . . . . . . . . . . . . . . $ 1,128,646 $ 465,300 $ 474,076
Future production costs . . . . . . . . . . . . . . . . . . . . (242,370) (134,774) (113,297)
Future development and dismantlement costs . . . . . . . . . . (143,845) (82,300) (68,938)
Future income tax expenses . . . . . . . . . . . . . . . . . . (183,850) (27,176) (57,187)
---------- ----------- -----------
Future net cash flows . . . . . . . . . . . . . . . . . . . . . 558,581 221,050 234,654
10% annual discount for estimated timing of cash flows . . . . ( 151,625) (68,423) (75,481)
---------- ----------- -----------
Standardized measure of discounted future net cash flows . . . $ 406,956 $ 152,627 $ 159,173
========== =========== ===========
</TABLE>
The following table summarizes the principal sources of change in the
standardized measure of discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Standardized measure -- beginning of period . . . . . . . . . . . . $ 152,627 $ 159,173 $ 196,685
Sales of oil and gas produced, net of production costs . . . . . . (45,655) (35,274) (33,347)
Purchases of minerals-in-place . . . . . . . . . . . . . . . . . . 167,129 21,645 29,014
Extensions and discoveries . . . . . . . . . . . . . . . . . . . . 91,413 20,841 2,645
Sales of minerals-in-place . . . . . . . . . . . . . . . . . . . . (4,395) (13) (101)
Net changes in prices and production costs . . . . . . . . . . . . 181,480 (49,976) 7,784
Changes in estimated future development and dismantlement costs . . (6,322) (5,956) (31,310)
Revisions to previous quantity estimates . . . . . . . . . . . . . (20,468) (207) 19,541
Accretion of discount . . . . . . . . . . . . . . . . . . . . . . . 15,263 15,917 19,669
Changes in timing of production and other . . . . . . . . . . . . . (10,611) 6,134 (12,615)
Net changes in income taxes . . . . . . . . . . . . . . . . . . . . (113,505) 20,343 (38,792)
--------- --------- ---------
Standardized measure-end of period . . . . . . . . . . . . . . . . $ 406,956 $ 152,627 $ 159,173
========= ========= =========
</TABLE>
The standardized measure is based on current prices as of the valuation
date and reflects overall weighted average prices of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
Oil (per Bbl) . . . . . . . . . . . . . . . . . . . . . $ 19.16 $ 16.15 $ 16.67
Gas (per Mcf) . . . . . . . . . . . . . . . . . . . . . $ 3.02 $ 1.64 $ 2.12
</TABLE>
The standardized measure of discounted future net cash flows was calculated
by applying current prices to estimated future production, less future
expenditures (based on current costs) to be incurred in developing and
producing such proved reserves and the estimated effect of future income taxes
based on the current tax law. The resulting future net cash flows were
discounted using a rate of 10% per annum.
F-29
<PAGE> 89
FORCENERGY INC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Subsequent to the reserve valuation date , the natural gas industry
experienced a softening in natural gas prices, partly offset by increases in
oil prices. Weighted average prices that the Company estimates it will receive
for March 1996 production are $20 - $21 per barrel and $2.60 - $2.70 per Mcf
for oil and natural gas, respectively. These changes in prices would have had
an effect on the Standardized Measure of Discounted Cash Flows of the Company's
reserves at January 1, 1996.
F-30
<PAGE> 90
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Forcenergy Inc
We have audited the accompanying Historical Statement of Revenues and Direct
Operating Expenses of the property acquired by Forcenergy Inc (formerly known
as Forcenergy Gas Exploration, Inc.) from Conoco Inc. for the years ended
December 31, 1993 and 1994. This historical statement is the responsibility of
Conoco Inc. and Forcenergy Inc. Our responsibility is to express an opinion on
this historical statement based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the historical statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the historical statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the historical statement. We believe that our audits provide a reasonable
basis for our opinion.
The accompanying statement was prepared as described in Note 1 for the purpose
of complying with certain rules and regulations of the Securities and Exchange
Commission (SEC) for inclusion in certain SEC regulatory reports and filing of
Forcenergy Inc and are not intended to be a complete presentation of the
revenues and direct operating expenses of the property.
In our opinion, the historical statement referred to in the first paragraph of
this report presents fairly, in all material respects, the revenues and direct
operating expenses of the property as described in Note 1 for the years ended
December 31, 1993 and 1994, in conformity with generally accepted accounting
principles.
PRICE WATERHOUSE LLP
Houston, Texas
May 12, 1995
F-31
<PAGE> 91
SOUTH MARSH ISLAND BLOCKS 106, 136 AND 137
HISTORICAL STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------
1993 1994
------------- -------------
<S> <C> <C>
Revenues:
Oil and condensate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,304 $ 3,604
Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,202 5,725
------------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,506 9,329
Lease operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,456 2,196
------------- ------------
Revenues in excess of direct operating expenses . . . . . . . . . . . . . . . . . . $ 2,050 $ 7,133
============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE> 92
SOUTH MARSH ISLAND BLOCKS 106, 136 AND 137
NOTES TO HISTORICAL STATEMENT OF REVENUES
AND DIRECT OPERATING EXPENSES
(1) BASIS OF PRESENTATION
Under an agreement dated December 22, 1994 Forcenergy Inc (formerly known
as Forcenergy Gas Exploration, Inc.) (Forcenergy) has acquired Conoco Inc.'s
interest in South Marsh Island Blocks 106, 136 and 137 (the Conoco Property)
for approximately $27,500,000 in cash. The acquisition has been accounted for
as a purchase and the results of operations for the Conoco Property are
included in Forcenergy's results of operations effective March 3, 1995.
The accompanying statements of revenues and direct operating expenses
("Statement") were prepared from the historical accounting records of Conoco
(accrual basis, successful efforts method of accounting for oil and gas
activities, in accordance with generally accepted accounting principles).
Oil revenues and associated direct operating expense relate to the net
revenue interest and net working interest, respectively, in the Conoco
Property. With respect to gas sales, the sales method is used for recording
revenues. Under this approach, each party recognizes revenue based on sales
actually made regardless of its proportionate share of the related production.
Under the sales method, direct operating expenses are allocated to the Conoco
Property in proportion to the revenue recognized. Lease operating expenses
include labor, repairs and maintenance, fuel consumed and supplies utilized to
operate and maintain the wells and related equipment and facilities. The
Statement does not include general and administrative expenses, interest or
provisions for depreciation, depletion, amortization and dismantlement costs,
or for taxes on income.
Complete financial statements, including a balance sheet, are not presented
as the Conoco Property was not maintained as a separate business unit and
assets, liabilities or indirect operating costs applicable to the Conoco
Property were not segregated. It is not practicable to identify all assets,
liabilities or indirect operating costs applicable to the Conoco Property.
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Estimated Quantities of Proved Oil and Gas Reserves
Reserve information presented below is based on the January 1, 1995 reserve
report prepared by an independent petroleum engineer. The December 31, 1993
and 1992 information has been computed by adjusting the January 1, 1995 reserve
report for production and known purchases.
Proved reserves are estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves
are those which are expected to be recovered through existing wells with
existing equipment and operating methods. Below are the net quantities of
proved reserves and proved developed reserves for the Conoco Property:
F-33
<PAGE> 93
SOUTH MARSH ISLAND BLOCKS 106, 136 AND 137
NOTES TO HISTORICAL STATEMENT OF REVENUES
AND DIRECT OPERATING EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
Oil Gas
(Mbbls) (MMcf)
---------- ---------
<S> <C> <C>
Proved reserves at December 31, 1992 . . . . . . . . . . . . . . . . 842 11,522
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (212) (544)
Purchases of reserves in place . . . . . . . . . . . . . . . . . . . 370 9,174
---------- ---------
Proved reserves at December 31, 1993 . . . . . . . . . . . . . . . . 1,000 20,152
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (240) (2,916)
---------- ---------
Proved reserves at December 31, 1994 . . . . . . . . . . . . . . . . 760 17,236
========== =========
Proved developed reserves at:
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . 689 9,107
========== =========
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 449 6,329
========== =========
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves
The "Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves" (Standardized Measure") is a disclosure
requirement under Statement of Financial Accounting Standards No. 69 (SFAS No.
69). The Standardized Measure does not purport to present the fair market
value of the proved oil and gas reserves. This would require consideration of
expected future economic and operating conditions, which are not taken into
account in calculating the Standardized Measure.
Under the Standardized Measure, 1994 and 1993 future cash inflows were
estimated by applying December 31, 1994 and 1993 prices, respectively, adjusted
for fixed and determinable escalations, to the estimated future production of
proved reserves. Future cash inflows for 1994 and 1993 were reduced by
estimated future production, development and dismantlement costs based on 1994
and 1993 year-end costs, respectively, to determine pre-tax cash inflows.
Future net cash inflows were discounted using a 10% annual discount rate to
arrive at the Standardized Measure. No deduction has been made for general and
administrative expenses, interest or provisions for depreciation, depletion or
amortization, or for taxes on income.
The following Standardized Measure and changes in the Standardized Measure
are based on the reserve estimate performed as of December 31, 1994 using
appropriate year-end prices and costs.
Set forth below is the Standardized Measure (before income taxes) relating
to proved oil and gas reserves at December 31, (in thousands):
<TABLE>
<CAPTION>
1993 1994
----------- ------------
<S> <C> <C>
Future cash inflows . . . . . . . . . . . . . . . . . . . . . . . . $ 53,304 $ 43,975
Future production and development costs . . . . . . . . . . . . . . (14,432) (12,236)
----------- ------------
Future net cash inflows . . . . . . . . . . . . . . . . . . . . . . 38,872 31,739
10% annual discount for estimated timing of cash flows . . . . . . (7,750) (6,328)
----------- ------------
Standardized Measure (before income taxes) of discounted
future net cash flows . . . . . . . . . . . . . . . . . . . . . . $ 31,122 $ 25,411
=========== ============
</TABLE>
F-34
<PAGE> 94
SOUTH MARSH ISLAND BLOCKS 106, 136 AND 137
NOTES TO HISTORICAL STATEMENT OF REVENUES
AND DIRECT OPERATING EXPENSES (CONTINUED)
The Standardized Measure of discounted future net cash flows is based on
the following oil and gas prices at December 31:
<TABLE>
<CAPTION>
1993 1994
---------- -----------
<S> <C> <C>
Oil (per Bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13.27 $ 16.77
Gas (per Mcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.48 $ 1.81
</TABLE>
The following is an analysis of the changes in the Standardized Measure
(before income taxes) for the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1993 1994
----------- ------------
<S> <C> <C>
Standardized measure (before income taxes) -- beginning $ 16,804 $ 31,122
of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and transfers of oil and gas product, net of production (2,050) (7,133)
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of reserves in place . . . . . . . . . . . . . . . . . . 15,858 --
Accretion of discount . . . . . . . . . . . . . . . . . . . . . . . 1,680 3,112
Changes in timing of production and other . . . . . . . . . . . . . (1,170) (1,690)
----------- ------------
Standardized measure (before income taxes) -- end of year . . . . . $ 31,122 $ 25,411
=========== ============
</TABLE>
F-35
<PAGE> 95
Board of Directors
Ashlawn Energy, Inc.
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheets of Ashlawn Energy, Inc. as
of December 31, 1993 and December 31, 1994, and the related statements of
income, changes in stockholders' equity, and cash flows for the period from
inception (January 8, 1992) to December 31, 1992 and for the years ended
December 31, 1993 and December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ashlawn Energy, Inc. as of
December 31, 1993 and 1994, and the results of its operations and its cash
flows for the initial period then ended December 31, 1992 and the years then
ended December 31, 1993 and 1994 in conformity with generally accepted
accounting principles.
As explained in Note I to the financial statements, Ashlawn Energy, Inc.
retroactively changed from the full cost method to the successful efforts
method of accounting for its oil and gas properties as of January 1, 1994.
As explained in Note J to the financial statements, on May 25, 1995,
Ashlawn Energy, Inc.'s stockholders entered into an agreement and plan of
merger with another company.
LaPORTE, SEHRT, ROMIG & HAND
A Professional Accounting Corporation
Metairie, Louisiana
April 12, 1995 except for Note J
for which the date is May 25, 1995
F-36
<PAGE> 96
ASHLAWN ENERGY, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1994
-------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 188,158 $ 200,323
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 339,201 593,951
Oil and Gas Sales Receivable . . . . . . . . . . . . . . . . . . . . . 1,283,908 1,061,014
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,279 219,856
Other Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . 24,581 95,709
-------------- ---------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . 2,081,127 2,170,853
PROPERTY AND EQUIPMENT (AT COST):
Oil and Gas Properties (Successful Efforts Method):
Proved Properties . . . . . . . . . . . . . . . . . . . . . . . . . 7,281,481 7,724,617
Wells and Related Equipment . . . . . . . . . . . . . . . . . . . . 1,677,489 3,251,811
Support Equipment and Facilities . . . . . . . . . . . . . . . . . . 2,776,162 2,895,207
Other Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 149,926 167,414
-------------- ---------------
11,885,058 14,039,049
Less: Accumulated Depreciation, Depletion and
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,770,677) (2,677,573)
-------------- ---------------
Net Property and Equipment . . . . . . . . . . . . . . . . . . . 10,114,381 11,361,476
OTHER ASSETS:
Financing Costs (Net of Accumulated Amortization
of $187,533 and $313,632, respectively) . . . . . . . . . . . . . . . 348,387 222,289
Investments and Other . . . . . . . . . . . . . . . . . . . . . . . . . 31,203 29,163
-------------- ---------------
Total Other Assets . . . . . . . . . . . . . . . . . . . . . . . 379,590 251,452
-------------- ---------------
$ 12,575,098 $ 13,783,781
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,045,253 $ 2,822,971
Accounts Payable -- Affiliate . . . . . . . . . . . . . . . . . . . . . 718,077 13,294
Joint Owner Advance Payments . . . . . . . . . . . . . . . . . . . . . 70,000 274,460
Royalties and Revenue Payable . . . . . . . . . . . . . . . . . . . . . 216,743 85,133
Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,936 32,823
-------------- ---------------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . 2,080,009 3,228,681
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,400,000 2,300,000
-------------- ---------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . 9,480,009 5,528,681
COMMITMENTS AND CONTINGENCIES (NOTE F)
STOCKHOLDERS' EQUITY:
Common Stock -- No Par Value; 10,000 Shares
Authorized; 2,000 Shares Issued and Outstanding . . . . . . . . . . . 2,000 2,000
Additional Paid-In Capital . . . . . . . . . . . . . . . . . . . . . . 2,000,000 2,000,000
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,093,089 6,253,100
-------------- ---------------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . 3,095,089 8,255,100
-------------- ---------------
$ 12,575,098 $ 13,783,781
============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 97
ASHLAWN ENERGY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
(JANUARY 8, 1992)
TO FOR THE YEARS ENDED SEVEN MONTHS
DECEMBER 31, DECEMBER 31, ENDED JULY 31,
------------ -------------------------------- -----------------
1992 1993 1994 1995
---------- --------------- -------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Oil and Gas Sales . . . . . . . . . . . . . . . $ 3,704,504 $ 10,790,830 $ 8,481,832 $ 6,125,609
Gain on Sale of Oil and
Gas Leases and
Properties . . . . . . . . . . . . . . . . . 1,716,769 -- 4,108,585 --
Gain on Sale of Assets . . . . . . . . . . . . -- -- 1,278 --
Interest Income . . . . . . . . . . . . . . . . 7,520 10,130 48,149 --
Other . . . . . . . . . . . . . . . . . . . . . -- 50,289 15,359 26,974
---------- --------------- -------------- ----------------
Total Revenue . . . . . . . . . . . . . . . 5,428,793 10,851,249 12,655,203 6,152,583
---------- --------------- -------------- ----------------
COSTS AND EXPENSES:
Lease Operating . . . . . . . . . . . . . . . . 2,707,746 4,100,363 3,930,286 1,904,622
Well Workover . . . . . . . . . . . . . . . . . 888,632 352,312 244,103 165,053
Production Taxes . . . . . . . . . . . . . . . 431,565 1,018,370 791,986 508,605
Depreciation, Depletion
and Amortization . . . . . . . . . . . . . . 459,424 1,498,791 1,057,347 698,792
General and Administrative . . . . . . . . . . 184,632 238,840 654,050 584,385
Interest . . . . . . . . . . . . . . . . . . . 418,970 449,310 438,252 182,734
Bank Fees . . . . . . . . . . . . . . . . . . . 146,250 46,948 91,668 36,138
---------- --------------- -------------- ----------------
Total Costs and
Expenses . . . . . . . . . . . . . . . . . 5,237,219 7,704,934 7,207,692 4,080,329
---------- --------------- -------------- ----------------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 191,574 $ 3,146,315 $ 5,447,511 $ 2,072,254
========== =============== ============== ================
EARNINGS PER COMMON
SHARE . . . . . . . . . . . . . . . . . . . . . $ 96 $ 1,573 $ 2,724 $ 1,036
========== =============== ============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 98
ASHLAWN, ENERGY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
(JANUARY 8, 1992)
TO FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31,
1992 1993 1994
------------- ------------- ------------
<S> <C> <C> <C>
COMMON STOCK
Balance at Beginning of Year . . . . . . . . . . . . . . . . . $ -- $ 2,000 $ 2,000
Sale of Stock for Cash . . . . . . . . . . . . . . . . . . . . 2,000 -- --
------------- ------------- ------------
Balance at End of Period . . . . . . . . . . . . . . . . . . . $ 2,000 $ 2,000 $ 2,000
============= ============= ============
ADDITIONAL PAID-IN CAPITAL
Balance at Beginning of Year . . . . . . . . . . . . . . . . . $ -- $ 2,000,000 $ 2,000,000
Contributed Capital for Cash . . . . . . . . . . . . . . . . . 2,000,000 -- --
------------- ------------- ------------
Balance at End of Period . . . . . . . . . . . . . . . . . . . $ 2,000,000 $ 2,000,000 $ 2,000,000
============= ============= ============
RETAINED EARNINGS
Balance at Beginning of Year, as
Previously Reported . . . . . . . . . . . . . . . . . . . . . $ -- $ 302,402 $ 1,379,257
Cumulative Effect on Prior Years of
Retroactive Restatement for
Accounting Change . . . . . . . . . . . . . . . . . . . . . . -- (110,828) (286,168)
------------- ------------- ------------
Balance at Beginning of Year, as
Adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . -- 191,574 1,093,089
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . 191,574 3,146,315 5,447,511
Dividends Paid ($1,122 per share in
1993 and $144 per share in 1994) . . . . . . . . . . . . . . -- (2,244,800) (287,500)
------------- ------------- ------------
Balance at End of Period . . . . . . . . . . . . . . . . . . . $ 191,574 $ 1,093,089 $ 6,253,100
============= ============= ============
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . $ 2,193,574 $ 3,095,089 $ 8,255,100
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 99
ASHLAWN ENERGY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
(JANUARY 8, 1992)
TO FOR THE YEAR ENDED SEVEN MONTHS
DECEMBER 31, DECEMBER 31, ENDED JULY 31,
------------ ------------------------------ ---------------
1992 1993 1994 1995
---------- ------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . $ 191,574 $ 3,146,315 $ 5,447,511 2,072,254
Adjustments to Reconcile Net Income to Net
Cash Provided by (Used in) Operating Activities:
Depreciation, Depletion and Amortization . . . . 459,424 1,498,791 1,057,347 698,792
Gain on Sale of Oil and Gas Properties . . . . . (1,716,769) -- (4,108,585) --
Gain on Sale of Fixed Assets . . . . . . . . . . -- -- (1,278) --
(Increase) Decrease in Accounts
Receivable . . . . . . . . . . . . . . . . . . . (767,988) 428,787 (254,750) 367,335
(Increase) Decrease in Oil and Gas Sales
Receivable . . . . . . . . . . . . . . . . . . . (627,811) (656,097) 222,894 216,704
(Increase) Decrease in Insurance Claim
Receivable . . . . . . . . . . . . . . . . . . . (139,218) 139,218 -- --
(Increase) Decrease in Prepaid Insurance . . . . (143,070) (102,209) 25,423 219,856
Increase in Prepaid Intangible Drilling Cost . . -- -- -- (3,000,000)
(Increase) Decrease in Other Current
Assets . . . . . . . . . . . . . . . . . . . . . (20,681) (3,900) (71,128) 23,287
Increase (Decrease) in Accounts Payable . . . . . 1,830,296 (785,043) 1,777,718 (2,461,236)
Increase (Decrease) in Accounts
Payable -- Affiliates . . . . . . . . . . . . . 196,636 521,441 (704,783) --
Increase (Decrease) in Joint Owner
Advance Payments . . . . . . . . . . . . . . . . 151,079 (81,079) 204,460 (274,460)
Increase (Decrease) in Royalties and
Revenue Payable . . . . . . . . . . . . . . . . 72,634 144,109 (131,610) 30,885
Increase (Decrease) in Accrued Expenses . . . . . 29,632 304 2,887 (6,954)
----------- ------------- -------------- --------------
Net Cash Provided by (Used in)
Operating Activities . . . . . . . . . . . . . (484,262) 4,250,637 3,466,106 (2,113,537)
----------- ------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Oil and Gas Properties . . . . . . . . . (13,664,537) (379,473) (2,361,231) --
Capital Expenditures on Oil and Gas Properties . . . -- (1,997,199) (1,580,878) (650,789)
Investments and Other . . . . . . . . . . . . . . . . (25,844) (5,359) 2,040 --
Proceeds from Sale of Oil and Gas Properties . . . . 6,022,841 -- 5,892,774 --
Proceeds from the Sale of Assets . . . . . . . . . . -- -- 6,000 --
Purchase of Other Fixed Assets . . . . . . . . . . . (116,300) (33,626) (25,146) (10,664)
----------- ------------- -------------- ---------------
Net Cash Provided by (Used in)
Investing Activities . . . . . . . . . . . . . (7,783,840) (2,415,657) 1,933,559 (661,453)
----------- ------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Common Stock . . . . . . . 2,000 -- -- --
Proceeds from Additional Paid-In Capital . . . . . . 2,000,000 -- -- --
Additions to Long-Term Debt . . . . . . . . . . . . . 15,000,000 7,400,000 2,200,000 8,200,000
Repayment of Long-Term Debt . . . . . . . . . . . . . (8,000,000) (7,000,000) (7,300,000) (4,800,000)
Dividends Paid . . . . . . . . . . . . . . . . . . . -- (2,244,800) (287,500) (650,350)
Finance Costs . . . . . . . . . . . . . . . . . . . . (535,920) -- -- --
----------- ------------- -------------- --------------
Net Cash Provided by (Used in)
Financing Activities . . . . . . . . . . . . . 8,466,080 (1,844,800) (5,387,500) 2,749,650
----------- ------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . 197,978 (9,820) 12,165 (25,340)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR . . . . . . . . . . . . . . . . . . . . . . . -- 197,978 188,158 200,323
----------- ------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . $ 197,978 $ 188,158 $ 200,323 $ 174,983
=========== ============= ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash Paid During the Period for Interest . . . . . . $ 418,970 $ 449,310 $ 438,252 $ 182,734
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 100
ASHLAWN ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ashlawn Energy, Inc. began operations in July 1992 as the operator and
interest owner of oil and gas producing properties. The Company grants
credit to selected customers substantially all of whom are related to the
petroleum industry.
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Method of Accounting for Oil and Gas Properties
The Company uses the successful efforts method of accounting for oil
and gas producing activities, as set forth in the Statement of Financial
Accounting Standards No. 19, as amended. Costs to acquire mineral
interests in oil and gas properties, to drill and equip exploratory wells
that find proved reserves, and to drill and equip development wells are
capitalized. Costs to drill exploratory wells that do not find proved
reserves, geological and geophysical costs and costs of carrying and
retaining unproved properties are expensed as incurred.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at
the time of impairment by providing a valuation allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil
and gas properties, after considering estimated dismantlement and
abandonment costs and estimated salvage values, are depreciated and
depleted by the unit-of-production method. Support equipment servicing
more than one property is carried at cost and depreciated using the
unit-of-production method according to the properties serviced. Other
property and equipment are carried at cost and depreciated over their
estimated useful lives.
On sale or retirement of a complete unit of a proved property, the
cost and related accumulated depreciation, depletion and amortization are
eliminated from the property accounts, and the resultant gain or loss is
recognized. On retirement or sale of a partial unit of proved property,
the cost is charged to accumulated depreciation, depletion and amortization
with a resulting gain or loss recognized in income.
On sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized taking into
consideration the amount of any recorded impairment if the property had
been assessed individually. If a partial interest in an unproved property
is sold, the amount received is treated as a reduction of the interest
retained.
Property and Equipment
Office equipment and vessels are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the assets (primarily five to seven years).
F-41
<PAGE> 101
ASHLAWN ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company is an S Corporation for Federal and state income tax
reporting purposes. Under this election, income or loss of the Company is
included in the stockholders' tax returns.
Earnings Per Common Share
Earnings per common share amounts are based on the weighted average
number of shares outstanding (2,000 in 1995, 1994, 1993 and 1992).
Interim Financial Statements
The financial statements for the seven-month period ended July 31,
1995 and all related footnote information for that period are unaudited and
reflect all normal and recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the Company's results of
operations and cash flows.
NOTE B.
PURCHASES OF INTERESTS IN OIL AND GAS PROPERTIES
In separate transactions completed in 1993, the Company purchased
interests in oil and gas leases, movable and immovable property in the
Grand Isle 76 Field, Offshore, Louisiana from Shell Offshore, Inc., SOI
Royalties, Inc., Devon Energy Corporation and Grand Isle Corporation. The
entire cost of each purchase was capitalized as oil and gas property under
the successful efforts method of accounting. In connection with these
transactions, the Company has agreed to workover a specific reservoir in a
certain well. Should the workover prove economically productive, the
Company has agreed to pay the seller 40% of the gross revenue attributable
to the Company's interest in the reservoir up to an aggregate maximum of
$2,616,500. In accordance with the sale of this property in 1994, this
agreement was transferred as part of the sale.
In November 1993, the Company purchased an interest in an oil and gas
lease and movable and immovable property in the Vermillion 28 Field,
Offshore, Louisiana from Chevron U.S.A., Inc. The entire cost of the
purchase was capitalized as oil and gas property under the successful
efforts method of accounting.
In 1994, the Company purchased an interest in an oil and gas lease and
movable and immovable property in Ship Shoal Blocks 25 and 26, Offshore,
Louisiana from Four Star Oil and Gas Company. The entire cost of the
purchase was capitalized as oil and gas property under the successful
efforts method of accounting.
NOTE C.
SALE OF INTERESTS IN OIL AND GAS PROPERTIES
In September 1992, the Company sold one-third of the interests
acquired from Chevron U.S.A., Inc. in the South Pass 24 Field, Plaquemines
Parish, Louisiana, a proved property, for $6,040,989. The Company recorded
a gain from this transaction of $1,716,768.
F-42
<PAGE> 102
ASHLAWN ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
In 1994, the Company sold its entire interest in the Grand Isle 76
Field, a proved property, to Forcenergy Inc. for $4,250,000. The Company
recorded a gain from this transaction of $3,908,585.
NOTE C.
SALE OF INTERESTS IN OIL AND GAS PROPERTIES (CONTINUED)
In 1994, the Company sold 50% of its interest in Ship Shoal Blocks 25
and 26, a proved property, for $1,372,294. The Company recorded a gain
from this transaction of $200,000.
NOTE D.
INVESTMENTS
Investments consist of a U.S. Treasury Note with a par value of
$25,000 and an interest yield of 6.345%, maturing May 31, 1997. The market
value of the U.S. Treasury Note as of December 31, 1993 and 1994 was
$26,555 and $26,719, respectively. The U.S. Treasury Note has been pledged
to secure the Company's Louisiana Statewide Oil and Gas Lease Bond.
NOTE E.
LONG-TERM DEBT
The details of long-term debt as of December 31, 1993 and 1994 are as
follows:
<TABLE>
<CAPTION>
1993 1994
-------------- --------------
<S> <C> <C>
Note Payable -- Internationale Nederlanden (U.S.) Capital
Corporation; interest payable quarterly beginning June
1992 at 1.5% above the bank's prime lending rate; principal
payments due quarterly beginning December 1992 in
accordance with the amended credit agreement; maturity
December 1996 . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,000 $ 100,000
Note Payable -- Whitney National Bank; interest payable
at 6.5%; secured by a personal guaranty of a major
stockholder and all Company funds on deposit with the
financial institution; principal due January 6, 1994 . . . . . . 7,300,000 --
Note Payable -- Whitney National Bank; interest payable
at 8.5%; secured by a personal guaranty of a major
stockholder and all Company funds on deposit with the
financial institution; principal due January 6, 1995 . . . . . . -- 2,200,000
--------------- ---------------
7,400,000 2,300,000
Less: Current Maturities . . . . . . . . . . . . . . . . . . -- --
--------------- ---------------
Total Long-Term Debt . . . . . . . . . . . . . . . . . . . . . $ 7,400,000 $ 2,300,000
=============== ===============
The following is a schedule of note payable maturities:
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,300,000
===============
</TABLE>
F-43
<PAGE> 103
ASHLAWN ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE E.
LONG-TERM DEBT (CONTINUED)
Note Payable -- Whitney National Bank
Subsequent to December 31, 1993, the Company satisfied its Note
Payable -- Whitney National Bank with a loan from an affiliate. The Note
Payable -- Affiliate is unsecured, interest is payable monthly at the
Whitney National Bank's prime lending rate, and the principal is due
January 31, 1995.
Subsequent to December 31, 1994, the Company satisfied its Note
Payable -- Whitney National Bank with a loan from an affiliate. The Note
Payable -- Affiliate is unsecured, interest is payable monthly at the
Whitney National Bank's prime lending rate, and the principal is due
January 31, 1996.
Note Payable -- Internationale Nederlanden (U.S.) Capital Corporation
During 1993, the Company made principal reductions of $6,900,000
satisfying its obligation to the bank until December 1996.
In accordance with the terms of the credit agreement, the Company has
the option to subject all or any portion of its obligation to a fixed rate
of interest for periods of up to three months. As of December 31, 1993,
the Company exercised this option for the entire note balance at an
effective interest rate of 6.6250% for a three month period. As of
December 31, 1994, the Company has exercised this option for the entire
note balance at an effective interest rate of 9.750% for a three month
period.
The note is secured by mortgage liens on all of the Company's interest
in the South Pass 24 Field, Plaquemines Parish, Louisiana, the assignment
of production proceeds therefrom, and the limited guaranty of a major
stockholder.
The agreement with the lender contains provisions regarding the
maintenance of certain ratios, covenants requiring the Company to furnish
the bank certain financial, reserve, and production data within specified
time periods, as well as other restrictive covenants concerning debt,
ownership, dividends and contracts. As of December 31, 1993 and 1994, the
lender has waived compliance with certain financial ratios and covenants
contained in the credit agreement for a period of one year.
In consideration of the bank granting the Company this loan, the
Company has conveyed to the lending institution an overriding royalty
interest equal to 2.5% of the majority of the Company's operating interest
in oil, gas and other minerals produced from the South Pass 24 Field,
Plaquemines Parish, Louisiana. The Company has been granted an option to
purchase and reduce the overriding royalty percentage in accordance with
the agreements.
F-44
<PAGE> 104
ASHLAWN ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE F.
COMMITMENTS AND CONTINGENCIES
In connection with the 1992 purchase of certain oil and gas interests
in the South Pass 24 Field, Plaquemines Parish, Louisiana, the Company, by
agreement, assumed certain plugging and abandonment, reclamation,
restoration and clean up liabilities and obligations related thereto. To
secure these liabilities and obligations and to provide a source of funds
to satisfy the liabilities and obligations, a guarantee trust, funded by a
$4,500,000 letter of credit, was established. The original letter of
credit matured June 1993 and was renewed until December 31, 1994. The
letter of credit is secured by mortgage liens on all of the Company's
interest in the South Pass 24 Field, Plaquemines Parish, Louisiana, the
assignment of production proceeds therefrom, and the limited guaranty of a
major stockholder. In connection with the 1992 sale of a portion of the
Company's interest in the South Pass 24 Field, a letter of credit on behalf
of the purchasing company in the amount of $1,500,000 has been secured to
fund its share of the $4,500,000 guarantee trust.
In connection with the 1993 purchase of certain oil and gas interests
in the Vermillion 28 Field, Offshore, Louisiana, the Company, by agreement,
assumed certain plugging and abandonment, reclamation, restoration and
clean up liabilities and obligations related thereto. A $600,000 letter of
credit and a $600,000 corporate guaranty from an affiliate have been
established to secure these liabilities and obligations. The letter of
credit matures October 31, 1995 and is secured by a personal guaranty of a
major stockholder.
In connection with the 1993 purchase of certain oil and gas interests
in the Grand Isle 76 Field, Offshore, Louisiana, the Company, by agreement,
assumed certain plugging and abandonment, reclamation, restoration and
clean up liabilities and obligations related thereto.
In July 1993, a $250,000 letter of credit maturing July 30, 1994 and
since extended to July 31, 1995, and a corporate guaranty from an affiliate
were established to secure federal offshore operator's and right-of-way
bonds in connection with the Company's purchase of certain oil and gas
interests in the Grand Isle 76 Field. The letter of credit is secured by a
personal guaranty of a major stockholder.
In connection with the 1994 purchase of certain oil and gas interests
in the Ship Shoal Blocks 25 and 26, Offshore, Louisiana, the Company, by
agreement, assumed certain plugging and abandonment, reclamation,
restoration and clean up liabilities and obligations related thereto. A
$2,500,000 Guarantee Trust and Custodial Agreement has been established to
secure these liabilities and obligations. The Guarantee Trust and
Custodial Agreement is secured by assets of a major stockholder.
NOTE G.
RELATED PARTY TRANSACTIONS
During 1992, 1993 and 1994, the Company had purchases from affiliated
companies of approximately $251,717, $540,998 and $429,403, respectively.
Transactions with affiliates also included the advancement of funds,
payment of interest, the reimbursement of operating expenses and the
payment of certain administrative services at terms determined by
management. At December 31, 1993 and 1994, amounts due to the affiliates
were $718,077 and $13,294, respectively.
During 1992, the Company sold a substantial portion of its product to
one customer totaling $3,509,004.
F-45
<PAGE> 105
ASHLAWN ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE G.
RELATED PARTY TRANSACTIONS (CONTINUED)
During 1993 and 1994, the Company sold a substantial portion of its
product to two customers. At December 31, 1993, sales to those customers
aggregated $8,319,054 and $1,638,168, respectively. At December 31, 1993,
amounts due from those customers included in oil and gas sales receivable
were $450,204 and $490,218, respectively. At December 31, 1994, sales to
those customers aggregated $5,730,214 and $1,152, 834, respectively. At
December 31, 1994, amounts due from those customers included in oil and gas
sales receivable were $524,980 and $-0-, respectively.
NOTE H.
OFF-BALANCE SHEET RISK
During 1993 and 1994, the Company maintained balances in a financial
institution in excess of the federally insured limit.
NOTE I.
CHANGE IN ACCOUNTING PRINCIPLE
During 1994, the Company changed its method of accounting for its oil
and gas properties from the full cost method to the successful efforts
method. The Company believes that the new method more accurately reflects
the results of operations and is the more commonly used method in the
industry. The financial statements for 1992 and 1993 have been restated
for the change which resulted in a decrease of net income of $110,828 ($55
per share) and $175,340 ($88 per share), respectively. The effect of this
change was to increase net income in 1994 by approximately $3,320,000
($1,660 per share). Retained earnings have been adjusted for the
retroactive effect of the new method.
NOTE J.
SUBSEQUENT EVENT
Effective May 25, 1995, the Company entered into an agreement and plan
of merger with Forcenergy Inc. The consideration for the acquisition of
the Company will consist of $7.5 million in cash (to be reduced by any
long- term debt assumed, negative working capital, and dividends paid to
the Company's stockholders since January 1, 1995) and common stock of
Forcenergy Inc with a market value of $30.0 million based upon the initial
public offering price. This transaction is contingent upon the completion
of Forcenergy Inc's initial public offering of its common stock under the
Securities Act of 1933 as amended.
F-46
<PAGE> 106
ASHLAWN ENERGY, INC.
SUPPLEMENTARY INFORMATION REGARDING OIL AND
GAS PRODUCING ACTIVITIES (UNAUDITED)
The following supplementary oil and gas information is provided in
accordance with SFAS No. 69, "Disclosures about Oil and Gas Producing
Activities".
Capitalized Costs Relating to Oil and Gas Producing Activities
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1993 1994
---------------- ---------------
<S> <C> <C>
Proved Oil and Gas Properties . . . . . . . . . . . . . . . . . . $ 8,958,970 $ 10,976,428
Support Equipment and Facilities . . . . . . . . . . . . . . . . 2,926,088 3,062,621
---------------- ---------------
11,885,058 14,039,049
Less: Accumulated Depreciation, Depletion and
----- -----
Amortization . . . . . . . . . . . . . . . . . . . . . . . . (1,770,677) (2,677,573)
---------------- ---------------
Net Capitalized Costs . . . . . . . . . . . . . . . . . . . $ 10,114,381 $ 11,361,476
================ ===============
</TABLE>
Costs Incurred in Oil and Gas Producing Activities
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1992 1993 1994
------------- ------------- -------------
<S> <C> <C> <C>
Property Acquisition Costs Proved . . . . . . . . . . . $ 7,024,217 $ 257,264 $ 954,243
Exploration Costs . . . . . . . . . . . . . . . . . . . -- 253,884 107,609
Development Costs . . . . . . . . . . . . . . . . . . . 78,403 1,985,274 1,800,084
------------- ------------- -------------
$ 7,102,620 $ 2,496,422 $ 2,861,936
============= ============= =============
</TABLE>
Reserve Quantity Information
The following estimates, based on reports of independent petroleum
engineers, of proved developed and proved undeveloped reserve quantities and
related standardized measure of discounted net cash flow are estimates only,
and do not purport to reflect realizable values or fair market values of the
Company's reserves. The Company emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more imprecise
than those of currently producing oil and gas properties. Accordingly, these
estimates are expected to change as future information becomes available. All
of the Company's reserves are located in the United States.
Proved reserves are estimated, reserves of crude oil (including condensate
and natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells,
equipment and operating methods.
F-47
<PAGE> 107
ASHLAWN ENERGY, INC.
SUPPLEMENTARY INFORMATION REGARDING OIL AND
GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
Reserve Quantity Information (Continued)
<TABLE>
<CAPTION>
Oil Gas
(Mbbls) (MMcf)
------------- --------------
<S> <C> <C>
1992
Proved Developed and Undeveloped Reserves:
Beginning of Year . . . . . . . . . . . . . . . . . . -- --
Revisions of Previous Estimates . . . . . . . . . -- --
Improved Recovery . . . . . . . . . . . . . . . . -- --
Purchases of Minerals in Place . . . . . . . . . . 8,319 5,170
Extensions and Discoveries . . . . . . . . . . . . -- --
Production . . . . . . . . . . . . . . . . . . . . (171) (95)
Sales of Minerals in Place . . . . . . . . . . . . (2,773) (1,724)
----------- ------------
End of Year . . . . . . . . . . . . . . . . . . . . . 5,375 3,351
=========== ============
Proved Developed Reserves:
Beginning of Year . . . . . . . . . . . . . . . . . . -- --
=========== ============
End of Year . . . . . . . . . . . . . . . . . . . . . 4,686 1,176
=========== ============
1993
Proved Developed and Undeveloped Reserves:
Beginning of Year . . . . . . . . . . . . . . . . . . 5,375 3,351
Revisions of Previous Estimates . . . . . . . . . (944) (1,685)
Improved Recovery . . . . . . . . . . . . . . . -- --
Purchases of Minerals in Place . . . . . . . . . . 103 7,363
Extensions and Discoveries . . . . . . . . . . . . -- --
Production . . . . . . . . . . . . . . . . . . . . (515) (915)
Sales of Minerals in Place . . . . . . . . . . . . -- --
----------- ------------
End of Year . . . . . . . . . . . . . . . . . . . . . 4,019 8,114
=========== ============
Proved Developed Reserves:
Beginning of Year . . . . . . . . . . . . . . . . . . 4,686 1,176
=========== ============
End of Year . . . . . . . . . . . . . . . . . . . . . 4,019 8,114
=========== ============
1994
Proved Developed and Undeveloped Reserves:
Beginning of Year . . . . . . . . . . . . . . . . . . 4,019 8,114
Revisions of Previous Estimates . . . . . . . . . 2,465 14,465
Improved Recovery . . . . . . . . . . . . . . . . -- --
Purchases of Minerals in Place . . . . . . . . . . 244 6,228
Extensions and Discoveries -- --
Production . . . . . . . . . . . . . . . . . . . . (447) (744)
Sales of Minerals in Place . . . . . . . . . . . . (299) (12,557)
----------- ------------
End of Year . . . . . . . . . . . . . . . . . . . . . 5,982 15,506
=========== ============
Proved Developed Reserves:
Beginning of Year . . . . . . . . . . . . . . . . . . 4,019 8,114
=========== ============
End of Year . . . . . . . . . . . . . . . . . . . . . 4,167 11,691
=========== ============
</TABLE>
Revisions of previous estimates in 1994 are primarily due to improved
seismic and geological data analysis. Purchases of minerals in place include
the purchase of oil and gas properties in 1992, 1993 and 1994. Sales of
minerals in place for 1994 included the sale of interests in Ship Shoal Block
26 and Grand Isle prospect.
F-48
<PAGE> 108
ASHLAWN ENERGY, INC.
SUPPLEMENTARY INFORMATION REGARDING OIL AND
GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated
future production of proved oil and gas reserves, less estimated future
expenditures (based on year-end costs) to be incurred in developing and
producing the proved reserves, and assuming continuation of existing economic
conditions. The estimated future net cash flows are then discounted using a
rate of 10 percent a year to reflect the estimated timing of the future cash
flows.
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves is as follows (Dollars in Thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1992 1993 1994
------------- ------------ -------------
<S> <C> <C> <C>
Future Cash Inflows . . . . . . . . . . . . . . . . . . . . . $ 106,048 $ 71,094 $ 123,706
Future Production Costs . . . . . . . . . . . . . . . . . . . (61,409) (42,398) (48,729)
Future Development Costs . . . . . . . . . . . . . . . . . . (5,984) (2,511) (7,104)
------------ ----------- -----------
Future Net Cash Flows . . . . . . . . . . . . . . . . . . . . 38,655 26,185 67,873
Less: 10% Annual Discount for Estimated
Timing of Cash Flows . . . . . . . . . . . . . . . (16,851) (7,830) (25,586)
------------ ----------- -----------
Standardized Measure of Discounted Future Net Cash
Flows Relating to Proved Oil and Gas Reserves . . . . . . . $ 21,804 $ 18,355 $ 42,287
============ =========== ===========
</TABLE>
The following table reconciles the change in the standardized measure
of discounted future net cash flows (Dollars in Thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1992 1993 1994
----------- ------------ -----------
<S> <C> <C> <C>
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 21,804 $ 18,355
Sales of Oil and Gas Produced, Net of Production Costs . . . . 323 (5,320) (3,692)
Net Changes in Prices and Production Costs . . . . . . . . . . -- (6,842) 6,715
Net Change in Estimated Future Development Costs . . . . . . . -- 2,450 (3,681)
Revisions of Previous Quantity Estimates . . . . . . . . . . . -- (4,187) 24,087
Net Change From Purchases and Sales of Minerals in Place . . . 21,481 6,981 (2,779)
Accretion of Discount . . . . . . . . . . . . . . . . . . . . . -- 2,180 1,836
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,289 1,446
----------- ----------- ----------
End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,804 $ 18,355 $ 42,287
=========== =========== ==========
</TABLE>
F-49
<PAGE> 109
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
MARKET FOR AND RECENT PRICES OF
COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . 18
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . 19
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 45
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SELLING STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 49
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . 49
SHARES ELIGIBLE FOR FUTURE SALE . . . . . . . . . . . . . . . . . . . . . 54
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 56
GLOSSARY OF OIL AND GAS TERMS . . . . . . . . . . . . . . . . . . . . . . 57
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
================================================================================
================================================================================
1,750,000 SHARES
FORCENERGY INC
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED
================================================================================
