================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2002 Commission file number: 000-32261 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ATP Oil & Gas Corporation (Exact name of registrant as specified in its charter) Texas 76-0362774 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4600 Post Oak Place, Suite 200 Houston, Texas 77027 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code): (713) 622-3311 Securities Registered Pursuant to Section 12 (b) of the Act: Title of each class Name of exchange on which registered ------------------------------------------- -------------------------------------- Common Stock, par value $.001 per share NASDAQ Securities Registered Pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No__ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by Reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes[X] No__ Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes__ No[X] The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of June 28, 2002 (the last business day of the Registrant's most recently completed second fiscal quarter) was approximately $18,271,364. The number of shares of the Registrant's common stock outstanding as of March 21, 2003 was 20,338,753. DOCUMENTS INCORPORATED BY REFERENCE: The information required in Part III of the Annual Report on Form 10-K is incorporated by reference to the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A for the Registrant's Annual Meeting of Stockholders. ================================================================================ ATP OIL & GAS CORPORATION AND SUBSIDIARIES 2002 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page ---- Part I ...................................................................................... 6 Item 1. Business ...................................................................... 6 Item 2. Properties .................................................................... 14 Item 3. Legal Proceedings ............................................................. 17 Item 4. Submission of Matters to a Vote of Security Holders ........................... 17 Part II ..................................................................................... 19 Item 5. Market for Registrants Common Units and Related Security Holder Matters ....... 19 Item 6. Selected Financial Data ....................................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................................... 21 Item 7a. Quantitative and Qualitative Disclosures about Market Risk .................... 39 Item 8. Financial Statements and Supplementary Data ................................... 40 Item 9. Disagreements on Accounting and Financial Disclosure .......................... 40 Part III .................................................................................... 41 Item 10. Directors and Executive Officers of Registrant ................................ 41 Item 11. Executive Compensation ........................................................ 41 Item 12. Security Ownership of Certain Beneficial Owners and Management ................ 41 Item 13. Certain Relationships and Related Transactions ................................ 41 Item 14. Controls and Procedures ....................................................... 41 Part IV ..................................................................................... 42 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............... 42 2 Cautionary Statement About Forward-Looking Statements This annual report on Form 10-K includes assumptions, expectations, projections, intentions or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. We caution that assumptions, expectations, projections, intentions and beliefs about future events may and often do vary from actual results and the differences can be material. All statements in this document that are not statements of historical fact are forward looking statements. Forward looking statements include, but are not limited to: . projected operating or financial results; . budgeted or projected capital expenditures; . expectations regarding our planned expansions and the availability of acquisition opportunities; . statements about the expected drilling of wells and other planned development activities; . expectations regarding natural gas and oil markets in the United States and the United Kingdom; and . estimates of quantities of our proved reserves and the present value thereof, and timing and amount of future production of natural gas and oil. When used in this document, the words "anticipate," "estimate," "project," "forecast," "may," "should," and "expect" reflect forward-looking statements. There can be no assurance that actual results will not differ materially from those expressed or implied in such forward looking statements. Some of the key factors which could cause actual results to vary from those expected include: . the timing and extent of changes in natural gas and oil prices; . the timing of planned capital expenditures; . our ability to identify and acquire additional properties necessary to implement our business strategy and our ability to finance such acquisitions; . the inherent uncertainties in estimating proved reserves and forecasting production results; . operational factors affecting the commencement or maintenance of producing wells, including catastrophic weather related damage, unscheduled outages or repairs, or unanticipated changes in drilling equipment costs or rig availability; . the condition of the capital markets generally, which will be affected by interest rates, foreign currency fluctuations and general economic conditions; . cost and other effects of legal and administrative proceedings, settlements, investigations and claims, including environmental liabilities which may not be covered by indemnity or insurance; . the political and economic climate in the foreign or domestic jurisdictions in which we conduct oil and gas operations, including risk of war or potential adverse results of military or terrorist actions in those areas, and; . other United States or United Kingdom regulatory or legislative developments which affect the demand for natural gas or oil generally increase the environmental compliance cost for our production wells or impose liabilities on the owners of such wells. 3 CERTAIN DEFINITIONS As used herein, the following terms have specific meanings as set forth below: Bbls Barrels of crude oil or other liquid hydrocarbons Bcf Billion cubic feet Bcfe Billion cubic feet equivalent MBbls Thousand barrels of crude oil or other liquid hydrocarbons Mcf Thousand cubic feet of natural gas Mcfe Thousand cubic feet equivalent MMBbls Million barrels of crude oil or other liquid hydrocarbons MMBtu Million british thermal units MMcf Million cubic feet of natural gas MMcfe Million cubic feet equivalent MMBoe Million barrels of crude oil or other liquid hydrocarbons equivalent U.S. United States U.K. United Kingdom of Great Britain and Northern Ireland Crude oil and other liquid hydrocarbons are converted into cubic feet of gas equivalent based on six Mcf of gas to one barrel of crude oil or other liquid hydrocarbons. Development well is a well drilled within the proved area of an oil or natural gas field to the depth of a stratigraphic horizon known to be productive. Dry hole is 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 is a well drilled to find and produce natural gas or oil reserves that is not a development well. Farm-in or farm-out is an agreement whereby the owner of a working interest in an oil and gas lease or license assigns the working interest or a portion thereof to another party who desires to drill on the leased or licensed 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 is an area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature or stratigraphic condition. Net feet of natural gas and condensate is the true vertical thickness of reservoir rock estimated to both contain hydrocarbons and be capable of contributing to producing rates. PV-10 is the estimated future net revenue to be generated from the production of proved reserves discounted to present value using an annual discount rate of 10%. These amounts are calculated net of estimated production costs and future development and abandonment costs, using prices and costs in effect as of a certain date, without escalation and without giving effect to non-production related expenses, such as general and administrative expenses, debt service, future income tax expense, or depreciation, depletion, and amortization. Productive well is a well that is producing or is capable of production, including natural gas wells awaiting pipeline connections to commence deliveries and oil wells awaiting connection to production facilities. 4 Proved reserves are the estimated quantities of oil and gas which geological and engineering data demonstrate, with reasonable certainty, can be recovered in future years from known reservoirs under existing economic and operating conditions. Reservoirs are considered proved if shown to be economically producible by either actual production or conclusive formation tests. Proved developed reserves are the portion of proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are the portion of 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 for completion. Reserve life index is a measure of the productive life of a natural gas and oil property or a group of natural gas and oil properties, expressed in years. Reserve life equals the estimated net proved reserves attributable to property or group of properties divided by production from the property or group of properties for the four fiscal quarters preceding the date as of which the proved reserves were estimated. Working interest is the operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production. Workover is operations on a producing well to restore or increase production. 5 PART I Item 1. Business General ATP Oil & Gas Corporation ("ATP") was incorporated in Texas in 1991. We are engaged in the acquisition, development and production of natural gas and oil properties in the Gulf of Mexico and the U.K. and Dutch Sectors of the North Sea (the "North Sea"). We primarily focus our efforts on natural gas and oil properties with proved undeveloped reserves that are economically attractive to us but are not strategic to major or exploration-oriented independent oil and gas companies. We attempt to achieve a high return on our investment in these properties by limiting our up-front acquisition costs and by developing our acquisitions quickly. Our management team has extensive engineering, geological, geophysical, technical and operational expertise in successfully developing and operating properties in both our current and planned areas of operation. During 2002, we produced approximately 26.5 Bcfe, our seventh consecutive annual increase in production. Natural gas accounted for 67% of our production and all of our 2002 production was from the Gulf of Mexico. In December 2002, we were near completion of our first well in the U.K. Sector - North Sea and, we anticipate first production some time in the first half of 2003. We increase our reserves and production primarily through acquisitions and the subsequent development of proved reserves. During 2002 we added proved reserves of approximately 38.5 Bcfe, of which 20.3 Bcf were through acquisitions in the U.K. Sector - North Sea and 4.7 Bcf were through acquisitions in the Gulf of Mexico. The remaining increase of 13.5 Bcfe came from an upward revision in our previous reserve estimates. Also during 2002, we elected to sell an interest in two of our U.K. Sector - North Sea properties which accounted for a disposition of 17.1 Bcf in reserves. At December 31, 2002, we had estimated net proved reserves of 230.0 Bcfe, of which approximately 136.9 Bcfe (60%) was in the Gulf of Mexico and 93.1 Bcf (40%) was in the U.K. Sector - North Sea. Year-end reserves were comprised of 195.5 Bcf of natural gas and 5.7 MMBbls of oil. All of our oil reserves are located in the Gulf of Mexico and approximately 52% of our natural gas reserves are located in the Gulf of Mexico with the balance in the U.K. Sector - North Sea. The estimated pre-tax PV-10 of our reserves at December 31, 2002 was $355.3 million. Prices used in the U.S. reserve estimates were $4.74 per MMBtu of natural gas and $31.23 per barrel of oil. For the U.K reserve estimates, we used 13.7 pence per thermal unit or approximately $2.20 per MMBtu of natural gas. At December 31, 2002, we had leasehold and other interests in 50 offshore blocks, 29 platforms and 70 wells, including six subsea wells, in the Gulf of Mexico. We operate 55 of these 70 wells, including all of the subsea wells, and 76% of our offshore platforms. We also had interests in seven blocks and one company-operated subsea well in the U.K. Sector - North Sea. Our average working interest in our properties at December 31, 2002 was approximately 82%. For more information regarding our operations in the Gulf of Mexico and North Sea, see Note 15 to the Notes to Consolidated Financial Statements. Our Business Strategy Our business strategy is to enhance shareholder value primarily through the acquisition, development and production of proved natural gas and oil reserves in areas that have: . an existing infrastructure of oil and natural gas pipelines and production/processing platforms; . geographic proximity to developed markets for natural gas and oil; . a number of properties that major oil companies, exploration-oriented independents and others consider non-strategic; and . a relatively stable history of consistently applied governmental regulations for offshore natural gas and oil development and production. 6 We believe our strategy significantly reduces the risks associated with traditional natural gas and oil exploration. Our focus is to acquire properties that have been explored by others and found to contain proved reserves. From the inception of operations in 1995 through March 20, 2003, we have successfully brought to production 30 out of 31 projects from previously undeveloped reserves, a 97% success ratio. We focus on acquiring properties that contain proved undeveloped reserves that have become non-core or non-strategic to their original owners for various reasons. For example, larger oil companies from time to time adjust their capital spending or shift their focus to exploration prospects with greater reserve potential. Some projects provide lower economic returns to a larger company due to its cost structure. Also, due to timing or budget constraints, a company may be unable or unwilling to develop a property before the expiration of the lease and desire to sell the property before they forfeit their lease rights. Because of our cost structure, expertise in our areas of focus and our ability to develop projects efficiently, these properties may be economically attractive to us. We focus on developing projects in the shortest time possible between initial investment and first revenue generated in order to maximize our rate of return. Since we operate a significant number of the properties in which we acquire a working interest, we are able to significantly influence the time of a project's development. We typically initiate new development projects by simultaneously obtaining the various required components such as the pipeline and the production platform or subsea well completion equipment. We believe this strategy, combined with our ability to evaluate and implement a project's requirements, allows us to efficiently complete the development project and commence production quickly. Our Strengths . Low Acquisition Cost Structure. We believe that our focus on acquiring properties with minimal cash investment allows us to pursue the acquisition, development and production of properties that may not be economically attractive to others. For the three-year period ended December 31, 2002, our total average finding and development costs (which do not include future development costs) incurred in the acquisition and development of our net proved reserves was $1.09 per Mcfe. . Technical Expertise and Significant Experience. We have assembled a technical staff with an average of over 20 years of industry experience. Our technical staff has specific expertise in the Gulf of Mexico and North Sea offshore property development, including the implementation of subsea completion technology. . Operating Control. As the operator of a property, we are afforded greater control of the selection of completion and production equipment, the timing and amount of capital expenditures and the operating parameters and costs of the project. As of December 31, 2002, we operated 76% of our offshore platforms, all of our subsea wells and all of our properties under development. . Employee Ownership. Through employee ownership, we have built a staff whose business decisions are aligned with the interests of our shareholders. Our executive officers and directors own approximately 70% of our common stock on a fully diluted basis. . Inventory of Projects. We have a substantial inventory of properties to develop in both the Gulf of Mexico and in the North Sea. We currently have three developments in the U.K. Sector - North Sea one development at our 2003 acquisition in the Dutch Sector - North Sea and seven developments in the Gulf of Mexico. Marketing and Delivery Commitments We sell our natural gas and oil production under price sensitive or market price contracts. Our revenues, profitability and future growth depend substantially on prevailing prices for natural gas and oil. The price received by us for our non-hedged natural gas and oil production can fluctuate widely. Changes in the prices of natural gas and oil will affect the carrying value of our proved reserves as well as our revenues, profitability and cash flow. Although we are not currently experiencing any significant involuntary curtailment of our natural gas or oil production, market, economic and regulatory factors may in the future materially affect our ability to sell our natural gas or oil production. 7 We sell a portion of our natural gas and oil to end users through various gas marketing companies. Historically, we have sold our natural gas and oil to a relatively few number of purchasers. For instance, in 2002, four purchasers accounted for 88% of our revenues. However, we are not dependent upon, or confined to, any one purchaser or small group of purchasers. Due to the nature of natural gas and oil markets and because natural gas and oil are commodities and there are numerous purchasers in the areas in which we sell production, we do not believe the loss of a single purchaser, or a few purchasers, would materially affect our ability to sell our production. Competition We compete with major and independent natural gas and oil companies for property acquisitions. We also compete for the equipment and labor required to operate and to develop these properties. Some of our competitors have substantially greater financial and other resources and may be able to sustain wide fluctuations in the economics of our industry more easily than we can. Since we are in a highly regulated industry, they may be able to absorb the burden of any changes in federal, state and local laws and regulations more easily than we can. Our ability to acquire and develop additional properties in the future will depend upon our ability to conduct operations, to evaluate and select suitable properties, to secure adequate financing and to consummate transactions in this highly competitive environment. Royalty Relief In November 2001, we received notification from the U.S. Minerals Management Service ("MMS") that our application for deepwater royalty relief for the Garden Banks 409 property had been approved under a federal law that was enacted in November 1995. The royalty relief provides for the abatement of federal royalty on the first 52.5 MMBoe of oil and gas production from the property. The royalty abatement continues in effect for each calendar year, unless realized prices exceed certain prescribed thresholds. If the prescribed threshold prices are exceeded during a calendar year, then royalty relief is suspended and we would be required to pay royalties for that calendar year. Regulation Federal Regulation of Sales and Transportation of Natural Gas. Historically, the transportation and sale for resale of natural gas in interstate commerce is regulated pursuant to the Natural Gas Act of 1938 ("the Natural Gas Act"), the Natural Gas Policy Act of 1978 and Federal Energy Regulatory Commission ("FERC") regulations. In the past, the federal government has regulated the prices at which natural gas could be sold. Deregulation of natural gas sales by producers began with the enactment of the Natural Gas Policy Act of 1978. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act, which removed all remaining Natural Gas Act of 1938 and Natural Gas Policy Act of 1978 price and non-price controls affecting producer sales of natural gas effective January 1, 1993. Our sales of natural gas are affected by the availability, terms and cost of pipeline transportation. The price and terms for access to pipeline transportation are subject to extensive federal regulation. Beginning in April 1992, the FERC issued Order No. 636 and a series of related orders, which required interstate pipelines to provide open-access transportation on a not unduly discriminatory basis for all natural gas shippers. The FERC stated that Order No. 636 and the FERC's future restructuring activities are intended to foster increased competition within all phases of the natural gas industry. Although the regulations instituted by Order No. 636 do not directly apply to our production and marketing activities, they do affect how buyers and sellers gain access to the necessary transportation facilities and how we and our competitors sell natural gas in the marketplace. The courts have largely affirmed the significant features of Order No. 636 and the numerous related orders pertaining to individual pipelines. Subsequent to Order No. 636, the FERC continued to modify its regulations regarding the transportation of natural gas. 8 In 2000, the FERC issued Order No. 637 and subsequent orders, which we refer to collectively as "Order No. 637." Order No. 637 imposes a number of additional reforms designed to enhance competition in natural gas markets. Among other things, Order No. 637 revised the FERC pricing policy by waiving price ceilings for short-term released capacity for a two-year period ending September 30, 2002, and effected changes in the FERC regulations relating to scheduling procedures, capacity segmentation, pipeline penalties, rights of first refusal ("ROFR") and information reporting. Several parties subsequently filed appeals in the Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") seeking court review of various aspects of Order 637, particularly (i) the right of customers to segment their contractual capacity in a manner that allows a forwardhaul/backhaul to a single point and (ii) the ROFR granted to existing customers to extend contracts beyond the end of the contract's term. On April 5, 2002, the D.C. Circuit generally affirmed Order No. 637 but remanded certain issues to FERC, including the forwardhaul/backhaul and ROFR issues. The FERC on remand affirmed its position on the forwardhaul/backhaul issue but reversed itself on the ROFR issue. Requests for rehearing of this order are currently pending at FERC. Order No. 637 also required interstate natural gas pipelines to implement the policies mandated by the order through individual compliance filings. The FERC has now ruled on a number of the individual compliance filings, although its decisions in such proceedings remain subject to the outcome of pending rehearing requests and possible court appeals. In April 1999, the FERC issued Order No. 603, which implemented new regulations governing the procedure for obtaining authorization to construct and operate new pipeline facilities or to abandon facilities under Section 7 of the Natural Gas Act. In September 1999, the FERC issued a related policy statement establishing a presumption in favor of requiring owners of new pipeline facilities to charge rates for service on new pipeline facilities based solely on the costs associated with such new pipeline facilities. We cannot predict what further action the FERC will take on these or related matters, nor can we accurately predict whether the FERC's actions will achieve the goal of increasing competition in markets in which our natural gas is sold. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other natural gas producers, gatherers and marketers. The Outer Continental Shelf Lands Act, which the FERC implements with regard to transportation and pipeline issues, requires that all pipelines operating on or across the Outer Continental Shelf provide open-access, non-discriminatory service. Historically, the FERC has opted not to impose regulatory requirements under its Outer Continental Shelf Lands Act authority on gatherers and other entities outside the reach of its Natural Gas Act jurisdiction. However in April 2000, the FERC issued Order No. 639, requiring that virtually all non-proprietary pipeline transporters of natural gas on the Outer Continental Shelf report information on their affiliations, rates and terms and conditions of service. The reporting requirements established by the FERC in Order No. 639 may apply, in certain circumstances, to operators of production platforms and other facilities on the Outer Continental Shelf, with respect to gas movements across such facilities. Among FERC's stated purposes in issuing such rules was the desire to increase transparency in the market and to provide producers and shippers on the Outer Continental Shelf with greater assurance of (a) open-access services on pipelines located on the Outer Continental Shelf and (b) non-discriminatory rates and conditions of service on such pipelines. In January 2002, the U.S. District Court for the District of Columbia permanently enjoined the FERC from enforcing Order No. 639 and related orders. FERC's appeal of the district court's decision is currently pending at the D.C. Circuit. The FERC retains authority under the Outer Continental Shelf Lands Act to exercise jurisdiction over gatherers and other entities outside the reach of its Natural Gas Act jurisdiction if necessary to insure non-discriminatory access to service on the Outer Continental Shelf. We do not believe that any FERC action taken under its Outer Continental Shelf Lands Act jurisdiction will affect us in a way that materially differs from the way it affects other natural gas producers, gatherers and marketers. 9 Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the FERC and the courts. 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. Federal Leases. A substantial portion of our operations is located on federal natural gas and oil leases, which are administered by the MMS pursuant to the Outer Continental Shelf Lands Act. These leases are issued through competitive bidding and contain relatively standardized terms. These leases require compliance with detailed MMS regulations and orders that are subject to interpretation and change by the MMS. For offshore operations, lessees must obtain MMS approval for exploration, 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 Outer Continental Shelf to meet stringent engineering and construction specifications. The MMS also has regulations restricting the flaring or venting of natural gas, and has proposed to amend such regulations to prohibit the flaring of liquid hydrocarbons and oil without prior authorization. Similarly, the MMS has promulgated other regulations governing the plugging and abandonment of wells located offshore and the installation and removal of all production facilities. To cover the various obligations of lessees on the Outer Continental Shelf, the MMS generally requires that lessees have substantial net worth or post bonds or other acceptable assurances that such obligations will be satisfied. The cost of these bonds or assurances can be substantial, and there is no assurance that they can be obtained in all cases. We currently have several supplemental bonds in place. Under some circumstances, the MMS may require any of our operations on federal leases to be suspended or terminated. Any such suspension or termination could materially adversely affect our financial condition and results of operations. The MMS also administers the collection of royalties under the terms of the Outer Continental Shelf Lands Act and the oil and gas leases issued under the Act. The amount of royalties due is based upon the terms of the oil and gas leases as well as of the regulations promulgated by the MMS. The MMS has issued a final rule that governs the calculation of royalties and the valuation of crude oil produced from federal leases. This rule amends the way that the MMS values crude oil produced from federal leases for determining royalties by eliminating posted prices as a measure of value and relying instead on arm's-length sales prices and spot market prices as indicators of value. The lawfulness of the new rule has been challenged at the D.C. Circuit. We cannot predict whether this new rule will be upheld, nor can we predict whether the MMS will take further action on this matter. We believe this rule will not have a material impact on our financial condition, liquidity or results of operations. Oil Price Controls and Transportation Rates. Sales of crude oil, condensate and natural gas liquids by us are not currently regulated and are made at market prices. In a number of instances, however, the ability to transport and sell such products is dependent on pipelines whose rates, terms and conditions of service are subject to FERC jurisdiction under the Interstate Commerce Act. In other instances, the ability to transport and sell such products is dependent on pipelines whose rates, terms and conditions of service are subject to regulation by state regulatory bodies under state statutes. The regulation of pipelines that transport crude oil, condensate and natural gas liquids is generally more light-handed than the FERC's regulation of gas pipelines under the Natural Gas Act. Regulated pipelines that transport crude oil, condensate, and natural gas liquids are subject to common carrier obligations that generally ensure non-discriminatory access. With respect to interstate pipeline transportation subject to regulation of the FERC under the Interstate Commerce Act, rates generally must be cost-based, although market-based rates or negotiated settlement rates are permitted in certain circumstances. Pursuant to FERC Order No. 561, issued in October 1993, the FERC implemented regulations generally grandfathering all previously unchallenged interstate pipeline rates and made these rates subject to an indexing methodology. Under this indexing 10 methodology, pipeline rates are subject to changes in the Producer Price Index for Finished Goods, minus one percent. A pipeline can seek to increase its rates above index levels provided that the pipeline can establish that there is a substantial divergence between the actual costs experienced by the pipeline and the rate resulting from application of the index. A pipeline can seek to charge market-based rates if it establishes that it lacks significant market power. In addition, a pipeline can establish rates pursuant to settlement if agreed upon by all current shippers. A pipeline can seek to establish initial rates for new services through a cost-of-service proceeding, a market-based rate proceeding, or through an agreement between the pipeline and at least one shipper not affiliated with the pipeline. As provided for in Order No. 561, in July 2000, the FERC issued a Notice of Inquiry seeking comment on whether to retain or to change the existing oil rate-indexing method. In December 2000, the FERC issued an order concluding that the rate index reasonably estimated the actual cost changes in the pipeline industry and should be continued for another 5-year period, subject to review in July 2005. In February 2003, on remand of its December 2000 order from the D.C. Circuit, the FERC changed the rate indexing methodology to the Producer Price Index for Finished Goods, but without the subtraction of 1% as had been done previously. The FERC made the change prospective only, but did allow oil pipelines to recalculate their maximum ceiling rates as though the new rate indexing methodology had been in effect since July 1, 2001. With respect to intrastate crude oil, condensate and natural gas liquids pipelines subject to the jurisdiction of state agencies, such state regulation is generally less rigorous than the regulation of interstate pipelines. State agencies have generally not investigated or challenged existing or proposed rates in the absence of shipper complaints or protests. Complaints or protests have been infrequent and are usually resolved informally. We do not believe that the regulatory decisions or activities relating to interstate or intrastate crude oil, condensate, or natural gas liquids pipelines will affect us in a way that materially differs from the way it affects other crude oil, condensate, and natural gas liquids producers or marketers. Environmental Regulations. Our operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Public interest in the protection of the environment has increased dramatically in recent years. Offshore drilling in some areas has been opposed by environmental groups and, in some areas, has been restricted. To the extent laws are enacted or other governmental action is taken that prohibits or restricts offshore drilling or imposes environmental protection requirements that result in increased costs to the natural gas and oil industry in general and the offshore drilling industry in particular, our business and prospects could be adversely affected. The Oil Pollution Act of 1990 and related regulations impose a variety of regulations on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills in U.S. waters. A "responsible party" includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which an offshore facility is located. The Oil Pollution Act of 1990 assigns liability to each responsible party for oil removal costs and a variety of public and private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Even if applicable, the liability limits for offshore facilities require the responsible party to pay all removal costs, plus up to $75.0 million in other damages. Few defenses exist to the liability imposed by the Oil Pollution Act of 1990. The Oil Pollution Act of 1990 also requires a responsible party to submit proof of its financial responsibility to cover environmental cleanup and restoration costs that could be incurred in connection with an oil spill. As amended by the Coast Guard Authorization Act of 1996, the Oil Pollution Act of 1990 requires parties responsible for offshore facilities to provide financial assurance in the amount of $35.0 million to cover potential Oil Pollution Act of 1990 liabilities. This amount can be increased up to $150.0 million if a study by the MMS indicates that an amount higher than $35.0 million should be required. On August 11, 1998, the 11 MMS adopted a rule implementing the Oil Pollution Act of 1990 financial responsibility requirements. We are in compliance with this rule. In addition, the Outer Continental Shelf Lands Act authorizes regulations relating to safety and environmental protection applicable to lessees and permittees operating on the Outer Continental Shelf. Specific design and operational standards may apply to Outer Continental Shelf vessels, rigs, platforms and structures. Violations of lease conditions or regulations issued pursuant to the Outer Continental Shelf Lands Act can result in substantial civil and criminal penalties, as well as potential court injunctions curtailing operations and the cancellation of leases. Such enforcement liabilities can result from either governmental or private prosecution. The Oil Pollution Act of 1990 also imposes other requirements, such as the preparation of an oil spill contingency plan. We have such a plan in place. We are also regulated by the Clean Water Act, which prohibits any discharge into waters of the U.S. except in strict conformance with discharge permits issued by federal or state agencies. We have obtained, and are in material compliance with, the discharge permits necessary for our operations. We are also subject to similar state and local water quality laws and regulations for any production or drilling activities that occur in state coastal waters. Failure to comply with the ongoing requirements of the Clean Water Act or inadequate cooperation during a spill event may subject a responsible party to civil or criminal enforcement actions. The Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on some classes of persons that are considered to have contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. We could be subject to liability under CERCLA because our drilling and production activities generate relatively small amounts of liquid and solid wastes that may be subject to classification as hazardous substances under CERCLA. These wastes must be brought to shore for proper disposal under the Resource Conservation and Recovery Act. We minimize this potential liability by selecting reputable contractors to dispose of our wastes at government-approved landfills or other types of disposal facilities. Our operations are also subject to regulation of air emissions under the Clean Air Act and the Outer Continental Shelf Lands Act. Implementation of these laws could lead to the gradual imposition of new air pollution control requirements on our operations. Therefore, we may incur capital expenditures over the next several years to upgrade our air pollution control equipment. We could also become subject to similar state and local air quality laws and regulations in the future if we conduct production or drilling activities instate coastal waters. We do not believe that our operations would be materially affected by any such requirements, nor do we expect such requirements to be anymore burdensome to us than to other companies our size involved in similar natural gas and oil development and production activities. In addition, legislation has been proposed in Congress from time to time that would reclassify some natural gas and oil exploration and production wastes as "hazardous wastes," which would make the reclassified wastes subject to much more stringent handling, disposal and clean-up requirements. If Congress were to enact this legislation, it could increase our operating costs, as well as those of the natural gas and oil industry in general. Initiatives to further regulate the disposal of natural gas and oil wastes are also pending in some states, and these various initiatives could have a similar impact on us. 12 Our management believes that we are in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on us. U.K. Regulation of Natural Gas and Oil Production. Pursuant to the Petroleum Act 1998, all natural gas and oil reserves contained in properties located in the U.K. are the property of the U.K. government. The development and production of natural gas and oil reserves in the U.K. Sector - North Sea requires a petroleum production license granted by the U.K. government. Prior to developing a field, we are required to obtain from the Secretary of State for Trade and Industry (the "Secretary of State") a consent to develop that field. We would be required to obtain the consent of the Secretary of State prior to transferring an interest in a license. The terms of the U.K. petroleum production licenses are based on model license clauses applicable at the time of the issuance of the license. Licenses frequently contain regulatory provisions governing matters such as working method, pollution and training, and reserve to the Secretary of State the power to direct some of the licensee's activities. For example, a licensee may be precluded from carrying out development or production activities other than with the consent of the Secretary of State or in accordance with a development plan which the Secretary of State for Trade and Industry has approved. Breach of these requirements may result in the revocation of the license. In addition, licenses that we acquire may require us to pay fees and royalties on production and also impose certain other duties on us. Our operations in the U.K. are subject to the Petroleum Act 1998, which imposes a health and safety regime on offshore natural gas and oil production activities. The Petroleum Act 1998 also regulates the abandonment of facilities by licensees. In addition, the Mineral Workings (Offshore Installations) Act provides a framework in which the government can impose additional regulations relating to health and safety. Since its enactment, a number of regulations have been promulgated relating to offshore construction and operation of offshore production facilities. Health and safety offshore is further governed by the Health and Safety at Work Act 1974 and applicable regulations. Our operations are also subject to environmental laws and regulations imposed by both the European Union and the U.K. government. Petroleum production licenses require the prior approval of the Secretary of State of a licensee to act as operator. The operator under a license organizes or supervises all or any of the development and production operations of natural gas and oil properties subject thereto. As an operator, we may obtain operational services from third parties, but will remain fully responsible for the operations as if we conduct them ourselves. Our operations in the U.K. may entail the construction of offshore pipelines, which are subject to the provisions of the Petroleum Act 1998 and other legislation. The Petroleum Act 1998 requires a license to construct and operate a pipeline in U.K. North Sea, including its continental shelf. Easements to permit the laying of pipelines must be obtained from the Crown Estate Commissioners prior to their construction. We plan to use capacity in existing offshore pipelines in order to transport our gas. However, access to the pipelines of a third party would need to be obtained on a negotiated basis, and there is no assurance that we can obtain access to existing pipelines or, if access is obtained, it may only be on terms that are not favorable to us. The natural gas we produce may be transported through the U.K.'s onshore national gas transmission system, or NTS. The NTS is owned by a licensed gas transporter, BG Transco plc ("Transco"). The terms on which Transco must transport gas are governed by the Gas Acts of 1986 and 1995, the gas transporter's license issued to Transco under those Acts and a network code. For us to use the NTS, we must obtain a shipper's license under the Gas Acts and arrange to have gas transported by Transco within the NTS. We will therefore be subject to the network code, which imposes obligations to payment, gas flow nominations, capacity booking and system imbalance. Applying for and complying with a shipper's license, and acting as a gas shipper, is expensive and administratively burdensome. Alternatively, we may sell natural gas `at the beach' before it enters the NTS or arrange with an existing gas shipper for them to ship the gas through the NTS on our behalf. 13 Employees At December 31, 2002 we had 39 full-time employees in our Houston office and seven full-time employees and seven contract personnel in our London office. None of our employees are covered by a collective bargaining agreement. From time to time, we use the services of independent consultants and contractors to perform various professional services, particularly in the areas of construction, design, well-site supervision, permitting and environmental assessment. Independent contractors usually perform field and on-site production operation services for us, including gauging, maintenance, dispatching, inspection and well testing. Item 2. Properties General We are engaged in the acquisition, development and production of natural gas and oil properties primarily in the Gulf of Mexico and the North Sea. At December 31, 2002, we had leasehold and other interests in 50 offshore blocks, 29 platforms and 70 wells, including six subsea wells, in the Gulf of Mexico. We operate 55 of these 70 wells, including all of the subsea wells, and 76% of our offshore platforms. We also held interests in seven blocks and one company-operated subsea well located in the U.K. Sector - North Sea. Our average working interest in our properties at December 31, 2002 was approximately 82%. As of December 31, 2002, we had leasehold interests located in the Gulf of Mexico and the U.K. Sector - North Sea covering approximately 250,000 gross and 196,000 net acres. Acquisitions and Dispositions Gulf of Mexico During 2002, we entered into a farm-in agreement to acquire a 100% working interest in one block with associated proved reserves of approximately 4.7 Bcf, based on third party reservoir engineering estimates at year-end. We plan to develop this block in 2003. In 2003, we entered into an agreement whereby a third party received a 25% working interest in this block in exchange for paying a disproportionate share of all costs prior to first production. In addition, we acquired another block for approximately $1.0 million. This block, along with the block immediately to the south which we did not acquire, contains an accumulation of oil and gas. Since the well that identified proved reserves is located on the southern block and due to the strict limitations to declare reserves as proved, we are unable to record any proved reserves with this acquisition. U.K. Sector - North Sea In 2001, we acquired interests in three properties (five blocks) in the North Sea which included a 100% interest in one block ("Helvellyn"), a 50% interest in one block ("Venture") and an 86% interest in three blocks ("Tors"). Helvellyn. In August 2002 we entered into an agreement, which was completed on September 30, 2002, whereby we assigned 50% of our working interest in the Helvellyn development in the U.K. Sector - North Sea to a joint venture partner. The terms of the agreement required the other party to pay a disproportionate share of the development costs on the project. The partner's share of development costs totaled $28.9 million through December 31, 2002, of which $17.3 million was paid to us in cash, $11.0 million is included in accounts receivable and $0.6 million is included as a receivable in other long term assets. We retained a 50% working interest and continued as the operator of the field. 14 Tors. In February 2002 the U.K. Department of Trade and Industry directly awarded us a 75% working interest in two lease blocks. The lease sale in the U.K. is referred to as a "round" and the award is known as an "out of round" award. We paid no acquisition costs and net proved reserves for these properties at December 31, 2002, were approximately 20.3 Bcf, based on third party reservoir engineering estimates at year-end. These two blocks will become a component of our Tors development. Neither of the properties were producing when acquired and we expect to pursue development operations in 2004 and 2005. In October 2002 we entered into an earn-in agreement whereby we assigned an 11% interest in three blocks acquired in 2001 to a joint venture partner in return for them funding part of the block's development costs. We retained a 75% working interest and continued as the operator. As of December 31, 2002, these blocks had not yet been developed. Dutch Sector - North Sea In February 2003, we acquired a 50% working interest in a block located in the Dutch Sector - North Sea. First production is expected some time in 2004. The remaining 50% interest is owned by a Dutch company who participates on behalf of the Dutch state. This acquisition expands our offshore development strategy and presents an extension of substantial opportunities for us. Natural Gas and Oil Reserves The following table presents our estimated net proved natural gas and oil reserves and the net present value of our reserves at December 31, 2002 based on reserve reports prepared by Ryder Scott Company, L.P. for our domestic reserves and Troy-Ikoda Limited for our U.K. reserves. Proved Reserves ------------------------------------------------- Developed Undeveloped Total ------------- --------------- ----------- Gulf of Mexico Natural gas (MMcf) .................................... 34,068 68,370 102,438 Oil and condensate (MBbls) ............................ 2,318 3,422 5,740 Total proved reserves (MMcfe) ......................... 47,976 88,903 136,879 U. K. Sector - North Sea Natural gas (MMcf) .................................... - 93,100 93,100 Total Natural gas (MMcf) .................................... 34,068 161,470 195,538 Oil and condensate (MBbls) ............................ 2,318 3,422 5,740 Total proved reserves (MMcfe) ......................... 47,976 182,003 229,979 15 Our estimates of proved reserves in the table above do not differ from those we have filed with other federal agencies. The process of estimating natural gas and oil reserves is complex. It requires various assumptions, including assumptions relating to natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. We must project production rates and timing of development expenditures. We analyze available geological, geophysical, production and engineering data, and the extent, quality and reliability of this data can vary. Therefore, estimates of natural gas and oil reserves are inherently imprecise. In accordance with the Securities and Exchange Commission ("SEC") requirements, we base the estimated discounted future net cash flows from proved reserves on prices and costs on the date of the estimate. Actual future prices and costs may differ materially from those used in the net present value estimate. Actual future production, natural gas and oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas and oil reserves most likely will vary from our estimates and these variances may be material. Our business strategy is to acquire proved reserves, usually proved undeveloped, and to bring those reserves on production as rapidly as possible. At December 31, 2002, all of our reserves in the U.K. Sector - North Sea and approximately 65% of our estimated equivalent net proved reserves in the Gulf of Mexico were undeveloped. Recovery of undeveloped reserves generally requires significant capital expenditures and successful drilling and completion operations. The reserve data assumes that we will make these expenditures. Although we estimate our reserves and the costs associated with developing them in accordance with industry standards, the estimated costs may be inaccurate, development may not occur as scheduled and results may not be as estimated. Drilling Activity The following table shows our drilling and completion activity. In the table, "gross" refers to the total wells in which we have a working interest and "net" refers to gross wells multiplied by our working interest in such wells. We did not drill or complete any exploratory wells in any period presented. Years Ended December 31, --------------------------------------------------------------- 2002 2001 2000 -------------------- -------------------- ------------------- Gross Net Gross Net Gross Net --------- -------- --------- -------- --------- -------- Development Wells: Productive - Gulf of Mexico .................. - - 8.0 6.3 12.0 11.0 Nonproductive - Gulf of Mexico ............... - - 1.0 1.0 1.0 1.0 Drilling at end of period - Gulf of Mexico ... 1.0 1.0 - - - - Drilling at end of period - U.K. North Sea ... 1.0 0.5 - - - - --------- --------- -------- ------- ------- ------- Total 2.0 1.5 9.0 7.3 13.0 12.0 ========= ========= ======== ======= ======= ======= Productive Wells The following table presents the number of productive natural gas and oil wells in which we owned an interest as of December 31, 2002. Natural Gas Wells Oil Wells --------------------- ----------------- Gross Net Gross Net --------- --------- -------- ------ Gulf of Mexico ............................................. 30.0 23.8 9.0 4.4 ======== ========= ======== ====== Multiple completion wells included above ................... 9.0 7.5 - - 16 Acreage The following table summarizes our developed and undeveloped acreage holdings at December 31, 2002. Acreage in which ownership interest is limited to royalty, overriding royalty and other similar interests is excluded (in acres): Developed (1) Undeveloped (2) Total ------------------- ------------------ ------------------ Gross Net Gross Net Gross Net ------- -------- -------- ------- ------- -------- Gulf of Mexico .............................. 147,893 118,364 36,177 34,927 184,070 153,291 U.K. Sector - North Sea. .................... - - 66,148 42,524 66,148 42,524 --------- --------- --------- --------- --------- --------- 147,893 118,364 102,325 77,451 250,218 195,815 ========= ========= ========= ========= ========= ========= - ------------------ (1) Developed acres are acres spaced or assigned to productive wells. (2) Undeveloped acres are acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of natural gas and oil, regardless of whether such acreage contains proved reserves. Production and Pricing Data Information on production and pricing data is contained in Item 7. - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations". Item 3. Legal Proceedings On August 28, 2001 ATP entered into a written agreement to acquire a property in the Gulf of Mexico during September 2001. On October 9, 2001 the agreement was amended to ultimately extend the closing date until October 31, 2001 in exchange for payments made by ATP totaling $3.0 million. This amendment also contained an arrangement whereby if ATP did not close on the property, and if sellers sold the property to a third party with a sale that met specific contract requirements, ATP would be required to execute a six month note for payment of the differential. Since ATP did not obtain the financing for the acquisition by October 31, 2001, the transaction did not close by that date; however, the parties' intensive work toward closing continued beyond that date without interruption. While working on the closing for the property with ATP, the sellers sold the property to a third party without informing ATP until after the closing had taken place. ATP filed an action in the District Court of Harris County, Texas against the sellers, generally alleging improper sale of the offshore property to a third party and breach of contract, and seeking unspecified damages from the sellers. The case is encaptioned ATP Oil & Gas Corporation vs. Legacy Resources Co., L.P. et al, No. 2001-63224 in the 269th Judicial District Court of Harris County, Texas. At the same time sellers notified ATP of their sale to a third party, the sellers had a demand made upon ATP for execution of a six month note for the amount of an alleged differential of approximately $12.3 million plus interest at 16%. Substantiation of the amount and validity of the demand could not be ascertained based on the content of the demand received. ATP contested the entire demand. The judge has abated the litigation, until arbitration pursuant to the underlying agreements between the sellers and ATP is completed. A tentative date of May 19, 2003 has been scheduled for the arbitration with an alternative date in September 2003. Due to the inherent uncertainties involving contested facts and legal issues a prediction as to the likely outcome cannot be made with any degree of certainty, and we have not accrued any amount related to this matter. While we are seeking recovery of the amounts previously paid and discussed above, the $3.0 million has been charged to earnings along with other costs related to this matter. ATP intends to vigorously defend against the sellers' claims and forcefully pursue its own claims in this matter. In August 2001, Burlington Resources Inc. filed suit against ATP alleging formation of a contract with ATP and our breach of the alleged contract. The complaint seeks compensatory damages of approximately $1.1 million. We believe that this claim is without merit, and we intend to defend it vigorously. We are also, in the ordinary course of business, a claimant and/or defendant in various legal proceedings. Management does not believe that the outcome of these legal proceedings, individually, and in the aggregate will have a materially adverse effect on our financial condition, results of operations or cash flows. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of 2002. 17 Executive Officers of the Company Set forth below are the names, ages (as of March 21, 2003) and titles of the persons currently serving as executive officers of the Company. All executive officers hold office until their successors are elected and qualified. Name Age Position - ---- --- -------- T. Paul Bulmahn .......................... 59 Chairman and President Gerald W. Schlief ........................ 55 Senior Vice President Albert L. Reese, Jr. ..................... 53 Senior Vice President and Chief Financial Officer Leland E. Tate. .......................... 55 Senior Vice President, Operations John E. Tschirhart. ...................... 52 Senior Vice President, General Counsel T. Paul Bulmahn has served as our Chairman and President since he founded the company in 1991. From 1988 to 1991, Mr. Bulmahn served as President and Director of Harbert Oil & Gas Corporation. From 1984 to 1988, Mr. Bulmahn served as Vice President, General Counsel of Plumb Oil Company. From 1978 to 1984, Mr. Bulmahn served as counsel for Tenneco's interstate gas pipelines and as regulatory counsel in Washington, D.C. From 1973 to 1978, he served the Railroad Commission of Texas, the Public Utility Commission and the Interstate Commerce Commission as an administrative law judge. Gerald W. Schlief has served as our Senior Vice President since 1993 and is primarily responsible for acquisitions. Between 1990 and 1993, Mr. Schlief acted as a consultant for the onshore and offshore independent oil and gas industry. From 1984 to 1990, Mr. Schlief served as Vice President, Offshore Land for Plumb Oil Company where he managed the acquisition of interests in over 35 offshore properties. From 1983 to 1984, Mr. Schlief served as Offshore Land Consultant for Huffco Petroleum Corporation. He served as Treasurer and Landman for Huthnance Energy Corporation from 1981 to 1983. In addition, from 1974 to 1978, Mr. Schlief conducted audits of oil and gas companies for Arthur Andersen & Co., and from 1978 to 1981, he conducted audits of oil and gas companies for Spicer & Oppenheim. Albert L. Reese, Jr. has served as our Chief Financial Officer since March 1999 and, in a consulting capacity, as our director of finance from 1991 until March 1999. He was also named Senior Vice President in August 2000. From 1986 to 1991, Mr. Reese was employed with the Harbert Corporation where he established a registered investment bank for the company to conduct project and corporate financings for energy, co-generation, and small power activities. From 1979 to 1986, Mr. Reese served as chief financial officer of Plumb Oil Company and its successor, Harbert Energy Corporation. Prior to 1979, Mr. Reese served in various capacities with Capital Bank in Houston, the independent accounting firm of Peat, Marwick & Mitchell, and as a partner in Arnold, Reese & Swenson, a Houston-based accounting firm specializing in energy clients. Leland E. Tate has served as our Senior Vice President, Operations, since August 2000. Prior to joining ATP, Mr. Tate worked for over 30 years with Atlantic Richfield Company ("ARCO"). From 1998 until July 2000, Mr. Tate served as the President of ARCO North Africa. He also was Director General of Joint Ventures at ARCO from 1996 to 1998. From 1994 to 1996, Mr. Tate served as ARCO's Vice President Operations & Engineering, where he led technical negotiations in field development. Prior to 1994, Mr. Tate's positions with ARCO included Director of Operations, ARCO British Ltd.; Vice President of Engineering, ARCO International; Senior Vice President Marketing and Operations, ARCO Indonesia; and for three years was Vice President and District Manager in Lafayette, Louisiana. John E. Tschirhart joined us in November 1997 and has served as our General Counsel since March 1998. Mr. Tschirhart was named Senior Vice President in July 2001 and served as Managing Director of ATP Oil & Gas (UK) Limited from May 2000 to May 2001. From 1993 to November 1997, Mr. Tschirhart worked as a partner at the law firm of Tschirhart and Daines, a partnership in Houston, Texas. From 1985 to 1993 Mr. Tschirhart was in private practice handling civil litigation matters including oil and gas and employment law. From 1979 to 1985, he was with Coastal Oil & Gas Corporation and from 1974 to 1979 he was with Shell Oil Company. 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share. There were 20,338,753 shares of common stock and no shares of preferred stock outstanding as of March 21, 2003. There were 61 holders of record of our common stock as of March 21, 2003. Our common stock is traded on the Nasdaq National Market under the ticker symbol ATPG. There was no public market for our common stock before February 6, 2001. The following tables sets forth the range of high and low closing sales prices for the common stock as reported on the Nasdaq National Market for the periods indicated below: High Low ---------- ----------- 2002: ----- 4th Quarter $ 4.49 $ 2.78 3rd Quarter 3.40 2.51 2nd Quarter 4.77 2.50 1st Quarter 5.00 1.47 2001: ----- 4th Quarter $ 7.15 $ 2.00 3rd Quarter 12.00 6.61 2nd Quarter 12.96 8.71 1st Quarter 14.56 9.88 We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings and other cash resources, if any, for the operation and development of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Payment of any future dividends will be at the discretion of our board of directors after taking into account many factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. In addition, our current credit facility prohibits us from paying cash dividends on our common stock. Any future dividends may also be restricted by any loan agreements which we may enter into from time to time. Securities Authorized for Issuance under Equity Compensation Plans The following table includes information regarding our equity compensation plans as of the year ended December 31, 2002: Number of securities Weighted Number of to be issued average securities remaining upon exercise exercise price available for future of outstanding of outstanding issuance under equity Plan Category options options compensation plans - ------------------------------------------- ---------------- --------------- ---------------------- Equity compensation plans approved by security holders 1,685,147 $ 8.29 4,647,569 Equity compensation plans not approved by security holders - - - ---------------- ---------------------- 1,685,147 $ 8.29 4,647,569 ================ ====================== 19 Item 6. Selected Financial Data (In thousands, except per share data) The selected historical financial information was derived from, and is qualified by reference to our consolidated financial statements, including the notes thereto, appearing elsewhere in this report. The following data should be read in conjunction with "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations". Years Ended December 31, ------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- Statement of Operations Data: Revenues: Oil and gas production ............................ $ 88,151 $ 105,757 $ 75,940 $ 34,981 $ 20,410 Gas sold - marketing .............................. 6,272 7,417 8,015 7,703 - Gain on sale of oil and gas properties ............ - - 33 287 - ----------- ----------- ----------- ----------- ----------- Total revenues .................................. 94,423 113,174 83,988 42,971 20,410 ----------- ----------- ----------- ----------- ----------- Cost and operating expenses: Lease operating ................................... 16,764 14,806 11,559 5,587 3,193 Gas purchased - marketing ......................... 6,087 7,218 7,788 7,402 - Geological and geophysical expenses ............... 154 1,068 - - - General and administrative ....................... 10,287 9,981 5,409 3,541 2,591 Non-cash compensation expense (general and administrative) .................... 595 3,364 - - - Depreciation, depletion and amortization .......... 43,390 53,428 40,569 22,521 17,442 Impairment of oil and gas properties .............. 6,844 24,891 10,838 7,509 5,072 Loss on unsuccessful property acquisition ......... - 3,147 - - - Other expense ..................................... - - 450 - - ----------- ----------- ----------- ----------- ----------- Total operating expenses .......................... 84,121 117,903 76,613 46,560 28,298 ----------- ----------- ----------- ----------- ----------- Income (loss) from operations ........................ 10,302 (4,729) 7,375 (3,589) (7,888) Other income (expense): Interest income ................................... 73 884 451 202 141 Interest expense .................................. (10,418) (10,039) (11,907) (9,399) (7,963) Other income ...................................... 1,081 - - - - Realized loss on derivative instruments ........... (153) (19,348) (4,662) - - Unrealized gain (loss) on derivative instruments... (8,166) 1,265 (7,249) - - ----------- ----------- ----------- ----------- ----------- Loss before income taxes and extraordinary item ................................ (7,281) (31,967) (15,992) (12,786) (15,710) Income tax benefit-deferred ....................... 2,581 11,186 5,594 1,829 - ----------- ----------- ----------- ----------- ----------- Loss before extraordinary item ....................... (4,700) (20,781) (10,398) (10,957) (15,710) Extraordinary item, net of tax ....................... - (602) - 29,185 - ----------- ----------- ----------- ----------- ----------- Net income (loss) .................................... $ (4,700) $ (21,383) $ (10,398) $ 18,228 $ (15,710) =========== =========== =========== =========== =========== Weighted average number of common shares outstanding - basic and diluted ............ 20,315 19,704 14,286 14,286 11,926 Loss per common share before extraordinary item - basic and diluted .......................... $ (0.23) $ (1.06) $ (0.73) $ (0.77) $ (1.32) Net income (loss) per common share: Basic and diluted ............................... $ (0.23) $ (1.09) $ (0.73) $ 1.28 $ (1.32) Balance Sheet Data: Cash and cash equivalents ............................ $ 6,944 $ 5,294 $ 18,136 $ 17,779 $ 3,411 Working capital ...................................... (13,699) (29,071) (3,835) 14,115 (5,106) Net oil and gas properties ........................... 119,036 133,033 98,725 72,278 47,612 Total assets ......................................... 182,055 177,564 161,993 107,054 61,354 Total debt ........................................... 86,387 100,111 116,529 91,723 62,690 Total liabilities .................................... 143,508 132,572 175,172 109,835 82,363 Shareholders' equity (deficit) ....................... 38,547 44,992 (13,179) (2,781) (21,009) 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview We are engaged in the acquisition, development and production of natural gas and oil properties in the Gulf of Mexico and in the North Sea. We primarily focus our efforts on natural gas and oil properties with proved undeveloped reserves that are economically attractive to us but are not strategic to major or exploration-oriented independent oil and gas companies. We attempt to achieve a high return on our investment in these properties by limiting our up-front acquisition costs and by developing our acquisitions quickly. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S., which require management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities as of the date of the balance sheet as well as the reported amounts of revenues and expenses during the reporting period. We routinely make estimates and judgments about the carrying value of our assets and liabilities that are not readily apparent from other sources. Such estimates and judgments are evaluated and modified as necessary on an ongoing basis. We believe that of our significant accounting policies (see Note 2, Summary of Significant Accounting Policies and Estimates, to our Consolidated Financial Statements), the following may involve a higher degree of judgment and complexity. Oil and Gas Reserves The process of estimating quantities of natural gas and crude oil reserves is very complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various fields make these estimates generally less precise than other estimates included in the financial statement disclosures. We use the units-of-production method to amortize our oil and gas properties. This method requires us to amortize the capitalized costs incurred in developing a property in proportion to the amount of oil and gas produced as a percentage of the amount of proved reserves contained in the property. Accordingly, changes in reserve estimates as described above will cause corresponding changes in depletion expense recognized in periods subsequent to the reserve estimate revision. See the Supplemental Information (unaudited) in our consolidated financial statements for reserve data related to our properties. Oil and Gas Producing Activities We follow the "successful efforts" method of accounting for oil and gas properties. Under this method, lease acquisition costs and intangible drilling and development costs on successful wells and development dry holes are capitalized. Capitalized costs relating to producing properties are depleted on the units-of-production method. Proved developed reserves are used in computing unit rates for drilling and development costs and total proved reserves for depletion rates of leasehold, platform and pipeline costs. Estimated dismantlement, restoration and abandonment costs and estimated residual salvage values are taken into account in determining amortization and depletion provisions. Expenditures for geological and geophysical testing are generally charged to expense unless the costs can be specifically attributed to determining the placement for a future developmental well location. 21 Expenditures for repairs and maintenance are charged to expense as incurred; renewals and betterments are capitalized. The costs and related accumulated depreciation, depletion, and amortization of properties sold or otherwise retired are eliminated from the accounts, and gains or losses on disposition are reflected in the statements of operations. We perform an impairment analysis whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable. An impairment allowance is provided on an unproved property when we determine that the property will not be developed. To determine if a depletable unit is impaired, we compare the net carrying value of the depletable unit to the undiscounted future net cash flows by applying management's estimates of future oil and gas prices to the estimated future production of oil and gas reserves over the economic life of the property. Future net cash flows are based upon our independent reservoir engineer's estimate of proved reserves. In addition, other factors such as probable and possible reserves are taken into consideration when justified by economic conditions and actual or planned drilling or other development activities. For a property determined to be impaired, an impairment loss equal to the difference between the carrying value and the estimated fair value of the impaired property will be recognized. Fair value, on a depletable unit basis, is estimated to be the present value of the aforementioned expected future net cash flows. Any impairment charge incurred is recorded in accumulated depreciation, depletion, impairment and amortization to reduce our recorded basis in the asset. Each part of this calculation is subject to a large degree of judgment, including the determination of the depletable units' estimated reserves, future cash flows and fair value. Contingent Liabilities In preparing financial statements at any point in time, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. As discussed in Part I, Item 3. - "Legal Proceedings" and the Notes to Consolidated Financial Statements, we are involved in actions, which if determined adversely, could have a material negative impact on our financial position, results of operations and cash flows. Management, with the assistance of counsel makes estimates, if determinable, of ATP's probable liabilities and records such amounts in the consolidated financial statements. Such estimates may be the minimum amount of a range of probable loss when no single best estimate is determinable. Disclosure is made, when determinable, of any additional possible amount of loss on these claims, or if such estimate cannot be made, that fact is disclosed. Along with our counsel, we monitor developments related to these legal matters and, when appropriate, we make adjustments to recorded liabilities to reflect current facts and circumstances. Although it is difficult to predict the ultimate outcome of these matters, management believes that the recorded amounts, if any, are reasonable. Price Risk Management Activities As of July 1, 2002, we performed the requisite steps to qualify our derivative instruments for hedge accounting treatment under the provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended. Under SFAS 133 all derivative instruments are recorded on the balance sheet at fair value. Changes in the derivative's fair value are recognized currently in earnings unless specific hedge accounting criteria are met. For qualifying cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income (loss) to the extent the hedge is effective. For qualifying fair value hedges, the gain or loss on the derivative is offset by related results of the hedged item in the statement of operations. Gains and losses on hedging instruments included in accumulated other comprehensive income (loss) are reclassified to oil and gas revenues in the period that the related production is delivered. Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at market value in the consolidated balance sheet, and the associated unrealized gains and losses are recorded as current expense or income in the consolidated statement of operations. Prior to July 1, 2002, gains or losses from our derivative instruments were included in other income (expense). 22 Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our consolidated financial statements provide a meaningful and fair perspective of our company. Results of Operations The following table sets forth selected financial and operating information for our natural gas and oil operations inclusive of the effects of price risk management activities: Years Ended December 31, ------------------------------------------------ 2002 2001 2000 ------------- ------------- ------------- Production: Natural gas (MMcf) .................................... 17,732 20,957 22,410 Oil and condensate (MBbls) ............................ 1,454 790 345 ------------- ------------- ------------- Total (MMcfe) ...................................... 26,457 25,696 24,477 ============= ============= ============= Revenues (in thousands): Natural gas ........................................... $ 56,659 $ 88,908 $ 94,051 Effects of risk management activities (1) ............. (2,764) (19,751) (26,729) ------------- ------------- ------------- Total .............................................. $ 53,895 $ 69,157 $ 67,322 ============= ============= ============= Oil and condensate .................................... $ 32,756 $ 16,849 $ 10,112 Effects of risk management activities (1).............. (615) - (1,494) ------------- ------------- ------------- Total .............................................. $ 32,141 $ 16,849 $ 8,618 ============= ============= ============= Natural gas, oil and condensate ....................... $ 89,415 $ 105,757 $ 104,163 Effects of risk management activities (1).............. (3,379) (19,751) (28,223) ------------- ------------- ------------- Total .............................................. $ 86,036 $ 86,006 $ 75,940 ============= ============= ============= Average sales price per unit: Natural gas (per Mcf) ................................. $ 3.20 $ 4.24 $ 4.20 Effects of risk management activities (per Mcf) ....... (0.16) (0.94) (1.19) ------------- ------------- ------------- Total (per Mcf) .................................... $ 3.04 $ 3.30 $ 3.01 ============= ============= ============= Oil and condensate (per Bbl) .......................... $ 22.53 $ 21.33 $ 29.35 Effects of risk management activities (per Mcf) ....... (0.42) - (4.34) ------------- ------------- ------------- Total (per Bbl) .................................... $ 22.11 $ 21.33 $ 25.01 ============= ============= ============= Natural gas, oil and condensate (per Mcfe) ............ $ 3.38 $ 4.12 $ 4.26 Effects of risk management activities (per Mcfe) ...... (0.13) (0.77) (1.16) ------------- ------------- ------------- Total (per Mcfe) ................................... $ 3.25 $ 3.35 $ 3.10 ============= ============= ============= Expenses (per Mcfe): Lease operating ....................................... $ 0.63 $ 0.58 $ 0.47 General and administrative ............................ 0.39 0.39 0.22 Depreciation, depletion and amortization .............. 1.64 2.08 1.66 - ---------------- (1) Represents the net loss on the settlement of derivatives attributable to actual production. Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 For the year ended December 31, 2002, we reported a net loss of $4.7 million, or $0.23 per share as compared to a net loss of $21.4 million, or $1.09 per share in 2001. Oil and Gas Revenue. Excluding the effects of settled derivatives, our revenue from natural gas and oil production for 2002 decreased 16% compared to 2001, from $105.8 million to $89.4 million. This decrease was primarily due to an approximate 18% decrease in our average sales price per Mcfe from $4.12 per Mcfe in 2001 to $3.38 in 2002. This decrease was partially offset by a 3% increase in production volumes from 25.7 Bcfe to 26.5 Bcfe due primarily to two properties that were completed and began production in 2002. Additionally, one property was completed in September 2001 but did not contribute a full year of production until 2002. 23 Early in the fourth quarter, we were forced to shut-in a majority of our Gulf of Mexico production when Hurricane Lili, a Category 4 storm, blew through the central Gulf. Our current production continues to be hampered by the damage wrought by Hurricane Lili and we estimated a fourth-quarter impact of approximately 1.0 Bcfe. We carry insurance, subject to normal deductibles, that covers both the physical damage and loss of production income, which will partially mitigate the financial impact of this hurricane. Marketing Revenue. Revenues from natural gas marketing activities decreased to $6.3 million in 2002 as compared to $7.4 million in 2001. This decrease was due to a decrease in the sales price per MMBtu. The average sales price per MMBtu decreased from $4.06 in 2001 to $3.44 in 2002. For more information regarding this marketing activity, see Note 13 to the Consolidated Financial Statements. Lease Operating Expense. Our lease operating expense for 2002 increased 13% from $14.8 million ($0.58 per Mcfe) to $16.8 million ($0.63 per Mcfe). This increase was primarily the result of an increase in the number of producing wells we own and an increase in their total production volume. Lease operating expense per Mcfe increased due to higher than expected repairs and maintenance costs on our platforms and costs incurred related to the hurricane and tropical storm. Gas Purchased-Marketing. Our cost of purchased gas was $6.1 million for 2002 compared to $7.2 million for 2001. The average gas cost decreased from $3.96 per MMBtu in 2001 to $3.34 per MMBtu in 2002. For more information regarding this marketing activity, see Note 13 to the Consolidated Financial Statements. Geological and Geophysical. In 2002, we recorded approximately $0.2 million of costs related to the acquisition of 3-D seismic data purchased for certain properties in the U.K Sector - North Sea. In 2001, we recorded $1.1 million of these same costs on properties in both the Gulf of Mexico and the U.K Sector - North Sea. General and Administrative Expense. General and administrative expense increased to $10.3 million for 2002 compared to $10.0 million for 2001. The primary reason for the increase was the result of higher compensation related costs in 2002 which was substantially offset by a bad debt allowance recorded in 2001. Non-Cash Compensation Expense. In 2002, we recorded a non-cash charge to compensation expense of approximately $0.6 million for options granted since September 1999 through the date of our initial public offering ("IPO") on February 5, 2001 (the "measurement date"). The total expected expense as of the measurement date is recognized in the periods in which the option vests. Each option is divided into three equal portions corresponding to the three vesting dates (April 10, 2001, February 9, 2002, and February 9, 2003), with the related compensation cost for each portion amortized straight-line over the period to the vesting date. In 2001, we recorded a non-cash compensation expense of $2.9 million for the above options and an additional non-cash compensation expense of $0.5 million related to certain options granted prior to September 1999 and exercised during 2001. The additional expense was recorded as a result of the manner in which those shares were exercised. Depreciation, Depletion and Amortization Expense. Depreciation, depletion and amortization expense ("DD&A") decreased 19% from $53.4 million in 2001 to $43.4 million in 2002. The average DD&A rate was $1.64 per Mcfe during 2002 compared to $2.08 per Mcfe during 2001. This decrease in the rate was attributable to (1) impairments taken in 2001, (2) higher than expected costs of an abandonment completed in 2001 and (3) a new property brought on line in 2002 with a lower average DD&A rate than those properties producing in 2001. 24 Impairment Expense. On two of our properties in 2002 and eight of our properties in 2001, the future undiscounted cash flows were less than their individual net book value. As a result, we recorded impairments of $6.8 million in 2002 and $24.9 million in 2001. The impairments in 2002 were primarily the result of reductions in recoverable reserves. The impairments in 2001 were primarily the result of drilling a non-commercial development well ($8.3 million), a decrease in expected future gas prices and reductions in recoverable reserves. The impairments were calculated as the difference between the carrying value and the estimated fair value of the impaired depletable unit. Other Income (Expense). Effective July 1, 2002, we qualified for hedge accounting treatment under the provisions of SFAS 133 and began recording any gains or losses on settled derivative instruments as a component of oil and gas revenue. The effective portion of any changes in the fair market value of open positions at the end of the period is recorded in other comprehensive income (loss). The loss on derivative instruments of $8.3 million in 2002 represents amounts recorded prior to July 1, 2002 and is comprised of a realized loss of $0.1 million for derivative contracts settled in the first half of 2002 and an unrealized loss of $8.2 million representing the change in fair market value of the open derivative positions at June 30, 2002. In 2001, we recorded a loss on derivative instruments of $18.1 million. The net loss in 2001 was comprised of a realized loss of $19.3 million for derivative contracts settled in the period and an unrealized gain of $1.2 million representing the change in fair market value of the open derivative positions at December 31, 2001. Interest expense increased by $0.4 million over 2001 due to amounts owed on a long-term contract with a third party and we capitalized $0.3 million of interest for the year ended December 31, 2002 related to one property in the U.K. Sector - North Sea. Other income includes $0.6 million of accrued insurance proceeds related to the loss of production from Hurricane Lili in October 2002 and the forgiveness of interest of $0.4 million related to amounts owed on a long-term contract with a third party. We filed an insurance claim during the fourth quarter of 2002 covering the estimated damages and lost production from the Gulf of Mexico region resulting from the effects of Hurricane Lili in October 2002. Our financial statements reflect probable amounts recoverable, net of deductibles, of approximately $1.5 million for damages to ten properties and lost production on four properties through December 31, 2002. The total claim will be determined when the final documentation is received and approved and any remaining payment related to 2003 will be recorded when we have a firm settlement commitment from the insurance company. Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 For the year ended December 31, 2001, we reported a net loss of $21.4 million, or $1.09 per share as compared to a net loss of $10.4 million, or $0.73 per share in 2000. Oil and Gas Revenue. Excluding the effects of settled derivatives, our revenue from natural gas and oil production for 2001 increased 2% over 2000, from $104.2 million to $105.8 million. This increase resulted from a slight increase in the price of natural gas and a 5% increase in production, partially offset by a 27% decrease in the price of oil. The increase in production volumes from 24.4 Bcfe to 25.7 Bcfe was attributable to 13 properties that were on production during 2001 that were not on production during 2000. This increase in production was offset by the natural decline in our existing offshore properties. Risk management activities, which were included in oil and gas revenues in 2000 would have decreased oil and natural gas revenues by $24.4 million, or $0.95 per Mcfe in 2001 and decreased $28.2 million, or $1.16 per Mcfe in 2000. Marketing Revenue. Revenues from natural gas marketing activities decreased to $7.4 million in 2001 as compared to $8.0 million in 2000. This decrease was due to a decrease in the sales price per MMBtu. The average sales price per MMBtu decreased from $4.38 in 2000 to $4.06 in 2001. For more information regarding this marketing activity, see Note 13 to the Consolidated Financial Statements. 25 Lease Operating Expense. Our lease operating expense for 2001 increased 28% from $11.6 million to $14.8 million. This increase was primarily the result of an increase in the number of producing wells we own and an increase in their total production volume. Additionally, the lease operating expense per Mcfe on those properties acquired in 2001 was higher due to cost structures and contract obligations in place at the time of acquisition. Transportation related costs increased ($0.6 million) and workover spending decreased ($0.9 million) as compared to 2000. Gas Purchased-Marketing. Our cost of purchased gas was $7.2 million for 2001 compared to $7.8 million for 2000. The average gas cost decreased from $4.26 per MMBtu in 2000 to $3.96 per MMBtu in 2001. For more information regarding this marketing activity, see Note 13 to the Consolidated Financial Statements. Geological and Geophysical. In 2001, we recorded $1.1 million of costs related to the acquisition of 3-D seismic data purchased for certain properties in the Gulf of Mexico and the U.K. Sector - North Sea. General and Administrative Expense. General and administrative expense increased to $10.0 million for 2001 compared to $5.4 million for 2000. The primary reason for the increase was the result of compensation and related expenses due to an increase in the number of employees in our Houston office from 28 at the end of 2000 to 39 at the end of 2001 ($0.9 million) and the opening of our U.K. office in the third quarter of 2000 ($1.7 million). As a result of becoming a public company in 2001, we incurred costs such as insurance, filing fees, professional fees, investor relations expenses and other expenses related to public company requirements ($1.3 million). Non-Cash Compensation Expense. In 2001, we recorded a non-cash compensation expense of $3.4 million. A portion of the expense ($2.9 million) is related to options granted from September 1999 to the date of our IPO and is based on the difference between the exercise price for those options and the fair market value of our stock as determined by the IPO price of $14.00 per share. The expense is recognized in the periods in which the options vest. Each option is divided into three equal portions corresponding to the three vesting dates, with the related compensation cost amortized straight-line over the period between the IPO date and the vesting date. The remaining expense ($0.5 million) was related to certain options granted prior to September 1999 and exercised in the current year. The expense was recorded on those exercises as the method in which those shares were exercised required us to account for the options under variable accounting. Depreciation, Depletion and Amortization Expense. Depreciation, depletion and amortization expense increased 32% from $40.6 million in 2000 to $53.4 million in 2001. The average DD&A rate was $2.08 per Mcfe during 2001 compared to $1.66 per Mcfe during 2000. Impairment Expense. As of December 31, 2001, the future undiscounted cash flows for our properties were $354.2 million and the net book value for the properties was $157.9 million before current year impairment expense. At December 31, 2000, the future undiscounted cash flows for our properties were $931.2 million and the net book value for the properties was $109.6 million before current year impairment expense. However, on eight of our properties in 2001 and three of our properties in 2000, the future undiscounted cash flows were less than their individual net book value. As a result, we recorded impairments of $24.9 million in 2001 and $10.8 million in 2000. The impairments in 2001 were primarily the result of drilling a non-commercial development well at our Main Pass 282 property ($8.3 million), a decrease in expected future gas prices and reductions in recoverable reserves. In 2000, the impairments were primarily the result of a reduction in recoverable reserves individually attributable to the particular properties. Other Income (Expense). In 2001, we recorded a loss on derivative instruments of $18.1 million comprised of a realized loss of $19.3 million and an unrealized gain of $1.2 million. The realized loss represents derivative contracts settled in 2001, while the offsetting gain represents the fair market value of the open derivative positions at December 31, 2001. Prior to the adoption of SFAS 133, realized gains or losses 26 were recorded as a component of revenue. For 2000 we recorded an expense of $4.3 million ($1.7 million realized and $2.6 million unrealized) on a natural gas derivative position as a result of our hedging position exceeding our expected production in an upcoming period. In addition, we recorded an expense of $7.6 million ($3.0 million realized and $4.6 million unrealized) related to losses associated with our written call option contracts. In both of these situations in 2000, we were required to account for the positions using the mark-to-market method. Interest expense decreased from $11.9 million in 2000 to $10.0 million in 2001 primarily due to lower debt levels following the use of proceeds from our IPO and as a result of lower interest rates. We capitalized zero and $0.7 million of interest for the years ended December 31, 2001 and 2000, respectively. Liquidity and Capital Resources General We have financed our acquisition and development activities through a combination of project-based development arrangements, bank borrowings and proceeds from our February 2001 IPO, as well as cash from operations and the sale on a promoted basis of interests in selected properties. We intend to finance our near-term development projects in the Gulf of Mexico and North Sea through available cash flows and the potential sell down of interests in the development projects. As operator of all of our projects in development, we have the ability to significantly control the timing of most of our capital expenditures. We believe the cash flows from operating activities combined with our ability to control the timing of substantially all of our future development and acquisition requirements will provide us with the flexibility and liquidity to meet our future planned capital requirements. However, future cash flows are subject to a number of variables including changes in the borrowing base, the level of production from our properties, oil and natural gas prices and the impact, if any, of commitments and contingencies. Future borrowings under credit facilities are subject to variables including the lenders' practices and policies, changes in the prices of oil and natural gas and changes in our oil and gas reserves. A material reduction in the borrowing base or the institution of a monthly reduction amount by our lenders would have a material negative impact on our cash flows and our ability to fund future obligations. No assurance can be given that operations and other capital resources will provide cash in sufficient amounts to maintain planned levels of operations and capital expenditures. Historically, in periods of reduced availability of funds from either cash flows or credit sources we have delayed planned capital expenditures and will continue do to so when necessary. While the delay decreases the amount of capital expenditures in the current period, it could negatively impact our future revenues and cash flows. Cash Flows Years Ended December 31, ------------------------------------ 2002 2001 2000 ---------- ---------- ---------- (in thousands) Cash provided by (used in): Operating activities ......... $ 51,298 $ 41,356 $ 57,157 Investing activities ......... (35,167) (110,810) (76,835) Financing activities ......... (14,481) 56,612 20,035 Operating activities. Net cash provided by operating activities in 2002 was $51.3 million compared to $41.4 million in 2001. The change in accounts payable reflects the primary reason for this increase as we utilized a substantial portion of our operating cash flow in 2001 to reduce amounts owed to third parties. This increase was partially offset by an 18% decrease in our average sales price per Mcfe. Restricted cash of $0.4 million represents funds set aside to satisfy payment conditions in our drilling contract for development in the U.K. 27 Investing activities. Cash used in investing activities decreased in 2002 to $35.2 million of which $34.9 was for acquisition and development activities. We incurred no costs for two acquisitions made in 2002 and approximately $1.0 million for the acquisition of an undeveloped block in the Gulf of Mexico. Developmental capital expenditures in the Gulf of Mexico and the North Sea were approximately $17.5 million and $16.4 million, respectively. In 2001, capital expenditures for acquisition and development were $25.9 million and $78.8 million, respectively, and $5.6 million was used to purchase the overriding royalty interests associated with the repayment of our non-recourse debt. Financing activities. Cash used in financing activities in 2002 represents net principal payments on our credit facility. Cash provided from financing activities in 2001 included the proceeds from our initial public offering in February 2001 of $78.3 million, repayment of prior credit facilities of $119.9 million and proceeds of $100.0 million from our credit facility and promissory note. Amounts borrowed under our credit agreements were as follows for the dates indicated (in thousands): December 31, ------------------------ 2002 2001 ---------- ----------- Credit facility .................................................... $ 56,000 $ 70,000 Note payable, net of unamortized discount of $863 and $1,139 ....... 30,387 30,111 ---------- ----------- Total debt ....................................................... $ 86,387 $ 100,111 ========== =========== Credit Facility We have a $100.0 million senior-secured revolving credit facility which is secured by substantially all of our U.S. oil and gas properties, as well as by approximately two-thirds of the capital stock of our foreign subsidiaries and is guaranteed by our wholly owned subsidiary, ATP Energy, Inc. The amount available for borrowing under the credit facility is limited to the loan value, as determined by the bank, of oil and gas properties pledged under the facility. At December 31, 2002, the borrowing base was $56.0 million with no further scheduled borrowing base reduction. If our outstanding balance exceeds our borrowing base at any time, we are required to repay such excess within 30 days and our interest rate during the time an excess exists is increased by 2.00%. On March 25, 2003, we entered into an agreement with our lenders to defer our scheduled borrowing base redetermination until the next scheduled redetermination in May 2003. This agreement reaffirmed the current borrowing base of $56.0 million and the borrowing base reduction amount of zero. As part of this agreement we committed to reduce the amount outstanding under our borrowing base by $6.0 million between March 28, 2003 and May 31, 2003. Additionally, if the aggregate principal amount of the loan exceeds the required month-end reductions of $1.5 million, $2.5 million and $2.0 million during the period from March 28, 2003 to May 31, 2003, such principal amounts in excess of the applicable period limits shall bear interest at a per annum rate of interest equal to the adjusted reference rate plus 2%. Further, the lenders agreed to raise the limit of advances available to be made to our foreign subsidiaries and specified certain future events which would require our foreign subsidiaries to return the incremental advances to the parent. On March 28, 2003, we made a payment of $1.5 million reducing our outstanding principal to $54.5 million. At the next scheduled redetermination in May 2003, the lenders can increase or decrease the borrowing base and re-establish the monthly reduction amount. A material reduction in the borrowing base or a material increase in the monthly reduction amount by the lender would have a material negative impact on our cash flows and our ability to fund future operations. Advances under the credit facility can be in the form of either base rate loans or Eurodollar loans. The interest on a base rate loan is a fluctuating rate equal to the higher of the Federal funds rate plus 0.5% and the bank base rate, plus a margin of 0.25%, 0.50%, 0.75% or 1.00% depending on the amount outstanding under the credit agreement. The interest on a Eurodollar loan is equal to the Eurodollar rate, plus a margin of 2.25%, 2.50%, 2.875%, or 3.125% depending on the amount outstanding under the credit facility. The credit facility matures in May 2004. Our credit facility contains conditions and restrictive provisions, among other things, (1) limiting us to enter into any arrangement to sell or transfer any of our material property, (2) prohibiting a merger into or consolidation with any other person or sell or dispose of all or substantially all of our assets, (3) maintaining certain financial ratios and (4) limitations on advances to our foreign subsidiaries. 28 Note Payable Effective June 29, 2001, we issued a note payable to a purchaser for a face principal amount of $31.3 million which matures in June 2005 and bears interest at a fixed rate of 11.5% per annum. The note is secured by second priority liens on substantially all of our U.S. oil and gas properties and is subordinated in right of payment to our existing senior indebtedness. We executed an agreement in connection with the note which contains conditions and restrictive provisions and requires the maintenance of certain financial ratios. Upon consent of the purchaser, which shall not be unreasonably withheld, the note may be repaid prior to the maturity date with an additional repayment premium based on the percentage of the principal amount paid, ranging from 4.5% during the first year to 16.5% in the final year of payment. If the note is paid at maturity, the maximum payment premium of 16.5% is required. The expected repayment premium is being amortized to interest expense straight-line, over the term of the note which approximates the effective interest method. The resulting liability is included in other long-term liabilities on the consolidated balance sheet. In July 2001, we received proceeds of $30.0 million in consideration for the issuance of the note. The discount of $1.3 million is being amortized to interest expense using the effective interest method. The amount available for borrowing under the note is limited to the loan value of oil and gas properties pledged under the note, as determined by the purchaser. The purchaser has the right to make a redetermination of the borrowing base at least once every six months. We were not notified of any change in the borrowing base in 2002. If our outstanding balance exceeds the borrowing base at any time, we are required to repay such excess within 10 days subject to the provisions of the agreement. A material reduction in the borrowing base by the lender would have a material negative impact on our cash flows and our ability to fund future obligations. As of December 31, 2002, all of our borrowing base under the agreement was outstanding. As of December 31, 2002, we were in compliance with all of the financial covenants of our credit facility and note payable agreements. Working Capital At December 31, 2002, we had a working capital deficit of approximately $13.7 million, an improvement over our working capital deficit of $29.1 million at December 31, 2001. In compliance with the definition of working capital in our credit facility, which excludes current maturities of long-term debt and the current portion of assets and liabilities from derivatives, we had working capital of approximately $0.3 million at December 31, 2002 as compared to a deficit of approximately $9.0 million at December 31, 2001. We believe the cash flows from operating activities combined with our ability to control the timing of substantially all of our future development and acquisition requirements will provide us with the flexibility and liquidity to meet our future planned capital requirements. Our 2003 planned development and acquisition programs are projected to be funded substantially by available cash flow from our 2003 operations. We believe the cash flows from operating activities combined with our ability to control the timing of substantially all of our future development and acquisition requirements will provide us with the flexibility and liquidity to meet our future capital requirements. In addition to these measures, we are currently in discussions with potential investors to provide additional capital. These discussions involve increases to our current credit facilities, new credit facilities and the sale of interests in selected properties. We have also explored the possibility of the issuance of new debt or equity. Completion of any of these potential financings would expand our capabilities to further reduce our outstanding indebtedness, improve our working capital position and may allow us to expand or accelerate our future development and acquisition programs. There can be no assurance however, that we will be successful in negotiating any of these transactions or that the form of the transaction will be acceptable to both the potential investor and our management or our board of directors. 29 Commitments We have various commitments primarily related to leases for office space, other property and equipment and other agreements. We expect to fund these commitments with cash generated from operations. The following table summarizes certain contractual obligations at December 31, 2002 (in thousands): Payments Due By Period ----------------------------------------------------------- Less Than After Contractual Obligation (1) Total 1 Year 1-2 Years 3-4 Years 4 Years --------------------------------------- ----------- ----------- --------- ----------- ------- Total debt .................................. $ 87,250 $ 6,000 $ 81,250 $ - $ - Interest expense on credit facility (2) ..... 3,971 2,940 1,031 - - Interest expense on promissory note (3) ..... 12,332 4,940 7,392 - - Non-cancelable operating leases ............. 2,949 539 910 503 997 Contractor commitment (4) ................... 11,146 -- 11,146 - - ----------- ----------- --------- ----------- ------- Total contractual obligations ........... $ 117,648 $ 14,419 $ 101,729 $ 503 $ 997 =========== =========== ========= =========== ======= - ------------- (1) Does not include any amounts related to contingencies discussed below. (2) Includes interest based on rates and monthly reduction amounts in effect at December 31, 2002. (3) Includes 11.5% interest and repayment premium. (4) Includes 12% interest. Contingencies On August 28, 2001 ATP entered into a written agreement to acquire a property in the Gulf of Mexico during September 2001. On October 9, 2001 the agreement was amended to ultimately extend the closing date until October 31, 2001 in exchange for payments made by ATP totaling $3.0 million. This amendment also contained an arrangement whereby if ATP did not close on the property, and if sellers sold the property to a third party with a sale that met specific contract requirements, ATP would be required to execute a six month note for payment of the differential. Since ATP did not obtain the financing for the acquisition by October 31, 2001, the transaction did not close by that date; however, the parties' intensive work toward closing continued beyond that date without interruption. While working on the closing for the property with ATP, the sellers sold the property to a third party without informing ATP until after the closing had taken place. ATP filed an action in the District Court of Harris County, Texas against the sellers, generally alleging improper sale of the offshore property to a third party and breach of contract, and seeking unspecified damages from the sellers. The case is encaptioned ATP Oil & Gas Corporation vs. Legacy Resources Co., L.P. et al, No. 2001-63224 in the 269th Judicial District Court of Harris County, Texas. At the same time sellers notified ATP of their sale to a third party, the sellers had a demand made upon ATP for execution of a six month note for the amount of an alleged differential of approximately $12.3 million plus interest at 16%. Substantiation of the amount and validity of the demand could not be ascertained based on the content of the demand received. ATP contested the entire demand. The judge has abated the litigation, until arbitration pursuant to the underlying agreements between the sellers and ATP is completed. A tentative date of May 19, 2003 has been scheduled for the arbitration with an alternative date in September 2003. Due to the inherent uncertainties involving contested facts and legal issues a prediction as to the likely outcome cannot be made with any degree of certainty, and we have not accrued any amount related to this matter. While we are seeking recovery of the amounts previously paid and discussed above, the $3.0 million has been charged to earnings along with other costs related to this matter. ATP intends to vigorously defend against the sellers' claims and forcefully pursue its own claims in this matter. In August 2001, Burlington Resources Inc. filed suit against ATP alleging formation of a contract with ATP and our breach of the alleged contract. The complaint seeks compensatory damages of approximately $1.1 million. We believe that this claim is without merit, and we intend to defend it vigorously. In 2001 we purchased three properties in the U.K. Sector - North Sea for approximately $3.1 million. In accordance with the purchase agreement, we also committed to pay future consideration contingent upon the successful development and operation of the properties. The contingent consideration for each property includes amounts to be paid upon achieving first commercial production and upon achieving designated cumulative production levels. Active development is in progress on our Helvellyn property and future development is planned on the other two properties. First commercial production from the Helvellyn property may occur sometime in the first half of 2003. Although a significant portion of the work required has been completed, there remains significant additional work to be performed before this property can produce commercially. That work includes completion, hook-up, and testing of the pipeline and production facilities and final negotiation of certain terms in our transportation and processing agreements. Accordingly, there can be no assurance of eventual production from this development until the aforementioned activities are completed successfully. At such time, the required amount will accrued for payment to the seller and capitalized as acquisition costs. 30 We are also, in the ordinary course of business, a claimant and/or defendant in various legal proceedings. Management does not believe that the outcome of these legal proceedings, individually, and in the aggregate will have a materially adverse effect on our financial condition, results of operations or cash flows. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 provides accounting requirements for retirement obligations associated with tangible long-lived assets, including: 1) the timing of liability recognition; 2) initial measurement of the liability; 3) allocation of asset retirement cost to expense; 4) subsequent measurement of the liability; and 5) financial statement disclosures. SFAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long- lived asset and subsequently allocated to expense using a systematic and rational method. The statement is effective for fiscal years beginning after June 15, 2002 and we adopted the statement on January 1, 2003. The transition adjustment resulting from the adoption of SFAS 143 will be reported as a cumulative effect of a change in accounting principle. We have not yet completed our assessment of the impact of SFAS 143 on our financial condition and results of operations. However, we expect that adoption of the statement will result in increases in the capitalized costs of our oil and properties and in the recognition of additional liabilities related to asset retirement obligations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, No. 44, and No. 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). Among other things, SFAS 145 requires gains and losses from early extinguishment of debt to be included in income from continuing operations instead of being classified as extraordinary items as previously required by generally accepted accounting principles. SFAS 145 is effective for fiscal years beginning after May 15, 2002 and we adopted the statement on January 1, 2003. Any gain or loss on early extinguishment of debt that was classified as an extraordinary item in periods prior to adoption must be reclassified into income from continuing operations. The adoption of SFAS 145 will require the $0.6 million (net of tax) of extraordinary loss for the year ended December 31, 2001 to be reclassified to interest expense and income tax benefit. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring". SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. We adopted the provisions of SFAS 146 on January 1, 2003 and the adoption did not have an effect on our financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure an amendment of FASB Statement No. 12" ("SFAS 148"). This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to 31 stock-based employee compensation. Finally, this statement amends Accounting Principles Board Opinion No. 28, "Interim Financial Reporting" ("APB 28"), to require disclosure about those effects in interim financial information. We intend to continue to account for stock-based compensation based on the provisions of APB Opinion No. 25. The amended disclosure requirements have been incorporated in Note 2 to the Consolidated Financial Statements. In November 2002, the FASB issued FASB Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantee of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45's provisions for initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure provisions apply to financial statements for periods ending after December 15, 2002. We do not currently have guarantees that require disclosure. We adopted the measurement provisions of this statement in the first quarter of 2003 and the adoption did not have an effect on our financial position or results of operations. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires a company to consolidate a variable interest entity if it is designated as the primary beneficiary of that entity even if the company does not have a majority of voting interest. A variable interest entity is generally defined as an entity where its equity is unable to finance its activities or where the owners of the entity lack the risk and rewards of ownership. The provisions of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. The adoption of FIN 46 is not currently expected to have an effect on our financial position or results of operations when adopted. Emerging Issues Task Force ("EITF") Issue No. 02-03, "Recognition and Reporting of Gains and Losses on Energy Trading Contracts" under EITF Issues No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" was issued in June 2002. EITF Issue No. 02-03 addresses certain issues related to energy trading activities, including (a) gross versus net presentation in the income statement, (b) whether the initial fair value of an energy trading contract can be other than the price at which it was exchanged, and (c) accounting for inventory utilized in energy trading activities. As of January 1, 2003, we will present our gas sold and purchased activities in the statement of operations for all periods on a net rather than a gross basis. The change will decrease reported revenues and costs and operating expenses, but will have no effect on operating income or cash flow. The remaining provisions effective January 1, 2003 will have no impact on our financial statements. For more information regarding this marketing activity, see Note 13 to the Consolidated Financial Statements. Factors That May Affect Future Results You should carefully consider the risks described below in evaluating the other statements made herein. The risks described below are not the only risks of our company. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business operations. Our business, financial condition, results of operations or the trading price of our common stock could be adversely affected by any of these risks. We have debt, trade payables and related interest payment requirements that may restrict our future operations and impair our ability to meet our obligations. Our debt, trade payables and related interest payment requirements may have important consequences. For instance, it could: . make it more difficult or render us unable to satisfy our financial obligations; . require us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, which will reduce funds available for other business purposes; . increase our vulnerability to general adverse economic and industry conditions; . limit our flexibility in planning for or reacting to changes in our business and the industry in which we operate; . place us at a competitive disadvantage compared to some of our competitors that have less financial leverage; and . limit our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporate purposes. 32 Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control. We cannot provide assurance that our business will generate sufficient cash flow or that future financings will be available to provide sufficient proceeds to meet these obligations. The successful execution of our business strategy and the maintenance of our economic viability are also contingent upon our ability me meet our financial obligations. Our debt instruments impose restrictions on us that may affect our ability to successfully operate our business. Our bank credit facility and our 11.5% fixed rate note contain customary restrictions, including covenants limiting our ability to incur additional debt, grant liens, make investments, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, make capital expenditures and enter into transactions with affiliates. We also are required to meet specified financial ratios under the terms of our bank credit facilities. These restrictions may make it difficult for us to successfully execute our business strategy or to compete in our industry with companies not similarly restricted. Our bank credit facility matures in May 2004 and our 11.5% note matures in June 2005, at which time we will be required to repay or refinance those borrowings. We cannot provide assurance that we will be able to obtain replacement financing at that time or that any available replacement financing will be on terms acceptable to us. If we are unable to obtain acceptable replacement financing, we will not be able to satisfy our obligations under our bank credit facility or note due in 2005 and may be required to take other actions to avoid defaulting on those facilities, including selling assets or surrendering assets to our lenders, which would not otherwise be in our long-term economic interest. Our properties are subject to rapid production declines and we require significant capital expenditures to replace our reserves at a faster rate than companies whose reserves have longer production periods. We may not be able to identify or complete the acquisition of properties with sufficient proved reserves to implement our business strategy. Production of reserves from reservoirs in the Gulf of Mexico generally declines more rapidly than production from reservoirs in many other producing regions of the world. This results in recovery of a relatively higher percentage of reserves from properties in the Gulf of Mexico during the initial years of production. As our reserves decline from production, we must incur significant capital expenditures to replace declining production. As a result, in order to increase our reserves, we must replace our reserves with newly-acquired properties. Also, our return on capital for a particular property depends significantly on prices prevailing during the relatively short production period of that property. As of December 31, 2002 and 2001, our reserve life index was 8.7 years and 9.1 years, respectively. We may not be able to identify or complete the acquisition of properties with sufficient proved undeveloped reserves to implement our business strategy. As we deplete our existing reserves we must identify, acquire and develop properties through new acquisitions or our level of production and cash flows will be adversely affected. The availability of properties for acquisition depends largely on the divesting practices of other natural gas and oil companies, commodity prices, general economic conditions and other factors that we cannot control or influence. A substantial decrease in the availability of proved oil and gas properties in our areas of operation, or a substantial increase in the cost to acquire these properties, would adversely affect our ability to replace our reserves. 33 Our actual drilling results are likely to differ from our estimates of proved reserves. We may experience production that is less than estimated in our reserve reports and drilling costs that are greater than estimated in our reserve reports. Such differences may be material. Estimates of our natural gas and oil reserves and the costs associated with developing these reserves may not be accurate. Development of our reserves may not occur as scheduled and the actual results may not be as estimated. Drilling activity may result in downward adjustments in reserves or higher than estimated costs. Our estimates of our proved natural gas and oil reserves and the estimated future net revenues from such reserves are based upon various assumptions, including assumptions required by the SEC relating to natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. This process requires significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. Therefore, these estimates are inherently imprecise and the quality and reliability of this data can vary. Any significant variance could materially affect the estimated quantities and PV-10 of reserves set forth in this annual report. Our properties may also be susceptible to hydrocarbon drainage from production by other operators on adjacent properties. In addition, we will likely adjust estimates of proved reserves to reflect production history, results of development, prevailing oil and natural gas prices and other factors, many of which are beyond our control. Actual production, revenues, taxes, development expenditures and operating expenses with respect to our reserves may vary materially from our estimates. If we are not able to generate sufficient funds from our operations and other financing sources, we may not be able to finance our planned development activity or acquisitions or service our debt. We have historically needed and will continue to need substantial amounts of cash to fund our capital expenditure and working capital requirements. Our ongoing capital requirements consist primarily of funding acquisition, development and abandonment of oil and gas reserves and to meet our debt service obligations. Our capital expenditures were $34.9 million during 2002, $110.3 million during 2001 and $76.5 million during 2000. For 2003, we plan to finance anticipated expenses, debt service and acquisition and development requirements with funds generated from the following sources: . cash provided by operating activities; . funds available under new credit facilities; . the potential increased availability from our existing credit facilities; . extended financing arrangements with suppliers and service providers; . net cash proceeds from the sale of assets, debt or equity; and . the potential issuance of new debt or equity. Our projected cash flows provide the necessary funds for our debt service and our planned Gulf of Mexico developments and we intend to finance our planned North Sea development with projected cash flows and potential new financing arrangements. Low commodity prices, production problems, disappointing drilling results and other factors beyond our control could reduce our funds from operations and may restrict our ability to obtain additional financing. In addition, financing may not be available to us in the future on acceptable terms or at all. In the event additional capital is not available, we may curtail our acquisition, drilling, development and other activities or be forced to sell some of our assets on an untimely or unfavorable basis. In addition, we may not be able to pay interest and principal on our debt obligations. 34 Natural gas and oil prices are volatile, and low prices have had in the past and could have in the future a material adverse impact on our business. Our revenues, profitability and future growth and the carrying value of our properties depend substantially on the prices we realize for our natural gas and oil production. Because approximately 85% of our estimated proved reserves as of December 31, 2002 were natural gas reserves, our financial results are more sensitive to movements in natural gas prices. Our realized prices also affect the amount of cash flow available for capital expenditures and our ability to borrow and raise additional capital. Historically, the markets for natural gas and oil have been volatile, and they are likely to continue to be volatile in the future. For example, natural gas and oil prices increased significantly in late 2000 and steadily declined in 2001, only to climb again in 2002. Among the factors that can cause this volatility are: . worldwide or regional demand for energy, which is affected by economic conditions; . the domestic and foreign supply of natural gas and oil; . weather conditions; . domestic and foreign governmental regulations; . political conditions in natural gas or oil producing regions; . the ability of members of the Organization of Petroleum Exporting Countries to agree upon and maintain oil prices and production levels; and . the price and availability of alternative fuels. It is impossible to predict natural gas and oil price movements with certainty. Lower natural gas and oil prices may not only decrease our revenues on a per unit basis but also may reduce the amount of natural gas and oil that we can produce economically. A substantial or extended decline in natural gas and oil prices may materially and adversely affect our future business, financial condition, results of operations, liquidity and ability to finance planned capital expenditures. Further, oil prices and natural gas prices do not necessarily move together. Our price risk management decisions may reduce our potential gains from increases in commodity prices and may result in losses. We periodically utilize derivative instruments with respect to a portion of our expected production. These instruments expose us to risk of financial loss if: . production is less than expected; . the other party to the derivative instrument defaults on its contract obligations; or . there is an adverse change in the expected differential between the underlying price in the derivative instrument and actual prices received. Our results of operations may be negatively impacted by our derivative instruments in the future and these instruments may limit any benefit we would receive from increases in the prices for natural gas and oil. For the years ended December 31, 2002, 2001 and 2000, we realized a loss of $3.4 million, $19.7 million and $28.2 million, respectively. See Item 7a. "Quantitative and Qualitative Disclosure about Market Risk" for volume and price information on our price risk management activities. 35 We may incur substantial impairment writedowns. If management's estimates of the recoverable reserves on a property are revised downward or if natural gas and oil prices decline, we may be required to record additional non-cash impairment writedowns in the future, which would result in a negative impact to our financial position. In addition, future writedowns to our properties could result in corresponding reductions of our borrowing base under our credit facility and promissory note. We review our proved oil and gas properties for impairment on a depletable unit basis when circumstances suggest there is a need for such a review. To determine if a depletable unit is impaired, we compare the carrying value of the depletable unit to the undiscounted future net cash flows by applying management's estimates of future oil and gas prices to the estimated future production of oil and gas reserves over the economic life of the property. Future net cash flows are based upon our independent reservoir engineer's estimate of proved reserves. In addition, other factors such as probable and possible reserves are taken into consideration when justified by economic conditions. For each property determined to be impaired, we recognize an impairment loss equal to the difference between the estimated fair value and the carrying value of the property on a depletable unit basis. Fair value is estimated to be the present value of the aforementioned expected future net cash flows. Any impairment charge incurred is recorded in accumulated depreciation, depletion, impairment and amortization to reduce our recorded basis in the asset. Each part of this calculation is subject to a large degree of judgment, including the determination of the depletable units' estimated reserves, future cash flows and fair value. We recorded impairments of $6.8 million, $24.9 million and $10.8 million for the years ended December 31, 2002, 2001 and 2000, respectively. Management's assumptions used in calculating oil and gas reserves or regarding the future cash flows or fair value of our properties are subject to change in the future. Any change could cause impairment expense to be recorded, impacting our net income or loss and our basis in the related asset. Any change in reserves directly impacts our estimate of future cash flows from the property, as well as the property's fair value. Additionally, as management's views related to future prices change, the change will affect the estimate of future net cash flows and the fair value estimates. Changes in either of these amounts will directly impact the calculation of impairment. The natural gas and oil business involves many uncertainties and operating risks that can prevent us from realizing profits and can cause substantial losses. Our development activities may be unsuccessful for many reasons, including cost overruns, equipment shortages and mechanical difficulties. Moreover, the successful drilling of a natural gas or oil well does not ensure a profit on investment. A variety of factors, both geological and market-related, can cause a well to become uneconomical or only marginally economic. In addition to their cost, unsuccessful wells can hurt our efforts to replace reserves. The natural gas and oil business involves a variety of operating risks, including: . fires; . explosions; . blow-outs and surface cratering; . uncontrollable flows of natural gas, oil and formation water; . pipe, cement, subsea well or pipeline failures; . casing collapses; . embedded oil field drilling and service tools; . abnormally pressured formations; and . environmental hazards, such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases. 36 If we experience any of these problems, it could affect well bores, platforms, gathering systems and processing facilities, which could adversely affect our ability to conduct operations. We could also incur substantial losses as a result of: . injury or loss of life; . severe damage to and destruction of property, natural resources and equipment; . pollution and other environmental damage; . clean-up responsibilities; . regulatory investigation and penalties; . suspension of our operations; and . repairs to resume operations. Offshore operations are also subject to a variety of operating risks peculiar to the marine environment, such as capsizing, collisions and damage or loss from hurricanes or other adverse weather conditions. These conditions can cause substantial damage to facilities and interrupt production. As a result, we could incur substantial liabilities that could reduce or eliminate the funds available for development or leasehold acquisitions, or result in loss of equipment and properties. Terrorist Attacks or Similar Hostilities May Adversely Impact Our Results of Operations. The impact that future terrorist attacks or regional hostilities (particularly in the Middle East) may have on the energy industry in general, and on us in particular, is not known at the time. Uncertainty surrounding military strikes or a sustained military campaign may affect our operations in unpredictable ways, including disruptions of fuel supplies and markets, particularly oil, and the possibility that infrastructure facilities, including pipelines, production facilities, processing plants and refineries, could be direct targets of, or indirect casualties of, an act of terror or war. Moreover, we have incurred additional costs since the terrorist attacks of September 11, 2001 to safeguard certain of our assets and we may be required to incur significant additional costs in the future. The terrorist attacks on September 11, 2001 and the changes in the insurance markets attributable to such attacks have made certain types of insurance more difficult for us to obtain. There can be no assurance that insurance will be available to us without significant additional costs. A lower level of economic activity could also result in a decline in energy consumption which could adversely affect our revenues or restrict our future growth. Instability in the financial markets as a result of terrorism or war could also affect our ability to raise capital. Our insurance coverage may not be sufficient to cover some liabilities or losses which we may incur. The occurrence of a significant accident or other event not fully covered by our insurance could have a material adverse effect on our operations and financial condition. Our insurance does not protect us against all operational risks. We do not carry business interruption insurance at levels that would provide enough funds for us to continue operating without access to other funds. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. Because third party drilling contractors are used to drill our wells, we may not realize the full benefit of workmen's compensation laws in dealing with their employees. In addition, pollution and environmental risks generally are not fully insurable. We may be unable to identify liabilities associated with the properties that we acquire or obtain protection from sellers against them. The acquisition of properties with proved undeveloped reserves requires us to assess a number of factors, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments, we perform a review of the subject properties, but such a review will not reveal all existing or potential problems. 37 In the course of our due diligence, we may not inspect every well, platform or pipeline. We cannot necessarily observe structural and environmental problems, such as pipeline corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities that it created. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oilfield services could adversely affect our ability to execute on a timely basis our development plans within our budget. Shortages or an increase in cost of drilling rigs, equipment, supplies or personnel could delay or adversely affect our operations, which could have a material adverse effect on our business, financial condition and results of operations. In periods of increased drilling activity in the Gulf of Mexico, we may experience increases in associated costs, including those related to drilling rigs, equipment, supplies and personnel and the services and products of other vendors to the industry. Increased drilling activity in the Gulf of Mexico also decreases the availability of offshore rigs. These costs may increase further and necessary equipment and services may not be available to us at economical prices. Competition in our industry is intense, and we are smaller and have a more limited operating history than some of our competitors in the Gulf of Mexico and in the North Sea. We compete with major and independent natural gas and oil companies for property acquisitions. We also compete for the equipment and labor required to operate and to develop these properties. Some of our competitors have substantially greater financial and other resources than us. In addition, larger competitors may be able to absorb the burden of any changes in federal, state and local laws and regulations more easily than we can, which would adversely affect our competitive position. These competitors may be able to pay more for natural gas and oil properties and may be able to define, evaluate, bid for and acquire a greater number of properties than we can. Our ability to acquire additional properties and develop new and existing properties in the future will depend on our ability to conduct operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment. In addition, some of our competitors have been operating in the Gulf of Mexico and in the North Sea for a much longer time than we have and have demonstrated the ability to operate through industry cycles. Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations. Our success will depend on our ability to retain and attract experienced geoscientists and other professional staff. As of December 31, 2002, we had 13 engineers, geologist/geophysicists and other technical personnel in our Houston office and five engineers, geologist/geophysicists and other technical personnel in our London location. We depend to a large extent on the efforts, technical expertise and continued employment of these personnel and members of our management team. If a significant number of them resign or become unable to continue in their present role and if they are not adequately replaced, our business operations could be adversely affected. Rapid growth may place significant demands on our resources. We have experienced rapid growth in our operations and expect that significant expansion of our operations will continue. Our rapid growth has placed, and our anticipated future growth will continue to place, a significant demand on our managerial, operational and financial resources due to: . the need to manage relationships with various strategic partners and other third parties; . difficulties in hiring and retaining skilled personnel necessary to support our business; . the need to train and manage a growing employee base; and . pressures for the continued development of our financial and information management systems. 38 If we have not made adequate allowances for the costs and risks associated with this expansion or if our systems, procedures or controls are not adequate to support our operations, our business could be adversely impacted. We are subject to complex laws and regulations, including environmental regulations that can adversely affect the cost, manner or feasibility of doing business. Development, production and sale of natural gas and oil in the U.S., especially in the Gulf of Mexico, and in the North Sea, are subject to extensive laws and regulations, including environmental laws and regulations. We may be required to make large expenditures to comply with environmental and other governmental regulations. Matters subject to regulation include: . discharge permits for drilling operations; . bonds for ownership, development and production of oil and gas properties; . reports concerning operations; and . taxation. Under these laws and regulations, we could be liable for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages. Failure to comply with these laws and regulations also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover, these laws and regulations could change in ways that substantially increase our costs. Accordingly, any of these liabilities, penalties, suspensions, terminations or regulatory changes could materially adversely affect our financial condition and results of operations. Members of our management team own a significant amount of common stock, giving them influence or control in corporate transactions and other matters, and the interests of these individuals could differ from those of other shareholders. Members of our management team beneficially own approximately 70% of our outstanding shares of common stock. As a result, these shareholders are in a position to significantly influence or control the outcome of matters requiring a shareholder vote, including the election of directors, the adoption of an amendment to our articles of incorporation or bylaws and the approval of mergers and other significant corporate transactions. Their control of ATP may delay or prevent a change of control of ATP and may adversely affect the voting and other rights of other shareholders. Item 7a. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk We are exposed to changes in interest rates. Changes in interest rates affect the interest earned on our cash and cash equivalents and the interest rate paid on borrowings under the credit facility. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. Foreign Currency Risk. The net assets, net earnings and cash flows from our wholly owned subsidiary in the U.K. are based on the U.S. dollar equivalent of such amounts measured in the applicable functional currency. These foreign operations have the potential to impact our financial position due to fluctuations in the local currency arising from the process of re-measuring the local functional currency in the U.S. dollar. We have not utilized derivatives or other financial instruments to hedge the risk associated with the movement in foreign currencies. 39 Commodity Price Risk Our revenues, profitability and future growth depend substantially on prevailing prices for natural gas and oil. Prices also affect the amount of cash flow available for capital expenditures and our ability to borrow and raise additional capital. The amount we can borrow under our bank credit facility is subject to periodic re-determination based in part on changing expectations of future prices. Lower prices may also reduce the amount of natural gas and oil that we can economically produce. We currently sell a portion of our natural gas and oil production under price sensitive or market price contracts. We periodically use derivative instruments to hedge our commodity price risk. We hedge a portion of our projected natural gas and oil production through a variety of financial and physical arrangements intended to support natural gas and oil prices at targeted levels and to manage our exposure to price fluctuations. We may use futures contracts, swaps and fixed price physical contracts to hedge our commodity prices. Realized gains and losses from our price risk management activities are recognized in oil and gas sales when the associated production occurs. For derivatives designated as cash flow hedges, the unrecognized gains and losses are included as a component of other comprehensive income (loss) to the extent the hedge is effective. See Note 12 to the Consolidated Financial Statements for additional information. We do not hold or issue derivative instruments for trading purposes. Our internal hedging policy provides that we examine the economic effect of entering into a commodity contract with respect to the properties that we acquire. We generally acquire properties at prices that are below the management's estimated value of the estimated proved reserves at the then current natural gas and oil prices. We may enter into short-term hedging arrangements if (1) we are able to obtain commodity contracts at prices sufficient to secure an acceptable internal rate of return on a particular property or on a group of properties or (2) if deemed necessary by the terms of our existing credit agreements. During 2002, we hedged approximately 51% of our natural gas and oil production. To calculate the potential effect of the derivative and fixed-price contracts on future income (loss) before taxes, we applied the NYMEX oil and gas strip prices as of December 31, 2002 to the quantity of our oil and gas production covered by those contracts as of that date. The following table shows the estimated potential effects of the derivative and fixed-price contracts on future income (loss) before taxes (in thousands): Estimated Increase (Decrease) In Income (Loss) Before Taxes Due to ------------------------------ 10% 10% Decrease Increase Instrument in Prices in Prices ---------- ------------ ------------- Natural gas swaps ....................................... $ 2,772 $ (2,772) Oil swaps ............................................... 504 (504) Natural gas fixed price contracts ....................... 2,374 (2,374) Oil fixed price contracts ............................... 642 (642) Item 8. Financial Statements and Supplementary Data The information required here is included in the report as set forth in the "Index to the Consolidated Financial Statements" on page F-1. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 40 PART III Item 10. Directors and Executive Officers of Registrant Except for the information relating to Executive Officers of the Registrant, which is included in Part 1, Item 4 of this Report, the information required by Item 10 of Form 10-K is incorporated by reference to "Election of Directors" and "Section 16 Compliance" included in the definitive proxy statement for the Company's Annual Meeting of Shareholders to be held on May 28, 2003 (the "Proxy Statement"). Item 11. Executive Compensation The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the section captioned "Executive Compensation" of the Registrant's Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the section captioned "Securities Ownership by Principal Shareholders and Management" of the Registrant's Proxy Statement. Item 13. Certain Relationships and Related Transactions The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the section captioned "Election of Directors - Certain Transactions" of the Registrant's Proxy Statement. Item 14. Controls and Procedures a. Based on their evaluation of the Company's disclosure controls and procedures as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the Company's chief executive officer and chief financial officer have concluded that Company's disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and the Company's consolidated subsidiaries would be made known to them by others within those entities. b. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 41 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) and (2) Financial Statements and Financial Statement Schedules See "Index to Consolidated Financial Statements" on page F-1. (a) (3) Exhibit 3.1 Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of ATP's registration statement No. 333-46034 on Form S-1) 3.2 Restated Bylaws (incorporated by reference to Exhibit 3.2 of ATP's registration statement No. 333-46034 on Form S-1) 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of ATP's registration statement No. 333-46034 on Form S-1) 10.1 Gas Service Agreement, dated December 31, 1998, between American Citigas Company and ATP Energy, Inc. (incorporated by reference to Exhibit 10.6 of ATP's registration statement No. 333-46034 on Form S-1) 10.2 Marketing & Natural Gas Purchase Agreement, dated December 1, 1998, between ATP Energy, Inc. and El Paso Energy Marketing Company (incorporated by reference to Exhibit 10.7 of ATP's registration statement No. 333-46034 on Form S-1) 10.3 Purchase and Sale Agreement, effective as of May 1, 1999, between Eugene Offshore Holdings, LLC and ATP Oil & Gas Corporation (incorporated by reference to Exhibit 10.8 of ATP's registration statement No. 333-46034 on Form S-1) 10.4 ATP Oil & Gas Corporation 1998 Stock Option Plan (incorporated by reference to Exhibit 10.9 of ATP's registration statement No. 333-46034 on Form S-1) 10.5 First Amendment to the ATP Oil & Gas Corporation 1998 Stock Option Plan (incorporated by reference to Exhibit 10.10 of ATP's registration statement No. 333-46034 on Form S-1) 10.6 ATP Oil & Gas Corporation 2000 Stock Plan (incorporated by reference to Exhibit 10.11 of ATP's Annual Report on Form 10-K for the year ended December 31, 2000) 10.7 Note Purchase Agreement dated June 29, 2001 between ATP Oil & Gas Corporation and Aquila Energy Capital Corporation (incorporated by reference to Exhibit 10.3 of ATP's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001) 10.8 Intercreditor and Subordination Agreement dated June 29, 2001, among ATP Oil & Gas Corporation, Aquila Energy Capital Corporation, BNP Paribas, as Agent, and the Lenders Signatory thereto (incorporated by reference to Exhibit 10.4 of ATP's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 10.9 First Amendment to Note Purchase Agreement dated March 27, 2002 between ATP Oil & Gas Corporation and Aquila Energy Capital Corporation (incorporated by reference to Exhibit 10.23 of ATP's Annual Report on Form 10-K for the year ended December 31, 2001) 10.10 Amended and Restated Credit Agreement dated July 31, 2002, among ATP Oil & Gas Corporation, Union Bank of California, N.A., as agent, Guaranty Bank, FSB, as Co-Agent and the Lenders Signatory thereto (incorporated by reference to Exhibit 10.1 of ATP's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002) *21.1 Subsidiaries of ATP Oil & Gas Corporation *23.1 Consent of KPMG LLP *23.2 Consent of Ryder Scott Company *23.3 Consent of Troy-Ikoda Limited *99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 --------------- * Filed herewith 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ATP Oil & Gas Corporation By: /s/ Albert L. Reese, Jr. --------------------------------- Albert L. Reese, Jr. Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities indicated on March 28, 2003. Signature Title --------- ----- /s/ T. PAUL BULMAHN Chairman, President and Director - ---------------------------------- (Principal Executive Officer) T. Paul Bulmahn /s/ ALBERT L. REESE, JR. Senior Vice President and - ---------------------------------- Chief Financial Officer Albert L. Reese, Jr. (Principal Financial Officer and Principal Accounting Officer) /s/ CHRIS A. BRISACK Director - ---------------------------------- Chris A. Brisack /s/ ARTHUR H. DILLY Director - ---------------------------------- Arthur H. Dilly /s/ GERARD J. SWONKE Director - ---------------------------------- Gerard J. Swonke /s/ ROBERT C. THOMAS Director - ---------------------------------- Robert C. Thomas /s/ WALTER WENDLANDT Director - ---------------------------------- Walter Wendlandt 43 ATP OIL & GAS CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- ATP OIL & GAS CORPORATION AND SUBSIDIARIES Independent Auditors' Report ............................................................ F-2 Consolidated Balance Sheets as of December 31, 2002 and 2001 ............................ F-3 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 ................................................... F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 ................................................... F-5 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2002, 2001 and 2000 ................................................... F-6 Notes to Consolidated Financial Statements .............................................. F-7 F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors ATP Oil & Gas Corporation: We have audited the accompanying consolidated balance sheets of ATP Oil & Gas Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of ATP Oil & Gas Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, effective January 1, 2001, the Company changed its method of accounting for derivative financial instruments. KPMG LLP Houston, Texas March 26, 2003 F-2 ATP OIL & GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Amounts) December 31, ------------------------ 2002 2001 ----------- ----------- Assets Current assets: Cash and cash equivalents ................................................. $ 6,944 $ 5,294 Restricted cash ........................................................... 414 - Accounts receivable (net of allowance of $1,266 and $1,423, respectively).. 24,998 10,371 Deferred tax asset ........................................................ 1,628 - Derivative asset .......................................................... - 1,936 Other current assets ...................................................... 3,245 1,754 ----------- ----------- Total current assets ................................................... 37,229 19,355 ----------- ----------- Oil and gas properties (using the successful efforts method of accounting)..... 355,088 319,506 Less: Accumulated depletion, impairment and amortization.................. (236,052) (186,473) ----------- ----------- Oil and gas properties, net............................................. 119,036 133,033 ----------- ----------- Furniture and fixtures (net of accumulated depreciation)....................... 810 794 Deferred tax asset............................................................. 21,580 19,228 Other assets, net.............................................................. 3,400 5,154 ----------- ----------- Total assets............................................................ $ 182,055 $ 177,564 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accruals.............................................. $ 35,336 $ 26,426 Current maturities of long-term debt....................................... 6,000 22,000 Derivative liability....................................................... 9,592 - ----------- ----------- Total current liabilities............................................... 50,928 48,426 Long-term debt................................................................. 80,387 78,111 Long-term derivative liability................................................. - 671 Deferred revenue............................................................... 1,111 1,296 Other long-term liabilities and deferred obligations........................... 11,082 4,068 ----------- ----------- Total liabilities....................................................... 143,508 132,572 ----------- ----------- Shareholders' equity: Preferred stock: $0.001 par value, 10,000,000 shares authorized; none issued............................................................. - - Common stock: $0.001 par value, 100,000,000 shares authorized in December 31, 2002 and 2001........................................... 20 20 Additional paid in capital................................................. 81,087 80,478 Accumulated deficit........................................................ (39,314) (34,614) Accumulated other comprehensive income (loss).............................. (2,335) 19 Treasury stock, at cost.................................................... (911) (911) ----------- ----------- Total shareholders' equity.............................................. 38,547 44,992 ----------- ----------- Total liabilities and shareholders' equity.............................. $ 182,055 $ 177,564 =========== =========== See accompanying notes to the consolidated financial statements. F-3 ATP OIL & GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts) Years Ended December 31, ---------------------------------- 2002 2001 2000 ---------- ---------- ---------- Revenues: Oil and gas production........................................ $ 88,151 $ 105,757 $ 75,940 Gas sold - marketing.......................................... 6,272 7,417 8,015 Gain on sale of oil and gas properties........................ - - 33 ---------- ---------- ---------- 94,423 113,174 83,988 ---------- ---------- ---------- Costs and operating expenses: Lease operating expenses...................................... 16,764 14,806 11,559 Gas purchased - marketing..................................... 6,087 7,218 7,788 Geological and geophysical expenses........................... 154 1,068 - General and administrative expenses........................... 10,287 9,981 5,409 Non-cash compensation expense (general and administrative).... 595 3,364 - Depreciation, depletion and amortization...................... 43,390 53,428 40,569 Impairment of oil and gas properties.......................... 6,844 24,891 10,838 Loss on unsuccessful property acquisition..................... - 3,147 - Other expense................................................. - - 450 ---------- ---------- ---------- 84,121 117,903 76,613 ---------- ---------- ---------- Income (loss) from operations.................................... 10,302 (4,729) 7,375 ---------- ---------- ---------- Other income (expense): Interest income............................................... 73 884 451 Interest expense.............................................. (10,418) (10,039) (11,907) Other......................................................... 1,081 - - Loss on derivative instruments................................ (8,319) (18,083) (11,911) ----------- ---------- ---------- (17,583) (27,238) (23,367) ---------- ---------- ---------- Loss before income taxes and extraordinary item ................. (7,281) (31,967) (15,992) Income tax benefit .............................................. 2,581 11,186 5,594 ---------- ---------- ---------- Loss before extraordinary item................................... (4,700) (20,781) (10,398) Extraordinary item, net of tax................................... - (602) - ---------- ---------- ---------- Net loss......................................................... (4,700) (21,383) (10,398) Other comprehensive income (loss): Cumulative effect of change in accounting principle - (34,252) - Reclassification adjustment for settled contracts 627 34,252 - Change in fair value of outstanding hedging positions (3,651) - - Foreign currency translation adjustment 670 19 - ----------- ---------- ---------- Other comprehensive income (loss) (2,354) 19 - ----------- ---------- ---------- Comprehensive loss $ (7,054) $ (21,364) $ (10,398) =========== ========== ========== Basic and diluted loss per common share: Loss before extraordinary item................................ $ (0.23) $ (1.06) $ (0.73) Extraordinary item, net of tax................................ - (0.03) - ---------- ---------- ---------- Net loss per common share..................................... $ (0.23) $ (1.09) $ (0.73) ========== ========== ========== Weighted average number of common shares: Basic and diluted............................................. 20,315 19,704 14,286 ========== ========== ========== See accompanying notes to the consolidated financial statements. F-4 ATP OIL & GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Years Ended December 31, ----------------------------------- 2002 2001 2000 ---------- ---------- ----------- Cash flows from operating activities: Net loss ........................................................ $ (4,700) $ (21,383) $ (10,398) Adjustments to reconcile net loss to net cash provided by operating activities - Depreciation, depletion and amortization ................... 43,390 53,428 40,569 Impairment of oil and gas properties ....................... 6,844 24,891 10,838 Amortization of deferred financing costs ................... 1,429 797 376 Extraordinary item ......................................... - 926 - Other comprehensive loss ................................... (3,024) - - Deferred tax assets ........................................ (2,352) (11,576) (5,594) Non-cash compensation expense .............................. 595 3,364 - Gain on sale of oil and gas properties ..................... - - (33) Other expense .............................................. - - 450 Other non-cash items ....................................... 746 196 431 Changes in assets and liabilities - Accounts receivable and other ................................ (14,659) 23,014 (22,772) Restricted cash .............................................. (414) - 471 Net (assets) liabilities from risk management activities ..... 9,229 (8,513) 7,249 Accounts payable and accruals ................................ 8,910 (23,436) 37,309 Other long-term assets ....................................... (1,525) (4,183) (1,462) Other long-term liabilities and deferred credits ............. 6,829 3,831 (277) ---------- ---------- ------------ Net cash provided by operating activities ........................... 51,298 41,356 57,157 ---------- ---------- ----------- Cash flows from investing activities: Additions and acquisitions of oil and gas properties ............ (34,873) (110,264) (76,474) Additions to furniture and fixtures ............................. (294) (546) (361) ---------- ---------- ----------- Net cash used in investing activities ............................... (35,167) (110,810) (76,835) ---------- ---------- ----------- Cash flows from financing activities: Proceeds of initial public offering ............................. - 78,330 - Payment of offering costs ....................................... - (893) (621) Proceeds from long-term debt .................................... 1,000 119,000 15,800 Payments of long-term debt ...................................... (15,000) (46,750) (8,250) Proceeds from non-recourse borrowings ........................... - 3,359 42,745 Payments of non-recourse borrowings ............................. - (92,138) (29,239) Deferred financing costs ........................................ (495) (3,586) (400) Treasury stock purchases ........................................ - (911) - Other ........................................................... 14 201 - ---------- ---------- ----------- Net cash provided by (used in) financing activities ................. (14,481) 56,612 20,035 ---------- ---------- ----------- Increase (decrease) in cash and cash equivalents .................... 1,650 (12,842) 357 Cash and cash equivalents, beginning of period ...................... 5,294 18,136 17,779 ---------- ---------- ----------- Cash and cash equivalents, end of period ............................ $ 6,944 $ 5,294 $ 18,136 ========== ========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for interest ........................ $ 7,361 $ 4,177 $ 2,531 ========== ========== =========== Cash paid during the period for taxes ........................... $ - $ - $ 497 ========== ========== =========== See accompanying notes to the consolidated financial statements. F-5 ATP OIL & GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (In Thousands) 2002 2001 2000 ------------------- ------------------- -------------------- Shares Amount Shares Amount Shares Amount ------ ----------- ------ ---------- ------ ---------- Common Stock Balance, beginning of year ........... 20,313 $ 20 14,286 $ 14 14,286 $ 14 Issuances of common stock Public offering .................... - - 6,000 6 - - Exercise of stock options .......... 9 - 103 - - - Purchase of treasury stock ........... - - (76) - - - ------ ----------- ------ ---------- ------ ---------- Balance, end of year ................. 20,322 $ 20 20,313 $ 20 14,286 $ 14 ====== ----------- ====== ---------- ====== ---------- Paid-in Capital Balance, beginning of year ........... $ 80,478 $ 38 $ 38 Issuances of common stock Public offering .................... - 76,809 - Exercise of stock options .......... 14 267 - Non-cash compensation expense ........ 595 3,364 - ----------- ----------- ----------- Balance, end of year ................. $ 81,087 $ 80,478 $ 38 ----------- ---------- ----------- Accumulated Deficit Balance, beginning of year ........... $ (34,614) $ (13,231) $ (2,833) Net loss ............................. (4,700) (21,383) (10,398) ----------- ---------- ------------ Balance, end of year ................. $ (39,314) $ (34,614) $ (13,231) ----------- ---------- ----------- Accumulated Other Comprehensive Income (Loss) Balance, beginning of year ......... $ 19 $ - $ - Other comprehensive income (loss) .................... (2,354) 19 - ----------- ----------- ----------- Balance, end of year ............... $ (2,335) $ 19 $ - ----------- ---------- ----------- Treasury Stock Balance, beginning of year ........... 76 $ (911) - $ - - $ - Purchase of treasury stock ........... - - 76 (911) - - ------ ----------- ----------- ----------- ---------- ----------- Balance, end of year ................. 76 $ (911) 76 $ (911) - $ - ====== ----------- =========== ----------- ========== ----------- Total Shareholders' Equity (Deficit) ..................... $ 38,547 $ 44,992 $ (13,179) =========== ========== =========== See accompanying notes to the consolidated financial statements. F-6 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 -- Organization and Basis of Presentation Organization ATP Oil & Gas Corporation ("ATP") was incorporated in Texas in 1991. We are engaged in the acquisition, development and production of natural gas and oil properties in the Gulf of Mexico and the U.K. and Dutch Sectors of the North Sea (the "North Sea"). We primarily focus our efforts on natural gas and oil properties with proved undeveloped reserves that are economically attractive to us but are not strategic to major or exploration-oriented independent oil and gas companies. We attempt to achieve a high rate of return on our investment in these properties by limiting our up-front acquisition costs and by developing our acquisitions quickly. Basis of Presentation The consolidated financial statements include our accounts and our wholly-owned subsidiaries, ATP Energy, Inc. (ATP Energy), ATP Oil & Gas (UK) Limited and ATP Oil & Gas Netherlands (B.V.). All significant intercompany transactions are eliminated upon consolidation. Certain reclassifications have been made to the prior year statements to conform to the current year presentation. Note 2 -- Summary of Significant Accounting Policies and Estimates Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") 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 in the financial statements, including the use of estimates for oil and gas reserve information and the valuation allowance for deferred income taxes. Actual results could differ from those estimates. Cash and Cash Equivalents. Cash and cash equivalents primarily consist of cash on deposit and investments in money market funds with original maturities of three months or less, stated at market value. Oil and Gas Producing Activities. We follow the "successful efforts" method of accounting for oil and gas properties. Under this method, lease acquisition costs and intangible drilling and development costs on successful wells and development dry holes are capitalized. Capitalized costs relating to producing properties are depleted on the unit-of-production method. Proved developed reserves are used in computing unit rates for drilling and development costs and total proved reserves for depletion rates of leasehold, platform and pipeline costs. Estimated dismantlement, restoration and abandonment costs and estimated residual salvage values are taken into account in determining amortization and depletion provisions. Expenditures for geological and geophysical data are generally charged to expense unless the costs can be specifically attributed to determining the placement for a future developmental well location. Expenditures for repairs and maintenance are charged to expense as incurred; renewals and betterments are capitalized. The costs and related accumulated depreciation, depletion, and amortization of properties sold or otherwise retired are eliminated from the accounts, and gains or losses on disposition are reflected in the statements of operations. F-7 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We perform a review for impairment of proved oil and gas properties on a depletable unit basis when circumstances suggest there is a need for such a review in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). To determine if a depletable unit is impaired, we compare the carrying value of the depletable unit to the undiscounted future net cash flows by applying management's estimates of future oil and gas prices to the estimated future production of oil and gas reserves over the economic life of the property. Future net cash flows are based upon our independent reservoir engineer's estimate of proved reserves. In addition, other factors such as probable and possible reserves are taken into consideration when justified by economic conditions and actual or planned drilling or other development activities. For a property determined to be impaired, an impairment loss equal to the difference between the carrying value and the estimated fair value of the impaired property will be recognized. Fair value, on a depletable unit basis, is estimated to be the present value of the aforementioned expected future net cash flows. Any impairment charge incurred is recorded in accumulated depreciation, depletion, impairment and amortization to reduce our recorded basis in the asset. Each part of this calculation is subject to a large degree of judgment, including the determination of the depletable units' reserves, future cash flows and fair value. We recorded impairments during the years ended December 31, 2002, 2001 and 2000 of $6.8 million, $24.9 million and $10.8 million, respectively, primarily due to either depressed oil and natural gas prices, unfavorable operating performance or downward revisions of recoverable reserves or a combination of these. The impairments were calculated as the difference between the carrying value and the estimated fair value of the impaired depletable unit. Furniture and Fixtures. Furniture and fixtures consists of office furniture, computer hardware and software and leasehold improvements. Depreciation of furniture and fixtures is computed using the straight-line method over their estimated useful lives, which vary from three to five years. Other Assets. Other assets consist of the following (in thousands): December 31, ------------------------------ 2002 2001 ------------- -------------- Debt financing costs ............... $ 3,767 $ 3,584 Spare parts inventory .............. 1,000 2,138 Long-term portion of receivable .... 629 - Other .............................. 10 9 ------------- -------------- 5,406 5,731 Accumulated amortization ........... (2,006) (577) ------------- -------------- $ 3,400 $ 5,154 ============= ============== Costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the term of the related agreement, using the effective interest or straight-line method (which approximates the effective interest method). Environmental Liabilities. Environmental 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 our commitment to a formal plan of action. Revenue Recognition. We use the sales method of accounting for natural gas and oil revenues. Under this method, revenues are recognized based on actual volumes of gas and oil sold to purchasers. The volumes sold may differ from the volumes to which we are entitled based on our interests in the properties. Differences between volumes sold and entitled volumes create gas imbalances which are generally reflected as adjustments to reported proved gas reserves and future cash flows in the our supplemental oil and gas disclosures. F-8 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Adjustments for gas imbalances totaled approximately 0.25 percent of our proved gas reserves at December 31, 2002. If our excess takes of natural gas or oil exceed our estimated remaining proved reserves for a property, a natural gas or oil imbalance liability is recorded in the consolidated balance sheet. No such amount was recorded in 2002. Major Customers. We sell a portion of our oil and gas to end users through various gas marketing companies. For the year ended December 31, 2002, revenues from four purchasers accounted for 34%, 26%, 14% and 14%, respectively, for oil and gas production revenues. For the year ended December 31, 2001, revenues from three purchasers accounted for 53%, 17% and 10%, respectively, of oil and gas production revenues. For the year ended December 31, 2000, revenues from two purchasers accounted for 41% each of oil and gas production revenues. Percentages are calculated on oil and gas revenues before any effects of price risk management activities. Translation of Foreign Currencies. Financial statement amounts related to our U.K. subsidiary, which has a functional currency of the British pound sterling, are translated into the U.S. dollar equivalents at exchange rates as follows: (1) balance sheet accounts at year-end exchange rates and (2) statement of operations accounts at the weighted average exchange rate for the period. The gains or losses resulting from such translations are deferred and included in accumulated other comprehensive income as a separate component of shareholders' equity. Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences or benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes that enactment date. Comprehensive Loss. Comprehensive loss is net loss, plus certain other items that are recorded directly to shareholders' equity. In 2002 and 2001, comprehensive loss was $7.1 million and $21.4 million, respectively. In 2000, we had no comprehensive income (loss) other than net loss. Stock Options. At December 31, 2002, we had stock-based compensation plans which are more fully described in Note 6. We account for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations. Under APB 25, no compensation expense is recognized when the exercise price of options equals the fair value (market price) of the underlying stock on the date of grant. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") to stock based compensation: Year Ended December 31, ------------------------------ 2002 2001 ------------ ------------ Net loss before extraordinary item, as reported ............................ $ (4,700) $ (20,781) Add: Stock based employee compensation expense included in reported net loss, determined under APB 25, net of related tax effects ... 387 2,187 Deduct: Total stock based employee compensation expense determined under fair value for all awards, net of related tax effects ... (2,673) (3,517) ------------- ------------ Pro forma net loss before extraordinary item ............................... $ (6,986) $ (22,111) ============ ============ Earnings per share: Basic and diluted - as reported ........................................... $ (0.23) $ (1.06) Basic and diluted - pro forma ............................................. $ (0.34) $ (1.12) F-9 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value of Financial Instruments. The following methods and assumptions were used in estimating the fair value of each class of financial instruments for which it is practicable to estimate fair value. For cash and cash equivalents, receivables and payables, the carrying amounts approximate fair value because of the short maturity of these instruments. As of January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires the recognition of all derivative instruments as assets or liabilities in our balance sheet and measurement of those instruments at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a derivative instrument is designated as a hedge and if so, the type of hedge. For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income (loss) to the extent the hedge is effective, until the hedged item is recognized in earnings. Hedge effectiveness is measured quarterly based on the relative changes in fair value between the derivative instrument and the hedged item over time. Any change in fair value resulting from ineffectiveness, as defined by SFAS 133, is recognized immediately in earnings. The following table provides information our debt (in thousands): December 31, ----------------------------------------------------------- 2002 2001 ----------------------------- ---------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------- ------------- ------------- ------------- Bank debt .......................... $ 56,000 $ 56,000 $ 70,000 $ 70,000 Note payable ....................... 30,387 34,376 30,111 33,400 ------------- ------------- ------------- ------------- Total ............................ $ 86,387 $ 90,376 $ 100,111 $ 103,400 ============= ============= ============= ============= Our bank debt is variable rate debt and as such, approximates fair value, as interest rates are variable based on prevailing market rates. Our note payable is a fixed rate note and the fair value has been determined by discounting the future payments using our incremental borrowing rate, based on the differential between the fixed interest rate and interest rates of long-term treasury securities at the date of the borrowing and the balance sheet date. New Accounting Standards. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 provides accounting requirements for retirement obligations associated with tangible long-lived assets, including: 1) the timing of liability recognition; 2) initial measurement of the liability; 3) allocation of asset retirement cost to expense; 4) subsequent measurement of the liability; and 5) financial statement disclosures. SFAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long- lived asset and subsequently allocated to expense using a systematic and rational method. The statement is effective for fiscal years beginning after June 15, 2002 and we adopted the statement on January 1, 2003. The transition adjustment resulting from the adoption of SFAS 143 will be reported as a cumulative effect of a change in accounting principle. We have not yet completed our assessment of the impact of SFAS 143 on our financial condition and results of operations. However, we expect that adoption of the statement will result in increases in the capitalized costs of our oil and properties and in the recognition of additional liabilities related to asset retirement obligations. F-10 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, No. 44, and No. 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). Among other things, SFAS 145 requires gains and losses from early extinguishment of debt to be included in income from continuing operations instead of being classified as extraordinary items as previously required by generally accepted accounting principles. SFAS 145 is effective for fiscal years beginning after May 15, 2002 and we adopted the statement on January 1, 2003. Any gain or loss on early extinguishment of debt that was classified as an extraordinary item in periods prior to adoption must be reclassified into income from continuing operations. The adoption of SFAS 145 will require the $0.6 million (net of tax) of extraordinary loss for the year ended December 31, 2001 to be reclassified to interest expense and income tax benefit. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring". SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. We adopted the provisions of SFAS 146 on January 1, 2003 and the adoption did not have an effect on our financial position or results of operations. In November 2002, the FASB issued FASB Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantee of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45's provisions for initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure provisions apply to financial statements for periods ending after December 15, 2002. We do not currently have guarantees that require disclosure. We adopted the measurement provisions of this statement in the first quarter of 2003 and the adoption did not have an effect on our financial position or results of operations. F-11 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires a company to consolidate a variable interest entity if it is designated as the primary beneficiary of that entity even if the company does not have a majority of voting interest. A variable interest entity is generally defined as an entity where its equity is unable to finance its activities or where the owners of the entity lack the risk and rewards of ownership. The provisions of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. The adoption of FIN 46 is not currently expected to have an effect on our financial position or results of operations when adopted. Emerging Issues Task Force ("EITF") Issue No. 02-03, "Recognition and Reporting of Gains and Losses on Energy Trading Contracts" under EITF Issues No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" was issued in June 2002. EITF Issue No. 02-03 addresses certain issues related to energy trading activities, including (a) gross versus net presentation in the income statement, (b) whether the initial fair value of an energy trading contract can be other than the price at which it was exchanged, and (c) accounting for inventory utilized in energy trading activities. As of January 1, 2003, we will present our gas sold and purchased activities in the statement of operations for all periods on a net rather than a gross basis. The change will decrease reported revenues and costs and operating expenses, but will have no effect on operating income or cash flow. The remaining provisions effective January 1, 2003 will have no impact on our financial statements. For more information regarding this marketing activity, see Note 13. Note 3 -- Acquisitions and Dispositions Gulf of Mexico During 2002, we entered into a farm-in agreement to acquire a 100% working interest in one block with associated proved reserves of approximately 4.7 Bcf (unaudited), based on third party reservoir engineering estimates at year-end. We plan to develop this block in 2003. In addition, we acquired another block for approximately $1.0 million. This block, along with the block immediately to the south which we did not acquire, contains an accumulation of oil and gas. Since the well that identified proved reserves is located on the southern block and due to the strict limitations to declare reserves as proved, we are unable to record any proved reserves with this acquisition. The cost of this unproved property is included in oil and gas properties. U.K. Sector - North Sea In 2001, we acquired interests in three properties (five blocks) in the North Sea which included a 100% interest in one block ("Helvellyn"), a 50% interest in one block ("Venture") and an 86% interest in three blocks ("Tors"). Helvellyn. In August 2002 we entered into an agreement, which was completed on September 30, 2002, whereby we assigned 50% of our working interest in the Helvellyn development in the U.K. Sector - North Sea to a joint venture partner. The terms of the agreement required the other party to pay a disproportionate share of the development costs on the project. The partner's share of development costs totaled $28.9 million through December 31, 2002, of which $17.3 million was paid to us in cash, $11.0 million is included in accounts receivable and $0.6 million is included as a receivable in other long term assets. We retained a 50% working interest and continued as the operator of the field. Tors. In February 2002 the U.K. Department of Trade and Industry directly awarded us a 75% working interest in two lease blocks. The lease sale in the U.K. is referred to as a "round" and the award is known as an "out of round" award. We paid no acquisition costs and net proved reserves for these properties at December 31, 2002, were approximately 20.3 Bcf (unaudited), based on third party reservoir engineering estimates at year-end. These two blocks will become a component of our Tors development. In October 2002 we entered into an earn-in agreement whereby we assigned an 11% interest in three blocks acquired in 2001 to a joint venture partner in return for them funding part of the block's development costs. We retained a 75% working interest and continued as the operator. As of December 31, 2002, these blocks had not yet been developed. F-12 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dutch Sector - North Sea In February 2003, we acquired a 50% working interest in a block located in the Dutch Sector - North Sea. The remaining 50% interest is owned by a Dutch company who participates on behalf of the Dutch state. Note 4 -- Financing and Debt Long-term debt consisted of the following balances (in thousands): December 31, ------------------------- 2002 2001 ----------- ----------- Credit facility, bearing interest at 5.25% and 5.26% at December 31, 2002 and 2001, respectively .............. $ 56,000 $ 70,000 11.5 % Note payable, net of unamortized discount of $863 and $1,139 at December 31, 2002 and 2001, respectively ... 30,387 30,111 ----------- ----------- Total debt ................................................. 86,387 100,111 Less current maturities .................................... (6,000) (22,000) ----------- ----------- Total long-term debt ....................................... $ 80,387 $ 78,111 =========== =========== Credit Facility We have a $100.0 million senior-secured revolving credit facility which is secured by substantially all of our U.S. oil and gas properties, as well as by approximately two-thirds of the capital stock of our foreign subsidiaries and is guaranteed by our wholly owned subsidiary, ATP Energy, Inc. The amount available for borrowing under the credit facility is limited to the loan value, as determined by the bank, of oil and gas properties pledged under the facility. At December 31, 2002, the borrowing base was $56.0 million with no further scheduled borrowing base reduction. If our outstanding balance exceeds our borrowing base at any time, we are required to repay such excess within 30 days and our interest rate during the time an excess exists is increased by 2.00%. On March 25, 2003, we entered into an agreement with our lenders to defer our scheduled borrowing base redetermination until the next scheduled redetermination in May 2003. This agreement reaffirmed the current borrowing base of $56.0 million and the borrowing base reduction amount of zero. As part of this agreement we committed to reduce the amount outstanding under our borrowing base by $6.0 million between March 28, 2003 and May 31, 2003. Additionally, if the aggregate principal amount of the loan exceeds the required month-end reductions of $1.5 million, $2.5 million and $2.0 million during the period from March 28, 2003 to May 31, 2003, such principal amounts in excess of the applicable period limits shall bear interest at a per annum rate of interest equal to the adjusted reference rate plus 2%. Further, the lenders agreed to raise the limit of advances available to be made to our foreign subsidiaries and specified certain future events which would require our foreign subsidiaries to return the incremental advances to the parent. At the next scheduled redetermination in May 2003, the lenders can increase or decrease the borrowing base and re-establish the monthly reduction amount. A material reduction in the borrowing base or a material increase in the monthly reduction amount by the lender would have a material negative impact on our cash flows and our ability to fund future operations. Advances under the credit facility can be in the form of either base rate loans or Eurodollar loans. The interest on a base rate loan is a fluctuating rate equal to the higher of the Federal funds rate plus 0.5% and the bank base rate, plus a margin of 0.25%, 0.50%, 0.75% or 1.00% depending on the amount outstanding under the credit agreement. The interest on a Eurodollar loan is equal to the Eurodollar rate, plus a margin of 2.25%, 2.50%, 2.875%, or 3.125% depending on the amount outstanding under the credit facility. The credit facility matures in May 2004. Our credit facility contains conditions and restrictive provisions, among other things, (1) limiting us to enter into any arrangement to sell or transfer any of our material property, (2) prohibiting a merger into or consolidation with any other person or sell or dispose of all or substantially all of our assets, (3) maintaining certain financial ratios and (4) limitations on advances to our foreign subsidiaries. F-13 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Payable Effective June 29, 2001, we issued a note payable to a purchaser for a face principal amount of $31.3 million which matures in June 2005 and bears interest at a fixed rate of 11.5% per annum. The note is secured by second priority liens on substantially all of our U.S. oil and gas properties and is subordinated in right of payment to our existing senior indebtedness. We executed an agreement in connection with the note which contains conditions and restrictive provisions and requires the maintenance of certain financial ratios. Upon consent of the purchaser, which shall not be unreasonably withheld, the note may be repaid prior to the maturity date with an additional repayment premium based on the percentage of the principal amount paid, ranging from 4.5% during the first year to 16.5% in the final year of payment. If the note is paid at maturity, the maximum payment premium of 16.5% is required. The expected repayment premium is being amortized to interest expense straight-line, over the term of the note which approximates the effective interest method. The resulting liability is included in other long-term liabilities on the consolidated balance sheet. In July 2001, we received proceeds of $30.0 million in consideration for the issuance of the note. The discount of $1.3 million is being amortized to interest expense using the effective interest method. The amount available for borrowing under the note is limited to the loan value of oil and gas properties pledged under the note, as determined by the purchaser. The purchaser has the right to make a redetermination of the borrowing base at least once every six months. We were not notified of any change in the borrowing base in 2002. If our outstanding balance exceeds the borrowing base at any time, we are required to repay such excess within 10 days subject to the provisions of the agreement. A material reduction in the borrowing base by the lender would have a material negative impact on our cash flows and our ability to fund future obligations. As of December 31, 2002, all of our borrowing base under the agreement was outstanding. As of December 31, 2002, we were in compliance with all of the financial covenants of our credit facility and note payable agreements. Maturities The aggregate amount of maturities of our long-term debt for the next five years is: 2003 - $6.0 million, 2004 -$50.0 million and 2005 - $31.3 million. Note 5 -- Equity Common Stock At December 31, 2002, we had 100,000,000 shares authorized, 20,398,007 shares issued, 20,322,167 shares outstanding and 75,840 shares in treasury. At December 31, 2001, we had 100,000,000 shares authorized, 20,388,488 shares issued, 20,312,648 shares outstanding and 75,840 shares in treasury. Treasury Stock During the second quarter 2001, the first option vesting date occurred for certain options granted since September 1999 through the date of our initial public offering ("IPO") on February 5, 2001, as well as for certain options granted prior to September 1999. Of those options exercised during that period, certain optionees elected to receive cash upon exercise of their options, whereby we purchased 75,840 shares for approximately $0.9 million and recorded such purchase as treasury stock using the cost method. F-14 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 -- Stock Option Plans In May 1994, the Board of Directors approved the 1994 Stock Option Plan (the "1994 Plan") under which it was authorized to issue up to 55,902,930 shares of common stock. The exercise price of the options under the 1994 Plan was not less than the greater of par value per share or fair market value, at date of grant. These options had a maximum term of 10 years, subject to vesting requirements in the individual option agreements. In April 2000, the only outstanding option to purchase 18,937,397 shares under the 1994 Plan was amended to limit the number of shares that could be purchased pursuant to the option to such number that enables the holder to maintain ownership of a majority of the outstanding shares. Because the holder of this option owned a majority of the shares, the number of shares exercisable as of April 2000 was zero. Upon the closing of the IPO in February 2001, the 1994 Plan and all outstanding options under this plan were cancelled. In December 1998, the Board of Directors approved the 1998 Stock Option Plan (the "1998 Plan") to provide increased incentive for its employees and directors. The 1998 Plan authorizes the granting of incentive and nonqualified stock options for up to 2,678,571 shares of common stock to eligible participants and expires five years after the closing date of our IPO. One third of the options were exercisable on April 10, 2001 with each remaining third exercisable on the first and second anniversaries of the IPO. Options granted under this plan remain exercisable by the employees owning such options, but no new options will be granted under this plan. In January 2001, the Board of Directors approved the 2000 Stock Option Plan (the "2000 Plan") to provide increased incentive for its employees and directors. The 2000 Plan authorizes the granting of options and awards for up to 4,000,000 shares of common stock. Generally, options are granted at prices equal to at least 100% of the fair value of the stock at the date of grant, expire not later than five years from the date of grant and vest ratably over a four-year period following the date of grant. From time to time, as approved by the Board of Directors, options with differing terms have also been granted. The following table is a summary of stock option activity: 2002 2001 2000 ------------------------- ------------------------ ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------ -------- ----------- --------- ------------ ---------- Outstanding at beginning of year .. 1,637,809 $ 8.520 646,608 $ 2.710 19,394,362 $ 0.040 Granted ........................... 86,500 3.430 1,117,000 11.200 368,215 3.690 Exercised ......................... (9,519) 1.431 (102,774) 1.960 - - Forfeited ......................... (29,643) 9.089 (23,025) 4.000 (178,572) 1.400 Cancelled ......................... - - - - (18,937,397) 0.004 ------------ ----------- ------------ Outstanding at end of year ........ 1,685,147 $ 8.290 1,637,809 $ 8.520 646,608 $ 2.710 ============ =========== ============ Exercisable at end of year ........ 563,344 $ 6.760 112,760 $ 3.370 - $ - ============ =========== ============ Weighted average fair value of options granted during the year .. $ 1.74 $ 4.65 $ - F-15 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about all stock options outstanding at December 31, 2002: Options Outstanding Options Exercisable -------------------------------------- ------------------------- Weighted Average Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Range of Exercise Prices Outstanding Life Price Exercisable Price - -------------------------------------------- ----------- ---------- -------- ----------- -------- $ 1.40 - $ 3.85 .......................... 607,647 2.4 Years $ 2.94 306,469 $ 3.37 $ 6.95 - $ 6.95 .......................... 25,000 3.8 Years 6.95 6,250 6.95 $11.24 - $ 11.40 .......................... 1,032,500 3.4 Years 11.37 245,625 11.37 $14.00 - $ 14.00 .......................... 20,000 3.1 Years 14.00 5,000 14.00 ----------- ----------- $ 1.40 - $ 14.00 .......................... 1,685,147 3.0 Years $ 8.29 563,344 $ 6.76 =========== =========== We have elected to follow APB 25 and related interpretations in accounting for our stock option plans. Accordingly, no compensation expense, except as specifically described below, has been recognized for employee stock option plans. Since options granted under the 1998 Plan did not vest nor were exercisable until 60 days after the date of our IPO, under the provisions of SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"), our pro forma net loss and per share amounts would have been unchanged for the year ended December 31, 2000. The pro forma effect on net income and earnings per share in 2002 and 2001, had we applied the fair-value-recognition provisions of SFAS 123, are shown in Note 2. The fair value of options granted in 2002 was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions: zero dividend yield; risk-free interest rate of 2.8%, volatility of 92.8% and an expected life of 2.5 years. The fair value of options granted prior to 2002 was estimated on the latter of the date of grant or date of our IPO using a Black-Scholes option-pricing model with the following weighted-average assumptions: zero dividend yield; risk-free interest rate of 4.5% and volatility of 80.2% and an expected life of 2.4 years. Non-Cash Compensation Expense. In 2002, we recorded a non-cash charge to compensation expense of approximately $0.6 million for options granted since September 1999 through the date of our initial public offering on February 5, 2001 (the "measurement date"). The total expected expense as of the measurement date is recognized in the periods in which the option vests. Each option is divided into three equal portions corresponding to the three vesting dates (April 10, 2001, February 9, 2002, and February 9, 2003), with the related compensation cost for each portion amortized straight-line over the period to the vesting date. In 2001, we recorded a non-cash compensation expense of $2.9 million for the above options and an additional non-cash compensation expense of $0.5 million related to certain options granted prior to September 1999 and exercised during 2001. The additional expense was recorded as a result of the manner in which those shares were exercised. F-16 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We have a 401(k) Savings Plan which covers all domestic employees. At our discretion, we may match a certain percentage of the employees' contributions to the plan. The matching percentage is discretionary and is currently 50% of each participant's contributions up to 6% of the participant's compensation. Our matching contributions to the plan were approximately $97,000, $70,000 and $56,000, for the years ended December 31, 2002, 2001 and 2000, respectively. We also have a defined contribution plan for our U.K. employees. We currently contribute 3% to the plan and such contributions are subject to the Pensions Act 1999 (U.K.) and to U.K. rules on taxation. For the years ended December 31, 2002 and 2001, we contributed approximately $15,500 and $14,000, respectively. Note 7 -- Earnings Per Share Basic earnings per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined on the assumption that outstanding stock options have been converted using the average price for the period. For purposes of computing earnings per share in a loss year, potential common shares have been excluded from the computation of weighted average common shares outstanding because their effect is antidilutive. Basic and diluted net loss per share is computed based on the following information (in thousands, except per share amounts): Years Ended December 31, ------------------------------------------------ 2002 2001 2000 ------------- ------------- ------------- Net loss available to common shareholders .................. $ (4,700) $ (21,383) $ (10,398) ============= ============= ============= Weighted average shares - basic and diluted ................ 20,315 19,704 14,286 ============= ============= ============= Net loss per share- basic and diluted: Loss before extraordinary item ........................ $ (0.23) $ (1.06) $ (0.73) Extraordinary item, net of income taxes ............... - (0.03) - ------------- ------------- ------------- Net loss per common share ........................... $ (0.23) $ (1.09) $ (0.73) ============= ============= ============= Note 8 -- Extraordinary Item For the year ended December 31, 2001, we recognized an extraordinary loss of $0.6 million, net of income taxes, related to the early extinguishment of our non-recourse borrowings. This loss will be reclassified to interest expense and income tax benefit upon the adoption of SFAS 145. Note 9 -- Income Taxes The benefit (provision) for income taxes before extraordinary item consisted of the following (in thousands): Years Ended December 31, ------------------------------------------------ 2002 2001 2000 ------------- ------------- ------------- Current: State .................................................... $ - $ - $ - Federal .................................................. 229 - - ------------- ------------- ------------- 229 - - ------------- ------------- ------------- Deferred: State .................................................... - - - Federal .................................................. 2,352 11,186 5,594 ------------- ------------- ------------- 2,352 11,186 5,594 ------------- ------------- ------------- Benefit for income taxes before extraordinary item ......... $ 2,581 $ 11,186 $ 5,594 ============= ============= ============= F-17 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The reconciliation of income tax, before any valuation allowance, computed at the U.S. federal statutory tax rates to the provision for income taxes is as follows: Years Ended December 31, ------------------------------------------------ 2002 2001 2000 ------------- ------------- ------------- Statutory federal income tax rate ..................... (35.00)% (35.00)% (35.00)% Nondeductible and other ............................... (0.39) 0.01 0.02 ------------- ------------- ------------- (35.39)% (34.99)% (34.98)% ============= ============= ============= Significant components of our deferred tax assets (liabilities) as of December 31, 2002 and 2001 are as follows (in thousands): December 31, ------------------------------ 2002 2001 ------------- ------------- Deferred tax assets: Net operating loss carryforwards ....................................... $ 19,550 $ 3,809 Minimum tax credit carryforwards ....................................... - 229 Fixed asset basis differences .......................................... (5,427) 11,367 State taxes ............................................................ 17 17 Unrealized book (gains) losses ......................................... 2,415 (443) Stock based compensation expense ....................................... 1,107 1,177 Litigation ............................................................. 1,101 1,050 Foreign equity in subsidiary ........................................... 1,989 1,152 Deferred taxes related to SFAS 133...................................... 1,628 - Other .................................................................. 828 870 ------------- ------------- Net deferred tax assets ..................................................... $ 23,208 $ 19,228 ============= ============= At December 31, 2002, 2001 and 2000, we had net operating loss carryforwards for federal income tax purposes of approximately $55.9 million, $10.7 million, and $11.0 million respectively, which are available to offset future federal taxable income through 2021. At December 31, 2002 we have determined that it is more likely than not the deferred tax assets will be realized based on current projections of future taxable income due to higher commodity prices at year-end. A tax benefit related to the exercise of employee stock options of approximately $0.1 million was allocated directly to additional paid-in capital in 2001. Additionally, a tax benefit of $0.3 million was recognized related to the extraordinary loss for the year ended December 31, 2001. Note 10 -- Comprehensive Loss Comprehensive loss consists of net loss, as reflected on the consolidated statement of operations, and other gains and losses affecting shareholders' equity that are excluded from net loss. We recorded other comprehensive income for the first time in 2001. F-18 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of comprehensive loss are as follows (in thousands): Years Ended December 31, ------------------------------ 2002 2001 ------------- ------------- Net loss ......................................................................... $ (4,700) $ (21,383) ------------- ------------- Other comprehensive income (loss), net of tax: Cumulative effect of change in accounting principle - January 1, 2001 .......... - (34,252) Reclassification adjustment for settled contracts .............................. 627 34,252 Change in fair value of outstanding hedging positions .......................... (3,651) - Foreign currency translation adjustment ........................................ 670 19 ------------- ------------- Other comprehensive income (loss) ............................................ (2,354) 19 ------------- ------------- Comprehensive loss ............................................................... $ (7,054) $ (21,364) ============= ============= Note 11 -- Commitments and Contingencies Operating Leases We have commitments under an operating lease agreement for office space. Total rent expense for the years ended December 31, 2002, 2001 and 2000 was approximately $0.5 million, $0.3 million and $0.2 million respectively. At December 31, 2002, the future minimum rental payments due under the lease are as follows (in thousands amounts): 2003 ......................................... $ 539 2004 ......................................... 539 2005 ......................................... 371 2006 ......................................... 289 2007 ......................................... 214 Later Years .................................. 997 --------- Total .................................... $ 2,949 ========= Contingencies In 2001 we purchased three properties in the U.K. Sector - North Sea for approximately $3.1 million. In accordance with the purchase agreement, we also committed to pay future consideration contingent upon the successful development and operation of the properties. The contingent consideration for each property includes amounts to be paid upon achieving first commercial production and upon achieving designated cumulative production levels. Active development is in progress on our Helvellyn property and future development is planned on the other two properties. First commercial production on the Helvellyn property may occur sometime in the second quarter of 2003. Although a significant portion of the work required has been completed, there remains significant additional work to be performed before this property can produce commercially. That work includes completion, hook-up, and testing of the pipeline and production facilities and final negotiation of certain terms in our transportation and processing agreements. Accordingly, there can be no assurance of eventual production from this development until the aforementioned activities are completed successfully. At such time, the required amount will be accrued for payment to the seller and capitalized as acquisition costs. Litigation On August 28, 2001 ATP entered into a written agreement to acquire a property in the Gulf of Mexico during September 2001. On October 9, 2001 the agreement was amended to ultimately extend the closing date until October 31, 2001 in exchange for payments made by ATP totaling $3.0 million. This amendment also contained an arrangement whereby if ATP did not close on the property, and if sellers sold the property to a third party with a sale that met specific contract requirements, ATP would be required to execute a six month note for payment of the differential. Since ATP did not obtain the financing for the acquisition by October 31, 2001, the transaction did not close by that date; however, the parties' intensive work toward closing continued beyond that date without interruption. While working on the closing for the property with ATP, the sellers sold the property to a third party without informing ATP until after the closing had taken place. ATP filed an action in the District Court of Harris County, Texas against the sellers, generally alleging improper sale of the offshore property to a third party and breach of contract, and seeking unspecified damages from the sellers. The case is encaptioned ATP Oil & Gas Corporation vs. Legacy Resources Co., L.P. et al, No. 2001-63224 in the 269th Judicial District Court of Harris County, Texas. At the same time sellers notified ATP of their sale to a third party, the sellers had a demand made upon ATP for execution of a six month note for the amount of an alleged differential of approximately $12.3 million plus interest at 16%. Substantiation of the amount and validity of the demand could not be ascertained based on the content of the demand received. ATP contested the entire demand. The judge has abated the litigation, until arbitration pursuant to the underlying agreements between the sellers and ATP is completed. A tentative date of May 19, 2003 has been scheduled for the arbitration with an alternative date in September 2003. Due to the inherent uncertainties involving contested facts and legal issues a prediction as to the likely outcome cannot be made with any degree of certainty, and we have not accrued any amount related to this matter. While we are seeking recovery of the amounts previously paid and discussed above, the $3.0 million has been charged to earnings along with other costs related to this matter. ATP intends to vigorously defend against the sellers' claims and forcefully pursue its own claims in this matter. F-19 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In August 2001, Burlington Resources Inc. filed suit against ATP alleging formation of a contract with ATP and our breach of the alleged contract. The complaint seeks compensatory damages of approximately $1.1 million. We believe that this claim is without merit, and we intend to defend it vigorously. We are also, in the ordinary course of business, a claimant and/or defendant in various legal proceedings. Management does not believe that the outcome of these legal proceedings, individually, and in the aggregate will have a materially adverse effect on our financial condition, results of operations or cash flows. Note 12 -- Derivative Instruments and Price Risk Management Activities On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended, and recorded a cumulative transition loss of $34.3 million, net of tax, to accumulated other comprehensive income (loss) to account for the effect of the change in accounting principle. The standard requires that all derivatives be recorded on the balance sheet at fair value and establishes criteria for documentation and measurement of hedging activities. We occasionally use derivative instruments with respect to a portion of our oil and gas production to manage our exposure to price volatility. These instruments may take the form of futures contracts, swaps or options. Prior to July 1, 2002, we had not attempted to qualify our derivatives for the hedge accounting provisions under SFAS 133. Accordingly, we accounted for the changes in market value of these derivatives through current earnings. Gains and losses on all derivative instruments prior to July 1, 2002 were included in other income (expense) on the consolidated financial statements. Loss on derivative instruments is comprised of the following components (in thousands): Years Ended December 31, ------------------------------------------------ 2002 2001 2000 ------------- ------------- ------------- Loss on settled contracts .................................. $ (153) $ (19,348) $ - Loss on speculative positions (1) .......................... - - (4,662) Loss on open speculative positions (1) ..................... - - (7,249) Gain (loss) on open derivative positions ................... (8,166) 1,265 - ------------- ------------- ------------- $ (8,319) $ (18,083) $ (11,911) ============= ============= ============= - --------------- (1) In 2000, we found ourselves in a speculative position as a result of actual production being less than projected production when the derivative products were consummated or as a result of entering into speculative derivative instruments. This position was accounted for using the mark-to-market method. As of July 1, 2002, we performed the requisite steps to qualify our existing derivative instruments for hedge accounting treatment under the provisions of SFAS 133. Derivative instruments designated as cash flow hedges are reflected at fair value on our consolidated balance sheets. Changes in fair value, to the extent the hedge is effective, are recognized in other comprehensive income (loss) until the hedged item is settled and is recognized in earnings. Any ineffective portion of the derivative instrument's change in fair value is recognized in revenues in the current period. Hedge effectiveness is measured at least quarterly. F-20 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Oil and gas revenues are comprised of the following components for the periods indicated (in thousands): Years Ended December 31, --------------------------------------- 2002 2001 2000 --------- --------- --------- Oil and gas production ........................................ $ 89,415 $ 105,757 $ 104,163 Derivative settlements during the period ...................... (3,225) - (28,223) --------- --------- --------- 86,190 105,757 75,940 Amounts previously recognized in earnings prior to July 1, 2002 qualification for hedge accounting (1) ....... 3,225 - - Change in fair value of derivative hedging positions (2) ...... (964) - - Ineffective portion of derivative hedging instruments ......... (300) - - --------- --------- --------- $ 88,151 $ 105,757 $ 75,940 ========= ========= ========= - ---------- (1) Represents the mark to market valuation of open positions at June 30, 2002 which were previously recognized in other income (expense). (2) Represents the change in fair value of settled positions between the beginning and end of the period. At December 31, 2002, a $4.6 million loss ($3.0 million after tax) was recorded to accumulated other comprehensive loss for the effective portion of the change in fair market value during the last six months of 2002. All of this deferred loss will be reversed during the next twelve months as the forecasted transactions actually occur, assuming no further changes in fair market value. All forecasted transactions currently being hedged are expected to occur by December 2003. As of December 31, 2002, the fair value of the outstanding derivative instruments was a current liability of $9.6 million. This amount represents the difference between contract prices and future market prices on contracted volumes of the commodities as of December 31, 2002. As of December 31, 2002, we had derivative contracts in place for the following natural gas and oil volumes: Average Fixed Period Volumes Price ------ ----------- --------- Natural gas (MMBtu): 2003 ....................................... 6,080,000 $ 3.02 Oil (Bbl): 2003 ....................................... 182,500 24.10 In addition to these derivative instruments, we also manage our exposure to oil and gas price risks by periodically entering into fixed-price delivery contracts. As of December 31, 2002, we had fixed-price contracts in place for the following natural gas and oil volumes: Average Fixed Period Volumes Price(1) ------ ----------- ---------- Natural gas (MMBtu): 2003 ....................................... 5,173,000 $ 3.83 Oil (Bbl): 2003 ....................................... 227,500 26.41 - ---------- (1) Includes the effect of basis differentials. F-21 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes all derivative instruments and fixed-price contracts as of December 31, 2002: Average Fixed Period Volumes Price (1) ------ ----------- ---------- Natural gas (MMBtu): 2003 ...................................... 11,253,000 $ 3.39 Oil (Bbl): 2003 ...................................... 410,000 25.38 Thus far, in 2003 we have entered into the following fixed-price contracts: Average Fixed Period Volumes Price (1) ------ ----------- ---------- Natural gas (MMBtu): 2004 ...................................... 3,403,000 $ 4.32 Oil (Bbl): 2003 ...................................... 44,500 31.61 ------------- (1) Includes the effect of basis differentials. Additionally in 2003, we entered into a costless collar arrangement for 300,000 MMBtu of our natural gas production for the months of January through March 2004 with a floor of $4.40 per MMBtu and a ceiling of $5.80 MMBtu. Collar arrangements are put and call options used to establish floor and ceiling commodity prices for a fixed volume of production during a certain time period. They provide for payments to counterparties if the index price exceeds the ceiling and payments from the counterparties if the index price is below the floor. Note 13 -- ATP Energy Gas Purchase Transaction ATP Energy entered an agreement in December 1998 with American Citigas Company ("American Citigas") to purchase gas over a ten-year period commencing January 1999. The amount of gas to be purchased was 9,000 MMBtu per day for the first year and 5,000 MMBtu per day for years two through ten. The contract requires ATP Energy to purchase on a monthly basis the gas at a premium of approximately $2.50 per MMBtu to the Gas Daily Henry Hub Index. American Citigas is required to reimburse ATP Energy on a monthly basis for a portion of this premium during the term of the contract. This portion of the reimbursement is accomplished by a note receivable in favor of ATP. The note receivable bears interest at 6% and has monthly payments of approximately $0.4 million until January 2009. The balance of the note receivable at December 31, 2002 and 2001 was $22.9 million and $25.9 million, respectively. At December 31, 2002 and 2001, the present value of the remaining premium payments to be made by ATP Energy, using a discount rate of 6%, was $22.7 million and $25.8 million, respectively. The note receivable and the premium payable to American Citigas have been offset in the consolidated financial statements in accordance with the prescribed accounting in FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts". The aggregate amount of premium payments to be paid by ATP Energy over the term of the contract is approximately $49.0 million and the aggregate amount of payments to be paid to ATP Energy over the term of the note is approximately $45.0 million. At December 31, 2002 the remaining premium to be paid was $27.1 million, which will be reimbursed by the monthly reimbursement from American Citigas and the remaining deferred obligation discussed below. The terms provide for the immediate termination of the agreement upon non-performance by American Citigas. ATP Energy entered into a contract with El Paso Energy Marketing in December 1998 to sell an identical quantity of natural gas at the Gas Daily Henry Hub index price less $0.015 until December 2001 and has been renewed on a month-to-month basis since then. F-22 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ATP Energy received $6.0 million in connection with these transactions, of which $2.0 million was recorded as deferred revenue and $4.0 million was recorded as deferred obligations. The deferred revenue amount of $2.0 million is a non-refundable fee received by ATP Energy and is recognized into income as earned over the life of the contract. At December 31, 2002 and 2001, the deferred revenue amount was $1.1 million and $1.3 million, respectively. The deferred obligation amount of $4.0 million represented the difference between the premium we agreed to pay for natural gas under the American Citigas contract and the obligation of American Citigas to partially reimburse us for such premium. Any deferred obligation amount not utilized is refundable if the contract is terminated. The transaction is structured with American Citigas such that there is no financial impact to ATP Energy associated with the premium paid and reimbursement received other than the $2.0 million realized by ATP Energy. The premium we pay to American Citigas will be approximately the same as the reimbursement obligation for the remainder of the contract. ATP Energy entered into the transactions to earn the fee for agreeing to market the volumes of natural gas specified in the American Citigas contract. Our officers were paid $152,125 for the year ended December 31, 2000 for negotiating and monitoring ATP Energy's gas supply contract. We have recognized these amounts in general and administrative expense in the respective periods. No amounts were paid in 2002 and 2001 and we do not intend to pay any further amounts. Note 14 -- Related Party Transactions We have granted to certain of our officers overriding royalty interests ranging in amounts from 0.2% to 3.0% in four of its oil and gas properties. The overriding royalty interest entitles the holder to a portion, 0.2% to 3.0%, of the future revenue for the life of each property. As a result, we recognized $0.3 million in general and administrative expense for the year ended December 31, 2000. No amounts were paid in 2002 and 2001 and we do not intend to pay any further amounts. Note 15 -- Segment Information We follow SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. We manage our business and identify our segments based on geographic areas. We have two reportable segments: our operations in the Gulf of Mexico and our operations in the North Sea. Both of these segments involve oil and gas producing activities. Following is certain financial information regarding our segments for 2002, 2001 and 2000 is as follows (in thousands). Gulf of Mexico North Sea Total ------------ --------- --------- 2002 Revenues ....................................... $ 94,423 $ - $ 94,423 Depreciation, depletion and amortization ....... 43,292 98 43,390 Impairment of oil and gas properties ........... 6,844 - 6,844 Operating income (loss) ........................ 12,728 (2,426) 10,302 Total assets ................................... 144,069 37,986 182,055 Additions to oil and gas properties ............ 18,520 16,353 34,873 Table continued on following page F-23 ATP OIL & GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Gulf of Mexico North Sea Total ---------- ----------- ----------- 2001 Revenues .................................................. $ 113,174 $ - $ 113,174 Depreciation, depletion and amortization .................. 53,376 52 53,428 Impairment of oil and gas properties ...................... 24,891 - 24,891 Operating loss ............................................ (1,825) (2,904) (4,729) Total assets .............................................. 172,300 5,264 177,564 Additions to oil and gas properties ....................... 106,433 3,831 110,264 2000 Revenues .................................................. $ 83,988 $ - $ 83,988 Depreciation, depletion and amortization .................. 40,563 6 40,569 Impairment of oil and gas properties ...................... 10,838 - 10,838 Operating income (loss) ................................... 7,813 (438) 7,375 Total assets .............................................. 161,400 593 161,993 Additions to oil and gas properties ....................... 76,086 388 76,474 Note 16 -- Summarized Quarterly Financial Data (Unaudited) (In Thousands, Except Per Share Amounts) First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 2002 Revenues ...................................... $ 19,790 $ 29,311 $ 24,668 $ 20,654 Costs and expenses ............................ 19,489 20,950 19,446 24,236(1) Income (loss) from operations ................. 301 8,361 5,222 (3,582) Net income (loss) ............................. (6,363) 3,171 1,665 (3,173) Net income (loss) per common share: Basic and diluted (3) ....................... $ (0.31) $ 0.16 $ 0.08 $ (0.16) 2001 Revenues ...................................... $ 41,443 $ 31,035 $ 20,883 $ 19,813 Costs and expenses ............................ 28,701(2) 29,694(2) 24,659(2) 34,849(2) Income (loss) from operations ................. 12,742 1,341 (3,776) (15,036) Income (loss) before extraordinary item ....... (6,873) 3,813 (6,499) (11,222) Net income (loss) ............................. (6,873) 3,211 (6,499) (11,222) Income (loss) per common share before extraordinary item, basic and diluted ....... $ (0.38) $ 0.19 $ (0.32) $ (0.55) Net income (loss) per common share: Basic and diluted (3) ....................... $ (0.38) $ 0.16 $ (0.32) $ (0.55) - ---------- (1) Includes impairment charges of $6.8 million during the fourth quarter for two properties. (2) Includes impairment charges of $8.5 million, $5.7 million, $3.7 million and $7.0 million during the first, second, third and fourth quarters, respectively, for eight properties. (3) The sum of the per share amounts per quarter does not equal the year due to the changes in the average number of common shares outstanding F-24 ATP OIL & GAS CORPORATION SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS Oil and Gas Reserves and Related Financial Data (Unaudited) Costs Incurred The following table summarizes costs incurred in natural gas and oil property acquisition, exploration and development activities are summarized below (in thousands): Gulf of Mexico North Sea Total ------------- ------------- ------------- 2002 Property acquisition costs: Unproved ................................. $ 959 $ - $ 959 Proved ................................... - - - Development costs ........................... 17,561 16,353 33,914 ------------- ------------- ------------- $ 18,520 $ 16,353 $ 34,873 ============= ============= ============= 2001 Property acquisition costs: Proved ................................... $ 28,344 $ 3,112 $ 31,456 Development costs ........................... 77,783 719 78,502 ------------- ------------- ------------- $ 106,127 $ 3,831 $ 109,958 ============= ============= ============= 2000 Property acquisition costs: Proved ................................... $ 7,534 $ - $ 7,534 Development costs ........................... 68,982 - 68,982 ------------- ------------- ------------- $ 76,516 $ - $ 76,516 ============= ============= ============= Natural Gas and Oil Reserves Proved reserves are estimated quantities of natural gas and oil 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 proved reserves that can reasonably be expected to be recovered through existing wells with existing equipment and operating methods. Reserves quantities as well as certain information regarding future production and discounted cash flows were prepared by independent petroleum engineers Ryder Scott Company, L.P. for all years presented and Schlumberger Holditch-Reservoir Technologies Consulting Services for one property for 2000. Our U.K. reserves at December 31, 2002 and 2001 were prepared by independent petroleum consultants Troy Ikoda Limited. F-25 ATP OIL & GAS CORPORATION SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth our net proved oil and gas reserves at December 31, 1999, 2000, 2001 and 2002 and the changes in net proved oil and gas reserves for the years ended December 31, 2000, 2001 and 2002: Oil, Condensate and Natural Gas (MMcf) Natural Gas Liquids (MMBbls) ----------------------------------- ----------------------------------- Gulf of Gulf of Mexico North Sea Total Mexico North Sea Total ---------- ------------- -------- ----------- ----------- ------- Proved Reserves at December 31, 1999 ................. 93,997 - 93,997 1,689 - 1,689 Revisions of previous estimates ...... (19,423) - (19,423) (46) - (46) Extensions and discoveries ........... 7,239 - 7,239 77 - 77 Purchase of properties ............... 42,318 - 42,318 2,602 - 2,602 Disposition of properties ............ (151) - (151) - - - Production ........................... (22,410) - (22,410) (345) - (345) ----------- ----------- ----------- ----------- ----------- ------------ Proved Reserves at December 31, 2000 ................. 101,570 - 101,570 3,977 - 3,977 Revisions of previous estimates ...... (6,793) - (6,793) 134 - 134 Purchase of properties ............... 40,060 80,629 120,689 3,432 - 3,432 Production ........................... (20,957) - (20,957) (790) - (790) ----------- ----------- ----------- ----------- ----------- ----------- Proved Reserves at December 31, 2001 ................. 113,880 80,629 194,509 6,753 - 6,753 Revisions of previous estimates ...... 1,594 9,314 10,908 441 - 441 Purchase of properties ............... 4,696 20,272 24,968 - - - Disposition of properties ............ - (17,115) (17,115) - - - Production ........................... (17,732) - (17,732) (1,454) - (1,454) ----------- ----------- ----------- ----------- ----------- ----------- Proved Reserves at December 31, 2002 ................. 102,438 93,100 195,538 5,740 - 5,740 =========== =========== =========== =========== =========== =========== Oil, Condensate and Natural Gas (MMcf) Natural Gas Liquids (MMBbls) ----------------------------------- ----------------------------------- Gulf of Gulf of Mexico North Sea Total Mexico North Sea Total ---------- ----------- -------- ----------- ----------- ------- Proved Developed Reserves at December 31, 1999 ................. 67,314 - 67,314 710 - 710 December 31, 2000 ................. 42,502 - 42,502 851 - 851 December 31, 2001 ................. 56,704 - 56,704 3,115 - 3,115 December 31, 2002 ................. 34,068 - 34,068 2,318 - 2,318 Standardized Measure The standardized measure of discounted future net cash flows relating to proved natural gas and oil reserves as of year-end is shown below (in thousands): Gulf of Mexico North Sea Total ----------- ----------- ------------ 2002 Future cash inflows............................................... $ 649,927 $ 205,629 $ 855,556 Future operating expenses......................................... (69,215) (78,131) (147,346) Future development costs.......................................... (128,803) (109,510) (238,313) ---------- --------- ---------- Future net cash flows............................................. 451,909 17,988 469,897 Future income taxes............................................... (129,435) (929) (130,364) ---------- --------- ---------- Future net cash flows, after income taxes......................... 322,474 17,059 339,533 10% annual discount per annum..................................... (74,770) (5,870) (80,640) ---------- --------- ---------- Standardized measure of discounted future net cash flows $ 247,704 $ 11,189 $ 258,893 ========== ========= ========== Table continued on following page F-26 ATP OIL & GAS CORPORATION SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS Gulf of Mexico North Sea Total ------------- ------------- ------------- 2001 Future cash inflows .............................................. $ 423,273 $ 302,894 $ 726,167 Future operating expenses ........................................ (59,722) (100,330) (160,052) Future development costs ......................................... (100,919) (111,044) (211,963) ------------- ------------- ------------- Future net cash flows ............................................ 262,632 91,520 354,152 Future income taxes .............................................. (35,469) (26,188) (61,657) ------------- ------------- ------------- Future net cash flows, after income taxes ........................ 227,163 65,332 292,495 10% annual discount per annum .................................... (54,247) (25,584) (79,831) ------------- ------------- ------------- Standardized measure of discounted future net cash flows ......... $ 172,916 $ 39,748 $ 212,664 ============= ============= ============= 2000 Future cash inflows .............................................. $ 1,139,404 $ - $ 1,139,404 Future operating expenses ........................................ (70,719) - (70,719) Future development costs ......................................... (137,453) - (137,453) ------------- ------------- ------------- Future net cash flows ............................................ 931,232 - 931,232 Future income taxes .............................................. (285,587) - (285,587) ------------- ------------- ------------- Future net cash flows, after income taxes ........................ 645,645 - 645,645 10% annual discount per annum .................................... (121,164) - (121,164) ------------- ------------- ------------- Standardized measure of discounted future net cash flows ......... $ 524,481 $ - $ 524,481 ============= ============= ============= Future cash inflows are computed by applying year-end prices of oil and gas to the year-end estimated future production of proved oil and gas reserves. The base prices used for the Pretax PV-10 calculation were public market prices on December 31 adjusted by differentials to those market prices. These price adjustments were done on a property-by-property basis for the quality of the oil and natural gas and for transportation to the appropriate location. The Henry Hub and West Texas Intermediate prices, before adjustment for quality and transportation, utilized in the PV-10 value at December 31, 2002 were $4.74 per MMBtu of natural gas and $31.23 per barrel of oil. The National Balancing Point (the U.K. natural gas benchmark), before adjustment for quality and transportation, utilized in the PV-10 value at December 31, 2002 was $2.20 per MMBtu of natural gas. Estimates of future development and production costs are based on year-end costs and assume continuation of existing economic conditions and year-end prices. We will incur significant capital in the development of our Gulf of Mexico and North Sea oil and gas properties. We believe with reasonable certainty that we will be able to obtain such capital in the normal course of business. The estimated future net cash flows are then discounted using a rate of 10 percent per year to reflect the estimated timing of the future cash flows. The standardized measure of discounted cash flows is the future net cash flows less the computed discount. F-27 ATP OIL & GAS CORPORATION SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS Changes in Standardized Measure Changes in standardized measure of future net cash flows relating to proved natural gas and oil reserves are summarized below (in thousands): Gulf of Mexico North Sea Total -------------- ------------ ------------ 2002 Beginning of year................................................. $ 172,916 $ 39,748 $ 212,664 ------------- ------------- ------------- Sales of oil and gas, net of production costs.................. (72,658) - (72,658) Net changes in income taxes.................................... (68,837) 24,007 (44,830) Net changes in price and production costs...................... 192,111 (30,166) 161,945 Revisions of quantity estimates................................ 13,666 10,893 24,559 Accretion of discount.......................................... 20,001 6,427 26,428 Development costs incurred..................................... 13,163 14,413 27,576 Changes in estimated future development costs.................. (23,508) (10,670) (34,178) Purchases of minerals-in-place................................. 8,252 662 8,914 Sales of minerals-in-place..................................... - (13,664) (13,664) Changes in production rates, timing and other................... (7,402) (30,461) (37,863) ------------- ------------- ------------- 74,788 (28,559) 46,229 ------------- ------------- ------------- End of year ...................................................... $ 247,704 $ 11,189 $ 258,893 ============= ============= ============= 2001 Beginning of year ................................................ $ 524,481 $ - $ 524,481 ------------- ------------- ------------- Sales of oil and gas, net of production costs ................. (90,951) - (90,591) Net changes in income taxes ................................... 193,247 (24,517) 168,730 Net changes in price and production costs ..................... (593,914) - (593,914) Revisions of quantity estimates ............................... (11,220) - (11,220) Accretion of discount ......................................... 74,483 - 74,483 Development costs incurred .................................... 57,119 - 57,119 Changes in estimated future development costs ................. 22,413 - 22,413 Purchases of minerals-in-place ................................ 64,322 64,265 128,587 Changes in production rates, timing and other ................. (67,064) - (67,064) ------------- ------------- ------------- (351,565) 39,748 (311,817) ------------- ------------- ------------- End of year ...................................................... $ 172,916 $ 39,748 $ 212,664 ============= ============= ============= 2000 Beginning of year ................................................ $ 128,706 $ - $ 128,706 ------------- ------------- ------------- Sales of oil and gas, net of production costs ................. (64,381) - (64,381) Net changes in income taxes ................................... (193,613) - (193,613) Net changes in price and production costs ..................... 416,738 - 416,738 Revisions of quantity estimates ............................... (147,777) - (147,777) Accretion of discount ......................................... 15,632 - 15,632 Development costs incurred .................................... 18,134 - 18,134 Changes in estimated future development costs ................. (14,709) - (14,709) Purchases of minerals-in-place ................................ 300,706 - 300,706 Sales of minerals-in-place .................................... (525) - (525) Extensions and discoveries .................................... 51,795 - 51,795 Changes in production rates, timing and other ................. 13,775 - 13,775 ------------- ------------- ------------- 395,775 - 395,775 ------------- ------------- ------------- End of year ...................................................... $ 524,481 $ - $ 524,481 ============= ============= ============= F-28 ATP OIL & GAS CORPORATION SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS Sales of natural gas and oil, net of natural gas and oil operating expenses, are based on historical pre-tax results. Sales of natural gas and oil properties, extensions and discoveries, purchases of minerals-in-place and the changes due to revisions in standardized variables are reported on a pre-tax discounted basis, while the accretion of discount is presented on an after-tax basis. Capitalized Costs Related to Oil and Gas Producing Activities The following table summarizes capitalized costs related to our oil and gas operations (in thousands): Gulf of Mexico North Sea Total ------- --------- ----- 2002 Oil and gas properties: Unproved $ 959 $ - $ 959 Proved 333,082 21,047 354,129 Accumulated depletion, impairment and amortization (236,052) - (236,052) ------------- ------------- ------------- $ 97,989 $ 21,047 $ 119,036 ============= ============= ============= 2001 Oil and gas properties: Proved $ 315,287 $ 4,219 $ 319,506 Accumulated depletion, impairment and amortization (186,473) - (186,473) ------------- ------------- ------------- $ 128,814 $ 4,219 $ 133,033 ============= ============= ============= F-29 CERTIFICATIONS I, T. Paul Bulmahn, certify that: 1. I have reviewed this annual report on Form 10-K of ATP Oil & Gas Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 By: /s/ T. Paul Bulmahn ------------------------------------- T. Paul Bulmahn President and Chief Executive Officer F-30 I, Albert L. Reese, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of ATP Oil & Gas Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 By: /s/ Albert L. Reese, Jr. -------------------------------- Albert L. Reese, Jr. Senior Vice President and Chief Financial Officer F-31