Filed Pursuant to Rule 424(b)(3)
Registration No. 333-77060
333-77060-01
333-77060-02
333-77060-03
333-77060-04
333-77060-05
333-77060-06
333-77060-07
333-77060-08
PROSPECTUS
[WESTPORT LOGO]
WESTPORT RESOURCES CORPORATION
OFFER TO EXCHANGE
ALL OUTSTANDING 8 1/4% SENIOR SUBORDINATED NOTES DUE 2011
($275,000,000 PRINCIPAL AMOUNT)
FOR
8 1/4% SENIOR SUBORDINATED NOTES DUE 2011
($275,000,000 PRINCIPAL AMOUNT),
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH 8,
2002,
UNLESS WE EXTEND THE OFFER. WE DO NOT CURRENTLY INTEND TO EXTEND THE EXCHANGE
OFFER.
---------------------
- - We are offering to exchange up to $275.0 million aggregate principal amount of
new 8 1/4% Senior Subordinated Notes due 2011, or exchange notes, which have
been registered under the Securities Act of 1933, as amended, for any and all
outstanding 8 1/4% Senior Subordinated Notes due 2011, or old notes, issued in
a private offering on November 5, 2001.
- We will exchange all old notes that are validly tendered and not validly
withdrawn prior to the closing of the exchange offer for an equal
principal amount of exchange notes that have been registered.
- You may withdraw tenders of old notes at any time prior to the expiration
of the exchange offer.
- The terms of the exchange notes to be issued are identical in all
material respects to the old notes, except for transfer restrictions and
registration rights that do not apply to the exchange notes, and
different administrative terms.
- The exchange of notes will not be a taxable exchange for United States
federal income tax purposes.
- We will not receive any proceeds from the exchange offer.
- No public market exists for the old notes. We do not intend to list the
exchange notes on any securities exchange and, therefore, no active
public market is anticipated.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF FACTORS THAT YOU
SHOULD CONSIDER BEFORE TENDERING YOUR OLD NOTES.
---------------------
Each broker-dealer that receives exchange notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. The letter of transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act of 1933, as amended. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for old notes where such old
notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. We have agreed that, for a period of 180
days after the consummation of the exchange offer, we will make this prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------
The date of this prospectus is February 5, 2002
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Special Note Regarding Forward-Looking Statements........... i
Prospectus Summary.......................................... 1
Risk Factors................................................ 13
The Exchange Offer.......................................... 25
Use of Proceeds............................................. 35
Capitalization.............................................. 36
Unaudited Proforma Condensed Consolidated Financial
Statements................................................ 37
Selected Historical Consolidated Financial and Operating
Data...................................................... 43
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 47
Business.................................................... 60
Management.................................................. 70
Certain Relationships and Related Transactions.............. 86
Security Ownership of Westport's Principal Stockholders and
Management................................................ 89
Description of Certain Indebtedness......................... 97
Description of Exchange Notes............................... 98
Certain United States Federal Income Tax Considerations..... 146
Plan of Distribution........................................ 149
Legal Matters............................................... 150
Experts..................................................... 150
Where You Can Find More Information......................... 150
Glossary of Oil and Natural Gas Terms....................... 153
Index to Consolidated Financial Statements.................. F-1
Annex A -- Letter of Transmittal............................ A-1
Annex B -- Notice of Guaranteed Delivery.................... B-1
Annex C -- Notice to Investors.............................. C-1
Annex D -- Notice to Broker Dealers......................... D-1
</Table>
---------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or Securities Act,
Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act,
and the Private Securities Litigation Reform Act of 1995 that are subject to
risks and uncertainties. Forward-looking statements give our current
expectations and projections relating to the merger of Westport Resources
Corporation and Belco Oil & Gas Corp., also referred to as the Merger, and the
financial condition, results of operations, plans, objectives, future
performance and business of Westport Resources Corporation and its subsidiaries.
You can identify these statements by the fact that they do not relate strictly
to historical or current facts. These statements may include words such as
"anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and
other words and terms of similar meaning in connection with any discussion of
the timing or nature of future operating or financial performance or other
events. All statements other than statements of historical facts included in
this prospectus that address
i
activities, events or developments that we expect, believe or anticipate will or
may occur in the future are forward-looking statements and include, among other
things, statements relating to:
- amount, nature and timing of capital expenditures;
- drilling of wells;
- reserve estimates;
- timing and amount of future production of oil and natural gas;
- operating costs and other expenses;
- cash flow and anticipated liquidity;
- estimates of proved reserves, exploitation potential or exploration
prospect size; and
- marketing of oil and natural gas.
These forward-looking statements are based on our expectations and beliefs
concerning future events affecting us and are subject to uncertainties and
factors relating to our operations and business environment, all of which are
difficult to predict and many of which are beyond our control. Although we
believe that the expectations reflected in our forward-looking statements are
reasonable, we do not know whether our expectations will prove correct. Any or
all of our forward-looking statements in this prospectus may turn out to be
wrong. They can be affected by inaccurate assumptions we might make or by known
or unknown risks and uncertainties. Many factors mentioned in our discussion in
this prospectus, including the risks outlined under "Risk Factors," will be
important in determining future results. Actual future results may vary
materially. Because of these factors, we caution that investors should not place
undue reliance on any of our forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which it is made, and
except as required by law we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which it is made or to reflect the occurrence of anticipated or unanticipated
events or circumstances.
ii
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all of the information that you should
consider before participating in the exchange offer. Unless otherwise indicated
in this prospectus or the context otherwise requires, all references in this
prospectus to "Westport," the "Company," "us," "our," or "we," are to Westport
Resources Corporation and its consolidated subsidiaries. Unless otherwise
indicated, the operating results and property descriptions presented here are
those of Westport Resources Corporation, adjusted to reflect the pro forma
effect of its merger, also referred to as the Merger, with Belco Oil & Gas Corp.
on August 21, 2001. Except as otherwise specified, references to "Old Westport"
are to Westport Resources Corporation prior to the Merger. References to "Belco"
are to Belco Oil & Gas Corp. prior to the Merger. We have provided definitions
for some of the oil and natural gas industry terms used in this prospectus in
the "Glossary of Oil and Natural Gas Terms" beginning on page 153. Unless
otherwise specified or the context otherwise requires, the term "old notes"
refers to the 8 1/4% senior subordinated notes due 2011 issued on November 5,
2001, the term "exchange notes" refers to the 8 1/4% senior subordinated notes
due 2011 issued pursuant to the registration statement of which this prospectus
is a part and the term "notes" refers to the old notes and the exchange notes,
collectively.
WESTPORT RESOURCES CORPORATION
We are an independent energy company engaged in oil and natural gas
exploitation, acquisition and exploration activities primarily in the United
States. Our reserves and production operations are concentrated in the following
divisions: Northern (Rocky Mountains); Southern (Permian Basin, Mid-Continent
and Gulf Coast); and Gulf of Mexico (offshore). We focus on maintaining a
balanced portfolio of lower-risk, long-life onshore reserves and higher-margin
offshore reserves to provide a diversified cash flow foundation for our
exploitation, acquisition and exploration activities. As of June 30, 2001, our
reserve base consisted of 54% natural gas and 46% oil and had a reserve life
index of 8.7 years, based upon annualized production for the six months ended
June 30, 2001. We produced 126.9 Bcfe in 2000 and 95.0 Bcfe in the nine months
ended September 30, 2001. Based upon pro forma production levels for the nine
months ended September 30, 2001, we are among the 20 largest domestic
independent exploration and production companies. Pro forma for the nine months
ended September 30, 2001, we generated net revenues and EBITDAX of $451,982
million and $230,457 million, respectively.
Over the last several years, growth in our reserves, production and cash
flow has resulted primarily from our acquisitions and subsequent development
drilling activities focused in core project areas. From Old Westport in 1997 to
Westport pro forma as of June 30, 2001, we increased proved reserves from 197
Bcfe to 1,081 Bcfe, a compounded annual growth rate of approximately 63%. Over
the same period we increased average daily production from 66 Mmcfe/d to 341
Mmcfe/d, a compounded annual growth of approximately 60%. This growth has been
complemented by management's ability to substantially reduce our cost structure,
including lease operating expenses, transportation costs, production taxes and
general and administrative costs, over the same period from $1.32 per Mcfe to
$1.14 per Mcfe.
We believe that our exploitation and acquisition expertise and our sizable
exploration inventory, together with our operating experience and efficient cost
structure, provide us with the ability to generate substantial current cash flow
and position us for future growth. We operate approximately 70% of the net
present value of our reserves, allowing us to better manage expenses, capital
allocation and the decision-making processes related to other aspects of
exploitation and exploration activities. We expect to further develop our
properties through lower-risk recovery methods. Our capital budget for 2001 was
approximately $265 million balanced between exploitation and exploration both
onshore and offshore. We have a capital budget of approximately $200 million for
2002. We have over 1,300 identified drilling opportunities. We anticipate
drilling approximately 300 to 350 of these locations in 2002.
As of June 30, 2001, our proved reserves of 1,081 Bcfe had a net present
value before income taxes, discounted at 10%, of $1,474 million based on NYMEX
prices of $26.23 per barrel of oil and $3.22 per Mmbtu of natural gas. This
provides a 3.6x coverage ratio of our debt, which, adjusted to reflect the
offering of $275.0 million of the old notes and the application of the proceeds
therefrom on November 5, 2001, totaled
1
$411.7 million as of September 30, 2001. Assuming lower NYMEX prices of $20.00
per barrel of oil and $2.50 per Mmbtu of natural gas, our net present value of
proved reserves before income taxes discounted at 10% would have been $974
million based on June 30, 2001 reserve estimates. This provides a 2.4x coverage
ratio of our total debt as of September 30, 2001, adjusted to reflect the
offering of $275.0 million of the old notes and the application of the proceeds
therefrom on November 5, 2001. Approximately 75% of our reserves were classified
as proved developed as of June 30, 2001.
The following table sets forth the pro forma volume and net present value
of our proved reserves as of June 30, 2001 and undeveloped acreage as of
December 31, 2001 and a summary of third quarter 2001 production by our three
divisions.
<Table>
<Caption>
AS OF
AS OF JUNE 30, 2001 DECEMBER 31, 2001 THIRD QUARTER 2001
--------------------------------------- ----------------- -----------------------
TOTAL NET PRESENT NET
PROVED % OF VALUE BEFORE % OF UNDEVELOPED AVERAGE % OF
DIVISION RESERVES TOTAL INCOME TAX TOTAL ACRES PRODUCTION PRODUCTION
- -------- -------- ----- ------------ ----- ----------------- ---------- ----------
(BCFE) ($MILLIONS) (000S) (MMCFE/D)
Northern.................. 346 32% $ 391 27% 562 103 29%
Southern.................. 564 52 753 51 81 138 39
Gulf of Mexico............ 171 16 330 22 204 117 32
----- --- ------ ---- --- --- ---
Total................... 1,081 100% $1,474 100% 847 358 100%
===== === ====== ==== === === ===
</Table>
OUR STRATEGY
Our strategy is to grow our reserve base, diversify our risk profile and
expand our investment opportunities by (a) executing on lower-risk exploitation
projects and acquisitions and (b) drilling potentially higher-impact exploration
prospects. We generally allocate 65% to 75% of our capital budget to
exploitation projects and 25% to 35% to exploration projects, thereby balancing
risks while maintaining significant potential for growth. We do not budget for
acquisitions. To accomplish this strategy, we will:
- enhance our existing and acquired properties through exploitation to
increase production and enlarge our reserve base;
- pursue acquisitions with developmental upside to grow our inventory of
exploitation projects and to employ our operating expertise;
- generate and drill an extensive prospect inventory by applying current
technology and leveraging off our significant operational capabilities;
and
- maintain financial flexibility and a conservative capital structure.
We intend to implement our strategy as follows:
Continue an Active Exploitation Program. We plan to drill more than 300
development wells in 2002. We drilled 317 development wells in 2001, 308 of
which were successful, resulting in 97% success rate. In 2000, we drilled 266
development wells onshore and 24 development wells in the Gulf of Mexico with a
95% success rate. We have identified significant prospective exploitation
projects both onshore and offshore and have a proven track record of executing
such projects. For example, in 2000 we initiated a horizontal infill drilling
program in our Wiley field in North Dakota, and increased our water injection
capacity in that area. Through December 31, 2001, we have drilled 22 wells in
this field, all of which have been successful. This activity increased gross
production in this field from approximately 600 bbl/d in April 2000 to nearly
2,100 bbl/d in November 2001, while replacing nearly 292% of our production over
the same period. In the next 12 months, we plan to drill 8 to 10 additional
wells in the Wiley field.
Pursue and Capitalize on Acquisitions. Through a series of acquisitions
from 1995 through 2000, Old Westport substantially increased its reserve base by
investing approximately $452 million in acquiring oil and natural gas properties
at an average unit acquisition cost of $1.09 per Mcfe. Old Westport invested an
additional $105 million to exploit these acquired properties and added reserves
at an average unit cost of
2
$0.72 per Mcfe, thereby reducing average unit acquisition costs to $1.00 per
Mcfe. The subsequent reserve additions resulting from these exploitation
activities replaced approximately 91% of production from the acquired
properties, while generating cash flows through December 31, 2000 of
approximately $320 million.
In August 2001, we completed our Merger with Belco for approximately $1.0
billion, including approximately $714 million allocated to proved oil and
natural gas properties, or $1.12/Mcfe. We believe that, due to the significant
geographic overlap and the similarity of reserve characteristics, the Belco
operations complement our existing onshore areas of operations. Within our
Northern Division, the Merger added in excess of 1.2 million gross acres to our
exploration inventory in the gas-prone basins of Wyoming, while adding 43
Mmcfe/d to production in this region. The Merger also added critical mass to our
onshore Gulf Coast, Permian and Mid-Continent regions, growing our net daily
production in these regions from 24 Mmcfe/d for Old Westport prior to the Merger
to over 144 Mmcfe/d after the Merger.
Due to a trend toward industry consolidation and asset rationalization, we
believe that we will continue to have opportunities to acquire oil and natural
gas properties at attractive rates of return. We have an experienced management
team focused on executing our disciplined approach to identifying and capturing
these opportunities.
Capitalize on Extensive Exploration Opportunities. Our strategy continues
to focus on enhancing reserve and production growth in our core areas by
emphasizing and applying the latest geological, geophysical and drilling
technologies. We seek exploration opportunities with characteristics similar to
producing properties in our core areas in order to leverage our technical and
operational expertise. For the twelve months ended December 31, 2001, we had a
76% success ratio on exploration projects.
Onshore, we hold interests in approximately 1.6 million gross
(approximately 0.6 million net) undeveloped acres, two-thirds of which are
located in the principal natural gas basins of Wyoming -- the Greater Green
River, Wind River and Big Horn. Over the next 12 to 24 months we plan to drill
20 to 25 exploratory wells onshore, primarily in Wyoming and in the Texas Gulf
Coast.
In the Gulf of Mexico, we had a 21 prospect exploration inventory located
on 24 blocks as of December 31, 2001, and had additional exploration
opportunities in several of our 67 developed blocks. We have under license 3-D
seismic data covering over 18,000 square miles (2,300 blocks) and 2-D seismic
data covering over 150,000 linear miles in this area. In order to control
activity, our strategy typically includes retaining large working interests in
our internally-generated prospects. Prior to drilling, we typically trade a
portion of these prospects for interests in prospects developed by others. This
strategy allows us to achieve multiple prospect exposure while diversifying our
investment risk.
Maintain Financial Flexibility and a Conservative Capital Structure. We
plan to maintain financial flexibility and a conservative capital structure,
which we believe is integral to the successful execution of our exploitation,
acquisition and exploration strategy. Prior to the Merger, Old Westport had $0.2
million of total debt. As adjusted to reflect the offering of $275.0 million of
the old notes and the application of the proceeds therefrom on November 5, 2001,
our total debt to total capitalization ratio of 30.7% is one of the lowest in
our industry and our debt (as so adjusted) to EBITDAX ratio for the nine months
ended September 30, 2001 was 1.79x.
PRINCIPAL EXECUTIVE OFFICES
We are incorporated under the laws of the State of Nevada. Our principal
offices are located at 410 Seventeenth Street, Suite 2300, Denver, Colorado
80202-4436. Our telephone number is (303) 573-5404, and our web site can be
found at www.westportresources.com. Information contained on our website does
not constitute part of this prospectus.
FAILURE TO EXCHANGE YOUR OLD NOTES
The old notes that you do not tender or that we do not accept will,
following the exchange offer, continue to be restricted securities. Therefore,
you may only transfer or resell them in a transaction registered under or exempt
from the Securities Act and applicable state securities laws. We will issue the
exchange notes in
3
exchange for the old notes under the exchange offer only following the
satisfaction of the procedures and conditions discussed under the caption "The
Exchange Offer."
Because we anticipate that most holders of the old notes will elect to
exchange their old notes, we expect that the liquidity of the market, if any,
for any old notes remaining after the completion of the exchange offer will be
substantially limited. Any old notes tendered and exchanged in the exchange
offer will reduce the aggregate principal amount outstanding of the old notes.
THE EXCHANGE OFFER
On November 5, 2001, we completed the private offering of our unregistered
8 1/4% Senior Subordinated Notes due 2011, which we refer to in this prospectus
as the old notes. In this exchange offer, we are offering to exchange, for your
old notes, exchange notes that are identical in all material respects to the old
notes except for transfer restrictions and registration rights that do not apply
to the exchange notes, and different administrative terms.
Registration Rights
Agreement..................... We sold the old notes on November 5, 2001 to
the initial purchasers -- Credit Suisse First
Boston Corporation, Fleet Securities, Inc.,
Fortis Investment Services, LLC, J. P. Morgan
Securities Inc., Lehman Brothers, Inc., TD
Securities (USA) Inc. and U.S. Bancorp Piper
Jaffray Inc. Simultaneously with the sale of
the old notes, we entered into a registration
rights agreement that provides for, among other
things, the exchange offer. You may exchange
your old notes for exchange notes, which have
substantially identical terms. After the
exchange offer is over, you will not be
entitled to any exchange or registration rights
with respect to your old notes, except under
limited circumstances.
The Exchange Offer............ We are offering to exchange up to $275.0
million aggregate principal amount of old notes
for up to $275.0 million aggregate principal
amount of exchange notes. You may exchange your
old notes only by following the procedures
described elsewhere in this prospectus under
the heading "The Exchange Offer."
Expiration Date; Withdrawal of
Tender........................ The exchange offer will expire at 5:00 p.m.,
New York City time, on March 8, 2002, unless we
extend it. We do not currently intend to extend
the exchange offer. You may withdraw your
tender of old notes pursuant to the exchange
offer at any time prior to the expiration date
of the exchange offer. See "The Exchange Offer"
for a more complete description of the tender
and withdrawal provisions.
Resale........................ We believe that the exchange notes issued
pursuant to the exchange offer in exchange for
old notes may be offered for resale, resold and
otherwise transferred by you (unless you are an
"affiliate" of ours within the meaning of Rule
405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act, so
long as you are acquiring the exchange notes in
the ordinary course of your business and you
have not engaged in, do not intend to engage
in, and have no arrangement or understanding
with any person to participate in, a
distribution of the exchange notes.
Each participating broker-dealer that receives
exchange notes for its own account under the
exchange offer in exchange for old notes
4
that were acquired by the broker-dealer as a
result of market-making or other trading
activity must acknowledge that it will deliver
a prospectus in connection with any resale of
the exchange notes. See "Plan of Distribution."
Any holder of old notes who:
- is our affiliate;
- does not acquire exchange notes in the
ordinary course of its business; or
- exchanges old notes in the exchange offer
with the intention to participate, or for the
purpose of participating, in a distribution
of exchange notes must, in the absence of an
exemption, comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with the resale
of the exchange notes.
Conditions to the Exchange
Offer......................... The exchange offer is subject to customary
conditions, which we may, but are not required
to, waive. We currently anticipate that each of
the conditions will be satisfied and that we
will not need to waive any conditions. We
reserve the right to terminate or amend the
exchange offer at any time before the
expiration date if any such condition occurs.
For additional information regarding the
conditions to the exchange offer, see "The
Exchange Offer."
Procedures for Tendering Old
Notes......................... If you are a holder of old notes who wishes to
accept the exchange offer, you must:
- complete, sign and date the accompanying
letter of transmittal, or a facsimile of the
letter of transmittal, and mail or otherwise
deliver the letter of transmittal, together
with all other documents required by the
letter of transmittal, including your old
notes, to the exchange agent at the address
set forth under "The Exchange Offer;" or
- arrange for The Depository Trust Company to
transmit certain required information,
including an agent's message forming part of
a book-entry transfer in which you agree to
be bound by the terms of the letter of
transmittal, to the exchange agent in
connection with a book-entry transfer.
By tendering your old notes in either manner,
you will be representing among other things,
that:
- the exchange notes you receive pursuant to
the exchange offer are being acquired in the
ordinary course of your business;
- you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to participate,
in the distribution of the exchange notes
issued to you in the exchange offer; and
- you are not an "affiliate" of ours, or if you
are an affiliate of ours you will comply with
the applicable registration and prospectus
delivery requirements of the Securities Act.
5
If a broker, dealer, commercial bank, trust
company or other nominee is the registered
holder of your old notes, we urge you to
contact that person or entity promptly to
tender your old notes in the exchange offer.
For more information on tendering your old
notes, please refer to the sections in this
prospectus entitled "The Exchange Offer --
Acceptance of Old Notes for Exchange" and
"-- Procedures for Tendering Old Notes."
United States Federal Income
Tax Consequences.............. Your exchange of old notes for exchange notes
in the exchange offer will not result in any
gain or loss to you for United States federal
income tax purposes. See "Certain United States
Federal Income Tax Considerations" for a more
detailed description of the tax consequences of
the exchange offer associated with the exchange
of old notes for the exchange notes to be
issued in the exchange offer and the ownership
and disposition of those exchange notes.
Use of Proceeds............... We will not receive any cash proceeds from the
issuance of exchange notes pursuant to the
exchange offer.
Exchange Agent................ The Bank of New York.
Consequences of Failure to
Exchange Your Old Notes....... Old notes not exchanged in the exchange offer
will continue to be subject to the restrictions
on transfer that are described in the legend on
the old notes. In general, you may offer or
sell your old notes only if they are registered
under, or offered or sold under an exemption
from, the Securities Act and applicable state
securities laws. We do not currently intend to
register the old notes under the Securities
Act. If your old notes are not tendered and
accepted in the exchange offer, it may become
more difficult for you to sell or transfer your
old notes.
THE EXCHANGE NOTES
The terms of the exchange notes are identical in all material respects to
those of the old notes, except for transfer restrictions and registration rights
that do not apply to the exchange notes, and different administrative terms. The
exchange notes will evidence the same debt as the old notes, and the same
indenture will govern the exchange notes as the old notes. The summary below
describes the principal terms of the exchange notes. Certain of the terms and
conditions described below are subject to important limitations and exceptions.
The "Description of Exchange Notes" section of this prospectus contains a more
detailed description of the terms and conditions of the exchange notes.
Issuer........................ Westport Resources Corporation.
Securities.................... Up to $275.0 million aggregate principal amount
of 8 1/4% senior subordinated notes due 2011
registered under the Securities Act.
Interest Rate and Payment
Dates......................... 8 1/4% per annum payable on May 1 and November
1 of each year, commencing on May 1, 2002.
Maturity Date................. November 1, 2011.
Ranking....................... The exchange notes will be senior subordinated
unsecured obligations. They will rank equal in
right of payment with our outstand-
6
ing 8 7/8% Senior Subordinated Notes, any old
notes that are not exchanged in the exchange
offer and any of our other existing and future
Senior Subordinated Indebtedness and will be
subordinated in right of payment to our
obligations under the Revolving Credit Facility
and any of our other existing and future Senior
Indebtedness. As of September 30, 2001,
adjusted to reflect the offering of $275.0
million of the old notes and the application of
the proceeds therefrom on November 5, 2001, we
had approximately $12.0 million of Senior
Indebtedness and approximately $399.7 million
of Senior Subordinated Indebtedness. The terms
"Revolving Credit Facility," "Senior
Indebtedness" and "Senior Subordinated
Indebtedness" are defined under "Description of
Exchange Notes -- Certain Definitions."
Optional Redemption........... Prior to November 1, 2004, we are entitled to
redeem up to 35% of the original principal
amount of the notes, including the original
principal amount of any additional notes we may
issue, from the proceeds of certain equity
offerings, so long as:
- we pay to the holders of such notes a
redemption price of 108.25% of the principal
amount of the notes, plus accrued and unpaid
interest to the date of redemption; and
- at least 65% of the original aggregate
principal amount of the notes and any
additional notes remains outstanding after
each such redemption, other than the notes
held by us or our affiliates.
Prior to November 1, 2006, we are entitled to
redeem the exchange notes as a whole at a
redemption price equal to the principal amount
of the exchange notes plus the Applicable
Premium and accrued and unpaid interest. The
term "Applicable Premium" is defined under
"Description of Exchange Notes -- Certain
Definitions."
On or after November 1, 2006, we are entitled
to redeem some or all of the exchange notes at
the fixed redemption prices listed under
"Description of Exchange Notes -- Optional
Redemption," plus accrued and unpaid interest
to the date of redemption.
Guaranties.................... The payment of the principal, interest and
premium on the exchange notes will be fully and
unconditionally guaranteed on a senior
subordinated basis by some of our existing and
future restricted subsidiaries. See
"Description of Exchange Notes -- Guaranties."
The subsidiary guaranties will rank equal in
right of payment with our restricted
subsidiaries' guaranties of our outstanding
8 7/8% Senior Subordinated Notes, any old notes
that are not exchanged in the exchange offer
and any other existing and future Senior
Subordinated Indebtedness of our restricted
subsidiaries and subordinated in right of
payment to our restricted subsidiaries'
guaranties of our obligations under the
Revolving Credit Facility and any other
existing and future Senior Indebtedness of our
restricted subsidiaries.
7
Restrictive Covenants......... The indenture governing the exchange notes
limits what we and our restricted subsidiaries
may do. The provisions of the indenture limit
our and such subsidiaries' ability, among other
things, to:
- incur additional indebtedness;
- pay dividends on our capital stock or redeem,
repurchase or retire our capital stock or
subordinated indebtedness;
- make investments;
- incur liens;
- create any consensual limitation on the
ability of our restricted subsidiaries to pay
dividends, make loans or transfer property to
us;
- engage in transactions with our affiliates;
- sell assets, including capital stock of our
subsidiaries; and
- consolidate, merge or transfer assets.
During any period that the notes have
investment grade ratings from both Moody's
Investors Service, Inc. and Standard and Poor's
Ratings Group and no default has occurred and
is continuing, the foregoing covenants will
cease to be in effect with the exception of
covenants that contain limitations on liens and
on, among other things, certain consolidations,
mergers and transfers of assets.
These covenants are subject to important
exceptions and qualifications described under
"Description of Exchange Notes -- Certain
Covenants."
Change of Control............. If we experience a Change of Control, subject
to certain conditions, we must give holders of
the notes the opportunity to sell to us their
notes at 101% of the principal amount, plus
accrued and unpaid interest. The term "Change
of Control" is defined under "Description of
Exchange Notes -- Change of Control."
Absence of a Public Market for
the Exchange Notes............ The exchange notes will generally be freely
transferable, but will be new securities for
which there will not initially be a market. We
cannot assure you as to the development or
liquidity of any market for the exchange notes.
We do not intend to apply for listing of the
exchange notes on any securities exchange or
any automated dealer quotation system.
YOU SHOULD REFER TO THE SECTION ENTITLED "RISK FACTORS" FOR AN EXPLANATION
OF CERTAIN RISKS ASSOCIATED WITH THE EXCHANGE NOTES.
8
SUMMARY UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA
The following tables set forth summary unaudited pro forma financial and
operating data to give effect to the merger between Old Westport and Belco and,
for the 2000 period, the merger between Westport Oil and Gas Company, Inc. and
Equitable Production (Gulf) Company, both of which have been accounted for as
purchase transactions for financial accounting purposes. The unaudited pro forma
statement of operations data assume that the mergers occurred on January 1,
2000. The unaudited pro forma financial and operating data do not purport to be
indicative of the results of operations or the financial position that would
have occurred had the mergers occurred on the date indicated, nor do they
purport to be indicative of future results of operations. The unaudited pro
forma financial and operating data should be read in conjunction with the
historical consolidated financial statements and related notes of Old Westport
and Belco, the historical statements of revenues and direct operating expenses
and related notes for the properties acquired from Equitable Production (Gulf)
Company, our unaudited pro forma condensed consolidated financial statements and
related notes, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial information contained in this
prospectus.
<Table>
<Caption>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 2000 SEPTEMBER 30, 2001
----------------- ------------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Oil and natural gas sales................................. $ 438,361 $388,309
Commodity price risk management activities:
Non-hedge cash settlements............................. (33,953) (52,649)
Non-hedge non-cash change in fair value of
derivatives.......................................... (104,349) 116,322
Gain on sale of assets, net............................... 3,130 --
--------- --------
Net revenues...................................... 303,189 451,982
--------- --------
Operating costs and expenses:
Lease operating expense................................... 68,902 61,096
Production taxes.......................................... 25,095 22,414
Transportation costs...................................... 3,034 3,921
Exploration............................................... 18,758 27,131
Depletion, depreciation and amortization.................. 136,786 114,851
Impairment of proved properties........................... 2,911 --
Impairment of unproved properties......................... 5,124 3,114
Stock compensation expense................................ 5,539(1) (1,060)
General and administrative................................ 18,246 19,457
--------- --------
Total operating expenses.......................... 284,395 250,924
--------- --------
Operating income.................................. 18,794 201,058
Other income (expense):
Interest expense.......................................... (36,007) (23,889)
Interest income........................................... 2,181 1,685
Other..................................................... 152 1,897
--------- --------
Income (loss) before income taxes........................... (14,880) 180,751
Benefit (provision) for income taxes........................ 5,208 (64,738)
--------- --------
Net income (loss) before cumulative effect of change in
accounting principle...................................... $ (9,672) $116,013
========= ========
</Table>
9
<Table>
<Caption>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 2000 SEPTEMBER 30, 2001
----------------- ------------------
(DOLLARS IN THOUSANDS)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic..................................................... 45,834 52,043
Diluted................................................... 45,834 52,876
NET INCOME (LOSS) AVAILABLE TO COMMON STOCK BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE PER
COMMON SHARE(2):
Basic..................................................... $ (0.34) $ 2.16
Diluted................................................... $ (0.34) $ 2.12
</Table>
<Table>
<Caption>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 2000 SEPTEMBER 30, 2001
----------------- ------------------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE
SALES PRICES AND AVERAGE COSTS DATA)
OTHER FINANCIAL AND OPERATING DATA:
EBITDAX(3).................................................. $291,211 $230,457
PRODUCTION:
Oil (Mbbls)................................................. 7,613 5,560
Natural gas (Mmcf).......................................... 81,236 61,689
Oil and natural gas (Mmcfe)................................. 126,914 95,049
AVERAGE SALES PRICES:
Oil (per bbl)............................................... $ 28.60 $ 23.27
Natural gas (per Mcf)....................................... 3.74 4.20
Oil and natural gas (per Mcfe).............................. 4.11 4.09
AVERAGE COSTS (PER MCFE):
Lease operating expense..................................... $ 0.54 $ 0.64
Production taxes............................................ 0.20 0.24
Transportation costs........................................ 0.02 0.04
General and administrative.................................. 0.14 0.20
Depletion, depreciation and amortization.................... 1.08 1.21
</Table>
- ---------------
(1) Includes compensation expense of $3.4 million recorded as a result of a
one-time repurchase of employee stock options in March 2000 in connection
with the merger between Westport Oil and Gas and Equitable Production (Gulf)
Company.
(2) Net income available to common stock before cumulative effect of change in
accounting principle per common share reflects the impact of preferred stock
dividends of $6,022,000 and $3,696,000 in the 2000 and 2001 periods,
respectively.
(3) EBITDAX (as used herein) is defined as net income (loss) before interest
expense, income taxes, depletion, depreciation and amortization, impairment
of unproved properties, impairment of proved properties, exploration
expense, non-cash stock compensation expense and non-cash derivative gain
(loss). While EBITDAX should not be considered in isolation or as a
substitute for net income (loss), operating income (loss), cash flow
provided by operating activities or other income or cash flow data prepared
in accordance with generally accepted accounting principles or as an
indicator of a company's financial performance, we believe that it provides
additional information with respect to our ability to meet our future debt
service, capital expenditure commitments and working capital requirements.
When evaluating EBITDAX, investors should consider, among other factors, (i)
increasing or decreasing trends in EBITDAX, (ii) whether EBITDAX has
remained at positive levels historically and (iii) how EBITDAX compares to
levels of interest expense. Because EBITDAX excludes some, but not all,
items
10
that affect net income and is defined differently among companies in our
industry, the measure of EBITDAX presented above may not be comparable to
similarly titled measures of other companies.
SUMMARY UNAUDITED PRO FORMA OIL AND NATURAL GAS RESERVE DATA
The following table sets forth pro forma summary data with respect to our
combined estimated net proved oil and natural gas reserves as of June 30, 2001.
<Table>
<Caption>
TOTAL
CRUDE PROVED
OIL NATURAL GAS RESERVES
(MBBLS) (MMCF) (MMCFE)(1)
------- ----------- ----------
ESTIMATED NET PROVED RESERVES:
Developed........................................... 64,321 424,854 810,778
Undeveloped......................................... 17,787 163,926 270,649
------ ------- ---------
Total............................................. 82,108 588,780 1,081,427
====== ======= =========
</Table>
<Table>
RESERVE VALUATION DATA (IN THOUSANDS):
Estimated future net revenues (before income taxes)......... $2,407,349
Present value of estimated future net revenues (before
income taxes, discounted at 10%).......................... 1,473,632
Standardized measure of discounted future net cash
flows(2).................................................. 1,094,284
</Table>
- ---------------
(1) Mbbls converted to Mmcfe based on a six to one conversion ratio.
(2) The standardized measure of discounted future net cash flows represents the
present value of future net revenues after income taxes discounted at 10%.
Reserves and present values were calculated using NYMEX prices at the close
of business on June 29, 2001 of $26.23 per bbl and $3.22 per Mmbtu. The
foregoing standardized measures of discounted future net cash flows do not
include the effects of hedging or other derivative contracts. Assuming lower
NYMEX prices of $20.00 per barrel of oil and $2.50 per Mmbtu of natural gas, our
net present value of proved reserves before income taxes discounted at 10% would
have been $974 million based on June 30, 2001 reserve estimates.
11
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data for Belco
and Westport and pro forma and combined per share data after giving effect to
the Merger under the purchase method of accounting.
<Table>
<Caption>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------ -----------------
HISTORICAL -- BELCO
Earnings (Loss) Per Share:
Basic............................................. $(1.71) N/A
Diluted........................................... (1.71) N/A
Book Value Per Share -- Diluted...................... 1.68 N/A
HISTORICAL -- WESTPORT
Earnings (Loss) Per Share:
Basic............................................. 1.54 1.53
Diluted........................................... 1.52 1.50
Book Value Per Share -- Diluted...................... 11.92 17.41
PRO FORMA COMBINED -- NEW WESTPORT
Earnings (Loss) Per Share:
Basic............................................. (0.34) 2.16
Diluted........................................... (0.34) 2.12
Book Value Per Share -- Diluted...................... N/A 17.41
PRO FORMA COMBINED -- BELCO
EQUIVALENT PER SHARE
Earnings (Loss) Per Share:
Basic............................................. (0.14) N/A
Diluted........................................... (0.14) N/A
Book Value Per Share -- Diluted...................... N/A N/A
</Table>
12
RISK FACTORS
You should carefully consider the following factors, as well as the other
information contained in this prospectus, before deciding to exchange your old
notes for exchange notes. An investment in the notes represents a high degree of
risk. There are a number of factors, including those specified below, which may
adversely affect our ability to make payments on the notes. You could therefore
lose a substantial portion or all of your investment in the notes. Consequently,
an investment in the notes should only be considered by persons who can assume
such risk. The risk factors described below are not necessarily exhaustive and
you are encouraged to perform your own investigation with respect to the notes
and us. Each of the risks described in this section with respect to the exchange
notes are generally applicable to the old notes. Before making your investment
decision, you should also read the other information included in this
prospectus, including our financial statements and the related notes.
RISKS RELATED TO OUR BUSINESS
OIL AND NATURAL GAS PRICES FLUCTUATE WIDELY, AND LOW PRICES COULD HARM OUR
BUSINESS.
Our results of operations are highly dependent upon the prices of oil and
natural gas. Historically, oil and natural gas prices have been volatile and are
likely to continue to be volatile in the future. For example, our average sales
prices for oil and natural gas for the nine months ended September 30, 2000 were
$27.45/bbl and $3.60/Mcf, respectively, with production totaling 39.7 Bcfe and
combined oil and natural gas sales of $158.4 million during this period. In
contrast, our average sales prices for oil and natural gas for the nine months
ended September 30, 2001 were $24.12/bbl and $4.31/Mcf, with production
increasing to 55.6 Bcfe and combined oil and natural gas sales increasing to
$234.4 million during this period. Since September 30, 2001, commodity prices
have declined overall. The prices received for oil and natural gas production
depend upon numerous factors including, among others:
- consumer demand;
- governmental regulations and taxes;
- the price and availability of alternative fuels;
- geopolitical developments;
- commodity processing, gathering and transportation availability;
- the level of foreign imports of oil and natural gas; and
- the overall economic environment.
All of these factors are beyond our control. Any significant decrease in prices
for oil and natural gas could have a material adverse effect on our financial
condition, results of operations and quantities of reserves that are
commercially recoverable. For example, the decline in oil and natural gas prices
in the past nine months has impacted our cash flow and could adversely impact
our borrowing base and liquidity in general. If the oil and natural gas industry
continues to experience significant future price decreases or other adverse
market conditions, we may not be able to generate sufficient cash flow from
operations to meet our obligations and make planned capital expenditures.
WE WILL REQUIRE SUBSTANTIAL CAPITAL TO FUND OUR OPERATIONS.
We expect for the foreseeable future to make substantial capital
expenditures for the acquisition, exploration and development of oil and natural
gas reserves. Historically, we have paid for these expenditures primarily with
cash from operating activities and with proceeds from debt and equity
financings. If revenues decrease as a result of lower oil and natural gas prices
or for any other reason, we may not have the funds available to replace our
reserves or to maintain production at current levels, which would result in a
decrease in production over time.
13
WE MAY NOT REALIZE THE BENEFITS OF INTEGRATING THE OPERATIONS, SYSTEMS AND
PERSONNEL OF OLD WESTPORT AND BELCO OR BE SUCCESSFUL IN MANAGING OUR COMBINED
COMPANY.
The Merger of Old Westport with and into Belco on August 21, 2001
approximately doubled the size of our company. To be successful following this
business combination, we will need to integrate the operations, financial,
technological and management systems, controls and personnel of the two
companies. The integration process has required and will continue to require the
time of our management and other personnel, which may distract their attention
from day-to-day business, the development or acquisition of new properties and
the pursuit of other business opportunities. We may encounter difficulties in
the integration process and in the ongoing management of the combined business,
such as the loss of key employees, customers or suppliers. In addition, our
efforts to integrate these businesses could be affected by factors beyond our
control, such as regulatory developments, general economic conditions and
increased competition. We also expect to incur additional costs related to the
Merger. Unless management is successful in integrating and managing on a
going-forward basis the resources of the combined company in a cost-efficient
manner, we will not realize the benefits sought from the Merger. We may not be
able to successfully integrate the operations of Old Westport and Belco, or
successfully manage the combined company, and the failure to do so could harm
our business, profitability and growth prospects.
WE MAY NOT BE ABLE TO CONSUMMATE FUTURE ACQUISITIONS OR SUCCESSFULLY INTEGRATE
ACQUISITIONS INTO OUR BUSINESS.
Our business strategy includes growing our reserve base through
acquisitions. We may not continue to be successful in identifying or
consummating future acquisitions or integrating acquired businesses successfully
into our existing business, or in anticipating the expenses or liabilities we
will incur in doing so. Such failures may have a material adverse effect on
future growth or results of operations.
We are continually investigating opportunities for acquisitions. In
connection with future acquisitions, the process of integrating acquired
operations into our existing operations may result in unforeseen operating
difficulties and may require significant management attention and financial
resources that would otherwise be available for the ongoing development or
expansion of existing operations. Our ability to make future acquisitions may be
constrained by our ability to obtain additional financing.
Acquisitions may involve a number of special risks, including:
- unexpected losses of key employees, customers and suppliers of the
acquired business;
- conforming the financial, technological and management standards,
processes, procedures and controls of the acquired business with those of
our existing operations; and
- increasing the scope, geographic diversity and complexity of our
operations.
Possible future acquisitions could result in our incurring additional debt,
contingent liabilities and amortization expenses related to intangible assets,
all of which could have a material adverse effect on our financial condition and
operating results.
REPERCUSSIONS FROM THE RECENT TERRORIST ACTS COMMITTED IN THE UNITED STATES
COULD HARM OUR BUSINESS.
On September 11, 2001, terrorists destroyed the World Trade Center in New
York, New York and substantially damaged The Pentagon in Arlington, Virginia.
The nature of the repercussions from these incidents and the effect they will
have on us and our industry are unknown, cannot be predicted and are beyond our
control, but could harm our business. For example, current U.S. military action
in Afghanistan, future armed conflict relating to U.S. anti-terrorist efforts,
civil unrest, additional terrorist activities and the attendant political
instability and societal disruption may prevent us from meeting our obligations
under the notes, including the payment of amounts due under the notes.
Additionally, if the adverse effect on the United States and global economies
resulting from the terrorist attacks, military activity or related events
persist, that may reduce overall demand for oil and natural gas, which could
result in downward pressure on prevailing oil and natural gas prices and a
reduction in our revenues.
14
BELCO'S RECENT PRE-MERGER COMMODITY PRICE RISK MANAGEMENT ACTIVITIES HAVE
RESULTED IN LOSSES AND MAY LIMIT OUR POTENTIAL GAINS.
In 1999 and 2000, Belco recorded non-hedge commodity price risk management
losses of $36.5 million and $137.6 million, respectively. These losses consisted
of $2.4 million and $34.0 million in cash settlements and $34.1 million and
$103.6 million in unrealized non-cash mark-to-market losses due to substantial
increases in commodity prices for 1999 and 2000, respectively. Belco's hedge and
non-hedge transactions for the first quarter 2001 resulted in net reported
revenue reductions of $47.0 million in actual cash settlements paid. Belco's
hedge and non-hedge transactions for the second quarter of 2001 resulted in net
reported revenue reductions of $24.0 million in actual cash settlements paid.
For the fourth quarter of 2001, we had approximately 6,000 bbl/d and 58,000
Mmbtu/d committed at average prices of $20.24 per bbl of oil and $1.70 per Mmbtu
of natural gas. The committed volumes assume the NYMEX forward curve reference
prices as of September 30, 2001. We may experience additional losses from these
activities in 2002. If commodity prices increase, our cash settlement costs will
also increase. In addition, certain of Belco's commodity price risk management
arrangements will require us to deliver cash collateral or other assurances of
performance to the counterparties in the event that payment obligations with
respect to commodity price risk management transactions exceed certain levels.
As of September 30, 2001, we had no letters of credit outstanding.
In order to manage our exposure to price volatility in marketing our oil
and natural gas, we may enter into oil and natural gas price risk management
arrangements for a portion of our expected production. While intended to reduce
the effects of volatile oil and natural gas prices, commodity price risk
management transactions may limit our potential gains if oil and natural gas
prices were to rise substantially over the price established by the
arrangements, as was the case with a significant portion of the Belco hedges
described above. In addition, our commodity price risk management transactions
may expose us to the risk of financial loss in certain circumstances, including
instances in which:
- our production is less than expected;
- there is a widening of price differentials between delivery points for
our production and the delivery point assumed in the hedge arrangement;
or
- the counterparties to our contracts fail to perform under terms of the
contracts.
OUR COMMODITY PRICE RISK MANAGEMENT AND PRODUCTION SALES TRANSACTIONS WITH
ENRON NORTH AMERICA CORP. AND ITS AFFILIATES MAY EXPOSE US TO CERTAIN
FINANCIAL LOSSES.
Prior to the Merger, Belco entered into a substantial portion of its
natural gas and crude oil commodity swap agreements and option agreements with
Enron North America Corp., or ENA, formerly known as Enron Capital & Trade
Resources Corp., a wholly owned subsidiary of Enron Corp. Mr. Robert A. Belfer,
one of our directors, is a member of the Board of Directors of Enron Corp. and
was the CEO of Belco at the time these transactions were entered into. These
agreements were entered into in the ordinary course of business of Belco and
have terms that we believe are no less favorable to Belco than the terms of
similar arrangements with third parties. Pursuant to the terms of these
agreements Belco paid ENA a net amount of approximately $32 million in fiscal
year 2000 and approximately $45 million in 2001.
On November 29, 2001, we terminated our commodity derivative contracts with
ENA. We exercised our rights pursuant to the early termination provisions of
such contracts as a result of ENA's ratings downgrade and related events. ENA
subsequently declared bankruptcy. We believe that we had the legal right to
terminate these agreements, but ENA may challenge our termination in bankruptcy
court. Applying the mark-to-market and setoff methodology of our contracts with
ENA, we have calculated that we owed ENA a net $204,000 for all hedging
transactions that were outstanding under our ENA contracts. Although we believe
this methodology was correct, it is possible that ENA will challenge our
calculations and claim larger amounts owed.
15
We have also terminated our production sales contracts with ENA or its
affiliates except for an ongoing month-to-month sales arrangement with EOTT
Energy Partners, L.P., a publicly traded entity owned in part by Enron Corp.
which has a viable credit line and has supported its payment obligations to us
by posting letters of credit. We believe that our exposure to potential loss for
payment on production delivered to Enron affiliates is less than $1.0 million.
EXPLORATION IS A HIGH-RISK ACTIVITY. THE SEISMIC DATA AND OTHER ADVANCED
TECHNOLOGIES WE WILL USE ARE EXPENSIVE AND CANNOT ELIMINATE EXPLORATION RISKS.
Our oil and natural gas operations are subject to the economic risks
typically associated with drilling exploratory wells. In conducting exploration
activities, we may drill unsuccessful wells and experience losses and, if oil
and natural gas is discovered, there is no assurance that such oil and natural
gas can be economically produced or satisfactorily marketed. There can be no
assurance that new wells we drill will be productive or that we will recover all
or any portion of our investment. The presence of unanticipated pressure or
irregularities in formations, miscalculations or accidents may cause our
exploration activities to be unsuccessful, resulting in a total loss of our
investment in such activities. The cost of drilling, completing and operating
wells is often uncertain. Our drilling operations may be curtailed, delayed or
canceled as a result of numerous factors, many of which may be beyond our
control, including unexpected drilling conditions, title problems, weather
conditions, compliance with environmental and other governmental requirements
and shortages or delays in the delivery of equipment and services.
We rely to a significant extent on seismic data and other advanced
technologies in conducting our exploration activities. Even when used and
properly interpreted, seismic data and visualization techniques only assist
geoscientists in identifying subsurface structures and hydrocarbon indicators.
Such data is not conclusive in determining if hydrocarbons are present or
economically producible. The use of seismic data and other technologies also
requires greater pre-drilling expenditures than traditional drilling strategies.
We could incur losses as a result of these expenditures.
FAILURE TO REPLACE RESERVES MAY NEGATIVELY AFFECT OUR BUSINESS.
Our future success depends upon our ability to find, develop or acquire
additional oil and natural gas reserves that are economically recoverable. Our
proved reserves generally decline when reserves are produced, unless we conduct
successful exploration or development activities or acquire properties
containing proved reserves, or both. We may not be able to find, develop or
acquire additional reserves on an economic basis. Furthermore, while our
revenues may increase if oil and natural gas prices increase significantly, our
finding costs for additional reserves could also increase.
RESERVE ESTIMATES ARE INHERENTLY UNCERTAIN. ANY MATERIAL INACCURACIES IN OUR
RESERVE ESTIMATES OR ASSUMPTIONS UNDERLYING OUR RESERVE ESTIMATES, SUCH AS THE
DISCOUNT RATE USED, COULD CAUSE THE QUANTITIES AND NET PRESENT VALUE OF OUR
RESERVES TO BE OVERSTATED.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond our control, that could cause the
quantities and net present value of our reserves to be overstated. The reserve
information set forth in this prospectus represents estimates based on reports
prepared or audited by independent petroleum engineers and prepared by our
internal engineers. Reserve engineering is not an exact science. Estimates of
economically recoverable oil and natural gas reserves and of future net cash
flows necessarily depend upon a number of variable factors and assumptions, any
of which may cause these estimates to vary considerably from actual results,
such as:
- historical production from the area compared with production from other
producing areas;
- assumed effects of regulation by governmental agencies;
- assumptions concerning future oil and natural gas prices;
- assumptions regarding future operating costs;
16
- estimates of future severance and excise taxes;
- assumptions regarding capital expenditures; and
- estimates regarding workover and remedial costs.
Estimates of reserves based on risk of recovery and estimates of expected
future net cash flows prepared or audited by different engineers, or by the same
engineers at different times, may vary substantially. Actual production,
revenues and expenditures with respect to our reserves will likely vary from
estimates, and the variance may be material. The net present values referred to
in this prospectus should not be construed as the current market value of the
estimated oil and natural gas reserves attributable to our properties. In
accordance with requirements of the SEC, the estimated discounted net cash flows
from proved reserves are generally based on prices and costs as of the date of
the estimate, whereas actual future prices and costs may be materially higher or
lower.
COMPETITION IN OUR INDUSTRY IS INTENSE, AND MANY OF OUR COMPETITORS HAVE
GREATER FINANCIAL, TECHNOLOGICAL AND OTHER RESOURCES THAN WE HAVE.
We operate in the highly competitive areas of oil and natural gas
exploitation, exploration and acquisition. The oil and natural gas industry is
characterized by rapid and significant technological advancements and
introductions of new products and services using new technologies. We face
intense competition from major and independent oil and natural gas companies in
each of the following areas:
- seeking to acquire desirable producing properties or new leases for
future exploration;
- marketing our oil and natural gas production;
- integrating new technologies; and
- acquiring the personnel, equipment and expertise necessary to develop and
operate our properties.
Many other companies have financial, technological and other resources
substantially greater than our own. These companies may be able to pay more for
exploratory prospects and productive oil and natural gas properties and may be
able to define, evaluate, bid for and purchase a greater number of properties
and prospects than our financial or human resources permit. Further, many of our
competitors may enjoy technological advantages over us and may be able to
implement new technologies more rapidly than we can. Our ability to explore for
oil and natural gas and to acquire additional properties in the future will
depend upon our ability to successfully conduct operations, implement advanced
technologies, evaluate and select suitable properties and consummate
transactions in this highly competitive environment.
WE ARE SUBJECT TO COMPLEX LAWS AND REGULATIONS, INCLUDING ENVIRONMENTAL AND
SAFETY REGULATIONS, THAT CAN ADVERSELY AFFECT THE COST, MANNER OR FEASIBILITY
OF DOING BUSINESS.
Our operations and facilities are subject to certain federal, state and
local laws and regulations relating to the exploration for, and the development,
production and transportation of, oil and natural gas, as well as environmental
and safety matters. Although we believe that we are in substantial compliance
with all applicable laws and regulations, we cannot be certain that existing
laws or regulations, as currently interpreted or reinterpreted in the future, or
future laws or regulations will not harm our business, results of operations and
financial condition. We may be required to make large and unanticipated capital
expenditures to comply with environmental and other governmental regulations,
such as:
- land use restrictions;
- drilling bonds and other financial responsibility requirements;
- spacing of wells;
- unitization and pooling of properties;
17
- habitat and endangered species protection, reclamation and remediation,
and other environmental protection;
- safety precautions;
- operational reporting; and
- taxation.
Under these laws and regulations, we could be liable for:
- personal injuries;
- property and natural resource damages;
- oil spills and releases or discharges of hazardous materials;
- well reclamation costs;
- remediation and clean-up costs and other governmental sanctions, such as
fines and penalties; and
- other environmental damages.
We could also experience significant delays in operations on our
properties, inability to develop particular properties, or significantly
increased costs of operations as a result of regulatory requirements or
restrictions. We are unable to predict the ultimate cost of compliance with
these requirements or their effect on our operations.
WE CANNOT CONTROL ACTIVITIES ON PROPERTIES WE DO NOT OPERATE. INABILITY TO
FUND OUR CAPITAL EXPENDITURES MAY RESULT IN REDUCTION OR FORFEITURE OF OUR
INTERESTS IN SOME OF OUR NON-OPERATED PROJECTS.
Other companies operate approximately 30% of the net present value of our
reserves and we have limited ability to exercise influence over operations for
these properties or their associated costs. Our dependence on the operator and
other working interest owners for these projects and our limited ability to
influence operations and associated costs could prevent the realization of our
targeted returns on capital in drilling or acquisition activities. The success
and timing of drilling and exploitation activities on properties operated by
others, therefore, depend upon a number of factors that will be outside our
control, including:
- timing and amount of capital expenditures;
- the operator's expertise and financial resources;
- approval of other participants in drilling wells; and
- selection of technology.
Where we are not the majority owner or operator of a particular oil and
natural gas project, we may have no control over the timing or amount of capital
expenditures associated with such project. If we are not willing to fund our
capital expenditures relating to such projects when required by the majority
owner or operator, our interests in these projects may be reduced or forfeited.
OUR BUSINESS INVOLVES MANY OPERATING RISKS THAT MAY RESULT IN SUBSTANTIAL
LOSSES. INSURANCE MAY BE UNAVAILABLE OR INADEQUATE TO PROTECT US AGAINST THESE
RISKS.
Our operations are subject to hazards and risks inherent in drilling for,
producing and transporting oil and natural gas, such as:
- fires;
- natural disasters;
- explosions;
- formations with abnormal pressures;
18
- casing collapses;
- embedded oilfield drilling and service tools;
- uncontrollable flows of underground natural gas, oil and formation water;
- surface cratering;
- pipeline ruptures or cement failures; and
- environmental hazards such as natural gas leaks, oil spills and
discharges of toxic gases.
Any of these risks can cause substantial losses resulting from:
- injury or loss of life;
- damage to and destruction of property, natural resources and equipment;
- pollution and other environmental damage;
- regulatory investigations and penalties;
- suspension of operations; and
- repair and remediation costs.
As protection against operating hazards, we maintain insurance coverage
against some, but not all, potential losses. However, losses could occur for
uninsurable or uninsured risks, or in amounts in excess of existing insurance
coverage. The occurrence of an event that is not fully covered by insurance
could harm our financial condition and results of operations.
WE ARE VULNERABLE TO RISKS ASSOCIATED WITH OPERATING IN THE GULF OF MEXICO.
Our operations and financial results could be significantly impacted by
conditions in the Gulf of Mexico because we explore and produce extensively in
that area. As a result of this activity, we are vulnerable to the risks
associated with operating in the Gulf of Mexico, including those relating to:
- adverse weather conditions;
- oil field service costs and availability;
- compliance with environmental and other laws and regulations;
- remediation and other costs resulting from oil spills or releases of
hazardous materials; and
- failure of equipment or facilities.
In addition, we intend to conduct some of our exploration in the deep
waters (greater than approximately 1,000 feet) of the Gulf of Mexico, where
operations are more difficult and costly than in shallower waters. The deep
waters in the Gulf of Mexico lack the physical and oilfield service
infrastructure present in its shallower waters. As a result, deep water
operations may require a significant amount of time between a discovery and the
time that we can market our production, thereby increasing the risk involved
with these operations.
Further, production of reserves from reservoirs in the Gulf of Mexico
generally declines more rapidly than 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 few years
of production, and as a result, our reserve replacement needs from new prospects
may be greater there than for our operations elsewhere. Also, our revenues and
return on capital will depend significantly on prices prevailing during these
relatively short production periods.
19
WE DEPEND UPON OUR MANAGEMENT TEAM AND OUR OPERATIONS REQUIRE US TO ATTRACT
AND RETAIN EXPERIENCED TECHNICAL PERSONNEL.
The successful implementation of our strategies, integration of Old
Westport and Belco and handling of other issues integral to our future success
will depend, in part, on our experienced management team. The loss of members of
our management team could have an adverse effect on our business. Our
exploratory drilling success and the success of other activities integral to our
operations will depend, in part, on our ability to attract and retain
experienced explorationists, engineers and other professionals. Competition for
experienced explorationists, engineers and some other professionals is extremely
intense. If we cannot retain our technical personnel or attract additional
experienced technical personnel, our ability to compete could be harmed.
THE MARKETABILITY OF OUR PRODUCTION DEPENDS UPON FACTORS OVER WHICH WE MAY
HAVE NO CONTROL.
The marketability of our production depends in part upon the availability,
proximity and capacity of pipelines, natural gas gathering systems and
processing facilities. Any significant change in market factors affecting these
infrastructure facilities could adversely impact our ability to deliver the oil
and natural gas we produce to market in an efficient manner, which could harm
our financial condition and results of operations. We deliver oil and natural
gas through gathering systems and pipelines that we do not own. These facilities
may not be available to us in the future. Our ability to produce and market oil
and natural gas is affected and may be also harmed by:
- federal and state regulation of oil and natural gas production;
- transportation, tax and energy policies;
- changes in supply and demand; and
- general economic conditions.
OUR PRINCIPAL STOCKHOLDERS OWN A SIGNIFICANT AMOUNT OF OUR COMMON STOCK,
GIVING THEM A CONTROLLING INFLUENCE OVER CORPORATE TRANSACTIONS AND OTHER
MATTERS.
Our principal stockholders, including Westport Energy LLC, ERI Investments,
Inc. and a group of former Belco stockholders, or the Belfer Group, beneficially
own approximately 68.4% of our outstanding common stock. Accordingly, these
stockholders, acting together through the shareholders agreement, based on their
current share ownership, are able to control the outcome of the election of
directors as well as, if they choose to act together, the adoption or amendment
of provisions in our articles of incorporation or bylaws and the approval of
mergers and other significant corporate transactions. These factors may also
delay or prevent a change in our management or voting control.
RISKS RELATING TO OUR INDEBTEDNESS
OUR LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH FLOW
AND OUR ABILITY TO MAKE PAYMENTS ON THE NOTES.
As of September 30, 2001, adjusted to reflect the offering of $275.0
million of the old notes and the application of the proceeds therefrom on
November 5, 2001, we had total debt, as adjusted to reflect the offer of $275.0
million of the new notes and the application of the proceeds therefrom on
November 5, 2001, of $411.7 million and stockholders' equity of $929.8 million.
Our level of debt could have important consequences for you, including the
following:
- it may be more difficult for us to satisfy our obligations with respect
to the notes;
- we may have difficulties borrowing money in the future for acquisitions,
to meet our operating expenses or other purposes;
- the amount of our interest expense may increase because certain of our
borrowings are at variable rates of interest, which, if interest rates
increase, could result in higher interest expense;
20
- we will need to use a portion of the money we earn to pay principal and
interest on our debt which will reduce the amount of money we have to
finance our operations and other business activities;
- we may have a higher level of debt than some of our competitors, which
may put us at a competitive disadvantage;
- we may be more vulnerable to economic downturns and adverse developments
in our industry; and
- our debt level could limit our flexibility in planning for, or reacting
to, changes in our business and the industry in which we operate.
Our ability to meet our expenses and debt obligations will depend on our
future performance, which will be affected by financial, business, economic,
regulatory and other factors. We will not be able to control many of these
factors, such as economic conditions and governmental regulation. We cannot be
certain that our earnings will be sufficient to allow us to pay the principal
and interest on our debt, including the notes, and meet our other obligations.
If we do not have enough money, we may be required to refinance all or part of
our existing debt, including the notes, sell assets, borrow more money or raise
equity. We may not be able to refinance our debt, sell assets, borrow more money
or raise equity on terms acceptable to us, if at all. Further, failing to comply
with the financial and other restrictive covenants in our indebtedness could
result in an event of default under such indebtedness, which could adversely
affect our business, financial condition and results of operations.
IN LIGHT OF OUR CURRENT INDEBTEDNESS, WE MAY BE ABLE TO INCUR SUBSTANTIALLY
MORE DEBT. THIS COULD EXACERBATE THE RISKS DESCRIBED ABOVE.
Together with our subsidiaries, we may be able to incur substantially more
debt in the future. Although the indenture governing the notes contains
restrictions on our incurrence of additional indebtedness, these restrictions
are subject to a number of qualifications and exceptions, and under certain
circumstances, indebtedness incurred in compliance with these restrictions could
be substantial. Also, these restrictions do not prevent us from incurring
obligations that do not constitute indebtedness. As of September 30, 2001,
adjusted to reflect the offering of $275 million of the old notes and the
application of the proceeds therefrom on November 5, 2001, we had approximately
$384 million of additional borrowing capacity under the Revolving Credit
Facility, subject to specific requirements, including compliance with financial
covenants. To the extent new debt is added to our current debt levels, the risks
described above could substantially increase.
ANY FAILURE TO MEET OUR DEBT OBLIGATIONS COULD HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
If our cash flow and capital resources are insufficient to fund our debt
obligations, we may be forced to sell assets, seek additional equity or debt
capital or restructure our debt. In addition, any failure to make scheduled
payments of interest and principal on our outstanding indebtedness would likely
result in a reduction of our credit rating, which could harm our ability to
incur additional indebtedness on acceptable terms. Our cash flow and capital
resources may be insufficient for payment of interest on and principal of our
debt in the future, including payments on the notes, and any such alternative
measures may be unsuccessful or may not permit us to meet scheduled debt service
obligations, which could cause us to default on our obligations and impair our
liquidity.
RISKS RELATING TO THE EXCHANGE NOTES
SUBORDINATION OF THE EXCHANGE NOTES MAY LIMIT PAYMENT ON THE EXCHANGE NOTES.
Our obligations under terms of the exchange notes are subordinate in right
of payment to all of our existing and future Senior Indebtedness, including
outstanding borrowings under the Revolving Credit Facility. As of September 30,
2001, adjusted to reflect the offering of $275 million of the old notes and the
application of the proceeds therefrom on November 5, 2001, we had approximately
$12 million of Senior Indebtedness outstanding. We may incur additional Senior
Indebtedness from time to time, subject to certain restrictions imposed by the
indenture governing the exchange notes. By reason of the subordination of the
21
exchange notes, in the event of our insolvency, liquidation or other
reorganization, creditors who are holders of Senior Indebtedness must be paid in
full before any payments may be made to holders of the exchange notes. There may
not be sufficient assets remaining after payment of prior claims to pay amounts
due on the exchange notes. In addition, under certain circumstances, no payments
may be made with respect to the exchange notes if a default exists with respect
to Senior Indebtedness. See "Description of Exchange Notes -- Ranking." The term
"Senior Indebtedness" is defined in "Description of Exchange Notes -- Certain
Definitions."
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM
GUARANTORS.
Federal and state statutes allow courts, under specific circumstances, to
void guarantees and require creditors such as the noteholders to return payments
received from guarantors. Under federal bankruptcy law and comparable provisions
of state fraudulent transfer laws, a guarantee could be voided or claims in
respect of a guarantee could be subordinated to all other debts of that
guarantor if, for example, the guarantor, at the time it issued its guarantee:
- intended to hinder, delay or defraud any present or future creditor or
received less than reasonably equivalent value or fair compensation for
the guarantee;
- was insolvent or rendered insolvent by making the guarantee;
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay them as they mature.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, a guarantor would be considered
insolvent if:
- the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all of its assets;
- the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, we believe that the subsidiary guaranties are being incurred
for proper purposes and in good faith and that each guarantor, after giving
effect to its guarantee of the exchange notes, will not be insolvent, have
unreasonably small capital for the business in which it is engaged or have
incurred debts beyond its ability to pay as they mature. We cannot be certain,
however, that a court would agree with our conclusions in this regard.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon the occurrence of a Change of Control, we would be required to offer
to repurchase all outstanding notes. However, it is possible that we would not
have sufficient funds available to us to make the required repurchase of such
notes. In addition, the Revolving Credit Facility provides that the occurrence
of certain specific kinds of Change of Control events constitute events of
default, in which case we may be prohibited by the subordination provisions of
the notes from making any payments with respect to the notes, including for the
repurchase of the notes. Our failure to purchase tendered notes would constitute
a default under the indenture governing the notes which, in turn, could
constitute a further event of default under the Revolving Credit Facility.
22
WE ARE SUBJECT TO RESTRICTIVE DEBT COVENANTS.
The Revolving Credit Facility contains covenants that are similar to, but
more restrictive to us than, those contained in the indenture governing the
exchange notes, and requires us to maintain specified financial ratios.
Our ability to meet those financial ratios can be affected by events beyond
our control, and we cannot assure you that we will meet those ratios. A breach
of any of these covenants, ratios or restrictions could result in an event of
default under the Revolving Credit Facility. Upon the occurrence of an event of
default under the Revolving Credit Facility, the lenders could elect to declare
all amounts outstanding under the Revolving Credit Facility, together with
accrued interest, to be immediately due and payable. If we were unable to repay
those amounts, the lenders could proceed against the collateral granted to them
to secure the indebtedness. If the lenders under the Revolving Credit Facility
accelerate the payment of the indebtedness, we cannot assure you that our assets
would be sufficient to repay in full that indebtedness and our other
indebtedness, including the exchange notes.
A FINANCIAL FAILURE BY US OR ANY SUBSIDIARY GUARANTOR MAY HINDER THE RECEIPT
OF PAYMENT ON THE EXCHANGE NOTES, AS WELL AS THE ENFORCEMENT OF REMEDIES UNDER
THE SUBSIDIARY GUARANTIES.
An investment in the exchange notes, as in any type of security, involves
insolvency and bankruptcy considerations that investors should carefully
consider. If we or any of our subsidiary guarantors become a debtor subject to
insolvency proceedings under the bankruptcy code, it is likely to result in
delays in the payment of the exchange notes and in the exercise of enforcement
remedies under the exchange notes or the subsidiary guaranties. Provisions under
the bankruptcy code or general principles of equity that could result in the
impairment of your rights include the automatic stay, avoidance of preferential
transfers by a trustee or a debtor-in-possession, substantive consolidation,
limitations of collectability of unmatured interest or attorneys' fees and
forced restructuring of the exchange notes.
A FINANCIAL FAILURE BY US MAY RESULT IN THE ASSETS OF ANY OR ALL SUBSIDIARIES
BECOMING SUBJECT TO THE CLAIMS OF OUR CREDITORS.
A financial failure by us could affect payment of the exchange notes if a
bankruptcy court were to "substantively consolidate" us and our subsidiaries. If
a bankruptcy court substantively consolidated us and our subsidiaries, the
assets of each entity would be subject to the claims of creditors of all
entities. This would expose you not only to the usual impairments arising from
bankruptcy, but also to potential dilution of the amount ultimately recoverable
because of the larger creditor base. Furthermore, forced restructuring of the
notes could occur through the "cram-down" provision of the bankruptcy code.
Under this provision, the exchange notes could be restructured over your
objections as to their general terms, primarily interest rate and maturity.
RISKS RELATED TO THE EXCHANGE OFFER
THERE IS NO ESTABLISHED TRADING MARKET FOR THE EXCHANGE NOTES, THE VALUE OF
THE EXCHANGE NOTES MAY FLUCTUATE SIGNIFICANTLY AND ANY MARKET FOR THE EXCHANGE
NOTES MAY BE ILLIQUID.
The exchange notes are a new issue of securities with no established
trading market. We cannot assure you that a liquid market will develop for the
exchange notes, that you will be able to sell your exchange notes at a
particular time or that the prices you will receive when you sell will be
favorable. Moreover, we do not intend to apply for the exchange notes to be
listed on any securities exchange or to arrange for quotation on any automated
dealer quotation system. The trading prices of the exchange notes could be
subject to significant fluctuations in response to government regulations,
variations in quarterly operating results, demand for oil and natural gas,
general economic conditions and various other factors. In addition, the
liquidity of the trading market in these exchange notes and the market price
quoted for the exchange notes may be adversely affected by changes in the
overall market for high yield securities and by changes in our financial
performance or prospects or in the prospects for companies in our industry
generally. As a result, we can give you no assurance that an active trading
market will develop for the exchange notes. If no active trading market
develops, you may not be able to resell your exchange notes at their fair market
value or at all. This offer to
23
exchange the exchange notes for the old notes does not depend on any minimum
amount of old notes being tendered for exchange.
IF YOU DO NOT EXCHANGE YOUR OLD NOTES, THEY MAY BE DIFFICULT TO RESELL.
It may be difficult for you to sell old notes that are not exchanged in the
exchange offer, since any old notes not exchanged will remain subject to
existing transfer restrictions. These restrictions on transfer of your old notes
exist because we issued the old notes pursuant to an exemption from the
registration requirements of the Securities Act and applicable state securities
laws. Generally, the old notes that are not exchanged for exchange notes
pursuant to the exchange offer will remain restricted securities. Accordingly,
such old notes may be resold only:
- to us (upon redemption of the exchange notes or otherwise);
- pursuant to an effective registration statement under the Securities Act;
- so long as the old notes are eligible for resale pursuant to Rule 144A
under the Securities Act to a qualified institutional buyer within the
meaning of Rule 144A in a transaction meeting the requirements of Rule
144A;
- outside the United States to a foreign person pursuant to the exemption
from the registration requirements of the Securities Act provided by
Regulation S under the Securities Act;
- pursuant to an exemption from registration under the Securities Act
provided by Rule 144 thereunder (if available); or
- pursuant to another available exemption from the registration
requirements of the Securities Act, in each case in accordance with any
applicable securities laws of any state of the United States.
Other than in this exchange offer, we do not intend to register the notes
under the Securities Act. To the extent any old notes are tendered and accepted
in the exchange offer, the trading market, if any, for the old notes that remain
outstanding after the exchange offer would be adversely affected due to a
reduction in market liquidity.
24
THE EXCHANGE OFFER
This section of the prospectus describes the proposed exchange offer. While
we believe that the description covers the material terms of the exchange offer,
this summary may not contain all of the information that is important to you.
You should carefully read this entire document and the other documents referred
to herein for a more complete understanding of the exchange offer.
PURPOSE OF THE EXCHANGE OFFER
In connection with the issuance of the old notes, we entered into a
registration rights agreement which provides for the exchange offer. A copy of
the registration rights agreement is filed as an exhibit to the registration
statement of which this prospectus is a part. Under the registration rights
agreement we agreed that we would, subject to certain exceptions:
- within 75 days after the issue date of the old notes, file a registration
statement with the SEC with respect to a registered offer to exchange the
old notes for exchange notes having terms substantially identical in all
material respects to the old notes (except that the exchange notes will
not contain terms with respect to transfer restrictions);
- use our reasonable best efforts to cause the registration statement to be
declared effective under the Securities Act within 180 days after the
issue date of the old notes;
- following the declaration of the effectiveness of the registration
statement, promptly offer the exchange notes in exchange for surrender of
the old notes; and
- keep the exchange offer open for not less than 30 days (or longer if
required by applicable law) after the date notice of the exchange offer
is mailed to the holders of the old notes.
For each old note tendered to us pursuant to the exchange offer, we will
issue to the holder of such old note an exchange note having a principal amount
equal to that of the surrendered old note. Interest on each exchange note will
accrue from the last interest payment date on which interest was paid on the old
note surrendered in exchange therefor, or, if no interest has been paid on such
old note, from the date of its original issue.
Under existing SEC interpretations, the exchange notes will be freely
transferable by holders other than our affiliates after the exchange offer
without further registration under the Securities Act if the holder of the
exchange notes represents to us in the exchange offer that it is acquiring the
exchange notes in the ordinary course of its business, that it has no
arrangement or understanding with any person to participate in the distribution
of the exchange notes and that it is not an affiliate of ours, as such terms are
interpreted by the SEC; provided, however, that broker-dealers receiving
exchange notes in the exchange offer will have a prospectus delivery requirement
with respect to resales of such exchange notes. The SEC has taken the position
that such participating broker-dealers may fulfill their prospectus delivery
requirements with respect to exchange notes (other than a resale of an unsold
allotment from the original sale of the old notes) with the prospectus contained
in this registration statement. Each broker-dealer that receives exchange notes
for its own account in exchange for old notes, where such old notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. See "Plan of Distribution."
Under the registration rights agreement, we are required to allow
participating broker-dealers and other persons, if any, with similar prospectus
delivery requirements to use the prospectus contained in this registration
statement in connection with the resale of such exchange notes for 180 days
following the effective date of such registration statement (or such shorter
period during which participating broker-dealers are required by law to deliver
such prospectus).
A holder of old notes (other than certain specified holders) who wishes to
exchange old notes for exchange notes in the exchange offer will be required to
represent that any exchange notes to be received by it will be acquired in the
ordinary course of its business and that at the time of the commencement of the
exchange offer it has no arrangement or understanding with any person to
participate in the distribution
25
(within the meaning of the Securities Act) of the exchange notes and that it is
not an "affiliate" of ours, as defined in Rule 405 of the Securities Act, or if
it is an affiliate, that it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
In the event that:
(1) any change of law or in applicable interpretations thereof by the
staff of the SEC do not permit us to effect an exchange offer; or
(2) for any other reason we do not consummate the exchange offer
within 220 days of the issue date of the old notes; or
(3) an initial purchaser of old notes notifies us following
consummation of the exchange offer that old notes held by it are not
eligible to be exchanged for exchange notes in the exchange offer; or
(4) certain holders of old notes are not eligible to participate in
the exchange offer or may not resell the exchange notes acquired by them in
the exchange offer to the public without delivering a prospectus,
then, we will, subject to certain exceptions:
(1) file a shelf registration statement with the SEC covering resales
of the old notes or the exchange notes, as the case may be, on or prior to
the date (which we call the shelf filing date) which is the 75th day after
the date on which the obligation to file the shelf registration statement
arises;
(2) use our reasonable best efforts to cause the shelf registration
statement to be declared effective under the Securities Act on or prior to
the 75th day after the shelf filing date; and
(3) use our reasonable best efforts to keep the shelf registration
statement effective until the earliest of (A) the time when the old notes
or exchange notes covered by the shelf registration statement can be sold
pursuant to Rule 144 without any limitations under Rule 144, (B) two years
from the effective date of the shelf registration statement and (C) the
date on which all old notes or exchange notes registered thereunder are
disposed of in accordance therewith.
We will, in the event a shelf registration statement is filed, among other
things, provide to each holder for whom such shelf registration statement was
filed copies of the prospectus which is a part of the shelf registration
Statement, notify each such holder when the shelf registration statement has
become effective and take certain other actions as are required to permit
unrestricted resales of the old notes or the exchange notes, as the case may be.
A holder selling such old notes or exchange notes pursuant to the shelf
registration statement generally would be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the registration rights agreement that are applicable to such
holder (including certain indemnification obligations).
We will pay additional cash interest on the applicable old notes and
exchange notes, subject to certain exceptions:
(1) if we fail to file the registration statement of which this
prospectus forms a part with the SEC on or prior to the 75th day after the
issue date of the old notes;
(2) if the registration statement of which this prospectus forms a
part is not declared effective by the SEC on or prior to the 180th day
after the issue date of the old notes;
(3) if the exchange offer is not consummated on or before the 40th day
after the registration statement of which this prospectus forms a part is
declared effective;
(4) if obligated to file the shelf registration statement, we fail to
file the shelf registration statement with the SEC on or prior to the shelf
filing date;
(5) if obligated to file a shelf registration statement, the shelf
registration statement is not declared effective on or prior to the 75th
day after the shelf filing date; or
26
(6) after the registration statement of which this prospectus forms a
part or the shelf registration statement, as the case may be, is declared
effective, such registration statement thereafter ceases to be effective or
usable (subject to certain exceptions);
from and including the date on which any such default shall occur to but
excluding the date on which all such defaults have been cured.
The rate of any such additional interest will be 0.50% per annum. We will
pay any such additional interest on regular interest payment dates. Such
additional interest will be in addition to any other interest payable from time
to time with respect to the old notes and the exchange notes.
All references in the indenture governing the old notes and the exchange
notes, in any context, to any interest or other amount payable on or with
respect to the old notes or the exchange notes shall be deemed to include any
additional interest pursuant to the registration rights agreement.
If we effect the exchange offer, we will be entitled to close the exchange
offer 30 days after the commencement thereof provided that we have accepted all
old notes theretofore validly tendered in accordance with the terms of the
exchange offer.
BACKGROUND OF THE EXCHANGE OFFER
An aggregate of $275,000,000 principal amount of 8 1/4% senior subordinated
notes due 2011 are currently issued and outstanding. The maximum principal
amount of exchange notes that will be issued in exchange for old notes is
$275,000,000. The terms of the exchange notes and the old notes are identical in
all material respects, except for transfer restrictions and registration rights
that do not apply to the exchange notes, and will contain different
administrative terms.
The exchange notes will bear interest at a rate of 8 1/4% per year, payable
semiannually on May 1 and November 1 of each year, beginning on May 1, 2002.
Interest on each exchange note will accrue from the last interest payment date
on which interest was paid on the old note surrendered in exchange therefor, or,
if no interest has been paid on such note, from the date of its original issue.
Holders of exchange notes will not receive any interest on old notes tendered
and accepted for exchange. In order to exchange your old notes for transferable
exchange notes in the exchange offer, you will be required to make the following
representations:
- the exchange notes will be acquired in the ordinary course of your
business;
- you have no arrangements with any person to participate in the
distribution of the exchange notes; and
- you are not our "affiliate" as defined in Rule 405 of the Securities Act,
or if you are an affiliate of ours, you will comply with the applicable
registration and prospectus delivery requirements of the Securities Act.
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any old notes
properly tendered and not validly withdrawn in the exchange offer, and the
exchange agent will deliver the exchange notes promptly after the expiration
date of the exchange offer. We expressly reserve the right to delay acceptance
of any of the tendered old notes or terminate the exchange offer and not accept
for exchange any tendered old notes not already accepted if any conditions set
forth under "-- Conditions of the Exchange Offer" have not been satisfied or
waived by us or do not comply, in whole or in part, with any applicable law.
If you tender your old notes, you will not be required to pay brokerage
commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of the old notes. We
will pay all charges, expenses and transfer taxes in connection with the
exchange offer, other than certain taxes described below under "-- Transfer
Taxes."
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on March
8, 2002, unless we extend it. We expressly reserve the right to extend the
exchange offer on a daily basis or for such period or periods as we
27
may determine in our sole discretion from time to time by giving oral, confirmed
in writing, or written notice to the exchange agent and by making a public
announcement by press release to the Dow Jones News Service prior to 9:00 a.m.,
New York City time, on the first business day following the previously scheduled
expiration date. During any extension of the exchange offer, all old notes
previously tendered, not validly withdrawn and not accepted for exchange will
remain subject to the exchange offer and may be accepted for exchange by us.
To the extent we are legally permitted to do so, we expressly reserve the
absolute right, in our sole discretion, but are not required, to:
- waive any condition of the exchange offer; and
- amend any terms of the exchange offer.
Any waiver or amendment to the exchange offer will apply to all old notes
tendered, regardless of when or in what order the old notes were tendered. If we
make a material change in the terms of the exchange offer or if we waive a
material condition of the exchange offer, we will disseminate additional
exchange offer materials, and we will extend the exchange offer to the extent
required by law.
We expressly reserve the right, in our sole discretion, to terminate the
exchange offer if any of the conditions set forth under "-- Conditions of the
Exchange Offer" exist. Any such termination will be followed promptly by a
public announcement. In the event we terminate the exchange offer, we will give
immediate notice to the exchange agent, and all old notes previously tendered
and not accepted for exchange will be returned promptly to the tendering
holders.
In the event that the exchange offer is withdrawn or otherwise not
completed, exchange notes will not be given to holders of old notes who have
validly tendered their old notes.
RESALE OF EXCHANGE NOTES
Based on interpretations of the SEC set forth in no-action letters issued
to third parties, we believe that exchange notes issued under the exchange offer
in exchange for old notes may be offered for resale, resold and otherwise
transferred by you without compliance with the registration and prospectus
delivery provisions of the Securities Act, if:
- you are not an "affiliate" of ours within the meaning of Rule 405 under
the Securities Act;
- you are acquiring exchange notes in the ordinary course of your business;
and
- you do not intend to participate in the distribution of the exchange
notes.
If you tender old notes in the exchange offer with the intention of
participating in any manner in a distribution of the exchange notes:
- you cannot rely on those interpretations of the SEC; and
- you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction, and the secondary resale transaction must be covered by an
effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K
under the Securities Act.
Unless an exemption from registration is otherwise available, any security
holder intending to distribute exchange notes should be covered by an effective
registration statement under the Securities Act containing the selling security
holder's information required by Item 507 of Regulation S-K. This prospectus may
be used for an offer to resell, a resale or other re-transfer of exchange notes
only as specifically set forth in the section captioned "Plan of Distribution."
Only broker-dealers that acquired the exchange notes as a result of market-
making activities or other trading activities may participate in the exchange
offer. Each broker-dealer that receives exchange notes for its own account in
exchange for old notes, where such old notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
the exchange notes. Please read the section captioned "Plan of Distribution" for
more details regarding the transfer of exchange notes.
28
ACCEPTANCE OF OLD NOTES FOR EXCHANGE
We will accept for exchange old notes validly tendered pursuant to the
exchange offer, or defectively tendered, if such defect has been waived by us,
after the later of:
- the expiration date of the exchange offer; and
- the satisfaction or waiver of the conditions specified below under
"-- Conditions of the Exchange Offer."
We will not accept old notes for exchange subsequent to the expiration date of
the exchange offer. Tenders of old notes will be accepted only in principal
amounts equal to $1,000 or integral multiples thereof.
We expressly reserve the right, in our sole discretion, to:
- delay acceptance for exchange of old notes tendered under the exchange
offer, subject to Rule 14e-1 under the Exchange Act, which requires that
an offeror pay the consideration offered or return the securities
deposited by or on behalf of the holders promptly after the termination
or withdrawal of a tender offer; or
- terminate the exchange offer and not accept for exchange any old notes
not accepted for exchange, if any of the conditions set forth below under
"-- Conditions of the Exchange Offer" have not been satisfied or waived
by us or in order to comply in whole or in part with any applicable law.
In all cases, exchange notes will be issued only after timely receipt by
the exchange agent of certificates representing old notes, or confirmation of
book-entry transfer, a properly completed and duly executed letter of
transmittal, or a manually signed facsimile thereof, and any other required
documents. For purposes of the exchange offer, we will be deemed to have
accepted for exchange validly tendered old notes, or defectively tendered old
notes with respect to which we have waived such defect, if, as and when we give
oral, confirmed in writing, or written notice to the exchange agent. Promptly
after the expiration date, we will deposit the exchange notes with the exchange
agent, who will act as agent for the tendering holders for the purpose of
receiving the exchange notes and transmitting them to the holders. The exchange
agent will deliver the exchange notes to holders of old notes accepted for
exchange after the exchange agent receives the exchange notes.
If, for any reason, we delay acceptance for exchange of validly tendered
old notes or we are unable to accept for exchange validly tendered old notes,
then the exchange agent may, nevertheless, on its behalf, retain tendered old
notes, without prejudice to our rights described in this prospectus under the
captions "-- Expiration Date; Extensions; Termination; Amendments,"
"-- Conditions of the Exchange Offer" and "-- Withdrawal of Tenders," subject to
Rule 14e-1 under the Securities Exchange Act of 1934, which requires that an
offeror pay the consideration offered or return the securities deposited by or
on behalf of the holders thereof promptly after the termination or withdrawal of
a tender offer.
If any tendered old notes are not accepted for exchange for any reason, or
if certificates are submitted evidencing more old notes than those that are
tendered, certificates evidencing old notes that are not exchanged will be
returned, without expense, to the tendering holder, or, in the case of old notes
tendered by book-entry transfer into the exchange agent's account at a
book-entry transfer facility under the procedure set forth under "-- Procedures
for Tendering Old Notes-Book-Entry Transfer," such old notes will be credited to
the account maintained at such book-entry transfer facility from which such old
notes were delivered, unless otherwise requested by such holder under
"-- Special Delivery Instructions" in the letter of transmittal, promptly
following the exchange date or the termination of the exchange offer.
Tendering holders of old notes exchanged in the exchange offer will not be
obligated to pay brokerage commissions or transfer taxes with respect to the
exchange of their old notes other than as described under the caption
"-- Transfer Taxes" or as set forth in the letter of transmittal. We will pay
all other charges and expenses in connection with the exchange offer.
29
PROCEDURES FOR TENDERING OLD NOTES
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee or held through
a book-entry transfer facility and who wishes to tender old notes should contact
such registered holder promptly and instruct such registered holder to tender
old notes on such beneficial owner's behalf.
Tender of Old Notes Held Through The Depository Trust Company. The
exchange agent and The Depository Trust Company, or DTC, have confirmed that the
exchange offer is eligible for the DTC automated tender offer program.
Accordingly, DTC participants may electronically transmit their acceptance of
the exchange offer by causing DTC to transfer old notes to the exchange agent in
accordance with DTC's automated tender offer program procedures for transfer.
DTC will then send an agent's message to the exchange agent.
The term "agent's message" means a message transmitted by DTC and received
by the exchange agent that forms part of the book-entry confirmation. The
agent's message states that DTC has received an express acknowledgment from the
participant in DTC tendering old notes that are the subject of that book-entry
confirmation, that the participant has received and agrees to be bound by the
terms of the letter of transmittal, and that we may enforce such agreement
against such participant. In the case of an agent's message relating to
guaranteed delivery, the term means a message transmitted by DTC and received by
the exchange agent, which states that DTC has received an express acknowledgment
from the participant in DTC tendering old notes that they have received and
agree to be bound by the notice of guaranteed delivery.
Tender of Old Notes Held in Physical Form. For a holder to validly tender
old notes held in physical form:
- the exchange agent must receive at its address set forth in this
prospectus a properly completed and validly executed letter of
transmittal, or a manually signed facsimile thereof, together with any
signature guarantees and any other documents required by the instructions
to the letter of transmittal; and
- the exchange agent must receive certificates for tendered old notes at
such address, or such old notes must be transferred pursuant to the
procedures for book-entry transfer described above. A confirmation of
such book-entry transfer must be received by the exchange agent prior to
the expiration date of the exchange offer. A holder who desires to tender
old notes and who cannot comply with the procedures set forth herein for
tender on a timely basis or whose old notes are not immediately available
must comply with the procedures for guaranteed delivery set forth below.
LETTERS OF TRANSMITTAL AND OLD NOTES SHOULD BE SENT ONLY TO THE EXCHANGE
AGENT, AND NOT TO US OR TO ANY BOOK-ENTRY TRANSFER FACILITY.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER TENDERING OLD NOTES. DELIVERY OF SUCH DOCUMENTS WILL BE DEEMED MADE ONLY
WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, WE
SUGGEST THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE OF THE EXCHANGE OFFER TO PERMIT DELIVERY TO THE EXCHANGE AGENT
PRIOR TO SUCH DATE. NO ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF OLD
NOTES WILL BE ACCEPTED.
Signature Guarantees. A signature on a letter of transmittal or a notice
of withdrawal must be guaranteed by an eligible institution. Eligible
institutions include banks, brokers, dealers, municipal securities dealers,
municipal securities brokers, government securities dealers, government
securities brokers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations. The
signature need not be guaranteed by an eligible institution if the old notes are
tendered:
- by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the
letter of transmittal; or
- for the account of an eligible institution.
30
If the letter of transmittal is signed by a person other than the
registered holder of any old notes, the old notes must be endorsed or
accompanied by a properly completed bond power. The bond power must be signed by
the registered holder as the registered holder's name appears on the old notes
and an eligible institution must guarantee the signature on the bond power.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, these
persons should so indicate when signing. Unless we waive this requirement, they
should also submit evidence satisfactory to us of their authority to deliver the
letter of transmittal.
Book-Entry Transfer. The exchange agent will seek to establish a new
account or utilize an existing account with respect to the old notes at DTC
promptly after the date of this prospectus. Any financial institution that is a
participant in the book-entry transfer facility system and whose name appears on
a security position listing it as the owner of the old notes may make book-entry
delivery of old notes by causing the book-entry transfer facility to transfer
such old notes into the exchange agent's account. HOWEVER, ALTHOUGH DELIVERY OF
OLD NOTES MAY BE EFFECTED THROUGH BOOK-ENTRY TRANSFER INTO THE EXCHANGE AGENT'S
ACCOUNT AT A BOOK-ENTRY TRANSFER FACILITY, A PROPERLY COMPLETED AND VALIDLY
EXECUTED LETTER OF TRANSMITTAL, OR A MANUALLY SIGNED FACSIMILE THEREOF, MUST BE
RECEIVED BY THE EXCHANGE AGENT AT ITS ADDRESS SET FORTH IN THIS PROSPECTUS ON OR
PRIOR TO THE EXPIRATION DATE OF THE EXCHANGE OFFER, OR ELSE THE GUARANTEED
DELIVERY PROCEDURES DESCRIBED BELOW MUST BE COMPLIED WITH. The confirmation of a
book-entry transfer of old notes into the exchange agent's account at a
book-entry transfer facility is referred to in this prospectus as a "book-entry
confirmation." Delivery of documents to the book-entry transfer facility in
accordance with that book-entry transfer facility's procedures does not
constitute delivery to the exchange agent.
Guaranteed Delivery. If you wish to tender your old notes and:
- certificates representing your old notes are not lost but are not
immediately available;
- time will not permit your letter of transmittal, certificates
representing your old notes and all other required documents to reach the
exchange agent on or prior to the expiration date of the exchange offer;
or
- the procedures for book-entry transfer cannot be completed on or prior to
the expiration date of the exchange offer;
you may tender your old notes if:
- your tender is made by or through an eligible institution; and
- on or prior to the expiration date of the exchange offer, the exchange
agent has received from the eligible institution a properly completed and
validly executed notice of guaranteed delivery, by manually signed
facsimile transmission, mail or hand delivery, in substantially the form
provided with this prospectus:
- setting forth your name and address, the registered number(s) of your
old notes and the principal amount of old notes tendered;
- stating that the tender is being made by guaranteed delivery; and
- guaranteeing that, within three New York Stock Exchange trading days
after the date of the notice of guaranteed delivery, the letter of
transmittal or facsimile thereof, properly completed and validly
executed, together with certificates representing the old notes, or a
book-entry confirmation, and any other documents required by the letter
of transmittal and the instructions thereto, will be deposited by the
eligible institution with the exchange agent; and
- the exchange agent receives the properly completed and validly executed
letter of transmittal or facsimile thereof with any required signature
guarantees, together with certificates for all old notes in proper form
for transfer, or a book-entry confirmation, and any other required
documents, within three New York Stock Exchange trading days after the
date of the notice of guaranteed delivery.
31
Other Matters. Exchange notes will be issued in exchange for old notes
accepted for exchange only after timely receipt by the exchange agent of:
- certificates for, or a timely book-entry confirmation with respect to,
your old notes;
- a properly completed and duly executed letter of transmittal or facsimile
thereof with any required signature guarantees, or, in the case of a
book-entry transfer, an agent's message; and
- any other documents required by the letter of transmittal.
All questions as to the form of all documents and the validity, including
time of receipt, and acceptance of all tenders of old notes will be determined
by us, in our sole discretion, the determination of which shall be final and
binding. ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF OLD NOTES WILL NOT BE
CONSIDERED VALID. We reserve the absolute right to reject any or all tenders of
old notes that are not in proper form or the acceptance of which, in our
opinion, would be unlawful. We also reserve the right to waive any defects,
irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties.
Unless waived by us, any defect or irregularity in connection with tenders
of old notes must be cured within the time that we determine. Tenders of old
notes will not be deemed to have been made until all defects and irregularities
have been waived by us or cured. Neither us, the exchange agent, or any other
person will be under any duty to give notice of any defects or irregularities in
tenders of old notes, or will incur any liability to holders for failure to give
any such notice.
By signing or agreeing to be bound by the letter of transmittal, you will
represent to us that, among other things:
- any exchange notes that you receive will be acquired in the ordinary
course of your business;
- you have no arrangement or understanding with any person or entity to
participate in the distribution of the exchange notes;
- if you are not a broker-dealer, that you are not engaged in and do not
intend to engage in the distribution of the exchange notes;
- if you are a broker-dealer that will receive exchange notes for your own
account in exchange for old notes that were acquired as a result of
market-making activities or other trading activities, that you will
deliver a prospectus, as required by law, in connection with any resale
of those exchange notes; and
- you are not an "affiliate" of ours, as defined in Rule 405 of the
Securities Act, or, if you are an affiliate, you will comply with any
applicable registration and prospectus delivery requirements of the
Securities Act.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw your
tender of old notes at any time prior to the expiration date of the exchange
offer.
For a withdrawal to be effective:
- the exchange agent must receive a written notice of withdrawal at the
address set forth below under "-- Exchange Agent"; or
- you must comply with the appropriate procedures of DTC's automated tender
offer program system.
Any notice of withdrawal must:
- specify the name of the person who tendered the old notes to be
withdrawn; and
- identify the old notes to be withdrawn, including the principal amount of
the old notes to be withdrawn.
32
If certificates for old notes have been delivered or otherwise identified
to the exchange agent, then, prior to the release of those certificates, the
withdrawing holder must also submit:
- the serial numbers of the particular certificates to be withdrawn; and
- a signed notice of withdrawal with signatures guaranteed by an eligible
institution, unless the withdrawing holder is an eligible institution.
If old notes have been tendered pursuant to the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn old notes and
otherwise comply with the procedures of DTC.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of notices of withdrawal, and our determination shall
be final and binding on all parties. We will deem any old notes so withdrawn not
to have been validly tendered for exchange for purposes of the exchange offer.
We will return any old notes that have been tendered for exchange but that
are not exchanged for any reason to their holder without cost to the holder. In
the case of old notes tendered by book-entry transfer into the exchange agent's
account at DTC, according to the procedures described above, those old notes
will be credited to an account maintained with DTC for the old notes. This
return or crediting will take place as soon as practicable after withdrawal,
rejection of tender or termination of the exchange offer. You may re-tender
properly withdrawn old notes by following one of the procedures described under
"-- Procedures for Tendering Old Notes" at any time on or prior to the
expiration date of the exchange offer.
CONDITIONS OF THE EXCHANGE OFFER
Despite any other term of the exchange offer, we will not be required to
accept for exchange any old notes and we may terminate or amend the exchange
offer as provided in this prospectus before accepting any old notes for exchange
if in our reasonable judgment:
- the exchange notes to be received will not be tradable by the holder
without restriction under the Securities Act and the Exchange Act and
without material restrictions under the blue sky or securities laws of
substantially all of the states of the United States;
- the exchange offer, or the making of any exchange by a holder of old
notes, would violate applicable law or any applicable interpretation of
the staff of the SEC; or
- any action or proceeding has been instituted or threatened in any court
or by or before any governmental agency with respect to the exchange
offer that would reasonably be expected to impair our ability to proceed
with the exchange offer.
We will not be obligated to accept for exchange the old notes of any holder
that has not made to us:
- the representations described under the captions "-- Procedures for
Tendering Old Notes" and "Plan of Distribution"; and
- any other representations that may be reasonably necessary under
applicable Securities and Exchange Commission rules, regulations or
interpretations to make available to us an appropriate form for
registration of the exchange notes under the Securities Act.
We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. Consequently, we may
delay acceptance of any old notes by giving oral or written notice of an
extension to their holders. During an extension, all old notes previously
tendered will remain subject to the exchange offer, and we may accept them for
exchange. We will return any old notes that we do not accept for exchange for
any reason without expense to their tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
We expressly reserve the right to amend or terminate the exchange offer and
to reject for exchange any old notes not previously accepted for exchange, upon
the occurrence of any of the conditions of the exchange offer specified above.
By public announcement we will give oral or written notice of any extension,
33
amendment, non-acceptance or termination to the holders of the old notes as
promptly as practicable. If we amend the exchange offer in a manner that we
consider material, we will disclose the amendment in the manner required by
applicable law.
These conditions are solely for our benefit and we may assert them
regardless of the circumstances that may give rise to them or waive them in
whole or in part at any time or at various times in our sole discretion. If we
fail at any time to exercise any of the foregoing rights, this failure will not
constitute a waiver of that right. Each of these rights will be deemed an
ongoing right that we may assert at any time or at various times.
We will not accept for exchange any old notes tendered, and will not issue
exchange notes in exchange for any old notes, if at any time a stop order is
threatened or in effect with respect to the registration statement of which this
prospectus constitutes a part or the qualification of the indenture under the
Trust Indenture Act of 1939.
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the transfer and
exchange of old notes pursuant to the exchange offer. The tendering holder,
however, will be required to pay any transfer taxes, whether imposed on the
record holder or any other person, if:
- delivery of the exchange notes, or certificates for old notes for
principal amounts not exchanged, are to be made to any person other than
the record holder of the old notes tendered;
- tendered certificates for old notes are recorded in the name of any
person other than the person signing any letter of transmittal; or
- a transfer tax is imposed for any reason other than the transfer and
exchange of old notes under the exchange offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
If you do not exchange your old notes for exchange notes in the exchange
offer, you will remain subject to restrictions on transfer of the old notes:
- as set forth in the legend printed on the old notes as a consequence of
the issuance of the exchange notes pursuant to the exemptions from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws; and
- as otherwise set forth in the offering circular distributed in connection
with the private offering of the old notes.
In general, you may not offer or sell the old notes unless they are
registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the registration rights agreement, we do not intend to
register resales of the old notes under the Securities Act. Based on
interpretations of the SEC, you may offer for resale, resell or otherwise
transfer exchange notes issued in the exchange offer without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that:
- you are not an "affiliate" within the meaning of Rule 405 under the
Securities Act;
- you acquired the exchange notes in the ordinary course of your business;
and
- you have no arrangement or understanding with respect to the distribution
of the exchange notes to be acquired in the exchange offer.
34
If you tender old notes in the exchange offer for the purpose of
participating in a distribution of the exchange notes:
- you cannot rely on the applicable interpretations of the SEC; and
- you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction and that such a secondary resale transaction must be covered
by an effective registration statement containing the selling security
holder information required by Item 507 or 508, as applicable, of
Regulation S-K under the Securities Act.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. You should direct questions and requests for assistance, requests for
additional copies of this prospectus, the letter of transmittal or any other
documents to the exchange agent. You should send certificates for old notes,
letters of transmittal and any other required documents to the exchange agent
addressed as follows:
<Table>
By Registered or Certified By Hand or Overnight Delivery Facsimile Transmission
Mail
The Bank of New York (Eligible Institutions Only)
The Bank of New York Reorganization Department (212) 235-2261
Reorganization Department 15 Broad Street
15 Broad Street 16th Floor To Confirm by Telephone or
16th Floor New York, New York 10005 for
New York, New York 10005 Attn: Kin Lau Information Call:
Attn: Kin Lau
Kin Lau
(212) 235-2358
</Table>
Delivery of the letter of transmittal to an address other than as shown
above or transmission via facsimile other than as set forth above does not
constitute a valid delivery of the letter of transmittal.
OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to exchange old notes for exchange notes. We urge you to
consult your financial and tax advisors in making your own decision on what
action to take.
We may in the future seek to acquire untendered old notes in open market or
privately negotiated transactions, through subsequent exchange offers or
otherwise, on terms that may differ from the terms of the exchange offer. We
have no present plans to acquire any old notes that are not tendered in the
exchange offer or to file a registration statement to permit resales or any
untendered old notes.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes under the exchange offer. In consideration for issuing the exchange notes
as contemplated by this prospectus, we will receive the old notes in like
principal amount. The old notes surrendered in exchange for the exchange notes
will be retired and cancelled and cannot be reissued. Accordingly, the issuance
of the exchange notes will not result in any increase in our indebtedness or
capital stock.
35
CAPITALIZATION
The following table sets forth the capitalization of Westport and its
subsidiaries at September 30, 2001 adjusted to reflect the offering of $275.0
million of the old notes and the application of the proceeds therefrom on
November 5, 2001. This table should be read in conjunction with the historical
consolidated financial statements and related notes of Old Westport and Belco,
our unaudited pro forma condensed consolidated financial statements and related
notes, "Management's Discussion and Analysis of Financial Conditions and Results
of Operations" and other financial information included elsewhere in this
prospectus.
<Table>
<Caption>
SEPTEMBER 30, 2001
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
Cash........................................................ $ 37,030 $ 37,030
========== ==========
Total debt:
Revolving Credit Facility(1).............................. $ 255,000 $ 12,000
8 1/4% Senior Subordinated Notes due 2011................. -- 275,000
8 7/8% Senior Subordinated Notes due 2007(2).............. $ 149,205 $ 124,661
---------- ----------
Total debt............................................. 404,205 411,661
Stockholders' equity:
Preferred stock........................................... 29 29
Common stock.............................................. 520 520
Additional paid-in-capital................................ 875,172 875,172
Other comprehensive income................................ 7,350 7,350
Treasury stock............................................ 47,147 47,147
Retained earnings......................................... (408) (408)
---------- ----------
Total stockholders' equity............................. 929,810 929,810
---------- ----------
Total capitalization................................... $1,334,015 $1,341,471
========== ==========
</Table>
- ---------------
(1) On December 31, 2001, our Revolving Credit Facility had a borrowing base of
$400.0 million.
(2) In connection with the Merger, we assumed $147 million face amount, $149
million fair value of Belco's 8 7/8% Senior Subordinated Notes due 2007. On
November 1, 2001, approximately $24.3 million face amount of our 8 7/8%
Senior Subordinated Notes due 2007 was tendered to us, pursuant to the
change of control provisions of the related indenture. The tender price was
equal to 101% of the principal amount of each note plus accrued and unpaid
interest as of October 29, 2001. Including the premium and accrued interest,
the total amount paid was $24.8 million. We used borrowings under our
Revolving Credit Facility to fund the repayment.
36
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The merger of Old Westport into Belco on August 21, 2001 was accounted for
as a purchase transaction for financial accounting purposes. Because Old
Westport stockholders own a majority of the Westport common stock, the Merger
was accounted for as a reverse acquisition in which Old Westport is the
purchaser of Belco. Westport began consolidating the results of Belco with the
results of Old Westport as of the August 21, 2001 closing date. The unaudited
pro forma condensed consolidated statements of operations of Westport for the
year ended December 31, 2000 and the nine months ended September 30, 2001 give
effect to the Merger as if it had occurred on January 1, 2000. The unaudited pro
forma condensed consolidated statement of operations of Westport for the year
ended December 31, 2000 also reflects the merger of Westport Oil and Gas
Company, Inc., referred to herein as Westport Oil and Gas, with Equitable
Production (Gulf) Company, referred to herein as EPGC, which occurred on April
7, 2000 and is referred to herein as the EPGC Merger, as if it had occurred on
January 1, 2000. The pro forma adjustments are based on estimates and
assumptions explained in further detail in the accompanying notes to unaudited
pro forma condensed consolidated financial statements.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the accompanying notes to unaudited pro forma
condensed consolidated financial statements, the historical consolidated
financial statements and related notes of Old Westport and Belco, the historical
statements of revenues and direct operating expenses and related notes for the
properties acquired from Equitable Production (Gulf) Company, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included elsewhere in this prospectus. The pro forma
information presented does not purport to be indicative of the financial
position or results of operations that would have actually occurred had the
Merger and the EPGC Merger occurred on the dates indicated or which may occur in
the future.
Gains and losses related to derivatives that do not qualify as hedges for
accounting purposes and gains on the sale of operating assets have been
classified as revenues in the accompanying unaudited pro forma condensed
consolidated statements of operations. Such amounts are classified as
non-operating Other Income (Expense) in the Historical Statements of Operations
of Old Westport and Belco.
37
WESTPORT RESOURCES CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
<Table>
<Caption>
OLD PRO FORMA
WESTPORT BELCO MERGER
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenues:
Oil and natural gas sales.................... $232,581 $155,728 $ $388,309
Commodity price risk management activities:
Non-hedge cash settlements................ (558) (52,091) (52,649)
Non-hedge non-cash change in fair value of
derivatives............................. 24,486 91,836 116,322
-------- -------- ------- --------
Net revenues......................... 256,509 195,473 451,982
-------- -------- ------- --------
Operating costs and expenses:
Lease operating expense...................... 34,770 26,326 61,096
Production taxes............................. 8,942 13,472 22,414
Transportation costs......................... 3,921 -- 3,921
Exploration.................................. 24,333 -- 2,798(a) 27,131
Depletion, depreciation and amortization..... 72,251 38,632 3,968(b) 114,851
Impairment of unproved properties............ 3,114 -- 3,114
Stock compensation expense................... (1,060) -- (1,060)
General and administrative................... 10,832 6,016 2,609(c) 19,457
-------- -------- ------- --------
Total operating expenses............. 157,103 84,446 9,375 250,924
-------- -------- ------- --------
Operating income (loss).............. 99,406 111,027 (9,375) 201,058
Other income (expense):
Interest expense............................. (4,483) (19,406) (23,889)
Interest income.............................. 1,522 163 1,685
Other........................................ 1,897 -- 1,897
-------- -------- ------- --------
Income (loss) before income taxes.............. 98,342 91,784 (9,375) 180,751
Benefit (provision) for income taxes........... (35,895) (32,124) 3,281(d) (64,738)
-------- -------- ------- --------
Net income (loss) before cumulative effect of
change in accounting principle............... $ 62,447 $ 59,660 $(6,094) $116,013
======== ======== ======= ========
Weighted average number of common shares
outstanding:
Basic........................................ 40,496 -- 11,547(h) 52,043
Diluted...................................... 41,329 -- 11,547(h) 52,876
Net income available to common stockholders
before cumulative effect of change in
accounting principle per common share:
Basic........................................ $ 1.53 $ 2.16(i)
Diluted...................................... $ 1.50 $ 2.12(i)
</Table>
The accompanying notes to the unaudited pro forma condensed consolidated
financial statements
are an integral part of these statements.
38
WESTPORT RESOURCES CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000
<Table>
<Caption>
OLD PRO FORMA PRO FORMA
WESTPORT BELCO EPGC MERGER
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenues:
Oil and natural gas sales.......... $220,042 $ 199,387 $18,932(e) $ $ 438,361
Commodity price risk management
activities:
Non-hedge cash settlements...... -- (33,953) (33,953)
Non-hedge non-cash change in
fair value of derivatives..... (739) (103,610) (104,349)
Gain on sale of assets, net........ 3,130 -- 3,130
-------- --------- ------- --------- ---------
Net revenues............... 222,433 61,824 18,932 303,189
-------- --------- ------- --------- ---------
Operating costs and expenses:
Lease operating expense............ 34,397 33,290 1,215(e) 68,902
Production taxes................... 10,631 14,464 25,095
Transportation costs............... 3,034 -- 3,034
Exploration........................ 12,790 -- 5,968(a) 18,758
Depreciation, depletion and
amortization.................... 64,856 56,721 10,126(e) 5,083(b) 136,786
Impairment of proved properties.... 2,911 -- 2,911
Impairment of unproved
properties...................... 5,124 -- 5,124
Stock compensation expense......... 5,539 -- 5,539
General and administrative......... 7,542 6,538 702(e) 3,464(c) 18,246
-------- --------- ------- --------- ---------
Total operating expenses... 146,824 111,013 12,043 14,515 284,395
-------- --------- ------- --------- ---------
Operating income (loss).... 75,609 (49,189) 6,889 (14,515) 18,794
Other income (expense):
Interest expense................... (9,731) (25,253) (1,023)(e) (36,007)
Interest income.................... 1,230 951 2,181
Other.............................. 152 -- 152
-------- --------- ------- --------- ---------
Income (loss) before income taxes.... 67,260 (73,491) 5,866 (14,515) (14,880)
Benefit (provision) for income
taxes.............................. (23,724) 25,722 (2,542)(e) 5,752(d) 5,208
-------- --------- ------- --------- ---------
Net income (loss).................... 43,536 (47,769) 3,324 (8,763) (9,672)
Preferred stock dividends............ -- (6,022) (6,022)
-------- --------- ------- --------- ---------
Net income (loss) available to common
stock.............................. $ 43,536 $ (53,791) $ 3,324 $ (8,763) $ (15,694)
======== ========= ======= ========= =========
Weighted average number of common
shares outstanding:
Basic.............................. 28,296 31,469 4,007(g) (17,938)(f) 45,834
Diluted............................ 28,645 31,469 4,007(g) (18,287)(f) 45,834
Net income (loss) per common share:
Basic.............................. $ 1.54 $ (1.71) -- -- $ (0.34)
Diluted............................ $ 1.52 $ (1.71) -- -- $ (0.34)
</Table>
The accompanying notes to the unaudited pro forma condensed consolidated
financial statements
are an integral part of these statements.
39
WESTPORT RESOURCES CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND AVERAGE PRICE DATA)
The following notes discuss the pro forma adjustments related to the
Merger, and for the 2000 unaudited pro forma condensed consolidated statement of
operations, Westport's merger with EPGC on April 7, 2000.
(a) Adjustment to expense exploration costs capitalized by Belco (under the
full cost method of accounting) to conform to the successful efforts method
of accounting utilized by Old Westport.
(b) Adjustment to reflect additional depletion, depreciation and amortization
expense resulting from the additional basis of oil and natural gas
properties recorded in connection with purchase accounting. The additional
pro forma depletion, depreciation and amortization expense was computed
based on the portion of the purchase price allocated to proved properties
using the units of production depletion method (under the successful
efforts method of accounting) based on estimates of proved reserves of the
Belco properties as of the beginning of each period presented.
(c) Adjustment to expense general and administrative expenses capitalized by
Belco (under the full cost method of accounting) to conform to the
successful efforts method of accounting utilized by Old Westport.
(d) Adjustment to reflect provision for income taxes resulting from pro forma
income before income taxes, assuming an effective tax rate of 35.8% and
35.0% in the 2001 period and 2000 period, respectively.
(e) Adjustment to reflect additional revenues and expenses attributable to the
EPGC properties acquired by Old Westport in the EPGC Merger on April 7,
2000. Adjustment reflects revenues and expenses of the EPGC properties for
the period prior to the EPGC Merger.
(f) Adjustment to reflect the elimination of Belco's historical shares
outstanding and the issuance of 13,587,425 shares of New Westport common
stock in connection with the merger of Westport into Belco and the
reduction of Westport's weighted average number of diluted common shares as
a result of Westport's common stock equivalents which become antidilutive
on a pro forma basis.
(g) Adjustment to reflect the issuance of 15,236,152 shares of Westport common
stock on April 7, 2000 in connection with Westport's acquisition of EPGC.
(h) Adjustment to reflect the elimination of Belco's historical shares
outstanding and the issuance of 13,587,425 shares of New Westport common
stock in connection with the merger of Westport into Belco and the impact
of Belco's common stock equivalents.
(i) Net income available to common stockholders before cumulative effect of
change in accounting principle per common share reflects the impact of
preferred stock dividends of $3,696,000.
40
(UNAUDITED) SUPPLEMENTAL PRO FORMA DATA RELATED TO
OIL AND GAS ACTIVITIES
Estimates of proved oil and natural gas reserve quantities and the related
discounted future net cash flows for Old Westport at December 31, 2000 were
prepared by Ryder Scott Company, L.P. and Netherland, Sewell and Associates,
Inc. Estimates of proved oil and natural gas reserve quantities and the related
discounted future net cash flows of Belco as of December 31, 2000 are based on
internal estimates and audited by Miller and Lents, Ltd. independent petroleum
engineers.
PRO FORMA QUANTITIES OF OIL AND NATURAL GAS RESERVES (UNAUDITED)
The following table presents estimates of net proved and proved developed
oil and natural gas reserves as of December 31, 2000 for Old Westport, Belco and
pro forma for the Merger.
<Table>
<Caption>
OLD WESTPORT BELCO PRO FORMA
----------------- ----------------- -----------------
OIL GAS OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
------- ------- ------- ------- ------- -------
Total proved reserves:
Beginning of year.......... 32,750 119,338 53,076 322,148 85,826 441,486
Production................. (3,584) (34,316) (3,922) (40,847) (7,506) (75,163)
Revisions of previous
estimates............... 1,417 10,662 (1,316) (33,128) 101 (22,466)
Extensions, discoveries and
other additions......... 3,135 33,445 4,289 76,433 7,424 109,878
Purchases of reserves in
place................... 3,249 116,783 8,346 57,726 11,595 174,509
Sales of reserves in
place................... (2,167) (447) (2,982) (1,009) (5,149) (1,456)
------ ------- ------ ------- ------ -------
End of year................ 34,800 245,465 57,491 381,323 92,291 626,788
====== ======= ====== ======= ====== =======
Proved developed reserves.... 28,673 185,354 40,642 231,380 69,315 416,734
====== ======= ====== ======= ====== =======
</Table>
STANDARDIZED MEASURE OF DISCOUNTED PRO FORMA FUTURE NET CASH FLOWS RELATING TO
PROVED OIL AND NATURAL GAS RESERVES (UNAUDITED)
The following table presents the standardized measure of discounted future
net cash flows as of December 31, 2000 for Old Westport, Belco and pro forma for
the Merger.
<Table>
<Caption>
OLD
WESTPORT BELCO PRO FORMA
---------- ----------- -----------
(DOLLARS IN THOUSANDS)
Future cash flows.............................. $2,993,022 $ 5,139,439 $ 8,132,461
Future production costs........................ (546,358) (977,369) (1,523,727)
Future development costs....................... (119,415) (184,305) (303,720)
---------- ----------- -----------
Future net cash flows before tax............... 2,327,249 3,977,765 6,305,014
Future income taxes............................ (691,048) (1,309,197) (2,000,245)
---------- ----------- -----------
Future net cash flows after tax................ 1,636,201 2,668,568 4,304,769
Annual discount at 10%......................... (537,802) (1,002,564) (1,540,366)
---------- ----------- -----------
Standardized measure of discounted future net
cash flows................................... $1,098,399 $ 1,666,004 $ 2,764,403(1)
========== =========== ===========
</Table>
- ---------------
(1) As of June 30, 2001 our pro forma standardized measure was $1,094,284.
41
(UNAUDITED) CHANGES IN STANDARDIZED MEASURE OF PRO FORMA DISCOUNTED FUTURE NET
CASH FLOWS
The following table presents changes in the standardized measure of
discounted future net cash flows for the year ended December 31, 2000 for Old
Westport, Belco and pro forma for the Merger.
<Table>
<Caption>
OLD
WESTPORT BELCO PRO FORMA
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Balance, beginning of year....................... $ 322,435 $ 465,329 $ 787,764
Oil and natural gas sales, net of production
costs.......................................... (196,608) (209,916) (406,524)
Net changes in anticipated prices and production
cost........................................... 369,244 1,430,220 1,799,464
Extensions and discoveries, less related costs... 228,685 101,596 330,281
Changes in estimated future development costs.... (15,807) 24,303 8,496
Previously estimated development costs
incurred....................................... 16,827 -- 16,827
Net change in income taxes....................... (445,830) (429,170) (875,000)
Purchase of minerals in place.................... 748,854 118,390 867,244
Sales of minerals in place....................... (3,205) (13,633) (16,838)
Accretion of discount............................ 34,910 62,654 97,564
Revision of quantity estimates................... 48,384 (147,218) (98,834)
Changes in production rates and other............ (9,490) 263,449 253,959
---------- ---------- ----------
Balance, end of year............................. $1,098,399 $1,666,004 $2,764,403
========== ========== ==========
</Table>
42
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following information should be read in conjunction with the historical
consolidated financial statements and related notes of Old Westport and Belco,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information included elsewhere in this document.
WESTPORT
<Table>
<Caption>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- ---------------------
1996 1997 1998 1999 2000 2000 2001
-------- --------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS
DATA:
Operating revenues.......... $ 35,141 $ 63,870 $ 52,355 $ 75,488 $ 220,042 $142,691 $ 256,509
-------- --------- --------- -------- --------- -------- ---------
Operating costs and
expenses:
Lease operating expense... 10,716 19,583 21,554 22,916 34,397 23,609 34,770
Production taxes.......... 3,561 5,923 3,888 5,742 10,631 7,460 8,942
Transportation costs...... -- 781 850 1,725 3,034 1,967 3,921
Exploration............... 1,054 7,424 14,664 7,314 12,790 7,610 24,333
Depletion, depreciation
and amortization........ 8,325 23,659 36,264 25,210 64,856 42,015 72,251
Impairment of proved
properties.............. 442 5,765 8,794 3,072 2,911 -- --
Impairment of unproved
properties.............. -- 380 1,898 2,273 5,124 1,908 3,114
Stock compensation
expense................. -- -- -- -- 5,539(1) 3,682(1) (1,060)
General and
administrative.......... 2,655 5,316 5,913 5,297 7,542 5,277 10,832
-------- --------- --------- -------- --------- -------- ---------
Total operating
expenses.............. 26,753 68,831 93,825 73,549 146,824 93,528 157,103
-------- --------- --------- -------- --------- -------- ---------
Operating income
(loss)................ 8,388 (4,961) (41,470) 1,939 73,218 49,163 99,406
Other income (expense):
Interest expense.......... (2,774) (5,635) (8,323) (9,207) (9,731) (8,454) (4,483)
Interest income........... 313 309 403 489 1,230 614 1,522
Gain (loss) on sale of
assets, net............. 128 (13) -- 3,637 3,130 3,379 --
Other..................... 44 (54) 29 16 (587) 100 1,897
-------- --------- --------- -------- --------- -------- ---------
Income (loss) before
income taxes............ 6,099 (10,354) (49,361) (3,126) 67,260 44,802 98,342
Benefit (provision) for
income taxes............ (2,289) 973 -- -- (23,724) (15,192) (35,895)
-------- --------- --------- -------- --------- -------- ---------
Net income (loss)....... 3,810 (9,381) (49,361) (3,126) 43,536 29,610 62,447
Preferred Stock
Dividends............... -- -- -- -- -- -- 397
-------- --------- --------- -------- --------- -------- ---------
Net income (loss)
available to common
stock................... $ 3,810 $ (9,381) $ (49,361) $ (3,126) $ 43,536 $ 29,610 $ 62,050
======== ========= ========= ======== ========= ======== =========
Weighted average number of
common shares
outstanding:
Basic................... 4,531 9,326 11,004 14,727 28,296 25,474 40,496
======== ========= ========= ======== ========= ======== =========
Diluted................. 4,531 9,326 11,004 14,727 28,645 25,729 41,329
======== ========= ========= ======== ========= ======== =========
</Table>
43
<Table>
<Caption>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- ---------------------
1996 1997 1998 1999 2000 2000 2001
-------- --------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss) per
common share:
Basic................... $ 0.84 $ (1.01) $ (4.49) $ (0.21) $ 1.54 $ 1.16 $ 1.53
======== ========= ========= ======== ========= ======== =========
Diluted................. $ 0.84 $ (1.01) $ (4.49) $ (0.21) $ 1.52 $ 1.15 $ 1.50
======== ========= ========= ======== ========= ======== =========
OTHER FINANCIAL DATA:
EBITDAX(2).................. $ 18,694 $ 32,509 $ 20,582 $ 43,950 $ 165,567 $105,088 $ 175,100
Net cash provided by
operating activities...... 15,921 24,146 7,622 21,279 143,429 64,853 175,695
Net cash provided by (used
in) investing
activities................ (24,040) (150,441) (113,019) 17,981 (140,169) (87,962) (138,355)
Net cash provided by (used
in) financing
activities................ 13,735 126,675 104,667 (29,933) (2,581) 39,141 (20,464)
Capital expenditures........ 24,023 153,791 113,008 14,005 146,086 93,539 139,007
Ratio of earnings to fixed
charges(3)................ 3.20x -- -- -- 7.91x 6.30x 20.13x
</Table>
<Table>
<Caption>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
---------------------------------------------------- ---------------------
1996 1997 1998 1999 2000 2000 2001
-------- -------- -------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents... $ 10,497 $ 10,878 $ 10,148 $ 19,475 $ 20,154 $ 35,507 $ 37,030
Working capital (deficit)... 7,797 4,296 (30,993) 12,837 20,487 56,825 (5,148)
Total assets................ 117,597 245,394 302,302 271,477 551,831 536,281 1,623,854
Total debt.................. 26,795 93,462 153,128 106,795 162 145,795 404,205
Total stockholders'
equity.................... 80,471 131,098 126,737 140,011 458,056 338,363 929,810
</Table>
- ---------------
(1) Includes compensation expenses of $3.4 million recorded as a result of a
one-time repurchase of employee stock options in March 2000 in connection
with the merger between Westport Oil and Gas Company, Inc. and Equitable
Production (Gulf) Company.
(2) EBITDAX (as used herein) is defined as net income (loss) before interest
expense, income taxes, depletion, depreciation and amortization, impairment
of unproved properties, impairment of proved properties, exploration
expense, non-cash stock compensation expense and non-cash derivative gain
(loss). While EBITDAX should not be considered in isolation or as a
substitute for net income (loss), operating income (loss), cash flow
provided by operating activities or other income or cash flow data prepared
in accordance with generally accepted accounting principles or as an
indicator of a company's financial performance, Old Westport believes that
it provides additional information with respect to its ability to meet its
future debt service, capital expenditure commitments and working capital
requirements. When evaluating EBITDAX, investors should consider, among
other factors, (i) increasing or decreasing trends in EBITDAX, (ii) whether
EBITDAX has remained at positive levels historically and (iii) how EBITDAX
compares to levels of interest expense. Because EBITDAX excludes some, but
not all, items that affect net income and is defined differently among
companies in our industry, the measure of EBITDAX presented above may not be
comparable to similarly titled measures of other companies. Old Westport
believes that EBITDAX may provide additional information with respect to its
ability to meet its future debt service, capital expenditure commitments and
working capital requirements, certain functional or legal requirements of
its business may require it to utilize its available funds for other
purposes.
(3) In calculating the ratio of earnings to fixed charges, earnings consist of
income prior to income tax benefit (expense) and fixed charges. Fixed
charges consist of interest expense and amortization of debt issuance
44
costs. Earnings were insufficient to cover fixed charges by $10,354,000,
$49,361,000 and $3,126,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
BELCO
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- --------------------
1996 1997 1998 1999 2000 2000 2001
--------- --------- --------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales, net of
hedging activities......... $ 119,710 $ 129,994 $ 129,916 $141,932 $ 199,387 $ 97,842 $127,778
--------- --------- --------- -------- --------- --------- --------
Operating costs and expenses:
Oil and gas operating
expenses................... 6,296 7,358 33,615 29,854 33,290 15,201 19,079
Production taxes............. 1,551 5,400 7,232 9,314 14,464 7,522 10,881
Depreciation, depletion and
amortization............... 40,904 46,684 56,102 54,182 56,721 28,166 29,192
Impairment of oil and gas
properties................. -- 150,000 229,000 -- -- -- --
General and administrative... 3,059 3,913 5,216 4,940 6,538 3,145 3,565
--------- --------- --------- -------- --------- --------- --------
Total operating costs
and expenses........ 51,810 213,355 331,165 98,290 111,013 54,034 62,717
--------- --------- --------- -------- --------- --------- --------
Operating income
(loss).............. 67,900 (83,361) (201,249) 43,642 88,374 43,808 65,061
Other income (expense):
Interest expense............. -- (1,668) (21,013) (21,021) (25,253) (13,602) (14,571)
Interest income.............. 2,653 3,245 1,730 1,134 951 500 145
Impairment of equity
securities................. -- -- (24,216) (450) -- -- --
Derivative gain
(loss) -- cash............. 3,417 (1,551) 172 (2,442) (33,953) (12,995) (47,685)
Derivative gain
(loss) -- non-cash......... (9,384) (4,928) 18,912 (34,094) (103,610) (65,963) 91,836
--------- --------- --------- -------- --------- --------- --------
Income (loss) before income
taxes........................ 64,586 (88,263) (225,664) (13,231) (73,491) (48,252) 94,786
Benefit (provision) for income
taxes(1)..................... (21,953) 31,355 78,107 4,631 25,722 16,888 (33,175)
--------- --------- --------- -------- --------- --------- --------
Net income (loss) before
cumulative effect of change
in accounting principle...... 42,633 (56,908) (147,557) (8,600) (47,769) (31,364) 61,611
Cumulative effect of change in
accounting principle......... -- -- -- -- -- -- (4,324)
--------- --------- --------- -------- --------- --------- --------
Net income (loss)(1)......... $ 42,633 $ (56,908) $(147,557) $ (8,600) $ (47,769) $ (31,364) $ 57,287
========= ========= ========= ======== ========= ========= ========
Net income (loss) available
to common stock............ $ 42,633 $ (56,908) $(152,963) $(15,484) $ (53,791) $ (34,516) $ 54,702
========= ========= ========= ======== ========= ========= ========
OTHER FINANCIAL DATA:
EBITDA(2)...................... $ 114,874 $ 115,017 $ 85,755 $ 96,516 $ 112,093 $ 59,479 $ 46,713
Net cash provided by operating
activities................... 108,059 101,523 86,345 78,044 86,698 $ 44,505 $ 52,808
Net cash used in investing
activities................... (143,826) (363,136) (138,526) (74,542) (175,282) $(114,676) $(60,697)
Net cash provided by (used in)
financing activities......... 77,684 230,400 42,356 (3,832) 89,145 $ 71,197 $ 6,810
Capital expenditures (net)..... 142,712 564,459 126,506 73,183 175,328 114,447 60,532
</Table>
45
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- --------------------
1996 1997 1998 1999 2000 2000 2001
--------- --------- --------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA (AS OF
PERIOD END):
Cash and cash equivalents...... $ 43,473 $ 12,260 $ 2,435 $ 2,105 $ 2,666 $ 3,131 $ 1,587
Working capital (deficit)(3)... 48,667 36,757 14,821 (8,389) (101,729) (40,058) (51,585)
Total assets................... 303,918 697,109 505,536 510,973 657,374 610,618 661,914
Total debt..................... -- 352,090 294,990 306,744 402,033 380,899 409,656
Stockholders' equity........... 233,203 184,648 138,291 113,972 60,400 90,060 107,065
</Table>
- ---------------
(1) 1996 includes a one-time non-cash deferred tax charge of $30.1 million
recognized as a result of the combination of assets consummated on March 29,
1996 in connection with Belco's initial public offering.
(2) EBITDA (as used herein) is defined as net income (loss) before interest
expense, income taxes, depletion, depreciation and amortization, impairment
of oil and natural gas properties, impairment of equity securities, the
non-cash portion of derivative gain (loss) and cumulative effect of change
in accounting principle. While EBITDA should not be considered in isolation
or as a substitute for net income (loss), operating income (loss), cash flow
provided by operating activities or other income or cash flow data prepared
in accordance with generally accepted accounting principles or as an
indicator of a company's financial performance, Belco believes that it
provides additional information with respect to its ability to meet its
future debt service, capital expenditure commitments and working capital
requirements.
(3) Excluding the commodity price risk management non-cash mark-to-market
balance sheet items, working capital would have been positive $6.6 million
and $7.5 million at December 31, 1999 and December 31, 2000, respectively.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the historical
consolidated financial statements and related notes of Old Westport and Belco
and other financial information included elsewhere in this prospectus.
OVERVIEW
Westport is an independent energy company engaged in oil and natural gas
exploitation, acquisition and exploration activities primarily in the United
States. Our reserves and production operations are concentrated in the following
diversified divisions: Northern (Rocky Mountains); Southern (Permian Basin, Mid-
Continent and Gulf Coast); and Gulf of Mexico (offshore). We focus on
maintaining a balanced portfolio of lower-risk, long-life onshore reserves and
higher-margin offshore reserves to provide a diversified cash flow foundation
for our exploitation, acquisition and exploration activities.
In 1999 and 2000, results of operations were significantly impacted by the
prices of oil and natural gas, which are volatile. In these two years, oil and
natural gas prices increased compared to prices in the previous two years.
However, beginning in mid-2001, oil and natural gas prices began declining. The
prices we receive for our oil vary from NYMEX prices based on the location and
quality of the crude oil. The prices we receive for our natural gas are based on
Henry Hub prices reduced by transportation and processing fees.
Revenues are derived from the sale of oil and natural gas and natural gas
liquids. We utilize the sales method of accounting for natural gas sales,
whereby revenues are recognized based on cash received and not on our
proportionate share of production. We periodically enter into fixed price sales
agreements or other hedging transactions to take advantage of prices that we
believe to be attractive and to reduce risks related to potential price
declines. While our hedging contracts protect us from price declines related to
future production volumes that are hedged, such contracts can also reduce the
benefits we could realize from increases in oil and natural gas prices. Gains
and losses from hedging transactions are recognized as oil and natural gas
revenue when the associated production occurs.
Oil and natural gas production costs are composed of lease operating
expense and production taxes. Lease operating expense consists of pumpers'
salaries, utilities, maintenance and other costs necessary to operate our
producing properties. In general, lease operating expense per unit of production
is lower on our offshore properties and does not fluctuate proportionately with
our production. Production taxes are assessed by applicable taxing authorities
as a percentage of revenues. However, properties located in Federal waters
offshore are generally not subject to production taxes.
Exploration expense consists of geological and geophysical costs, delay
rentals and the cost of unsuccessful exploratory wells. Delay rentals are
typically fixed in nature in the short term. However, other exploration costs
are generally discretionary and exploration activity levels are determined by a
number of factors, including oil and natural gas prices, availability of funds,
quantity and character of investment projects, availability of service providers
and competition.
Depletion of capitalized costs of producing oil and natural gas properties
is computed using the units-of-production method based upon proved reserves. For
purposes of computing depletion, proved reserves are redetermined as of the end
of each year and on an interim basis when deemed necessary. Because the economic
life of each producing well depends upon the assumed price for production,
fluctuations in oil and natural gas prices impact the level of proved reserves.
Higher prices generally have the effect of increasing reserves, which reduces
depletion, while lower prices generally have the effect of decreasing reserves,
which increases depletion.
General and administrative expenses consist primarily of salaries and
related benefits, stock compensation expense, office rent, legal fees,
consultants, systems costs and other administrative costs incurred in our
Denver, Dallas and Houston offices. While we expect such costs to increase with
our growth, we expect such increases to be proportionately smaller than our
production growth.
47
MERGER OF OLD WESTPORT AND BELCO
On August 21, 2001, the stockholders of Belco approved the Agreement and
Plan of Merger, dated as of June 8, 2001, between Belco and Old Westport.
Pursuant to the merger agreement, Old Westport was merged with and into Belco,
with Belco surviving and changing its name to Westport Resources Corporation.
The Merger was accounted for as a purchase transaction for financial accounting
purposes. Because former Old Westport stockholders now own a majority of the
outstanding Westport common stock as a result of the Merger, the Merger is
accounted for as a reverse acquisition in which Old Westport is the purchaser of
Belco.
Old Westport was formed by the merger on April 7, 2000 of Westport Oil and
Gas with EPGC. As a result of the merger, Westport Oil and Gas became a
wholly-owned subsidiary of EPGC, which subsequently changed its name to Westport
Resources Corporation, and the stockholders of Westport Oil and Gas became the
majority stockholders of EPGC. The senior management team of Westport Oil and
Gas became the management team for the combined company, complemented by certain
key managers from EPGC.
Based on pro forma production levels for the first nine months of 2001, we
are one of the 20 largest publicly traded independent exploration and production
companies in the United States. Our corporate headquarters are in Denver,
Colorado and we have division offices in Denver, Colorado, Dallas, Texas and
Houston, Texas. All of our oil and natural gas properties are located within the
continental United States, the Gulf of Mexico and Canada.
Our results of operations are significantly impacted by the price of oil
and natural gas. The prices we receive for our oil vary from NYMEX prices based
on the location and quality of the crude oil. The prices we receive for our
natural gas are based on Henry Hub prices reduced by transportation and
processing fees.
We account for our oil and natural gas properties using the successful
efforts method of accounting, which Old Westport followed prior to the Merger.
Under this method, all costs associated with property acquisitions, successful
exploration wells and all development wells are capitalized. Items charged to
expense generally include geological and geophysical costs, costs of
unsuccessful exploratory wells and oil and natural gas production costs. Belco
previously used the full cost method of accounting. Under that method, all costs
associated with acquisition, exploration and development of oil and natural gas
reserves, including directly related internal costs such as general and
administrative costs, geological and geophysical costs and unsuccessful
exploratory wells, were capitalized.
INTERNAL RESTRUCTURING OF THE COMPANY'S SUBSIDIARIES
Effective December 31, 2001, we completed an internal restructuring of some
of our subsidiaries, the primary purpose of which was to eliminate inactive
subsidiaries and to consolidate our assets and properties into an ownership and
decision-making structure consistent with the regional business units into which
our operations have been organized. The restructuring was accomplished through
creation of two new corporate subsidiaries, a series of mergers and transfers of
equity interests, and the statutory conversion of Westport Oil and Gas Company,
Inc. into a limited partnership.
RESULTS OF OPERATIONS -- THE COMPANY
As indicated above, the merger between Belco and Old Westport was accounted
for using purchase accounting with Old Westport as the surviving accounting
entity. We began consolidating the results of Belco with the results of Old
Westport as of the August 21, 2001 closing date. The merger between EPGC and
Westport Oil and Gas was accounted for using purchase accounting with Westport
Oil and Gas as the surviving accounting entity. Old Westport began consolidating
the results of EPGC with the results of Westport Oil and Gas as of the April 7,
2000 closing date.
The discussion below includes a comparison of our consolidated results of
operations with Old Westport's for the nine months ended September 30, 2001 and
2000 and for the years ended December 31, 2000, 1999 and 1998.
48
Revenues. Oil and natural gas revenues for the nine months ended September
30, 2001 increased by $76.1 million, or 48%, from $158.4 million to $234.4
million, over the comparable period in 2000. Production from the acquired EPGC
properties accounted for $17.1 million of the increase and production from the
acquired Belco properties accounted for $11.7 million of the increase. The
increase was also a result of an increase of 20% in realized natural gas prices
partially offset by a decrease of 12% in oil prices. Production volumes
increased 15.9 Bcfe from 39.7 Bcfe in 2000 to 55.6 Bcfe in 2001 (acquired EPGC
and Belco properties accounted for 1.4 Bcfe and 4.7 Bcfe, respectively, of the
increase). Production volumes also increased 7.9 Bcfe from recent discoveries in
the Gulf of Mexico, 0.8 Bcfe from coalbed methane development in the Powder
River Basin area, 0.6 Bcfe from the horizontal drilling program in the Wiley
Field, 0.6 Bcfe from the drilling program in northern Louisiana and 0.6 Bcfe
from the acquired interest in the Ward Estes Field in August 2000. Increases
were partially offset by declines in existing properties. Hedging transactions
had the effect of reducing oil and natural gas revenues by $1.8 million and
$15.7 million, or $0.03 and $0.39 per Mcfe, for the nine months ended September
30, 2001 and 2000, respectively.
Oil and natural gas revenues for 2000 increased by $144.5 million, or 191%,
from $75.5 million to $220.0 million. Production from the acquired EPGC
properties accounted for $95.3 million of the increase and the remaining
increase resulted from increases of 70% and 92% in realized oil and natural gas
prices, respectively. The increase of 22,709 Mmcfe in production volumes from
33,113 Mmcfe in 1999 to 55,822 Mmcfe in 2000 was primarily due to 21,260 Mmcfe
from the acquired EPGC properties. Hedging transactions had the effect of
reducing oil and natural gas revenues by $24.6 million and $7.9 million, or
$0.44 and $0.24 per Mcfe, for the year ended December 31, 2000 and 1999,
respectively.
Oil and natural gas revenues for 1999 increased by $23.1 million, or 44%,
from $52.4 million to $75.5 million. This increase resulted from increases of
52% and 22% in realized oil and natural gas prices, respectively, and an
increase of 64% in natural gas production volumes partially offset by a decrease
of 5% in oil production volumes. The increase in production volumes from 29.0
Bcfe to 33.1 Bcfe was primarily attributable to oil and natural gas properties
acquired from Total Minatome Corporation in October 1998. Hedging transactions
had the effect of reducing oil and natural gas revenues by $7.9 million, or
$0.24 per Mcfe, in 1999 and increasing oil and natural gas revenues by $0.3
million, or $0.01 per Mcfe, in 1998.
Commodity Price Risk Management Activities, or CPRM, Activities. For the
nine months ended September 30, 2001, we recorded a net gain of $24.5 million in
the non-hedge non-cash change in fair value of derivatives and a net loss of
$0.6 million in non-hedge cash settlements of derivatives. The net gain relates
to cash settlements of derivatives and changes in fair value on derivatives that
under SFAS No. 133 do not qualify for hedge accounting. Old Westport had no
derivatives that did not qualify for hedge accounting for the nine months ended
September 30, 2000.
Lease Operating Expense. Lease operating expense for the nine months ended
September 30, 2001 increased by $11.2 million, or 47%, from $23.6 million to
$34.8 million, compared to the same period in 2000. Lease operating expenses
from the acquired EPGC properties and Belco properties accounted for $1.5
million and $2.5 million, respectively, of the increase. An increase of $1.4
million was due to chemicals used in initiating the alkaline surfactant polymer
flood in the Mellot Ranch field in the Powder River Basin. Lease operating
expenses increased in the Gooseberry field in the Big Horn Basin by $0.6 million
as a result of several workovers to enhance current production. Recent
discoveries in the Gulf of Mexico and recent onshore discoveries accounted for
$1.1 million and $1.5 million, respectively, of the increase. Also the acquired
interest in the Ward Estes lease in West Texas in August 2000 accounted for $0.5
million of the increase. Remaining increase was primarily due to workovers
performed on certain fields in the Williston Basin. On a per Mcfe basis, lease
operating expense increased from $0.59 to $0.63 in the 2000 and 2001 periods,
respectively.
Lease operating expense for 2000 increased by $11.5 million, or 50%, from
$22.9 million to $34.4 million. Lease operating expenses from the acquired EPGC
properties accounted for $6.5 million of the increase. On a per Mcfe basis,
lease operating expense decreased from $0.69 to $0.62, primarily due to the
lower lease operating expense associated with the acquired EPGC properties.
Lease operating expense for 1999 increased by $1.3 million, or 6%, from
$21.6 million to $22.9 million. The increase in lease operating expense was the
result of additional expense recorded as a result of oil and
49
natural gas properties acquired from Total Minatome Corporation in October 1998,
offset by uneconomic properties shut in during 1999 and sales of oil and natural
gas properties during 1999. On a per Mcfe basis, lease operating expense
decreased from $0.74 in 1998 to $0.69 in 1999. The cost per Mcfe decreased
because the acquired properties are primarily natural gas properties, which have
lower operating costs than oil properties.
Production Taxes. Production taxes for the nine months ended September 30,
2001 increased by $1.4 million, or 19%, from $7.5 million to $8.9 million,
compared to the same period in 2000. Acquired Belco properties accounted for
$1.1 million of the increase in production taxes. As a percent of oil and
natural gas revenues (excluding the effects of hedges), production taxes
decreased from 4.7% to 3.8%. The decrease in production taxes as a percent of
revenue is primarily the result of the EPGC merger and recent discoveries in the
Gulf of Mexico, which increased the number of offshore properties that are not
subject to production taxes.
Production taxes for 2000 increased by $4.9 million, or 85%, from $5.7
million to $10.6 million. The increase in production taxes is primarily
attributable to an increase in the average realized price of oil and natural
gas. As a percent of oil and natural gas revenues (excluding the effects of
hedges), production taxes decreased from 6.9% to 4.3%. The decrease in
production taxes as a percent of revenue is primarily the result of the EPGC
Merger, which increased the number of offshore properties Old Westport owns that
are not subject to production taxes.
Production taxes for 1999 increased by $1.8 million, or 48%, from $3.9
million to $5.7 million. The increase in production taxes is primarily
attributable to an increase in the average realized price of oil and natural
gas. As a percent of oil and natural gas revenues (excluding the effects of
hedges), production taxes decreased from 7.5% in 1998 to 6.9% in 1999. The
decrease in production taxes as a percent of revenue is primarily the result of
the Total Minatome acquisition, which increased the number of offshore
properties Old Westport owns that are not subject to production taxes.
Transportation Costs. Transportation costs for the nine months ended
September 30, 2001 increased by $1.9 million, or 95%, from $2.0 million to $3.9
million, compared to the same period in 2000. Transportation costs from the
acquired EPGC properties accounted for $0.2 million of the increase. The
remaining increase was primarily due to additional offshore and coalbed methane
wells that started producing in the latter part of 2000 and 2001.
Transportation costs for 2000 increased by $1.3 million, or 76%, from $1.7
million to $3.0 million. Transportation costs from the acquired EPGC properties
accounted for $0.4 million of the increase. The remaining increase was due to
additional natural gas offshore wells and coalbed methane wells that started
producing in 2000, which incur higher costs to process and transport the natural
gas.
Transportation costs for 1999 increased by $0.9 million, or 103%, from $0.8
million to $1.7 million. The increase in transportation costs was primarily the
result of natural gas properties located in northern Louisiana acquired from
Total Minatome Corporation in October 1998.
Exploration Costs. Exploration costs for the nine months ended September
30, 2001 increased by $16.7 million, or 220%, from $7.6 million to $24.3
million, compared to the same period in 2000. Dry hole costs increased $14.5
million as a result of five unsuccessful exploratory wells drilled in the Gulf
of Mexico during the nine months ended September 30, 2001. For the nine months
ended September 30, 2000 there were two unsuccessful exploratory offshore wells
and two unsuccessful exploratory onshore wells. Purchases of Gulf of Mexico 3-D
seismic data increased $1.8 million during the nine months ended September 30,
2001 compared to the same period in 2000.
Exploration costs for 2000 increased by $5.5 million, or 75%, from $7.3
million to $12.8 million. Exploration costs consist of $6.0 million of dry hole
costs, $5.6 million of geological and geophysical costs and $1.2 million of
delay rentals. The increase was primarily due to $4.0 million in additional dry
hole costs as a result of five unsuccessful offshore exploratory wells and three
unsuccessful onshore exploratory wells drilled during 2000. Geological and
geophysical costs increased $1.0 million due to increased offshore activity in
50
2000. Delay rentals accounted for $0.5 million of the increase as a result of
acquiring offshore leases in the EPGC Merger.
Exploration costs decreased $7.4 million, or 50%, during 1999, from $14.7
million to $7.3 million. The decrease was primarily due to four unsuccessful
offshore exploratory wells and seven unsuccessful onshore exploratory wells
drilled during 1998 compared to one unsuccessful offshore exploratory well and
two unsuccessful onshore exploratory wells drilled during 1999.
Depletion, Depreciation and Amortization, or DD&A, Expense. DD&A expense
increased $30.2 million during the nine months ended September 30, 2001, from
$42.0 million to $72.2 million, compared to the same period in 2000. Depletion
related to the acquired EPGC properties and Belco properties caused DD&A expense
to increase $8.9 million and $5.3 million, respectively. Recent discoveries in
the Gulf of Mexico caused DD&A expense to increase $10.8 million. An increase of
$2.2 million was due to additions in oil and natural gas properties in northern
Louisiana since September 30, 2000. These increases were the primary factors
which caused DD&A expense to increase on a per Mcfe basis from $1.06 to $1.30.
DD&A expense increased $39.7 million during 2000 from $25.2 million to
$64.9 million. Depletion related to the acquired EPGC properties caused DD&A
expense to increase $36.8 million. The remaining increase was due to the
additions in oil and natural gas properties during 2000. The average DD&A rate
increased from $0.76 per Mcfe during 1999 to $1.16 per Mcfe during 2000, a 53%
increase in the DD&A rate primarily due to the acquired offshore EPGC
properties.
DD&A expense decreased $11.1 million, or 30%, during 1999, from $36.3
million to $25.2 million. The average DD&A rate of $0.76 per Mcfe of production
during 1999 represents a 39% decrease from the $1.25 per Mcfe recorded in 1998.
This decrease was attributable primarily to an increase in estimated proved
reserves attributable to higher oil and natural gas prices at December 31, 1999
as compared to December 31, 1998, as well as to proved property impairments of
$8.8 million recorded in 1998.
Impairment of Proved Properties. During 2000, 1999 and 1998, Old Westport
recognized proved property impairments of $2.9 million, $3.1 million and $8.8
million, respectively. Impairments recorded in 2000 were mainly the result of a
decline in Old Westport's oil and natural gas reserve value due to reserve
volume reductions in under performing fields in Wyoming, offshore and Louisiana.
The impairment recorded in 1999 was the result of a decrease in risk adjusted
probable reserves for the Ward Estes lease located in West Texas, which were
subsequently assigned to the operator of the lease in exchange for existing
producing property equipment and infrastructure owned by the operator. The
impairments recorded in 1998 were as follows: $4.9 million resulting from
depressed oil prices for certain long-lived oil properties located primarily in
the Rocky Mountains, $2.5 million resulting from depressed natural gas prices
for certain natural gas properties located in the Mid-Continent and $1.4 million
based on the results of unsuccessful development drilling in the Mid-Continent.
Impairment of Unproved Properties. During the nine months ended September
30, 2001, we recognized unproved property impairments of $3.1 million on
offshore leases, as a result of an assessment of the exploration opportunities
existing on such properties. During the nine months ended September 30, 2000, we
recognized unproved property impairments of $1.9 million of which impairments of
$0.6 million were taken on offshore leases, $0.4 million for leases held in
Kansas and the remaining $0.9 million for various leases held in North Dakota,
Wyoming and Louisiana.
In 2000, Old Westport recognized unproved property impairments of $5.1
million, as a result of an assessment of the exploration opportunities existing
on such properties. The $5.1 million consisted of $2.5 million for leases held
in North Dakota, $1.5 million for leases held offshore and $1.1 million for
various leases held in Kansas, Wyoming and Louisiana. In 1999, Old Westport
recognized unproved property impairments of $2.3 million of which $1.3 million
was associated with a prospect off the coast of Argentina and the remaining $1.0
million for various leases held in North Dakota and Wyoming. In 1998, $1.7
million and $0.2 million were impaired for leases held in Michigan and North
Dakota, respectively.
Stock Compensation Expense. During the nine months ended September 30,
2001, we recorded a $1.4 million reduction in stock compensation expense
previously recognized as a result of applying the
51
provisions of FASB Interpretation No. 44 and $0.3 million in expense related to
the issuance of restricted stock. The reduction of $1.4 million partially
offsets the $2.2 million of stock compensation expense recorded in the second
half of 2000 related to provisions of FASB Interpretation No. 44. During the
nine months ended September 30, 2000, we recognized $3.7 million of stock
compensation expense due to a $3.4 million one-time stock compensation expense
related to the repurchase of employee stock options and $0.3 million related to
provisions of FASB Interpretation No. 44.
During 2000, Old Westport recognized $5.5 million of stock compensation
expense composed of $2.1 million related to applying the provisions of FASB
Interpretation No 44, and a one-time stock compensation charge of $3.4 million
related to the repurchase of employee stock options in connection with the EPGC
Merger. There was no stock compensation expense recorded in 1999 and 1998.
General and Administrative, or G&A, Expense. G&A expense increased $5.5
million, or 104%, during the nine months ended September 30, 2001, from $5.3
million to $10.8 million, compared to the same period in 2000. In connection
with the EPGC merger additional employees were hired in the Houston office which
accounted for a $2.3 million increase in G&A expense. The Belco Merger accounted
for $0.9 million of the increase. A majority of the remaining increase was due
to payroll costs resulting from an increase in staff and costs incurred in 2001
as a result of the reporting requirements of being an SEC registrant.
G&A expense increased $2.2 million, or 42%, during 2000, from $5.3 million
to $7.5 million. In connection with the EPGC Merger additional employees were
hired in the Houston office, which accounted for a $3.4 million increase in G&A
expense. Offsetting the increase in G&A expense was a $0.6 million increase in
overhead recoveries from additional drilling in 2000 and $0.5 million additional
costs incurred in 1999 related to closing down an office acquired in an
acquisition. On a Mcfe basis, G&A expense decreased 13% from $0.16 during 1999
to $0.14 during 2000.
G&A expense decreased $0.6 million, or 10%, during 1999, from $5.9 million
to $5.3 million. The decrease was the result of a reduction in workforce during
1999 combined with increased overhead recoveries from development of its
interest in the coalbed methane play in the Powder River Basin. On a Mcfe basis,
G&A expense decreased 20% from $0.20 during 1998 to $0.16 during 1999.
Other Income (Expense). Other expense for the nine months ended September
30, 2001 was $1.1 million compared to $7.7 million for the nine months ended
September 30, 2000. Interest expense decreased $3.9 million during the nine
months ended September 30, 2001, as a result of a reduction in our debt balance.
Other income increased $1.8 million primarily from changes in fair values on
interest rate swap contracts that were not designated as hedges for accounting
purposes. Interest income increased $0.9 million due to the increase in our cash
balance.
Other income (expense) for 2000 was ($6.0 million) compared to ($5.1
million) for 1999. The variance was primarily due to interest expense which
increased $0.5 million from $9.2 million in 1999 to $9.7 million in 2000 as a
result of $50 million in additional borrowings relating to the EPGC Merger.
Other income (expense) for 1999 was ($5.1 million) compared to ($7.9
million) for 1998. The variance was attributable to a $3.6 million gain on the
sale of assets recorded in 1999. The gain was partially offset by an increase in
interest expense of $0.9 million, resulting from an increase in average
borrowings related to acquiring oil and natural gas properties from Total
Minatome Corporation in October 1998, and an increase in interest rates in 1999.
Substantially all of the borrowings in both periods were under a bank line of
credit.
Income Taxes. We recorded income tax expense of $35.9 million ($33.9
million deferred and $2.0 million current) for the nine months ended September
30, 2001 and $15.2 million for the nine months ended September 30, 2000. The
difference between the income tax expense for those periods and the amounts that
would be calculated by applying statutory income tax rates to income before
income taxes is due primarily to the reversal of deferred tax valuation
allowance in the 2000 period and the utilization of credits generated from
applying enhanced recovery methods in both periods.
Old Westport recorded income tax expense of $23.7 million for 2000 and no
income tax expense or benefit for 1999 resulting from a loss incurred in 1999.
The difference between the income tax expense
52
(benefit) for those periods and the amounts that would be calculated by applying
statutory income tax rates to income before income taxes is due primarily to the
credits from applying enhanced recovery methods in 2000 and a deferred tax
valuation allowance recorded in 1999. As of December 31, 2000, Old Westport had
a net deferred tax liability of $38.5 million, which includes net operating loss
carryforwards of $16.7 million.
Old Westport recorded no income tax benefit in 1999 and 1998 resulting from
losses incurred in those years. The difference between the income tax benefit
for those years and the amount that would be calculated by applying statutory
income tax rates to loss before income taxes is due primarily to deferred tax
asset valuation allowances recorded in those years.
Net Income. Net income for the nine months ended September 30, 2001 was
$62.4 million compared to net income of $29.6 million for the nine months ended
September 30, 2000. The variance was primarily attributable to increases in
revenues of $110.4 million and decreases in other expenses of $6.7 million
offset by increases of $63.6 million in operating expenses and $20.7 million in
income tax expense.
Net income for 2000 was $43.5 million compared to a net loss of $3.1
million for 1999. The variance was primarily attributable to an increase in
revenues of $144.6 million, partially offset by increases of $39.6 million in
DD&A, $11.5 million in lease operating expenses and $23.7 million in income tax
expense.
Net loss for 1999 was $3.1 million compared to $49.4 million for 1998. The
decrease in net loss was primarily attributable to an increase in revenues of
$23.1 million and decreases in exploration costs of $7.4 million and DD&A
expense of $11.1 million.
RESULTS OF OPERATIONS -- BELCO
The following is a discussion of the financial condition and results of
operations of Belco for the years ended December 31, 2000, 1999 and 1998.
YEAR ENDED 2000 COMPARED TO YEAR ENDED 1999
Revenues. Oil and natural gas sales revenues for the year 2000, net of
hedging activities, increased $57.5 million, or 41% to $199.4 million when
compared to the prior year, primarily the result of both higher production and
higher commodity prices. Natural gas production increased 3% over the prior
year. Average Mcfe price realizations, net of hedging activities, increased by
32% when compared to last year's price realizations. Natural gas production
represented approximately 63% of total production on an Mcfe basis compared to
the 66% reported for 1999. Oil production increased by 14% over the prior year
due to property acquisitions and newly drilled well additions during the year,
less oil producing properties sold.
CPRM activities, including hedged and non-hedged transactions, for the year
2000 resulted in reported revenue reductions of $92.2 million in actual cash
settlements paid compared to incremental revenues of $0.2 million received in
the prior year. In addition, $103.6 million in non-cash mark-to-market
unrealized future losses related to CPRM activities were recorded under costs
and expenses in compliance with current accounting rules. In the prior year,
Belco reported $34.1 million in non-cash mark-to-market unrealized losses.
Costs and Expenses. Production and operating expenses for the year 2000
increased by 11% to $33.3 million compared to $29.9 million reported in the
prior year. The increase was related to the addition of wells, both acquired and
drilled, in the current year. On an equivalent unit basis, lifting costs were
$0.52 per Mcfe for the year 2000 compared to $0.49 per Mcfe in 1999. Production
taxes were $0.22 and $0.16 per Mcfe for the years 2000 and 1999, respectively,
with the increase related to higher commodity prices.
DD&A for the year 2000 increased $2.5 million to $56.7 million when
compared to the $54.2 million recorded in the prior year due to higher
production volumes. The annual DD&A rate per Mcfe was $0.88, a 2% decline as
compared to the prior year when $0.90 per Mcfe was recorded.
G&A costs increased by 32% in 2000 to $6.5 million when compared to the
$4.9 million incurred in 1999. The increase was principally due to reduced
amounts charged to the full cost pool. The G&A costs per Mcfe increased from
$0.08 to $0.10.
53
Interest expense is incurred on $147 million of 8 7/8% senior subordinated
notes due 2007 issued in September 1997, $109 million of 10 1/2% notes assumed
in Belco's acquisition of Coda Energy, Inc. in November 1997 and bank debt
incurred to fund various activities. Interest expense for the year 2000
increased by $4.2 million to $25.3 million, a 20% increase over the $21.0
million incurred in the prior year. The increase is due to higher interest rates
charged and additional borrowings outstanding under Belco's credit facility
related to property acquisitions. The higher interest costs were partially
offset by additional amounts capitalized during the current year.
Income (Loss) Before Income Taxes. Belco's reported loss before income tax
benefits for the year 2000 was ($73.5 million). This compares to a pre-tax loss
of ($13.2 million) reported for the year 1999. The 2000 and 1999 reported losses
are the result of recognizing the required non-cash mark-to-market unrealized
CPRM losses as required by current accounting rules. Excluding the effect of the
non-cash mark-to-market unrealized CPRM losses, Belco had income before income
taxes of $30.1 million and $20.9 million for the years 2000 and 1999,
respectively.
Income Taxes. Income tax benefits were recorded for the year 2000 in the
amount of $25.7 million as a result of the reported pre-tax loss. The benefit
for income taxes for 1999 was $4.6 million.
YEAR ENDED 1999 COMPARED TO YEAR ENDED 1998
Revenues. Oil and natural gas sales revenues for the year 1999, net of
hedging activities, increased 9% to $141.9 million compared to $129.9 million
realized in 1998. The year over year increase is due to higher commodity prices
and higher natural gas production partially offset by lower crude oil
production. In 1999, weighted average oil prices realized, net of hedging,
totaled $19.25 per barrel, a 20% increase when compared to the $16.09 realized
in 1998. The natural gas weighted average prices realized, net of hedging,
increased by 13% from $1.69 in 1998 to $1.91 in 1999. Average daily production
volume in 1999 on an Mcfe basis declined by 3% to 165 Mmcfe/d.
CPRM activities, including hedged and non-hedged transactions, increased
revenues by $0.2 million in the year 1999 and $5.9 million in 1998. In addition,
a $34.1 million charge and a ($18.9) million reduction was recorded in 1999 and
1998, respectively, under costs and expenses representing non-cash
mark-to-market unrealized future losses or (gains) related to CPRM activities in
compliance with current accounting rules.
Costs and Expenses. Production and operating expenses declined to $39.2
million or 4% in 1999 when compared to the $40.8 million incurred during 1998.
The decrease is identified with cost reduction efforts in response to lower
commodity prices realized in the first half of 1999 combined with the
implementation of other operating efficiencies on newly operated properties
located in Wyoming. On a unit basis, operating costs were $0.65 per Mcfe for
1999 compared to $0.66 per Mcfe for 1998, including production taxes.
DD&A costs for the year totaled $54.2 million when compared to the $56.1
million recorded for the prior year. The DD&A rate for the year was unchanged at
$0.90 per Mcfe. For the year 1998, Belco also recorded $229 million ($149
million after-tax) in non-cash ceiling test provisions as required by full-cost
accounting rules. The provisions were the result of applying substantially lower
commodity prices to estimated recoverable reserves.
G&A costs declined by 5% during 1999 to $4.9 million when compared to the
$5.2 million incurred in 1998. The decrease is primarily due to the cost
controls implemented in response to lower commodity prices. The rate per Mcfe
for such costs was unchanged at $0.08 for both years. Exploration related G&A
expenses for 1999 in the amount of $5.5 million have been capitalized to oil and
natural gas property accounts. The decrease of $0.7 million when compared to
1998 comparable capitalized amount of $6.2 million principally reflects reduced
exploration activities.
Interest expense is incurred on $150 million of the 8 7/8% Senior
Subordinated Notes due 2007 issued in September 1997, $109 million of the
10 1/2% Senior Subordinated Notes due 2006 and bank debt incurred under Belco's
revolving credit facility. Net interest costs incurred for the year 1999 totaled
$25.9 million, with approximately $4.9 million of this total capitalized to
property accounts. The 1999 net total interest cost
54
declined modestly when compared to 1998 when net total interest costs were $26.1
million, with $5.1 million capitalized.
As a result of the substantial decline in the market value of Big Bear
Exploration Ltd., or Big Bear, securities acquired in June 1998, impairment
provisions were $450,000 and $9.7 million recorded by Belco in 1999 and 1998,
respectively.
Income (Loss) Before Income Taxes. Belco's reported loss before income tax
benefits for the year 1999 was $13.2 million. This compares to a loss of $225.7
million reported in 1998. The substantially lower loss reported for 1999
reflects improved commodity prices and the absence of non-cash ceiling test and
securities impairment provisions of $229.0 million and $24.2 million,
respectively, reported in 1998.
Income Taxes. Income tax benefits were recorded for 1999 in the amount of
$4.6 million and $78.1 million for 1998 as a result of reported pre-tax losses.
LIQUIDITY AND CAPITAL RESOURCES
Our principal uses of capital have been for the exploitation, acquisition
and exploration of oil and natural gas properties.
Cash flow from operating activities was $175.7 million for the nine months
ended September 30, 2001 compared to $64.9 million generated by Old Westport for
the nine months ended September 30, 2000. Operating cash flow in the nine month
period increased compared to the prior period due to an increase in natural gas
prices, increase in production as a result of the mergers with EPGC and Belco,
recent discoveries in the Gulf of Mexico, additional production from coalbed
methane development and activity in the Wiley, northern Louisiana and Ward Estes
Fields.
Cash flow used in investing activities was $138.4 million for the nine
months ended September 30, 2001 compared to $88 million used by Old Westport for
the nine months ended September 30, 2000. Of this total, $132.7 million was used
for exploitation and exploration activities and $6.3 million was used for
acquisitions, offset by proceeds from sales of properties of $0.7 million.
Investing activities for the nine months ended September 30, 2000 included $49.7
million for exploitation and exploration activities and $43.9 million for
acquisitions, of which $42.4 million was related to the merger with EPGC.
Net cash used in financing activities was $20.5 million for the nine months
ended September 30, 2001 compared to $39.1 million cash generated by Old
Westport for the nine months ended September 30, 2000. Financing activities for
the nine months ended September 30, 2001 consisted of $273.3 million in
repayment of long-term debt, new financing fees of $2 million and stock
repurchase of $0.4 million offset by $255.0 million in borrowings and $0.3
million from the issuance of common stock. Financing activities for the nine
months ended September 30, 2000 reflected borrowings of $50 million utilized to
consummate the merger with EPGC and $0.1 million from the issuance of common
stock offset by repayments of long-term debt of $11.0 million.
FINANCING ACTIVITY
Revolving Credit Facility
We entered into a new credit facility, which we refer to as the Revolving
Credit Facility, with a syndicate of banks upon closing of the Merger. The
Revolving Credit Facility was subsequently amended on November 5, 2001. The
Revolving Credit Facility, as amended, provides for a maximum committed amount
of $500 million and a borrowing base of approximately $400 million as of
November 5, 2001. The facility matures on July 1, 2005. Advances under the
Revolving Credit Facility are in the form of either a base rate loan or a
Eurodollar loan.
The interest on a base rate loan is a fluctuating rate based upon the
highest of:
- the rate of interest announced by JPMorgan Chase Bank, formerly known as
The Chase Manhattan Bank, as its prime rate;
55
- the secondary market rate for three month certificates of deposits plus
1%; and
- the federal funds effective rate plus 0.5%;
in each case plus a margin of 0% to 0.125% based upon the ratio of total debt to
EBITDAX.
The interest on a Eurodollar loan is a fluctuating rate based upon the rate
at which Eurodollar deposits in the London interbank market are quoted plus a
margin of 1.25% to 1.50% based upon the ratio of total debt to EBITDAX.
As of September 30, 2001, adjusted to reflect the offering of $275.0
million of the old notes and the application of the proceeds therefrom on
November 5, 2001, we had borrowings and letters of credit issued of
approximately $16 million outstanding under the Revolving Credit Facility, and
available unused borrowing capacity of approximately $384 million with an
average interest rate of 4.58%.
Redemption of 10 1/2% Senior Subordinated Notes due 2006
On September 20, 2001, we redeemed all of our outstanding 10 1/2% Senior
Subordinated Notes due 2006 at a price of $1,050.25 per note plus accrued
interest. The notes were originally issued by Coda Energy and assumed in
connection with the Merger, and they were redeemed pursuant to the optional
redemption provision of the related indenture at 105.25% of the principal amount
of each note plus accrued interest, for a total amount of approximately $120.1
million, consisting of $114.7 million in principal and $5.4 million in accrued
interest. The redemption was funded by borrowings under the Revolving Credit
Facility and available cash. No gain or loss was recognized in connection with
the redemption as the fair value of the 10 1/2% Senior Subordinated Notes
recorded in connection with the Merger equaled the redemption cost.
8 7/8% Senior Subordinated Notes due 2007
In connection with the Merger, we assumed $147 million face amount, $149
million fair value, of Belco's 8 7/8% Senior Subordinated Notes due 2007. On
November 1, 2001, approximately $24.3 million face amount of these notes was
tendered to us pursuant to the change of control provisions of the related
indenture. The tender price was equal to 101% of the principal amount of each
note plus accrued and unpaid interest as of October 29, 2001. Including the
premium and accrued interest, the total amount paid was $24.8 million. We used
borrowings under our Revolving Credit Facility to fund the repayment. No gain or
loss was recorded in connection with the redemption as the fair value of the
8 7/8% Senior Subordinated Notes recorded in connection with the Merger equaled
the redemption cost.
8 1/4% Senior Subordinated Notes due 2011
On November 5, 2001, we completed the private placement of $275 million of
8 1/4% Senior Subordinated Notes due 2011 pursuant to SEC rule 144A. Proceeds of
approximately $268 million, net of underwriting discounts and offering costs,
were used to reduce outstanding indebtedness under the Revolving Credit
Facility.
Stock Repurchase
On September 21, 2001, the board of directors authorized management to
repurchase up to $30 million of our common stock. Under this authorization, we
have repurchased 30,000 shares at an average price of $13.61 per share including
broker commissions.
Capital Expenditures
We anticipate that our capital expenditures for 2002 will be approximately
$200 million. Our capital expenditures for 2001 on a combined basis were between
$265-$270 million, not including acquisitions. We will continue to seek
opportunities for acquisitions of proved reserves with substantial exploitation
and exploration potential. The size and timing of capital requirements for
acquisitions is inherently unpredictable
56
and we therefore do not budget for them. We expect to fund our capital
expenditure activities through cash flow from operations.
We believe that our capital resources are adequate to meet the requirements
of our business. However, future cash flows are subject to a number of variables
including the level of production and oil and natural gas prices. We cannot
assure you that operations and other capital resources will provide cash in
sufficient amounts to maintain planned levels of capital expenditures or that
increased capital expenditures will not be undertaken. Actual levels of capital
expenditures may vary significantly due to a variety of factors, including but
not limited to:
- drilling results;
- product prices;
- industry conditions and outlook; and
- future acquisition of properties.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We produce and sell crude oil, natural gas and natural gas liquids.
Accordingly, our operating results may be significantly affected by fluctuations
in commodity prices and interest rates caused by changing market conditions. We
enter into various commodity price risk management transactions involving a
variety of derivatives instruments to hedge the impact of crude oil and natural
gas price fluctuations. In addition, we enter into interest rate swap agreements
to reduce current interest burdens related to our fixed long-term debt.
The derivative commodity price instruments are generally put in place to
limit the risk of adverse oil and natural gas price movements. However, such
instruments can limit future gains resulting from upward favorable oil and
natural gas price movements. Recognition of both realized and unrealized gains
or losses are reported currently in our financial statements as required by
existing generally accepted accounting principles.
As of September 30, 2001, we had substantial derivative financial
instruments outstanding related to our price risk management program.
COMMODITY DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We periodically enter into commodity price risk management, or CPRM,
transactions such as swaps and options in order to manage our exposure to oil
and gas price volatility. All CPRM data is presented in accordance with
requirements of Statement of Financial Accounting Standards, or SFAS, No. 133
which became effective January 1, 2001. Accordingly, unrealized gains and losses
related to the change in fair market value of derivative contracts which qualify
and are designated as hedges are recorded as other comprehensive income or loss
and recognized as revenues or expenses as the associated production occurs.
Derivative contracts that do not qualify for hedge accounting treatment are
reflected at market value at the end of the reporting period as assets and
liabilities in the consolidated balance sheet, and the associated unrealized
gains and losses are reflected in the consolidated statement of operations.
For the nine months ended September 30, 2001, we recorded CPRM cash
settlements paid in the amount of $0.6 million and unrealized non-cash mark to
market gains of $24.5 million. There was no non-hedge activity for the nine
months ended September 30, 2000.
For the nine months ended September 30, 2001 and 2000, we recorded hedging
cash settlements paid out by us in the amounts of $1.8 million and $15.7
million, respectively.
On November 29, 2001, we terminated our commodity derivative contracts with
Enron North America Corp., or ENA, formerly known as Enron Capital & Trade
Resources Corp., a wholly-owned subsidiary of Enron Corp. We exercised our
rights pursuant to the early termination provisions of such contracts as a
result of ENA's ratings downgrade and related events. ENA subsequently declared
bankruptcy. We believe that we had the legal right to terminate these
agreements, but ENA may challenge our termination in bankruptcy
57
court. Applying the mark-to-market and setoff methodology of our contracts with
ENA, we have calculated that we owed ENA a net $204,000 for all hedging
transactions outstanding under our ENA contracts. Although we believe this
methodology was correct, it is possible that ENA will challenge our calculations
and claim larger amounts owed.
As of November 1, 2001, we had approximately 0.5 million barrels of oil and
7.9 Bcf of natural gas subject to CPRM contracts for the fourth quarter of 2001.
These contracts are subject to weighted average floor prices of $19.82 per
barrel and $2.44 per Mmbtu and weighted average ceiling prices of $20.49 per
barrel and $3.33 per Mmbtu, respectively. We have approximately 4.0 million
barrels of oil and 20.8 Bcf of natural gas subject to CPRM contracts for 2002.
The 2002 contracts have weighted average floor prices of $22.32 per barrel and
$3.09 per Mmbtu, with weighted average ceiling prices of $24.43 per barrel and
$3.81 per Mmbtu, respectively. We have approximately 1.6 million barrels of oil
and 5.0 Bcf of natural gas subject to CPRM contracts for 2003. The contracts for
2003 are at weighted average floor prices of $21.59 per barrel and $3.08 per
Mmbtu and weighted average ceiling prices of $22.96 per barrel and $4.58 per
Mmbtu, respectively. These contracts represent our hedge and non-hedge
positions.
The tables below provide details about the volumes and prices of all open
CPRM commitments, hedge and non-hedge, as of September 30, 2001.
<Table>
<Caption>
REMAINDER
HEDGES OF 2001 2002 2003
- ------ --------- ------ ------
GAS
Price Swaps Sold -- receive fixed price (thousand
Mmbtu).............................................. -- -- 1,363
Average price, per Mmbtu............................ -- -- $ 3.69
Price Swaps Bought -- pay fixed price (thousand
Mmbtu).............................................. (2,300) (460) --
Average price, per Mmbtu............................ $ 4.59 $ 4.47 --
Collars Sold (thousand Mmbtu).......................... 3,404 5,925 3,650
Average floor price, per Mmbtu...................... $ 2.75 $ 2.66 $ 2.85
Average ceiling price, per Mmbtu.................... $ 3.87 $ 3.80 $ 4.91
Puts Bought (thousand Mmbtu)........................... -- 3,650 --
Average price per Mmbtu............................. -- $ 3.13 --
OIL
Price Swaps Sold -- receive fixed price (Mbbls)........ 240 840 480
Average price, per bbl.............................. $ 19.49 $20.29 $20.60
Collars Sold (Mbbls)................................... 60 300 90
Average floor price per bbl......................... $ 18.75 $19.60 $21.00
Average ceiling price per bbl....................... $ 22.68 $25.10 $24.63
NON-HEDGES
GAS
Price Swaps Sold -- received fixed price (thousand
Mmbtu).............................................. 5,290 -- --
Average price, per Mmbtu............................ $ 2.55 -- --
Price Swaps Bought -- pay fixed price (thousand
Mmbtu).............................................. (230) -- --
Average price, per Mmbtu............................ $ 3.25 -- --
Puts Sold (thousand Mmbtu)............................. (690) -- --
Average price, per Mmbtu............................ $ 4.34 -- --
Extension Swaps Sold -- receive fixed price (thousand
Mmbtu).............................................. -- 3,650 --
Average price per Mmbtu............................. -- $ 2.65 --
Calls Sold (thousand Mmbtu)............................ 966 4,380 --
Average price per Mmbtu............................. $ 3.28 $ 2.95 --
Collars Sold (Mmbtu)(1)................................ 1,472 3,650 --
</Table>
58
<Table>
<Caption>
REMAINDER
HEDGES OF 2001 2002 2003
- ------ --------- ------ ------
Average floor price, per Mmbtu...................... $ 5.19 $ 4.50 --
Average ceiling price, per Mmbtu.................... $ 7.38 $ 6.75 --
OIL
Price Swaps Sold -- received fixed price (Mbbls)....... 30 -- --
Average price, per bbl.............................. $ 17.25 -- --
Calls Sold (Mbbls)..................................... 165 720 --
Average price, per bbl.............................. $ 20.55 $22.00 --
Puts Sold (Mbbls)...................................... (45) -- --
Average price, per bbl.............................. $ 16.00 -- --
Extension Swaps Sold -- receive fixed price (Mbbls).... -- 300 300
Average price, per bbl.............................. -- $18.86 $18.86
Extension Collars Sold................................. 30 -- --
Average floor price................................. $ 17.50 -- --
Average ceiling price............................... $ 20.35 -- --
Collars Sold (Mbbls)(1)................................ -- 1,820 730
Average floor price, per bbl........................ -- $24.39 $23.25
Average ceiling price, per bbl...................... -- $28.10 $26.00
</Table>
- ---------------
(1) On certain contracts the counterparties hold options to put volumes of
natural gas or oil to us over similar time periods at $3.54/MmBtu and
$3.50/MmBtu for the remainder of a 2001 natural gas collar and the 2002
natural gas collar, respectively, and between $19.00/bbl and $19.75/bbl for
the 2002 oil collars and $18.65 for the 2003 oil collar.
INTEREST RATE SWAP AGREEMENTS
The following table summarizes the interest rate derivative contracts we
currently have in place:
<Table>
<Caption>
CURRENT
TRANSACTION EXPIRATION ESTIMATED
NOTIONAL AMOUNT DATE DATE RATE
- --------------- ------------- ------------------ --------------
$25 million................... March 1999 March 11, 2002 5.61%
$122.7 million................ November 2001 September 15, 2007 LIBOR + 3.44%
$100 million.................. November 2001 November 1, 2011 LIBOR + 2.42%
</Table>
For the nine month period ended September 30, 2001, we recorded $2.3
million in unrealized derivative gain for the change in fair value of interest
rate derivative contracts.
59
BUSINESS
OVERVIEW
We are an independent energy company engaged in oil and natural gas
exploitation, acquisition and exploration activities primarily in the United
States. Our reserves and production operations are concentrated in the following
divisions: Northern (Rocky Mountains); Southern (Permian Basin, Mid-Continent
and Gulf Coast); and Gulf of Mexico (offshore). We focus on maintaining a
balanced portfolio of lower-risk, long-life onshore reserves and higher-margin
offshore reserves to provide a diversified cash flow foundation for our
exploitation, acquisition and exploration activities. As of June 30, 2001, our
reserve base consisted of 54% natural gas and 46% oil and had a reserve life
index of 8.7 years, based upon annualized production for the six months ended
June 30, 2001. We produced 126.9 Bcfe in 2000 and 95.0 Bcfe in the nine months
ended September 30, 2001. Based upon pro forma production levels for the nine
months ended September 30, 2001, we are among the 20 largest domestic
independent exploration and production companies. Pro forma for the nine months
ended September 30, 2001, we generated net revenues and EBITDAX of $451,982
million and $230,457 million, respectively.
Over the last several years, growth in our reserves, production and cash
flow has resulted primarily from our acquisitions and subsequent development
drilling activities focused in core project areas. From Old Westport in 1997 to
Westport pro forma as of June 30, 2001, we increased proved reserves from 197
Bcfe to 1,081 Bcfe, a compounded annual growth rate of approximately 63%. Over
the same period we increased average daily production from 66 Mmcfe/d to 341
Mmcfe/d, a compounded annual growth of approximately 60%. This growth has been
complemented by management's ability to substantially reduce our cost structure,
including lease operating expenses, transportation costs, production taxes and
general and administrative costs, over the same period from $1.32 per Mcfe to
$1.14 per Mcfe.
We believe that our exploitation and acquisition expertise and our sizable
exploration inventory, together with our operating experience and efficient cost
structure, provide us with the ability to generate substantial current cash flow
and position us for future growth. We operate approximately 70% of the net
present value of our reserves, allowing us to better manage expenses, capital
allocation and the decision-making processes related to other aspects of
exploitation and exploration activities. We expect to further develop our
properties through lower-risk recovery methods. Our capital budget for 2001 was
approximately $265 million balanced between exploitation and exploration both
onshore and offshore. We have a capital budget of approximately $200 million for
2002. We have over 1,300 identified drilling opportunities. We anticipate
drilling approximately 300 to 350 of these locations in 2002.
As of June 30, 2001, our proved reserves of 1,081 Bcfe had a net present
value before income taxes, discounted at 10%, of $1,474 million based on NYMEX
prices of $26.23 per barrel of oil and $3.22 per Mmbtu of natural gas. This
provides a 3.6x coverage ratio of our debt, which, adjusted to reflect the
offering of $275.0 million of the old notes and the application of the proceeds
therefrom on November 5, 2001, totaled $411.7 million as of September 30, 2001.
Assuming lower NYMEX prices of $20.00 per barrel of oil and $2.50 per Mmbtu of
natural gas, our net present value of proved reserves before income taxes
discounted at 10% would have been $974 million based on June 30, 2001 reserve
estimates. This provides a 2.4x coverage ratio of our total debt as of September
30, 2001, adjusted to reflect the offering of $275.0 million of the old notes
and the application of the proceeds therefrom on November 5, 2001. Approximately
75% of our reserves were classified as proved developed as of June 30, 2001.
COMPANY HISTORY
We are an independent energy company engaged in oil and natural gas
exploitation, acquisition and exploration activities primarily in the United
States. Based upon pro forma production levels for the nine months ended
September 30, 2001, we are among the 20 largest domestic independent exploration
and production companies. Our corporate headquarters are in Denver, Colorado and
we have division offices in Denver, Colorado, Dallas, Texas and Houston, Texas.
60
Prior to the Merger, Old Westport was a Denver-based independent energy
company with exploitation, exploration and acquisition activities in the Gulf of
Mexico, the Rocky Mountains, West Texas/Mid-Continent and the Gulf Coast. Old
Westport was formed in connection with the merger in April 2000 of Westport Oil
and Gas Company, Inc. and Equitable Production (Gulf) Company, an indirect,
wholly-owned subsidiary of Equitable Resources, Inc.
Prior to the Merger, Belco was an independent energy company with its
primary operating office in Dallas, Texas. Belco was engaged in the exploration
for, and the acquisition, exploitation, development and production of, natural
gas and oil in the United States, primarily in the Rocky Mountains, the Gulf
Coast, the Permian Basin and the Mid-Continent region.
We are managed by the executive management team of Old Westport with the
addition of Grant W. Henderson, former President and Chief Operating Officer of
Belco. Mr. Henderson joined our management team as Executive Vice President and
General Manager of the Southern Division based in Dallas. Our Board of Directors
consists of members of Old Westport's Board of Directors with the addition of
Robert A. Belfer, former Chairman and Chief Executive Officer of Belco, and
Laurence D. Belfer, former Vice Chairman of Belco. Robert A. Haas, a former
director of Westport Oil and Gas Company, Inc. and Old Westport, joined our
Board of Directors on November 28, 2001.
PROPERTIES
The following table sets forth the volume and net present value of our
proved reserves as of June 30, 2001, undeveloped acreage as of December 31, 2001
and a summary of third quarter 2001 production by our three divisions.
<Table>
<Caption>
AS OF
AS OF JUNE 30, 2001 DECEMBER 31, 2001 THIRD QUARTER 2001
--------------------------------------- ----------------- -----------------------
TOTAL NET PRESENT NET
PROVED % OF VALUE BEFORE % OF UNDEVELOPED AVERAGE % OF
DIVISION RESERVES TOTAL INCOME TAX TOTAL ACRES PRODUCTION PRODUCTION
- -------- -------- ----- ------------ ----- ----------------- ---------- ----------
(BCFE) ($MILLIONS) (000S) (MMCFE/D)
Northern................... 346 32% $ 391 27% 562 103 29%
Southern................... 564 52 753 51 81 138 39
Gulf of Mexico............. 171 16 330 22 204 117 32
----- --- ------ --- --- --- ---
Total.................... 1,081 100% $1,474 100% 847 358 100%
===== === ====== === === === ===
</Table>
NORTHERN DIVISION
The Northern Division conducts operations in the Rocky Mountain region. The
Division represented 27% of our net present value as of June 30, 2001 and
contributed 39% of our third quarter 2001 production. We have interests in
731,788 developed and 1,419,208 undeveloped gross acres in the region and in
1,862 gross producing wells (approximately 522 net). The average daily net
production in the third quarter of 2001 from wells in this Division was 103
Mmcfe/d. We had 346 Bcfe of proved reserves in the properties in this Division
at June 30, 2001.
The majority of the net present value of our Northern Division reserves is
concentrated in North Dakota and Wyoming. The Northern Division's strategy is to
develop lower-risk opportunities, exploit its infill, horizontal and
secondary/tertiary recovery opportunities and make tactical acquisitions to
enhance current operations.
North Dakota. Our two most active projects in North Dakota are in the
South Fryburg Tyler area and the Wiley field.
- South Fryburg Tyler Area. The South Fryburg Tyler area continues to be
one of our most active drilling programs. We continue development within
the South Fryburg Tyler Unit, where we are the operator. We are also
involved in exploration and development drilling in the Mission Canyon
formation on two contiguous acreage blocks southeast of the Unit and are
exploring a prospect to the
61
east of the Unit. Within the South Fryburg Tyler Unit, we expanded the
Tyler sand production with development drilling in 2000. On our acreage
blocks adjoining the Unit to the southeast, our drilling program targets
zones within the Mission Canyon formation. On the first block, where our
working interests vary from 25% to 100%, we drilled four wells in 2000
and 13 wells in 2001, all of which were successful. In 2002, we expect to
participate in an additional 8 to 12 wells. On the second block, we own
approximately 75,000 net acres in four separate prospects. We drilled 16
wells in 2000 with a 75% success ratio. In 2001, we drilled six wells,
all of which were successful.
- Wiley Field. We operate this waterflood with a 54% working interest. In
2000, we initiated a horizontal drilling program and in 2001 drilled 17
wells, all of which were successful. In addition to the horizontal
drilling, we increased water injection capacity. As a result of this
activity, gross daily production has increased from 600 bbl/d in April
2000 to nearly 2,100 bbl/d in November 2001. Over the next 12 months, we
plan to drill 8 to 10 additional wells while continuing to increase water
injection capacity.
Wyoming. Our three primary areas of focus in Wyoming are the Big Horn
Basin, the Powder River Basin and the Greater Green River area. The Merger added
in excess of 1.2 million gross acres of exploratory acreage in the Big Horn,
Wind River and Greater Green River gas basins of Wyoming. We plan to drill 18 to
22 exploration wells in these areas over the next 12 to 24 months. The wells
will target multiple formations and successful projects hold the potential for
multi-well development programs.
- Big Horn Basin. The Gooseberry field is our most significant property in
the basin. We own a 100% working interest (nearly 90% net revenue
interest) in this field, which consists of two waterflood units. Since
acquiring the field in 1995, we increased production by nearly 70%
through the acquisition of proprietary 3-D seismic data, drilling of
delineation wells, installation of the two waterfloods and the addition
of shallower producing zones. During the next 12 months, we plan to drill
from two to three additional producing wells and to expand water
injection capacity.
- Powder River Basin. We currently own more than 28,000 net undeveloped
acres in the Powder River basin, on which we emphasize coalbed methane
drilling. In 2000 and 2001, we participated in the drilling of 178 wells,
all of which were successful. We operate 84 of these wells. In 2002, we
expect to participate in another 100 to 125 wells.
- Greater Green River Area. One of the primary operating locations within
the Greater Green River Area is the Moxa Arch Trend, where we drilled 16
wells in 2001, 14 of which were successful. In 2002, we expect to drill 8
to 10 wells. This area represents a multi-year program with more than 100
potential drilling locations. Wells target the Frontier and Dakota
formations at depths that range from approximately 10,000 to 12,500 feet.
Production from Moxa Arch wells, particularly from the Frontier
formation, tends to be long-lived, with 25 to 30 year reserve life
potential.
SOUTHERN DIVISION
The Southern Division conducts operations in the Permian Basin, the
Mid-Continent and the onshore Gulf Coast regions. This division represented 51%
of our net present value as of June 30, 2001 and contributed 39% of our third
quarter 2001 pro forma production. We have interests in 578,252 developed and
165,939 undeveloped gross acres and in 3,900 gross (approximately 1,603 net)
producing wells. The average net daily production in the third quarter 2001 was
approximately 138 Mmcfe/d from properties in this division. We had 564 Bcfe of
proved reserves in this area at June 30, 2001.
Permian Basin. The Southern Division's principal Permian Basin properties
are the Andrews Unit, Howard Glasscock Field and the Shafter Lake San Andres
Unit.
- Andrews Unit. The Andrews Unit produces from the Wolfcamp/Penn formation
at approximately 8,600 feet. We have a 98.6% working interest in this
3,230-acre Unit. Water injection began in late 1996 with the first
response occurring in late 1998. During 2000, we expanded the waterflood
program by drilling one producing and two injector wells, converting
three additional wells to injection, re-entering a plugged well for
conversion to injection and performing 13 workovers. The conversion and
62
workover activity continued in 2001. We plan to drill three wells in
2002. We believe that production from this waterflood Unit can be
enhanced with the use of CO(2) flooding or other tertiary recovery
methods.
- Howard Glasscock Field. We continue to exploit our 100% working interest
in the Howard Glasscock field. Based on the results from adjacent
successful waterfloods, we believe that additional potential exists
through the installation and expansion of waterfloods on our leases. In
May 2001, we initiated a drilling program for 20 to 25 injection and
development wells to expand waterfloods on two of our leases.
Additionally, we have identified opportunities for recompletions and well
deepenings.
- Shafter Lake San Andres Unit. The Shafter Lake San Andres Unit is a
12,880-acre Unit that produces from the Grayburg and San Andres
formations at approximately 4,500 feet. We have an 81.4% working interest
in this secondary recovery Unit. In 2000, we drilled nine wells on
20-acre spacing along with six wells on 10-acre spacing, all of which
were successful. Operators of nearby San Andres fields have successfully
drilled to 10-acre spacing before CO(2) injection. We have identified the
next 15 wells to expand the 20-acre and 10-acre spacing pattern and these
wells will be drilled during the next 12-18 months. Potential exists for
CO(2) flooding as the field matures.
Mid-Continent. The Southern Division's Mid-Continent operations are
currently focused in Oklahoma and Kansas. Oil production is concentrated in our
operated waterfloods in Oklahoma, while natural gas production is primarily in
third party operated wells in Oklahoma and in our operated wells in Kansas. The
two most significant waterflood units in Oklahoma are the Oakdale Unit and
Calumet Unit.
- Oakdale Red Fork Unit. We own a 97.3% working interest in this 3,600
acre Unit in northwestern Oklahoma. We operate the secondary recovery
Unit that produces from the Red Fork formation at 6,400 feet. Operations
in 2000 included drilling two wells and re-entering one. We drilled two
wells successfully in 2001. We expanded our water injection program in
2001 and plan to continue this expansion through 2002.
- Calumet Cottage Grove Unit. We operate this secondary recovery Unit
consisting of 11,400 acres in central Oklahoma. Production is from the
Pennsylvanian Cottage Grove formation at 8,100 feet. We have a 44.1%
working interest in this Unit. We drilled five wells in 2000 and seven
wells in 2001, all of which were successful. We plan to drill six to
eight additional wells in 2002.
Onshore Gulf Coast. The Southern Division's Gulf Coast operations are
primarily focused in the Austin Chalk/Georgetown trend of east-central Texas and
in Northern Louisiana where we are active in two fields, the Elm Grove Field and
the North Louisiana Field Complex.
- Austin Chalk/Georgetown Trend. The trend is a fractured carbonate
formation that has been highly conducive to the application of horizontal
drilling technology. The Austin Chalk formation is encountered in this
field at depths ranging between approximately 7,000 and 17,000 feet. The
Georgetown formation, approximately 300 to 500 feet below the base of the
Austin Chalk, has been a secondary objective in the field. Recent success
targeting the Georgetown formation indicates it may be the main objective
for future development in the field. We control approximately 203,000
gross (60,500 net) undeveloped acres in this area. In 2001, we
participated in the drilling of six wells, all of which were successful.
At least one drilling rig should remain active in this area throughout
2002 and we will continue an active workover program in the Austin Chalk.
- Elm Grove Field. In early-2000, we acquired an approximately 37% working
interest in 20 wells in the Elm Grove field in Caddo and Bossier Parishes
in Northern Louisiana. The 20 wells in 17 sections were drilled to extend
the Cotton Valley production downdip from the mature Caspiana field. In
addition to the Cotton Valley, shallower secondary objectives include the
Hosston and Rodessa intervals. Four rigs are currently drilling in the
field, where we drilled 42 wells in 2001, all of which were successful.
At least two rigs will continue drilling through 2002.
- North Louisiana Field Complex. We acquired this interest in late 1998
and have identified over 100 development locations in its four
fields -- Ada, Sibley, West Bryceland and Sailes. The 2,000 foot
63
thick Hosston interval contains over 20 separate producing zones. Gross
reserves per well average approximately two Bcf. In 2000, we participated
in 33 wells, of which 30 were successful. In 2001, we drilled 34 wells,
all of which were successful. We anticipate drilling between 35 and 45
wells in this region in each of the next two years.
GULF OF MEXICO DIVISION
The Gulf of Mexico Division represented 22% of our net present value as of
June 30, 2001 and contributed nearly 32% of our third quarter 2001 production.
We have interests in 303,804 developed and 357,059 undeveloped gross acres in
the Gulf of Mexico and in 158 gross producing wells (approximately 47 net). Our
average net daily production for third quarter 2001 in the Gulf of Mexico was
over 117 Mmcfe/d. We had 171 Bcfe of proved reserves in the Gulf of Mexico at
June 30, 2001.
In addition to a production base with numerous exploitation opportunities
within our developed acreage, the Gulf of Mexico provides us with moderate-risk
exploration targets. We drilled 18 exploratory wells in the Gulf of Mexico in
2000 and 16 exploratory wells in 2001. We have under license 3-D seismic data
covering over 18,000 square miles (approximately 2,300 blocks) and 2-D seismic
data covering 150,000 linear miles within the Gulf of Mexico.
West Cameron Blocks 180/198. The West Cameron Blocks 180/198 complex
consists of all or a portion of seven offshore blocks, including 30,000 gross
developed and 5,000 gross undeveloped acres. This field was never owned by an
independent producer prior to its purchase by Old Westport in October 1997. The
complex is located 30 miles offshore in 52 feet of water. It has produced
approximately 1.7 Tcf of natural gas and 10 Mmbbl of oil from over 20 separate
producing zones since its discovery. Since acquiring this field, we have
increased production from approximately 26 Mmcfe/d to 59 Mmcfe/d at September
2001. At the time of the acquisition, proved reserves were 77 Bcfe. As of June
30, 2001, we had 84 Bcfe of proved reserves in the complex.
In the first quarter of 2001, we commenced production on three development
wells drilled in 2000 and in the third quarter of 2001 we commenced production
on three development wells drilled in the first half of 2001. We also drilled a
successful exploration well in the complex in 2001. The complex holds additional
drilling opportunities.
West Cameron Blocks 613/614. In 1999, we discovered this field, located
approximately 120 miles offshore in 290 feet of water. We drilled a second
exploration well on an adjoining block in the third quarter of 2000. We operate
the field with a working interest of 50% and installed facilities and commenced
production in December 2000. The wells are currently producing 25 Mmcfe/d (10
Mmcfe/d net).
West Cameron Block 370. We discovered this field, located approximately 60
miles offshore in 78 feet of water, in the fourth quarter of 2000. We operate
the field with a 60% working interest. Following the discovery well we drilled
three additional wells, installed a platform and commenced production in the
third quarter of 2001. The wells are currently producing at 30 Mmcfe/d (15
Mmcfe/d net).
East Cameron Block 369. We discovered this field in the first quarter of
2001 and commenced production from it in December 2001. It is located
approximately 132 miles offshore in 350 feet of water. We operate the two-well
field with a 60% working interest. The wells are currently producing at 18
Mmcfe/d (9 Mmcfe/d net).
Recent Discoveries. In 2002, we will continue to exploit the following
discoveries in the Gulf of Mexico:
- Vermilion Block 408. This field is located approximately 110 miles
offshore in 400 feet of water and was discovered in 1999. We have a 25%
non-operated working interest in the field. A second well was drilled in
this block in the third quarter of 2000. A third well was in progress at
year end 2001. Facilities were installed in late 2001 and production is
expected to commence in the first quarter of 2002.
- Mississippi Canyon Block 322. This field is located approximately 35
miles offshore in 750 feet of water and was discovered in the second
quarter of 2001. We own a non-operated 25% working interest
64
in the field. A second well was also drilled. Both wells have been
completed and production is expected to commence in the second quarter of
2002.
- High Island Block 197. This field is located approximately 28 miles
offshore in 50 feet of water and was discovered in the third quarter of
2001. We have a 25% non-operated working interest in the field. A second
well was in progress at year end 2001. We expect a platform to be
installed and production to be commenced in the third quarter of 2002.
- High Island Block 84. This field is located approximately 23 miles
offshore in 50 feet of water and was discovered in the third quarter of
2001. We operate the field with a 30% working interest. We plan to
install a platform and commence production in the third quarter of 2002.
PROVED RESERVES
The following table sets forth estimated proved reserves for the dates
indicated:
<Table>
<Caption>
PRO FORMA
----------
OLD WESTPORT AS OF DECEMBER 31, BELCO AS OF DECEMBER 31, AS OF
-------------------------------- -------------------------------- JUNE 30,
1998 1999 2000 1998 1999 2000 2001
-------- -------- ---------- -------- -------- ---------- ----------
OIL (MBBLS):
Developed.......... 20,323 29,489 28,673 41,475 42,352 40,642 64,321
Undeveloped........ 4,053 3,261 6,127 11,579 10,724 16,849 17,787
-------- -------- ---------- -------- -------- ---------- ----------
Total......... 24,376 32,750 34,800 53,054 53,076 57,491 82,108
======== ======== ========== ======== ======== ========== ==========
NATURAL GAS (MMCF):
Developed.......... 80,327 82,639 183,872 213,449 224,143 231,380 424,225
Undeveloped........ 19,957 36,531 58,839 72,084 98,005 149,943 163,160
-------- -------- ---------- -------- -------- ---------- ----------
Total......... 100,284 119,170 242,711 285,533 322,148 381,323 587,385
======== ======== ========== ======== ======== ========== ==========
NATURAL GAS LIQUIDS
(MBBLS):
Developed.......... 50 28 247 0 0 0 105
Undeveloped........ 0 0 212 0 0 0 128
-------- -------- ---------- -------- -------- ---------- ----------
Total......... 50 28 459 0 0 0 233
======== ======== ========== ======== ======== ========== ==========
TOTAL (MMCFE)........ 246,840 315,838 454,265 603,857 640,604 726,269 1,081,431
======== ======== ========== ======== ======== ========== ==========
PRESENT VALUE ($ IN
THOUSANDS):
Developed.......... $101,574 $300,328 $1,234,605 $317,916 $527,783 $1,480,512 $1,161,565
Undeveloped........ 9,710 48,771 336,287 38,400 106,931 775,875 312,067
-------- -------- ---------- -------- -------- ---------- ----------
Total......... $111,284 $349,099 $1,570,892(1) $356,316 $634,714 $2,256,387 $1,473,632
======== ======== ========== ======== ======== ========== ==========
STANDARDIZED MEASURE
($ IN
THOUSANDS)(2)...... $104,606 $322,435 $1,098,399 $353,159 $465,329 $1,666,004 $1,094,284
</Table>
- ---------------
(1) The difference in net present value from December 31, 1999 to December 31,
2000 resulted almost entirely from (i) the addition of 134 Bcfe of proved
reserves acquired in connection with the EPGC Merger, (ii) the addition of
52 Bcfe as discoveries and extensions and (iii) the increase in commodity
prices used to determine net present value (from $25.60 to $26.83 per bbl of
oil and $2.30 to $9.52 per Mmbtu of natural gas).
65
(2) The standardized measure is the value of the future after-tax net revenues
discounted at 10%. The difference between the net present value and the
standardized measure is the effect of income taxes discounted at 10%.
Estimated quantities of oil and natural gas reserves and the present value
thereof are based upon reserve reports prepared by the independent petroleum
engineering firms of Ryder Scott Company, L.P., Netherland, Sewell and
Associates, Inc. and Miller and Lents, Ltd. and internal estimates. The Ryder
Scott, Netherland Sewell and Miller and Lents, Ltd. reports covered
approximately 85% of the total net present value of the reserves and the
internally-generated report covered the remaining 15% of the net present value.
Proved developed reserves are proved reserves that are expected to be
recovered from existing wells with existing equipment and operating methods.
Proved undeveloped reserves are proved reserves that are expected to be
recovered from new wells drilled to known reservoirs on undrilled acreage for
which the existence and recoverability of such reserves can be estimated with
reasonable certainty, or from existing wells where a relatively major
expenditure is required to establish production.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
exploitation expenditures. The data in the above tables represent estimates
only. Oil and natural gas reserve engineering is inherently a subjective process
of estimating underground accumulations of oil and natural gas that cannot be
measured exactly, and estimates of other engineers might differ materially from
those shown above. The accuracy of any reserve estimate is a function of the
quality of available data and engineering and geological interpretation and
judgment. Results of drilling, testing and production after the date of the
estimate may justify revisions. Accordingly, reserve estimates may vary from the
quantities of oil and natural gas that are ultimately recovered.
Future prices received for production and costs may vary, perhaps
significantly, from the prices and costs assumed for purposes of these
estimates. The present value shown should not be construed as the current market
value of the reserves. The 10% discount factor used to calculate present value,
which is mandated by generally accepted accounting principles, is not
necessarily the most appropriate discount rate. The present value, no matter
what discount rate is used, is materially affected by assumptions as to timing
of future production, which may prove to be inaccurate. For properties that we
operate, expenses exclude our share of overhead charges. In addition, the
calculation of estimated future net revenues does not take into account the
effect of various cash outlays, including, among other things, general and
administrative costs and interest expense.
66
PRODUCTION AND PRICE HISTORY
The following table sets forth information regarding net production of oil,
natural gas and natural gas liquids, and certain price and cost information for
each of the periods indicated.
<Table>
<Caption>
OLD WESTPORT YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1998 1999 2000 2000 2001
------- ------- ------- ------- -------
PRODUCTION DATA:
Oil (Mbbls).......................... 3,483 3,300 3,584 2,642 3,075
Natural gas (Mmcf)................... 8,101 13,313 34,318 23,842 37,177
Total Mmcfe.......................... 28,999 33,113 55,822 39,694 55,627
AVERAGE SALES PRICES(1):
Oil (per bbl)........................ $ 10.79 $ 16.45 $ 27.98 $ 27.45 $ 24.12
Natural gas (per Mcf)................ 1.79 2.19 4.21 3.60 4.31
Total per Mcfe....................... 1.80 2.52 4.38 3.99 4.21
AVERAGE COSTS (PER MCFE):
Lease operating expenses............. $ 0.74 $ 0.69 $ 0.62 $ .59 $ .63
General and administrative........... 0.20 0.16 0.14 .13 .19
Depletion, depreciation and
amortization....................... 1.25 0.76 1.16 1.06 1.30
</Table>
- ---------------
(1) Does not include the effects of hedging transactions.
<Table>
<Caption>
BELCO YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- -----------------
1998 1999 2000 2000 2001
------- ------- ------- ------- -------
PRODUCTION DATA:
Oil (Mbbls).......................... 4,177 3,439 3,922 2,014 1,878
Natural gas (Mmcf)................... 37,207 39,737 40,847 21,051 18,518
Total Mmcfe.......................... 62,272 60,370 64,379 33,136 29,786
AVERAGE SALES PRICES(1):
Oil (per bbl)........................ $ 13.17 $ 17.49 $ 29.23 $ 27.70 $ 26.90
Natural gas (per Mcf)................ 1.86 1.99 3.50 2.65 5.43
Total per Mcfe....................... 1.99 2.31 4.00 3.37 5.07
AVERAGE COSTS (PER MCFE):
Lease operating expenses............. $ 0.50 $ 0.49 $ 0.52 $ 0.46 $ 0.64
General and administrative........... 0.08 0.08 0.10 0.09 0.12
Depletion, depreciation and
amortization....................... 0.90 0.90 0.88 0.85 0.98
</Table>
- ---------------
(1) Does not include the effects of hedging transactions.
67
PRODUCING WELLS
The following table sets forth information at December 31, 2001 relating to
the producing wells in which Westport owned a working interest as of that date.
We also held royalty interests in 1,726 producing wells as of that date. Wells
are classified as oil or natural gas wells according to their predominant
production stream.
<Table>
<Caption>
GROSS AVERAGE
PRODUCING NET PRODUCING WORKING
WELLS WELLS INTEREST
--------- ------------- --------
Crude oil and liquids................................ 3,601 1,584.3 44.0%
Natural gas.......................................... 2,319 588.0 25.4%
----- ------- ----
Total.............................................. 5,920 2,172.3 --
===== ======= ====
</Table>
ACREAGE
The following table sets forth information at December 31, 2001 relating to
acreage held by us. Developed acreage is assigned to producing wells.
Undeveloped acreage is acreage held under lease, permit, contract or option that
is not in a spacing unit for a producing well; including leasehold interests
identified for exploitation or exploratory drilling. "Gross" acres refers to the
total number of acres in which we own a working interest. "Net" acres refers to
gross acres multiplied by our fractional working interest.
<Table>
<Caption>
GROSS NET
ACREAGE ACREAGE
--------- -------
DEVELOPED:
Gulf of Mexico............................................ 303,804 75,299
Northern.................................................. 731,788 216,322
Southern.................................................. 578,252 230,390
Total Developed...................................... 1,613,844 522,011
========= =======
UNDEVELOPED:
Gulf of Mexico............................................ 357,059 204,223
Northern.................................................. 1,419,208 561,519
Southern.................................................. 165,939 80,996
Total Undeveloped.................................... 1,942,206 846,738
========= =======
</Table>
68
DRILLING RESULTS
The following table sets forth information with respect to wells drilled
during the periods indicated. The information should not be considered
indicative of future performance, nor should it be assumed that there is
necessarily any correlation between the number of productive wells drilled,
quantities of reserves found or economic value. Productive wells are those that
produce commercial quantities of hydrocarbons, whether or not they produce a
reasonable rate of return.
<Table>
<Caption>
PRO FORMA
TWELVE
MONTHS
OLD WESTPORT YEAR BELCO YEAR ENDED ENDED
ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------- ------------------- ------------
1998 1999 2000 1998 1999 2000 2001
---- ---- ----- ---- ---- ----- ------------
DEVELOPMENT WELLS DRILLED:
Productive
Gross........................ 61.0 83.0 169.0 69.0 46.0 106.0 308.0
Net.......................... 14.5 28.2 40.0 47.1 29.4 57.2 115.6
Dry
Gross........................ 1.0 0 8.0 1.0 2.0 7.0 9.0
Net.......................... 0.6 0 1.7 1.0 1.0 5.1 4.6
EXPLORATORY WELLS DRILLED:
Productive
Gross........................ 5.0 8.0 12.0 28.0 11.0 17.0 28.0
Net.......................... 1.9 1.4 5.8 9.4 8.2 10.8 12.3
Dry
Gross........................ 8.0 3.0 8.0 7.0 3.0 5.0 9.0
Net.......................... 1.8 1.3 3.4 4.0 2.5 3.7 5.1
</Table>
As of December 31, 2001, three additional exploration wells and seven
development wells were in progress.
69
MANAGEMENT
The following table sets forth certain information with respect to the
executive officers and directors of Westport.
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
Donald D. Wolf.................. 58 Chairman of the Board and Chief Executive Officer
Barth E. Whitham................ 45 President and Chief Operating Officer
Grant W. Henderson.............. 42 Executive Vice President and General Manager --
Southern Division
Lon McCain...................... 53 Vice President, Chief Financial Officer and
Treasurer
Kenneth D. Anderson............. 59 Vice President -- Accounting
Lynn S. Belcher................. 48 Vice President and General Manager -- Northern
Division
Brian K. Bess................... 41 Vice President -- Engineering
Howard L. Boigon................ 55 Vice President, General Counsel and Secretary
Robert R. McBride, Jr. ......... 45 Vice President and General Manager -- Gulf of
Mexico Division
Robert A. Belfer................ 66 Director
Laurence D. Belfer.............. 35 Director
James M. Funk................... 52 Director
Murry S. Gerber................. 48 Director
Robert A. Haas.................. 49 Director
Peter R. Hearl.................. 50 Director
David L. Porges................. 44 Director
Michael Russell................. 51 Director
Randy Stein..................... 48 Director
William F. Wallace.............. 62 Director
</Table>
Donald D. Wolf has served as Chairman of the Board and Chief Executive
Officer of Westport since August 2001. From April 2000 until August 2001, Mr.
Wolf served as Chairman of the Board and Chief Executive Officer of Old
Westport. Mr. Wolf joined Westport Oil and Gas Company, Inc. in June 1996 as
Chairman and Chief Executive Officer and has a diversified 35-year career in the
oil and natural gas industry. In 1981, Mr. Wolf founded General Atlantic Energy
Co., where he was Chairman and Chief Executive Officer when it successfully
completed an initial public offering in 1993. General Atlantic subsequently
merged with UMC Petroleum in 1994. Mr. Wolf resigned from UMC in May 1996 as
President and Chief Operating Officer. Prior to that time, Mr. Wolf held
positions with Sun Oil Co. and Bow Valley Exploration in Canada before moving to
Denver in 1974, where he was employed by Tesoro Petroleum and Southland Royalty
Co. In 1977, he co-founded Terra Marine Energy Co., which was sold in 1980 to
Southport Exploration.
Barth E. Whitham has served as President and Chief Operating Officer of
Westport since August 2001. From April 2000 until August 2001, Mr. Whitham
served as President, Chief Operating Officer and Secretary of Old Westport. Mr.
Whitham joined Westport Oil and Gas Company, Inc. at its inception in 1991,
where he held the positions of President and Chief Operating Officer until the
merger with EPGC. Prior to joining Westport Oil and Gas Company, Inc., Mr.
Whitham was Manager of Production Operations for the Caza companies. From 1979
to 1991, Mr. Whitham was associated with several U.S. and Canadian oil and
natural gas companies, including Pennzoil Exploration and Production Co. and
Pembina Resources Ltd., where his experience included reservoir engineering,
strategic planning, property evaluation and operations management.
Grant W. Henderson has served as Executive Vice President and General
Manager -- Southern Division since August 2001. Prior to August 2001, Mr.
Henderson served as President and Chief Operating Officer of
70
Belco. He was named President effective March 1, 1999 and Chief Operating
Officer effective May 2000. Prior to this, Mr. Henderson served as Senior Vice
President -- Corporate Development of Belco. Mr. Henderson was formerly
President and Chief Financial Officer of Coda Energy, Inc., or Coda. Mr.
Henderson joined Coda in October 1993 as Executive Vice President and Chief
Financial Officer. He was elected a director of Coda in 1995 and became
President of Coda in February 1996. Mr. Henderson was previously employed by
NationsBank (now Bank of America N.A.), beginning in 1981, last serving as
Senior Vice President in its Energy Banking Group.
Lon McCain has served as Vice President and Chief Financial Officer of
Westport since August 2001. From April 2001 until August 2001, Mr. McCain served
as Vice President and Chief Financial Officer of Old Westport. Mr. McCain served
as Senior Vice President and Principal for the eight years prior to joining Old
Westport with Petrie Parkman & Co., where he was involved with the firm's
capital market activities. Prior to joining Petrie Parkman, Mr. McCain had over
15 years experience as a senior financial executive in operating independent oil
and natural gas companies. Mr. McCain has taught as an adjunct professor of
finance since 1982 at the University of Denver's Graduate School of Business.
Kenneth D. Anderson has served as Vice President -- Accounting since August
2001. From April 2000 until August 2001, Mr. Anderson served as Vice
President -- Accounting of Old Westport. Mr. Anderson joined Westport Oil and
Gas Company, Inc. in September 1991 as Controller.
Lynn S. Belcher has served as Vice President and General
Manager -- Northern Division since August 2001. From June 2001 until August
2001, Mr. Belcher served as Vice President and General Manager -- Northern Unit
of Old Westport. From April 2000 until June 2001, Mr. Belcher served as Vice
President -- Business Development of Old Westport. Mr. Belcher joined Westport
Oil and Gas Company, Inc. in September 1996 as Vice President -- Land. Mr.
Belcher served in this position until June 1998 when he was named Vice
President -- Business Development. Mr. Belcher co-founded Focus Exploration,
Inc. in 1985 and Peak Energy Co., in 1992. Mr. Belcher served as Vice
President -- Land for Peak Energy Co. from June 1995 through September 1996.
Brian K. Bess has served as Vice President -- Engineering since August
2001. From April 2000 until August 2001, Mr. Bess served as Vice
President -- Engineering of Old Westport. Mr. Bess joined Westport Oil and Gas
Company, Inc. in May 1999 as Vice President -- Engineering. Prior to joining
Westport Oil and Gas Company, Inc., Mr. Bess was the Acquisitions and Reservoir
Manager for General Atlantic Resources/ UMC Petroleum Corp. from February 1993
until May 1998.
Howard L. Boigon has served as Vice President, General Counsel and
Secretary since August 2001. From May 2001 until August 2001, Mr. Boigon served
as Vice President, General Counsel and Secretary of Old Westport. Mr. Boigon
served in the same positions and as a director of Basin Exploration, Inc. from
1992 until its merger with Stone Energy Corporation on February 1, 2001. Prior
to joining Basin, Mr. Boigon was with the Denver law firm of Davis, Graham &
Stubbs for 18 years, where he specialized in the practice of natural resources
law.
Robert R. McBride, Jr. has served as Vice President and General
Manager -- Gulf of Mexico Division since August 2001. From June 2001 until
August 2001, Mr. McBride served as Vice President -- General Manager -- Gulf of
Mexico Unit of Old Westport. Mr. McBride joined Old Westport in February 2001 as
Vice President and General Manager -- Gulf of Mexico. Prior to joining Old
Westport, Mr. McBride was Vice President and Regional Manager of Cabot Oil & Gas
Corporation from September 1999 to January 2001. From September 1997 to
September 1999, Mr. McBride served as President and General Manager of Pennzoil
Venezuela Corporation. Mr. McBride held various positions with American
Exploration Company from April 1992 to May 1997.
Robert A. Belfer has served as a Director of Westport since August 2001.
Mr. Belfer was a director of Belco from 1996 until August 2001. Mr. Belfer
served as Chairman of the Board and Chief Executive Officer of Belco since March
1996. From March 1996 to April 1, 1997, Mr. Belfer was also President of Belco.
Mr. Belfer joined Belco Petroleum Corporation, or BPC, in 1958 and became
Executive Vice President in 1964, President in 1965 and Chairman of the Board in
1984. BPC went public in 1959 and merged with
71
InterNorth, Inc. (now Enron Corp.) in 1983. Following the InterNorth merger, Mr.
Belfer became Chief Operating Officer of BelNorth Petroleum Corp., a combination
of oil and natural gas producing operations of BPC and InterNorth. He resigned
from his position with InterNorth in 1986 and pursued personal investments in
oil and natural gas and other industries. In April 1992, Mr. Belfer founded
Belco. Mr. Belfer also serves on the board of Enron Corp.
Laurence D. Belfer has served as a Director of Westport since August 2001.
Mr. Belfer was a director of Belco from 1996 until August 2001. Mr. Belfer
joined Belco as Vice President in September 1992. He was promoted to Executive
Vice President in May 1995 and Chief Operating Officer in December 1995, was
named President in April 1997 and Vice Chairman in March 1999. He is a founder
and Chairman of Harvest Management, Inc., a money management firm. Laurence D.
Belfer is the son of Robert A. Belfer.
James M. Funk has served as a Director of Westport since August 2001. Mr.
Funk was a director of Old Westport from April 2000 until August 2001. Mr. Funk
joined Equitable Resources, Inc. as president, Equitable Production Company, in
June 2000. Prior to joining Equitable Production Company, Mr. Funk was an
independent consultant for J.M. Funk & Assoc., Inc. from February 1999 through
June 2000. Prior to this, Mr. Funk worked for 23 years at Shell Oil, where he
held positions of president, Shell Continental Companies (January 1998 through
January 1999), vice president, Shell Offshore, Inc. and general manager, Shelf
E&P Business Unit (October 1991 through December 1997), and chief executive
officer of Shell Midstream Enterprises, Inc. (April 1996 through December 1997).
Mr. Funk is a certified petroleum geologist.
Murry S. Gerber has served as a Director of Westport since August 2001. Mr.
Gerber was a director of Old Westport from April 2000 until August 2001. Mr.
Gerber is chairman, president and chief executive officer of Equitable
Resources, Inc. where he has served since June 1998. Prior to joining Equitable
Resources, Inc., Mr. Gerber served as chief executive officer of Coral Energy, a
joint venture of Shell Oil, Tejas Gas and Shell Canada from November 1995
through June 1998. Prior to that, he held various positions at Shell Oil,
including treasurer from November 1994 through November 1995. Mr. Gerber also
serves on the board of BlackRock, Inc.
Robert A. Haas LLB is the son of the Senior Partner of Dr. Richard J. Haas
Partners, Trust Lawyers in London. He has been a partner in the firm for 17
years and for the last 10 years has been responsible for developing and heading
a diversified family office unit, responsible for overseeing the strategy and
global activities of a major European family group who have been clients of the
practice for over 35 years. Mr. Haas' principal experience is in private banking
and he has been responsible for the banking relationships with large European
banks who manage clients' assets worldwide. Mr. Haas sat on the Controlling
Board of Amro Bank und Finanz, Switzerland while it was a wholly owned
subsidiary of Amro Bank Holland until the merger with ABN Holland 11 years ago.
Mr. Haas was a Director of Westport Oil and Gas and is a Director of the
investment vehicle which still controls a major stake in Westport Resources. Mr.
Haas also reports to clients on all their real estate, private equity and
philanthropic activities.
Peter R. Hearl has served as a Director of Westport since August 2001. Mr.
Hearl was a director of Old Westport from July 2000 until August 2001. Mr. Hearl
is executive vice president of Tricon Restaurants International, formerly
PepsiCo Restaurants International. Mr. Hearl joined Tricon in 1991. During his
tenure with Tricon, Mr. Hearl has served in various senior management and
executive positions throughout Europe, Asia, Australia, the Middle East and
Africa. Mr. Hearl also serves on Tricon's Partners Council and is Tricon's
senior representative for joint venture businesses in Japan, Canada and Poland.
Prior to joining Tricon, Mr. Hearl worked for Exxon in Australia and the United
States in a variety of strategic planning, marketing, operational and senior
management positions. He serves as a director of Kentucky Fried Chicken Ltd.
Japan.
David L. Porges has served as a Director of Westport since August 2001. Mr.
Porges was a director of Old Westport from April 2000 until August 2001. Mr.
Porges is executive vice president and chief financial officer of Equitable
Resources, Inc. Mr. Porges joined Equitable Resources, Inc. in July 1998. Prior
to joining Equitable Resources, Inc., Mr. Porges was a managing director for
Bankers Trust Corporation, a financial services firm, from 1991 through July
1998. He has been involved in the oil and natural gas business, and financial
services supporting that business, for more than 20 years.
72
Michael Russell has served as a Director of Westport since August 2001. Mr.
Russell was a director of Old Westport from April 2000 until August 2001. Mr.
Russell is a partner of Dr. Richard J. Haas Partners, London, the Trust Lawyers
who are responsible worldwide for overseeing the affairs of the founder of
Westport Oil and Gas Company, Inc. and a major shareholder of Westport. He was a
director of Westport Oil and Gas Company, Inc. and served as its president from
its inception through June 1996. He has been involved in the U.S. oil and
natural gas industry for the past 20 years. Mr. Russell has worked for Dr.
Richard J. Haas Partners for the past 24 years. Together with senior partner Dr.
Richard J. Haas, he was responsible for starting in 1981 the original U.S. oil
and natural gas operations that led to the formation of Westport Oil and Gas
Company, Inc. Mr. Russell was called to the bar at Lincoln's Inn, London.
Randy Stein has served as a Director of Westport since August 2001. Mr.
Stein was a director of Old Westport from July 2000 until August 2001. Since
July 1, 2000, Mr. Stein has been a self-employed tax and business consultant.
From November 1986 to June 30, 2000, Mr. Stein served as a principal at
PricewaterhouseCoopers LLP, formerly Coopers & Lybrand LLP, where he was in
charge of the Denver tax practice with responsibility for client service,
business development and other operational affairs. From 1980 through November
1986, Mr. Stein was an executive officer of Petro Lewis Corporation, a Denver
based energy company. Mr. Stein has over 25 years of experience in the energy
industry providing accounting and tax consulting, and has been involved in
numerous mergers, acquisitions and initial public offerings.
William F. Wallace has served as a Director of Westport since August 2001.
Mr. Wallace was a director of Old Westport from April 2000 until August 2001.
Mr. Wallace is an advisory member of the Beacon Alliance of the Beacon Group, a
private investment and venture capital fund recently purchased by Chase
Manhattan Bank Group. Mr. Wallace has worked with Beacon Alliance since January
1996. Mr. Wallace was a director of Westport Oil and Gas Company, Inc. prior to
the EPGC Merger. He also serves on the board of directors of Input/Output, Inc.
and the Khanty Mansiysk Oil Corp. Mr. Wallace was vice chairman of Barrett
Resources from August 1995 through March 1996. He served as president, chief
operating officer and director of Plains Petroleum Co. from September 1994 to
August 1995. Prior to joining Plains Petroleum in 1994, Mr. Wallace spent a
combined total of 23 years with Texaco Inc., including six years of service as
vice president of exploration for Texaco USA and as regional vice president of
Texaco's Eastern Region, responsible for all exploration and producing
activities onshore and offshore throughout the eastern United States.
BOARD OF DIRECTORS
Pursuant to a shareholders agreement dated July 20, 2001, entered into in
connection with the Merger, ERI and WELLC each have the right to designate a
total of three directors, one to each class, and a group of former Belco
stockholders, or the Belfer Group, has a right to designate a total of two
directors, one director to Class III and one director to Class I. The number of
directors a party may designate is reduced if such party's ownership of Westport
common stock is reduced below certain thresholds. See "Certain Relationships and
Related Transactions."
EMPLOYMENT AGREEMENTS
We are party to employment agreements entered into by Old Westport on May
8, 2000 with each of Donald D. Wolf and Bart E. Whitham, pursuant to which
Messrs. Wolf and Whitham serve as Westport's Chairman and Chief Executive
Officer and its President and Chief Operating Officer, respectively. The initial
term of each employment agreement extends through May 31, 2003. During 2001, Mr.
Wolf and Mr. Whitham received a salary of $357,000 and $247,000. The agreements
provide that if any payments or distributions to Mr. Wolf or Mr. Whitham by us
or any of our affiliates are subject to Section 4999 of the Code, we are
required to compensate such person for the amount of any excise tax imposed
pursuant to Section 4999 of the Code and for any taxes imposed on that
additional payment. Section 4999 of the Code addresses additional taxes payable
in the event of a change of control of us.
The employment agreements also provide for severance payments to Mr. Wolf
and Mr. Whitham if we terminate such person's employment other than for cause or
if such person's employment is terminated upon a
73
change of control of us. In such case, we must pay accrued base salary and
business expenses incurred as of the date of termination, an amount equal to
three times the individual's then applicable base salary and three times the
average of the bonus he received for the last three years. The employment
agreements also include a non-competition provision for one year if the
individual voluntarily terminates his employment and a non-solicitation
provision for one year following the termination of such person's employment.
RETENTION AGREEMENTS
Following the Merger, we entered into retention agreements with our
executive officers. The retention agreements set forth the terms and conditions
of the officers' compensation in the event of termination of their employment
following a change in control, as defined in the agreements, within five years
of the date of such retention agreements. Each agreement automatically expires
if a change in control has not occurred within the five-year period, and may be
renewed for successive one-year periods by written agreement of the parties. If
a termination following a change in control occurs within the specified period,
other than a termination for cause or without good reason, as defined in the
agreement, the terminated person will be entitled to all earned and accrued
compensation and benefits plus severance compensation equal to a stated
percentage of the sum of their respective base salary and average bonus for
three prior years, plus the amount of any excise tax imposed on such severance
payment under Section 4999 of the Code. In addition, all equity incentive awards
become immediately vested.
THE RETENTION AND SEVERANCE PLAN
Under the Retention and Severance Plan adopted by Belco prior to the
Merger, we will pay certain benefits to former employees of Belco. The Retention
and Severance Plan generally provides that each former Belco employee will
receive a lump sum retention payment equal to 30% of such employee's aggregate
wages earned during a retention period lasting from June 8, 2001 until the
earlier of (1) 90 days after the effective date of the Merger or (2) the
termination of the merger agreement relating to the Merger. The retention
payment will be paid by us within 30 days of the end of the retention period.
The Retention and Severance Plan also generally provides that severance benefits
will be paid to former Belco employees whose employment is terminated for any
reason other than "cause" during the period from June 8, 2001 through the
earlier of (1) 18 months after the effective date of the Merger or (2) the
termination of the merger agreement. The severance compensation payable under
the Retention and Severance Plan is as follows:
<Table>
<Caption>
TITLE AMOUNT OF PAYMENT(1)
- ----- --------------------
Senior Vice President or higher.......... Three months' salary per year of service
with a maximum payment of 18 months'
salary
Vice President........................... Two months' salary per year of service
with a maximum payment of 12 months'
salary
All other employees...................... One months' salary per year of service
with a maximum payment of 6 months'
salary
</Table>
- ---------------
(1) Minimum severance compensation for any eligible employee will be two months
salary.
Severed employees eligible for severance benefits under the Retention and
Severance Plan may also be eligible for certain health insurance benefits.
Compensation payable under the Retention and Severance Plan will be subject to
applicable withholding taxes and will not be eligible for 401(k) matching
benefits.
EXECUTIVE COMPENSATION
The following tables set forth certain information with respect to the
compensation for the years ended December 31, 2000, 1999 and 1998 of the chief
executive officer and the four other most highly compensated executive officers
for each of Belco and Old Westport. These executive officers' annual
compensation amounts in the table exclude perquisites and other personal
benefits for individuals for whom the aggregate amount of
74
such compensation does not exceed the lesser of (i) $50,000 and (ii) 10% of the
total annual salary and bonus for such executive officer in that year.
SUMMARY COMPENSATION TABLE OF BELCO
<Table>
<Caption>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
--------------------------- ----------------------------------------------
SECURITIES
UNDERLYING
RESTRICTED STOCK OPTIONS/SARS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($)(1)(2) (#)(1) COMPENSATION
- --------------------------- ---- --------- -------- ---------------- ------------ ------------
Robert A. Belfer(3)...... 2000 $180,000 -- -- -- $8,177(4)
Chairman of the Board 1999 $180,000 -- -- -- $8,010(5)
and Chief Executive 1998 $180,047 -- -- -- $5,610(6)
Officer
Laurence D. Belfer(7).... 2000 $300,000 -- -- 40,000 $8,550(8)
Vice Chairman 1999 $251,923 -- $ 97,500(9) 40,000 $8,100(10)
1998 $186,923 -- -- 40,000 $8,100(10)
Grant W. Henderson(11)... 2000 $321,827 -- -- 50,000 $8,550(8)
President and Chief 1999 $257,692 -- $551,250(12) 100,000 $8,100(10)
Operating Officer 1998 $224,306 -- $225,000(13) 100,000 $8,100(10)
Dominick J. Golio(14).... 2000 $274,616 $20,000 -- 20,000 $8,550(8)
Senior Vice President -- 1999 $253,077 -- $129,375(15) 20,000 $8,100(10)
Financing, Chief 1998 $233,416 -- $ 81,250(16) 50,000 $6,863(17)
Financial Officer,
Secretary and
Treasurer
Shiv K. Sharma(18)....... 2000 $234,539 $ 5,825 $ 48,750(19) 10,000 $8,100(10)
Senior Vice President -- 1999 $224,539 -- -- 10,000 $5,691(20)
Engineering 1998 $212,482 -- -- -- --
</Table>
- ---------------
(1) As a result of the Merger, stock options issued under Belco's 1996
Non-employee Directors' Stock Option Plan and the 1996 Stock Incentive Plan
became fully vested and exercisable at the effective time of the Merger
notwithstanding any exercisability or vesting provisions. In addition, the
restriction on disposition and forfeiture provisions on all restricted
shares of Belco common stock issued under these plans terminated at the
effective time of the Merger.
(2) Except as described in note 1 above, each of the grants of restricted stock
generally vest 20% per year beginning at the first anniversary date of the
grant. Holders of restricted stock are entitled to receive dividends, if
and when declared by the board of directors of Belco. As of December 31,
2000, the officers listed above had the following number of restricted
shares having a value (based on the closing price of Belco's unrestricted
common stock at December 29, 2000 of $12.4375) as follows:
Laurence D. Belfer 20,000 shares, value $248,750; Dominick J. Golio 55,000
shares, value $684,063; Grant W. Henderson 130,000 shares, value
$1,616,875; Shiv K. Sharma 15,000 shares, value $186,563.
(3) Robert A. Belfer resigned from Belco effective as of August 21, 2001 and is
currently a director of Westport.
(4) This amount includes $7,650 contributed by Belco under Belco's 401(k)
profit sharing plan and $527 paid by Belco for life insurance premiums.
(5) This amount includes $7,200 contributed by Belco under Belco's 401(k)
profit sharing plan and $810 paid by Belco for life insurance premiums.
(6) This amount includes $4,800 contributed by Belco under Belco's 401(k)
profit sharing plan and $810 paid by Belco for life insurance premiums.
(7) Laurence D. Belfer resigned from Belco effective as of August 21, 2001 and
is currently a director of Westport.
75
(8) This amount includes $7,650 contributed by Belco under Belco's 401(k)
profit sharing plan and $900 paid by Belco for life insurance premiums.
(9) This dollar amount was calculated by multiplying the number of shares of
restricted stock granted (20,000) by the closing market price of Belco's
unrestricted common stock on March 1, 1999 ($4.875), the date of the grant.
(10) This amount includes $7,200 contributed by Belco under Belco's 401(k)
profit sharing plan and $900 paid by Belco for life insurance premiums.
(11) Mr. Henderson resigned from Belco effective as of August 21, 2001 and is
currently Westport's Executive Vice President and General
Manager -- Southern Division.
(12) This dollar amount was calculated by multiplying the number of shares of
restricted stock granted (100,000 and 10,000) by the closing market price
of Belco's unrestricted common stock on March 1, 1999 ($4.875) and November
1, 1999 ($6.375), the dates of the grants.
(13) This dollar amount was calculated by multiplying the number of shares of
restricted stock granted (10,000 and 10,000) by the closing market price of
Belco's unrestricted common stock on April 7, 1998 ($16.25) and November 2,
1998 ($6.25), the dates of the grants.
(14) Mr. Golio resigned from Belco effective as of August 21, 2001, the
effective time of the Merger.
(15) This dollar amount was calculated by multiplying the number of shares of
restricted stock granted (20,000 and 5,000) by the closing market price of
Belco unrestricted common stock on March 1, 1999 ($4.875) and November 1,
1999 ($6.375), the dates of the grants.
(16) This dollar amount was calculated by multiplying the number of shares of
restricted stock granted (5,000) by the closing market price of Belco
unrestricted common stock on April 7, 1998, the date of the grant ($16.25).
(17) This amount includes $6,000 contributed by Belco under Belco's 401(k)
profit sharing plan and $863 paid by Belco for life insurance premiums.
(18) Mr. Sharma resigned from Belco effective as of August 21, 2001, the
effective time of the Merger.
(19) This dollar amount was calculated by multiplying the number of shares of
restricted stock granted (10,000) by the closing market price of Belco
unrestricted common stock on March 1, 1999, the date of the grant ($4.875).
(20) This amount includes $4,800 contributed by Belco under Belco's 401(k)
profit sharing plan and $891 paid by Belco for life insurance premium.
76
SUMMARY COMPENSATION TABLE OF OLD WESTPORT
<Table>
<Caption>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#) COMPENSATION($)
- --------------------------- ---- --------- -------- ------------------ ------------ ---------------
Donald D. Wolf........... 2000 323,396 100,000 14,204 900,000 --
Chairman, 1999 220,631 50,000 13,117 308,250 --
Chief Executive 1998 217,087 30,000 13,994 -- --
Officer
Barth E. Whitham(2)...... 2000 224,251 65,000 14,684 337,500 --
President, Chief 1999 196,181 33,000 12,533 98,100 --
Operating Officer, 1998 194,121 25,000 16,093 -- --
Secretary
James H. Shonsey(3)...... 2000 166,506 35,000 -- 38,812 --
Chief Financial 1999 153,181 11,945 -- 18,000 --
Officer 1998 151,621 -- -- -- 20,000(4)
Brian K. Bess............ 2000 152,422 40,000 -- 77,710 --
Vice President -- 1999 140,000 23,500 -- 18,000 --
Engineering 1998 106,755 50,000 -- 37,500 10,000(4)
Klein P. Kleinpeter(5)... 2000 145,167 40,000 -- 45,000 --
Vice President and 1999 -- -- -- -- --
General Manager, 1998 -- -- -- -- --
Gulf Coast
</Table>
- ---------------
(1) Includes an automobile allowance and club membership dues.
(2) As of August 21, 2001, the effective time of the Merger, Mr. Whitham serves
as President and Chief Operating Officer of Westport.
(3) Mr. Shonsey resigned from Old Westport on May 31, 2001.
(4) Reimbursement for moving expenses.
(5) Mr. Kleinpeter resigned from Old Westport on January 31, 2001.
77
STOCK OPTIONS GRANTED IN 2000
The following tables set forth information concerning stock options granted
to the named executive officers of each of Belco and Old Westport in 2000.
STOCK OPTIONS GRANTED BY BELCO
<Table>
<Caption>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE PER OPTION TERMS($)(3)
OPTIONS/SARS EMPLOYEES IN SHARE EXPIRATION -----------------------
NAME GRANTED(#)(1)(2) 2000 ($/SHARE)(2) DATE 5%($) 10%($)
- ---- ---------------- ------------ ------------ ---------- ---------- ----------
Robert A. Belfer(4)........... -- -- -- -- -- --
Chairman of the Board and
Chief Executive Officer
Laurence D. Belfer(5)......... 24,000(6) 6.8% $7.5625 3/1/10 $114,144 $289,264
Vice Chairman 16,000(7) 4.5% $8.3187 3/1/10 $ 63,996 $180,743
Grant W. Henderson(8)......... 50,000(9) 14.2% $7.5625 3/1/10 $237,801 $602,634
President and Chief
Operating Officer
Dominick J. Golio(10)......... 20,000(11) 5.7% $7.5625 3/1/10 $ 95,120 $241,054
Senior Vice President --
Finance, Chief Financial
Officer, Secretary and
Treasurer
Shiv K. Sharma(12)............ 10,000(13) 2.8% $7.5625 3/1/10 $ 47,560 $120,527
Senior Vice President --
Engineering
</Table>
- ---------------
(1) All options were granted under Belco's 1996 Stock Incentive Plan. The
options expire 10 years from the date of grant. The options became fully
vested and exercisable as of August 21, 2001, the effective time of the
Merger, notwithstanding any exercisability or vesting provisions.
(2) The number of securities and the exercise price per share were adjusted on
August 21, 2001, the effective time of the Merger, to reflect the reverse
stock split providing for the conversion of options to purchase Belco
common stock into options to purchase Westport common stock based on a
0.4125 conversion ratio.
(3) Calculated based upon the indicated rates of appreciation, compounded
annually, from the date of grant to the end of each option term. Actual
gains, if any, on stock option exercises and Belco common stock holdings
are dependent on the future performance of the Belco common stock and
overall stock market conditions. There can be no assurance that the amounts
reflected in this table will be achieved. The calculation does not take
into account the effects, if any, of provisions of the option plan
governing termination of options upon employment termination,
transferability or vesting.
(4) Robert A. Belfer resigned from Belco effective as of August 21, 2001 and is
currently a director of Westport.
(5) Laurence D. Belfer resigned from Belco effective as of August 21, 2001 and
is currently a director of Westport.
(6) Represent non-statutory stock options.
(7) Represent incentive stock options.
(8) Mr. Henderson resigned from Belco effective as of August 21, 2001 and is
currently Westport's Executive Vice President and General
Manager -- Southern Division.
(9) 10,000 are incentive stock options; 40,000 are non-statutory stock options.
78
(10) Mr. Golio resigned from Belco effective as of August 21, 2001, the
effective time of the Merger.
(11) 8,000 are incentive stock options; 12,000 are non-statutory stock options.
(12) Mr. Sharma resigned from Belco effective as of August 21, 2001, the
effective time of the Merger.
(13) 6,544 are incentive stock options; 3,456 are non-statutory stock options.
STOCK OPTIONS GRANTED BY OLD WESTPORT
<Table>
<Caption>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERMS($)(4)
OPTIONS/SARS EMPLOYEES PRICE PER EXPIRATION ----------------------
NAME GRANTED(#)(1)(2) IN 2000(3) SHARE($/SH) DATE 5% 10%
- ---- ---------------- ------------ ----------- ---------- --------- ----------
Donald D. Wolf........ 750,000 35.5 10.85 5/8/10 5,120,000 12,975,000
Chairman, 150,000 7.1 17.63 12/13/10 1,663,000 4,213,000
Chief Executive
Officer
Barth E. Whitham(5)... 262,500 12.4 10.85 5/8/10 1,792,000 4,541,250
President, Chief 75,000 3.6 17.63 12/13/10 831,000 2,107,000
Operating Officer,
Secretary
James H. Shonsey(6)... 38,812 1.8 10.85 5/8/10 264,960 671,456
Chief Financial
Officer
Brian K. Bess......... 52,710 2.5 10.85 5/8/10 359,833 911,883
Vice President -- 25,000 1.2 17.63 12/13/10 277,000 702,000
Engineering
Klein P.
Kleinpeter(7)....... 45,000 2.1 10.85 5/8/10 499,000 1,264,000
Vice President and
General Manager,
Gulf Coast
</Table>
- ---------------
(1) The options expire ten years from the date of grant and vest 1/3 on each
anniversary of the date of grant.
(2) On August 21, 2001, the effective time of the Merger, these options to
purchase Old Westport common stock were converted into the same number of
options to purchase Westport common stock having the same terms as Old
Westport options.
(3) In 2000, Old Westport granted to employees and directors options to purchase
a total of 2,110,880 shares of Old Westport common stock, of which 44,421
were subsequently forfeited and 13,018 were exercised as of December 31,
2000.
(4) In accordance with the rules of the SEC, the amounts shown on this table
represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. These gains are based on
the assumed rates of stock appreciation of 5% and 10% compounded annually
from the date the respective options were granted to their expiration date
and do not reflect Westport's estimates or projections of the future price
of Westport common stock. The gains shown are net of the option price, but
do not include deductions for taxes or other expenses associated with the
exercise. Actual gains, if any, on stock option exercises will depend on the
future performance of Westport common stock, the option holder's continued
employment through the option period, and the date on which the options are
exercised.
(5) As of August 21, 2001, the effective time of the Merger, Mr. Whitham serves
as President and Chief Executive Officer of Westport.
(6) Mr. Shonsey resigned from Old Westport on May 31, 2001.
(7) Mr. Kleinpeter resigned from Old Westport on January 31, 2001.
79
STOCK OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following tables contain certain information concerning stock options
exercised during 2000 and the value of unexercised options at December 31, 2000
for the named executive officers of each of Belco and Old Westport.
STOCK OPTION EXERCISES AND FISCAL YEAR-END VALUES OF BELCO
<Table>
<Caption>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 2000(#)(1) DECEMBER 31, 2000($)(2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ----------- ------------- ----------- -------------
Robert A. Belfer(3)...... -- -- -- -- -- --
Chairman of the Board
and Chief Executive
Officer
Laurence D. Belfer(4).... -- -- 96,000 124,000 $ 98,588 $467,677
Vice Chairman
Grant W. Henderson(5).... -- -- 72,000 198,000 $248,750 $995,000
President and Chief
Operating Officer
Dominick J. Golio(6)..... -- -- 60,000 80,000 $ 79,000 $291,625
Senior Vice
President -- Finance,
Chief Financial
Officer, Secretary and
Treasurer
Shiv K. Sharma(7)........ -- -- 39,000 36,000 $ 24,875 $123,875
Senior Vice
President --
Engineering
</Table>
- ---------------
(1) On August 21, 2001, the effective time of the Merger, all of the options
became fully vested and exercisable notwithstanding any exercisability or
vesting provisions.
(2) The value of each in-the-money stock option is equal to the difference
between the closing price of the Belco common stock on the NYSE on December
29, 2000 of $12.4375 and the per share exercise price of the stock option.
(3) Robert A. Belfer resigned from Belco effective as of August 21, 2001 and is
currently a director of Westport.
(4) Laurence D. Belfer resigned from Belco effective as of August 21, 2001 and
is currently a director of Westport.
(5) Mr. Henderson resigned from Belco effective as of August 21, 2001 and is
currently Westport's Executive Vice President and General
Manager -- Southern Division.
(6) Mr. Golio resigned from Belco effective as of August 21, 2001, the effective
time of the Merger.
(7) Mr. Sharma resigned from Belco effective as of August 21, 2001, the
effective time of the Merger.
80
STOCK OPTION EXERCISES AND FISCAL YEAR-END VALUES OF OLD WESTPORT
<Table>
<Caption>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 2000(#) DECEMBER 31, 2000($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Donald D. Wolf.............. -- -- -- 900,000 -- 8,964,750
Chairman, Chief Executive
Officer
Barth E. Whitham(2)......... -- -- -- 337,500 -- 3,234,750
President, Chief Operating
Officer, Secretary
James H. Shonsey(3)......... -- -- -- 38,812 -- 430,425
Chief Financial Officer
Brian K. Bess............... -- -- -- 77,710 -- 664,754
Vice
President -- Engineering
Klein P. Kleinpeter(4)...... -- -- -- 45,000 -- 499,050
Vice President and General
Manager, Gulf Coast
</Table>
- ---------------
(1) The value of each unexercised in-the-money stock option is equal to the
difference between the closing price of Old Westport common stock on the
NYSE on December 29, 2000 of $21.94 per share and the exercise price of the
stock option.
(2) As of August 21, 2001, the effective time of the Merger, Mr. Whitham serves
as President and Chief Executive Officer of Westport.
(3) Mr. Shonsey resigned from Old Westport on May 31, 2001.
(4) Mr. Kleinpeter resigned from Old Westport on January 31, 2001.
The following table sets forth certain information with respect to the
compensation for the year ended December 31, 2001 for the chief executive
officer and the four other most highly compensated executive officers of
Westport. These executive officers' annual compensation amounts in the table
exclude perquisites and other personal benefits for individuals for whom the
aggregate amount of such compensation does not exceed the lesser of (i) $50,000
and (ii) 10% of the total annual salary and bonus for such executive officer in
that year.
SUMMARY COMPENSATION TABLE OF WESTPORT
<Table>
<Caption>
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION(*) ----------------------------
------------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION AWARDS($) OPTIONS/SARS(#)
- --------------------------- ---- --------- -------- ------------ ---------- ---------------
Donald D. Wolf...................... 2001 $356,557 $100,000 $ 14,358(1) $ 42,750 0
Chairman, Chief Executive Officer
Barth E. Whitham.................... 2001 $246,847 $ 65,000 $ 20,475(1) $ 32,063 0
President, Chief Operating Officer
Brian K. Bess....................... 2001 $171,102 $ 40,000 $ -- $ 12,825 10,000
Vice President --
Engineering
Grant W. Henderson.................. 2001 $345,576(2) $ -- $ -- $228,700(3) 85,310(4)
Executive Vice President, General
Manager --
Southern Division
Robert R. McBride, Jr. ............. 2001 $183,333 $ -- $104,741(5) $263,925 45,000
Vice President,
General Manager --
Gulf of Mexico
</Table>
81
- ---------------
(*) The compensation committee may make additional compensation awards to the
Company's officers and employees for performance during 2001. The
Compensation Committee had not made such determinations as of the date of
this prospectus.
(1) Includes an automobile allowance and club membership dues.
(2) $245,192 paid by Belco prior to August 21, 2001, the effective time of the
Merger, and $100,384 paid by Westport after the effective time of the
Merger. Prior to the Merger, Mr. Henderson served as the President and Chief
Operating Officer of Belco and is currently the Executive Vice President and
General Manager -- Southern Division of Westport.
(3) $27,600 of the amount represents the value of 3,000 shares of restricted
common stock granted by Belco prior to the Merger, which were converted into
1,237 shares of Westport common stock on August 21, 2001, the effective time
of the Merger. The restrictions on these shares of common stock were removed
as of that date. $201,100 of the amount represents the value of 10,000
shares of restricted common stock granted by Westport after the effective
time of the Merger.
(4) Options to purchase 25,000 shares of Belco common stock and the exercise
price per share were adjusted on August 21, 2001, the effective time of the
Merger, to reflect the reverse stock split providing for the conversion of
options to purchase Belco common stock into options to purchase Westport
common stock based on a 0.4125 conversion ratio. These options were
converted into options to purchase 10,310 shares of Westport common stock,
which became immediately vested and exercisable as of the effective time of
the Merger. Options to purchase 75,000 shares of Westport common stock were
granted by Westport after the effective time of the Merger.
(5) Reimbursement for moving expenses.
The following table sets forth information concerning stock options granted
to the named executive officers of Westport in 2001.
STOCK OPTIONS GRANTED BY WESTPORT
<Table>
<Caption>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE PER OPTION TERMS($)(1)
OPTIONS/SARS EMPLOYEES IN SHARE EXPIRATION -----------------------
NAME GRANTED(#) 2001 ($/SHARE) DATE 5%/($) 10%($)
- ---- ----------------- ------------ --------- ---------- --------- -----------
Donald D. Wolf......... -- -- -- -- -- --
Chairman,
Chief Executive
Officer
Barth E. Whitham....... -- -- -- -- -- --
President,
Chief Operating
Officer
Brian K. Bess.......... 10,000(2) 1.27% 31.07 5/18/2011 195,000 495,000
Vice President --
Engineering
Grant W. Henderson..... 10,310(3) 1.31% 22.303 3/1/2011 145,000 366,000
Executive Vice
President -- 75,000(2) 9.51% 20.11 8/21/2011 949,000 2,404,000
General Manager --
Southern Division
Robert R. McBride,
Jr. ................. 35,000(2) 4.44% 19.55 2/1/2001 430,000 1,091,000
Vice President -- 10,000(2) 1.27% 31.07 5/18/2001 195,000 495,000
General Manager --
Gulf of Mexico
</Table>
- ---------------
(1) In accordance with the rules of the SEC, the amounts shown on this table
represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. These gains
82
are based on the assumed rates of stock appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date and do not reflect Westport's estimates or projections
of the future price of Westport common stock. The gains shown are net of the
option price, but do not include deductions for taxes or other expenses
associated with the exercise. Actual gains, if any, on stock option
exercises will depend on the future performance of Westport common stock,
the option holder's continued employment through the option period, and the
date on which the options are exercised.
(2) Non-statutory stock options, which were granted under Westport's 2000 Stock
Incentive Plan. The options expire ten year from the date of grant and vest
1/3 on each anniversary of the grant.
(3) The number of securities and the exercise price per share were adjusted on
August 21, 2001, the effective time of the Merger, to reflect the reverse
stock split providing for the conversion of options to purchase Belco common
stock into options to purchase Westport common stock based on a 0.4125
conversion ratio. As a result, incentive stock options to purchase 13,297
shares of Belco common stock and non-statutory stock options to purchase
11,697 shares of Belco common stock granted under Belco's 1996 Stock
Incentive Plan were converted into incentive stock options to purchase 5,485
shares of Westport common stock and non-statutory stock options to purchase
4,825 shares of Westport common stock. The options became immediately vested
and exercisable on August 21, 2001. The options expire ten years from the
date of grant.
The following table contains certain information concerning stock options
exercised during 2001 and the value of unexercised options as of December 31,
2001 for the named executives of Westport.
STOCK OPTION EXERCISES AND FISCAL YEAR-END VALUES OF WESTPORT
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED OPTIONS MONEY OPTIONS AT
AT DECEMBER 31, 2001(#) DECEMBER 31, 2001(#)(1)
SHARES ACQUIRED VALUE --------------------------------- -----------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ------------ ---------------- ------------ --------------
Donald D. Wolf....... -- -- 300,000(3) 600,000 1,625,000 3,250,000
Chairman,
Chief Executive
Officer
Barth E. Whitham..... -- -- 112,500(3) 225,000 568,750 1,137,500
President,
Chief Operating
Officer
Brian K. Bess........ -- -- 25,904(3) 61,806 114,205 228,410
Vice President --
Engineering
Grant W. Henderson... -- -- 121,683(4) 75,000 228,195 --
Executive Vice
President --
General Manager --
Southern Division
Robert R. McBride,
Jr. ............... -- -- -- 45,000 -- --
Vice President --
General Manager --
Gulf of Mexico
</Table>
83
- ---------------
(1) The value of each unexercised in-the-money stock option is equal to the
difference between the closing price of Westport common stock on the NYSE on
December 31, 2001 of $17.35 per share and the exercise price of the stock
option.
(2) Non-statutory stock options. The options expire ten year from the date of
grant and vest 1/3 on each anniversary of the grant.
(3) Non-statutory stock options. The options expire ten years from the date of
grant.
(4) The number of securities and the exercise price per share were adjusted on
August 21, 2001, the effective time of the Merger, to reflect the reverse
stock split providing for the conversion of options to purchase Belco common
stock into options to purchase Westport common stock based on a 0.4125
conversion ratio. As a result, options to purchase 294,989 shares of Belco
common stock granted under Belco's 1996 Stock Incentive Plan were converted
into options to purchase 121,683 shares of Westport common stock. The
options became immediately vested and exercisable on August 21, 2001. The
options expire ten years from the date of grant.
EMPLOYEE BENEFIT PLANS OF WESTPORT
Employee Benefit Plan. Effective October 17, 2000, Old Westport adopted
the Westport Resources Corporation 2000 Stock Incentive Plan. The plan merged,
amended and restated the EPGC Directors' Stock Option Plan and the EPGC 2000
Stock Option Plan, each of which was adopted effective March 1, 2000. As amended
and restated, the plan contains terms regarding stock option awards that are
substantially similar to the terms of the predecessor plans, other than with
respect to the vesting period for options issued pursuant to the EPGC Directors'
Stock Option Plan, which formerly vested in full on the date of grant and now
vest on a schedule determined by Westport's Compensation Committee. Further, the
plan contemplates awards of stock appreciation rights, restricted stock and
other performance awards, in addition to the stock option grants contemplated by
the predecessor plans. Immediately prior to the Merger, the plan was amended to
increase the number of shares of common stock authorized and reserved under the
plan from 4,110,813 shares to 6,232,484 shares. In the Merger, we assumed the
obligations of Old Westport under the 2000 Stock Incentive Plan, and options to
purchase Old Westport common stock became options to purchase Westport common
stock on a one-for-one basis.
As of December 31, 2001, 1,197,000 options had been granted under the plan.
As of December 31, 2001, 175,333 options to purchase Westport common stock
issued under the plan became fully vested and immediately exercisable. These
options terminate not later than 10 years from the date of grant. In addition,
as of December 31, 2001, 36,550 shares of restricted stock were granted under
the plan.
Retirement Savings Plan. Old Westport assumed a retirement savings plan
pursuant to the merger between Westport Oil and Gas Company, Inc. and Equitable
Production (Gulf) Company. This savings and profit sharing plan covers all of
our employees. The plan is subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended, and Section 401(k) of the Code.
The assets of the plan are held and the related investments are executed by
the plan's trustee. Participants in the plan have investment alternatives in
which to place their funds. We pay all administrative fees on behalf of the
plan. The plan currently provides for discretionary matching by us of 75% of
each participant's contributions up to 6% of the participant's compensation.
Westport contributed $341,200 for the year ended December 31, 2001. Old Westport
contributed $155,000 for the year ended December 31, 2000 and Westport Oil and
Gas Company, Inc. (prior to Old Westport's assumption of the plan) contributed
$114,000 and $104,000 for the years ended December 31, 1999 and 1998,
respectively.
Annual Incentive Plan. The Westport Annual Incentive Plan 2000 provides an
opportunity for specified employees within a business unit to be eligible for a
bonus based on both Westport and the business unit achieving various performance
objectives. Under the plan, the administrator of the plan annually determines
the goals that each business unit must achieve, as well as the target bonus
amount for achieving the goals. The administrator also establishes our
performance goal, which must be achieved before any bonuses will be paid out
under this plan. If we obtain our performance goal and the individual business
units achieve their respective goals, 25% of the bonus amount allocated to a
business unit will be paid out to each participating
84
employee within such business unit and 75% of the bonus will be awarded to
various individuals within such business unit on a discretionary basis.
Royalty Participation Program. On October 17, 1997, Westport Overriding
Royalty LLC was established, through which Old Westport implemented a royalty
participation program. This program is designed to provide an incentive for
specified key employees to contribute to our success. Under the terms of the
program, participants can receive a percentage of an overriding royalty working
interest on prospects owned by us. Percentages are established at our
discretion, but in no event exceed 2% of our net interest. Effective March 31,
2000, officers or directors were permitted to retain existing royalty interests
but are no longer eligible to receive any new royalty interests from this
program.
Belco's 1996 Stock Incentive Plan. Prior to the Merger, Belco adopted its
1996 Stock Incentive Plan, which authorizes the stock option committee to award
incentive stock options, nonstatutory stock options and restricted stock to
employees of Belco. The aggregate maximum number of shares that may be issued
pursuant to awards granted under Belco's 1996 Stock Incentive Plan is 3,250,000
shares of common stock. Prior to the Merger, Belco's stock option committee
generally granted incentive stock options; however, in the case of the value of
a grant of stock options totaling more than $100,000, Belco's stock option
committee was authorized to grant the remainder as non-statutory stock options,
both at an exercise price equal to the fair market value of Belco common stock
on the date of the grant. Options issued under Belco's 1996 Stock Incentive Plan
generally have ten-year terms, with exercise restrictions that lapse over a
five-year period. Belco's stock option committee was also authorized to grant
awards of restricted stock which are characterized as shares of Belco common
stock that are subject to forfeiture under the circumstances specified by the
stock option committee at the time of the award of such shares. Stock option
grants were designed to align the long-term interests of Belco's employees with
those of its shareholders by directly linking compensation to shareholder
return, as well as by enabling employees to develop and maintain a significant,
long-term equity ownership position in Belco. During 2001, options to purchase
20,000, 10,000, 25,000 and 5,000 shares of Belco common stock were granted to
Messrs. Laurence D. Belfer, Dominick J. Golio, Grant W. Henderson and Shiv K.
Sharma, respectively. At the effective time of the Merger, these options were
converted into options to purchase 8,249, 4,125, 10,310 and 2,062 shares of
Westport common stock, respectively. As of the effective time of the Merger,
Messrs. Belfer, Golio and Sharma resigned as officers of Belco, and Mr.
Henderson became Executive Vice President -- Southern Division of Westport.
As a result of the Merger, stock options issued under Belco's 1996 Stock
Incentive Plan became fully vested and exercisable at the effective time of the
Merger. In addition, the restrictions on disposition and forfeiture provisions
on all restricted shares of Belco common stock issued under Belco's 1996 Stock
Incentive Plan terminated on August 21, 2001, the effective time of the Merger.
Since the effective time of the Merger, Westport has not awarded any incentive
stock options, nonstatutory stock options, or restricted stock under Belco's
1996 Stock Incentive Plan to any of its employees and does not currently intend
to grant any awards under such plan in the future.
DIRECTOR COMPENSATION
BELCO
Pursuant to Belco's 1996 Nonemployee Directors' Stock Option Plan, or the
Directors' Plan, directors of Belco who were not officers or employees of Belco
or any of its subsidiaries, also known as Non-Employee Directors, each received,
as of the date of each annual meeting of the shareholders of Belco, a
nonqualified stock option to purchase 6,000 shares of Belco common stock. Each
option has an exercise price equal to the fair market value of the Belco common
stock on the NYSE on the date of grant. The exercise price may be paid in cash,
in shares of Belco common stock having a fair market value equal to the purchase
price thereof, or by a combination of such means of payment. The number of
shares covered by each option and the exercise price per share are
proportionately adjusted in the event of a stock split, reverse stock split,
stock dividend, or similar capital adjustment effected without receipt of
consideration by Belco. The aggregate number of shares of common stock that may
be issued pursuant to the exercise of options granted under the Directors' Plan
cannot, on the date of the grant of any such option, exceed an amount equal to
0.5% of the number of then
85
outstanding shares of common stock. Shares issuable pursuant to the Directors'
Plan may be authorized but unissued shares or reacquired shares, and may be
purchased for this purpose.
Options granted under the Directors' Plan have a maximum term of ten years
and vest in three equal annual installments beginning on the first anniversary
of the date of grant. Notwithstanding the foregoing, upon the occurrence of a
"Change of Control" as defined in the Directors' Plan while a Non-Employee
Director is a member of the Board of Directors, or in the event that a
Non-Employee Director's membership on Belco's board of directors terminates by
reason of death or disability, each option then held by such Non-Employee
Director is exercisable in full. As a result of the Merger, all of the options
issued under the Directors' Plan became fully vested and exercisable
notwithstanding any exercisability or vesting provisions.
Pursuant to the Directors' Plan, on May 9, 2001, each of Messrs. Arnold,
Berlin, Saltz and Dr. Allison were granted an option to purchase 6,000 shares of
Belco common stock at an exercise price of $8.90 per share (the fair market
value of the Belco common stock on the NYSE on such date). On August 21, 2001,
the effective time of the Merger, the number of shares subject to these options
and the exercise price per share were adjusted to reflect the reverse stock
split in connection with the conversion of options to purchase Belco common
stock into options to purchase Westport common stock, based on a 0.4125
conversion ratio. As a result, each option to purchase 6,000 shares of Belco
common stock was converted into an option to purchase 2,475 shares of Westport
common stock and became immediately vested and exercisable. Messrs. Arnold,
Berlin, Saltz and Dr. Allison resigned as directors of Belco at the effective
time of the Merger and each of their respective options to purchase 2,475 shares
of Westport common stock lapsed on November 21, 2001.
During 2001, each of Messrs. Arnold and Berlin and Dr. Allison received an
annual retainer of $12,500 payable quarterly in arrears, and was reimbursed for
expenses incurred in attending meetings of the Belco board of directors and
committees thereof.
WESTPORT
Old Westport's outside directors received a retainer of $10,000 per year
for serving as members of the board of directors of Old Westport and could have
elected to receive this amount in the form of shares of Old Westport common
stock. In addition, each director received $2,000 per board meeting and $750 per
sub-committee meeting attended and was granted an annual stock option to
purchase 4,500 shares of our common stock, which vested annually over two years.
After the Merger, our outside directors are compensated by an annual retainer
fee of $20,000, plus fees of $2,000 per meeting attended in person and $1,000
per meeting attended by telephone, plus annual grants of options to purchase
4,500 shares of common stock of Westport granted at the time of each annual
meeting of stockholders and vesting over two years. Fees are payable in cash or,
at the election of each director, in common stock of Westport.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SHAREHOLDERS AGREEMENT
In connection with the Merger, Westport Energy LLC, or WELLC, ERI
Investments, Inc., or ERI, and a group of Belco stockholders, or the Belfer
Group, entered into a shareholders agreement with Old Westport and Belco. The
shareholders agreement contains provisions that determine how WELLC, ERI and the
Belfer Group will vote their respective shares of Westport common stock and
that, among other things, will have the effect, based on their share ownership,
of giving these parties the ability to determine the composition of our board of
directors and otherwise affect our corporate governance and business activities,
including provisions whereby:
- WELLC, ERI and the Belfer Group must vote their shares according to and
consistent with the terms of the shareholders agreement;
- Westport, WELLC, ERI and the Belfer Group are obligated to take or cause
to be taken all lawful action necessary to ensure that our articles of
incorporation and bylaws are at all times consistent with the provisions
of the shareholders agreement;
86
- Our board of directors will be comprised of 11 directors, two of whom
must be independent directors, as such term is defined in the
shareholders agreement, divided into three classes, with directors in
each class having a three-year term following a transition period in
which the initial Class I directors serve a one-year term, the initial
Class II directors serve a two-year term and the initial Class III
directors serve a three-year term;
- WELLC and ERI each have the right to nominate one director to Class III,
one director to Class II and one director to Class I and the Belfer Group
has the right to nominate one director to Class III and one director to
Class I. The number of directors any such party may nominate is reduced
if such party's ownership of our common stock falls below specified
percentages of the total number of shares of our common stock then
outstanding;
- WELLC, ERI and the Belfer Group, respectively, each have the right (1)
subject to applicable law, to remove, with or without cause, any director
nominated in accordance with the terms of the shareholders agreement by
WELLC, ERI or the Belfer Group, respectively, and (2) to nominate any
replacement for a director nominated in accordance with the terms of the
new shareholders agreement by WELLC, ERI or the Belfer Group,
respectively, upon the death, resignation, retirement, disqualification
or removal from office of such director. Our board of directors will duly
appoint as a director each person so nominated to fill a vacancy on the
board of directors. Notwithstanding the foregoing, pursuant to Nevada
law, an incumbent director may not be removed from office except upon the
affirmative vote of at least two-thirds of the issued and outstanding
voting power;
- We may take and may permit our subsidiaries to take and engage in the
following actions only upon receiving supermajority approval (as such
term is defined in the shareholders agreement) of our board of directors:
- subject to certain conditions, neither ERI, WELLC nor the Belfer Group
will acquire any additional shares of our common stock without the
consent of the other parties;
- Issuance of Common Stock. Issue, sell, grant or award or enter into any
agreement to issue, sell, grant or award any of our common stock other
than (1) pursuant to agreements or obligations in existence as of the
effective time of the Merger, (2) the issuance of our common stock
pursuant to any rights or agreements including without limitation any
security convertible or exchangeable into or exercisable for, with or
without consideration, our common stock so long as such rights or
agreements received supermajority approval and (3) the grant of options
and the issuance of restricted stock under our stock incentive plans for
the benefit of our employees and directors and the issuance of our
common stock upon the exercise of such options;
- Debt to Total Capitalization. Incur funded debt of Westport and our
subsidiaries so that the ratio of debt of Westport and our subsidiaries
to total capitalization is greater than 0.4 to 1.0; and
- Sale Transactions. Enter into any merger or consolidation, sale of all
or substantially all of our assets or sale of assets or transfer to a
third party by sale of assets, merger or otherwise by Westport or any of
our subsidiaries (in one transaction or a series of related
transactions) of any subsidiary or the assets or business of Westport or
a subsidiary thereof which involves more than $150 million (or such
other amount, established by resolution of our board of directors
(approved by supermajority approval) from time to time), of our total
assets and our subsidiaries taken as a whole, including a sale of
Westport effected by means of a sale of our common stock, but excluding,
however, dispositions of assets in the ordinary course of business
(including, but not limited to, oil and natural gas production);
- each of WELLC, ERI and the Belfer Group is granted unlimited piggyback
registration rights;
- each of WELLC and ERI is granted three demand registration rights and the
Belfer Group is granted two demand registration rights; and
- each of WELLC, ERI and the Belfer Group agree to enter into holdback
agreements if requested by the underwriters in underwritten offerings.
87
ENRON
Prior to the Merger, Belco entered into a substantial portion of its
natural gas and crude oil commodity swap agreements and option agreements with
Enron North America Corp., or ENA, formerly known as Enron Capital & Trade
Resources Corp., a wholly owned subsidiary of Enron Corp. Mr. Robert A. Belfer,
one of our directors, is a member of the Board of Directors of Enron Corp. These
agreements were entered into in the ordinary course of business of Belco have
are on terms that we believe are no less favorable to Belco than the terms of
similar arrangements with third parties. Pursuant to the terms of these
agreements Belco paid ENA a net amount of approximately $32 million in fiscal
year 2000 and approximately $45 million in 2001.
On November 29, 2001, we terminated our commodity derivative contracts with
ENA. We exercised our rights pursuant to the early termination provisions of
such contracts as a result of ENA's ratings downgrades and related events. ENA
subsequently declared bankruptcy. We believe that we had the legal right to
terminate these agreements, but ENA may challenge our termination in bankruptcy
court. Applying the mark-to-market and setoff methodology of our contracts with
ENA, we have calculated that we owed ENA a net $204,000 for all hedging
transactions outstanding under our ENA contracts. Although we believe this
methodology was correct, it is possible that ENA will challenge our calculations
and claim larger amounts owed.
We have also terminated our production sales contracts with ENA or its
affiliates except for an ongoing month-to-month sales arrangement with EOTT
Energy Partners, L.P., a publicly traded entity owned in part by Enron Corp.
which has a viable credit line and has supported its payment obligations to us
by posting letters of credit. We believe that our exposure to potential loss for
payment on production delivered to Enron affiliates is less than $1 million.
OFFICE LEASE
Belco paid Robert A. Belfer, former Chairman of the Board and Chief
Executive Officer of Belco and one of our directors, a fee of $269,582 during
2000 for office space and services provided through such office. The fee is
based on the actual cost of such office space pro-rated to the amount utilized
in our operations. We believe the fee compares favorably to the terms which
might have been available from a non-affiliated party. We will not use this
office space, nor reimburse Mr. Belfer for this fee, after December 31, 2001.
RESTRICTED STOCK
Pursuant to current federal income tax laws, recipients of awards of
restricted stock under Belco's 1996 Stock Incentive Plan are deemed to have
income equal to the fair market value of the vested shares of our common stock
on the date of vesting. As of December 31, 2000, Dominick J. Golio was indebted
to us in the amount of $88,078, representing federal income taxes paid by us on
behalf of Dominick J. Golio that arose pursuant to the vesting of Mr. Golio's
restricted stock. Interest is not being charged on this indebtedness. Since the
effective time of the Merger, Mr. Golio has relinquished his restricted stock
and some of his options to satisfy a portion of his indebtedness to us. He is
currently indebted to us in the amount of $69,320.
88
SECURITY OWNERSHIP OF WESTPORT'S PRINCIPAL STOCKHOLDERS
AND MANAGEMENT
The following table sets forth certain information, as of November 30,
2001, regarding beneficial ownership of Westport common stock by (1) each
person, or group of affiliated persons, known by Westport to own beneficially 5%
or more of its outstanding common stock, (2) each of Westport's directors and
executive officers and (3) all of Westport's executive officers and directors as
a group. The number of shares of Westport common stock outstanding as of
November 30, 2001 was 52,058,382 shares.
<Table>
<Caption>
BENEFICIAL OWNERSHIP(1)
------------------------
NAME OF BENEFICIAL OWNER SHARES PERCENT
- ------------------------ ------------ ---------
Westport Energy LLC(2)...................................... 35,591,676 68.4
21 Glen Oaks Ave
Summit, NJ 07901
ERI Investments, Inc.(3).................................... 35,591,676 68.4
801 West Street, 2nd Floor
Wilmington, Delaware 19804
Richard J. Haas(4).......................................... 35,591,676 68.4
Robert A. Haas**(4)......................................... 35,591,676 68.4
Eugen von Liechtenstein(4).................................. 35,591,676 68.4
Graham Garner(4)............................................ 35,591,676 68.4
Robert A. Belfer**(5)....................................... 35,831,093 68.5
Renee E. Belfer(6).......................................... 35,600,060 68.4
Belfer Corp.(7)............................................. 35,688,561 68.4
The Robert A. and Renee E. Belfer Family Foundation(8)...... 35,591,676 68.4
Trust for the Benefit of Elizabeth Kones Belfer (T-6)(9).... 35,591,676 68.4
Trust for the Benefit of Elizabeth Kones Belfer (T-7)(10)... 35,591,676 68.4
Renee Holdings Partnership, L.P.(11)........................ 35,666,203 68.4
A&B Investors, Inc.(12)..................................... 35,656,887 68.4
Belwest Petroleum, Inc.(13)................................. 35,591,676 68.4
LDB Corp.(14)............................................... 35,591,676 68.4
Robert A. Belfer Family Trust(15)........................... 35,591,676 68.4
The Laurence D. Belfer Family Foundation(16)................ 35,591,676 68.4
Vantz Limited Partnership(17)............................... 35,591,676 68.4
Laurence D. Belfer**(18).................................... 35,591,676 68.4
Jack Saltz(19).............................................. 35,591,676 68.4
Saltz Investment Group, LLC(20)............................. 35,591,676 68.4
Jack and Anita Saltz Foundation(21)......................... 35,591,676 68.4
Donald D. Wolf**(22)........................................ 335,750 *
Barth E. Whitham**(23)...................................... 147,750 *
Lon McCain**(24)............................................ 2,500 *
Grant W. Henderson**(25).................................... 165,095 *
Howard L. Boigon**(26)...................................... 2,500 *
Kenneth D. Anderson**(27)................................... 10,298 *
Lynn S. Belcher**(28)....................................... 37,545 *
Brian K. Bess**(29)......................................... 26,504 *
Robert R. McBride, Jr.**(30)................................ 13,500 *
James M. Funk**(31)......................................... 5,422 *
</Table>
89
<Table>
<Caption>
BENEFICIAL OWNERSHIP(1)
------------------------
NAME OF BENEFICIAL OWNER SHARES PERCENT
- ------------------------ ------------ ---------
Murry S. Gerber**(32)....................................... 35,598,176 68.4
Peter R. Hearl**(33)........................................ 3,052 *
David L. Porges**(34)....................................... 35,593,676 68.4
Michael Russell**........................................... -- --
Randy Stein**(35)........................................... 3,052 *
William F. Wallace**(36).................................... 15,920 *
Directors and executive officers as a group(37)............. 36,608,481 69.2
</Table>
- ---------------
* Less than one percent.
** Director or Executive Officer of Westport.
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. Shares of Westport common stock subject to options, warrants,
convertible notes and convertible preferred stock currently exercisable or
convertible, or exercisable or convertible within 60 days of November 30,
2001, are deemed outstanding for computing the percentage of the person or
entity holding such securities, but are not outstanding for computing the
percentage of any other person or entity. Except as indicated by footnote
and subject to community property laws where applicable, the persons named
in the table above have sole voting and investment power with respect to
all shares of Westport common stock shown as beneficially owned by them.
(2) Based on a report on Schedule 13D filed with the SEC on August 31, 2001 and
Westport's records. This number includes (i) 14,238,001 shares of Westport
common stock held by WELLC subject to the Second Amended and Restated
Shareholders Agreement, dated as of July 20, 2001, between Westport, Belco,
ERI, WELLC and certain stockholders of Belco (the "Belfer Group") named
therein (the "Shareholders Agreement") and (ii) an aggregate of 21,353,675
shares of Westport common stock held by ERI and the Belfer Group of which
WELLC may be deemed to have shared voting power and thus to be the
beneficial owner pursuant to the Shareholders Agreement. The Belfer Group
is defined to include the following stockholders of Westport: Robert A.
Belfer, Renee E. Belfer, Laurence D. Belfer, The Robert A. and Renee E.
Belfer Foundation ("Belfer Foundation"), Belfer Corp. ("BC"), Belwest
Petroleum, Inc. ("BPI"), A&B Investors, Inc. ("A&B"), Renee Holdings
Partnership, L.P. ("Renee Holdings"), Trust for the benefit of Elizabeth
Kones Belfer (T-6) ("T-6"), Trust for the benefit of Elizabeth Kones Belfer
(T-7) ("T-7"), The Laurence D. Belfer Family Foundation (the "LDB
Foundation"), LDB Corp. ("LDB"), Robert A. Belfer 1990 Family Trust (the
"RAB Trust"), Vantz Limited Partnership ("Vantz LP"), Jack Saltz, Saltz
Investment Group, LLC ("Saltz Investment") and Jack and Anita Saltz
Foundation ("JAS Foundation"). WELLC disclaims beneficial ownership of
21,353,675 shares of Westport common stock held by ERI and the Belfer Group
subject to the Shareholders Agreement. All of the interests of WELLC are
held by Westport Investments Limited, a Bahamas corporation. All voting
decisions with respect to the shares of Westport held by WELLC are made by
the board of directors of Westport Investments Limited. No member of the
board of directors of Westport Investments Limited holds any position with
Westport.
(3) Based on a report on Schedule 13D filed with the SEC on August 31, 2001 and
Westport's records. This number includes (i) 13,911,152 shares of Westport
common stock held by ERI subject to the Shareholders Agreement and (ii) an
aggregate of 21,680,524 shares of Westport common stock held by WELLC and
the Belfer Group subject to the Shareholders Agreement of which ERI may be
deemed to have shared voting power and thus to be the beneficial owner
pursuant to the Shareholders Agreement. ERI disclaims beneficial ownership
of 21,680,524 shares of Westport common stock held by WELLC and the Belfer
Group subject to the Shareholders Agreement. ERI is an indirect,
wholly-owned subsidiary of Equitable Resources, Inc. Murry S. Gerber, a
director of Westport, is Chairman, President and Chief Executive Officer of
Equitable Resources, Inc. David L. Porges, a director of Westport, is
Executive Vice President and Chief Financial Officer of Equitable
Resources, Inc. James M. Funk, a
90
director of Westport, is President of Equitable Production Company, an
indirect, wholly-owned subsidiary of Equitable Resources, Inc.
(4) Includes (i) 14,238,001 shares of Westport common stock held by WELLC and
(ii) an aggregate of 21,353,675 shares of Westport common stock held by ERI
and the Belfer Group subject to the Shareholders Agreement, of which shares
WELLC may be deemed to be the beneficial owner pursuant to the Shareholders
Agreement. All of the interests of WELLC are held by Westport Investments
Limited. The board of directors of Westport Investments Limited consists of
Dr. Richard J. Haas, Robert A. Haas, Eugen von Liechtenstein and Graham
Garner, each of whom disclaims beneficial ownership of the shares of
Westport common stock held by WELLC, ERI and the Belfer Group. The address
of Dr. Haas and each of Messrs. Haas, von Liechtenstein and Garner is c/o
Westport Resources Corporation, 410 Seventeenth Street, Suite 2300, Denver,
Colorado 80202.
(5) Based on a report on Schedule 13D/A filed with the SEC on September 5, 2001
and Westport's records. This number includes (i) 2,407,093 shares of
Westport common stock held by Robert A. Belfer subject to the Shareholders
Agreement, (ii) 6,000 shares of Westport's 6 1/2% convertible preferred
stock held by Mr. Belfer, which are convertible into 2,794 shares of
Westport common stock, (iii) an aggregate of 508,000 shares of Westport's
6 1/2% convertible preferred stock held by BC, A&B and Renee Holdings,
which are convertible into 236,623 shares of Westport common stock and of
which Mr. Belfer may be deemed to have shared voting and dispositive
powers, and (iv) an aggregate of 33,184,583 shares of Westport common stock
held by WELLC, ERI and members of the Belfer Group, excluding Mr. Belfer,
subject to the Shareholders Agreement, with respect to which shares Mr.
Belfer may be deemed to have shared voting power pursuant to the
Shareholders Agreement. Among the shares held by the Belfer Group subject
to the Shareholders Agreement, Mr. Belfer may be deemed to share voting and
dispositive powers with respect to an aggregate of 1,343,084 shares of
Westport common stock held by BC, BPI, the Belfer Foundation, T-6 and Renee
Holdings by virtue of his position as the sole executive officer and
director of BC and BPI, Donor Trustee of Belfer Foundation, co-trustee of
T-6 and general partner of Renee Holdings. Mr. Belfer disclaims beneficial
ownership of the shares of Westport common stock held by WELLC, ERI and
members of the Belfer Group subject to the Shareholders Agreement,
excluding shares held by Mr. Belfer, BC, BPI, Belfer Foundation, T-6 and
Renee Holdings. The address of Mr. Belfer is 767 Fifth Avenue, 46th Floor,
New York, New York 10153.
(6) Based on a report on Schedule 13D/A filed with the SEC on September 5, 2001
and Westport's records. This number includes (i) 1,157,310 shares of
Westport common stock held by Ms. Belfer subject to the Shareholders
Agreement, (ii) 18,000 shares of Westport's 6 1/2% convertible preferred
stock held by Ms. Belfer, which are convertible into 8,384 shares of
Westport common stock, and (iii) an aggregate of 34,434,366 shares of
Westport common stock held by WELLC, ERI and members of the Belfer Group,
excluding Ms. Belfer, subject to the Shareholders Agreement, with respect
to which shares Ms. Belfer may be deemed to have shared voting power
pursuant to the Shareholders Agreement. Among the shares held by the Belfer
Group subject to the Shareholders Agreement, Ms. Belfer may be deemed to
have shared voting and dispositive powers with respect to an aggregate of
415,342 shares of Westport common stock held by T-6 and T-7 due to her
position as co-trustee of T-6 and sole trustee of T-7. Ms. Belfer disclaims
beneficial ownership of the shares of Westport common stock held by WELLC,
ERI and members of the Belfer Group subject to the Shareholders Agreement,
excluding shares held by Ms. Belfer, T-6 and T-7. The address of Ms. Belfer
is 767 Fifth Avenue, 46th Floor, New York, New York 10153.
(7) Based on a report on Schedule 13D/A filed with the SEC on September 5, 2001
and Westport's records. This number includes (i) 348,674 shares of Westport
common stock held by BC subject to the Shareholders Agreement, (ii) 208,000
shares of Westport's 6 1/2% convertible preferred stock held by BC, which
are convertible into 96,885 shares of Westport common stock, and (iii) an
aggregate of 35,243,002 shares of Westport common stock held by WELLC, ERI
and members of the Belfer Group, excluding BC, subject to the Shareholders
Agreement, with respect to which shares BC may be deemed to have shared
voting power pursuant to the Shareholders Agreement. BC disclaims
beneficial ownership of the shares of Westport common stock held by WELLC,
ERI and members of the Belfer
91
Group, excluding BC, subject to the Shareholders Agreement. The address of
BC is c/o Robert A. Belfer, 767 Fifth Avenue, 46th Floor, New York, New
York 10153.
(8) Based on a report on Schedule 13D/A filed with the SEC on September 5, 2001
and Westport's records. This number includes (i) 294,318 shares of Westport
common stock held by Belfer Foundation and (ii) an aggregate of 35,297,358
shares of Westport common stock held by WELLC, ERI and members of the
Belfer Group, excluding Belfer Foundation, subject to the Shareholders
Agreement, with respect to which shares Belfer Foundation may be deemed to
have shared voting power pursuant to the Shareholders Agreement. Belfer
Foundation disclaims beneficial ownership of the shares of Westport common
stock held by WELLC, ERI and members of the Belfer Group, excluding Belfer
Foundation, subject to the Shareholders Agreement. The address of Belfer
Foundation is c/o Robert A. Belfer, 767 Fifth Avenue, 46th Floor, New York,
New York 10153.
(9) Based on a report on Schedule 13D/A filed with the SEC on September 5, 2001
and Westport's records. This number includes (i) 207,671 shares of Westport
common stock held by T-6 subject to the Shareholders Agreement and (ii) an
aggregate of 35,384,005 shares of Westport common stock held by WELLC, ERI
and members of the Belfer Group, excluding T-6, subject to the Shareholders
Agreement, with respect to which shares T-6 may be deemed to have shared
voting power pursuant to the Shareholders Agreement. T-6 disclaims
beneficial ownership of the shares of Westport common stock held by WELLC,
ERI and members of the Belfer Group, excluding T-6, subject to the
Shareholders Agreement. The address of T-6 is c/o Robert A. Belfer, 767
Fifth Avenue, 46th Floor, New York, New York 10153.
(10) Based on a report on Schedule 13D/A filed with the SEC on September 5, 2001
and Westport's records. This number includes (i) 207,671 shares of Westport
common stock held by T-7 subject to the Shareholders Agreement and (ii) an
aggregate of 35,384,005 shares of Westport common stock held by WELLC, ERI
and members of the Belfer Group, excluding T-7, subject to the Shareholders
Agreement, with respect to which shares T-7 may be deemed to have shared
voting power pursuant to the Shareholders Agreement. T-7 disclaims
beneficial ownership of the shares of Westport common stock held by WELLC,
ERI and members of the Belfer Group, excluding T-7, subject to the
Shareholders Agreement. The address of T-7 is c/o Renee E. Belfer, 767
Fifth Avenue, 46th Floor, New York, New York 10153.
(11) Based on a report on Schedule 13D/A filed with the SEC on September 5, 2001
and Westport's records. This number includes (i) 492,283 shares of Westport
common stock held by Renee Holdings subject to the Shareholders Agreement,
(ii) 160,000 shares of Westport's 6 1/2% convertible preferred stock held
by Renee Holdings, which are convertible into 74,527 shares of Westport
common stock, and (iii) an aggregate of 35,099,393 shares of Westport
common stock held by WELLC, ERI and members of the Belfer Group, excluding
Renee Holdings, subject to the Shareholders Agreement, with respect to
which shares Renee Holdings may be deemed to have shared voting power
pursuant to the Shareholders Agreement. Renee Holdings disclaims beneficial
ownership of the shares of Westport common stock held by WELLC, ERI and
members of the Belfer Group, excluding Renee Holdings, subject to the
Shareholders Agreement. The address of Renee Holdings is c/o Robert A.
Belfer, 767 Fifth Avenue, 46th Floor, New York, New York 10153.
(12) Based on a report on Schedule 13D/A filed with the SEC on September 5, 2001
and Westport's records. This number includes (i) 140,000 shares of Westport
preferred stock held by A&B, which are convertible into 65,211 shares of
Westport common stock and (ii) an aggregate of 35,591,676 shares of
Westport common stock held by WELLC, ERI and members of the Belfer Group
subject to the Shareholders Agreement, with respect to which shares A&B may
have shared voting power pursuant to the Shareholders Agreement. A&B
disclaims beneficial ownership of 35,591,676 shares of Westport common
stock held by WELLC, ERI and members of the Belfer Group subject to the
Shareholders Agreement. The address of A&B is c/o Robert A. Belfer, 767
Fifth Avenue, 46th Floor, New York, New York 10153.
(13) Based on a report on Schedule 13D/A filed with the SEC on September 5, 2001
and Westport's records. This number includes (i) 136 shares of Westport
common stock held by BPI subject to the
92
Shareholders Agreement and (ii) an aggregate of 35,591,540 shares of
Westport common stock held by WELLC, ERI and members of the Belfer Group,
excluding BPI, subject to the Shareholders Agreement, with respect to which
shares BPI may be deemed to have shared voting power pursuant to the
Shareholders Agreement. BPI disclaims beneficial ownership of the shares of
Westport common stock held by WELLC, ERI and members of the Belfer Group,
excluding BPI, subject to the Shareholders Agreement. The address of BPI is
c/o Robert A. Belfer, 767 Fifth Avenue, 46th Floor, New York, New York
10153.
(14) Based on a report on Schedule 13D/A filed with the SEC on August 31, 2001
and Westport's records. This number includes 112,552 shares of Westport
common stock held by LDB subject to the Shareholders Agreement and (ii) an
aggregate of 35,479,124 shares of Westport common stock held by WELLC, ERI
and members of the Belfer Group, excluding LDB, subject to the Shareholders
Agreement, with respect to which shares LDB may be deemed to have shared
voting power pursuant to the Shareholders Agreement. LDB disclaims
beneficial ownership of the shares held by WELLC, ERI and members of the
Belfer Group, excluding LDB, subject to the Shareholders Agreement. The
address of LDB is c/o Laurence D. Belfer, 767 Fifth Avenue, 46th Floor, New
York, New York 10153.
(15) Based on a report on Schedule 13D/A filed with the SEC on August 31, 2001
and Westport's records. This number includes 230,040 shares of Westport
common stock held by the RAB Trust subject to the Shareholders Agreement
and (ii) an aggregate of 35,361,636 shares of Westport common stock held by
WELLC, ERI and members of the Belfer Group, excluding the RAB Trust,
subject to the Shareholders Agreement, with respect to which shares the RAB
Trust may be deemed to have shared voting power pursuant to the
Shareholders Agreement. The RAB Trust disclaims beneficial ownership of the
shares held by WELLC, ERI and members of the Belfer Group, excluding the
RAB Trust, subject to the Shareholders Agreement. The address of the RAB
Trust is c/o Laurence D. Belfer, 767 Fifth Avenue, 46th Floor, New York,
New York 10153.
(16) Based on a report on Schedule 13D/A filed with the SEC on August 31, 2001
and Westport's records. This number includes 5,077 shares of Westport
common stock held by the LDB Foundation subject to the Shareholders
Agreement and (ii) an aggregate of 35,586,599 shares of Westport common
stock held by WELLC, ERI and members of the Belfer Group, excluding the LDB
Foundation, subject to the Shareholders Agreement, with respect to which
shares the LDB Foundation may be deemed to have shared voting power
pursuant to the Shareholders Agreement. The LDB Foundation disclaims
beneficial ownership of the shares held by WELLC, ERI and members of the
Belfer Group, excluding the LDB Foundation, subject to the Shareholders
Agreement. The address of the LDB Foundation is c/o Laurence D. Belfer, 767
Fifth Avenue, 46th Floor, New York, New York 10153.
(17) Based on a report on Schedule 13D/A filed with the SEC on August 31, 2001
and Westport's records. This number includes 261,611 shares of Westport
common stock held by Vantz LP subject to the Shareholders Agreement and
(ii) an aggregate of 35,330,065 shares of Westport common stock held by
WELLC, ERI and members of the Belfer Group, excluding Vantz LP, subject to
the Shareholders Agreement, with respect to which shares Vantz LP may be
deemed to have shared voting power pursuant to the Shareholders Agreement.
Vantz LP disclaims beneficial ownership of shares held by WELLC, ERI and
members of the Belfer Group, excluding Vantz LP, subject to the
Shareholders Agreement. The address of Vantz LP is c/o Laurence D. Belfer,
767 Fifth Avenue, 46th Floor, New York, New York 10153.
(18) Based on a report on Schedule 13D/A filed with the SEC on August 31, 2001,
Form 4 filed with the SEC on December 17, 2001 and Westport's records. This
number includes (i) 873,031 shares of Westport common stock held by
Laurence D. Belfer subject to the Shareholders Agreement and (ii) an
aggregate of 34,718,645 shares of Westport common stock held by WELLC, ERI
and members of the Belfer Group, excluding Mr. Belfer, subject to the
Shareholders Agreement, with respect to which shares Mr. Belfer may be
deemed to have shared voting power pursuant to the Shareholders Agreement.
Among the shares held by the Belfer Group subject to the Shareholders
Agreement, Mr. Belfer may be deemed to have shared voting and dispositive
powers with respect to an aggregate of 609,280 shares of Westport common
stock held by LDB, the RAB Trust, LDB Foundation and Vantz, LP due to his
93
position as the sole director and shareholder of LDB, the sole trustee of
the RAB Trust, the sole trustee of the LDB Foundation and the sole member
of Vantz LLC, the general partner of Vantz LP. Mr. Belfer disclaims
beneficial ownership of the shares of Westport common stock held by WELLC,
ERI and members of the Belfer Group subject to the Shareholders Agreement,
excluding shares held by Mr. Belfer, LDB, RAB Trust, the LDB Foundation and
Vantz LP. The address of Mr. Belfer is 767 Fifth Avenue, 46th Floor, New
York, New York 10153.
(19) Includes (i) 6,187 shares of Westport common stock held by Mr. Saltz
subject to the Shareholders Agreement and (ii) an aggregate of 35,585,489
shares of Westport common stock held by WELLC, ERI and members of the
Belfer Group, excluding Mr. Saltz, subject to the Shareholders Agreement,
with respect to which shares Mr. Saltz may be deemed to have shared voting
power pursuant to the Shareholders Agreement. Mr. Saltz disclaims
beneficial ownership of the shares of Westport common stock held by WELLC,
ERI and members of the Belfer Group, excluding Mr. Saltz, subject to the
Shareholders Agreement. The address of Mr. Saltz is 767 Fifth Avenue, 46th
Floor, New York, New York 10153.
(20) Includes (i) 776,829 shares of Westport common stock held by Saltz
Investment subject to the Shareholders Agreement and (ii) an aggregate of
34,814,847 shares of Westport common stock held by WELLC, ERI and members
of the Belfer Group, excluding Saltz Investment, subject to the
Shareholders Agreement, with respect to which shares Saltz Investment may
be deemed to have shared voting power pursuant to the Shareholders
Agreement. Saltz Investment disclaims beneficial ownership of the shares of
Westport common stock held by WELLC, ERI and members of the Belfer Group,
excluding Saltz Investment, subject to the Shareholders Agreement. The
address of Saltz Investment is c/o Jack Saltz, 767 Fifth Avenue, 46th
Floor, New York, New York 10153.
(21) Includes (i) 62,040 shares of Westport common stock held by JAS Foundation
subject to the Shareholders Agreement and (ii) an aggregate of 35,529,636
shares of Westport common stock held by WELLC, ERI and members of the
Belfer Group, excluding JAS Foundation, subject to the Shareholders
Agreement, with respect to which shares JAS Foundation may be deemed to
have shared voting power pursuant to the Shareholders Agreement. JAS
Foundation disclaims beneficial ownership of the shares of Westport common
stock held by WELLC, ERI and members of the Belfer Group, excluding JAS
Foundation, subject to the Shareholders Agreement. The address of JAS
Foundation is c/o Jack Saltz, 767 Fifth Avenue, 46th Floor, New York, New
York 10153.
(22) Includes (i) 33,750 shares of Westport common stock held by Donald D. Wolf
Family Limited Partnership, (ii) 2,000 shares of Westport common stock
subject to restrictions pursuant to a restricted stock agreement dated
January 11, 2001, and (iii) options to purchase 300,000 shares of Westport
common stock exercisable within 60 days of November 30, 2001. Excludes
options to purchase 600,000 shares of Westport common stock, none of which
are exercisable within 60 days of November 30, 2001. Mr. Wolf is the sole
general partner of the Donald D. Wolf Family Limited Partnership.
(23) Includes (i) 33,750 shares of Westport common stock held by Mr. Whitham,
(ii) 1,500 shares of Westport common stock held by Mr. Whitham subject to
restrictions pursuant to a restricted stock agreement dated January 11,
2001, and (iii) options to purchase 112,500 shares of Westport common stock
exercisable within 60 days of November 30, 2001. Excludes options to
purchase 225,000 shares of Westport common stock, none of which are
exercisable within 60 days of November 30, 2001.
(24) Includes 2,500 shares of Westport common stock held by Mr. McCain subject
to restrictions pursuant to a restricted stock agreement dated April 9,
2001. Excludes options to purchase 65,000 shares of Westport common stock,
none of which are exercisable within 60 days of November 30, 2001.
(25) Includes (i) 33,412 shares of Westport common stock held by Mr. Henderson,
(ii) 10,000 shares of Westport common stock held by Mr. Henderson subject
to restrictions pursuant to a restricted stock agreement dated September
10, 2001, and (iii) options to purchase 121,683 shares of Westport common
stock, all of which are exercisable within 60 days of November 30, 2001.
Excludes options to purchase 75,000 shares of Westport common stock, none
of which are exercisable within 60 days of November 30, 2001.
94
(26) Includes 2,500 shares of Westport common stock held by Mr. Boigon subject
to restrictions pursuant to a restricted stock agreement dated April 3,
2001. Excludes options to purchase 55,000 shares of Westport common stock,
none of which are exercisable within 60 days of November 30, 2001.
(27) Includes (i) 500 shares of Westport common stock held by Mr. Anderson and
(ii) options to purchase 9,798 shares of Westport common stock exercisable
within 60 days of November 30, 2001. Excludes options to purchase 19,596
shares of Westport common stock, none of which are exercisable within 60
days of November 30, 2001.
(28) Includes (i) 3,000 shares of Westport common stock held by Mr. Belcher,
(ii) 600 shares of Westport common stock held by Mr. Belcher subject to
restrictions pursuant to a restricted stock agreement dated January 11,
2001, and (iii) options to purchase 33,945 shares of Westport common stock
exercisable within 60 days of November 30, 2001. Excludes options to
purchase 77,886 shares of Westport common stock, none of which are
exercisable within 60 days of November 30, 2001.
(29) Includes (i) 600 shares of Westport common stock held by Mr. Bess subject
to restrictions pursuant to a restricted stock agreement dated January 11,
2001 and (ii) options to purchase 25,904 shares of Westport common stock
exercisable within 60 days of November 30, 2001. Excludes options to
purchase 61,806 shares of Westport common stock, none of which are
exercisable within 60 days of November 30, 2001.
(30) Includes 13,500 shares of Westport common stock held by Mr. McBride subject
to restrictions pursuant to a restricted stock agreement dated January 11,
2001. Excludes options to purchase 45,000 shares of Westport common stock,
none of which are exercisable within 60 days of November 30, 2001.
(31) Includes (i) 922 shares of Westport common stock held by Mr. Funk and (ii)
options to purchase 4,500 shares of Westport common stock, all of which are
exercisable within 60 days of November 30, 2001.
(32) Based on a report filed with the SEC on August 31, 2001 and Westport's
records. This number includes (i) 6,500 shares of Westport common stock
held by Mr. Gerber, (ii) 13,911,152 shares of Westport common stock held by
ERI subject to the Shareholders Agreement, beneficial ownership of which
shares may be attributable to Mr. Gerber, and (iii) an aggregate of
21,680,524 shares of Westport common stock held by WELLC and the Belfer
Group subject to the Shareholders Agreement, with respect to which shares
ERI and, as a result, Mr. Gerber may be deemed to have shared voting power
pursuant to the Shareholders Agreement. Mr. Gerber disclaims beneficial
ownership of 35,591,676 shares of Westport common stock subject to the
Shareholders Agreement. The address of Mr. Gerber is One Oxford Centre,
Suite 3300, 301 Grant Street, Pittsburgh, Pennsylvania 15219-6401.
(33) Includes (i) 802 shares of Westport common stock held by Mr. Hearl and (ii)
options to purchase 2,250 shares of Westport common stock exercisable
within 60 days of November 30, 2001. Excludes options to purchase 6,750
shares of Westport common stock, none of which are exercisable within 60
days of November 30, 2001.
(34) Based on a report filed with the SEC on August 31, 2001 and Westport's
records. This number includes (i) 2,000 shares of Westport common stock
held by Mr. Porges, (ii) 13,911,152 shares of Westport common stock held by
ERI subject to the Shareholders Agreement, beneficial ownership of which
shares may be attributable to Mr. Porges, and (iii) an aggregate of
21,680,524 shares of Westport common stock held by WELLC and the Belfer
Group subject to the Shareholders Agreement, with respect to which shares
ERI and, as a result, Mr. Porges may be deemed to have shared voting power
pursuant to the Shareholders Agreement. Mr. Porges disclaims beneficial
ownership of 35,591,676 shares of Westport common stock subject to the
Shareholders Agreement. The address of Mr. Porges is One Oxford Centre,
Suite 3300, 301 Grant Street, Pittsburgh, Pennsylvania 15219-6401.
(35) Includes (i) 802 shares of Westport common stock held by Mr. Stein and (ii)
options to purchase 2,250 shares of Westport common stock exercisable
within 60 days of November 30, 2001. Excludes options to purchase 6,750
shares of Westport common stock, none of which are exercisable within 60
days of November 30, 2001.
95
(36) Includes (i) 3,922 shares of Westport common stock held by Mr. Wallace and
(ii) options to purchase 11,998 shares of Westport common stock exercisable
within 60 days of November 30, 2001. Excludes options to purchase 4,500
shares of Westport common stock, none of which are exercisable within 60
days of November 30, 2001.
(37) The directors and executive officers together hold (i) options to purchase
1,867,116 shares of Westport common stock, 624,828 of which are exercisable
within 60 days of November 30, 2001, and (ii) 514,000 shares of Westport's
6 1/2% convertible preferred stock, which are convertible into 239,417
shares of Westport common stock within 60 days of November 30, 2001.
96
DESCRIPTION OF CERTAIN INDEBTEDNESS
REVOLVING CREDIT FACILITY
Under our Revolving Credit Facility, certain banks provided us a revolving
credit facility of up to $400 million, subject to a borrowing base calculation,
which is secured by liens on the stock of most of our subsidiaries. The
Revolving Credit Facility was amended on November 5, 2001 to increase the
aggregate commitments to $500 million, subject to a borrowing base calculation.
Our obligations under the Revolving Credit Facility are also guaranteed by most
of our subsidiaries. Final maturity of the Revolving Credit Facility is July 1,
2005.
The Revolving Credit Facility establishes a borrowing base if our senior
unsecured debt rating is (i) BB or less by Standard and Poor's Rating Group,
(ii) Ba2 or less by Moody's Investors Service, Inc., or (iii) unrated by either.
When the borrowing base is in effect, the amount available to be borrowed under
the Revolving Credit Facility is limited to the lesser of the facility size or
the borrowing base, which is based on the value of certain of our and our
subsidiaries' proved reserves of oil and natural gas properties.
Outstanding advances under the Revolving Credit Facility bear interest
payable quarterly. Advances under the Revolving Credit Facility are in the form
of either a base rate loan or a Eurodollar loan. The interest on a base rate
loan is a fluctuating rate based upon the highest of:
- the rate of interest announced by JPMorgan Chase Bank, formerly known as
The Chase Manhattan Bank, as its prime rate;
- the secondary market rate for three month certificates of deposits plus
1%; and
- the federal funds effective rate plus 0.5%;
in each case plus a margin of 0% to 0.125% based upon the ratio of total
debt to EBITDAX.
The interest on a Eurodollar loan is a fluctuating rate based upon the rate
at which Eurodollar deposits in the London interbank market are quoted plus a
margin of 1.25% to 1.50% based upon the ratio of total debt to EBITDAX.
At September 30, 2001, adjusted to reflect the offering of $275.0 million
of the old notes and the application of the proceeds therefrom on November 5,
2001, the unused portion of the Revolving Credit Facility was approximately $384
million, based on the current borrowing base of $400 million.
THE 8 7/8% SENIOR SUBORDINATED NOTES
We have outstanding an aggregate principal amount of $149 million of our
8 7/8% Senior Subordinated Notes due 2007. The 8 7/8% Senior Subordinated Notes
are our general unsecured obligations and are subordinated in right of payment
to all our existing and future senior debt. Our 8 7/8% Senior Subordinated Notes
rank pari passu in right of payment with all our other senior subordinated debt,
and they rank senior in right of payment to all of our indebtedness and other
liabilities that are subordinated by their express terms. Our obligations under
the 8 7/8% Senior Subordinated Notes are effectively subordinated to our
existing and future secured indebtedness to the extent of the value, priority
and validity of the assets securing such indebtedness and are structurally
subordinated to all existing and future indebtedness and other liabilities of
our subsidiaries that are not or do not become guarantors of the 8 7/8% Senior
Subordinated Notes. The 8 7/8% Senior Subordinated Notes are unconditionally
guaranteed on a senior subordinated unsecured basis by most of the Company's
subsidiaries, which we refer to as the Subsidiary Guarantors, which guarantees
are subordinated to senior debt of the Subsidiary Guarantors to the same extent
and in the same manner as the 8 7/8% Senior Subordinated Notes are subordinated
to the senior debt. Interest on the 8 7/8% Senior Subordinated Notes is payable
semi-annually on March 15 and September 15 of each year. The 8 7/8% Senior
Subordinated Notes are redeemable on or at any time after September 15, 2002, at
a declining premium.
The Merger on August 21, 2001 required us to make a change of control offer
to registered holders of the 8 7/8% Senior Subordinated Notes at 101% of the
aggregate principal amount of 8 7/8% Senior Subordinated
97
Notes outstanding. Such offer expired on October 29, 2001 and approximately $24
million principal amount of the 8 7/8% Senior Subordinated Notes were tendered.
We acquired such notes at an aggregate purchase price of approximately $25
million with borrowings under the Revolving Credit Facility. We used a portion
of the proceeds from the offering of the old notes to repay those borrowings. We
also expect to use a portion of the proceeds of the offering of the old notes to
acquire, on an opportunistic basis, additional 8 7/8% Senior Subordinated Notes
due 2007 in open market purchases.
DESCRIPTION OF EXCHANGE NOTES
The form and terms of the exchange notes are the same as the form and terms
of the old notes, except that the exchange notes have been registered under the
Securities Act, will not bear legends restricting the transfer thereof, will not
be entitled to certain registration rights under the registration rights
agreement and will have different administrative terms. Westport Resources
Corporation will issue the exchange notes under an indenture (the "Indenture")
among itself, the Guarantors and The Bank of New York, as Trustee. The terms of
the exchange notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939.
Certain terms used in this description are defined under the subheading
"-- Certain Definitions." In this description, the words "Company," "we," "us"
and "our" refer only to Westport Resources Corporation and not to any of its
subsidiaries. As used in this section, the term "notes" refers to both old notes
and exchange notes.
The old notes, the exchange notes and any additional notes issued from time
to time in accordance with the terms of the Indenture will constitute a single
class of debt securities under the Indenture. If the exchange offer is
consummated, holders of old notes who do not exchange their old notes for
exchange notes will vote together with holders of the exchange notes and, if
applicable, any holders of additional notes for all relevant purposes under the
Indenture. Accordingly, in determining whether the required holders have given
any notice, consent or waiver or taken any other action permitted under the
Indenture, any old notes that remain outstanding after the exchange offer will
be aggregated with the exchange notes and, if applicable, any additional notes,
and the holders of the old notes, the exchange notes and the additional notes
will vote together as a single class. All references in this prospectus to
specified percentages in aggregate principal amount of the notes that are
outstanding means, at any time after the exchange offer is consummated, the
percentage in aggregate principal amount of the old notes, the exchange notes
and the additional notes then outstanding (if any).
The following description is only a summary of the material provisions of
the Indenture. We urge you to read the Indenture because it, not this
description, define your rights as holders of the exchange notes. You may
request copies of the Indenture at our address set forth under the heading
"Where You Can Find More Information."
BRIEF DESCRIPTION OF EXCHANGE NOTES
These exchange notes:
- are unsecured senior subordinated obligations of the Company;
- are subordinated in right of payment to all existing and future Senior
Indebtedness of the Company;
- are senior in right of payment to any future Subordinated Obligations of
the Company;
- are guaranteed by each Subsidiary Guarantor; and
- are subject to registration rights pursuant to the Registration Rights
Agreement.
PRINCIPAL, MATURITY AND INTEREST
We will issue up to $275 million principal amount of exchange notes in this
exchange offer. We will issue the exchange notes in denominations of $1,000 and
any integral multiple of $1,000. The notes will mature on
98
November 1, 2011. Subject to our compliance with the covenant described under
the subheading "-- Certain Covenants -- Limitation on Indebtedness," we are
permitted to issue more notes from time to time under the Indenture ("Additional
Notes") in an unlimited principal amount. The exchange notes, together with any
old notes not exchanged in the exchange offer, and the Additional Notes, if any,
will be treated as a single class for all purposes of the indenture, including
waivers, amendments, redemptions and offers to purchase. Unless the context
otherwise requires, for all purposes of the Indenture and this "Description of
Exchange Notes," references to the "notes" include any Additional Notes actually
issued.
Interest on the notes will accrue at the rate of 8 1/4% per annum and will
be payable semiannually in arrears on May 1 and November 1, commencing on May 1,
2002. We will make each interest payment to the holders of record of the notes
on the immediately preceding April 15 and October 15. We will pay interest on
overdue principal at 1% per annum in excess of the above rate and will pay
interest on overdue installments of interest at such higher rate to the extent
lawful.
Interest on the notes will accrue from the date of original issuance.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Additional interest may accrue on the notes in certain circumstances
pursuant to the Registration Rights Agreement.
OPTIONAL REDEMPTION
Except as set forth below, we will not be entitled to redeem the notes at
our option prior to November 1, 2006.
On and after November 1, 2006, we will be entitled at our option to redeem
all or a portion of the notes upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed in percentages of principal amount
on the redemption date), plus accrued interest to the redemption date (subject
to the right of Holders of record on the relevant record date to receive
interest due on the relevant interest payment date), if redeemed during the
12-month period commencing on November 1 of the years set forth below:
<Table>
<Caption>
REDEMPTION
PERIOD PRICE
- ------ ----------
2006........................................................ 104.125%
2007........................................................ 102.750
2008........................................................ 101.375
2009 and thereafter......................................... 100.000%
</Table>
In addition, before November 1, 2004, we may at our option on one or more
occasions redeem notes (which includes Additional Notes, if any) in an aggregate
principal amount not to exceed 35% of the aggregate principal amount of the
notes (which includes Additional Notes, if any) issued prior to the redemption
date, at a redemption price (expressed as a percentage of principal amount) of
108.25%, plus accrued and unpaid interest to the redemption date, with the net
cash proceeds from one or more Public Equity Offerings; provided, however, that:
(1) at least 65% of such aggregate principal amount of notes (which
includes Additional Notes, if any) remains outstanding immediately after
the occurrence of each such redemption (other than notes held, directly or
indirectly, by the Company or its Affiliates); and
(2) each such redemption occurs within 90 days after the date of the
related Public Equity Offering.
We will be entitled, at our option, at any time as a whole prior to
November 1, 2006, to redeem the notes (which includes Additional Notes, if any)
at a redemption price equal to the sum of:
(1) the principal amount thereof, plus
(2) accrued and unpaid interest, if any, to the redemption date, plus
(3) the Applicable Premium at the redemption date.
99
SELECTION AND NOTICE OF REDEMPTION
If we are redeeming less than all the notes at any time, the Trustee will
select notes on a pro rata basis, by lot or by such other method as the Trustee
in its sole discretion shall deem to be fair and appropriate.
We will redeem notes of $1,000 or less in whole and not in part. We will
cause notices of redemption to be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount thereof to
be redeemed. We will issue a new note in a principal amount equal to the
unredeemed portion of the original note in the name of the holder upon
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.
MANDATORY REDEMPTION; OFFERS TO PURCHASE; OPEN MARKET PURCHASES
We are not required to make any mandatory redemption or sinking fund
payments with respect to the notes. However, under certain circumstances, we may
be required to offer to purchase notes as described under the captions
"-- Change of Control" and "Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock." We may at any time and from time to time purchase notes
in the open market or otherwise.
GUARANTIES
The Subsidiary Guarantors will jointly and severally guarantee, on a senior
subordinated basis, our obligations under the notes. The Subsidiary Guarantors
include substantially all of our Subsidiaries existing on the Issue Date and,
subject to certain exceptions, will include any of our future Restricted
Subsidiaries that Incur Indebtedness. The obligations of each Subsidiary
Guarantor under its Subsidiary Guaranty will be limited as necessary to prevent
that Subsidiary Guaranty from constituting a fraudulent conveyance under
applicable law. See "Risk Factors -- Federal and state statutes allow courts,
under specific circumstances, to void guarantees and require noteholders to
return payments received from guarantors."
Each Subsidiary Guarantor that makes a payment under its Subsidiary
Guaranty will be entitled upon payment in full of all guarantied obligations
under the Indenture to a contribution from each other Subsidiary Guarantor in an
amount equal to such other Subsidiary Guarantor's pro rata portion of such
payment based on the respective net assets of all the Subsidiary Guarantors at
the time of such payment determined in accordance with GAAP.
If a Subsidiary Guaranty were rendered voidable, it could be subordinated
by a court to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending on the
amount of such indebtedness, a Subsidiary Guarantor's liability on its
Subsidiary Guaranty could be reduced to zero. See "Risk Factors -- Federal and
state statutes allow courts, under specific circumstances, to void guarantees
and require noteholders to return payments received from guarantors."
The Subsidiary Guaranty of a Subsidiary Guarantor will be released:
(1) upon the sale or other disposition (including by way of
consolidation or merger) of that Subsidiary Guarantor; or
(2) upon the sale or disposition of all or substantially all the
assets of that Subsidiary Guarantor;
in each case other than to the Company or an Affiliate of the Company and as
permitted by the Indenture.
100
RANKING
SENIOR INDEBTEDNESS VERSUS NOTES
The payment of the principal of, premium, if any, and interest on the notes
and any other payment obligation of the Company in respect of the notes
(including any obligation to purchase notes) and the payment of any Subsidiary
Guaranty will be subordinate in right of payment to the prior payment in full of
all Senior Indebtedness of the Company or the relevant Subsidiary Guarantor, as
the case may be, including the obligations of the Company and such Subsidiary
Guarantor under the Revolving Credit Facility.
As of September 30, 2001, adjusted to reflect the offering of $275.0
million of the old notes and the application of the proceeds therefrom on
November 5, 2001:
(1) the Company's Senior Indebtedness would have been approximately
$12.0 million, all of which would have consisted of secured indebtedness;
and
(2) the Senior Indebtedness of the Subsidiary Guarantors would have
been approximately $12.0 million, all of which would have consisted of
their respective guaranties of Senior Indebtedness of the Company under the
Revolving Credit Facility.
Although the indenture contains limitations on the amount of additional
Indebtedness that the Company and the Subsidiary Guarantors may incur, under
certain circumstances the amount of such Indebtedness could be substantial and,
in any case, such Indebtedness may be Senior Indebtedness. See "-- Certain
Covenants -- Limitation on Indebtedness."
LIABILITIES OF SUBSIDIARIES VERSUS NOTES
A substantial portion of our operations are conducted through our
subsidiaries. Some of our subsidiaries are not guaranteeing the notes. Claims of
creditors of such non-guarantor subsidiaries, including trade creditors and
creditors holding indebtedness or guarantees issued by such non-guarantor
subsidiaries, and claims of preferred stockholders of such non-guarantor
subsidiaries generally will have priority with respect to the assets and
earnings of such non-guarantor subsidiaries over the claims of our creditors,
including holders of the notes, even if such claims do not constitute Senior
Indebtedness. Accordingly, the notes will be effectively subordinated to
creditors (including trade creditors) and preferred stockholders, if any, of
such non-guarantor subsidiaries.
At September 30, 2001, our subsidiaries (other than the Subsidiary
Guarantors existing as of the Issue Date) had no liabilities. Although the
Indenture limits the incurrence of Indebtedness and preferred stock of certain
of our subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Indenture does not impose any limitation on the
incurrence by such subsidiaries of liabilities that are not considered
Indebtedness under the indenture. See "-- Certain Covenants -- Limitation on
Indebtedness."
OTHER SENIOR SUBORDINATED INDEBTEDNESS VERSUS NOTES
Only Indebtedness of the Company or a Subsidiary Guarantor that is Senior
Indebtedness will rank senior to the notes and the relevant Subsidiary Guaranty
in accordance with the provisions of the indenture. The notes and each
Subsidiary Guaranty will in all respects rank pari passu with all other Senior
Subordinated Indebtedness of the Company and the relevant Subsidiary Guarantor,
respectively (including the obligations of the Company and such Subsidiary
Guarantor with respect to the Existing Notes).
As of September 30, 2001, after giving effect to the application of the net
proceeds from the offering of the old notes:
(1) the Company's Senior Subordinated Indebtedness would have been
approximately $411.7 million, consisting of the notes and Senior
Subordinated Indebtedness represented by the Existing Notes; and
101
(2) the Senior Subordinated Indebtedness of the Subsidiary Guarantors
would have been approximately $411.7 million, consisting of their
respective Guarantees of Senior Subordinated Indebtedness of the Company
represented by the notes and the Existing Notes.
We and the Subsidiary Guarantors have agreed in the Indenture that we and
they will not Incur, directly or indirectly, any Indebtedness that is
contractually subordinate or junior in right of payment to our Senior
Indebtedness or the Senior Indebtedness of such Subsidiary Guarantors, unless
such Indebtedness is Senior Subordinated Indebtedness of the applicable Person
or is expressly subordinated in right of payment to Senior Subordinated
Indebtedness of such Person. The Indenture does not treat unsecured Indebtedness
as subordinated or junior to Secured Indebtedness merely because it is
unsecured.
PAYMENT OF NOTES
We are not permitted to pay principal of, premium, if any, or interest on
the notes or any other payment obligation of the Company in respect of the notes
(including any obligation to purchase the notes) or make any deposit pursuant to
the provisions described under "-- Defeasance" below and may not purchase,
redeem or otherwise retire any notes (collectively, "pay the notes") if either
of the following occurs (a "Payment Default"):
(1) a default in the payment of any principal of, premium, if any, or
interest on Designated Senior Indebtedness of the Company occurs; or
(2) any other default on Designated Senior Indebtedness of the Company
occurs and the maturity of such Designated Senior Indebtedness is
accelerated in accordance with its terms;
unless, in either case, the Payment Default has been cured or waived and any
such acceleration has been rescinded or such Designated Senior Indebtedness has
been paid in full in cash. If a distribution is made to holders of the notes
that, due to the foregoing provisions limiting payments on the notes, should not
have been made to them, such holders of the notes are required to hold it in
trust for the holders of Senior Indebtedness of the Company and pay it over to
them as their interests may appear. Regardless of the foregoing, we are
permitted to pay the notes if we and the Trustee receive written notice
approving such payment from the Representatives of all Designated Senior
Indebtedness with respect to which the Payment Default has occurred and is
continuing.
During the continuance of any default (other than a Payment Default) with
respect to any Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods, we are not permitted to pay the notes for a period (a "Payment Blockage
Period") commencing upon the receipt by the Trustee (with a copy to us) of
written notice (a "Blockage Notice") of such default from the Representative of
such Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period and ending 179 days thereafter. The Payment Blockage Period will
end earlier if such Payment Blockage Period is terminated:
(1) by written notice to the Trustee and us from the Person or Persons
who gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice is cured,
waived or otherwise no longer continuing; or
(3) because such Designated Senior Indebtedness has been discharged or
repaid in full in cash.
Notwithstanding the provisions described above, unless the holders of such
Designated Senior Indebtedness or the Representative of such Designated Senior
Indebtedness have accelerated the maturity of such Designated Senior
Indebtedness, we are permitted to resume paying the notes after the end of such
Payment Blockage Period. The notes shall not be subject to more than one Payment
Blockage Period in any consecutive 360-day period irrespective of the number of
defaults with respect to Designated Senior Indebtedness during such period,
except that if any Blockage Notice is delivered to the Trustee by or on behalf
of holders of Designated Senior Indebtedness (other than holders of the Bank
Indebtedness), a Representative of holders
102
of Bank Indebtedness may give another Blockage Notice within such period.
However, in no event may the total number of days during which any Payment
Blockage Period or Periods is in effect exceed 179 days in the aggregate during
any consecutive 360-day period, and there must be 181 days during any
consecutive 360-day period during which no Payment Blockage Period is in effect.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property:
(1) the holders of Senior Indebtedness of the Company will be entitled
to receive payment in full in cash of such Senior Indebtedness before the
holders of the notes are entitled to receive any payment;
(2) until the Senior Indebtedness of the Company is paid in full in
cash, any payment or distribution to which holders of the notes would be
entitled but for the subordination provisions of the Indenture will be made
to holders of such Senior Indebtedness as their interests may appear,
except that holders of notes may receive certain Capital Stock and
subordinated debt obligations; and
(3) if a distribution is made to holders of the notes that, due to the
subordination provisions, should not have been made to them, such holders
of the notes are required to hold it in trust for the holders of Senior
Indebtedness of the Company and pay it over to them as their interests may
appear.
To the extent any payment of or distribution in respect of Senior
Indebtedness (whether by or on behalf of the Company or any Subsidiary
Guarantor, if any, as proceeds of security or enforcement of any right of setoff
or otherwise) is declared to be fraudulent or preferential, set aside or
required to be paid to any receiver, trustee in bankruptcy, liquidating trustee,
agent or other similar Person under any bankruptcy, insolvency, receivership,
fraudulent conveyance or similar law, then if such payment or distribution is
recovered by, or paid over to, such receiver, trustee in bankruptcy, liquidating
trustee, agent or other similar Person, the Senior Indebtedness or part thereof
originally intended to be satisfied shall be deemed to be reinstated and
outstanding as if such payment had not occurred.
If payment of the notes is accelerated because of an Event of Default, the
Company or the Trustee must promptly notify the holders of Designated Senior
Indebtedness or the Representative of such Designated Senior Indebtedness of the
acceleration.
A Subsidiary Guarantor's obligations under its Subsidiary Guaranty are
senior subordinated obligations. As such, the rights of Noteholders to receive
payment by a Subsidiary Guarantor pursuant to its Subsidiary Guaranty will be
subordinated in right of payment to the rights of holders of Senior Indebtedness
of such Subsidiary Guarantor. The terms of the subordination provisions
described above with respect to the Company's obligations under the notes apply
equally to a Subsidiary Guarantor and the obligations of such Subsidiary
Guarantor under its Subsidiary Guaranty.
By reason of the subordination provisions contained in the Indenture, in
the event of a liquidation or insolvency proceeding, creditors of the Company or
a Subsidiary Guarantor who are holders of Senior Indebtedness of the Company or
a Subsidiary Guarantor, as the case may be, may recover more, ratably, than the
holders of the notes, and creditors of ours who are not holders of Senior
Indebtedness may recover less, ratably, than holders of Senior Indebtedness and
may recover more, ratably, than the holders of the notes.
No right of any present or future holders of any Senior Indebtedness to
enforce subordination as provided in the Indenture will at any time in any way
be prejudiced or impaired by noncompliance by the Company or any Subsidiary
Guarantor (if any) with the terms of the Indenture, regardless of any knowledge
thereof that any such holder of Senior Indebtedness may have or otherwise be
charged with. The subordination provisions of the Indenture are intended to be
for the benefit of, and shall be enforceable directly by, the holders of Senior
Indebtedness.
Each holder of notes by the holder's acceptance thereof authorizes and
directs the Trustee on the holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination as provided in the
Indenture, and appoints the Trustee to act as the holder's attorney-in-fact for
any and all such purposes.
103
The holders of Senior Indebtedness may, at any time and from time to time
subject to the terms of such Senior Indebtedness, without the consent of or
notice to the Trustee or the holders of the notes, without incurring
responsibility to the holders of the notes and without impairing or releasing
the subordination provided in the Indenture or the obligations hereunder of the
holders of the notes to the holders of Senior Indebtedness, do any one or more
of the following: (a) change the manner, place or terms of payment or extend the
time of payment of, or renew or alter, Senior Indebtedness or any instrument
evidencing the same or any agreement under which Senior Indebtedness is
outstanding or secured; (b) sell, exchange, release or otherwise deal with any
property pledged, mortgaged or otherwise securing Senior Indebtedness; (c)
release any Person liable in any manner for the collection of Senior
Indebtedness; and (d) exercise or refrain from exercising any rights against the
Company and each Subsidiary Guarantor (if any) and any other Person.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the notes
pursuant to the provisions described under "-- Defeasance."
BOOK-ENTRY, DELIVERY AND FORM
We will issue the exchange notes in the form of one or more global notes
(the "Global Exchange Note"). The Global Exchange Note will be deposited with,
or on behalf of, The Depository Trust Company (the "Depository") and registered
in the name of the Depository or its nominee. Except as set forth below, the
Global Exchange Note may be transferred, in whole and not in part, and only to
the Depository or another nominee of the Depository. You may hold your
beneficial interests in the Global Exchange Note directly through the Depository
if you have an account with the Depository or indirectly through organizations
that have accounts with the Depository.
The Depository has advised the Company as follows: the Depository is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (which may
include the initial purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depository's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
(collectively, the "indirect participants") that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly.
The Company expects that pursuant to procedures established by the
Depository, upon the deposit of the Global Exchange Note with the Depository,
the Depository will credit, on its book-entry registration and transfer system,
the principal amount of notes represented by such Global Exchange Note to the
accounts of participants. The accounts to be credited shall be designated by the
initial purchasers. Ownership of beneficial interests in the Global Exchange
Note will be limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests in the Global Exchange Note will
be shown on, and the transfer of those ownership interests will be effected only
through, records maintained by the Depository (with respect to participants'
interests), the participants and the indirect participants (with respect to the
owners of beneficial interests in the Global Exchange Note other than
participants). The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and laws may impair the ability to transfer or pledge
beneficial interests in the Global Exchange Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Exchange Note, the Depository or such nominee, as the case
may be, will be considered the sole legal owner and holder of any related notes
evidenced by the Global Exchange Note for all purposes of such notes and the
Indenture. Except as set forth below, as an owner of a beneficial interest in
the Global Exchange Note, you will not be entitled to have the notes represented
by the Global Exchange Note registered in your name, will not receive
104
or be entitled to receive physical delivery of certificated notes and will not
be considered to be the owner or holder of any notes under the Global Exchange
Note. We understand that under existing industry practice, in the event an owner
of a beneficial interest in the Global Exchange Note desires to take any action
that the Depository, as the holder of the Global Exchange Note, is entitled to
take, the Depository would authorize the participants to take such action, and
the participants would authorize beneficial owners owning through such
participants to take such action or would otherwise act upon the instructions of
beneficial owners owning through them.
We will make payments of principal of, premium, if any, and interest on
notes represented by the Global Exchange Note registered in the name of and held
by the Depository or its nominee to the Depository or its nominee, as the case
may be, as the registered owner and holder of the Global Exchange Note.
We expect that the Depository or its nominee, upon receipt of any payment
of principal of, premium, if any, or interest on the Global Exchange Note will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Exchange
Note as shown on the records of the Depository or its nominee. We also expect
that payments by participants or indirect participants to owners of beneficial
interests in the Global Exchange Note held through such participants or indirect
participants will be governed by standing instructions and customary practices
and will be the responsibility of such participants or indirect participants. We
will not have any responsibility or liability for any aspect of the records
relating to, or payments made on account of, beneficial ownership interests in
the Global Exchange Note for any Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for any
other aspect of the relationship between the Depository and its participants or
indirect participants or the relationship between such participants or indirect
participants and the owners of beneficial interests in the Global Exchange Note
owning through such participants.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Exchange Note among participants
of the Depository, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. Neither
the Trustee nor the Company will have any responsibility or liability for the
performance by the Depository or its participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES
Subject to certain conditions, the notes represented by the Global Exchange
Note are exchangeable for certificated notes in definitive form of like tenor in
denominations of $1,000 and integral multiples thereof if:
(1) the Depository notifies us that it is unwilling or unable to
continue as Depository for the Global Exchange Note or the Depository
ceases to be a clearing agency registered under the Exchange Act and, in
either case, we are unable to locate a qualified successor within 90 days;
(2) we in our discretion at any time determine not to have all the
notes represented by the Global Exchange Note; or
(3) a default entitling the holders of the notes to accelerate the
maturity thereof has occurred and is continuing.
Any Note that is exchangeable as described above is exchangeable for
certificated notes issuable in authorized denominations and registered in such
names as the Depository shall direct. Subject to the foregoing, the Global
Exchange Note is not exchangeable, except for a Global Exchange Note of the same
aggregate denomination to be registered in the name of the Depository or its
nominee. In addition, such certificates will bear the legend referred to under
"Transfer Restrictions" (unless we determine otherwise in accordance with
applicable law), subject, with respect to such certificated notes, to the
provisions of such legend.
105
SAME-DAY PAYMENT
The Indenture requires us to make payments in respect of notes (including
principal, premium and interest) by wire transfer of immediately available funds
to the U.S. dollar accounts with banks in the U.S. specified by the holders
thereof or, if no such account is specified, by mailing a check to each such
holder's registered address.
REGISTERED EXCHANGE OFFER; REGISTRATION RIGHTS
Upon the closing of the offering of the old notes, we and the Subsidiary
Guarantors entered into the Registration Rights Agreement with the Initial
Purchasers, which provides for the exchange offer. A copy of the Registration
Rights Agreement is filed as an exhibit to the registration statement of which
this prospectus is a part. Please read the section captioned "The Exchange
Offer" for more details regarding the terms of the Registration Rights Agreement
and the exchange offer.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), then unless the Company shall have exercised its right to redeem all
the notes, each Holder shall have the right to require that the Company
repurchase such Holder's notes at a purchase price in cash equal to 101% of the
principal amount thereof on the date of purchase plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date):
(1) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than any one or more of the Permitted Holders, is
or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that for purposes of this clause (1) such
person shall be deemed to have "beneficial ownership" of all shares that
any such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 40% of the total voting power of the Voting Stock of the Company;
provided, however, that the Permitted Holders beneficially own (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly,
in the aggregate a lesser percentage of the total voting power of the
Voting Stock of the Company than such other person and do not have the
right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors (for the
purposes of this clause (1), such other person shall be deemed to
beneficially own any Voting Stock of the Company held by a parent entity,
if such other person is the beneficial owner (as defined in this clause
(1)), directly or indirectly, of more than 40% of the voting power of the
Voting Stock of such parent entity and the Permitted Holders beneficially
own (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly
or indirectly, in the aggregate a lesser percentage of the voting power of
the Voting Stock of such parent entity and do not have the right or ability
by voting power, contract or otherwise to elect or designate for election a
majority of the board of directors of such parent entity);
(2) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
(A) any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by
a vote of the majority of the directors of the Company then still in office
who were either directors at the beginning of such period or whose election
or nomination for election was previously so approved and (B) any
representative of a Permitted Holder) cease for any reason to constitute a
majority of the Board of Directors then in office;
(3) the adoption of a plan relating to the liquidation or dissolution
of the Company; or
(4) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company (determined on a
consolidated basis) to another Person (other than a Permitted Holder),
other than a transaction following which (A) in the case of a merger or
consolidation transaction, holders of securities
106
that represented 100% of the Voting Stock of the Company immediately prior
to such transaction (or other securities into which such securities are
converted as part of such merger or consolidation transaction) own directly
or indirectly at least a majority of the voting power of the Voting Stock
of the surviving Person in such merger or consolidation transaction
immediately after such transaction and (B) in the case of a sale of assets
transaction, the transferee Person becomes the obligor in respect of the
notes and a Subsidiary of the transferor of such assets.
Unless the Company has exercised its right to redeem all the notes and
shall have delivered an irrevocable notice of redemption to the Trustee, then
within 30 days following any Change of Control, we will mail a notice to each
Holder with a copy to the Trustee (the "Change of Control Offer") stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require us to purchase such Holder's notes at a purchase price in
cash equal to 101% of the principal amount thereof on the date of purchase,
plus accrued and unpaid interest, if any, to the date of purchase (subject
to the right of Holders of record on the relevant record date to receive
interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of
Control (including information with respect to pro forma historical income,
cash flow and capitalization, in each case after giving effect to such
Change of Control);
(3) the purchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions, as determined by us, consistent with the
covenant described hereunder, that a Holder must follow in order to have
its notes purchased.
The Revolving Credit Facility prohibits us from purchasing any notes prior
to April 1, 2002 and may restrict us from purchasing any notes on or after April
1, 2002 if our senior unsecured debt rating is BB or less by S&P or Ba2 or less
by Moody's, and also provides that the occurrence of certain change of control
events with respect to the Company would constitute a default thereunder. In the
event that at the time of a Change of Control, the terms of the Revolving Credit
Facility prohibit the Company from making a Change of Control Offer or from
purchasing the notes pursuant thereto, the Company shall, prior to the mailing
of the notice to Noteholders described in the preceding paragraph, but in any
event within 30 days following any Change of Control:
(1) repay in full all Indebtedness outstanding under the Revolving
Credit Facility or offer to repay in full all such Indebtedness and repay
the Indebtedness of each lender who has accepted such offer; or
(2) obtain the requisite consent under the Revolving Credit Facility
to permit the purchase of the notes as described above.
The Company must first comply with the covenant described above before it
will be required to purchase notes in the event of a Change of Control,
provided, however, that the Company's failure to comply with the covenant
described in the preceding sentence or to make a Change of Control Offer because
of any such failure shall constitute a default described in clause (4) under
"-- Defaults" below (and not under clause (2) thereof). As a result of the
foregoing, a holder of the notes may not be able to compel the Company to
purchase the notes unless the Company is able at the time to refinance all
Indebtedness outstanding under the Revolving Credit Facility or obtain requisite
consents under the Revolving Credit Facility.
We will not be required to make a Change of Control Offer following a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by us and
purchases all notes validly tendered and not withdrawn under such Change of
Control Offer.
We will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of notes as a result of a Change of Control. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of
107
the covenant described hereunder, we will comply with the applicable securities
laws and regulations and shall not be deemed to have breached our obligations
under the covenant described hereunder by virtue of our compliance with such
securities laws or regulations.
The Change of Control purchase feature of the notes may in certain
circumstances make more difficult or discourage a sale or takeover of the
Company and, thus, the removal of incumbent management. The Change of Control
purchase feature is a result of negotiations between the Company and the initial
purchasers. We have no present intention to engage in a transaction involving a
Change of Control, although it is possible that we could decide to do so in the
future. Subject to the limitations discussed below, we could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect our capital structure or credit ratings.
Restrictions on our ability to Incur additional Indebtedness are contained in
the covenants described under "-- Certain Covenants -- Limitation on
Indebtedness." Such restrictions can be waived with the consent of the holders
of a majority in principal amount of the notes then outstanding. The covenants
set forth in the Indenture may not afford Noteholders protection in the event of
a highly leveraged transaction.
Future indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require the repurchase of such indebtedness upon a Change of Control. Moreover,
the exercise by the Holders of their right to require us to repurchase the notes
could cause a default under such indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on us. Finally,
our ability to pay cash to the holders of notes following the occurrence of a
Change of Control may be limited by our then existing financial resources. There
can be no assurance that sufficient funds will be available when necessary to
make any required repurchases.
The definition of "Change of Control" includes the sale of all or
substantially all of the assets of the Company (determined on a consolidated
basis) to another Person. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, in certain
circumstances there may be a degree of uncertainty as to whether a particular
transaction would involve a disposition of "all or substantially all" of the
assets of the Company. As a result, it may be unclear as to whether a Change of
Control has occurred and whether a holder of notes may require the Company to
make an offer to repurchase the notes as described above.
The provisions under the Indenture relative to our obligation to make an
offer to repurchase the notes as a result of a Change of Control may be waived
or modified with the written consent of the holders of a majority in principal
amount of the notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
COVENANT SUSPENSION
During any period that the notes have a rating equal to or higher than BBB-
by S&P and Baa3 by Moody's ("Investment Grade Ratings") and no Default has
occurred and is continuing, the Company and the Restricted Subsidiaries will not
be subject to the following covenants:
(a) paragraphs (a) through (d) of the covenant described under
"-- Limitation on Indebtedness;"
(b) "-- Limitation on Restricted Payments;"
(c) "-- Limitation on Restrictions on Distributions from Restricted
Subsidiaries;"
(d) "-- Limitation on Sales of Assets and Subsidiary Stock;"
(e) "-- Limitation on Affiliate Transactions;"
108
(f) clause (3) of the covenant described under "-- Merger and
Consolidation;" and
(g) "-- Future Guarantors,"
(collectively, the "Suspended Covenants"). In the event that the Company and the
Restricted Subsidiaries are not subject to the Suspended Covenants for any
period of time as a result of the preceding sentence, and subsequently one or
both of S&P and Moody's downgrades the rating assigned to the notes below BBB-,
in the case of S&P, and below Baa3, in the case of Moody's, then the Company and
the Restricted Subsidiaries will thereafter again be subject to the Suspended
Covenants, and, with respect to Restricted Payments proposed to be made after
the time of such downgrade, the permissibility of such proposed Restricted
Payments will be calculated in accordance with the terms of the covenant
described below under "-- Limitation on Restricted Payments" as though such
covenant had been in effect since the Issue Date.
Subject to the provisions described under "Amendments and Waivers," if the
Indenture is amended by eliminating the subordination provisions contained
therein, including those set out in paragraph (e) of the covenant described
under "-- Limitation on Indebtedness," in connection with achieving Investment
Grade Ratings for the notes or otherwise, then, in addition to the suspension of
the Suspended Covenants described above and the suspension of the covenant
described under "-- Limitation on Liens," the Indenture will also be amended by
adding covenants, in the form attached as an annex to the Indenture, limiting
the Company and the Restricted Subsidiaries' ability to Incur or permit to exist
Liens on their properties or enter into any Sale/ Leaseback Transactions.
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; provided, however, that the
Company and the Subsidiary Guarantors will be entitled to Incur Indebtedness if,
on the date of such Incurrence and after giving effect thereto on a pro forma
basis, no Default has occurred and is continuing and the Consolidated Coverage
Ratio exceeds 2.5 to 1.
(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries will be entitled to Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred pursuant to Credit Facilities; provided,
however, that, after giving effect to any such Incurrence, the aggregate
principal amount of all Indebtedness Incurred under this clause (1) and
then outstanding does not exceed the greater of (A) $500 million less the
sum of all principal payments with respect to such Indebtedness pursuant to
paragraph (a)(3)(A) of the covenant described under "-- Limitation on Sales
of Assets and Subsidiary Stock" and (B) $250 million plus 20% of ACNTA as
of the date of such Incurrence;
(2) Indebtedness owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that (A) any subsequent issuance or transfer
of any Capital Stock which results in any such Wholly Owned Subsidiary
ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or a Wholly Owned Subsidiary) shall
be deemed, in each case, to constitute the Incurrence of such Indebtedness
by the obligor thereon and (B) if the Company is the obligor on such
Indebtedness, unless such Indebtedness is owing to a Subsidiary Guarantor,
such Indebtedness is expressly subordinated to the prior payment in full in
cash of all obligations with respect to the notes;
(3) the notes (including the exchange notes but excluding any
Additional Notes) and all Subsidiary Guaranties;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this covenant)
including the Existing Notes;
(5) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on or prior to the date on which such Subsidiary became a Restricted
Subsidiary or was acquired by the Company (other than Indebtedness Incurred
in connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such
109
Subsidiary became a Restricted Subsidiary or was acquired by the Company);
provided, however, that on the date such Subsidiary became a Restricted
Subsidiary or was acquired by the Company and after giving pro forma effect
thereto, the Company would have been able to Incur at least $1.00 of
additional Indebtedness pursuant to paragraph (a) of this covenant;
(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3), (4) or (5) or this
clause (6); provided, however, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness of a Restricted
Subsidiary Incurred pursuant to clause (5), such Refinancing Indebtedness
shall be Incurred only by such Restricted Subsidiary or, so long as such
Restricted Subsidiary has no liability with respect to such Refinancing
Indebtedness, by the Company or a Subsidiary Guarantor;
(7) Indebtedness consisting of Guarantees of production or payment
with respect to Production Payments; provided, however, that the Net
Present Value of the reserves related to such Production Payments shall not
exceed 2.5% of ACNTA at the time of Incurrence;
(8) Hedging Obligations consisting of Interest Rate Agreements related
to Indebtedness outstanding on the Issue Date or permitted to be Incurred
by the Company and the Restricted Subsidiaries pursuant to the Indenture;
(9) Hedging Obligations consisting of Oil and Natural Gas Hedging
Contracts and Currency Agreements entered into in the ordinary course of
business for the purpose of limiting risks that arise in the ordinary
course of business of the Company and its Subsidiaries;
(10) obligations in respect of performance, bid and surety bonds,
including Guarantees and letters of credit functioning as or supporting
such performance, bid and surety bonds, completion guarantees and other
reimbursement obligations provided by the Company or any Restricted
Subsidiary in the ordinary course of business (in each case other than for
an obligation for money borrowed);
(11) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business; provided, however,
that such Indebtedness is extinguished within two Business Days of its
Incurrence;
(12) Indebtedness consisting of any Guarantee by the Company or a
Subsidiary Guarantor of Indebtedness of the Company or a Subsidiary
Guarantor outstanding on the Issue Date or permitted by the Indenture to be
Incurred by the Company or a Subsidiary Guarantor;
(13) Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case, Incurred for the
purpose of financing all or any part of the purchase price, cost of
construction or improvement or carrying cost of assets used in the business
of the Company and its Restricted Subsidiaries and related financing costs,
and Refinancing Indebtedness Incurred to Refinance any Indebtedness
Incurred pursuant to this clause, in an aggregate principal amount at any
one time outstanding not to exceed $20 million;
(14) Indebtedness arising from any agreement providing for
indemnities, Guarantees, purchase price adjustments, holdbacks, contingency
payment obligations based on the performance of the acquired or disposed
assets or similar obligations (other than Guarantees of Indebtedness)
Incurred by any Person in connection with the acquisition or disposition of
assets;
(15) in-kind obligations relating to net oil or natural gas balancing
positions arising in the ordinary course of business; and
(16) Indebtedness of the Company or its Restricted Subsidiaries in an
aggregate principal amount which, when taken together with all other
Indebtedness of the Company and its Restricted Subsidiaries outstanding on
the date of such Incurrence (other than Indebtedness permitted by clauses
(1) through (15) above or paragraph (a)) does not exceed $25 million, of
which not more than $10 million may be Indebtedness of Restricted
Subsidiaries that are not Subsidiary Guarantors.
110
(c) Notwithstanding the foregoing, the Company will not, and will not
permit any Subsidiary Guarantor to, Incur any Indebtedness pursuant to the
foregoing paragraph (b) if the proceeds thereof are used, directly or
indirectly, to Refinance any Subordinated Obligations of the Company or any
Subsidiary Guarantor unless such Indebtedness shall be subordinated to the notes
or the applicable Subsidiary Guaranty to at least the same extent as such
Subordinated Obligations.
(d) For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Indebtedness described above (including paragraph (a) above), (1)
the Company, in its sole discretion may classify such item of Indebtedness at
the time of Incurrence, in any manner in compliance with this covenant, (2) the
Company will only be required to include the amount and type of such
Indebtedness in one of the above categories and (3) the Company will be entitled
to divide and classify such item of Indebtedness in more than one of the
categories of Indebtedness described above.
(e) Notwithstanding paragraphs (a) and (b) above, the Company will not, and
will not permit any Subsidiary Guarantor to, Incur any Indebtedness if such
Indebtedness is subordinate or junior in ranking in right of payment to any
Senior Indebtedness of such Person, unless such Indebtedness is Senior
Subordinated Indebtedness of such Person or is expressly subordinated in right
of payment to Senior Subordinated Indebtedness of such Person.
LIMITATION ON RESTRICTED PAYMENTS
(a) The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if at the time the Company
or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not entitled to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness;" or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of (without
duplication):
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal
quarter immediately following the fiscal quarter during which the Issue
Date occurs to the end of the most recent fiscal quarter ending at least
45 days prior to the date of such Restricted Payment (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such deficit);
plus
(B) 100% of the aggregate Net Cash Proceeds or the fair market
value of property other than cash (including Capital Stock of Persons
engaged in the Oil and Gas Business or assets used in the Oil and Gas
Business) received by the Company from the issuance or sale of its
Capital Stock (other than Disqualified Stock) subsequent to the Issue
Date (other than an issuance or sale to a Subsidiary of the Company and
other than an issuance or sale to an employee stock ownership plan or to
a trust established by the Company or any of its Subsidiaries for the
benefit of their employees) and 100% of any capital contribution
received by the Company from its shareholders subsequent to the Issue
Date; plus
(C) the aggregate Net Cash Proceeds received by the Company
subsequent to the Issue Date from the issuance or sale of its Capital
Stock (other than Disqualified Stock) to an employee stock ownership
plan or to a trust established by the Company or any of its Subsidiaries
for the benefit of their employees; provided, however, that if such
employee stock ownership plan or trust Incurs any Indebtedness to
finance the purchase of such Capital Stock, such aggregate amount shall
be limited to the excess of such Net Cash Proceeds over the amount of
such Indebtedness plus an amount equal to any increase in the
Consolidated Net Worth of the Company resulting from principal
111
repayments made from time to time by such employee stock ownership plan
or trust with respect to such Indebtedness; plus
(D) the amount by which Indebtedness of the Company is reduced on
the Company's balance sheet upon the conversion or exchange (other than
by a Subsidiary of the Company) subsequent to the Issue Date of any
Indebtedness of the Company convertible or exchangeable for Capital
Stock (other than Disqualified Stock) of the Company (less the amount of
any cash, or the fair value of any other property, distributed by the
Company upon such conversion or exchange); plus
(E) an amount equal to the sum of (x) the net reduction in the
Investments (other than Permitted Investments) made by the Company or
any Restricted Subsidiary in any Person resulting from repurchases,
repayments or redemptions of such Investments by such Person, proceeds
realized on the sale of such Investment and proceeds representing the
return of capital (excluding dividends and distributions), in each case
received by the Company or any Restricted Subsidiary and (y) to the
extent such Person is an Unrestricted Subsidiary, the portion
(proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Unrestricted Subsidiary
at the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that to the extent the foregoing sum
exceeds, in the case of any such Person or Unrestricted Subsidiary, the
amount of Investments (excluding Permitted Investments) previously made
(and treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Person or Unrestricted Subsidiary, such excess shall
not be included in this clause (E) unless the amount represented by such
excess has not been and will not be taken into account in one of the
foregoing clauses (A)-(D); plus
(F) $15.0 million.
(b) The preceding provisions will not prohibit:
(1) any Restricted Payment made out of the Net Cash Proceeds of the
substantially concurrent issuance or sale of, or made by conversion into or
exchange for, Capital Stock of the Company (other than Disqualified Stock
and other than Capital Stock issued or sold to a Subsidiary of the Company
or an employee stock ownership plan or to a trust established by the
Company or any of its Subsidiaries for the benefit of their employees) or a
substantially concurrent cash capital contribution received by the Company
from one or more of its shareholders; provided, however, that (A) such
Restricted Payment shall be excluded in the calculation of the amount of
Restricted Payments and (B) the Net Cash Proceeds from such sale or such
cash capital contribution (to the extent so used for such Restricted
Payment) shall be excluded from the calculation of amounts under clause
(3)(B) of paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations of the
Company or a Subsidiary Guarantor made by exchange for, or out of the
proceeds of the substantially concurrent Incurrence or sale of,
Indebtedness which is permitted to be Incurred pursuant to the covenant
described under "-- Limitation on Indebtedness;" provided, however, that
such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments;
(3) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Disqualified Stock of the Company or
a Subsidiary Guarantor made by conversion into or exchange for, or out of
the proceeds of the substantially concurrent issuance or sale (other than
to a Subsidiary of the Company or an employee stock ownership plan or to a
trust established by the Company or any of its Subsidiaries for the benefit
of their employees) of, Disqualified Stock of the Company which is
permitted to be issued pursuant to the covenant described under
"-- Limitation on Indebtedness;" provided, however, that such purchase,
repurchase, redemption, defeasance or other acquisition or retirement for
value shall be excluded in the calculation of the amount of Restricted
Payments;
(4) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; provided, however, that at the time of payment of
112
such dividend, no other Default shall have occurred and be continuing (or
result therefrom); provided further, however, that such dividend shall be
included in the calculation of the amount of Restricted Payments at the
time of payment;
(5) the purchase, redemption or other acquisition or retirement for
value of shares of Capital Stock of the Company or any of its Subsidiaries
from employees, former employees, directors or former directors of the
Company or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to
the terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such Capital Stock; provided, however, that the aggregate amount
of such purchases, redemptions and other acquisitions and retirements
(excluding amounts representing cancellation of Indebtedness) shall not
exceed $2.0 million in any calendar year; provided further, however, that
such purchases, redemptions and other acquisitions and retirements shall be
excluded in the calculation of the amount of Restricted Payments;
(6) the payment of cash in lieu of fractional shares of Capital Stock
in connection with any transaction otherwise permitted under this covenant;
provided, however, that such payment will be excluded in the calculation of
the amount of Restricted Payments;
(7) so long as no Default has occurred and is continuing, the
declaration and payment of regularly accruing dividends to holders of any
class or series of Designated Preferred Stock of the Company issued on or
after the Issue Date; provided, however, that at the time of the
designation of such Preferred Stock as Designated Preferred Stock, and
after giving effect to such designation on a pro forma basis (for purposes
of making determinations on a pro forma basis pursuant to this clause (7),
treating all dividends which will accrue on such Designated Preferred Stock
during the four full fiscal quarters immediately following such issuance,
as well as all other Designated Preferred Stock then outstanding, as if the
same will in fact be, or have in fact been, paid in cash), the Company
would have been able to incur at least $1.00 of additional Indebtedness
under paragraph (a) of the covenant described under "-- Limitation on
Indebtedness"; provided further, however, that such declaration and payment
shall be excluded from the calculation of Restricted Payments;
(8) so long as no Default has occurred and is continuing, any
declaration or payment of dividends and other distributions in respect of,
and any purchase, redemption or other acquisition or retirement for value
of, the Existing Preferred Stock; provided, however, that such dividends,
distributions, purchases, redemptions or other acquisitions or retirements
for value will be excluded from the calculation of Restricted Payments;
(9) Restricted Payments in or to the Company or any of its Restricted
Subsidiaries; provided, however, that such Restricted Payments will be
excluded from the calculation of Restricted Payments; or
(10) upon the occurrence of a Change of Control or an Asset
Disposition and within 60 days after the completion of the offer to
repurchase the Notes pursuant to the covenants described under "-- Change
of Control" above or "-- Limitation on Sales of Assets and Subsidiary
Stock" below, (including the purchase of all Notes tendered), any purchase,
repurchase, redemption, defeasance, acquisition or other retirement for
value of Subordinated Obligations required pursuant to the terms thereof as
a result of such Change of Control or Asset Disposition at a purchase or
redemption price not to exceed 101% of the outstanding principal amount
thereof, plus accrued and unpaid interest thereon, if any; provided,
however, that (A) at the time of such purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value, no Default shall
have occurred and be continuing (or would result therefrom), and (B) such
purchase, repurchase redemption, defeasance or other acquisition and
retirement for value will be excluded in the calculation of the amount of
Restricted Payments.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the assets proposed to be
transferred by the Company or such Restricted Subsidiary, as the case may be, in
accordance with the Restricted Payment.
113
For purposes of determining compliance with this covenant, in the event
that a Restricted Payment meets the criteria of more than one of the types of
Restricted Payments described above, the Company, in its sole discretion, may
order and classify such Restricted Payment in any manner in compliance with this
covenant.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to the
Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company,
(b) make any loans or advances to the Company or (c) transfer any of its
property or assets to the Company, except:
(1) with respect to clauses (a), (b) and (c),
(A) any encumbrance or restriction pursuant to an agreement
governing Indebtedness, Capital Stock and other agreements or
instruments in effect at or entered into on the Issue Date, including
the Revolving Credit Facility, the Indenture, the notes and the
Subsidiary Guaranties;
(B) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by such Restricted Subsidiary or Capital Stock or other
agreement or instrument of such Restricted Subsidiary in existence on or
prior to the date on which such Restricted Subsidiary was acquired
(including by merger or otherwise) by the Company or otherwise becomes a
Restricted Subsidiary (other than Indebtedness Incurred, Capital Stock
issued or agreements or instruments entered into as consideration in, or
to provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company) and outstanding on such date;
(C) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing in whole or in part of Indebtedness Incurred,
Capital Stock issued or agreements or instruments entered into pursuant
to an agreement referred to in clause (A) or (B) of clause (1) of this
covenant or this clause (C) or clause (B) of clause (2) of this covenant
or contained in any amendment to, or modification, restatement, renewal,
increase, supplement, replacement, or extension of, an agreement
referred to in clause (A) or (B) of clause (1) of this covenant or this
clause (C) or clause (B) of clause (2) of this covenant; provided,
however, that the encumbrances and restrictions with respect to such
Restricted Subsidiary contained in any such refinancing agreement or
amendment, modification, restatement, renewal, increase, supplement,
replacement or extension agreement are not materially more restrictive,
taken as a whole, than encumbrances and restrictions with respect to
such Restricted Subsidiary contained in such predecessor agreements;
(D) any customary restriction with respect to a Restricted
Subsidiary imposed pursuant to a merger agreement or an agreement
entered into for the sale or disposition of the Capital Stock or assets
of such Restricted Subsidiary pending the closing of such sale or
disposition;
(E) customary encumbrances and restrictions contained in agreements
of the types described in the definition of the term "Permitted Business
Investments;"
(F) customary supermajority voting provisions and other customary
provisions with respect to the disposition or distribution of assets,
each contained in corporate charters, bylaws, stockholders' agreements,
limited liability company agreements, partnership agreements, joint
venture agreements and other similar agreements entered into in the
ordinary course of business of the Company and its Restricted
Subsidiaries; and
(2) with respect to clause (c) only,
(A) any such encumbrance or restriction consisting of customary
nonassignment provisions (including provisions forbidding subletting or
sublicensing) in leases governing leasehold interests
114
and licenses to the extent such provisions restrict the transfer of the
lease or license or the property leased or licensed thereunder;
(B) encumbrances and restrictions contained in any agreement,
instrument or Capital Stock assumed by the Company or any of its
Restricted Subsidiaries or for which any of them becomes liable as in
effect at the time of such transaction (except to the extent such
agreement, instrument or Capital Stock was entered into in connection
with or in contemplation of such transaction), which encumbrances and
restrictions are not applicable to any assets other than assets acquired
in connection with such transaction and all improvements, additions and
accessions thereto and products and proceeds thereof;
(C) restrictions contained in credit agreements, security
agreements or mortgages securing Indebtedness of the Company or a
Restricted Subsidiary to the extent such restrictions restrict the
transfer of the property subject to such security agreements or
mortgages;
(D) restrictions on cash or other deposits imposed by customers
under contracts entered into in the ordinary course of business;
(E) encumbrances and restrictions contained in contracts entered
into in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract
from the value of, or from the ability of the Company and the Restricted
Subsidiaries to realize the value of, property or assets of the Company
or any Restricted Subsidiary in any manner material to the Company or
any Restricted Subsidiary; and
(F) restrictions on the transfer of property or assets required by
any regulatory authority having jurisdiction over the Company or such
Restricted Subsidiary.
LIMITATION ON LIENS
The Company will not, and will not permit any Subsidiary Guarantor to,
directly or indirectly, create, incur, assume or suffer to exist or become
effective any Lien securing Indebtedness of any kind except for Permitted Liens,
on or with respect to any of its assets, whether owned at the Issue Date or
thereafter acquired, unless (A) in the case of any Lien securing Subordinated
Obligations, the Notes are secured by a Lien on such assets that is senior in
priority to such Lien and (B) in the case of any other Lien, the Notes are
either secured equally and ratably with such Indebtedness or are secured by a
Lien on such assets that is senior in priority to such Lien.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, consummate any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration
at the time of such Asset Disposition at least equal to the fair market
value (as determined in good faith by the Board of Directors, an Officer or
an officer of such Restricted Subsidiary with responsibility for such
transaction, which determination shall be conclusive evidence of compliance
with this provision) of the shares or assets subject to such Asset
Disposition;
(2) in the case of an Asset Disposition in excess of $5.0 million, at
least 75% of the consideration thereof received by the Company or such
Restricted Subsidiary is in the form of cash, cash equivalents, oil and
natural gas properties or capital assets to be used by the Company or any
Restricted Subsidiary in the Oil and Gas Business; and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as
the case may be)
(A) first, to the extent the Company so elects, to prepay, repay,
purchase, repurchase, redeem, defease or otherwise acquire or retire for
value Senior Indebtedness of the Company or any
115
Subsidiary Guarantor or Indebtedness of a Wholly Owned Subsidiary that
is not a Subsidiary Guarantor (in each case other than Indebtedness owed
to the Company or an Affiliate of the Company) within one year from the
later of the date of such Asset Disposition or the receipt of such Net
Available Cash;
(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A), to the extent the
Company so elects, to acquire Additional Assets or make capital
expenditures in the Oil and Gas Business within one year from the later
of the date of such Asset Disposition or the receipt of such Net
Available Cash; and
(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to make an
offer to the holders of the notes (and to holders of other Senior
Subordinated Indebtedness of the Company designated by the Company) to
purchase notes (and such other Senior Subordinated Indebtedness of the
Company) pursuant to and subject to the conditions contained in the
Indenture;
provided, however, that in connection with any prepayment,
repayment, purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Indebtedness pursuant to clause
(A) or (C) above, the Company or such Restricted Subsidiary shall
permanently retire such Indebtedness and shall cause the related loan
commitment (if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries will not be required to apply any Net Available Cash
in accordance with this covenant except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which is not applied in accordance
with this covenant exceeds $20 million. Pending application of Net Available
Cash pursuant to this covenant, such Net Available Cash shall be invested in
Temporary Cash Investments or applied to temporarily reduce revolving credit
indebtedness.
For the purposes of paragraph (a)(2) above, the following are deemed to be
cash or cash equivalents:
(1) the release of, pursuant to a novation or other agreement, or the
discharge of, the Company or such Restricted Subsidiary from all liability
on Indebtedness in connection with such Asset Disposition; and
(2) securities received by the Company or any Restricted Subsidiary
from the transferee that are promptly converted by the Company or such
Restricted Subsidiary into cash.
Notwithstanding the foregoing, the 75% limitation referred to in paragraph
(a)(2) above shall be deemed satisfied with respect to any Asset Disposition in
which the cash or cash equivalents portion of the consideration received
therefrom, determined in accordance with the foregoing provision on an after-tax
basis, is equal to or greater than what the after-tax proceeds would have been
had such Asset Disposition complied with the aforementioned 75% limitation.
The requirement of clause (a)(3)(B) above shall be deemed to be satisfied
if an agreement (including a lease, whether a capital lease or an operating
lease) committing to make the acquisitions or expenditures referred to therein
is entered into by the Company or its Restricted Subsidiary within the time
period specified in such clause and such Net Available Cash is subsequently
applied in accordance with such agreement within six months following such
agreement.
(b) In the event of an Asset Disposition that requires the purchase of
notes (and other Senior Subordinated Indebtedness of the Company) pursuant to
clause (a)(3)(C) above, the Company will make such offer to purchase notes on or
before the 366th day after the later of the date of such Asset Disposition or
the receipt of such Net Available Cash, and will purchase notes tendered
pursuant to an offer by the Company for the notes (and such other Senior
Subordinated Indebtedness of the Company) at a purchase price of 100% of their
principal amount (or, in the event such other Senior Subordinated Indebtedness
of the Company was issued with significant original issue discount, 100% of the
accreted value thereof) without premium, plus accrued but unpaid interest (or,
in respect of such other Senior Subordinated Indebtedness of the Company,
116
such lesser price, if any, as may be provided for by the terms of such Senior
Subordinated Indebtedness of the Company) in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
Indenture. If the aggregate purchase price of the notes and any other Senior
Subordinated Indebtedness tendered exceeds the Net Available Cash allotted to
their purchase, the Company will select the notes and other Senior Subordinated
Indebtedness to be purchased on a pro rata basis but in round denominations,
which in the case of the notes will be denominations of $1,000 principal amount
or multiples thereof. The Company shall not be required to make such an offer to
purchase notes (and other Senior Subordinated Indebtedness of the Company)
pursuant to this covenant if the Net Available Cash available therefor is less
than $20 million (which lesser amount shall be carried forward for purposes of
determining whether such an offer is required with respect to the Net Available
Cash from any subsequent Asset Disposition).
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue of its compliance
with such securities laws or regulations.
LIMITATION ON AFFILIATE TRANSACTIONS
(a) The Company will not, and will not permit any Restricted Subsidiary to,
enter into any transaction (including the purchase, sale, lease or exchange of
any property, employee compensation arrangements or the rendering of any
service) with, or for the benefit of, any Affiliate of the Company (an
"Affiliate Transaction") unless:
(1) the terms of the Affiliate Transaction are no less favorable to
the Company or such Restricted Subsidiary than those that could reasonably
be expected to be obtained at the time of the Affiliate Transaction in
arm's-length dealings with a Person who is not an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of $15
million, the terms of the Affiliate Transaction are set forth in writing
and a majority of the non-employee directors of the Company disinterested
with respect to such Affiliate Transaction shall have determined in good
faith that the criteria set forth in clause (1) are satisfied and shall
have approved the relevant Affiliate Transaction as evidenced by a
resolution of the Board of Directors; and
(3) if such Affiliate Transaction involves an amount in excess of $30
million, the Board of Directors shall have received a written opinion from
an Independent Qualified Party to the effect that such Affiliate
Transaction is fair, from a financial standpoint, to the Company and its
Restricted Subsidiaries or is not less favorable to the Company and its
Restricted Subsidiaries than could reasonably be expected to be obtained at
the time in an arm's-length transaction with a Person who was not an
Affiliate.
(b) The provisions of the preceding paragraph (a) will not prohibit:
(1) any Investment (other than a Permitted Investment) or other
Restricted Payment, in each case not prohibited to be made pursuant to the
covenant described under "-- Limitation on Restricted Payments;"
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans and other benefit
plans approved by the Board of Directors;
(3) loans or advances to officers, directors and employees in the
ordinary course of business of the Company or its Restricted Subsidiaries,
but in any event not to exceed $3.0 million in the aggregate outstanding at
any one time;
(4) any transaction between or among the Company, a Restricted
Subsidiary or joint venture or other Person that would constitute an
Affiliate Transaction solely because the Company or a Restricted
117
Subsidiary owns an equity interest in or otherwise controls such Restricted
Subsidiary, joint venture or other Person;
(5) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company;
(6) reasonable fees and reasonable compensation paid to, and indemnity
and similar arrangements provided on behalf of, officers, directors and
employees of the Company or any Restricted Subsidiary as determined in good
faith by the Board of Directors or the Company's senior management; and
(7) with respect to any agreements or arrangements in effect on, or
entered into on or prior to, the Issue Date, and which are disclosed in the
Offering Circular dated October 31, 2001, any amendment, modification, or
supplement thereto or any replacement thereof, so long as any such
amendment, modification, supplement or replacement agreement or arrangement
is not materially more disadvantageous to the holders of the Notes than the
original agreements and arrangements as in effect on the Issue Date, and
any transactions contemplated by any of the foregoing agreements or
arrangements.
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, directly or
indirectly, all or substantially all the assets of the Company and its
Restricted Subsidiaries, taken as a whole, to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under
the notes and the Indenture;
(2) immediately after giving pro forma effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary as a result of such transaction as having been
Incurred by such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing;
(3) immediately after giving pro forma effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness;"
(4) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and such supplemental
indenture (if any) comply with the Indenture; and
(5) the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that the Holders will not recognize income, gain or
loss for Federal income tax purposes as a result of such transaction and
will be subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
transaction had not occurred;
provided, however, that clause (3) will not be applicable (A) to the Company or
a Restricted Subsidiary consolidating with, merging into, conveying,
transferring or leasing all or part of its assets to the Company or a Subsidiary
Guarantor, (B) to the Company merging with an Affiliate of the Company solely
for the purpose and with the sole effect of reincorporating the Company in
another jurisdiction within the United States of America or (C) at any time when
the Company and its Restricted Subsidiaries are not subject to the Suspended
Covenants.
The Successor Company (if not the Company) will be the successor to the
Company and shall succeed to, and be substituted for, and may exercise every
right and power of, the Company under the Indenture, and the predecessor
Company, except in the case of a lease, shall be released from the obligation to
pay the principal of and interest on the notes.
118
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of transactions, all or substantially all of its assets to any Person unless:
(1) (other than in the case of a Subsidiary Guarantor that has been
disposed of in its entirety to another Person (other than to the Company or
an Affiliate of the Company), whether through a merger, consolidation or
sale of Capital Stock or assets, if in connection therewith the Company
complies with its obligations under the covenant described under
"-- Limitation on Sales of Assets and Subsidiary Stock" in respect of such
disposition), the resulting, surviving or transferee Person (if not such
Subsidiary) shall be a Person organized and existing under the laws of the
jurisdiction under which such Subsidiary was organized or under the laws of
the United States of America, or any State thereof or the District of
Columbia, and, if such Person is not a Subsidiary Guarantor, such Person
shall expressly assume, by a Guaranty Agreement, in a form satisfactory to
the Trustee, all the obligations of such Subsidiary, if any, under its
Subsidiary Guaranty;
(2) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which
becomes an obligation of the resulting, surviving or transferee Person as a
result of such transaction as having been issued by such Person at the time
of such transaction), no Default shall have occurred and be continuing; and
(3) in the event a Guaranty Agreement is executed and delivered
pursuant to clause (1) above, the Company delivers to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and such Guaranty
Agreement comply with the Indenture.
FUTURE GUARANTORS
The Company will cause each Restricted Subsidiary that Incurs any
Indebtedness (other than Indebtedness Incurred pursuant to and in compliance
with the last clause of paragraph (b)(16) of the covenant described under
"-- Limitation on Indebtedness") to, at the same time, execute and deliver to
the Trustee a Guaranty Agreement pursuant to which such Restricted Subsidiary
will Guarantee payment of the notes on the same terms and conditions as those
set forth in the Indenture.
SEC REPORTS
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will file
with the SEC and provide the Trustee and Noteholders with such annual reports
and such information, documents and other reports as are specified in Sections
13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to
such Sections (but without exhibits in the case of Noteholders), such
information, documents and other reports to be so filed and provided at the
times specified for the filings of such information, documents and reports under
such Sections.
In addition, the Company will furnish to the Holders of the notes and to
prospective investors, upon the requests of such Holders, any information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act so
long as the notes are not freely transferable under the Securities Act.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in the payment of interest on the notes when due,
continued for 30 days;
(2) a default in the payment of principal of any note when due at its
Stated Maturity, upon optional redemption, upon required purchase, upon
declaration of acceleration or otherwise;
(3) the failure by the Company to comply with its obligations under
"-- Certain Covenants -- Merger and Consolidation" above;
119
(4) the failure by the Company to comply for 30 days after notice with
any of its obligations in the covenants described above under "Change of
Control" (other than a failure to purchase notes) or under "-- Certain
Covenants" under "-- Limitation on Indebtedness," "-- Limitation on
Restricted Payments," "-- Limitation on Restrictions on Distributions from
Restricted Subsidiaries," "-- Limitation on Liens," "-- Limitation on Sales
of Assets and Subsidiary Stock" (other than a failure to purchase notes),
"-- Limitation on Affiliate Transactions," "-- Future Guarantors" or
"-- SEC Reports;"
(5) the failure by the Company or any Subsidiary Guarantor to comply
for 60 days after notice with its other agreements contained in the
Indenture;
(6) Indebtedness of the Company or any Significant Subsidiary is not
paid within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $10.0 million
(the "cross acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of the
Company or any Significant Subsidiary (the "bankruptcy provisions");
(8) any judgment or decree for the payment of money in excess of $10.0
million above the coverage under applicable insurance policies and
indemnities as to which the relevant insurer or indemnitor has not
disclaimed responsibility is entered against the Company or any Significant
Subsidiary, remains outstanding for a period of 60 consecutive days
following such judgment and is not discharged, waived or stayed (the
"judgment default provision"); or
(9) a Subsidiary Guaranty ceases to be in full force and effect (other
than in accordance with the terms of such Subsidiary Guaranty) for five
days after notice or any Subsidiary Guarantor denies or disaffirms its
obligations under its Subsidiary Guaranty other than in accordance with the
terms of such Subsidiary Guaranty (the "Guarantor failure provision").
However, a default under clauses (4), (5) and (9) will not constitute an Event
of Default until the Trustee or the holders of at least 25% in principal amount
of the outstanding notes notify the Company of the default and the Company does
not cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding notes may declare the
principal of and accrued but unpaid interest on all the notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
notes may rescind any such acceleration with respect to the notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a note
may pursue any remedy with respect to the Indenture or the notes unless:
(1) such holder has previously given the Trustee notice that an Event
of Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding
notes have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee security or indemnity
satisfactory to it against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity; and
120
(5) holders of a majority in principal amount of the outstanding notes
have not given the Trustee a direction inconsistent with such request
within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder of a note or that would involve the Trustee in personal liability.
If a Default occurs, is continuing and is known to the Trustee, the Trustee
must mail to each holder of the notes notice of the Default within 90 days after
it occurs (and such notice must specify that it is a notice of default under the
Indenture). Except in the case of a Default in the payment of principal of or
interest on any note, the Trustee may withhold notice if and so long as a
committee of its Trust Officers determines that withholding notice is not
opposed to the interest of the holders of the notes. In addition, we are
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. We are required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action we
are taking or propose to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the notes then outstanding. However, without the consent of each
holder of an outstanding note affected thereby, an amendment or waiver may not,
among other things:
(1) reduce the amount of notes whose holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any note;
(3) reduce the principal of or extend the Stated Maturity of any note;
(4) reduce the amount payable upon the redemption of any note or
change the time at which any note may be redeemed as described under
"-- Optional Redemption;"
(5) make any note payable in money other than that stated in the note;
(6) impair the right of any holder of the notes to receive payment of
principal of and interest on such holder's notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's notes;
(7) make any change in the provisions which require each affected
holder's consent to an amendment or waiver;
(8) make any change in the ranking or priority of any note that would
adversely affect the Noteholders; or
(9) make any change in any Subsidiary Guaranty that would adversely
affect the Noteholders in any material respect.
Notwithstanding the preceding, the covenant described under the caption
"-- Change of Control" may be amended as described in the last paragraph of that
description.
121
Notwithstanding the preceding, without the consent of any holder of the
notes, the Company, the Subsidiary Guarantors and Trustee may amend the
Indenture:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor corporation of the
obligations of the Company or any Subsidiary Guarantor under the Indenture;
(3) to provide for uncertificated notes in addition to or in place of
certificated notes (provided that the uncertificated notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated notes are described in Section 163(f)(2)(B) of
the Code);
(4) to eliminate the subordination provisions contained therein and
add covenants relating to Liens and Sale/Leaseback Transactions described
under "Certain Covenants -- Covenant Suspension;"
(5) to add guarantees with respect to the notes, including any
Subsidiary Guaranties, or to secure the notes;
(6) to add to the covenants of the Company or any Subsidiary Guarantor
for the benefit of the holders of the notes or to surrender any right or
power conferred upon the Company or any Subsidiary Guarantor;
(7) to make any change that does not adversely affect the rights of
any holder of the notes; or
(8) to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act.
Except as is specified in clause (4) above, no amendment may be made to the
subordination provisions of the Indenture that adversely affects the rights of
any holder of Senior Indebtedness of the Company or of a Subsidiary Guarantor
then outstanding unless such holder of such Senior Indebtedness (or its
Representative) consents to such change or as otherwise permitted by the notes,
debentures, bonds or other similar instruments evidencing such Senior
Indebtedness.
The consent of the holders of the notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, we are required
to mail to holders of the notes a notice briefly describing such amendment.
However, the failure to give such notice to all holders of the notes, or any
defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The notes will be issued in registered form and will be transferable only
upon the surrender of the notes being transferred for registration of transfer.
We may require payment of a sum sufficient to cover any tax, assessment or other
governmental charge payable in connection with certain transfers and exchanges.
DEFEASANCE
At any time, we may terminate all our obligations under the notes and the
Indenture ("legal defeasance"), except for certain obligations, including those
respecting the defeasance trust and obligations to register the transfer or
exchange of the notes, to replace mutilated, destroyed, lost or stolen notes and
to maintain a registrar and paying agent in respect of the notes.
In addition, at any time we may terminate the subordination provisions
described above under "Ranking" and our obligations under "-- Change of Control"
and under the covenants described under "-- Certain Covenants" (other than the
covenant described under "-- Merger and Consolidation"), the operation of the
cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries, the judgment default and Guarantor failure provisions
described under "-- Defaults" above and the limitation contained in
122
clause (3) of the first paragraph under "-- Certain Covenants -- Merger and
Consolidation" above ("covenant defeasance").
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the notes may not be accelerated because of an Event of
Default with respect thereto. If we exercise our covenant defeasance option,
payment of the notes may not be accelerated because of an Event of Default
specified in clause (4), (6), (7) (with respect only to Significant
Subsidiaries), (8) or (9) under "-- Defaults" above or because of the failure of
the Company to comply with clause (3) of the first paragraph under "-- Certain
Covenants -- Merger and Consolidation" above. If we exercise our legal
defeasance option or our covenant defeasance option, each Subsidiary Guarantor
will be released from all of its obligations with respect to its Subsidiary
Guaranty.
In order to exercise either of our defeasance options, we must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amounts and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE
The Bank of New York is to be the Trustee under the Indenture and Registrar
and Paying Agent with regard to the notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; provided, however, if it acquires any conflicting interest it must
either eliminate such conflict within 90 days, apply to the SEC for permission
to continue or resign. The Trustee is currently a lender under the Revolving
Credit Facility and we are currently in compliance with the terms of the
Indebtedness owed by us to The Bank of New York under the Revolving Credit
Facility.
The Holders of a majority in principal amount of the outstanding notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. If an Event of Default occurs (and is not cured), the Trustee will
be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any Holder of notes unless such Holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense and then only to the extent required by
the terms of the Indenture.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Subsidiary Guarantor will have any liability for any obligations of the
Company or any Subsidiary Guarantor under the notes, any Subsidiary Guaranty or
the Indenture or for any claim based on, in respect of, or by reason of such
obligations or their creation. Each Holder of the notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. Such waiver and release may not be
effective to waive liabilities under the U.S. federal securities laws, and it is
the view of the SEC that such a waiver is against public policy.
123
GOVERNING LAW
The Indenture and the notes will be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means:
(1) any property, plant, equipment or other assets used in a Related
Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of such Capital Stock by the Company or
another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that
at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clause (2)
or (3) above is primarily engaged in a Related Business.
"Adjusted Consolidated Net Tangible Assets" or "ACNTA" means (without
duplication), as of the date of determination:
(a) the sum of:
(1) discounted future net revenue from proved crude oil and natural
gas reserves of the Company and its Restricted Subsidiaries calculated
in accordance with SEC guidelines before any state or federal income
taxes, as estimated in a reserve report prepared as of the end of the
fiscal year ending at least 45 days prior to the date of determination
(or for the period prior to the earlier of April 1, 2002 and the date
the reserve report for 2001 is available, as of June 30, 2001), which
reserve report is prepared or audited by independent petroleum
engineers, as increased by, as of the date of determination, the
discounted future net revenue of:
(A) estimated proved crude oil and natural gas reserves of the
Company and its Restricted Subsidiaries attributable to acquisitions
consummated since the date of such reserve report, and
(B) estimated crude oil and natural gas reserves of the Company
and its Restricted Subsidiaries attributable to extensions,
discoveries and other additions and upward determinations of
estimates of proved crude oil and natural gas reserves (including
previously estimated development costs incurred during the period and
the accretion of discount since the prior period end) due to
exploration, development or exploitation, production or other
activities which reserves were not reflected in such reserve report
which would, in accordance with standard industry practice, result in
such determinations, in each case calculated in accordance with SEC
guidelines (utilizing the prices utilized in such year-end reserve
report),
and decreased by, as of the date of determination, the
discounted future net revenue attributable to:
(C) estimated proved crude oil and natural gas reserves of the
Company and its Restricted Subsidiaries reflected in such reserve
report produced or disposed of since the date of such reserve report,
and
(D) reductions in the estimated oil and natural gas reserves of
the Company and its Restricted Subsidiaries reflected in such reserve
report since the date of such reserve report attributable to downward
determinations of estimates of proved crude oil and natural gas
reserves due to exploration, development or exploitation, production
or other activities conducted or otherwise occurring since the date
of such reserve report which would, in accordance
124
with standard industry practice, result in such determinations, in
each case calculated in accordance with SEC guidelines (utilizing the
prices utilized in such reserve report);
provided, however, that, in the case of each of the
determinations made pursuant to clauses (A) through (D), such
increases and decreases shall be estimated by the Company's
engineers, except that if as a result of such acquisitions,
dispositions, discoveries, extensions or revisions, there is a
Material Change, then such increases and decreases in the discounted
future net revenue shall be confirmed in writing by an independent
petroleum engineer;
(2) the capitalized costs that are attributable to crude oil and
natural gas properties of the Company and its Restricted Subsidiaries to
which no proved crude oil and natural gas reserves are attributed, based
on the Company's books and records as of a date no earlier than the most
recent fiscal quarter ending at least 45 days prior to the date of
determination;
(3) the Net Working Capital as of the end of the most recent fiscal
quarter ending at least 45 days prior to the date of determination; and
(4) the greater of (i) the net book value as of a date no earlier
than the most recent fiscal quarter ending at least 45 days prior to the
date of determination and (ii) the appraised value, as estimated by
independent appraisers, of other tangible assets of the Company and its
Restricted Subsidiaries as of a date no earlier than the most recent
fiscal year ending at least 45 days prior to the date of determination
(provided that the Company shall not be required to obtain such an
appraisal of such assets if no such appraisal has been performed); minus
(b) to the extent not otherwise taken into account in the immediately
preceding clause (a), the sum of:
(1) minority interests;
(2) any natural gas balancing liabilities of the Company and its
Restricted Subsidiaries reflected in the Company's latest audited
financial statements;
(3) the discounted future net revenue, calculated in accordance
with SEC guidelines (utilizing the same prices utilized in the Company's
year-end reserve report), attributable to reserves subject to
participation interests, overriding royalty interests or other interests
of third parties, pursuant to participation, partnership, vendor
financing or other agreements then in effect, or which otherwise are
required to be delivered to third parties;
(4) the discounted future net revenue calculated in accordance with
SEC guidelines (utilizing the same prices utilized in the Company's
year-end reserve report), attributable to reserves that are required to
be delivered to third parties to fully satisfy the obligations of the
Company and its Restricted Subsidiaries with respect to Volumetric
Production Payments on the schedules specified with respect thereto; and
(5) the discounted future net revenue, calculated in accordance
with SEC guidelines, attributable to reserves subject to
Dollar-Denominated Production Payments that, based on the estimates of
production included in determining the discounted future net revenue
specified in the immediately preceding clause (a)(1) (utilizing the same
prices utilized in the Company's year-end reserve report), would be
necessary to satisfy fully the obligations of the Company and its
Restricted Subsidiaries with respect to Dollar-Denominated Production
Payments on the schedules specified with respect thereto.
If the Company changes its method of accounting from the successful efforts
method to the full cost method or a similar method of accounting, "ACNTA" will
continue to be calculated as if the Company were still using the successful
efforts method of accounting.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of
125
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. For purposes of the
covenants described under "-- Certain Covenants -- Limitation on Restricted
Payments," "-- Certain Covenants -- Limitation on Affiliate Transactions" and
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock"
only, "Affiliate" shall also mean any beneficial owner of Capital Stock
representing 10% or more of the total voting power of the Voting Stock (on a
fully diluted basis) of the Company or of rights or warrants to purchase such
Capital Stock (whether or not currently exercisable). No Person shall be deemed
an Affiliate of an oil and natural gas royalty trust solely by virtue of
ownership of units of beneficial interest in such trust.
"Applicable Premium" means, with respect to a note at any time, the greater
of (1) 1.0% of the principal amount of such note at such time and (2) the excess
of (A) the present value at such time of the principal amount of such note plus
any required interest payments due on such note through November 1, 2006,
computed using a discount rate equal to the Treasury Rate plus 50 basis points,
over (B) the principal amount of such note.
"Asset Disposition" means any sale, lease, issuance, transfer or other
disposition (or series of related sales, leases, issuances, transfers or
dispositions) by the Company or any Restricted Subsidiary, including any
disposition by means of a merger, consolidation or similar transaction (each
referred to for the purposes of this definition as a "disposition"), of:
(1) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary);
(2) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted Subsidiary
outside of the ordinary course of business of the Company or such
Restricted Subsidiary.
Notwithstanding the foregoing, the following shall be deemed not to be
Asset Dispositions:
(A) a disposition by the Company or a Restricted Subsidiary to the
Company or a Restricted Subsidiary;
(B) for purposes of the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition that constitutes a Restricted Payment permitted by the
covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments" or a Permitted Investment;
(C) a disposition of all or substantially all the assets of the
Company in accordance with the covenant described under "-- Certain
Covenants -- Merger and Consolidation;"
(D) the trade or exchange by the Company or any Restricted
Subsidiary of any oil or natural gas property or interest therein of the
Company or such Restricted Subsidiary for any oil or natural gas
property or interest therein of another Person, including any cash or
cash equivalents necessary in order to achieve an exchange of equivalent
value; provided, however, that the value of the oil or natural gas
property or interest therein received by the Company or any Restricted
Subsidiary in such trade or exchange (including any cash or cash
equivalents) is at least equal to the fair market value (as determined
in good faith by the Board of Directors, an Officer or an officer of
such Restricted Subsidiary with responsibility for such transaction,
which determination shall be conclusive evidence of compliance with this
provision) of the oil or natural gas property or interest therein
(including any cash or cash equivalents) so traded or exchanged;
(E) the creation of a Lien;
(F) a disposition of oil and natural gas properties in connection
with tax credit transactions complying with Section 29 or any successor
or analogous provisions of the Code;
126
(G) a disposition of the Capital Stock of or any Investment in any
Unrestricted Subsidiary;
(H) surrender or waiver of contract rights or the settlement,
release or surrender of contract, tort or other claims of any kind;
(I) any disposition of defaulted receivables that arose in the
ordinary course of business for collection; and
(J) a disposition of assets with a fair market value of less than
$1.0 million.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the notes, compounded semi-annually) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/ Leaseback Transaction (including any period for which such lease has
been extended); provided, however, that if such Sale/Leaseback Transaction
results in a Capital Lease Obligation, the amount of Indebtedness represented
thereby will be determined in accordance with the definition of "Capital Lease
Obligation."
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of or redemption or similar payment with respect to such Indebtedness
multiplied by the amount of such payment by
(2) the sum of all such payments.
"Bank Indebtedness" means all obligations pursuant to any Credit
Facilities.
"Board of Directors" means the board of directors of the Company or any
committee thereof duly authorized to act on behalf of such board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (x) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (y) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that:
(1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding or
if the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, or both, then EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Indebtedness and the use of
proceeds thereof as if such Indebtedness had been Incurred on the first day
of such period and such proceeds had been applied as of such date;
(2) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness since the
beginning of such period or if any Indebtedness is to be repaid,
repurchased, defeased or otherwise discharged on the date of the
transaction giving rise to the need to
127
calculate the Consolidated Coverage Ratio, then EBITDA and Consolidated
Interest Expense for such period shall be calculated on a pro forma basis
as if such discharge had occurred on the first day of such period and as if
the Company or such Restricted Subsidiary had not earned the interest
income actually earned (if any) during such period in respect of cash or
Temporary Cash Investments used to repay, repurchase, defease or otherwise
discharge such Indebtedness;
(3) if, since the beginning of such period, the Company or any
Restricted Subsidiary shall have made any Asset Disposition, then EBITDA
for such period shall be reduced by an amount equal to EBITDA (if positive)
directly attributable to the assets which were the subject of such Asset
Disposition for such period, or increased by an amount equal to EBITDA (if
negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of
the Company or any Restricted Subsidiary repaid, repurchased, defeased or
otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and
its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale);
(4) if, since the beginning of such period, the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person which becomes a
Restricted Subsidiary) or an acquisition of material assets, then EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any
Indebtedness) as if such Investment or acquisition had occurred on the
first day of such period; and
(5) if, since the beginning of such period, any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period)
shall have made any Asset Disposition, any Investment or acquisition of
assets that would have required an adjustment pursuant to clause (3) or (4)
above if made by the Company or a Restricted Subsidiary during such period,
then EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition had occurred on the first day of
such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer.
If any Indebtedness bears a floating rate of interest and is being given
pro forma effect, the interest on such Indebtedness shall be calculated as if
the rate in effect on the date of determination had been the applicable rate for
the entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness, but if the remaining term of such Interest Rate Agreement is
less than 12 months, then such Interest Rate Agreement shall only be taken into
account for that portion of the period equal to the remaining term thereof).
The Consolidated Interest Expense attributable to interest on any
Indebtedness under a revolving credit facility, the outstanding principal
balance of which is required to be computed on a pro forma basis in accordance
with the foregoing, shall be computed based upon the average daily balance of
such Indebtedness during the applicable period, provided, that such average
daily balance shall take into account the amount of any repayment of
Indebtedness under such revolving credit facility during the applicable period,
to the extent such repayment permanently reduced the commitments or amounts
available to be borrowed under such facility.
128
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication:
(1) interest expense attributable to capital leases and the interest
expense attributable to leases constituting part of a Sale/Leaseback
Transaction;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;
(6) net payments pursuant to Interest Rate Agreements;
(7) Preferred Stock dividends in respect of all Preferred Stock held
by Persons other than the Company or a Wholly Owned Subsidiary (other than
dividends payable solely in Capital Stock (other than Disqualified Stock)
of the Company);
(8) interest incurred in connection with Investments in discontinued
operations;
(9) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by (or secured by the assets of) the
Company or any Restricted Subsidiary; and
(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person (other than the Company) in
connection with Indebtedness Incurred by such plan or trust;
minus, to the extent included above, write-off of deferred financing costs and
interest attributable to Dollar-Denominated Production Payments.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(1) any net income of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income in an amount equal to
the aggregate amount of cash actually distributed by such Person during
such period to the Company or a Restricted Subsidiary as a dividend,
interest payment or other distribution (subject, in the case of a
dividend, interest payment or other distribution paid to a Restricted
Subsidiary, to the limitations contained in clause (3) below); and
(B) the Company's equity in a net loss of any such Person for such
period shall not be included in determining such Consolidated Net
Income, except to the extent of the aggregate cash actually contributed
to such Person by the Company or a Restricted Subsidiary during such
period;
(2) solely for purposes of determining the aggregate amount available
for Restricted Payments under clause (a)(3) of the covenant described under
"Certain Covenants -- Limitation on Restricted Payments," any net income
(or loss) of any Person acquired by the Company or a Subsidiary in a
pooling of interests transaction for any period prior to the date of such
acquisition;
(3) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that:
(A) subject to the exclusion contained in clause (4) below, the net
income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income in an
129
amount equal to the aggregate amount of cash that could have been
distributed by such Restricted Subsidiary during such period to the
Company or another Restricted Subsidiary as a dividend, interest payment
or other distribution (subject, in the case of a dividend, interest
payment or other distribution paid to another Restricted Subsidiary, to
the limitation contained in this clause); and
(B) the net loss of any such Restricted Subsidiary for such period
shall be included in determining such Consolidated Net Income;
(4) any gain or loss, together with any related provision for taxes on
such gain or loss and all related fees and expenses, realized in connection
with (A) the sale or other disposition of any assets of the Company, its
consolidated Subsidiaries or any other Person (including pursuant to any
Sale/Leaseback Transaction) which is not sold or otherwise disposed of in
the ordinary course of business and (B) the disposition of any securities
of any Person or the extinguishment of any Indebtedness of the Company or
any of its Subsidiaries;
(5) extraordinary or nonrecurring gains or losses, together with any
related provision for taxes on such gains or losses and all related fees
and expenses;
(6) the cumulative effect of a change in accounting principles;
(7) any impairment losses on oil and natural gas properties;
(8) any unrealized noncash gains or losses or charges in respect of
Hedging Obligations (including those resulting from the application of FAS
133); and
(9) any non-cash compensation charge arising from any grant of stock,
stock options or other equity-based awards.
Notwithstanding the foregoing, for the purposes of the covenant described under
"Certain Covenants -- Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any repurchases, repayments or redemptions
of Investments, proceeds realized on the sale of Investments or return of
capital to the Company or a Restricted Subsidiary to the extent such
repurchases, repayments, redemptions, proceeds or returns increase the amount of
Restricted Payments permitted under such covenant pursuant to clause (a)(3)(E)
thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as the sum of:
(1) the par or stated value of all outstanding Capital Stock of the
Company; plus
(2) paid-in capital or capital surplus relating to such Capital Stock;
plus
(3) any retained earnings or earned surplus,
less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Credit Facilities" means, with respect to the Company or any Restricted
Subsidiary, one or more debt facilities (including the Revolving Credit
Facility) or commercial paper facilities with banks or other lenders providing
revolving credit loans, term loans, production payments, receivables financing
(including through the sale of receivables) or letters of credit, in each case,
as amended, restated, modified, renewed, refunded, replaced or refinanced in
whole or in part from time to time.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
130
"Designated Preferred Stock" means Preferred Stock (not constituting
Disqualified Stock) of the Company (excluding any Preferred Stock issued prior
to or on the Issue Date and any Preferred Stock issued in exchange or
substitution therefor or in a transaction to which clause (b)(1) of the covenant
described under "Certain Covenants -- Limitation on Restricted Payments"
applies) that is designated as Designated Preferred Stock on or after the date
of issuance thereof pursuant to an Officers' Certificate delivered to the
Trustee on the designation thereof, the cash proceeds of which are excluded from
the calculation set forth in clause (a)(3)(B) of the covenant described under
"Certain Covenants -- Limitation on Restricted Payments."
"Designated Senior Indebtedness" with respect to a Person means:
(1) the Bank Indebtedness; and
(2) any other Senior Indebtedness of such Person which, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to
lend up to, at least $25.0 million and is specifically designated by such
Person in the instrument evidencing or governing such Senior Indebtedness
as "Designated Senior Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable at the option of the holder) or upon the
happening of any event:
(1) matures or is mandatorily redeemable (other than redeemable only
for Capital Stock of such Person which is not itself Disqualified Stock)
pursuant to a sinking fund obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
(3) is mandatorily redeemable or must be purchased upon the occurrence
of certain events or otherwise, in whole or in part;
in each case on or prior to the first anniversary of the Stated Maturity of the
notes; provided, however, that:
(A) any Capital Stock that would not constitute Disqualified Stock but
for provisions thereof giving holders thereof the right to require such
Person to purchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" shall not constitute Disqualified Stock
if:
(1) the "asset sale" or "change of control" provisions applicable
to such Capital Stock are not more favorable, as measured by the
purchase or redemption price or the breadth of the definition of the
event or events triggering such purchase or redemption obligation, to
the holders of such Capital Stock than the terms applicable to the notes
and described under "-- Certain Covenants -- Limitation on Sales of
Assets and Subsidiary Stock" and "-- Certain Covenants -- Change of
Control;" and
(2) any such requirement only becomes operative after compliance
with such terms applicable to the notes, including the purchase of any
notes tendered pursuant thereto,
(B) any Capital Stock that would constitute Disqualified Stock solely
because such Capital Stock is issued pursuant to any plan for the benefit
of employees of the Company or Subsidiaries of the Company or by any such
plan to such employees and may be required to be repurchased by the Company
in order to satisfy applicable statutory or regulatory obligations shall
not constitute Disqualified Stock.
The amount of any Disqualified Stock that does not have a fixed redemption,
repayment or repurchase price will be calculated in accordance with the terms of
such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or
repurchased on any date on which the amount of such Disqualified Stock is to be
determined pursuant to the Indenture; provided, however, that if such
Disqualified Stock could not be required to be redeemed, repaid or repurchased
at the time of such determination, the redemption, repayment or
131
repurchase price will be the book value of such Disqualified Stock as reflected
in the most recent financial statements of such Person.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"EBITDA" for any period means the sum of Consolidated Net Income, plus the
following to the extent deducted in calculating such Consolidated Net Income:
(1) all income tax expense of the Company and its consolidated
Restricted Subsidiaries;
(2) Consolidated Interest Expense;
(3) depreciation, depletion, exploration and amortization expense of
the Company and its consolidated Restricted Subsidiaries (excluding
amortization expense attributable to a prepaid operating activity item that
was paid in cash in a prior period); and
(4) all other non-cash charges of the Company and its consolidated
Restricted Subsidiaries (excluding any such non-cash charge to the extent
that it represents an accrual of or reserve for cash expenditures in any
future period);
in each case for such period, and less, to the extent included in calculating
such Consolidated Net Income and in excess of any costs or expenses attributable
thereto and deducted in calculating such Consolidated Net Income, the sum of:
(A) the amount of deferred revenues that are amortized during such
period and are attributable to reserves that are subject to Volumetric
Production Payments; and
(B) amounts recorded in accordance with GAAP as repayments of
principal and interest pursuant to Dollar-Denominated Production Payments.
Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation, depletion, exploration and amortization and
non-cash charges of, a Restricted Subsidiary shall be added to Consolidated Net
Income to compute EBITDA only to the extent (and in the same proportion,
including by reason of minority interests) that the net income of such
Restricted Subsidiary was included in calculating Consolidated Net Income and
only if a corresponding amount would be permitted at the date of determination
to be dividended to the Company by such Restricted Subsidiary without prior
approval (that has not been obtained), pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted Subsidiary or its
stockholders.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended.
"Existing Investments" means assets (including securities) held by the
Company or any of the Restricted Subsidiaries as consideration for an Investment
made on or before the Issue Date or acquired thereafter pursuant to any
agreement or obligation as in effect on the Issue Date.
"Existing Notes" means the Company's 8 7/8% Senior Subordinated Notes Due
2007.
"Existing Preferred Stock" means the Company's 6 1/2% Convertible Preferred
Stock, par value $.01 per share and liquidation preference $25.00 per share.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting
Standards Board;
(3) such other statements by such other entity as approved by a
significant segment of the accounting profession; and
132
(4) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase
assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise); or
(2) entered into for the purpose of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any Indebtedness.
"Guaranty Agreement" means a supplemental indenture, in a form satisfactory
to the Trustee, pursuant to which a Subsidiary Guarantor guarantees the
Company's obligations with respect to the notes on the terms provided for in the
indenture.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Oil and Natural Gas Hedging Contract, Interest Rate Agreement or
Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Person at the time it becomes a Restricted Subsidiary. The term
"Incurrence" when used as a noun shall have a correlative meaning. Solely for
purposes of determining compliance with "-- Certain Covenants -- Limitation on
Indebtedness," (1) amortization of debt discount or the accretion of principal
with respect to a non-interest bearing or other discount security, (2) the
payment of regularly scheduled interest in the form of additional Indebtedness
of the same instrument or the payment of regularly scheduled dividends on
Capital Stock in the form of additional Capital Stock of the same class and with
the same terms, and (3) unrealized losses or charges in respect of Hedging
Obligations (including those resulting from the application of FAS 133) will be
deemed not to be Incurrences of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal in respect of (A) indebtedness of such Person for
money borrowed and (B) indebtedness evidenced by notes, debentures, bonds
or other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(2) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/ Leaseback Transactions entered into by such
Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding trade accounts payable and accrued expenses);
(4) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in clauses (1)
through (3) above) entered into in
133
the ordinary course of business of such Person to the extent such letters
of credit are not drawn upon or, if and to the extent drawn upon, such
drawing is reimbursed no later than the tenth Business Day following
payment on the letter of credit);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock of such
Person or, with respect to any Preferred Stock of any Restricted Subsidiary
of such Person, the principal amount of such Preferred Stock to be
determined in accordance with the Indenture (but excluding, in each case,
any accrued dividends) (and the term "Incur Indebtedness" and similar terms
include issuances of such Disqualified Stock and Preferred Stock);
(6) all obligations of the types referred to in clauses (1) through
(5) of other Persons for which, and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, including by means of any Guarantee;
(7) all obligations of the types referred to in clauses (1) through
(6) of other Persons secured by any Lien on any property of such Person
(whether or not such obligation is assumed by such Person), the amount of
such obligation being deemed to be the lesser of the liquidation value of
such property and the amount of the obligation so secured;
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person; and
(9) any Guarantee by such Person of production or payment with respect
to a Production Payment,
if and to the extent, in the case of obligations of the types referred to in
clauses (1), (2) and (3) above, such obligations would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP.
Except as expressly provided in clause (9) above, Production Payments and
Reserve Sales shall not constitute "Indebtedness."
Notwithstanding the foregoing, in connection with the purchase by the
Company or any Restricted Subsidiary of any business, the term "Indebtedness"
will exclude post-closing payment adjustments to which the seller may become
entitled to the extent such payment is determined by a final closing balance
sheet or such payment depends on the performance of such business after the
closing; provided, however, that, at the time of closing, the amount of any such
payment is not determinable and, to the extent such payment thereafter becomes
fixed and determined, the amount is paid within 30 days thereafter.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date; provided,
however, that in the case of Indebtedness sold at a discount, the amount of such
Indebtedness at any time will be the accreted value thereof at such time.
"Independent Qualified Party" means an investment banking firm, accounting
firm or appraisal firm of national standing; provided, however, that such firm
is not an Affiliate of the Company.
"Interest Rate Agreement" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit, including by way of Guarantee (but excluding any such
extension of credit made in the ordinary course of business to any customer or
supplier) or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), or any purchase or acquisition for value of Capital Stock,
Indebtedness or other similar instruments issued by, such Person. Except as
otherwise provided for herein, the amount of an Investment shall be its fair
value at the time the Investment is made and without giving effect to subsequent
changes in value therein or in the consideration received in exchange for such
Investment.
134
For purposes of the definition of "Unrestricted Subsidiary," the definition
of "Restricted Payment" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments:"
(1) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of
the net assets of any Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; and
(2) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer, in
each case as determined in good faith by the Board of Directors.
"Issue Date" means November 5, 2001.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices and changes resulting from the incurrence
of previously estimated development costs) of more than 50% during a fiscal
quarter in the discounted future net revenues from proved oil and natural gas
reserves of the Company and its Restricted Subsidiaries, calculated in
accordance with clause (a)(1) of the definition of ACNTA; provided, however,
that the following will be excluded from the calculation of Material Change:
(1) any acquisitions during the fiscal quarter of oil and natural gas
reserves that have been estimated by independent petroleum engineers and
with respect to which a report or reports of such engineers exist; and
(2) any disposition of properties existing at the beginning of such
fiscal quarter that have been disposed of in compliance with the covenant
described under "-- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock."
"Moody's" means Moody's Investors Service, Inc.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such assets or received in any other noncash form), in
each case net of:
(1) all accounting, engineering, investment banking, brokerage, legal,
title and recording tax expenses, commissions and other fees and expenses
incurred, and all Federal, state, provincial, foreign and local and other
taxes required to be accrued as a liability under GAAP, as a consequence of
such Asset Disposition, and any relocation expenses incurred or assumed in
connection with such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of
any Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of
the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Restricted Subsidiaries as a result of such
Asset Disposition; and
(4) the deduction of appropriate amounts provided by the seller as a
reserve for adjustment in respect of the sale price of the assets that were
the subject of such Asset Disposition or as a reserve, in accordance with
GAAP, against any liabilities associated with such assets and retained by
the Company or any Restricted Subsidiary after such Asset Disposition.
135
Notwithstanding the foregoing, to the extent that any or all of the Net
Available Cash from an Asset Disposition made outside the United States of
America is prohibited or delayed from being repatriated to the United States
pursuant to applicable local law (or to the extent that the Board of Directors
determines, in good faith, that repatriation of such Net Available Cash would
have a material adverse tax consequence to the Company) despite reasonable
effort by the Company or such Restricted Subsidiary to exclude or release those
funds from such restrictions or to avoid such tax, the portion of such Net
Available Cash so affected shall be deemed excluded from Net Available Cash for
so long as such restrictions or material adverse tax consequences exist.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Net Present Value" means, with respect to any proved oil and natural gas
reserves, the discounted future net cash flows associated with such reserves,
determined in accordance with the rules and regulations (including
interpretations thereof) of the SEC in effect on the date of this Offering
Circular.
"Net Working Capital" means:
(1) all current assets of the Company and its Restricted Subsidiaries,
except current assets from commodity price risk management activities
arising in the ordinary course of business; minus
(2) all current liabilities of the Company and its Restricted
Subsidiaries, except current liabilities included in Indebtedness and
current liabilities from commodity price risk management activities arising
in the ordinary course of business,
determined in accordance with GAAP.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Oil and Gas Business" means:
(1) the acquisition, exploration, exploitation, development, operation
and disposition of interests in oil, gas and other hydrocarbon properties;
(2) the gathering, marketing, distribution, treating, processing,
storage, refining, selling and transporting of any production from such
interests or properties and the marketing of oil and gas obtained from
unrelated Persons;
(3) any business relating to or arising from exploration for or
exploitation, development, production, treatment, processing, storage,
refining, transportation, gathering or marketing of oil, gas and other
minerals and products produced in association therewith;
(4) any other related energy business, including power generation and
electrical transmission business in a jurisdiction outside North America
where fuel required by such business is supplied, directly or indirectly,
from hydrocarbons produced substantially from properties in which the
Company or its Restricted Subsidiaries, directly or indirectly,
participates;
(5) any business relating to oil field sales and service; and
(6) any activity necessary, appropriate or incidental to the
activities described in the preceding clauses (1) through (5) of this
definition.
136
"Oil and Natural Gas Hedging Contract" means any oil and natural gas
hedging agreement, and other agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in oil and natural gas
prices.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Business Investments" means Investments and expenditures made in
the ordinary course of, and of a nature that is or shall have become customary
in, the Oil and Gas Business as means of actively exploiting, exploring for,
acquiring, developing, processing, gathering, marketing or transporting oil and
natural gas through agreements, transactions, interests or arrangements that
permit one to share risks or costs, comply with regulatory requirements
regarding local ownership or satisfy other objectives customarily achieved
through the conduct of the Oil and Gas Business jointly with third parties,
including:
(1) ownership interests in oil and natural gas properties or
gathering, transportation, processing, storage or related systems; and
(2) entry into, and Investments and expenditures in the form of or
pursuant to, operating agreements, working interests, royalty interests,
mineral leases, processing agreements, farm-in agreements, farm-out
agreements, contracts for the sale, transportation or exchange of oil and
natural gas, production sharing agreements, development agreements, area of
mutual interest agreements, unitization agreements, pooling arrangements,
joint bidding agreements, service contracts, joint venture agreements,
partnership agreements (whether general or limited), limited liability
company agreements, subscription agreements, stock purchase agreements,
stockholder agreements and other similar agreements with third parties
(including Unrestricted Subsidiaries).
"Permitted Holders" means:
(1) Robert A. Belfer, Renee E. Belfer, Laurence D. Belfer and Jack
Saltz;
(2) Saltz Investment Group, LLC, Jack & Anita Saltz Foundation, The
Robert A. and Renee E. Belfer Family Foundation, Belfer Corp., Belwest
Petroleum, Inc., A&B Investors, Inc., Renee Holdings Partnership, L.P.,
Trust for the benefit of Elizabeth Kones Belfer (T-6), Trust for the
benefit of Elizabeth Kones Belfer (T-7), The Laurence D. Belfer Family
Foundation, LDB Corp., Robert A. Belfer 1990 Family Trust and Vantz Limited
Partnership (together with the Persons listed in clause (1), the "Belfer
Group");
(3) Westport Energy LLC, Richard J. Haas, Robert A. Haas, Eugen von
Liechtenstein and Graham Garner (the "Westport Energy Group");
(4) ERI Investments, Inc.;
(5) the direct and indirect beneficial owners of the Persons described
in clauses (2), (3) and (4);
(6) the spouses or descendants of such individuals described or listed
above;
(7) the estates or legal representatives of the individuals described
or listed above;
(8) trusts created for the benefit of such Persons; and
(9) entities 80% or more directly or indirectly owned by any of the
preceding Persons,
provided, however, that to the extent Voting Stock beneficially owned (as
defined in clause (1) of the definition of "Change of Control") by any of the
Belfer Group, the Westport Energy Group or ERI Investments, Inc. (together with
their respective related persons identified in clauses (5) to (9)), exceeds in
the aggregate 30% of the Voting Stock of the Company, such Voting Stock shall be
deemed not to be beneficially owned by a Permitted Holder.
137
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) the Company, a Restricted Subsidiary or a Person that will as a
result of such Investment and all other related transactions, become a
Restricted Subsidiary or be merged, consolidated or amalgamated with or
into, or transfer or convey all or substantially all of its assets to, or
be liquidated into, the Company or a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary or Person
is a Related Business;
(2) cash and Temporary Cash Investments;
(3) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances;
(4) payroll, travel and similar extensions of credit to cover matters
that are expected at the time of such extensions of credit ultimately to be
treated as expenses for accounting purposes and that are made in the
ordinary course of business;
(5) extensions of credit to officers, directors and employees made in
the ordinary course of business of the Company or such Restricted
Subsidiary;
(6) Capital Stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to the Company
or any Restricted Subsidiary or in satisfaction of judgments;
(7) any Person to the extent such Investment represents the non-cash
portion of the consideration received for an Asset Disposition as permitted
pursuant to the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" or
consideration received for a disposition not constituting an Asset
Disposition;
(8) any Person where such Investment was acquired by the Company or
any of its Restricted Subsidiaries (a) in exchange for any other Investment
or accounts receivable held by the Company or any such Restricted
Subsidiary in connection with or as a result of a bankruptcy, workout,
reorganization or recapitalization of the issuer of such other Investment
or accounts receivable or (b) as a result of a foreclosure by the Company
or any of its Restricted Subsidiaries with respect to any secured
Investment or other transfer of title with respect to any secured
Investment in default;
(9) any acquisitions of Capital Stock solely in exchange for Capital
Stock (other than Disqualified Stock) of the Company; provided, however,
that the fair market value of such Capital Stock, when taken together with
all other Capital Stock acquired pursuant to this clause (9) and at the
time owned by the Company or its Restricted Subsidiaries, does not exceed
$10.0 million;
(10) Hedging Obligations;
(11) obligations of one or more officers, directors or employees of
the Company or any of its Restricted Subsidiaries in connection with such
individual's acquisition of shares of Capital Stock of the Company (and
refinancings of the principal thereof and accrued interest thereon) so long
as no net cash or other assets of the Company and its Restricted
Subsidiaries is paid by the Company or any of its Restricted Subsidiaries
to such individuals in connection with the acquisition of any such
obligations;
(12) Existing Investments and any Investments made with the proceeds
of any dispositions thereof;
(13) Permitted Business Investments;
(14) Guarantees of performance or other obligations (other than
Indebtedness) arising in the ordinary course in the Oil and Gas Business,
including obligations under oil and natural gas exploration, development,
joint operating, and related agreements and licenses or concessions related
to the Oil and Gas Business;
138
(15) Investments in prepaid expenses, negotiable instruments held for
collection or deposit and lease, utility and workers compensation,
performance and similar deposits entered into as a result of the operations
of the business in the ordinary course of business; and
(16) any Person, not otherwise permitted to be made pursuant to clause
(1) through (15), in an aggregate amount, which when taken together with
all other Investments made on or after the Issue Date pursuant to this
clause, does not exceed $20 million at any one time outstanding.
"Permitted Liens" means the following types of Liens:
(1) Liens securing Senior Indebtedness;
(2) Liens in favor of the Company or a Restricted Subsidiary;
(3) Liens securing the notes:
(4) Liens existing as of the Issue Date;
(5) Liens for taxes, assessments and governmental charges or claims
either (A) not delinquent or (B) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(6) statutory and contractual Liens of landlords and Liens of
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and
other Liens imposed by law or contract incurred in the ordinary course of
business for sums not delinquent or being contested in good faith, if such
reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made in respect thereof;
(7) Liens incurred or deposits or pledges made in the ordinary course
of business in connection with workers' compensation, unemployment
insurance and other types of social security, or to secure the payment or
performance of tenders, statutory or regulatory obligations, surety and
appeal bonds, bids, leases, government contracts and leases, performance
and return of money bonds and other similar obligations, including letters
of credit and bank guarantees required or requested by the United States,
any State thereof or any foreign government or any subdivision, department,
agency, organization or instrumentality of any of the foregoing in
connection with any contract or statute (exclusive of obligations for the
payment of borrowed money but including lessee or operator obligations
under statutes, governmental regulations, contracts or instruments related
to the ownership, exploration and production of oil, gas and minerals on
state, Federal or foreign lands or waters);
(8) Liens arising out of judgments, decrees, orders or awards not
constituting an Event of Default;
(9) leases, subleases, licenses or sublicenses to third parties
entered into in the ordinary course of business;
(10) Liens on, or related to, assets to secure all or part of the
costs incurred in the ordinary course of the Oil and Gas Business for the
exploration, drilling, development, production, processing, transportation,
marketing, storage or operation thereof;
(11) Liens on pipeline or pipeline facilities that arise under
operation of law;
(12) Liens arising under operating agreements, joint venture
agreements, partnership agreements, oil and gas leases, farm-out or farm-in
agreements, division orders, contracts for the sale, transportation or
exchange of oil or natural gas, unitization and pooling declarations and
agreements, area of mutual interest agreements and other agreements that
are customary in the Oil and Gas Business;
(13) Liens reserved in oil and gas mineral leases for bonus or rental
payments and for compliance with the terms of such leases;
(14) Liens constituting survey exceptions, encumbrances, easements,
and reservations of, and rights to others for, rights-of-way, zoning and
other restrictions as to the use of real properties, and minor defects of
title which, in the case of any of the foregoing, do not secure the payment
of borrowed money, and in the aggregate do not materially adversely affect
the value of the assets of the Company and its
139
Restricted Subsidiaries, taken as a whole, or materially impair the use of
such properties for the purposes for which such properties are held by the
Company or such Subsidiaries;
(15) Liens encumbering assets under construction arising from progress
or partial payments by a customer of the Company or its Restricted
Subsidiaries relating to such assets;
(16) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual or warranty requirements of the
Company or any of its Restricted Subsidiaries, including rights of offset
and set-off;
(17) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(18) Liens arising under the Indenture in favor of the Trustee for its
own benefit and similar Liens in favor of other trustees, agents and
representatives arising under instruments governing Indebtedness permitted
to be incurred under the Indenture, provided, however, that such Liens are
solely for the benefit of the trustees, agents or representatives in their
capacities as such and not for the benefit of the holders of such
Indebtedness;
(19) set-off, chargeback and other rights of depositary and collection
banks and other regulated financial institutions with respect to money or
instruments of the Company or any of its Restricted Subsidiaries on deposit
with or in the possession of such institutions; and
(20) Liens arising from the deposit of funds or securities in trust
for the purpose of decreasing or defeasing Indebtedness so long as such
deposit of funds or securities and such decreasing or defeasing of
Indebtedness are permitted under the covenant described under "Certain
Covenants -- Limitation on Restricted Payments."
In each case set forth above, notwithstanding any stated limitation on the
assets that may be subject to such Lien, a Permitted Lien on a specified asset
or group or type of assets may include Liens on all improvements, additions and
accessions thereto and all products and proceeds thereof (including, without
limitation, dividends, distributions and increases in respect thereof).
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of a note means the principal of the note plus the premium, if
any, payable on the note which is due or overdue or is to become due at the
relevant time.
"Production Payments" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"Production Payments and Reserve Sales" means the grant or transfer to any
Person of a Dollar-Denominated Production Payment, Volumetric Production
Payment, royalty, overriding royalty, net profits interest, master limited
partnership interest or other interest in oil and natural gas properties,
reserves or the right to receive all or a portion of the production or the
proceeds from the sale of production attributable to such properties.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
140
"Refinance" means, in respect of any Indebtedness, to refinance or refund,
or to issue other Indebtedness in exchange or replacement for, such
Indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced; and
(3) such Refinancing Indebtedness has an aggregate principal amount
(or if Incurred with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus accrued interest thereon and fees and
expenses, including any premium and defeasance costs) under the
Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include (A)
Indebtedness of a Restricted Subsidiary that is not a Subsidiary Guarantor which
Refinances Indebtedness of the Company and (B) Indebtedness of the Company or a
Restricted Subsidiary that Refinances Indebtedness of an Unrestricted
Subsidiary.
"Registration Rights Agreement" means the Registration Rights Agreement
dated October 31, 2001, among the Company, Credit Suisse First Boston
Corporation, Fleet Securities, Inc., Fortis Investment Services LLC, J.P. Morgan
Securities Inc., Lehman Brothers, Inc., TD Securities (USA) Inc. and U.S.
Bancorp Piper Jaffray Inc.
"Related Business" means the Oil and Gas Business and any other business in
which the Company or a Subsidiary was engaged on the Issue Date and any business
related, ancillary or complementary thereto.
"Representative" means with respect to a Person any trustee, agent or
representative (if any) for an issue of Senior Indebtedness of such Person.
"Restricted Payment" with respect to any Person means:
(1) the declaration or payment (without duplication) of any dividends
or any other distributions of any sort in respect of its Capital Stock
(including any payment in connection with any merger or consolidation
involving such Person) or similar payment to the direct or indirect holders
of its Capital Stock (other than (A) dividends or distributions payable
solely in its Capital Stock (other than Disqualified Stock), (B) dividends
or distributions payable solely to the Company or a Restricted Subsidiary,
and (C) dividends or other distributions made by a Subsidiary to the
holders of any class of its Capital Stock on a pro rata basis);
(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company held by any Person (other than a
Restricted Subsidiary) or of any Capital Stock of a Restricted Subsidiary
held by any Affiliate of the Company (other than the Company or a
Restricted Subsidiary), including the exercise of any option to exchange
any Capital Stock (other than into Capital Stock of the Company that is not
Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated Obligations
of such Person (other than the purchase, repurchase, redemption, defeasance
or other acquisition or retirement for value of Subordinated Obligations in
anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of such
purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value); or
141
(4) the making of any Investment (other than a Permitted Investment)
in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Revolving Credit Facility" means the Credit Agreement dated as of August
21, 2001 among the Company, the lenders referred to therein, The Chase Manhattan
Bank, as Issuing Bank and Administrative Agent, Credit Suisse First Boston and
Fleet National Bank, as Syndication Agents, and Fortis Capital Corp. and U.S.
Bank National Association, as Documentation Agents, together with the related
documents thereto (including the term loans and revolving loans thereunder, any
guarantees and security documents, whether made by the Company or any Restricted
Subsidiary), as amended, extended, renewed, restated, supplemented or otherwise
modified (in whole or in part, and without limitation as to amount, terms,
conditions, covenants and other provisions) from time to time, and any agreement
(and related document) governing Indebtedness incurred to Refinance, in whole or
in part, the borrowings and commitments then outstanding or permitted to be
outstanding under such credit agreement or a successor credit agreement, whether
by the same or any other lender or agent or group of lenders or agents.
"S&P" means Standard and Poor's Ratings Group.
"Sale/Leaseback Transaction" means an arrangement relating to property
owned by the Company or a Restricted Subsidiary on the Issue Date or thereafter
acquired by the Company or a Restricted Subsidiary whereby the Company or a
Restricted Subsidiary transfers such property to a Person and thereafter the
Company or a Restricted Subsidiary leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the U.S. Securities Act of 1933, as amended.
"Senior Indebtedness" means with respect to any Person:
(1) Indebtedness of such Person, whether outstanding on the Issue Date
or thereafter Incurred; and
(2) (i) accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization
relating to such Person whether or not post-filing interest is allowed in
such proceeding) and (ii) reimbursement obligations, fees, commissions,
expenses, indemnitees and other similar amounts in respect of (A)
indebtedness of such Person for money borrowed (and all Hedging Obligations
directly related thereto) and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable
unless, in the case of clauses (1) and (2), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such obligations are subordinate or pari passu in right of payment to the
Notes or the Subsidiary Guaranty of such Person, as the case may be; provided,
however, that Senior Indebtedness shall not include:
(A) any obligation of such Person to any Subsidiary;
(B) any liability for Federal, state, local or other taxes owed or
owing by such Person;
(C) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);
(D) any Indebtedness of such Person (and any accrued and unpaid
interest in respect thereof) which is subordinate or junior in right of
payment to any other Indebtedness or other obligation of such Person;
(E) any Disqualified Stock; and
(F) that portion of any Indebtedness which at the time of Incurrence
is Incurred in violation of the Indenture (but, as to any such obligation,
no such violation shall be deemed to exist for the purposes of this clause
(F) if the Trustee shall have received an Officers' Certificate of the
Company at the time of such Incurrence to the effect that the Incurrence of
such Indebtedness does not violate the Indenture) other than Indebtedness
under (i) the Revolving Credit Facility or (ii) any other Credit Facility
that is
142
incurred on the basis of a representation by the Company to the applicable
lenders that it is permitted to incur such Indebtedness under the
Indenture.
"Senior Subordinated Indebtedness" means, with respect to a Person, the
notes and the Existing Notes (in the case of the Company), a Subsidiary Guaranty
and a Guarantee of the Existing Notes (in the case of a Subsidiary Guarantor)
and any other Indebtedness of such Person that specifically provides that such
Indebtedness is to rank pari passu with the notes or such Subsidiary Guaranty,
as the case may be, in right of payment and is not subordinated by its terms in
right of payment to any Indebtedness or other obligation of such Person which is
not Senior Indebtedness of such Person.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means, with respect to a Person, any Indebtedness
of such Person (whether outstanding on the Issue Date or thereafter Incurred)
which is subordinate or junior in right of payment to the notes or a Subsidiary
Guaranty of such Person, as the case may be, pursuant to a written agreement to
that effect.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Voting Stock is at the time owned or controlled,
directly or indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
Unless otherwise specified, "Subsidiary" means a Subsidiary of the Company.
"Subsidiary Guarantor" means each Subsidiary of the Company that executes
the Indenture on the Issue Date as a guarantor and each other Subsidiary of the
Company that thereafter guarantees the notes pursuant to the terms of the
Indenture, in each case unless and until such Subsidiary is released from its
obligations under its Subsidiary Guaranty pursuant to the terms of the
Indenture.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the notes.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of
America or any agency thereof or obligations guaranteed by the United
States of America or any agency thereof;
(2) investments in demand accounts, time deposit accounts, bankers'
acceptances, overnight bank deposits, certificates of deposit and money
market deposits maturing within twelve months of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any State thereof or any foreign country
recognized by the United States of America, and which bank or trust company
is a lender under the Revolving Credit Facility or has capital, surplus and
undivided profits aggregating in excess of $50.0 million (or the foreign
currency equivalent thereof) and has outstanding debt which is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under
the Securities Act) or any money-market fund sponsored by a registered
broker dealer or mutual fund distributor;
143
(3) investments in deposits available for withdrawal on demand with
any commercial bank that is organized under the laws of any country in
which the Company or any Restricted Subsidiary maintains an office or is
engaged in the Oil and Gas Business, provided that (i) all such deposits
have been made in such accounts in the ordinary course of business and (ii)
such deposits do not at any one time exceed $10.0 million in the aggregate;
(4) repurchase (or reverse repurchase) obligations with a term of not
more than 30 days for underlying securities of the types described in
clause (1) above entered into with a bank meeting the qualifications
described in clause (2) above;
(5) investments in commercial paper issued by a corporation (other
than an Affiliate of the Company) organized and in existence under the laws
of the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's or
"A-1" (or higher) according to S&P; and
(6) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or "A" by Moody's.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two Business Days prior to the date fixed
for redemption or, in the case of defeasance, prior to the date of deposit (or,
if such Statistical Release is no longer published, any publicly available
source of similar market data)) most nearly equal to the then remaining average
life to November 1, 2006 or, in the case of defeasance, to maturity; provided,
however, that if the average life to November 1, 2006 or maturity, as the case
may be, of the notes is not equal to the constant maturity of a United States
Treasury security for which a weekly average yield is given, the Treasury Rate
shall be obtained by linear interpolation (calculated to the nearest one-twelfth
of a year) from the weekly average yields of United States Treasury securities
for which such yields are given, except that if the average life to November 1,
2006 or maturity, as the case may be, of the notes is less than one year, the
weekly average yield on actually traded United States Treasury securities
adjusted to a constant maturity of one year shall be used.
"Trustee" means The Bank of New York until a successor replaces it and,
thereafter, means the successor.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
sec.sec. 77aaa-77bbbb) as in effect on the Issue Date, except as specified in
the Indenture.
"Trust Officer" means any officer or assistant officer of the Trustee
assigned by the Trustee to administer its corporate trust matters.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors in
the manner provided below;
(2) any Subsidiary of an Unrestricted Subsidiary; and
(3) Belco Energy (Cayman Islands) Corp., AWM-Chile LLC and AWM-Chile
Two LLC,
in each case unless and until such time as such Subsidiary is designated a
Restricted Subsidiary for the purposes of the Indenture.
The Board of Directors may designate any Subsidiary of the Company
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital
Stock or Indebtedness of, or holds any Lien on any property of, the Company or
any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary
to be so designated; provided, however, that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary
144
has assets greater than $1,000, such designation would be permitted under the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments" (the amount of such Restricted Payment being calculated in the manner
set forth in the definition of the term "Investment").
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation (A) the Company could Incur $1.00 of additional Indebtedness
under paragraph (a) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness" and (B) no Default shall have occurred
and be continuing. Any such designation by the Board of Directors shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
resolution of the Board of Directors giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares required by
applicable law to be held by a Person other than the Company or a Restricted
Subsidiary) is owned by the Company or one or more Wholly Owned Subsidiaries.
145
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain of the material United States federal
income tax consequences of exchanging for, holding and selling the exchange
notes. Except where we state otherwise, this summary deals only with notes held
as capital assets, as defined in the Internal Revenue Code of 1986, as amended,
or the Code, by a United States Holder (as defined below) who is the initial
beneficial owner of the exchange note.
We do not address all of the tax consequences that may be relevant to a
United States Holder. We also do not address, except as stated below, any of the
tax consequences to holders that are Foreign Holders (as defined below) or to
holders that may be subject to special tax treatment including banks, thrift
institutions, real estate investment trusts, personal holding companies,
insurance companies, and brokers and dealers in securities or currencies.
Further, we do not address:
- the United States federal income tax consequences to stockholders in, or
partners or beneficiaries of, an entity that is a holder of the notes;
- the United States federal estate and gift or alternative minimum tax
consequences of the purchase, ownership or sale of the notes;
- the United States federal income tax consequences to persons who hold the
notes in a "straddle" or as part of a "hedging," "conversion" or
"constructive sale" transaction or whose "functional currency" is not the
United States dollar; or
- any state, local or foreign tax consequences of the purchase, ownership
and sale of the notes.
Accordingly, you should consult your own tax advisor regarding the particular
tax consequences of exchanging for, owning and selling the notes in light of
your circumstances.
A "United States Holder" is a beneficial owner of the notes who, for United
States federal income tax purposes, is:
- an individual who is a citizen or resident of the United States;
- a corporation or another entity taxable as a corporation created or
organized in or under the laws of the United States or any political
subdivision thereof or therein;
- an estate if its income is subject to United States federal income
taxation regardless of its source;
- a trust if (1) a United States court can exercise primary supervision
over its administration and (2) one or more United States persons have
the authority to control all of its substantial decisions; or
- specified electing trusts that were in existence on August 20, 1996 and
treated as domestic trusts on that date.
If a partnership holds notes, the tax treatment of a partner will generally
depend upon the status of the partner and upon the activities of the
partnership.
A "Foreign Holder" is a beneficial owner of the notes other than a United
States Holder.
This summary is based on the currently existing provisions of the Code,
Treasury regulations issued under the Code, and administrative judicial
interpretations thereof, all as they currently exist as of the date of this
prospectus and all of which are subject to change, possibly with retroactive
effect, or different interpretations. Legislative, judicial, or administrative
changes or interpretations may be forthcoming that could alter or modify the
statements and conclusions made below and that could affect the tax consequences
discussed below. We have not asked, and do not intend to ask, for a ruling from
the Internal Revenue Service on any of the tax consequences discussed below.
Accordingly, we can give you no assurance that the Internal Revenue Service will
not take a contrary view.
146
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
Payment of Interest on the Notes. Interest paid or payable on a note will
be taxable to a United States Holder as ordinary income, generally at the time
it is received or accrued, in accordance with such holder's regular method of
accounting for United States federal income tax purposes.
Exchange Offer. The exchange of old notes for exchange notes in the
Registered Exchange Offer will not constitute a taxable event for United States
Holders. Consequently, a United States Holder will not recognize gain or loss on
the exchange, the holding period of the exchange note will include the holding
period of the old note, and the basis of the exchange note will be the same as
the basis of the old note immediately before the exchange.
If a United States Holder receives additional interest, we believe it
should be treated in the same manner as regular interest on the notes. However,
the United States Holder might instead be required to report it as income when
it accrues or becomes fixed, even if the United States Holder is a cash method
taxpayer.
Sale, Exchange or Retirement of the Notes. Upon the sale, exchange,
redemption, retirement at maturity or other disposition of a note, a United
States Holder generally will recognize taxable gain or loss equal to the
difference between the sum of cash plus the fair market value of all non-cash
property received on such disposition (except to the extent such cash or
property is attributable to accrued, but unpaid, interest, which will be taxable
as ordinary income) and such United States Holder's adjusted tax basis in the
note. A United States Holder's adjusted tax basis in a note generally will equal
the cost of the note to such United States Holder. Gain or loss recognized on
the disposition of a note will be long-term capital gain or loss if, at the time
of such disposition, the United States Holder's holding period for the note is
more than one year. Long-term capital gain realized by individual taxpayers is
generally taxable at a maximum rate of 20 percent. The deductibility of capital
losses is subject to limitations.
Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements may apply to payments made with respect to
the notes. We, or our agent or a broker, as the case may be, will be required to
withhold from any payment that is subject to backup withholding United States
federal income tax a portion of such payment not to exceed 30.5% (30% beginning
January 1, 2002); if a United States Holder fails to furnish its taxpayer
identification number (social security or employer identification number) or
otherwise fails to comply with the applicable requirements of the backup
withholding rules. Corporations and certain other entities are generally exempt
from the backup withholding and information reporting requirements. Generally,
income on the notes will be reported to non-exempt United States Holders on an
applicable Internal Revenue Service Form 1099.
Any amounts withheld under the backup withholding rules from a payment to a
United States Holder will be allowed as a credit against such United States
Holder's United States federal income tax liability and may entitle the United
States Holder to a refund, provided that the required information is furnished
to the Internal Revenue Service by the United States Holder.
UNITED STATES FEDERAL INCOME TAXATION OF FOREIGN HOLDERS
Payment of Interest on the Notes. Payments of interest to a Foreign Holder
that are not effectively connected to the conduct of a United States trade or
business will generally not be subject to United States federal income tax, or
the withholding thereof, provided the Foreign Holder:
- does not own (directly or indirectly, actually or constructively) 10% or
more of the total combined voting power of all classes of our capital
stock entitled to vote;
- is not a controlled foreign corporation that is related to us through
stock ownership; and
- is not a bank receiving interest described in section 881(c)(3)(A) of the
Code.
A Foreign Holder that receives interest payments that are not effectively
connected with a United States trade or business but that does not satisfy each
of the three above mentioned conditions will be subject to
147
withholding tax at a rate of 30%, unless a United States income tax treaty
applies to reduce or eliminate withholding.
To qualify for exemption from withholding, the last United States payor in
the chain of payment prior to payment to a Foreign Holder (the "withholding
agent") must have received in the year in which a payment of interest or
principal occurs, or in either of the two preceding calendar years, a statement
that:
- is signed by the Foreign Holder under penalties of perjury;
- certifies that the holder of the securities is a Foreign Holder; and
- provides the name and address of the Foreign Holder.
The statement may be made on an Internal Revenue Service Form W-8BEN or a
substantially similar form, and the Foreign Holder must inform the withholding
agent of any change in the information on the statement within 30 days of any
change. If the notes are held through a securities clearing organization or
certain other financial institutions that are not qualified intermediaries, the
organization or institution may provide a signed statement to the withholding
agent along with a copy of Internal Revenue Service Form W-8BEN or a substitute
form provided by the Foreign Holder. If the financial institution is a qualified
intermediary, it generally will not be required to furnish a copy of the
Internal Revenue Service Form W-8BEN. A qualified intermediary is a financial
institution that has entered into a withholding agreement with the Internal
Revenue Service.
Exchange Offer. The exchange of old notes for exchange notes in the
Registered Exchange Offer will not constitute a taxable event for Foreign
Holders. Consequently, for United States federal income tax purposes, a Foreign
Holder will not recognize gain or loss on the exchange, the holding period of
the exchange note will include the holding period of the old note, and the basis
of the exchange note will be the same as the basis of the old note immediately
before the exchange. If a Foreign Holder receives additional interest on the
notes, we believe it should be treated in the same manner as regular interest on
the notes.
Sale, Exchange or Retirement of the Notes. A Foreign Holder will generally
not be subject to United States federal income tax, or the withholding thereof,
on any gain realized upon the sale, exchange, redemption, retirement at maturity
or other disposition of the notes. If, however, the gain is effectively
connected with the conduct of a trade or business within the United States by
the Foreign Holder or if the Foreign Holder is present in the United States for
183 days or more during the taxable year of sale, redemption, retirement or
other disposition and certain other conditions are met, the Foreign Holder may
be subject to income tax on all income and gains recognized.
United States Trade or Business. If a Foreign Holder holds the notes in
connection with a trade or business that the Foreign Holder is conducting in the
United States:
- Any interest on the notes, and any gain from disposing of the notes,
generally will be subject to income tax as if the Foreign Holder were a
United States Holder.
- If the Foreign Holder is a corporation, the Foreign Holder may be subject
to the "branch profits tax" on the earnings that are connected with
Foreign Holder's United States trade or business, including earnings from
the notes. This tax is 30%, but may be reduced or eliminated by an
applicable United States income tax treaty.
Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements do not apply to payments of interest made to
Foreign Holders if the certification needed to avoid withholding tax on
interest, as described above, is received, provided that the payor does not have
actual knowledge that the Holder is a United States Holder. If any payments of
principal and interest are made to the beneficial owner of a note by or through
the foreign office of a foreign custodian, foreign nominee or other foreign
agent of such beneficial owner, or if the foreign office of a foreign "broker"
(as defined in applicable United States Treasury regulations) pays the proceeds
of the sale of a note effected outside the United States to the seller thereof,
backup withholding and information reporting will not apply. Information
reporting requirements (but not backup withholding) will apply, however, to a
payment by or through a foreign office of
148
a broker of principal and interest or the proceeds of a sale of a note effected
outside the United States if that broker has specified types of relationships
with the United States, unless the broker has documentary evidence in its
records that the holder is a Foreign Holder and certain other conditions are met
or the Foreign Holder otherwise establishes an exemption. Payment by a United
States office of a broker is subject to both backup withholding at a rate not to
exceed 30.5% (30% beginning January 1, 2002) and information reporting unless
the holder certifies, under penalties of perjury, in the manner required as to
its Foreign Holder status or otherwise establishes an exemption.
PLAN OF DISTRIBUTION
Based on interpretations of the SEC set forth in no-action letters issued
to third parties, we believe that exchange notes issued under the exchange offer
in exchange for old notes may be offered for resale, resold and otherwise
transferred by you without compliance with the registration and prospectus
delivery provisions of the Securities Act, if:
- you are not an "affiliate" of ours within the meaning of Rule 405 under
the Securities Act;
- you are acquiring exchange notes in the ordinary course of your business;
and
- you do not intend to participate in the distribution of the exchange
notes.
If you tender old notes in the exchange offer with the intention of
participating in any manner in a distribution of the exchange notes:
- you cannot rely on those interpretations of the SEC; and
- you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction, and the secondary resale transaction must be covered by an
effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K
under the Securities Act.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of the exchange notes. This prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of exchange notes received in exchange
for old notes where the old notes were acquired as a result of market-making
activities or other trading activities. We have agreed that, for a period of 180
days after the exchange offer is completed, we will make this prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any resale of exchange notes. In addition, until 90 days after the date of
this prospectus, all dealers effecting transactions in the exchange notes may be
required to deliver a prospectus.
We will not receive any proceeds from any sales of the exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of methods of
resale, at market prices prevailing at the time of resale, at prices related to
those prevailing market prices or at negotiated prices. Any resale may be made
directly to the purchaser or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from the broker-dealer
and/or the purchasers of the exchange notes. Any broker-dealer that resells the
exchange notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
the exchange notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any resale of exchange notes and any
commissions or concessions received by any of those persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
149
For a period of 180 days after the exchange offer is completed we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay the expenses incident to the
exchange offer, other than commissions or concessions of any brokers or dealers
and the fees of any advisors or experts retained by the holders of old notes,
and will indemnify the holders of the old notes (including any broker-dealers)
against related liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain matters related to the exchange offer will be passed upon for us by
Akin, Gump, Strauss, Hauer & Feld, L.L.P., Brown, Drew & Massey, LLP, Woodburn
and Wedge and Howard L. Boigon, General Counsel of Westport.
EXPERTS
The audited consolidated financial statements of Westport Resources
Corporation included in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
The audited consolidated financial statements of Belco Oil & Gas Corp.
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
The audited statements of revenues and direct operating expenses for the
EPGC properties included in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
Certain information with respect to the oil and natural gas reserves
associated with Old Westport's oil and natural gas properties is derived from
the reports of Netherland, Sewell & Associates, Inc. and Ryder Scott Company
L.P., independent consulting petroleum engineers, and has been included in this
prospectus upon the authority of said firms as experts with respect to the
matters covered by such reports and in giving such reports.
Certain information with respect to the oil and natural gas reserves
associated with Belco's oil and natural gas reserves associated with Belco's oil
and natural gas properties is derived from the reports of Miller and Lents,
Ltd., independent consulting petroleum engineers, and has been included in this
prospectus upon the authority of said firm as experts with respect to the
matters covered by such reports and in giving such reports.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission, or SEC. You may read
and copy any document we file at:
- the Public Reference Room of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549; and
- the public reference facility at the SEC's regional office located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the SEC's
website at http://www.sec.gov. Reports and other information concerning us can
also be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005. Our common stock and 6 1/2% convertible
preferred stock are listed and traded on the New York Stock Exchange under the
trading symbols "WRC" and "WRC P," respectively.
150
We are incorporating by reference the documents listed below, all filings
we make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date we file with the SEC the Registration Statement on Form S-4 of
which this prospectus is a part, which date was January 18, 2002, and before the
date such registration statement is declared effective by the SEC, and any
future filings we will make with the SEC under Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date and time the SEC declares such registration
statement effective until the exchange offer has been completed:
BELCO SEC FILINGS:
- Annual Report on Form 10-K for the fiscal year ended December 31, 2000
filed on March 30, 2001 and as amended on April 2, 2001 by Belco;
- Definitive Proxy Statement on Schedule 14A filed with the SEC on April 5,
2001 by Belco;
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 filed
on May 15, 2001 by Belco;
- Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 filed
on August 14, 2001 by Belco;
- Current Report on Form 8-K filed on January 29, 2001 by Belco;
- Current Report on Form 8-K filed on June 14, 2001 by Belco;
- Current Report on Form 8-K filed on July 23, 2001 by Belco;
OLD WESTPORT SEC FILINGS:
- Annual Report on Form 10-K for the fiscal year ended December 31, 2000
filed on March 16, 2001 by Old Westport;
- Definitive Proxy Statement on Schedule 14A filed on April 17, 2001 by Old
Westport;
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 filed
on May 9, 2001 by Old Westport;
- Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 filed
on August 14, 2001 by Old Westport;
- Current Report on Form 8-K filed on June 11, 2001 by Old Westport;
WESTPORT SEC FILINGS:
- Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
filed on November 14, 2001 by Westport;
- Current Report on Form 8-K filed on August 31, 2001 by Westport;
- Current Report on Form 8-K filed on October 9, 2001 by Westport;
- Current Report on Form 8-K filed on October 22, 2001 by Westport;
- Current Report on Form 8-K filed on October 25, 2001 by Westport;
- Current Report on Form 8-K filed on November 1, 2001 by Westport;
- Current Report on Form 8-K filed on November 2, 2001 by Westport;
- Current Report on Form 8-K filed on November 2, 2001 by Westport;
- Current Report on Form 8-K filed on November 5, 2001 by Westport;
- Current Report on Form 8-K filed on November 7, 2001 by Westport;
- Current Report on Form 8-K filed on November 29, 2001 by Westport;
151
- Current Report on Form 8-K filed on November 30, 2001 by Westport;
- Current Report on Form 8-K filed on December 6, 2001 by Westport; and
- Current Report on Form 8-K filed on January 4, 2002 by Westport.
You may request copies of these documents by writing or telephoning us at
the following address:
Westport Resources Corporation
Attention: Investor Relations
410 Seventeenth Street
Suite 2300
Denver, Colorado 80202-4436
(303) 573-5404
To obtain timely delivery of any of our filings, agreements or other
documents, you must make your request to us no later that five business days
before the expiration date of the exchange offer. The exchange offer will expire
at 5:00 p.m. New York City time on March 8, 2002. The exchange offer can be
extended by us in our sole discretion. See the caption "The Exchange Offer" for
more detailed information.
152
GLOSSARY OF OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of certain terms commonly
used in the oil and natural gas industry and this offering circular:
ASP flood. A tertiary recovery technique that includes injection of a
mixture of chemicals into the producing reservoir designed to aid in the
efficiency of producing the oil in place, thus increasing ultimate produced
reserves.
bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in
reference to oil or other liquid hydrocarbons.
bbl/d. One stock tank barrel of oil or other liquid hydrocarbons per day.
Bcfe. One billion cubic feet equivalent of natural gas, calculated by
converting oil to equivalent Mcf at a ratio of 6 Mcf to 1 bbl of oil.
CO(2) flooding or injection. A tertiary recovery technique in which CO(2)
is used as the injectant.
Completion. The installation of permanent equipment for the production of
oil or natural gas.
Delay Rentals. Fees paid to the owner of the oil and natural gas lease
prior to the commencement of production.
Developed Acreage. The number of acres which are allocated or assignable
to producing wells or wells capable of production.
Development Well. A well drilled within or in close proximity to an area
of known production targeting existing reservoirs.
Exploratory Well. A well drilled to find and produce oil or natural gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir.
Finding and Development Costs. Capital costs incurred in the acquisition,
exploration, development and revisions of proved oil and natural gas reserves
divided by proved reserve additions.
Gross Acres or Gross Wells. The total acres or wells, as the case may be,
in which we have a working interest.
Horizontal Drilling. A drilling operation in which a portion of the well
is drilled horizontally within a productive or potentially productive formation.
This operation usually yields a well which has the ability to produce higher
volumes than a vertical well drilled in the same formation.
Infill Drilling. A drilling operation in which one or more development
wells is drilled within the proven boundaries of a field between two or more
other wells.
Injector Well or Injector. A well which is used to place liquids or gases
into the producing zone during secondary/tertiary recovery operations to assist
in maintaining reservoir pressure and enhancing recoveries from the field.
Mbbl. One thousand barrels of oil or other liquid hydrocarbons.
Mcf. One thousand cubic feet of natural gas.
Mcfe. One thousand cubic feet equivalent of natural gas, calculated by
converting oil to equivalent Mcf at a ratio of 6 Mcf to 1 bbl of oil.
Mmbbl. One million barrels of oil or other liquid hydrocarbons.
Mmbtu. One million British thermal units. One British thermal unit is the
amount of heat required to raise the temperature of one pound of water one
degree Fahrenheit.
Mmbtu/d. One million British thermal units per day.
153
Mmcf. One million cubic feet of natural gas.
Mmcfe. One million cubic feet equivalent of natural gas, calculated by
converting oil to equivalent Mcf at a ratio of 6 Mcf to 1 bbl of oil.
Mmcfe/d. One million cubic feet equivalent of natural gas per day,
calculated by converting oil to equivalent Mcf at a ratio of 6 Mcf to 1 bbl of
oil.
Net Acres or Net Wells. Gross acres or wells multiplied, as the case may
be, by the percentage working interest owned by us.
Net Production. Production that is owned, less royalties and production
due others.
Net Unrisked Reserves. Proved reserves which are owned, less royalties.
NYMEX. New York Mercantile Exchange.
Oil. Crude oil or condensate.
Operating Income. Gross oil and natural gas revenue less applicable
production taxes and lease operating expense.
Operator. The individual or company responsible for the exploration,
exploitation and production of an oil or natural gas well or lease.
Present Value of Future Net Revenues or Present Value, or PV10. The pretax
present value of estimated future revenues to be generated from the production
of proved reserves calculated in accordance with SEC guidelines, net of
estimated production and future development costs, using prices and costs as of
the date of estimation without future escalation, without giving effect to
non-property related expenses such as general and administrative expenses, debt
service and depreciation, depletion and amortization, and discounted using an
annual discount rate of 10%.
Proved Developed Reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved Reserves. The estimated quantities of oil, natural gas and natural
gas liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.
Proved Undeveloped Reserves. 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 recompletion.
Royalty. An interest in an oil and natural gas lease that gives the owner
of the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by an owner of the leasehold in
connection with a transfer to a subsequent owner.
2-D Seismic. The method by which a cross-section of the earth's subsurface
is created through the interpretation of reflecting seismic data collected along
a single source profile.
3-D Seismic. The method by which a three dimensional image of the earth's
subsurface is created through the interpretation of reflection seismic data
collected over a surface grid. 3-D seismic surveys allow for a more detailed
understanding of the subsurface than do conventional surveys and contribute
significantly to field appraisal, exploitation and production.
Tcf. One trillion cubic feet of natural gas.
Tertiary Recovery. An enhanced recovery operation that normally occurs
after waterflooding in which chemicals or gasses are used as the injectant.
154
Undeveloped Acreage. Acreage held under lease, permit, contract or option
that is not in a spacing unit for a producing well.
Waterflood. A secondary recovery operation in which water is injected into
the producing formation in order to maintain reservoir pressure and force oil
toward and into the producing wells.
Working Interest. An interest in an oil and natural gas lease that gives
the owner of the interest the right to drill for and produce oil and natural gas
on the leased acreage and requires the owner to pay a share of the costs of
drilling and production operations.
155
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Westport Resources Corporation
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1999 and
2000................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000....................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1999 and 2000........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000....................... F-6
Notes to Consolidated Financial Statements................ F-7
Consolidated Balance Sheets as of December 31, 2000 and
September 30, 2001 (unaudited)......................... F-26
Consolidated Statements of Operations for the nine months
ended September 30, 2000 and 2001 (unaudited).......... F-27
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 2001 (unaudited).......... F-28
Notes to Consolidated Financial Statements (unaudited).... F-29
Belco Oil & Gas Corp.
Report of Independent Public Accountants.................. F-43
Consolidated Balance Sheets as of December 31, 1999 and
2000................................................... F-44
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000....................... F-46
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1999 and 2000........... F-47
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000....................... F-48
Notes to Consolidated Financial Statements................ F-49
Condensed Consolidated Balance Sheets as of December 31,
2000 and June 30, 2001 (unaudited)..................... F-72
Condensed Consolidated Statements of Operations for the
six months ended June 30, 2000 and 2001 (unaudited).... F-73
Condensed Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2001 (unaudited)..... F-74
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 2001 (unaudited).... F-75
Notes to Unaudited Condensed Consolidated Financial
Statements............................................. F-76
EPGC Properties:
Report of Independent Public Accountants.................. F-83
Statements of Revenues and Direct Operating Expenses for
the EPGC Properties for the years ended December 31,
1998 and 1999 and the three months ended March 31,
2000................................................... F-84
Notes to Statements of Revenues and Direct Operating
Expenses for the EPGC Properties....................... F-85
</Table>
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Westport Resources Corporation:
We have audited the accompanying consolidated balance sheets of Westport
Resources Corporation (a Delaware corporation) and subsidiaries as of December
31, 1999 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Westport Resources
Corporation and subsidiaries as of December 31, 1999 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 23, 2001 (except with respect to the
matter discussed in Note 14,
as to which the date is January 18, 2002)
F-2
WESTPORT RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
--------------------
1999 2000
-------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 19,475 $ 20,154
Accounts receivable, net.................................. 14,645 49,200
Prepaid expenses.......................................... 1,712 4,670
-------- ---------
Total current assets................................. 35,832 74,024
-------- ---------
Property and equipment, at cost:
Oil and gas properties, successful efforts method:
Proved properties......................................... 307,068 591,367
Unproved properties....................................... 18,089 40,653
Office furniture and equipment............................ 2,182 2,642
Leasehold improvements.................................... 488 501
-------- ---------
327,827 635,163
Less accumulated depletion, depreciation and
amortization........................................... (92,950) (157,739)
-------- ---------
Net property and equipment................................ 234,877 477,424
-------- ---------
Other assets.............................................. 768 383
-------- ---------
Total assets...................................... $271,477 $ 551,831
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 8,482 $ 28,547
Accrued expenses.......................................... 10,574 19,827
Ad valorem taxes payable.................................. 2,606 4,788
Income taxes payable...................................... -- 375
Current portion of long-term debt......................... 1,333 --
-------- ---------
Total current liabilities......................... 22,995 53,537
-------- ---------
Long-term debt............................................ 105,462 162
Deferred income taxes..................................... -- 38,503
Other liabilities......................................... 3,009 1,573
-------- ---------
Total liabilities................................. 131,466 93,775
-------- ---------
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, $0.01 par value; 70,000,000 shares
authorized; 15,630,501 and 38,419,041 shares issued
and outstanding at December 31, 1999 and 2000,
respectively.......................................... 156 384
Additional paid-in capital............................. 198,295 472,576
Accumulated deficit.................................... (58,440) (14,904)
-------- ---------
Total stockholders' equity........................ 140,011 458,056
-------- ---------
Total liabilities and stockholders' equity........ $271,477 $ 551,831
======== =========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
WESTPORT RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
---------- -------- ---------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Operating revenues:
Oil and natural gas sales................................. $ 52,355 $75,488 $220,042
--------- ------- --------
Operating expenses:
Lease operating expense................................... 21,554 22,916 34,397
Production taxes.......................................... 3,888 5,742 10,631
Transportation costs...................................... 850 1,725 3,034
Exploration............................................... 14,664 7,314 12,790
Depletion, depreciation and amortization.................. 36,264 25,210 64,856
Impairment of proved properties........................... 8,794 3,072 2,911
Impairment of unproved properties......................... 1,898 2,273 5,124
Stock compensation expense................................ -- -- 5,539
General and administrative................................ 5,913 5,297 7,542
--------- ------- --------
Total operating expenses.......................... 93,825 73,549 146,824
--------- ------- --------
Operating income (loss)................................ (41,470) 1,939 73,218
--------- ------- --------
Other income (expense):
Interest expense.......................................... (8,323) (9,207) (9,731)
Interest income........................................... 403 489 1,230
Gain on sale of assets, net............................... -- 3,637 3,130
Derivative gain (loss) and other.......................... 29 16 (587)
--------- ------- --------
Income (loss) before income taxes........................... (49,361) (3,126) 67,260
--------- ------- --------
Provision for income taxes:
Current................................................... -- -- (675)
Deferred.................................................. -- -- (23,049)
--------- ------- --------
Total provision for income taxes.................. -- -- (23,724)
--------- ------- --------
Net income (loss)........................................... $ (49,361) $(3,126) $ 43,536
========= ======= ========
Weighted average number of common shares outstanding:
Basic..................................................... 11,004 14,727 28,296
========= ======= ========
Diluted................................................... 11,004 14,727 28,645
========= ======= ========
Net income (loss) per common share:
Basic..................................................... $ (4.49) $ (0.21) $ 1.54
========= ======= ========
Diluted................................................... $ (4.49) $ (0.21) $ 1.52
========= ======= ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
WESTPORT RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
COMMON STOCK ADDITIONAL
--------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- --------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 1997............... 9,638 $ 96 $136,955 $ (5,953) $131,098
Sale of common stock (Note 8)............ 3,943 40 44,960 -- 45,000
Net loss................................. -- -- -- (49,361) (49,361)
------ ---- -------- -------- --------
BALANCE AT DECEMBER 31, 1998............... 13,581 136 181,915 (55,314) 126,737
Sale of common stock (Note 8)............ 2,050 20 16,380 -- 16,400
Net loss................................. -- -- -- (3,126) (3,126)
------ ---- -------- -------- --------
BALANCE AT DECEMBER 31, 1999............... 15,631 156 198,295 (58,440) 140,011
Stock issuance for EPGC merger (Note
4).................................... 15,236 152 165,204 -- 165,356
Merger costs paid by principal
stockholder........................... -- -- 2,895 -- 2,895
Initial public offering of common
stock................................. 7,535 75 103,836 -- 103,911
Option plan compensation................. -- -- 2,156 -- 2,156
Stock options exercised.................. 13 1 140 -- 141
Stock issuance to directors.............. 4 -- 50 -- 50
Net income............................... -- -- -- 43,536 43,536
------ ---- -------- -------- --------
BALANCE AT DECEMBER 31, 2000............... 38,419 $384 $472,576 $(14,904) $458,056
====== ==== ======== ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
WESTPORT RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
--------- -------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ (49,361) $ (3,126) $ 43,536
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization.............. 36,264 25,210 64,856
Exploratory dry hole costs............................ 9,487 2,032 6,020
Impairment of proved properties....................... 8,794 3,072 2,911
Impairment of unproved properties..................... 1,898 2,273 5,124
Stock compensation expense............................ -- -- 2,156
Gain on sale of assets................................ -- (3,637) (3,130)
Deferred income taxes................................. -- -- 23,049
Director retainers settled for stock.................. -- -- 50
Changes in assets and liabilities, net of effects of
acquisitions:
Decrease (increase) in accounts receivable.......... 11,778 (6,448) (28,678)
Increase in prepaid expenses........................ (119) (338) (1,139)
Increase (decrease) in accounts payable............. (11,706) (1,753) 17,930
Increase in accrued expenses........................ 1,817 4,236 9,622
Increase (decrease) in ad valorem taxes payable..... (1,097) 337 2,183
Increase in income taxes payable.................... -- -- 375
Decrease in other liabilities....................... (133) (579) (1,436)
--------- -------- ---------
Net cash provided by operating activities........ 7,622 21,279 143,429
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment...................... (49,630) (14,005) (102,229)
Proceeds from sales of assets............................ 299 31,994 6,259
Merger with EPGC......................................... -- -- (42,403)
TMC acquisition, net of cash acquired.................... (56,348) -- --
Other acquisitions....................................... (7,030) -- (1,454)
Other.................................................... (310) (8) (342)
--------- -------- ---------
Net cash provided by (used in) investing
activities..................................... (113,019) 17,981 (140,169)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net.............. 45,000 16,400 104,052
Proceeds from issuance of long-term debt................. 61,000 -- 50,000
Repayment of long-term debt.............................. (1,333) (46,333) (156,633)
--------- -------- ---------
Net cash provided by (used in) financing
activities..................................... 104,667 (29,933) (2,581)
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents....... (730) 9,327 679
Cash and cash equivalents, beginning of year............... 10,878 10,148 19,475
--------- -------- ---------
Cash and cash equivalents, end of year..................... $ 10,148 $ 19,475 $ 20,154
========= ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest................................... $ 7,472 $ 9,575 $ 10,649
========= ======== =========
Cash paid for income taxes............................... $ -- $ -- $ 300
========= ======== =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued in connection with the EPGC merger... $ -- $ -- $ 165,356
========= ======== =========
Liabilities assumed in connection with the EPGC merger... $ -- $ -- $ 1,850
========= ======== =========
EPGC merger expenses paid by principal stockholder....... $ -- $ -- $ 2,895
========= ======== =========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On April 7, 2000, Westport Oil and Gas Company, Inc. merged with Equitable
Production (Gulf) Company ("EPGC"), an indirect subsidiary of Equitable
Resources, Inc. that held certain Gulf of Mexico assets (the "EPGC Properties").
This transaction was effected by a merger (the "Merger") between a newly-formed
subsidiary of EPGC and Westport Oil and Gas Company, Inc., resulting in Westport
Oil and Gas Company, Inc. becoming a wholly-owned subsidiary of EPGC, which
subsequently changed its name to Westport Resources Corporation (the "Company").
Business activities of the Company include the exploration for and production of
oil and natural gas primarily in the Gulf of Mexico, Rocky Mountains, the Gulf
Coast and the West Texas/Mid Continent area.
A summary of the Company's significant accounting policies follows:
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. The total carrying amount of cash and equivalents
approximates the fair value of such instruments.
REVENUE RECOGNITION
The Company follows the sales method of accounting for oil and natural gas
revenues. Under this method, revenues are recognized based on actual volumes of
oil and natural gas sold to purchasers.
NATURAL GAS BALANCING
The Company uses the sales method of accounting for natural gas imbalances.
Under this method, revenue is recognized based on cash received rather than the
Company's proportionate share of natural gas produced. Natural gas imbalances at
December 31, 1999 and 2000 were not significant.
OIL AND NATURAL GAS PROPERTIES
The Company accounts for its oil and natural gas operations using the
successful efforts method of accounting. Under this method, all costs associated
with property acquisition, successful exploratory wells and all development
wells are capitalized. Items charged to expense generally include geological and
geophysical costs, costs of unsuccessful exploratory wells and oil and natural
gas production costs. All of the Company's oil and natural gas properties are
located within the continental United States, the Gulf of Mexico and Canada.
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires the Company
to assess the need for an impairment of capitalized costs of oil and natural gas
properties on a field-by-field basis. In applying this statement, the Company
compares the expected undiscounted future net revenues on a field-by-field basis
with the related net capitalized costs at the end of each period. When the net
capitalized costs exceed the undiscounted future net revenues, the cost of the
property is written down to "fair value," which is determined using the
discounted future net revenues on a field-by-field basis. In 1998, 1999 and
2000, the Company recorded proved property impairments of $8.8 million, $3.1
million and $2.9 million, respectively. Gains and losses resulting from the
disposition of proved properties are included in operations.
Capitalized costs of proved properties are depleted on a field-by-field
basis using the units-of-production method based upon proved oil and natural gas
reserves. The amortizable base of the Company's offshore properties includes
estimated dismantlement, restoration and abandonment costs, net of estimated
salvage values. In management's opinion, abandonment, restoration and
dismantlement costs from onshore properties
F-7
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
generally approximate the residual value of equipment, and therefore, no accrual
for such costs has been recorded.
Unproved properties are assessed periodically to determine whether
impairment has occurred. Sales proceeds from unproved oil and natural gas
properties are credited to related costs of the prospect sold until all such
costs are recovered and then to net gain or loss on sales of unproved oil and
natural gas properties. In 1998, 1999 and 2000, the Company recorded unproved
property impairments of $1.9 million, $2.3 million and $5.1 million,
respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidation.
EARNINGS (LOSS) PER COMMON SHARE
The Company follows the provisions of SFAS No. 128, "Earnings Per Share."
Basic earnings per share is computed based on the weighted average number of
common shares outstanding. Diluted earnings per share is computed based on the
weighted average number of common shares outstanding adjusted for the
incremental shares attributed to outstanding options and warrants to purchase
common stock. All options to purchase common shares were excluded from the
computation of diluted earnings per share in 1998 and 1999, because they were
antidilutive as a result of the Company's net losses in those years. Dilutive
securities of the Company consist entirely of outstanding options to purchase
shares of the Company's common stock.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, the costs of exploratory dry
holes are included in cash flows from investing activities.
INCOME TAXES
The Company computes income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires an asset and liability
approach which results in the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of those assets and liabilities. SFAS No. 109
also requires the recording of a valuation allowance if it is more likely than
not that some portion or all of a deferred tax asset will not be realized.
OFFICE FURNITURE AND EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Office furniture and equipment are stated at cost and are depreciated using
the straight-line method over their estimated useful lives of five to seven
years. Leasehold improvements are amortized over the life of the related lease.
Maintenance and repairs are charged to expense as incurred. Gains or losses on
dispositions of office furniture and equipment are included in operations.
COMMODITY DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company periodically enters into commodity derivative contracts and
fixed-price physical contracts to manage its exposure to oil and natural gas
price volatility. The Company primarily utilizes price swaps, futures contracts
or collars, which are generally placed with major financial institutions or with
counterparties of high credit quality that the Company believes are minimal
credit risks. The oil and natural gas reference prices of these commodity
derivatives contracts are based upon crude oil and natural gas futures which
have a high degree of historical correlation with actual prices received by the
Company. The Company accounts for
F-8
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
its commodity derivatives contracts using the hedge (deferral) method of
accounting when the derivative contracts are designated as hedges for accounting
purposes and the mark to market method if such derivative contracts do not
qualify as hedges for accounting purposes. Under the deferral method, gains and
losses from derivative contracts accounted for as hedges are recognized in oil
and natural gas revenue when the associated production occurs, and the resulting
cash flows are reported as cash flows from operating activities. Gains and
losses from commodity derivatives contracts accounted for as hedges that are
closed before the hedged production occurs are deferred until the production
month originally hedged. In the event of a loss of correlation between changes
in oil and natural gas reference prices under a commodity derivatives contract
and actual oil and natural gas prices, a gain or loss would be recognized
currently to the extent the commodity derivatives contract did not offset
changes in actual oil and natural gas prices. Under mark to market accounting,
gains and losses on derivative contracts not qualifying as hedges are reflected
as derivative gains (losses) in the accompanying statements of operations at
each period end.
At December 31, 2000, the Company had costless collar agreements for a
total of 7,720,000 Mmbtus of natural gas for the months of January through
December 2001 at a floor price ranging from $4.50 per Mmbtu to $5.00 per Mmbtu
and a ceiling price ranging from $6.00 per Mmbtu to $7.00 per Mmbtu. One
costless collar agreement for 4,380,000 Mmbtus of natural gas for the months of
January through December 2001 was treated as a hedge for accounting purposes.
The other costless collar agreement for 3,340,000 Mmbtus of natural gas was for
the months of February through December. This gas collar did not qualify as a
hedge for accounting purposes.
In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," the Company has estimated the fair value of its commodity
derivative arrangements at December 31, 2000 utilizing the then-applicable crude
oil and natural gas strips. While it is not the Company's intention to terminate
any of the arrangements, it is estimated that the Company would have to pay
approximately $5.4 million to terminate the then-existing arrangements on
December 31, 2000 (including $0.7 million which has been recorded as a
derivative loss in the 2000 statement of operations). Due to the volatility of
crude oil and natural gas prices, the fair market value may not be
representative of the actual gain or loss that will be realized by the Company
in 2001.
The Company recognized reductions of oil and natural gas revenues of $7.9
million and $24.6 million from hedging agreements in 1999 and 2000,
respectively. The Company recognized an increase in oil and natural gas revenues
of $298,000 from oil hedging agreements in 1998. The Company recognized a
derivative loss of $0.7 million in 2000 from commodity derivative contracts that
did not qualify as hedges for accounting purposes.
INTEREST RATE SWAP AGREEMENT
The Company periodically enters into interest rate swap agreements to
effectively convert a portion of its floating-rate borrowings into fixed rate
obligations. The interest rate differential to be received or paid is recognized
as a current period adjustment to interest expense.
The Company entered into an interest rate swap contract for a period
commencing on July 30, 1998 and ending on March 11, 2002. The contract, as
amended, is for an aggregate notional amount of $25 million with a fixed
interest rate of 5.58% payable by the Company and the variable interest rate, a
three-month LIBOR, payable by the third party. The difference between the
Company's fixed rates and the three-month LIBOR rate, which is reset every 90
days, is received or paid by the Company in arrears every 90 days and recognized
as an adjustment to interest expense. Accordingly, the Company received $7,000
in December, 1998, paid $192,000 in 1999 and received $423,000 in 2000. As a
result of the Company's minimal debt balance at December 31, 2000, the interest
rate swap did not qualify as a hedge for accounting purposes. As such, the
Company recorded a mark to market gain of approximately $65,000 on the interest
rate swap at December 31, 2000.
F-9
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or liability
measured at its fair value. It also requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. Accordingly, upon adoption of SFAS No. 133 on January 1, 2001, the
Company recorded a hedging loss of approximately $3.1 million (net of tax effect
of $1.6 million) as a cumulative effect of a change in accounting principal in
other comprehensive income for the fair market value of derivative contracts
designated as hedges. A corresponding entry of $4.7 million was recorded to
derivative liability on the balance sheet.
In September 2000, the Emerging Issues Task Force reached a consensus on
issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF
No. 00-10"), which requires shipping and handling costs to be reflected as an
operating expense rather than as a reduction of revenue. The Company was
required to adopt the provisions of EITF No. 00-10 in the fourth quarter of
2000. Accordingly, the Company restated oil and natural gas revenues for all
periods presented to exclude the effects of transportation costs and recorded
such transportation costs as a separate line in the statements of operations.
Adoption of the provisions of EITF No. 00-10 had no impact on net income (loss).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, accounts receivable, accounts
payable, and accrued expenses approximate fair value due to the short-term
maturities of these assets and liabilities. The carrying amount of the Company's
long-term debt approximates fair value based on the variable borrowing rate of
the credit facility.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
The Company's consolidated financial statements are based on a number of
significant estimates including oil and natural gas reserve quantities which are
the basis for the calculation of depletion and impairment of oil and natural gas
properties. The Company's reserve estimates, which are inherently imprecise, are
determined by outside petroleum engineers.
COMPREHENSIVE INCOME
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. In addition to net income, comprehensive
income includes all changes in equity during a period, except those resulting
from investments and distributions to owner. The Company had no such changes in
1998, 1999 or 2000.
F-10
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain amounts reported in the prior year consolidated financial
statements have been reclassified to correspond to the December 31, 2000
presentation.
2. INITIAL PUBLIC OFFERING
On October 19, 2000, the Company completed an initial public offering of
9.15 million shares of common stock at $15.00 per share. The over allotment of
1.035 million additional shares was completed on November 22, 2000. Of the total
10.185 million shares sold, 7.535 million shares were offered by the Company and
2.65 million shares were offered by selling stockholders. After payment of
underwriting discounts and offering costs of $9.1 million, the Company received
net proceeds of $103.9 million. The proceeds were used to repay a portion of the
Company's outstanding debt.
Prior to completion of the initial public offering, the Board of Directors
approved a restated certificate of incorporation in Delaware. Subsequent to
filing of the restated certificate, the Company split the common stock on a
three-for-two basis by way of a stock dividend. All par value, authorized
shares, common stock and common stock amounts have been retroactively restated
in the accompanying consolidated financial statements to reflect the stock
split.
3. STOCK OPTION REPURCHASE
On March 24, 2000, the Company repurchased and cancelled 1,344,510 stock
options, representing all outstanding stock options at that date, from employees
and directors for approximately $3.4 million. The cost to repurchase the stock
options is included in stock compensation expense in the accompanying statement
of operations for the year ended December 31, 2000. The cost to repurchase the
stock options was based on the difference between $10.85 and the exercise prices
of $8.00 and $10.67 of such options. See Note 9.
4. MERGER
The Merger was a non-taxable transaction accounted for using purchase
accounting with Westport Oil and Gas as the surviving entity. Westport Resources
Corporation paid $50 million in cash from bank borrowings, issued 15.236 million
shares of common stock valued at $10.85 per share and assumed liabilities of
$1.85 million to consummate the Merger. The EPGC Properties consist of 37
producing properties and 30 undeveloped blocks in the Gulf of Mexico. The
results of operations of EPGC have been included in the Company's statement of
operations since the closing date of April 7, 2000.
The total purchase price of $217.2 million was allocated as follows (in
thousands):
<Table>
Acquisition Costs:
Common stock issued....................................... $165,356
Cash paid/Long-term debt incurred......................... 50,000
Liabilities assumed....................................... 1,850
--------
Total acquisition costs................................ $217,206
========
Allocation of Acquisition Costs:
Oil and gas properties -- proved.......................... $193,603
Oil and gas properties -- unproved........................ 23,603
--------
Total.................................................. $217,206
========
</Table>
F-11
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The value of the common stock issued to consummate the Merger was
determined utilizing a valuation model to determine a Net Asset Value ("NAV")
for each company based on the pre-tax discounted future net revenues of the
companies' oil and gas reserves, derived from third party engineering reports,
adjusted for the companies' other assets and liabilities.
In addition to the acquisition costs discussed above, the Company also
recorded deferred taxes of $15.5 million (net of the reversal of previously
established deferred tax valuation allowances of $21.9 million) for the
difference between the historical tax basis of the EPGC Properties and the
acquisition costs. Merger costs of $2.9 million paid by the Company's then
principal stockholder were also recorded as acquisition costs (with a
corresponding amount recorded to additional paid-in capital). The carrying value
of the oil and gas properties was subsequently reduced by approximately $15
million for normal working capital adjustments for the period between the
effective date, October 1, 1999, to the closing date.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The following table reflects the unaudited pro forma results of operations
for the years ended December 31, 1999 and 2000 as though the Merger had occurred
as of January 1 of each year presented. The pro forma amounts are not
necessarily indicative of the results that may be reported in the future.
<Table>
<Caption>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
1999 2000
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Revenues.................................................... $140,360 $238,974
Net income.................................................. 9,452 46,860
Basic net income per share.................................. 0.32 1.66
Diluted net income per share................................ 0.31 1.64
</Table>
5. CONCENTRATION OF CREDIT RISK
The Company has accounts with separate banks in Denver, Colorado and
Calgary, Canada. The Company invests substantially all available cash in an
overnight investment account consisting of U.S. Treasury obligations. At
December 31, 2000, the balance in the overnight investment account was $17.2
million.
The Company sells its oil and natural gas production to creditworthy
companies. Allowances for potential credit losses relating to product sales are
not maintained and the Company does not require collateral.
F-12
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The components of the provision for income taxes are as follows:
<Table>
<Caption>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1998 1999 2000
----- ----- -------
(IN THOUSANDS)
CURRENT:
Federal................................................... $ -- $ -- $ 675
State..................................................... -- -- --
----- ----- -------
-- -- 675
----- ----- -------
DEFERRED:
Federal................................................... -- -- 22,289
State..................................................... -- -- 760
----- ----- -------
-- -- 23,049
----- ----- -------
Provision for income taxes.................................. $ -- $ -- $23,724
===== ===== =======
</Table>
The difference between the provision for income taxes and the amounts
computed by applying the U.S. federal statutory rate are as follows:
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
--------- -------- --------
(IN THOUSANDS)
Federal statutory rate................................. $(16,783) $(1,063) $23,541
State income taxes, net of Federal effect.............. (1,630) (103) 760
Change in valuation allowance.......................... 18,425 1,177 (460)
Other permanent differences............................ (12) (11) (117)
-------- ------- -------
$ -- $ -- $23,724
======== ======= =======
</Table>
Long-term deferred tax assets (liabilities) are comprised of the following:
<Table>
<Caption>
DECEMBER 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
Oil and natural gas properties.............................. $ 4,945 $(45,031)
Net operating loss carryforward............................. 17,443 5,853
Alternative minimum tax credit.............................. -- 675
Valuation allowance......................................... (22,388) --
-------- --------
Net deferred tax liability.................................. $ -- $(38,503)
======== ========
</Table>
As of December 31, 2000, the Company had net operating loss carryforwards
for income tax purposes of approximately $16.7 million which expire between 2018
and 2019 and may be utilized to reduce future tax liability of the Company. In
first quarter 2000, the Company reduced its valuation allowance by approximately
$460,000 based on a determination that a portion of the Company's deferred tax
assets would be realized in the future based on taxable income generated by
current operations. In second quarter 2000, the Company reduced the remaining
valuation allowance of $21.9 million as a result of the Merger (see Note 4). The
F-13
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company believes under existing tax law it will be able to utilize its
historical deductible temporary differences and carryforwards to offset the
taxable temporary differences resulting from the Merger.
7. LONG-TERM DEBT
Long-term debt consisted of:
<Table>
<Caption>
DECEMBER 31,
---------------
1999 2000
-------- ----
(IN THOUSANDS)
9% bank term note, payable in 24 equal quarterly
installments of $333,333 plus interest, January 31, 1995
through December 31, 2000................................. $ 1,333 $ --
Bank line of credit due on April 4, 2003.................... 105,462 162
-------- ----
106,795 162
Less current portion........................................ (1,333) --
-------- ----
$105,462 $162
======== ====
</Table>
The Company entered into a credit agreement as of April 7, 2000 among a
syndicate of banks led by Bank of America, N.A. in the aggregate amount of
$325.0 million. The amount available for borrowing under the credit facility is
limited to an initial borrowing base of $200.0 million, but will be redetermined
semi-annually beginning on October 1, 2000. The credit agreement matures on
April 4, 2003 and is secured by substantially all of the Company's oil and gas
properties. Advances under the credit agreement can be in the form of either a
base rate loan or a Eurodollar loan. The interest on a base rate loan is a
fluctuating rate equal to (i) the higher of (a) the Federal funds rate plus 0.5%
and (b) Bank of America's prime rate, plus (ii) a margin of either 0% or 0.25%
depending on the amounts outstanding under the credit agreement. The interest on
a Eurodollar loan is equal to the sum of (i) a margin of between 1.00% and 1.75%
depending on the amount outstanding under the credit agreement and (ii) the rate
obtained by dividing the Eurodollar rate by one minus the reserve requirement
for the Eurodollar loan. The weighted average rate in effect was 8.0% and 7.61%
at December 31, 2000 and 1999, respectively. Commitment fees under the credit
agreement fluctuate from 0.25% to 0.40% based on the ratio of the borrowing base
to available borrowings. The credit agreement contains various covenants and
restrictive provisions including two financial covenants that require the
Company to maintain a current ratio of not less than 1.0 to 1.0 and a ratio of
EBITDA, as defined, to consolidated interest expense for the preceding four
consecutive fiscal quarters of not less than 2.5 to 1.0.
8. STOCKHOLDERS' EQUITY
In 1998 and 1999, 3,942,758, and 2,050,001 shares of common stock were
purchased by the Company's then principal stockholder for share prices of
$11.41, and $8.00, respectively. The share prices reflected the estimated market
value of the Company's stock at the time of purchase. The estimated market value
was determined utilizing a valuation model that was based on the pre tax
discounted future net revenues from the Company's oil and gas reserves adjusted
for the Company's other assets and liabilities.
9. STOCK OPTIONS
On October 17, 2000, the Westport Resources Directors' Stock Option Plan
and the Westport Resources Corporation Stock Option Plan (the "Predecessor
Plans") were merged into the Westport Resources Corporation 2000 Stock Incentive
Plan (the "Stock Option Plan"). The Stock Option Plan provides for issuance of
options to employees, officers and directors to purchase shares of common stock.
The aggregate number of shares of common stock that may be issued under the
Stock Option Plan is 4,110,813 shares. The exercise price, vesting and duration
of the options may vary and will be determined at the time of issuance.
F-14
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 2000, options to purchase 2,110,880 shares of the Company's common stock
were granted under the Stock Option Plan at exercise prices between $10.85 and
$17.63 per share, which reflected the estimated fair market value of the shares
at the date of grant. The options vest ratably over two or three years from the
date of grant and have a term of 10 years. Of the 2,110,880 options granted in
2000, 1,344,510 options are deemed to be replacement options (the "Replacement
Options") for those options repurchased by the Company on March 24, 2000 (see
Note 3). During 1998 and 1999, options to purchase 93,750 and 597,600 shares of
the Company's common stock were granted under the Predecessor Plans at exercise
prices between $15.78 and $8.00 per share, which reflected the estimated fair
market value of the shares at the date of grant.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." The Interpretation clarifies
(a) the definition of employee for purposes of applying APB Opinion No. 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of
previously fixed stock options or awards, and (d) the accounting for an exchange
of stock options and/or awards in a business combination. The Interpretation was
effective July 1, 2000, but certain conclusions in the Interpretation cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that the Interpretation covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying the Interpretation are recognized on a
prospective basis from July 1, 2000. Under provisions of the Interpretation, we
are required to account for 1,080,473 of the Replacement Options as variable
awards from July 1, 2000 until the date the options are exercised, forfeited or
expire unexercised. Compensation cost will be measured for the amount of any
increases in our stock price after July 1, 2000 and recognized over the
remaining vesting period of the options. Any decreases in our stock price
subsequent to July 1, 2000 will be recognized as a decrease in compensation
cost, limited to the amount of compensation cost previously recognized as a
result of increases in our stock price. Any adjustment to compensation cost for
further changes in the stock price after the award vests will be recognized
immediately. As of December 31, 2000, 1,018,223 of the Replacement Options were
still outstanding, which resulted in $2.1 million of compensation cost recorded
in the 2000 statement of operations.
A summary of the status of the Company's Stock Option Plan and Predecessor
Plans as of December 31, 1998, 1999 and 2000 and changes during the years ended
December 31, 1998, 1999 and 2000 are as follows:
<Table>
<Caption>
SHARES
UNDER WEIGHTED AVERAGE
OPTION PLAN EXERCISE PRICE
----------- ----------------
Balance at December 31, 1997............................. 986,723 $15.74
Options granted........................................ 93,750 11.41
----------
Balance at December 31, 1998............................. 1,080,473 15.37
Options cancelled...................................... (333,563) 15.37
Options granted........................................ 597,600 8.64
----------
Balance at December 31, 1999............................. 1,344,510 8.29
Options repurchased.................................... (1,344,510) 12.43
Options granted........................................ 2,110,880 12.61
Options forfeited...................................... (44,421) 10.85
Options exercised...................................... (13,018) 10.85
----------
Balance at December 31, 2000............................. 2,053,441 12.61
==========
Options exercisable at December 31, 1998................. 397,619 15.65
==========
Options exercisable at December 31, 1999................. 455,544 8.00
==========
Options exercisable at December 31, 2000................. 29,516 10.85
==========
</Table>
F-15
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has elected to continue following Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and has elected to
adopt the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Had compensation costs for the Company's options been determined
based on the fair value at the grant dates consistent with SFAS No. 123, the
Company's net income would have been decreased and the net loss would have been
increased to the pro forma amounts indicated below:
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1999 2000
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss)
As reported.......................................... $(49,361) $(3,126) $43,536
Pro forma............................................ (50,385) (4,114) 41,885
Basic net income (loss) per common share
As reported.......................................... $ (4.49) $ (0.21) $ 1.54
Pro forma............................................ (4.58) (0.28) 1.51
Diluted net income (loss) per common share
As reported.......................................... $ (4.49) $ (0.21) $ 1.52
Pro forma............................................ (4.58) (0.28) 1.49
</Table>
The weighted average fair value of options granted during the years ended
December 31, 1998, 1999 and 2000, calculated using the Black-Scholes option
pricing model, was $2.69, $4.21 and $5.44, respectively. The fair value of each
option granted is estimated with the following weighted average assumptions for
grants in 1998, 1999 and 2000: risk-free interest rate of 5.52%, 5.53% and
6.25%, respectively; no dividend yields; expected volatility of 0.01%, 0.01% and
38.34%, respectively; and expected lives of 5 years.
10. MAJOR PURCHASERS
The following purchasers accounted for 10% or more of the Company's oil and
gas sales for the years ended December 31, 1998, 1999 and 2000:
<Table>
<Caption>
1998 1999 2000
---- ---- ----
Dynegy Inc.................................................. -- -- 23%
Conoco Inc.................................................. 26% 26% 14%
Koch Oil Company............................................ 18% -- --
Energen Resources MAQ, Inc.................................. 17% 20% --
EOTT Energy Corporation..................................... -- 20% 13%
</Table>
11. COMMITMENTS AND CONTINGENCIES
At December 31, 2000, the Company had two leases covering office space
under noncancelable agreements which begin to expire in November, 2003. The
minimum annual rental payments under the leases are as follows (in thousands):
<Table>
<Caption>
YEAR ENDING DECEMBER 31
- -----------------------
2001........................................................ $ 502
2002........................................................ 515
2003........................................................ 482
------
$1,499
======
</Table>
F-16
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense for the years ended December 31, 1998, 1999 and 2000 was
approximately $652,000, $497,000 and $820,000, respectively.
The Company entered into employment agreements on May 8, 2000 with its
chief executive officer and president, which provide for annual base salaries of
$325,000 and $225,000, respectively, subject to annual adjustments through May
31, 2003. The agreements provide for severance payments equal to three times the
individual's then applicable base salary and three times the average of the
bonus the individual received the last three years if the Company terminates
such person's employment other than for cause or if such person's employment is
terminated upon a change of control.
The Company is subject to governmental and regulatory controls arising in
the ordinary course of business. It is the opinion of the Company's management
that there are no claims or litigation involving the Company that are likely to
have a material adverse effect on its financial position or results of
operations.
12. PRODUCING PROPERTIES ACQUISITIONS AND DIVESTITURES
TOTAL MINATOME CORPORATION ACQUISITION
On October 15, 1998, the Company entered into an agreement ("Agreement")
with an industry partner ("Purchaser") in connection with a stock purchase
("Stock Purchase") agreement between Purchaser and Total Minatome Corporation
("TMC") for the purchase of all of the outstanding stock of TMC ("TMC
Acquisition"), as an express third party beneficiary of the rights of the
Purchaser and the obligations of TMC under the Stock Purchase. Pursuant to the
Agreement, subsequent to the TMC Acquisition the Purchaser assigned the Company
a 31% interest in the individual assets and liabilities of TMC ("TMC Property
Acquisition"), which consist primarily of working interests in oil and natural
gas properties, for consideration of approximately $56 million. The TMC Property
Acquisition was funded by sales of common stock to the Company's then principal
stockholder and bank borrowings. The TMC Property Acquisition was accounted for
using the purchase method with the purchase price allocated among proved and
unproved oil and natural gas properties and other assets and liabilities based
on their relative fair values. Revenue associated with the TMC Property
Acquisition for the 3-month period ended December 31, 1998 was approximately
$5.5 million.
OTHER ACQUISITIONS
During 1998 the Company acquired producing properties ("Other
Acquisitions") for a total cash purchase price of approximately $7 million. The
Other Acquisitions were funded by sales of common stock to the Company's then
principal stockholder and bank borrowings. The Other Acquisitions were accounted
for using the purchase method. Revenues associated with these properties for the
year ended December 31, 1998 were approximately $1.3 million.
SALE OF OFFSHORE PROPERTIES
During 2000, the Company sold an interest in an oil and natural gas
development and exploration prospect located offshore in the Gulf of Mexico for
$6.2 million. The property had a book value of $2.9 million, and a $3.3 million
gain was recorded on the sale. Proceeds from the sale were used to reduce
borrowings under the credit agreement.
During 1999, the Company sold certain interests in oil and natural gas
development and exploration prospects located offshore in the Gulf of Mexico for
$21.4 million. The properties had a book value of $17.4 million, and a $4.0
million gain was recorded on the sale. Proceeds from the sale were used to
reduce borrowings under the credit agreement.
F-17
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RETIREMENT SAVINGS PLAN
Effective December 1, 1995, the Company adopted a retirement savings plan.
The Westport Savings and Profit Sharing Plan (the "Plan") is a defined
contribution plan and covers all employees of the Company. The Plan is subject
to the provisions of the Employee Retirement Income Security Act of 1974, as
amended, and Section 401(k) of the Internal Revenue Code.
The assets of the Plan are held and the related investments are executed by
the Plan's trustee. Participants in the Plan have investment alternatives in
which to place their funds and may place their funds in one or more of these
investment alternatives. Administrative fees are paid by the Company on behalf
of the Plan. The Plan provides for discretionary matching by the Company of 60%
of each participant's contributions up to 6% of the participant's compensation.
The Company contributed $104,000, $114,000 and $155,000, for the years ended
December 31, 1998, 1999, and 2000, respectively.
14. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF SUBSIDIARY GUARANTORS
On November 5, 2001 the Company completed a private placement of $275
million 8 1/4% Senior Subordinated Notes due 2011 (the "8 1/4% Senior
Subordinated Notes") pursuant to rule 144A. The 8 1/4% Senior Subordinated Notes
are fully and unconditionally guaranteed, jointly and severally, on a senior
subordinated unsecured basis by the following wholly-owned subsidiaries of
Westport: Westport Finance Co., Jerry Chambers Exploration Company, Westport
Argentina LLC, Westport Canada LLC, Westport Oil and Gas Company, L.P., Westport
Overriding Royalty LLC, WHG, Inc. and WHL, Inc. (collectively, the "Subsidiary
Guarantors"). The guarantees of the Subsidiary Guarantors are subordinated to
senior debt of the Subsidiary Guarantors. The only existing subsidiary of
Westport that has not guaranteed the 8 1/4% Senior Subordinated Notes is Horse
Creek Trading and Compression LLC, which is minor for purposes of the Securities
and Exchange Commission's rules regarding presentation of the condensed
consolidating financial statements below. As such, the financial position,
results of operations, and related cash flow information of Horse Creek have
been included in the Subsidiary Guarantor column.
Presented below are condensed consolidating financial statements for
Westport and the Subsidiary Guarantors. The condensed consolidating financial
statements for Westport and the Subsidiary Guarantors as of and for the years
ended December 31, 1999 and 1998 are not presented as Westport's only operations
as of those dates were conducted through the wholly-owned Subsidiary Guarantors.
F-18
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WESTPORT RESOURCES CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2000
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents.................... $ 12,458 $ 7,696 $ -- $ 20,154
Accounts receivable, net..................... 14,404 34,796 -- 49,200
Intercompany receivable...................... 97,347 -- (97,347) --
Prepaid expenses............................. 3,075 1,595 -- 4,670
-------- --------- -------- ---------
Total current assets.................... 127,284 44,087 (97,347) 74,024
-------- --------- -------- ---------
Property and equipment, at cost:
Oil and gas properties, successful efforts
method:
Proved properties......................... 226,454 364,913 -- 591,367
Unproved properties....................... 25,007 15,646 -- 40,653
Office building, furniture and equipment..... 197 2,445 -- 2,642
Leasehold improvements....................... -- 501 -- 501
-------- --------- -------- ---------
251,658 383,505 -- 635,163
Less accumulated depletion, depreciation and
amortization................................. (36,745) (120,994) -- (157,739)
-------- --------- -------- ---------
Net property and equipment.............. 214,913 262,511 -- 477,424
-------- --------- -------- ---------
Other assets................................. -- 383 -- 383
-------- --------- -------- ---------
Total assets............................ $342,197 $ 306,981 $(97,347) $ 551,831
======== ========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................. $ 7,061 $ 21,486 $ -- $ 28,547
Accrued expenses............................. 7,584 12,243 -- 19,827
Ad valorem taxes payable..................... -- 4,788 -- 4,788
Intercompany payable......................... -- 97,347 (97,347) --
Income taxes payable......................... -- 375 -- 375
-------- --------- -------- ---------
Total current liabilities............... 14,645 136,239 (97,347) 53,537
-------- --------- -------- ---------
Long-term debt................................. -- 162 -- 162
Deferred income taxes.......................... 28,610 9,893 -- 38,503
Other liabilities.............................. -- 1,573 -- 1,573
-------- --------- -------- ---------
Total liabilities....................... 43,255 147,867 (97,347) 93,775
-------- --------- -------- ---------
Stockholders' equity
Common stock................................. 384 3 (3) 384
Additional paid-in capital................... 274,125 198,448 3 472,576
Retained earnings (accumulated deficit)...... 24,433 (39,337) -- (14,904)
-------- --------- -------- ---------
Total stockholders' equity.............. 298,942 159,114 -- 458,056
-------- --------- -------- ---------
Total liabilities and stockholders'
equity............................... $342,197 $ 306,981 $(97,347) $ 551,831
======== ========= ======== =========
</Table>
F-19
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WESTPORT RESOURCES CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
(IN THOUSANDS)
Operating revenues:
Oil and natural gas sales..................... $ 95,336 $124,706 $ -- $220,042
-------- -------- ----- --------
Operating expenses:
Lease operating expense....................... 6,530 27,867 -- 34,397
Production taxes.............................. 15 10,616 -- 10,631
Transportation costs.......................... 384 2,650 -- 3,034
Exploration................................... 6,768 6,022 -- 12,790
Depletion, depreciation and amortization...... 36,744 28,112 -- 64,856
Impairment of proved properties............... -- 2,911 -- 2,911
Impairment of unproved properties............. -- 5,124 -- 5,124
Stock compensation expense.................... 2,156 3,383 -- 5,539
General and administrative.................... 3,383 4,159 -- 7,542
-------- -------- ----- --------
Total operating expenses................. 55,980 90,844 -- 146,824
-------- -------- ----- --------
Operating income......................... 39,356 33,862 -- 73,218
-------- -------- ----- --------
Other income (expense):
Interest expense.............................. (2,257) (7,474) -- (9,731)
Interest income............................... 416 814 -- 1,230
Gain on sale of assets, net................... -- 3,130 -- 3,130
Derivative gain (loss) and other.............. 76 (663) -- (587)
-------- -------- ----- --------
Income before income taxes...................... 37,591 29,669 -- 67,260
Provision for income taxes:
Current....................................... -- (675) -- (675)
Deferred...................................... (13,156) (9,893) -- (23,049)
-------- -------- ----- --------
Total provision for income taxes......... (13,156) (10,568) -- (23,724)
Net income...................................... $ 24,435 $ 19,101 $ -- $ 43,536
======== ======== ===== ========
</Table>
F-20
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WESTPORT RESOURCES CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
(IN THOUSANDS)
Cash flows from operating activities:
Net income.............................................. $ 24,435 $ 19,101 $ -- $ 43,536
Adjustments to reconcile net income to net cash provided
by operating activities:
Depletion, depreciation and amortization.............. 36,744 28,112 -- 64,856
Exploration dry hole costs............................ 1,564 4,456 -- 6,020
Impairment of proved properties....................... -- 2,911 -- 2,911
Impairment of unproved properties..................... -- 5,124 -- 5,124
Stock compensation expense............................ 2,156 -- -- 2,156
Gain on sale of assets................................ 0 (3,130) -- (3,130)
Deferred income taxes................................. 13,156 9,893 -- 23,049
Director retainers settled for stock.................. 50 -- -- 50
Changes in asset and liabilities, net of effects of
acquisitions:
Increase in accounts receivable..................... (8,527) (20,151) -- (28,678)
Decrease (increase) in prepaid expenses............. (1,256) 117 -- (1,139)
Increase in accounts payable........................ 4,926 13,004 -- 17,930
Decrease in accrued expenses........................ 7,584 2,038 -- 9,622
Increase in ad valorem taxes payable................ -- 2,183 -- 2,183
Increase in income taxes payable.................... -- 375 -- 375
Decrease in other liabilities....................... -- (1,436) -- (1,436)
-------- --------- -------- ---------
Net cash provided by (used in) operating
activities..................................... 80,832 62,597 -- 143,429
-------- --------- -------- ---------
Cash flows from investing activities:
Additions to property and equipment..................... (32,674) (69,555) -- (102,229)
Proceeds from sales of assets........................... -- 6,259 -- 6,259
Merger with EPGC........................................ (42,403) -- -- (42,403)
Other acquisitions...................................... -- (1,454) -- (1,454)
Increase in intercompany receivable..................... (97,347) -- 97,347 --
Other................................................... -- (342) -- (342)
-------- --------- -------- ---------
Net cash used in investing activities............ (172,424) (65,092) 97,347 (140,169)
-------- --------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock.................. 104,052 -- -- 104,052
Proceeds from issuance of long-term debt................ 50,000 -- -- 50,000
Repayment of long-term debt............................. (50,000) (106,633) -- (156,633)
Increase in intercompany payable........................ -- 97,347 (97,347) --
-------- --------- -------- ---------
Net cash provided by (used in) financing
activities..................................... 104,052 (9,286) (97,347) (2,581)
-------- --------- -------- ---------
Net increase (decrease) in cash and cash equivalents...... 12,460 (11,781) -- 679
Cash and cash equivalents, beginning of year.............. -- 19,475 -- 19,475
-------- --------- -------- ---------
Cash and cash equivalents, end of year.................... $ 12,460 $ 7,694 $ -- $ 20,154
</Table>
F-21
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS ACTIVITIES
The following tables set forth certain historical costs and costs incurred
related to the Company's oil and natural gas producing activities:
<Table>
<Caption>
DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
Capitalized costs
Proved oil and natural gas properties.............. $316,243 $307,068 $591,367
Unproved oil and natural gas properties............ 32,611 18,089 40,653
-------- -------- --------
Total oil and natural gas properties............ 348,854 325,157 632,020
Less: Accumulated depletion, depreciation and
amortization.................................... (73,096) (91,325) (155,752)
-------- -------- --------
Net capitalized costs........................... $275,758 $233,832 $476,268
======== ======== ========
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
(IN THOUSANDS)
Costs incurred
Proved property acquisition costs.................. $ 61,938 $ -- $182,944
Unproved property acquisition costs................ 15,873 2,336 31,821
Exploration costs.................................. 19,806 7,958 34,622
Development costs.................................. 15,164 3,695 58,958
-------- -------- --------
Total........................................... $112,781 $ 13,989 $308,345
======== ======== ========
</Table>
OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The following summarizes the policies used by the Company in preparing the
accompanying oil and natural gas reserve disclosures, Standardized Measure of
Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves and
reconciliation of such Standardized Measure between years.
Estimates of total proved and proved developed reserves at December 31,
2000 were prepared by Ryder Scott Company, L.P. and Netherland, Sewell and
Associates, Inc. and internal estimates. The Ryder Scott and Netherland Sewell
reports covered approximately 85% of the total net present value of the reserves
and the internally generated report covered the remaining 15% of the net present
value. Estimates of total proved and proved developed reserves at December 31,
1998 and 1999 were prepared by Ryder Scott Company, L.P. Proved reserves are
estimated quantities of crude oil and natural gas 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 be recovered
through existing wells with existing equipment and operating methods.
Substantially all of the Company's oil and natural gas reserves are located in
the United States and the Gulf of Mexico.
The Standardized Measure of discounted future net cash flows from
production of proved reserves was developed as follows:
1. Estimates are made of quantities of proved reserves and the future
periods during which they are expected to be produced based on year-end
economic conditions.
F-22
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. The estimated future cash flows from proved reserves were
determined based on year-end prices held constant, except in those
instances where fixed and determinable price escalations are included in
existing contracts.
3. The future cash flows are reduced by estimated production costs
and costs to develop and produce the proved reserves, all based on year-end
economic conditions and by the estimated effect of future income taxes
based on statutory income tax rates in effect at each year end, the
Company's tax basis in its proved oil and natural gas properties and the
effect of net operating loss, investment tax credit and other
carryforwards.
The Standardized Measure of discounted future net cash flows does not
purport to present, nor should it be interpreted to present, the fair value of
the Company's oil and natural gas reserves. An estimate of fair value would also
take into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs and a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.
QUANTITIES OF OIL AND GAS RESERVES (UNAUDITED)
The following table presents estimates of the Company's net proved and
proved developed oil and gas reserves:
<Table>
<Caption>
OIL GAS
(MBLS) (MMCF)
------ -------
Proved reserves at December 31, 1997........................ 27,991 28,791
Revisions of previous estimates........................... (2,905) 5,618
Discoveries............................................... 1,882 5,116
Purchase of minerals in place............................. 1,212 70,395
Sales of minerals in place................................ (321) (1,235)
Production................................................ (3,483) (8,101)
------ -------
Proved reserves at December 31, 1998........................ 24,376 100,584
Revisions of previous estimates........................... 13,814 20,332
Discoveries............................................... 708 24,250
Purchase of minerals in place............................. -- --
Sales of minerals in place................................ (2,848) (12,515)
Production................................................ (3,300) (13,313)
------ -------
Proved reserves at December 31, 1999........................ 32,750 119,338
Revisions of previous estimates........................... 1,417 10,662
Discoveries............................................... 3,135 33,445
Purchase of minerals in place............................. 3,249 116,783
Sales of minerals in place................................ (2,167) (447)
Production................................................ (3,584) (34,316)
------ -------
Proved reserves at December 31, 2000........................ 34,800 245,465
====== =======
Proved developed reserves at December 31, 1998.............. 20,323 80,627
====== =======
Proved developed reserves at December 31, 1999.............. 29,489 82,807
====== =======
Proved developed reserves at December 31, 2000.............. 28,673 185,354
====== =======
</Table>
F-23
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES (UNAUDITED)
<Table>
<Caption>
DECEMBER 31,
----------------------------------
1998 1999 2000
--------- --------- ----------
(IN THOUSANDS)
Future cash flows................................. $ 392,158 $ 986,992 $2,993,022
Future production costs........................... (170,279) (362,648) (546,358)
Future development costs.......................... (42,957) (44,552) (119,415)
--------- --------- ----------
Future net cash flows before tax.................. 178,922 579,792 2,327,249
Future income taxes............................... (4,766) (100,178) (691,048)
--------- --------- ----------
Future net cash flows after tax................... 174,156 479,614 1,636,201
Annual discount at 10%............................ (69,550) (157,179) (537,802)
--------- --------- ----------
Standardized measure of discounted future net cash
flows........................................... $ 104,606 $ 322,435 $1,098,399
========= ========= ==========
Discounted future net cash flows before income
taxes........................................... $ 111,284 $ 349,099 $1,570,892
========= ========= ==========
</Table>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
-------- -------- ---------
(IN THOUSANDS)
Oil and natural gas sales, net of production
costs............................................. $(25,765) $(53,009) $(196,608)
Net changes in anticipated prices and production
cost.............................................. (65,975) 147,678 369,244
Extensions and discoveries, less related costs...... 6,536 19,831 228,685
Changes in estimated future development costs....... 5,114 (11,691) (15,807)
Previously estimated development costs incurred..... 6,865 6,175 16,827
Net change in income taxes.......................... (4,821) (19,985) (445,830)
Purchase of minerals in place....................... 41,513 -- 748,854
Sales of minerals in place.......................... (2,301) (2,896) (3,205)
Accretion of discount............................... 15,541 11,129 34,910
Revision of quantity estimates...................... (5,822) 130,750 48,384
Changes in production rates and other............... (19,829) (10,153) (9,490)
-------- -------- ---------
Change in standardized measure.................... $(48,944) $217,829 $ 775,964
======== ======== =========
</Table>
F-24
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER FULL YEAR
------- ------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000
Total revenues...................... $25,462 $53,154 $64,075 $77,351 $220,042
Gross profit(1)..................... $16,094 $41,330 $52,230 $62,326 $171,980
Net income.......................... $ 1,397 $ 9,209 $19,004 $13,926 $ 43,536
Net income per share(2)
Basic............................. $ 0.13 $ 0.40 $ 0.62 $ 0.38 $ 1.54
Diluted........................... $ 0.13 $ 0.40 $ 0.61 $ 0.37 $ 1.52
1999
Total revenues...................... $15,150 $17,516 $19,784 $23,038 $ 75,488
Gross profit(1)..................... $ 8,560 $11,006 $11,477 $14,062 $ 45,105
Net income (loss)................... $ (159) $(1,617) $ 2,287 $(3,637) $ (3,126)
Net income (loss) per share(2)
Basic............................. $ (0.02) $ (0.12) $ 0.15 $ (0.23) $ (0.21)
Diluted........................... $ (0.02) $ (0.12) $ 0.14 $ (0.23) $ (0.21)
</Table>
- ---------------
(1) Gross profit is computed as the excess of oil and natural gas revenues over
operating expenses. Operating expenses include lease operating expense,
production taxes and transportation costs.
(2) The sum of the individual quarterly net income (loss) per share may not
agree with year-to-date net income (loss) per share as each period's
computation is based on the weighted average number of common shares
outstanding during the period.
F-25
WESTPORT RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------ -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
DATA)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 20,154 $ 37,030
Accounts receivable, net.................................. 49,200 45,880
Derivative asset.......................................... -- 20,576
Prepaid expenses.......................................... 4,670 7,426
--------- ----------
Total current assets................................ 74,024 110,912
--------- ----------
Property and equipment, at cost:
Oil and natural gas properties, successful efforts method:
Proved properties....................................... 591,367 1,409,193
Unproved properties..................................... 40,653 110,558
Office building, furniture and equipment.................. 2,642 7,514
Leasehold improvements.................................... 501 509
--------- ----------
635,163 1,527,774
Less accumulated depletion, depreciation and amortization... (157,739) (230,022)
--------- ----------
Net property and equipment............................ 477,424 1,297,752
--------- ----------
Other assets
Long-term derivative assets............................... -- 3,599
Goodwill.................................................. -- 210,091
Other assets.............................................. 383 1,500
--------- ----------
Total other assets.................................. 383 215,190
--------- ----------
Total assets........................................ $ 551,831 $1,623,854
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 28,547 $ 49,112
Accrued expenses.......................................... 19,827 31,598
Ad valorem taxes payable.................................. 4,788 11,201
Derivative liabilities.................................... -- 23,149
Income taxes payable...................................... 375 542
Other current liabilities................................. -- 458
--------- ----------
Total current liabilities........................... 53,537 116,060
--------- ----------
Long-term debt............................................ 162 404,205
Deferred income taxes..................................... 38,503 161,898
Long-term derivative liabilities.......................... -- 10,415
Other liabilities......................................... 1,573 1,466
--------- ----------
Total liabilities................................... 93,775 694,044
--------- ----------
Stockholders' equity:
6 1/2% Convertible preferred stock, $.01 par value;
10,000,000 shares authorized, 2,930,000 and 0 issued
and outstanding at September 30, 2001 and December 31,
2000, respectively..................................... -- 29
Common stock, $0.01 par value; 70,000,000 authorized;
52,037,435 and 38,419,041 shares issued and outstanding
at September 30, 2001 and December 31, 2000,
respectively............................................ 384 520
Additional paid-in capital.............................. 472,576 875,172
Treasury stock.......................................... -- (408)
Retained earnings (accumulated deficit)................. (14,904) 47,147
Other comprehensive income.............................. -- 7,350
--------- ----------
Total stockholders' equity.......................... 458,056 929,810
--------- ----------
Total liabilities and stockholders' equity.......... $ 551,831 $1,623,854
========= ==========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
WESTPORT RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 2001 2000 2001
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS) PER SHARE AMOUNTS)
(UNAUDITED) (UNAUDITED)
Operating revenues:
Oil and natural gas sales........................ $70,956 $70,157 $158,351 $234,405
Hedge cash settlements........................... (7,189) (307) (15,660) (1,824)
Commodity price risk management activities:
Non-hedge cash settlements.................... -- (1,025) -- (558)
Non-hedge non-cash change in fair value of
derivatives................................. -- 17,720 -- 24,486
Gain on sale of operating assets, net......... 3,390 -- 3,379 --
------- ------- -------- --------
Net revenues................................ 67,157 86,545 146,070 256,509
------- ------- -------- --------
Operating costs and expenses:
Lease operating expenses......................... 8,130 14,775 23,609 34,770
Production taxes................................. 2,816 3,009 7,460 8,942
Transportation costs............................. 591 1,236 1,967 3,921
Exploration...................................... 1,347 13,463 7,610 24,333
Depletion, depreciation and amortization......... 19,439 31,222 42,015 72,251
Impairment of unproved properties................ 366 1,366 1,908 3,114
Stock compensation expense....................... 299 (2,331) 3,682 (1,060)
General and administrative....................... 2,073 4,122 5,277 10,832
------- ------- -------- --------
Total operating expenses................. 35,061 66,862 93,528 157,103
------- ------- -------- --------
Operating income.............................. 32,096 19,683 52,542 99,406
------- ------- -------- --------
Other income (expense):
Interest expense................................. (3,166) (3,892) (8,454) (4,483)
Interest income.................................. 239 456 614 1,522
Change in interest rate swap fair value and
other......................................... 68 2,272 100 1,897
------- ------- -------- --------
(2,859) (1,164) (7,740) (1,064)
------- ------- -------- --------
Income before income taxes......................... 29,237 18,519 44,802 98,342
Provision for income taxes:
Current.......................................... -- -- -- (2,006)
Deferred......................................... (10,233) (6,759) (15,192) (33,889)
------- ------- -------- --------
Total provision for income taxes......... (10,233) (6,759) (15,192) (35,895)
------- ------- -------- --------
Net income.................................... 19,004 11,760 29,610 62,447
------- ------- -------- --------
Preferred stock dividends.......................... -- 397 -- 397
Net income available to common stock............... $19,004 $11,363 $ 29,610 $ 62,050
------- ------- -------- --------
Weighted average number of common shares
outstanding:
Basic............................................ 30,871 44,527 25,474 40,496
======= ======= ======== ========
Diluted.......................................... 31,235 45,238 25,729 41,329
======= ======= ======== ========
Net income per common share:
Basic............................................ $ .62 $ .26 $ 1.16 $ 1.53
======= ======= ======== ========
Diluted.......................................... $ .61 $ .25 $ 1.15 $ 1.50
======= ======= ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
WESTPORT RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2000 2001
-------- ---------
(IN THOUSANDS)
(UNAUDITED)
Cash flows from operating activities:
Net income................................................ $ 29,610 $ 62,447
Adjustments to reconcile net income to cash provided by
operating activities:
Depletion, depreciation and amortization................ 42,015 72,251
Exploratory dry hole costs.............................. 1,976 16,623
Impairment of unproved properties....................... 1,908 3,114
Deferred income taxes................................... 15,192 33,889
Director retainers settled for stock.................... 50 --
Stock compensation expense.............................. 299 (1,060)
Change in derivative fair value......................... -- (26,363)
Amortization of financing fees.......................... -- 633
Gain on sale of assets.................................. (3,379) --
Changes in assets and liabilities, net of effects of
acquisitions:
Decrease (increase) in accounts receivable............ (21,891) 27,001
Decrease in prepaid expenses.......................... 140 446
Increase (decrease) in accounts payable............... 2,123 (5,426)
Increase in ad valorem taxes payable.................. 2,164 3,141
Increase in income taxes payable...................... -- 306
Decrease in accrued expenses.......................... (3,930) (11,200)
Decrease in other liabilities......................... (1,424) (107)
-------- ---------
Net cash provided by operating activities................... 64,853 175,695
-------- ---------
Cash flows from investing activities:
Additions to property and equipment....................... (49,682) (132,688)
Proceeds from sales of assets............................. 6,259 654
Merger with EPGC.......................................... (42,403) --
Other acquisitions........................................ (1,454) (6,319)
Other..................................................... (682) (2)
-------- ---------
Net cash used in investing activities....................... (87,962) (138,355)
-------- ---------
Cash flows from financing activities:
Proceeds from insurance of common stock................... 141 264
Repurchase of common stock................................ -- (408)
Proceeds from long-term debt.............................. 50,000 255,000
Repayment of long-term debt............................... (11,000) (273,284)
Financing fees............................................ -- (2,036)
-------- ---------
Net cash provided by (used in) financing activities......... 39,141 (20,464)
-------- ---------
Net increase in cash and cash equivalents................... 16,032 16,876
Cash and cash equivalents, beginning of period.............. 19,475 20,154
-------- ---------
Cash and cash equivalents, end of period.................... $ 35,507 $ 37,030
======== =========
Supplemental cash flow information:
Cash paid for interest.................................... $ 6,912 $ 12,016
======== =========
Cash paid for income taxes................................ $ -- $ 1,700
======== =========
Supplemental schedule of noncash investing and financing
activities:
Common stock and stock options issued in connection with
the Belco and EPGC mergers, respectively................ $165,356 $ 349,214
======== =========
Liabilities assumed in connection with the Belco and EPGC
mergers, respectively................................... $ 1,850 $ 666,589
======== =========
EPGC merger costs paid by parent.......................... $ 2,895 $ --
======== =========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
On August 21, 2001, the stockholders of each of Westport Resources
Corporation, a Delaware corporation ("Old Westport") and Belco Oil & Gas Corp.,
a Nevada corporation ("Belco") approved the Agreement and Plan of Merger dated
as of June 8, 2001 (the "Merger Agreement"), between Belco and Old Westport.
Pursuant to the Merger Agreement, Old Westport was merged with and into Belco
(the "Merger"), with Belco surviving as the legal entity and changing its name
to Westport Resources Corporation (the "Company" or "Westport"). The merger of
Old Westport into Belco was accounted for as a purchase transaction for
financial accounting purposes. Because former Old Westport stockholders now own
a majority of the outstanding Westport common stock as a result of the Merger,
the Merger is accounted for as a reverse acquisition in which Old Westport is
the purchaser of Belco. Business activities of the Company include the
exploration for and production of oil and natural gas primarily in the Gulf of
Mexico, the Rocky Mountains, the Gulf Coast and the West Texas/Mid Continent
area.
2. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the financial position of the
Company as of September 30, 2001 and the results of operations and cash flows
for the periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission's rules and regulations. The results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full year. Management believes the disclosures made are
adequate to ensure that the information is not misleading, and suggests that
these financial statements be read in conjunction with Old Westport's December
31, 2000 audited financial statements set forth in Old Westport's Form 10-K.
3. DEBT
REVOLVING CREDIT FACILITY
The Company entered into a new credit facility (the "Revolving Credit
Facility") with a syndicate of banks upon closing of the Merger, which was
subsequently amended on November 5, 2001. The Revolving Credit Facility, as
amended, provides for a maximum committed amount of $500 million and a borrowing
base of approximately $400 million as of November 5, 2001. The facility matures
on July 1, 2005. Advances under the Revolving Credit Facility are in the form of
either an ABR loan or a Eurodollar loan.
The interest on an ABR loan is a fluctuating rate based upon the highest
of: (1) the Chase Manhattan Bank prime rate; (2) the secondary market rate for
three month certificates of deposits plus 1%; and (3) the Federal Funds
Effective rate plus 0.5% plus in each case a margin of 0% to 1.25% based upon
the ratio of total debt to EBITDAX.
The interest on a Eurodollar loan is a fluctuating rate based upon the rate
at which Eurodollar deposits in the London interbank market are quoted plus a
margin of 1.25% to 1.50% based upon the ratio of total debt to EBITDAX.
As of September 30, 2001, we had borrowings and letters of credit issued of
approximately $260 million outstanding under the Revolving Credit Facility, and
available unused borrowing capacity of approximately $140 million with an
average interest rate of 4.58%. Of the total amount borrowed, approximately $140
million was borrowed in connection with the Merger and to fund our capital
expenditures and working capital needs, and approximately $115 million was
borrowed to redeem our 10.5% Senior Subordinated Notes due 2006. The 10.5%
Senior Subordinated Notes, originally issued by Coda Energy and assumed in
connection with the
F-29
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Merger, were redeemed pursuant to the optional redemption provision of the
related indenture at 105.25% of the principal amount of each note plus accrued
interest, for a total amount of approximately $120 million. No gain or loss was
recognized in connection with the redemption as the fair value of the 10.5%
Senior Subordinated Notes recorded in connection with the Merger equaled the
redemption cost. As of November 5, 2001, after taking into account the items
mentioned below, we had borrowings and letters of credit of approximately $20
million outstanding under the Revolving Credit Facility and approximately $380
million of unused borrowing capacity available.
8.875% SENIOR SUBORDINATED NOTES DUE 2007
In connection with the Merger, the Company assumed $147 million face
amount, $149 million fair value of Belco's 8.875% Senior Subordinated Notes due
2007. On November 1, 2001, approximately $24.3 million face amount of these
notes was tendered to us pursuant to the change of control provisions of the
related indenture. The tender price was equal to 101% of the principal amount of
each note plus accrued and unpaid interest as of October 29, 2001. Including the
premium and accrued interest, the total amount paid was $24.8 million. The
Company used borrowings under its Revolving Credit Facility to fund the
repayment. No gain or loss will be recorded in connection with the redemption as
the fair value of the 8.875% Senior Subordinated Notes recorded in connection
with the Merger equaled the redemption cost.
8.25% SENIOR SUBORDINATED NOTES DUE 2011
On November 5, 2001, the Company completed the private placement of $275
million of 8.25% Senior Subordinated Notes due 2011 pursuant to SEC rule 144A.
The notes are non-callable until November 1, 2006, when the Company has the
right to redeem them for 104.125% of the face value, declining thereafter to
face value in 2009. Proceeds of approximately $268 million, net of underwriting
discounts, were used to reduce outstanding indebtedness under the Revolving
Credit Facility.
4. MERGER
In connection with the Merger, on August 21, 2001 the Company consummated a
0.4125 for 1 reverse stock split for existing Belco stockholders (issuing
approximately 13.588 million shares) and issued approximately 38.469 million
shares of common stock to Old Westport stockholders. Because former Old Westport
stockholders received a majority of the Company's common stock as a result of
the Merger, the Merger, which was a non-taxable transaction, was accounted for
using purchase accounting with Old Westport as the accounting survivor. The
Company began consolidating the results of Belco with the results of Old
Westport as of the August 21, 2001 closing date of the Merger.
F-30
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total purchase price of $1,015.8 million was allocated as follows (in
thousands):
<Table>
Purchase Price:
Fair value of common stock issued........................... $ 341,455
Fair value of Belco stock options........................... 7,759
Fair value of liabilities assumed:
Liabilities from commodity price risk management.......... 52,388
Current liabilities....................................... 45,135
Long-term debt............................................ 422,327
Deferred taxes............................................ 85,281
Other liabilities......................................... 253
Fair value of Belco preferred stock......................... 54,205
Estimated merger costs...................................... 7,000
----------
Total purchase price................................... $1,015,803
==========
Allocation of purchase price:
Oil and gas properties -- proved.......................... $ 701,116
Oil and gas properties -- unproved........................ 68,263
Goodwill.................................................. 210,091
Current assets............................................ 30,426
Other assets.............................................. 5,907
----------
Total allocation....................................... $1,015,803
==========
</Table>
The common stock issued to Belco stockholders in connection with the Merger
was valued at $25.13 per share. The fair value of the Belco stock options
assumed was determined using the Black-Scholes option pricing model. The fair
value of Belco's publicly-traded debt and preferred stock was based on quoted
market prices on August 21, 2001. The deferred taxes recorded were based on the
difference between the historical tax basis of the Belco assets and liabilities
and the acquisition costs.
The purchase price allocation above is subject to change resulting from,
among other things, actual merger costs incurred and changes in working capital.
We expect to be able to finalize the purchase price allocation by August 2002.
PRO FORMA RESULTS OF OPERATIONS
The following table reflects the pro forma results of operations for the
respective nine-month periods ended September 30, 2001 and 2000 as though the
Merger had occurred as of January 1 of each year presented. The pro forma
amounts are not necessarily indicative of the results that may be reported in
the future.
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 2001
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues.................................................... $220,194 $451,982
Net income (loss)........................................... $ (1,887) $118,156
Basic net income (loss) per share........................... $ (.05) $ 2.46
Diluted net income (loss) per share......................... $ (.05) $ 2.42
</Table>
F-31
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMODITY DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We periodically enter into commodity price risk management ("CPRM")
transactions such as swaps and options in order to manage our exposure to oil
and gas price volatility. All CPRM data is presented in accordance with
requirements of Statement of Financial Accounting Standards ("SFAS") No. 133
which became effective January 1, 2001. Accordingly, unrealized gains and losses
related to the change in fair market value of derivative contracts which qualify
and are designated as hedges are recorded as other comprehensive income or loss
and recognized as revenues or expenses as the associated production occurs.
Derivative contracts that do not qualify for hedge accounting treatment are
reflected at market value at the end of the reporting period as assets and
liabilities in the consolidated balance sheet, and the associated unrealized
gains and losses are reflected in the consolidated statement of operations.
For the three months ended September 30, 2001, we recorded, as required by
existing accounting rules, non-hedge CPRM cash settlements paid in the amount of
$1.0 million and unrealized non-cash mark to market gains in the amount of $17.7
million. There was no non-hedge activity for the three months ended September
30, 2000. For the nine months ended September 30, 2001, we recorded CPRM cash
settlements paid in the amount of $0.6 million and unrealized non-cash mark to
market gains of $24.5 million. There was no non-hedge activity for the nine
months ended September 30, 2000.
For the three months ended September 30, 2001 and 2000, we recorded hedging
cash settlements paid out by us in the amounts of $0.3 million and $7.2 million,
respectively. For the nine months ended September 30, 2001 and 2000, we recorded
hedging cash settlements paid out by us in the amounts of $1.8 million and $15.7
million, respectively.
As of November 1, 2001, we had approximately 0.5 million barrels of oil and
7.9 Bcf of natural gas subject to CPRM contracts for the fourth quarter of 2001.
These contracts are subject to weighted average floor prices of $19.82 per
barrel and $2.44 per Mmbtu and weighted average ceiling prices of $20.49 per
barrel and $3.33 per Mmbtu, respectively. We have approximately 4.0 million
barrels of oil and 20.8 Bcf of natural gas subject to CPRM contracts for 2002.
The 2002 contracts have weighted average floor prices of $22.32 per barrel and
$3.09 per Mmbtu, with weighted average ceiling prices of $24.43 per barrel and
$3.81 per Mmbtu, respectively. We have approximately 1.6 million barrels of oil
and 5.0 Bcf of natural gas subject to CPRM contracts for 2003. The contracts for
2003 are at weighted average floor prices of $21.59 per barrel and $3.08 per
Mmbtu and weighted average ceiling prices of $22.96 per barrel and $4.58 per
Mmbtu, respectively. These contracts represent the Company's hedge and non-hedge
positions.
F-32
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tables summarized below provide details about the volumes and prices of
all open CPRM commitments, hedge and non-hedge, as of September 30, 2001.
<Table>
<Caption>
REMAINDER
OF 2001 2002 2003
--------- ------ ------
HEDGES
GAS
Price Swaps Sold-receive fixed price (thousand
Mmbtu)............................................ -- -- 1,363
Average price, per Mmbtu.......................... -- -- $ 3.69
Price Swaps Bought-pay fixed price (thousand
Mmbtu)............................................ (2,300) (460) --
Average price, per Mmbtu.......................... $ 4.59 $ 4.47 --
Collars Sold (thousand Mmbtu)....................... 3,404 5,925 3,650
Average floor price, per Mmbtu.................... $ 2.75 $ 2.66 $ 2.85
Average ceiling price, per Mmbtu.................. $ 3.87 $ 3.80 $ 4.91
Puts Bought (thousand Mmbtu)........................ -- 3,650 --
Average price per Mmbtu........................... -- $ 3.13 --
OIL
Price Swaps Sold-receive fixed price (Mbbls)........ 240 840 480
Average price, per Bbl............................ $ 19.49 $20.29 $20.60
Collars Sold (Mbbls)................................ 60 300 90
Average floor price, per bbl...................... $ 18.75 $19.60 $21.00
Average ceiling price per bbl..................... $ 22.68 $25.10 $24.63
</Table>
F-33
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
REMAINDER
OF 2001 2002 2003
--------- ------ ------
NON-HEDGES
GAS
Price Swaps Sold-receive fixed price (thousand
Mmbtu)............................................ 5,290 -- --
Average price, per Mmbtu.......................... $ 2.55 -- --
Price Swaps Bought-pay fixed price (thousand
Mmbtu)............................................ (230) -- --
Average price, per Mmbtu.......................... $ 3.25 -- --
Puts Sold (thousand Mmbtu).......................... (690) -- --
Average price, per Mmbtu.......................... $ 4.34 -- --
Extension Swaps Sold-receive fixed price (thousand
Mmbtu)............................................ -- 3,650 --
Average price, per Mmbtu.......................... -- $ 2.65 --
Calls Sold (thousand Mmbtu)......................... 966 4,380 --
Average price per Mmbtu........................... $ 3.28 $ 2.95 --
Collars Sold (Mmbtu)(1)............................. 1,472 3,650 --
Average floor price, per Mmbtu.................... $ 5.19 $ 4.50 --
Average ceiling price, per Mmbtu.................. $ 7.38 $ 6.75 --
OIL
Price Swaps Sold-receive fixed price (Mbbls)........ 30 -- --
Average price, per Bbl............................ $17.25 -- --
Calls Sold (Mbbls).................................. 165 720 --
Average price, per Bbl............................ $20.55 $22.00 --
Puts Sold (Mbbls)................................... (45) -- --
Average price, per Bbl............................ $16.00 -- --
Extension Swaps Sold, receive fixed price (Mbbls)... -- 300 300
Average price, per Bbl............................ -- $18.86 $18.86
Extension Collars Sold.............................. 30 -- --
Average floor price............................... $17.50 -- --
Average ceiling price............................. $20.35 -- --
Collars Sold (Mbbls)(1)............................. -- 1,820 730
Average floor price, per Bbl...................... -- $24.39 $23.25
Average ceiling price per Bbl..................... -- $28.10 $26.00
</Table>
- ---------------
(1) On certain contracts the counterparties hold options to put volumes of
natural gas or oil to the Company over similar time periods at $3.54/ MMBtu
and $3.50/ MMBtu for the remainder of a 2001 natural gas collar and the 2002
natural gas collar, respectively, and between $19.00/ Bbl and $19.75/ Bbl
for the 2002 oil collars and $18.65 for the 2003 oil collar.
6. INTEREST RATE SWAP AGREEMENTS
As result of the Merger, the Company assumed an interest rate swap
agreement entered into by Belco to effectively convert a portion of its
floating-rate borrowings into fixed rate obligations and three interest rate
swap agreements to convert fixed rate obligations to floating rate obligations.
F-34
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the interest rate derivative contracts the
Company currently has in place:
<Table>
<Caption>
NOTIONAL AMOUNT TRANSACTION DATE EXPIRATION DATE CURRENT EFFECTIVE RATE CURRENT CAP
- --------------- ---------------- --------------- ---------------------- -----------
$100 million December 1997 Sep. 15, 2007 8.75% 8.875%
$ 50 million January 1998 Sep. 15, 2007 8.695% 8.875%
$ 85 million December 1997 April 1, 2003 10.198% 11.625%
$ 25 million March 10, 1999 March 11, 2002 5.61% N/A
</Table>
The Company accounts for the interest rate derivative contracts as
speculative positions. For the three and nine month periods ended September 30,
2001, respectively, the Company recorded $2.3 million in unrealized derivative
gain for the change in fair value of interest rate derivative contracts.
7. COMPREHENSIVE INCOME
The Company follows SFAS No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting comprehensive income. In addition to net
income, comprehensive income includes all changes in equity during a period,
except those resulting from investments and distributions to the owners of the
Company. The Company had no such changes for the nine months ended September 30,
2000. The components of other comprehensive income and related tax effects for
the nine months ended September 30, 2001 are as follows (in thousands):
<Table>
<Caption>
GROSS TAX EFFECT NET OF TAX
------- ---------- ----------
Cumulative effect of accounting change................ $(4,700) $ 1,600 $(3,100)
Change in derivative fair value of hedge.............. 18,099 (6,491) 11,608
Reclassification adjustments -- contract
settlements......................................... (1,824) 666 (1,158)
------- ------- -------
$11,575 $(4,225) $ 7,350
======= ======= =======
</Table>
8. RESTRICTED STOCK AWARDS
The Company issued 36,550 shares of Common Stock as restricted stock awards
pursuant to the Company's 2000 Stock Incentive Plan to certain employees during
the nine months ended September 30, 2001. The shares are restricted for various
periods ranging from one to three years after the date of grant. Compensation
expense of $0.3 million was recorded as a result of the issuance.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," which addresses financial accounting and
reporting for business combinations. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for under the purchase method initiated before but completed after
June 30, 2001. The adoption of SFAS No. 141 is not expected to have a material
impact on the Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which addresses, among other things, the financial accounting and
reporting for goodwill subsequent to an acquisition. The new standard eliminates
the requirement to amortize acquired goodwill; instead, such goodwill to be
reviewed at least annually for impairment. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001. The Company has not yet evaluated the
impact that SFAS No. 142 will have on its financial position or results of
operations upon adoption.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the fair value
of liabilities for retirement obligations of acquired assets. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. The Company will adopt
SFAS
F-35
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 143 on January 1, 2003, but has not yet quantified the effects of adopting
SFAS No. 143 on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 144 establishes a single accounting model
for long-lived assets to be disposed of by sale and requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The Company will adopt SFAS No. 144 on January 1, 2002, but has not
yet quantified the effects of adopting SFAS No. 144 on its financial position or
results of operations.
10. SUBSEQUENT EVENTS
In connection with the Merger, the Company assumed $147 million face
amount, $149 million fair value of Belco's 8.875% Senior Subordinated Notes due
2007. On November 1, 2001, approximately $24.3 million face amount of the
Company's 8.875% Senior Subordinated Notes due 2007 was tendered to us, pursuant
to the change of control provisions of the related indenture. The tender price
was equal to 101% of the principal amount of each note plus accrued and unpaid
interest as of October 29, 2001. Including the premium and accrued interest, the
total amount paid was $24.8 million. The Company used borrowings under its
Revolving Credit Facility to fund the repayment.
On November 5, 2001, the Company amended its Revolving Credit Facility. The
amendment increased the maximum commitment to $500 million, the borrowing base
to $520 million, subject to adjustment as described below, and allows the
Company to incur up to $400 million of Subordinated Indebtedness, as defined in
the Revolving Credit Facility. The borrowing base was adjusted downward by an
amount equal to 30% of the amount of the Subordinated Indebtedness outstanding.
As of November 5, 2001 the borrowing base was approximately $400 million, and
there was approximately $20 million outstanding under the facility, including
issued letters of credit. Unused availability was approximately $380 million.
On November 5, 2001, the Company completed the private placement of $275
million 8.25% Senior Subordinated Notes due 2011 (the "8.25% Senior Subordinated
Notes") pursuant to rule 144A. The notes are non-callable until November 1,
2006, when the Company has the right to redeem the 8.25% Senior Subordinated
Notes for 104.125% of the face value, and declining thereafter to face value in
2009. Proceeds of approximately $268 million, net of underwriting discounts,
were used to reduce outstanding indebtedness under the Revolving Credit
Facility.
11. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF SUBSIDIARY GUARANTORS
The 8.25% Senior Subordinated Notes are fully and unconditionally
guaranteed, jointly and severally, on a senior subordinated unsecured basis by
the following wholly-owned subsidiaries of Westport: Westport Finance Co., Jerry
Chambers Exploration Company, Westport Argentina LLC, Westport Canada LLC,
Westport Oil and Gas Company, L.P., Westport Overriding Royalty LLC, WHG, Inc.
and WHL, Inc. (collectively, the "Subsidiary Guarantors"). The guarantees of the
Subsidiary Guarantors are subordinated to senior debt of the Subsidiary
Guarantors. The only existing subsidiaries of Westport that have not guaranteed
the 8.25% Senior Subordinated Notes are Horse Creek Trading & Compression LLC
and Belco Energy (Cayman Islands) Corp., which are minor for purposes of the
Securities and Exchange Commission's rules regarding presentation of the
condensed consolidating financial statements below. As such, the financial
position, results of operations and cash flow information of Horse Creek have
been included in the Subsidiary Guarantor column and the financial position,
results of operations and cash flow information of Belco Energy (Cayman Islands)
Corp., have been included in the Parent Company column. Presented below are
condensed consolidating financial statements for Westport and the Subsidiary
Guarantors.
F-36
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WESTPORT RESOURCES CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2000
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents.................... $ 12,458 $ 7,696 $ -- $ 20,154
Accounts receivable, net..................... 14,404 34,796 -- 49,200
Intercompany receivable...................... 97,347 -- (97,347) --
Prepaid expenses............................. 3,075 1,595 -- 4,670
-------- --------- -------- ---------
Total current assets.................... 127,284 44,087 (97,347) 74,024
-------- --------- -------- ---------
Property and equipment, at cost:
Oil and gas properties, successful efforts
method:
Proved properties......................... 226,454 364,913 -- 591,367
Unproved properties....................... 25,007 15,646 -- 40,653
Office building, furniture and equipment..... 197 2,445 -- 2,642
Leasehold improvements....................... -- 501 -- 501
-------- --------- -------- ---------
251,658 383,505 -- 635,163
Less accumulated depletion, depreciation and
amortization................................. (36,745) (120,994) -- (157,739)
-------- --------- -------- ---------
Net property and equipment.............. 214,913 262,511 -- 477,424
-------- --------- -------- ---------
Other assets................................. -- 383 -- 383
-------- --------- -------- ---------
Total assets............................ $342,197 $ 306,981 $(97,347) $ 551,831
======== ========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................. $ 7,061 $ 21,486 $ -- $ 28,547
Accrued expenses............................. 7,584 12,243 -- 19,827
Ad valorem taxes payable..................... -- 4,788 -- 4,788
Intercompany payable......................... -- 97,347 (97,347) --
Income taxes payable......................... -- 375 -- 375
-------- --------- -------- ---------
Total current liabilities............... 14,645 136,239 (97,347) 53,537
-------- --------- -------- ---------
Long-term debt................................. -- 162 -- 162
Deferred income taxes.......................... 28,610 9,893 -- 38,503
Other liabilities.............................. -- 1,573 -- 1,573
-------- --------- -------- ---------
Total liabilities....................... 43,255 147,867 (97,347) 93,775
-------- --------- -------- ---------
Stockholders' equity
Common stock................................. 384 3 (3) 384
Additional paid-in capital................... 274,125 198,448 3 472,576
Retained earnings (accumulated deficit)...... 24,433 (39,337) -- (14,904)
-------- --------- -------- ---------
Total stockholders' equity.............. 298,942 159,114 -- 458,056
-------- --------- -------- ---------
Total liabilities and stockholders'
equity............................... $342,197 $ 306,981 $(97,347) $ 551,831
======== ========= ======== =========
</Table>
F-37
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WESTPORT RESOURCES CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2001
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 9,197 $ 27,833 $ -- $ 37,030
Accounts receivable, net.................................. 9,354 36,526 -- 45,880
Intercompany receivable................................... 357,259 -- (357,259) --
Derivative assets......................................... -- 20,576 -- 20,576
Prepaid expenses.......................................... 3,159 4,267 -- 7,426
-------- ---------- --------- ----------
Total current assets.................................. 378,969 89,202 (357,259) 110,912
-------- ---------- --------- ----------
Property and equipment, at cost:
Oil and natural gas properties, successful efforts method:
Proved properties....................................... 272,314 1,136,879 -- 1,409,193
Unproved properties..................................... 28,280 82,278 -- 110,558
Office building, furniture and equipment.................. 482 7,032 -- 7,514
Leasehold improvements.................................... -- 509 -- 509
-------- ---------- --------- ----------
301,076 1,226,698 -- 1,527,774
Less accumulated depletion, depreciation and amortization... (68,898) (161,124) -- (230,022)
-------- ---------- --------- ----------
Net property and equipment............................ 232,178 1,065,574 -- 1,297,752
-------- ---------- --------- ----------
Other assets:
Long-term derivative assets............................... -- 3,599 -- 3,599
Goodwill.................................................. -- 210,091 -- 210,091
Other assets.............................................. 1,448 52 -- 1,500
-------- ---------- --------- ----------
Total other assets.................................... 1,448 213,742 -- 215,190
-------- ---------- --------- ----------
Total assets.......................................... $612,595 $1,368,518 $(357,259) $1,623,854
======== ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 9,975 $ 39,137 $ -- $ 49,112
Accrued expenses.......................................... 6,434 25,164 -- 31,598
Ad valorem taxes payable.................................. -- 11,201 -- 11,201
Intercompany payable...................................... -- 357,259 (357,259) --
Derivative liabilities.................................... -- 23,149 -- 23,149
Income taxes payable...................................... (139) 681 -- 542
Other current liabilities................................. -- 458 -- 458
-------- ---------- --------- ----------
Total current liabilities............................. 16,270 457,049 (357,259) 116,060
-------- ---------- --------- ----------
Long-term debt.............................................. 255,000 149,205 -- 404,205
Deferred income taxes....................................... 34,026 127,872 -- 161,898
Long-term derivative liabilities............................ -- 10,415 -- 10,415
Other liabilities........................................... -- 1,466 -- 1,466
-------- ---------- --------- ----------
Total liabilities..................................... 305,296 746,007 (357,259) 694,044
-------- ---------- --------- ----------
Stockholders' equity
Preferred stock........................................... -- 29 -- 29
Common stock.............................................. 385 135 -- 520
Additional paid-in capital................................ 273,468 601,704 -- 875,172
Treasury stock............................................ (408) -- -- (408)
Retained earnings......................................... 33,854 13,293 -- 47,147
Other comprehensive income................................ -- 7,350 -- 7,350
-------- ---------- --------- ----------
Total stockholders' equity............................ 307,299 622,511 -- 929,810
-------- ---------- --------- ----------
Total liabilities and stockholders' equity............ $612,595 $1,368,518 $(357,259) $1,623,854
======== ========== ========= ==========
</Table>
F-38
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WESTPORT RESOURCES CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
Operating revenues:
Oil and natural gas sales...................... $76,524 $157,881 $ -- $234,405
Hedge cash settlements......................... -- (1,824) -- (1,824)
Commodity price risk management activities:
Non-hedge cash settlements.................. -- (558) -- (558)
Non-hedge non-cash change in fair value of
derivatives............................... -- 24,486 -- 24,486
------- -------- ----- --------
Net revenues.............................. 76,524 179,985 -- 256,509
------- -------- ----- --------
Operating costs and expenses:
Lease operating expenses....................... 5,390 29,380 -- 34,770
Production taxes............................... 7 8,935 -- 8,942
Transportation costs........................... 410 3,511 -- 3,921
Exploration.................................... 17,885 6,448 -- 24,333
Depletion, depreciation and amortization....... 32,154 40,097 -- 72,251
Impairment of unproved properties.............. 2,297 817 -- 3,114
Stock compensation expense..................... (1,060) -- -- (1,060)
General and administrative..................... 4,814 6,018 -- 10,832
------- -------- ----- --------
Total operating expenses.................. 61,897 95,206 -- 157,103
------- -------- ----- --------
Operating income.......................... 14,627 84,779 -- 99,406
------- -------- ----- --------
Other income (expense):
Interest expense............................... (974) (3,509) -- (4,483)
Interest income................................ 1,120 402 -- 1,522
Change in interest rate swap fair value and
other....................................... 63 1,834 -- 1,897
------- -------- ----- --------
209 (1,273) -- (1,064)
------- -------- ----- --------
Income before income taxes....................... 14,836 83,506 -- 98,342
Provision for income taxes:
Current........................................ -- (2,006) -- (2,006)
Deferred....................................... (5,415) (28,474) -- (33,889)
------- -------- ----- --------
Total provision for income taxes.......... (5,415) (30,480) -- (35,895)
Net income....................................... 9,421 53,026 -- 62,447
------- -------- ----- --------
Preferred stock dividends........................ -- 397 -- 397
------- -------- ----- --------
Net income available to common stock............. $ 9,421 $ 52,629 $ -- $ 62,050
======= ======== ===== ========
</Table>
F-39
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WESTPORT RESOURCES CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
Operating revenues:
Oil and natural gas sales...................... $59,395 $ 98,956 $ -- $158,351
Hedge cash settlements......................... -- (15,660) -- (15,660)
Gain on sale of operating assets, net....... -- 3,379 -- 3,379
------- -------- ----- --------
Net revenues.............................. 59,395 86,675 -- 146,070
------- -------- ----- --------
Operating costs and expenses:
Lease operating expenses....................... 3,871 19,738 -- 23,609
Production taxes............................... 8 7,452 -- 7,460
Transportation costs........................... 176 1,791 -- 1,967
Exploration.................................... 4,252 3,358 -- 7,610
Depletion, depreciation and amortization....... 23,221 18,794 -- 42,015
Impairment of unproved properties.............. -- 1,908 -- 1,908
Stock compensation expense..................... 299 3,383 -- 3,682
General and administrative..................... 2,178 3,099 -- 5,277
------- -------- ----- --------
Total operating expenses.................. 34,005 59,523 -- 93,528
------- -------- ----- --------
Operating income.......................... 25,390 27,152 -- 52,542
------- -------- ----- --------
Other income (expense):
Interest expense............................... (2,042) (6,412) -- (8,454)
Interest income................................ 98 516 -- 614
Change in interest rate swap fair value and
other....................................... 69 31 -- 100
------- -------- ----- --------
(1,875) (5,865) -- (7,740)
------- -------- ----- --------
Income before income taxes....................... 23,515 21,287 -- 44,802
Provision for income taxes:
Current........................................ -- -- -- --
Deferred....................................... (8,230) (6,962) -- (15,192)
------- -------- ----- --------
Total provision for income taxes.......... (8,230) (6,962) -- (15,192)
Net income....................................... $15,285 $ 14,325 $ -- $ 29,610
======= ======== ===== ========
</Table>
F-40
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WESTPORT RESOURCES CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
Cash flows from operating activities:
Net income.......................................... $ 9,421 $ 53,026 $ -- $ 62,447
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion, depreciation and amortization.......... 32,154 40,097 -- 72,251
Exploration dry hole costs........................ 11,310 5,313 -- 16,623
Impairment of unproved properties................. 2,297 817 -- 3,114
Deferred income taxes............................. 5,415 28,474 -- 33,889
Stock compensation expense........................ (1,060) -- -- (1,060)
Change in derivative fair value................... -- (26,363) -- (26,363)
Amortization of financing fees.................... 45 588 -- 633
Changes in asset and liabilities, net of effects
of acquisitions:
Decrease in accounts receivable................. 5,049 21,952 -- 27,001
Decrease (increase) in prepaid expenses......... 459 (13) -- 446
Decrease in accounts payable.................... (815) (4,611) -- (5,426)
Increase in ad valorem taxes payable............ -- 3,141 -- 3,141
Increase in income taxes payable................ -- 306 -- 306
Increase (decrease) in accrued expenses......... 1,311 (12,511) -- (11,200)
Decrease in other liabilities................... -- (107) -- (107)
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities................................. 65,586 110,109 -- 175,695
--------- --------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment................. (65,485) (67,203) -- (132,688)
Proceeds from sales of assets....................... -- 654 -- 654
Other acquisitions.................................. -- (6,319) -- (6,319)
Increase in intercompany receivable................. (256,182) -- 256,182 --
Other............................................... -- (2) -- (2)
--------- --------- --------- ---------
Net cash used in investing activities........ (321,667) (72,870) 256,182 (138,355)
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock.............. 264 -- -- 264
Repurchase of common stock.......................... (408) -- -- (408)
Proceed from long-term debt......................... 255,000 -- -- 255,000
Repayment of long-term debt......................... -- (273,284) -- (273,284)
Financing fees...................................... (2,036) -- -- (2,036)
Increase in intercompany payable.................... -- 256,182 (256,182) --
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities................................. 252,820 (17,102) (256,182) (20,464)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... (3,261) 20,137 -- 16,876
Cash and cash equivalents, beginning of period........ 12,458 7,696 -- 20,154
--------- --------- --------- ---------
Cash and cash equivalents, end of period.............. $ 9,197 $ 27,833 $ -- $ 37,030
========= ========= ========= =========
</Table>
F-41
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WESTPORT RESOURCES CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
Cash flows from operating activities:
Net income................................................ $ 15,284 $ 14,326 $ -- $ 29,610
Adjustments to reconcile net income to net cash provided
by operating activities:
Depletion, depreciation and amortization................ 23,222 18,793 -- 42,015
Exploration dry hole costs.............................. -- 1,976 -- 1,976
Impairment of unproved properties....................... -- 1,908 -- 1,908
Deferred income taxes................................... 8,230 6,962 -- 15,192
Director retainers settled for stock.................... 50 -- -- 50
Stock compensation expense.............................. 299 -- -- 299
Gain on sale of assets.................................. -- (3,379) -- (3,379)
Changes in asset and liabilities, net of effects of
acquisitions:
Increase in accounts receivable....................... (13,151) (8,740) -- (21,891)
Decrease (increase) in prepaid expenses............... (154) 294 -- 140
Increase (decrease) in accounts payable............... (2,727) 4,850 -- 2,123
Increase in ad valorem taxes payable.................. -- 2,164 -- 2,164
Increase (decrease) in accrued expenses............... 541 (4,471) -- (3,930)
Decrease in other liabilities......................... -- (1,424) -- (1,424)
-------- -------- -------- --------
Net cash provided by operating activities.......... 31,594 33,259 -- 64,853
-------- -------- -------- --------
Cash flows from investing activities:
Additions to property and equipment....................... (13,338) (36,344) -- (49,682)
Proceeds from sales of assets............................. -- 6,259 -- 6,259
Merger with EPGC.......................................... (42,403) -- -- (42,403)
Other acquisitions........................................ -- (1,454) -- (1,454)
Increase in intercompany receivable....................... (12,452) -- 12,452 --
Other..................................................... (523) (159) -- (682)
-------- -------- -------- --------
Net cash used in investing activities.............. (68,716) (31,698) 12,452 (87,962)
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 141 -- -- 141
Proceeds from long-term debt.............................. 50,000 -- -- 50,000
Repayment of long-term debt............................... -- (11,000) -- (11,000)
Increase in intercompany payable.......................... -- 12,452 (12,452) --
-------- -------- -------- --------
Net cash provided by (used in) financing
activities....................................... 50,141 1,452 (12,452) 39,141
-------- -------- -------- --------
Net increase in cash and cash equivalents................... 13,019 3,013 -- 16,032
Cash and cash equivalents, beginning of period.............. -- 19,475 -- 19,475
-------- -------- -------- --------
Cash and cash equivalents, end of period.................... $ 13,019 $ 22,488 $ -- $ 35,507
======== ======== ======== ========
</Table>
F-42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Belco Oil & Gas Corp.:
We have audited the accompanying consolidated balance sheets of Belco Oil &
Gas Corp. (a Nevada Corporation) and subsidiaries as of December 31, 1999 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Belco Oil &
Gas Corp. and subsidiaries as of December 31, 1999 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 23, 2001
F-43
BELCO OIL & GAS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents (including restricted cash of
$800,000 at December 31, 1999)......................... $ 2,105 $ 2,666
Accounts receivable....................................... 24,870 43,192
Income taxes receivable................................... 6,661 --
Assets from commodity price risk management activities.... 2,879 15,721
Prepaid expenses.......................................... 1,230 4,372
Other current assets...................................... 2,266 1,911
---------- ----------
Total Current Assets.............................. 40,011 67,862
Property and Equipment:
Oil and gas properties at cost based on full-cost
accounting --
Proved oil and gas properties.......................... 1,008,261 1,185,686
Unproved oil and gas properties........................ 71,075 68,979
Less -- Accumulated depreciation, depletion and
amortization.......................................... (619,446) (674,735)
---------- ----------
Net oil and gas property.................................. 459,890 579,930
---------- ----------
Building and other equipment.............................. 9,107 9,159
Less -- Accumulated depreciation....................... (2,634) (3,914)
---------- ----------
Net building and other equipment.......................... 6,473 5,245
Other Assets.............................................. 4,599 4,337
---------- ----------
Total Assets...................................... $ 510,973 $ 657,374
========== ==========
</Table>
F-44
BELCO OIL & GAS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
(IN THOUSANDS)
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable.......................................... $ 17,970 $ 25,443
Liabilities from commodity price risk management
activities............................................. 17,822 124,981
Accrued interest.......................................... 7,098 7,695
Accrued expenses.......................................... 3,743 8,926
Other liabilities......................................... 1,767 2,546
---------- ----------
Total Current Liabilities......................... 48,400 169,591
Long-Term Debt.............................................. 306,744 402,033
Deferred Income Taxes....................................... 33,638 7,933
Liabilities from commodity price risk management
activities................................................ 8,219 17,417
Stockholders' Equity:
Preferred stock, $0.01 par value; 10,000,000 shares
authorized and 3,985,000 and 3,273,600 outstanding at
December 31, 1999 and 2000, respectively............... 40 33
Common Stock, $0.01 par value; 120,000,000 shares
authorized; 31,797,300 and 32,342,315 issued and
outstanding at December 31, 1999 and 2000,
respectively........................................... 318 323
Additional paid-in capital................................ 297,225 292,635
Retained earnings deficit................................. (177,111) (230,902)
Treasury Stock, 704,900 shares at December 31, 1999....... (4,317) --
Unearned compensation..................................... (1,430) (936)
Notes receivable for equity interest...................... (753) (753)
---------- ----------
Total Stockholders' Equity........................ 113,972 60,400
---------- ----------
Total Liabilities and Stockholders' Equity........ $ 510,973 $ 657,374
========== ==========
</Table>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-45
BELCO OIL & GAS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1999 2000
------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Oil and gas sales, net of hedging activities.............. $ 129,916 $141,932 $199,387
Commodity Price Risk Management Activities -- Non-hedge
cash settlements....................................... 172 (2,442) (33,953)
Interest.................................................. 1,730 1,134 951
--------- -------- --------
Total revenues.................................... 131,818 140,624 166,385
--------- -------- --------
Costs and expenses:
Oil and gas operating expenses............................ 33,615 29,854 33,290
Production taxes.......................................... 7,232 9,314 14,464
Depreciation, depletion and amortization.................. 56,102 54,182 56,721
Impairment of oil and gas properties...................... 229,000 -- --
Impairment of equity securities........................... 24,216 450 --
General and administrative................................ 5,216 4,940 6,538
Interest expense.......................................... 21,013 21,021 25,253
Non-cash change in fair value of derivatives.............. (18,912) 34,094 103,610
--------- -------- --------
Total costs and expenses.......................... 357,482 153,855 239,876
--------- -------- --------
Income (loss) before income taxes........................... (225,664) (13,231) (73,491)
Provision (benefit) for income taxes........................ (78,107) (4,631) (25,722)
--------- -------- --------
Net income (loss)......................................... $(147,557) $ (8,600) $(47,769)
========= ======== ========
Net income (loss) available to common stock............... $(152,963) $(15,484) $(53,791)
========= ======== ========
Basic and diluted earnings (loss) per common share.......... $ (4.85) $ (0.49) $ (1.71)
========= ======== ========
Weighted average common shares outstanding.................. 31,529 31,642 31,469
========= ======== ========
</Table>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-46
BELCO OIL & GAS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED RECEIVABLE
--------------- --------------- PAID-IN UNEARNED EARNINGS FOR EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) INTEREST
------ ------ ------ ------ ---------- ------------ --------- ----------
(IN THOUSANDS)
BALANCE, DECEMBER 31, 1997......... -- -- 31,584 $316 $196,864 $(1,093) $ (8,664) $(775)
===== === ====== ==== ======== ======= ========= =====
Comprehensive Income...............
Issuance of Preferred Stock........ 4,370 $44 -- -- $105,025 -- -- --
Repurchase of Preferred Stock...... (58) (1) -- -- (806) -- -- --
Restricted Stock Issued (Net)...... -- -- 25 -- 333 11 -- --
Unrealized loss on marketable
equity securities................ -- -- -- -- -- -- -- --
Net income (loss).................. -- -- -- -- -- -- (147,557) --
Preferred Dividend paid............ -- -- -- -- -- -- (5,406) --
----- --- ------ ---- -------- ------- --------- -----
BALANCE, DECEMBER 31, 1998......... 4,312 $43 31,609 $316 $301,416 $(1,082) $(161,627) $(775)
===== === ====== ==== ======== ======= ========= =====
Comprehensive Income...............
Repurchase of Preferred Stock...... (327) $(3) -- -- $ (5,049) -- -- --
Restricted Stock Issued............ -- -- 200 2 1,018 (1,020) -- --
Restricted Stock Forfeited......... -- -- (12) -- (160) 160 -- --
Restricted Stock Amortized......... -- -- -- -- -- 512 -- --
Net Income (Loss).................. -- -- -- -- -- -- (8,600) --
Preferred Dividend Paid............ -- -- -- -- -- -- (6,884) --
Treasury Stock Acquisitions........ -- -- -- -- -- -- -- --
Payment Received................... -- -- -- -- -- -- -- 22
----- --- ------ ---- -------- ------- --------- -----
BALANCE, DECEMBER 31, 1999......... 3,985 $40 31,797 $318 $297,225 $(1,430) $(177,111) $(753)
===== === ====== ==== ======== ======= ========= =====
Comprehensive Income...............
Exchanges of Preferred Stock to
Common Stock..................... (691) (7) 536 5 (4,315) -- -- --
Exercise of stock options.......... -- -- 2 -- 10 -- -- --
Repurchase of Preferred Stock...... (20) -- -- -- (303) -- -- --
Restricted Stock Issued............ -- -- 10 -- 49 (49) -- --
Restricted Stock Forfeited......... -- -- (3) -- (31) 31 -- --
Restricted Stock Amortized......... -- -- -- -- -- 512 -- --
Net Income (Loss).................. -- -- -- -- -- -- (47,769) --
Preferred Dividend Paid............ -- -- -- -- -- -- (6,022) --
----- --- ------ ---- -------- ------- --------- -----
BALANCE, DECEMBER 31, 2000......... 3,274 $33 32,342 $323 $292,635 $ (936) $(230,902) $(753)
===== === ====== ==== ======== ======= ========= =====
Comprehensive Income...............
<Caption>
UNREALIZED
TREASURY LOSS ON
COMMON STOCK MARKETABLE
---------------- EQUITY COMPREHENSIVE
SHARES AMOUNT SECURITIES TOTAL INCOME
------ ------- ---------- -------- -------------
BALANCE, DECEMBER 31, 1997......... -- $ -- $(2,000) $184,648
==== ======= ======= ========
Comprehensive Income............... $ (58,228)
=========
Issuance of Preferred Stock........ -- -- -- $105,069 --
Repurchase of Preferred Stock...... -- -- -- (807) --
Restricted Stock Issued (Net)...... -- -- -- 344 --
Unrealized loss on marketable
equity securities................ -- -- 2,000 2,000 1,320(a)
Net income (loss).................. -- -- -- (147,557) (147,557)
Preferred Dividend paid............ -- -- -- (5,406) --
---- ------- ------- -------- ---------
BALANCE, DECEMBER 31, 1998......... -- $ -- $ -- $138,291
==== ======= ======= ========
Comprehensive Income............... $(146,237)
=========
Repurchase of Preferred Stock...... -- -- -- $ (5,052) --
Restricted Stock Issued............ -- -- -- --
Restricted Stock Forfeited......... -- -- -- -- --
Restricted Stock Amortized......... -- -- -- 512 --
Net Income (Loss).................. -- -- -- (8,600) (8,600)
Preferred Dividend Paid............ -- -- -- (6,884) --
Treasury Stock Acquisitions........ (705) (4,317) -- (4,317) --
Payment Received................... -- -- -- 22 --
---- ------- ------- -------- ---------
BALANCE, DECEMBER 31, 1999......... (705) $(4,317) $ -- $113,972
==== ======= ======= ========
Comprehensive Income............... $ (8,600)
=========
Exchanges of Preferred Stock to
Common Stock..................... 705 4,317 -- -- --
Exercise of stock options.......... -- -- -- 10 --
Repurchase of Preferred Stock...... -- -- -- (303) --
Restricted Stock Issued............ -- -- -- -- --
Restricted Stock Forfeited......... -- -- -- -- --
Restricted Stock Amortized......... -- -- -- 512 --
Net Income (Loss).................. -- -- -- (47,769) (47,769)
Preferred Dividend Paid............ -- -- -- (6,022) --
---- ------- ------- -------- ---------
BALANCE, DECEMBER 31, 2000......... -- $ -- $ -- $ 60,400
==== ======= ======= ========
Comprehensive Income............... $ (47,769)
=========
</Table>
- ---------------
(a) Represents a reclassification adjustment for $2.0 million gross ($1.32
million net of tax) unrealized loss recognized in comprehensive income in
1997, but recognized in net income during 1998.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-47
BELCO OIL & GAS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
--------- -------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $(147,557) $ (8,600) $ (47,769)
Adjustments to reconcile net income (loss) to net
operating cash inflows --
Depreciation, depletion and amortization.............. 56,102 54,182 56,721
Impairment of oil and gas properties.................. 229,000 -- --
Impairment of equity securities....................... 9,773 450 --
Deferred tax benefit.................................. (78,107) (4,856) (25,722)
Commodity price risk management activities............ 2,942 5,901 9,293
Other................................................. (19) 203 202
Changes in operating assets and liabilities --
Commodity price risk management..................... (21,869) 28,193 94,317
Accounts receivable................................. 15,208 3,617 (11,781)
Marketable equity securities........................ 30,884 -- --
Other current assets................................ 247 (1,292) (2,594)
Accounts payable and accrued liabilities............ (10,259) 246 14,031
--------- -------- ---------
Net operating cash inflows....................... 86,345 78,044 86,698
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures................. (133,078) (73,932) (186,845)
Proceeds from sale of oil and gas properties............. 6,292 215 11,517
Purchase of marketable equity securities................. (10,467) -- --
Changes in other assets.................................. (22) (351) 569
Other property additions................................. (1,251) (474) (523)
--------- -------- ---------
Net investing cash outflows...................... (138,526) (74,542) (175,282)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings..................................... 68,000 53,500 324,500
Long-term debt repayments................................ (124,500) (41,100) (225,500)
Proceeds from issuance of Preferred Stock................ 105,069 -- --
Dividends on Preferred Stock............................. (5,406) (6,884) (6,022)
Repurchase of Common Stock............................... -- (4,317) --
Repurchase of Preferred Stock............................ (807) (5,052) (303)
Repurchase of Bonds...................................... -- -- (2,850)
Credit Agreement fee..................................... -- -- (691)
Other.................................................... -- 21 11
--------- -------- ---------
Net financing cash inflows (outflows)............ 42,356 (3,832) 89,145
--------- -------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... (9,825) (330) 561
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........... 12,260 2,435 2,105
--------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 2,435 $ 2,105 $ 2,666
========= ======== =========
</Table>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-48
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION
Belco Oil & Gas Corp. ("Belco") was organized as a Nevada corporation in
January 1996 in connection with the combination of assets (the "Combination")
consisting of ownership interests (the "Combined Assets") in certain entities
and direct interests in oil and gas properties and certain hedge transactions
owned by the predecessors and entities related thereto. On March 29, 1996, Belco
Oil & Gas Corp. completed its initial public offering (the "Offering") issuing
6,500,000 shares of Common Stock at $19 per share. Belco Oil & Gas Corp. and the
owners of the Combined Assets entered into an Exchange and Subscription
Agreement and Plan of Reorganization dated as of January 1, 1996 (the "Exchange
Agreement") that provided for the issuance by Belco of an aggregate of
25,000,000 shares of Common Stock to such owners in exchange for the Combined
Assets on March 29, 1996, the date the Offering closed. The owners of the
Combined Assets received shares of Common Stock proportionate to the value of
the Combined Assets underlying their ownership interests in the predecessors and
the direct interests.
The Combination was accounted for as a reorganization of entities under
common control because of the common control of our stockholders and by virtue
of their direct ownership of the entities and interests exchanged. Accordingly,
the net assets acquired in the Combination have been recorded at the historical
cost basis of the affiliated predecessor owners. Belco currently conducts the
majority of our business through our wholly owned subsidiaries, Belco Energy
Corp. and Belco Energy I L.P.
NATURE OF CURRENT OPERATIONS
Belco is an independent energy company engaged in the exploration,
development and production of natural gas and oil. Belco operates in this single
industry segment, and all operations are presently conducted in the United
States. Belco's operations are focused in four core areas including the Permian
Basin (west Texas), the Mid-Continent (Oklahoma, north Texas and Kansas), the
Rocky Mountains (Wyoming and North Dakota), and the Gulf Coast/Austin Chalk
(Texas, Arkansas and Louisiana).
Substantially all of Belco's production is sold under market-sensitive
contracts. Belco's revenue, profitability and future rate of growth are
substantially dependent upon the price of, and demand for, oil, natural gas and
natural gas liquids. Prices for oil and natural gas are subject to wide
fluctuation in response to relatively minor changes in the supply of and demand
for oil and natural gas, market uncertainty and a variety of additional factors
that are beyond the control of Belco. These factors include the level of
consumer product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, the foreign supply of oil and natural gas, the
price of foreign imports and overall economic conditions. With the objective of
reducing price risk, Belco has entered into hedging and related price risk
management transactions with respect to a significant amount of its expected
future production (See Note 6).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for the periods presented include the
accounts of Belco and its wholly-owned subsidiaries. Belco's interests in the
Moxa Arch investment programs (the 1992 Moxa Arch Drilling Program, the 1993
Moxa Arch Drilling Program, the Moxa Arch 1992 Offset Drilling Program and the
Moxa Arch 1993 Offset Drilling Program) (collectively, the "Programs") are
accounted for using the proportionate consolidation method of accounting for
investments in oil and gas property interests, whereby Belco's share of each
program's assets, liabilities, revenues and expenses is included in the
appropriate accounts of the consolidated financial statements. All material
intercompany balances and transactions have
F-49
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
been eliminated. Certain reclassifications have been made to prior period
amounts to conform to current year presentations.
CASH EQUIVALENTS
Belco considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. At December 31, 1999 cash includes
$800,000 of funds related to Commodity Price Risk Management activities on
deposit with a counterparty. The depository amount varies from day to day and is
dependent on the movement of commodity prices.
PREPAID EXPENSES
Prepaid expenses consist primarily of settlements paid on certain CPRM
contracts applicable to future production months and prepaid insurance. All
prepaid expenses are amortized over the contract life, which typically is one
year or less.
PROPERTY AND EQUIPMENT
Belco follows the full-cost method of accounting for oil and gas
properties. Accordingly, all costs associated with acquisition, exploration and
development of oil and gas reserves, including directly related internal costs,
are capitalized. Belco capitalized $6,054,000, $5,492,000 and $3,684,000 of
related internal costs during 1998, 1999 and 2000, respectively.
Oil and gas properties are amortized on the unit-of-production method using
estimates of proved reserve quantities. Investments in unproved properties are
not amortized until proved reserves associated with the projects can be
determined or until impairment occurs. The amortizable base includes estimated
future development costs and, where significant, dismantlement, restoration and
abandonment costs, net of estimated salvage values.
In addition, the capitalized costs of proved oil and gas properties are
subject to a "ceiling test," which limits such costs to the estimated present
value net of related tax effects of future net cash flows from proved reserves.
The estimated present value is based on current economic and operating
conditions and discounted at a 10 percent interest rate (PV10). If capitalized
costs exceed this limit, the excess is charged to depreciation, depletion and
amortization.
The PV10 value of Belco's year-end 1999 and 2000 estimated proved reserves
were well in excess of the ceiling test limit. For the full year ended December
31, 1998 Belco recorded $229 million ($149 million after tax) in non-cash
ceiling test provisions as required by full cost accounting rules. The
provisions were the result of applying substantially lower commodity prices to
estimated recoverable reserves.
Sales and other dispositions of proved and unproved properties are
accounted for as adjustments of capitalized costs with no gain or loss
recognized, unless significant reserves are involved. Abandonments of properties
are accounted for as adjustments of capitalized costs with no loss recognized.
Buildings, equipment and gas processing facilities are depreciated on a
straight-line basis over the estimated useful lives of the assets, which range
from three to 20 years.
MANAGEMENT FEES
Belco manages several investment programs, which were formed during
1992-1994 to acquire and develop interests in certain drilling prospects located
in the Moxa Arch trend in Wyoming. Belco offered, to certain qualified
investors, the opportunity to invest in the prospects through participation in
the Programs. In return for its management activities on behalf of the Programs,
Belco earns an annual management fee of one percent of committed capital. After
elimination of management fees received from affiliated entities, including
F-50
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
predecessor owners, Belco earned management fees totaling $375,000 for the year
2000 and $305,000 for both 1998 and 1999.
CAPITALIZATION OF INTEREST
Interest costs related to the acquisition and development of unproved
properties are capitalized to oil and gas properties. Interest costs capitalized
for the years ended December 31, 1998, 1999 and 2000, totaled $5,123,000,
$4,881,000 and $7,570,000, respectively.
ACCOUNTING FOR COMMODITY PRICE RISK MANAGEMENT ACTIVITIES
Belco engages in price risk management activities in order to manage its
exposure to oil and gas price volatility. Commodity derivatives contracts, which
are usually placed with major financial institutions that Belco believes are
minimal credit risks, may take the form of futures contracts, swaps or options.
The oil and gas reference prices upon which these commodity derivatives
contracts are based reflect various market indices that have a high degree of
historical correlation with actual prices received by Belco. Gains and losses
related to qualifying hedges of Belco's oil and gas production are deferred and
are recognized as revenues as the associated production occurs. In the event of
a loss of correlation between changes in oil and gas reference prices under a
commodity derivatives contract and actual oil and gas prices, a gain or loss is
recognized currently to the extent the commodity derivatives have not offset
changes in actual oil and gas prices.
Transactions that do not qualify for hedge accounting are accounted for
using the mark-to-market method. Under such method, the financial instruments
are reflected at market value at the end of the period with resulting unrealized
gains and losses recorded as assets and liabilities in the consolidated
financial statements. Changes in the market value of outstanding financial
instruments are recognized as a gain or loss in the period of change (See Note
6).
GAS BALANCING/REVENUE RECOGNITION
Belco uses the sales method to account for natural gas imbalances. Under
the sales method, Belco recognizes revenues based on the amount of gas sold to
purchasers, which may differ from the amounts to which Belco is entitled based
on its interests in the properties. However, revenue is deferred and a liability
is recorded for those properties where production sold by Belco exceeds its
entitled share of remaining natural gas reserves. Gas balancing obligations as
of December 31, 1999 and 2000 were not significant.
INCOME TAXES
Belco accounts for income taxes under the provisions of SFAS No.
109 -- "Accounting for Income Taxes," which provides for an asset and liability
approach for accounting for income taxes. Under this approach, deferred tax
assets and liabilities are recognized based on anticipated future tax
consequences, using currently enacted tax laws, attributable to differences
between financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets are reduced by a valuation allowance
when, based upon management's estimate, it is more likely than not that a
portion of the deferred tax assets will not be realized in a future period.
NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted net income (loss) per common share have been computed in
accordance with SFAS No. 128, "Earnings Per Share," which Belco adopted at year
end 1997. Net income per share amounts for prior periods have been restated to
conform with the provisions of the standard. Basic net income per common share
is computed by dividing income available to common shareholders, after the
payment of dividends to preferred stockholders, by the weighted average number
of common shares outstanding for the periods.
F-51
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Diluted net income per common share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. Calculations of basic and diluted net income (loss)
per common share are illustrated in Note 12.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates with regard to these financial statements include the
estimated fair value of oil and gas commodity price risk management contracts
and the estimate of proved oil and gas reserve volumes and the related
discounted future net cash flows therefrom (See Notes 6 and 15).
NOTE 3 -- LONG TERM DEBT
Long term debt consists of the following at December 31, 1999 and 2000 (in
thousands):
<Table>
<Caption>
DECEMBER 31,
-------------------
1999 2000
-------- --------
Revolving credit facility due 2004.......................... $ 42,000 $141,000
8 7/8% Senior Subordinated Notes due 2007................... 150,000 147,000
10 1/2% Senior Subordinated Notes due 2006, including
premium totaling approximately $5.0 and $5.7 million for
2000 and 1999, respectively............................... 114,744 114,033
-------- --------
Total Debt............................................. 306,744 402,033
Less: Current maturities.................................... -- --
-------- --------
Long term debt.............................................. $306,744 $402,033
======== ========
</Table>
In September 1997, we entered into a five-year $150 million Credit
Agreement dated September 23, 1997 with The Chase Manhattan Bank, N.A., as
administrative agent and other lending institutions. In June 2000, the credit
facility was amended and restated and now provides for an aggregate principal
amount of revolving loans of up to the lesser of $250 million or a defined
borrowing base in effect from time to time, includes a sub-facility for letters
of credit and expires in January 2004. The borrowing base at December 31, 2000
was $200 million with $141.0 million advanced at that date. Additionally, there
were letters of credit outstanding in the amount of $36.5 million in connection
with CPRM activities. The borrowing base is redetermined by the agent and the
banks semi-annually based upon their usual and customary oil and gas lending
criteria as such exist from time to time. In addition, we may request two
additional redeterminations and the banks may request one additional
redetermination per year. During 2000 the credit facility weighted average
interest rate was approximately 7.6%.
Indebtedness under the credit facility is secured by a pledge of the
capital stock of each of Belco's material subsidiaries. Covenants contained in
the credit facility require us to maintain a minimum interest coverage ratio and
current ratio, as defined in the agreement. Belco and its subsidiaries may not
incur any indebtedness other than indebtedness falling within the enumerated
exceptions contained in the credit facility. In addition, Belco's various debt
instruments contain certain restrictive covenants that, among other things,
limit our ability to pay dividends.
Indebtedness under the credit facility bears interest at a floating rate
based (at our option) upon (i) the ABR with respect to ABR Loans or (ii) the
Eurodollar Rate (as defined) for one, two, three or six months (or nine or
twelve months if available to the banks) Eurodollar Loans (as defined), plus the
Applicable Margin.
F-52
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The ABR is the greater of (i) the Prime Rate (as defined), (ii) the Base CD Rate
(as defined) plus 1% or (iii) the Federal Funds Effective Rate (as defined) plus
0.50%. The Applicable Margin for Eurodollar Loans varies from 1.125% to 1.625%
depending on the borrowing base usage. Borrowing base usage is determined by a
ratio of (i) outstanding Loans (as defined) and letters of credit to (ii) the
then effective borrowing base. Interest on ABR Loans is payable quarterly in
arrears and interest on Eurodollar Loans is payable on the last day of the
interest period therefore and, if longer than three months, at three month
intervals.
We are required to pay to the banks a commitment fee based on the committed
undrawn amount of the lesser of the aggregate commitments or the then effective
borrowing base during a quarterly period equal to a percent that varies from
0.25% to 0.50% depending on the borrowing base usage.
In September 1997, Belco issued $150 million of the 8 7/8% Notes. In
January 2000, we purchased $3 million face value of the notes in the open
market. Interest accrues at the rate of 8 7/8% per annum and is payable
semi-annually in arrears on March 15 and September 15 of each year. The 8 7/8%
Notes mature on September 15, 2007 unless previously redeemed. Except under
limited circumstances, the 8 7/8% Notes are not redeemable at Belco's option
prior to September 15, 2002. Thereafter, the 8 7/8% Notes will be subject to
redemption at the option of Belco, in whole or in part, at specified redemption
prices, plus accrued and unpaid interest, if any, thereon to the applicable
redemption date. In addition, upon a change of control (as defined in the
indenture pursuant to which the 8 7/8% Notes were issued (the "8 7/8%
Indenture")) Belco is required to offer and redeem the 8 7/8% Notes for cash at
101% of the principal amount, plus accrued and unpaid interest, if any, thereon
to the applicable date of repurchase.
The 8 7/8% Notes are general unsecured obligations of Belco and are
subordinated in right of payment to all existing and future senior debt (as
defined in the 8 7/8% Indenture) of Belco, which includes borrowings under the
Credit Facility described above. The 8 7/8% Notes rank pari passu in right of
payment with any existing or future senior subordinated debt of Belco and rank
senior in right of payment to all other subordinated indebtedness of Belco.
As of December 31, 2000, Belco had outstanding $109 million face value of
the 10 1/2% Notes. The debt was assumed in connection with the acquisition of
Coda in 1997 and was recorded at $117.1 million, including premium, reflecting
the fair value at the date of acquisition. The 10 1/2% Notes bear interest at an
annual rate of 10 1/2% payable semiannually in arrears on April 1 and October 1
of each year. The Notes are general, unsecured obligations of Belco, are
subordinated in right of payment to all Senior Debt (as defined in the Indenture
governing the 10 1/2% Notes) of Belco, and are senior in right of payment to all
future subordinated debt of Belco. On February 25, 1998, Belco merged Coda into
Belco and Belco assumed the obligations under the Coda Indenture. Effective with
the merger, the 10 1/2% Notes became pari passu in right of payment with the
8 7/8% Notes.
The 10 1/2% Notes were issued pursuant to an Indenture, which contains
certain covenants that, among other things, limit the ability of Coda and its
restricted subsidiaries (as defined in the Indenture) to incur additional
indebtedness and issue Disqualified Stock (as defined in the Indenture), pay
dividends, make distributions, make investments, make certain other restricted
payments, enter into certain transactions with affiliates, dispose of certain
assets, incur liens securing pari passu or subordinated indebtedness of Belco
and engage in mergers and consolidations.
The 10 1/2% Notes mature April 1, 2006 and are not redeemable by Belco
prior to April 1, 2001. After April 1, 2001, the 10 1/2% Notes will be subject
to redemption at the option of Belco, in whole or in part, at the redemption
prices set forth in the Indenture, plus accrued and unpaid interest thereon to
the applicable redemption date.
As of December 31, 2000, Belco was in compliance with all debt covenants.
F-53
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Belco has entered into interest rate swap agreements converting two fixed
rate obligations to floating rate obligations. The agreements cover $150 million
of 8 7/8% long-term debt (comparable to the interest rate on the 8 7/8% Notes)
and obligates Belco to pay an initial rate of 8.175% through September 15, 1998.
Thereafter, the rate is redetermined at each six month period through September
15, 2007. The floating rates are capped at 8 7/8% through September 15, 2001 and
at 10% from March 15, 2002 through September 15, 2007. The remaining agreement
currently covers $85 million of 10 1/2% long-term debt (comparable to the
interest rate on the 10 1/2% Notes) and obligates Belco to pay an initial rate
of 9.8881% through April 1, 1998. Thereafter, the rate is redetermined at each
six month period through 2003. Floating rates on this agreement are capped at
10 1/2% through October 1, 1999 and 11.625% from April 1, 2000 through April 1,
2003.
NOTE 4 -- RELATED-PARTY TRANSACTIONS
Belco's executive offices are leased from its Chairman and approximately
$250,000 was paid under such lease in 1998, 1999 and 2000. Management believes
the fee compares favorably to the terms which might have been available from a
non-affiliated party.
Certain employees of Belco had an ownership interest in certain oil and gas
properties held by Belco as of December 31, 1995. Belco had receivables of
$753,000 as of December 31, 1999 and 2000 related to amounts loaned to employees
in connection with purchases of oil and gas interests from such employees. The
notes receivable have been recorded as a reduction of equity in the consolidated
balance sheets, as such interests were exchanged for Common Stock in the
Combination (See Note 1).
NOTE 5 -- INCOME TAXES
Total provision (benefit) for income taxes consists of the following:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
-------- ------- --------
(IN THOUSANDS)
CURRENT:
Federal(a).......................................... $ 20 $(6,661) $ (17)
State............................................... 87 225 --
-------- ------- --------
107 (6,436) (17)
DEFERRED:............................................. (78,214) 1,805 (25,705)
-------- ------- --------
Total income tax provision (benefit)............. $(78,107) $(4,631) $(25,722)
======== ======= ========
</Table>
- ---------------
(a) The 1999 federal income tax amount reflects a tax benefit of $6.7 million
for which a refund claim was filed in late 1999. Accordingly, this amount
was recorded as an income tax refund receivable as of December 31, 1999. The
refund was received in January 2000.
F-54
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The differences between the statutory federal income taxes and Belco's
effective taxes is summarized as follows (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
-------- ------- --------
Statutory federal income taxes........................ $(78,982) $(4,631) $(25,722)
State income tax, net of federal benefit.............. 57 146 --
Section 29 tax credits................................ -- -- --
Capital loss valuation allowance...................... 875 (161) --
Other................................................. (57) 15 --
-------- ------- --------
Provision (benefit) for income taxes.................. $(78,107) $(4,631) $(25,722)
======== ======= ========
</Table>
The principal components of Belco's net deferred income tax liability are
as follows:
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
DEFERRED INCOME TAX ASSETS:
Net operating loss........................................ $ 21,416 $ 63,443
Capital loss.............................................. 4,495 4,495
Other..................................................... 8,095 7,395
-------- --------
Sub-total.............................................. $ 34,006 $ 75,333
-------- --------
DEFERRED INCOME TAX LIABILITIES:
Depreciation, depletion and Amortization.................. $(60,834) $(65,353)
Commodity price risk management activities................ (1,875) (15,710)
Other..................................................... (4,221) (1,489)
-------- --------
Sub-total.............................................. (66,930) (82,552)
Valuation allowance....................................... (714) (714)
-------- --------
Total Net deferred income tax liability................ $(33,638) $ (7,933)
======== ========
</Table>
As a result of the acquisition of Coda, Belco succeeded to net operating
loss carryforwards ("NOLs") for income tax purposes that expire from 2000
through 2004. Due to a change of ownership (as defined by the Tax Return Act of
1986) which occurred prior to the acquisition by Belco, the utilization of the
Coda NOLs is severely restricted. At December 31, 2000, Belco estimates that
approximately $13.3 million of the Coda NOLs is available to offset future
income. Belco generated approximately $122.3 million of NOL for the year ended
December 31, 2000 that can be carried forward through the year 2021. For the
year ended December 31, 1999, Belco generated an NOL of $45.7 million which can
be carried forward from 2000 to 2020. In addition to the NOLs, at December 31,
2000, Belco has approximately $12.8 million of capital loss carry forwards which
may be used to offset capital gains realized over the next three years. A
valuation allowance of $2.0 million was established against the capital loss
carryforward since this amount is not expected to meet the realization test.
Belco also has $0.6 million of alternative minimum tax ("AMT") credit
carryovers. AMT credits may be carried forward indefinitely.
F-55
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Section 29 Tax Credit
The natural gas production from wells drilled on certain of Belco's
properties in the Moxa Arch Trend and Golden Trend Field qualifies for the
Section 29 Tax Credit. The Section 29 Tax Credit is an income tax credit against
regular federal income tax liability with respect to sales of Belco's production
of natural gas produced from tight gas sand formations, subject to a number of
limitations. Fuels qualifying for the Section 29 Tax Credit must be produced
from a well drilled or a facility placed in service after November 5, 1990 and
before January 1, 1993, and be sold before January 1, 2003.
The basic credit, which is currently approximately $0.52 per MMBtu of
natural gas produced from tight sand reservoirs and approximately $1.05 per
MMBtu of natural gas produced from Devonian Shale, is computed by reference to
the price of crude oil and is phased out as the price of oil exceeds $23.50 in
1979 dollars (as adjusted for inflation) with complete phaseout if such price
exceeds $29.50 in 1979 dollars (as adjusted for inflation). Under this formula,
the commencement of phaseout would be triggered if the average price for crude
oil rose above approximately $47 per Bbl in current dollars. Belco estimates
that it generated approximately $0.5 million of Section 29 Tax Credits in 2000.
The Section 29 Tax Credit may not be credited against the alternative minimum
tax, but under certain circumstances may be carried over and applied against
regular tax liability in future years. Therefore, no assurances can be given
that Belco's Section 29 Tax Credits will reduce its federal income tax liability
in any particular year. As production from qualified wells decline, the produced
based tax credit will also decline.
Texas Severance Tax Abatement
Production from natural gas wells that have been certified as tight
formations or deep wells by the Texas Railroad Commission ("high cost gas
wells") and that are spudded or completed during the period from May 24, 1989 to
September 1, 1996 qualify for an exemption from the 7.5% severance tax in Texas
on natural gas and natural gas liquids produced by such wells prior to August
31, 2001. The natural gas production from wells drilled on certain of Belco's
properties in the Austin Chalk area qualify for this tax reduction. In addition,
high cost gas wells that are spudded or completed during the period from
September 1, 1996 to August 31, 2010 are entitled to receive a severance tax
reduction upon obtaining a high cost gas certification from the Texas Railroad
Commission within 180 days after first production. The tax reduction is based on
a formula composed of the statewide "median" (as determined by the State of
Texas from producer reports) and the producer's actual drilling and completion
costs. More expensive wells will receive a greater amount of tax credit. This
tax rate reduction remains in effect for 10 years or until the aggregate tax
credits received equal 50% of the total drilling and completion costs. The
reduction in severance taxes for such wells is reflected as a reduction in oil
and gas operating expenses and an increase in the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves (See
Note 14).
NOTE 6 -- COMMODITY PRICE RISK MANAGEMENT ACTIVITIES (OR CPRM):
We periodically enter into CPRM transactions such as swaps and options in
order to manage our exposure to oil and gas price volatility. Gains and losses
related to hedges of our oil and gas production that qualify for hedge
accounting treatment are deferred and recognized as revenues as the associated
production occurs.
We use the mark-to-market method of accounting for instruments that do not
qualify for hedge accounting treatment. Under mark-to-market accounting, those
contracts that do not qualify for hedge accounting treatment are reflected at
market value at the end of the period with resulting unrealized gains and losses
recorded as assets and liabilities in the consolidated balance sheet. Under such
method, changes in the market value of outstanding financial instruments are
recognized as unrealized gain or loss in the period of change.
F-56
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The tables and related notes set forth in this footnote provide details
about the volumes and prices of all open Belco CPRM commitments, hedge and
non-hedge, as of December 31, 2000. Since most of the contracts covering a
substantial portion of the committed volumes were entered into in 1997 and early
1998 when commodity prices were substantially below current commodity price
levels, it is not possible to estimate future average prices to be realized
given the broad ranges covering both volumes and prices committed at different
points in time.
For the year ended December 31, 2000, we recorded as required by existing
accounting rules non-hedge commodity price risk management losses of $137.6
million, consisting of $34.0 million in cash settlements and $103.6 million in
unrealized non-cash mark-to-market losses. This compares to a $36.5 million net
loss consisting of $2.4 million in cash settlements paid and $34.1 million in
unrealized non-cash mark-to-market losses reported for 1999. Certain of Belco's
CPRM arrangements require Belco to deliver cash collateral or other assurances
of performance to the counterparties in the event that Belco's payment
obligations with respect to its CPRM transactions exceed certain levels. Two of
the inherent risks of a price risk management program are margin requirements
and collateralization. Certain transactions may be subject to margin calls under
certain conditions. Letters of credit in the amount of $36.5 million in favor of
counterparties were outstanding at December 31, 2000 and related to unrealized
non-cash mark-to-market and potential hedge losses at that date.
The following table and notes thereto cover Belco's pricing and notional
volumes on open natural gas and oil commodity hedges as of December 31, 2000:
<Table>
<Caption>
PRODUCTION PERIODS
-------------------------
2001 2002 2003
------- ------ ------
GAS(1) --
Price swaps sold -- receive fixed price (thousand
MMBtu)(2)............................................ 905 -- 913
Average price, per MMBtu............................. $ 2.30 -- $ 3.35
Price swaps bought -- pay fixed price (thousand
MMBtu)(2)............................................ (6,710) -- --
Average price, per MMBtu............................. $ 4.33 -- --
Sub-total -- net swap volume (thousand MMBtu)...... (5,805) -- --
Collars (thousand MMBtu)(4)............................. 9,125 5,475 3,650
Average floor price, per MMBtu....................... $ 1.91 $ 2.50 $ 2.85
Average ceiling price, per MMBtu..................... $ 2.85 $ 3.49 $ 4.91
Puts bought (thousand MMBtu)(3)......................... 228 3,650 --
Average price per MMBtu.............................. $ 4.50 $ 3.13 --
Calls bought (thousand MMBtu)(3)........................ (1,513) -- --
Average price per MMBtu.............................. $ 7.07 -- --
OIL --
Price swaps sold -- receive fixed price (MBbls)(2)...... 1,170 660 240
Average price, per Bbl............................... $ 19.54 $19.51 $19.60
Price swaps bought -- pay fixed price (MBbls)(2)........ (165) -- --
Average price, per Bbl............................... $ 28.53 -- --
Sub-total -- net swap volumes...................... 1,005 660 240
Collars sold (MBbls)(4)................................. 300 120 90
Average floor price, per Bbl......................... $ 18.30 $19.00 $21.00
Average ceiling price per Bbl........................ $ 22.12 $22.63 $24.63
</Table>
F-57
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
- ---------------
(1) Belco sells the majority of its Wyoming gas at prices based on the Northwest
Pipeline Rocky Mountain Index and has entered into basis swaps that require
the Counterparty to make a payment to Belco in the event that the NYMEX
Reference Price per MMBtu for a reference period exceeds the Northwest
Pipeline Rocky Mountain Index Price by more than a stated differential and
requires Belco to make a payment to the Counterparty in the event that the
NYMEX Reference Price exceeds the Northwest Pipeline Rocky Mountain Index
Price by less than a stated differential (or in the event that the Northwest
Pipeline Rocky Mountain Index Price is greater than the NYMEX Reference
Price). Natural gas volumes covered by basis transactions include 10,000
MMBtu/d at $0.27 for the year 2001.
Belco sells the majority of its East Texas gas at prices based on the Katy
and Houston Ship Channel Indices and has entered into basis swaps that
require the Counterparty to make a payment to Belco in the event that the
NYMEX Reference Price per MMBtu for a reference period exceeds the Katy and
Houston Ship Channel Indices Prices by more than a stated differential and
requires Belco to make a payment to the Counterparty in the event that the
NYMEX Reference Price exceeds the Katy and Houston Ship Channel Indices
Prices by less than a stated differential (or in the event that the Katy and
Houston Ship Channel Indices Prices are greater than the NYMEX Reference
Price). Natural gas volumes covered by basis transactions include 25,000
MMBtu/d at $0.02 for Katy and 5,000 MMBtu/d at $0.005 (over the NYMEX
Reference Price) for Houston Ship Channel for the year 2001.
(2) For any particular swap sold transaction, the Counterparty is required to
make a payment to Belco in the event that the NYMEX Reference Price for any
settlement period is less than the swap price for such hedge, and Belco is
required to make a payment to the Counterparty in the event that the NYMEX
Reference Price for any settlement period is greater than the swap price for
such hedge. Conversely, swaps bought require Belco to make a payment to the
Counterparty in the event that the NYMEX Reference Price for any settlement
period is less than the swap price for such hedge, and the Counterparty is
required to make a payment to Belco in the event that the NYMEX Reference
Price for any settlement period is greater than the swap price for such
hedge.
(3) Calls sold or puts sold under written option contracts, in return for a
premium received by Belco upon initiation of the contract. Belco is required
to make a payment to the Counterparty in the event that the NYMEX Reference
Price for any settlement period is greater than the price of the call sold,
or less than the price of the put sold. Conversely, calls or puts bought in
return for Belco's payment of a premium require the Counterparty to make a
payment to Belco in the event that the NYMEX Reference Price on any
settlement period is greater than the call price or less than the put price.
(4) For any particular collar transaction, the Counterparty is required to make
a payment to Belco if the average NYMEX Reference Price for the reference
period is below the floor price for such transaction, and Belco is required
to make payment to the Counterparty if the average NYMEX Reference Price is
above the ceiling price for such transaction.
NON-HEDGING TRANSACTIONS
We use the mark-to-market method of accounting for instruments that do not
qualify for hedge accounting treatment. The year 2000 results of operations
included an aggregate non-cash pre-tax loss of $103.6 million related to these
activities resulting from net change in the value of Belco's market-to-market
portfolio of price risk management activities. At December 31, 2000, Belco's
consolidated balance sheet reflects $15.7 million and $142.4 million of price
risk management assets and liabilities, respectively.
F-58
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The following table and notes thereto cover Belco's pricing and notional
volumes on open natural gas and oil financial instruments at December 31, 2000,
that do not qualify for hedge accounting:
<Table>
<Caption>
PRODUCTION PERIODS
-------------------------
2001 2002 2003
------- ------ ------
GAS --
Calls sold (thousand MMBtu)(1)............................ 3,788 4,380 --
Average price, per MMBtu................................ $ 3.27 $ 2.95 --
Price Swaps Sold -- receive fixed price (thousand
MMBtu)(2)............................................... 21,900 --
Average price, per MMBtu................................ $ 2.55 -- --
Price Swaps Bought -- pay fixed price (thousand
MMBtu)(2)............................................... (1,365) -- --
Average price, per MMBtu................................ $ 3.29 -- --
Sub-total net swap volume (thousand MMBtu)........... 20,535 -- --
------- ------ ------
Puts Sold (thousand MMBtu)(1)............................. (2,981) -- --
Average price, per MMBtu................................ $ 4.58 -- --
Extension Swaps Sold -- receive fixed price (thousand
MMBtu)(2)............................................... -- 3,650 --
Average price, per MMBtu................................ -- $ 2.65 --
OIL --
Price Swaps Sold -- receive fixed price (MBbls)(2)........ 120 -- --
Average price, per Bbl.................................. $ 17.25 -- --
Calls Sold (MBbls)(1)..................................... 840 720 --
Average price, per Bbl.................................. $ 20.21 $22.00 --
Puts Sold (MBbls)(1)...................................... (345) -- --
Average price, per Bbl.................................. $ 21.99 -- --
Extension Swaps Sold, receive fixed price (MBbls)(2)...... -- 300 300
Average price, per Bbl.................................. -- $18.86 $18.86
Extension Collars Sold(3)................................. 120 -- --
Average ceiling price................................... $ 20.35 -- --
Average floor price..................................... $ 17.50 -- --
</Table>
- ---------------
(1) Calls sold or puts sold under written option contracts, in return for a
premium received by Belco upon initiation of the contract. Belco is required
to make a payment to the Counterparty in the event that the NYMEX Reference
Price for any settlement period is greater than the price of the call sold,
or less than the price of the put sold. Conversely, calls or puts bought in
return for Belco's payment of a premium require the Counterparty to make a
payment to Belco in the event that the NYMEX Reference Price on any
settlement period is greater than the call price or less than the put price.
(2) For any particular swap sold transaction, the Counterparty is required to
make a payment to Belco in the event that the NYMEX Reference Price for any
settlement period is less than the swap price for such instrument and Belco
is required to make a payment to the Counterparty in the event that the
NYMEX Reference Price for any settlement period is greater than the swap
price for such instrument. Conversely, swaps bought require Belco to make a
payment to the counterparty in the event that the NYMEX Reference Price for
any settlement period is less than the swap price for such hedge, and the
counterparty is required to make a payment to Belco in the event that the
NYMEX Reference Price for any settlement period is greater than the swap
price for such hedge.
F-59
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(3) For any particular collar transaction, the Counterparty is required to make
a payment to Belco if the average NYMEX Reference Price for the reference
period is below the floor price for such transaction, and Belco is required
to make payment to the Counterparty if the average NYMEX Reference Price is
above the ceiling price for such transaction.
NOTE 7 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of Belco's financial instruments at December 31, 1999 and 2000. SFAS No. 107
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
<Table>
<Caption>
DECEMBER 31, 1999 DECEMBER 31, 2000
--------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- --------- ----------
(IN THOUSANDS)
Cash and cash equivalents................ $ 2,105 $ 2,105 $ 2,666 $ 2,666
Long-term debt........................... 306,744 296,323 402,033 390,733
Interest rate swaps...................... -- (6,549) -- (6,652)
Oil and gas commodity -- Hedges.......... -- (8,603) -- (36,172)
-- Non-hedges....................... (23,066) (23,066) (126,677) (126,677)
</Table>
The carrying values of trade receivables and trade payables included in the
accompanying consolidated balance sheets approximated market value at December
31, 1999 and 2000. The following methods and assumptions were used to estimate
the fair value of the financial instruments summarized in the above table.
CASH AND CASH EQUIVALENTS
The carrying amounts approximate fair value because of the short maturity
of those instruments.
MARKETABLE EQUITY SECURITIES
In June 1997, Belco purchased 2,940,000 shares of common stock of Hugoton
Energy Corp. ("Hugoton") at $10.50 per share for a total investment of $30.9
million. At December 31, 1997 a non-cash investment valuation provision in the
amount of $2 million was charged to stockholder's equity to reflect the value of
this investment at that date. In March 1998, Hugoton was acquired by Chesapeake
Energy Corporation ("CHK"). In the merger each share of Hugoton common stock was
converted into 1.3 shares of CHK common stock. During 1998, Belco disposed of
its holdings in CHK and realized a loss of $14.4 million.
On June 12, 1998, Belco, through its wholly-owned Canadian subsidiary,
purchased approximately $10.5 million of 5% Convertible Preferred Stock of Big
Bear Exploration, Ltd. ("Big Bear"), a Canadian oil and gas company, at
approximately $0.85 per share with each share convertible into one common share
of Big Bear. Through a subsequent restructuring agreement, Belco's preferred
stock holdings were converted to common stock and then subject to an 11:1
reverse stock split. As a result of the aforementioned transactions, Belco
became the owner of 1,948,052 common shares or approximately 4.6% ownership in
Big Bear. The substantial decline in the market value of Big Bear securities at
year-end 1999 and 1998 required Belco to record $0.45 and $9.7 million in
impairment provisions, respectively.
In January 2000, shareholders of Big Bear approved its acquisition by AVID
Oil & Gas, Ltd. ("AVID"), a Canadian based energy company providing for Big Bear
shareholders to receive 1 share of AVID common stock for every 15 common shares
of Big Bear. As a result of the transaction described above, Belco currently
owns 129,870 shares of Avid with an approximate market value of $190,000 (US) as
of December 31, 2000.
F-60
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
LONG-TERM DEBT
The fair value of Belco's revolving credit facility debt of $141.0 million
is assumed to be the same as the carrying value because the interest rate is
variable and is reflective of market rates. The fair value of the 10 1/2% Notes
is based upon the quoted market prices for that issue. The fair value of the
8 7/8% Notes is based upon estimates provided to Belco by independent banking
firms.
INTEREST RATE SWAPS AND OIL AND GAS COMMODITY FINANCIAL INSTRUMENTS
The estimated fair values of interest rate swaps and oil and gas commodity
financial instruments have been provided by responsible third parties and
determined by using available market data and applying certain valuation
methodologies. In some cases, quotes of termination values were available.
Judgment is usually required in interpreting market data, and the use of
different market assumptions or estimation methodologies could result in
different estimates of fair value.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
FUTURE CONTINGENCIES RELATED TO THE MOXA ARCH PROGRAMS
From 1992 to 1994, Belco established three Moxa Arch investment programs:
the 1992 Moxa Arch Drilling Program, the 1993 Moxa Arch Drilling Program, and
the Moxa Arch 1992 Offset Drilling Program. The Programs were established to
develop certain drilling prospects acquired as a result of a farmout agreement
with Amoco Production Company and others. Belco offered certain qualified
investors (the Investors) the opportunity to invest in the prospects through
participation in the Programs. Through October 30, 1996, Belco owned
approximately 55.20 percent of the 1992 Moxa Arch Drilling Program, 35.09
percent of the 1993 Moxa Arch Drilling Program, and 58.21 percent of the Moxa
Arch 1992 Offset Drilling Program. On October 31, 1996 Belco purchased from
certain third-party investors interests (the "Acquired Interests") in the Belco
Oil & Gas Corp. 1992, 1993 and 1992 Offset Moxa Arch Drilling Programs. The
effective date of the purchase was October 31, 1996 for financial reporting
purposes. The Acquired Interests represent incremental working interests in
Belco's natural gas wells in the Moxa Arch trend located in Lincoln, Sweetwater
and Uinta Counties, Wyoming. Belco paid aggregate cash consideration of $9.9
million plus an 80% participation in potential natural gas price increases (net
of incremental production costs) associated with production from the wells
through July 31, 1999 (the "Price Participation Right"). In November 1999,
pursuant to the 80% Price Participation Right provision Belco paid out $2.3
million to former third party investors in the Moxa Program. After the purchase,
Belco's interest in these programs was increased to 81.5% of the 1992 Moxa Arch
Drilling Program, 74.0% of the 1993 Moxa Arch Drilling Program, 80.5% of the
Moxa Arch 1992 Offset Drilling Program, and 74% of the Moxa Arch 1993 Offset
Drilling Program. The transaction was accounted for using the purchase method of
accounting.
The remaining third-party investors in the Programs may "put" their
interest to Belco annually through 2003, based upon a valuation by a nationally
recognized independent petroleum engineering firm of the discounted net present
value of the future net revenues from production of proved reserves attributable
to the interests. The put amount is to be calculated based upon certain
specified parameters including prices, discount factors and reserve life. No
investor under the Programs exercised the put right through December 31, 2000.
Belco is not obligated to repurchase in any one calendar year more than 30% of
the interests originally acquired by the program investors (including, for
purposes of this calculation, Belco's interest). Belco's purchase price under
the put right has not been calculated given that no investors have exercised
such right. However, using reserve values presented in Note 15, Standardized
Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas
Reserves (SEC basis using year end prices and a 10% discount rate), the maximum
purchase price if all remaining investors exercised the put option would not be
material to Belco as of December 31, 2000.
F-61
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
LEASE COMMITMENTS
At December 31, 2000, Belco had operating leases covering office space.
Minimum rental commitments under operating leases are $108,000, $99,000 and
$65,000 for the years 2001, 2002 and 2003, respectively. For the years ended
December 31, 1998, 1999 and 2000, total rental expense was approximately
$512,000, $316,000 and $328,000, respectively.
LEGAL PROCEEDINGS
Belco is a named defendant in routine litigation incidental to its
business. While the ultimate results of these proceedings cannot be predicted
with certainty, Belco does not believe that the outcome of these matters will
have a material adverse effect on Belco.
ENVIRONMENTAL MATTERS
Belco's operations are subject to various federal, state and local laws and
regulations relating to the protection of the environment, which have become
increasingly stringent. Belco believes its current operations are in material
compliance with current environmental laws and regulations. There are no
material environmental claims pending or, to Belco's knowledge, threatened
against Belco. There can be no assurance, however, that current regulatory
requirements will not change, currently unforeseen environmental incidents will
not occur or past noncompliance with environmental laws will not be discovered
on Belco's properties.
NOTE 9 -- CASH FLOW INFORMATION
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<Table>
<Caption>
FOR YEAR ENDED DECEMBER 31,
---------------------------
1998 1999 2000
------- ------- -------
(IN THOUSANDS)
Cash paid (received) during the year for:
Interest, including amounts capitalized............... $26,139 $26,823 $32,105
Income and other taxes, net of (refunds).............. (788) 487 (6,679)
</Table>
NOTE 10 -- CUSTOMER INFORMATION
CONCENTRATIONS OF CREDIT RISK
Belco's revenues are derived from uncollateralized sales to customers in
the oil and gas industry. The concentration of credit risk in a single industry
affects Belco's overall exposure. Belco has not experienced significant credit
losses on such sales.
All of Belco's price risk management transactions are carried out in the
over-the-counter market and not on the New York Mercantile Exchange ("NYMEX").
Belco currently utilizes approximately five financial counterparties that all
have at least an investment grade credit rating. All of these transactions
provide solely for financial settlements relating to closing prices on the
NYMEX.
MAJOR CUSTOMERS
Oil and gas sales for 2000 include $42.6 million, $27.6 million $23.8
million, $18.9 million, $17.6 million and $16.6 million in revenues received
from six customers. Oil and gas sales for 1999 include $26.6 million, $16.1
million, $14.1 million and $11.9 million in revenues received from four
customers. No other customers individually accounted for 10 percent or more of
revenues.
F-62
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
NOTE 11 -- EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
Belco provides a 401(k) and savings plan for all its full-time employees.
The plan qualifies under Section 401(k) of the Internal Revenue Code as a salary
reduction plan. Under the plan, but subject to certain limitations imposed under
the Internal Revenue Code, eligible employees are permitted to (a) defer receipt
of up to 15 percent of their compensation on a pre-tax basis (salary deferral
contributions) or (b) contribute up to 10 percent of their compensation to the
plan on an after-tax basis. The plan provides for a Company matching
contribution in an amount equal to 50 percent (75% for employees with more than
three years of service) of a participant's salary deferral contributions that
are not in excess of 6 percent of such participant's compensation. The plan also
permits Belco, in its sole discretion, to make a contribution that is allocated
on the last day of each calendar year to certain eligible participants. Company
matching and discretionary contributions are vested over a period of five years
at the rate of 20 percent per year.
During 1998, 1999 and 2000, Belco incurred contribution expenses of
$398,000, $378,000 and $409,000, respectively, in connection with this plan.
NOTE 12 -- CAPITAL STOCK
In December 1998, Belco's Board of Directors (the "Board") authorized the
purchase from time to time, in the open market or in privately negotiated
transactions, shares of its Common Stock and 6 1/2% Convertible Preferred Stock
in an aggregate amount not to exceed $10 million. This authorization was
exhausted in December 1999. Subsequently, the Board authorized an additional $10
million for the purchase of additional Common and Preferred Shares.
NET INCOME (LOSS) PER COMMON SHARE
A reconciliation of the components of basic and diluted net income (loss)
per common share for the three years ended December 31, 2000 is presented in the
table below (in thousands, except per share amounts):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
--------- ------- --------
Basic net income (loss) per share:
Net loss........................................... $(147,557) $(8,600) $(47,769)
Less: Preferred Stock dividends.................... (5,406) (6,884) (6,022)
--------- ------- --------
Loss attributable to common shareholders............. $(152,963) $15,484 $(53,791)
========= ======= ========
Weighted average shares of common stock
Outstanding........................................ 31,529 31,642 31,469
========= ======= ========
Basic net income (loss) per share.................... $ (4.85) $ (0.49) $ (1.71)
========= ======= ========
Diluted net income (loss) per share:
Weighted average shares of common stock
outstanding..................................... 31,529 31,642 31,469
Effect of dilutive securities:
Preferred stock, warrants and stock options(1)..... -- -- --
--------- ------- --------
Average shares of common stock outstanding including
dilutive securities................................ 31,529 31,642 31,469
========= ======= ========
Dilutive net loss per share.......................... $ (4.85) $ (0.49) $ (1.71)
========= ======= ========
</Table>
F-63
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
- ---------------
(1) Amounts are not included in the computation of diluted net loss per
share because to do so would have been antidilutive.
Potential common stock not included in the calculation of diluted earnings
per share because to do so would have been antidilutive amounted to 7,690,000,
7,673,000 and 5,463,000 for 1998, 1999 and 2000, respectively.
PREFERRED STOCK
Belco's 6 1/2% convertible preferred stock has a liquidation preference of
$25 per share and is convertible at the option of the holder into shares of
Belco's common stock at an initial conversion rate of 1.1292 shares of common
stock for each share of preferred stock, equivalent to a conversion price of
$22.14 per share of common stock.
Belco's credit facility and the indentures governing its subordinated debt
restrict the payments of dividends. As a result of reporting substantial
unrealized non-cash mark-to-market losses required by existing accounting rules,
dividends on Belco's preferred stock may be limited or prohibited by the
restrictions contained in Belco's 10 1/2% bond indenture. Payment of the March
2001 dividend on Belco's preferred stock will be permitted. Subsequent dividends
will be contingent upon the sale of equity interests or sufficient net income to
restore dividend payment capacity under the indenture. At the present time,
Belco management does not estimate that first quarter 2001 net income, as
defined in the indenture, will be sufficient to restore this dividend payment
capacity.
STOCK INCENTIVE PLANS
On March 25, 1996, Belco adopted a Stock Incentive Plan (the Plan) under
which options for shares of Belco's Common Stock may be granted to officers and
employees for up to 2,250,000 shares of Common Stock. Under the Plan, options
granted may either be incentive stock options or non-qualified stock options
with a maximum term of 10 years and are granted at no less than the fair market
value of the stock at the date of grant. Options vest 20% per year until fully
vested five years from the date of grant.
A separate plan has been established under which options for shares of
Belco's Common Stock may be granted to non-employee directors for up to
approximately 158,000 shares of Common Stock. The plan provides that each
non-employee director be granted stock options for 3,000 shares annually as of
the date of the Annual Meeting. The option price of shares issued is equal to
the fair market value of the stock on the date of grant. All options vest
33 1/3% per year, beginning one year from date of grant, until fully vested and
expire ten years after the date of grant.
F-64
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
A summary of the status of Belco's plans (the Plans) as of December 31,
1999 and 2000 and the changes during the years then ended is presented below:
<Table>
<Caption>
1998 1999 2000
------------------------ ------------------------ ------------------------
SHS. UNDER WTD. AVG. SHS. UNDER WTD. AVG. SHS. UNDER WTD. AVG.
OPTION EXER. PRICE OPTION EXER. PRICE OPTION EXER. PRICE
---------- ----------- ---------- ----------- ---------- -----------
Outstanding, beginning of
year................... 960,500 $20.31 1,154,000 $16.25 1,506,500 $13.68
Granted................ 433,000 9.82 414,500 5.19 376,750 7.72
Exercised.............. -- -- -- -- (2,100) 4.98
Forfeited.............. (239,500) 19.37 (62,000) 15.00 (115,000) 14.92
---------- ------ ---------- ------ ---------- ------
Outstanding, end of
year................... 1,154,000 $16.25 1,506,500 $13.68 1,766,150 $12.36
========== ====== ========== ====== ========== ======
Exercisable, end of
year................... 201,500 $20.24 432,300 $18.62 679,592 $16.36
========== ====== ========== ====== ========== ======
Available for grant, end
of year................ 1,254,000 901,500 639,750
========== ========== ==========
Weighted average fair
value of options
granted during the
year................... $ 10.36 $ 2.78 $ 7.69
========== ========== ==========
</Table>
The following table summarizes information about stock options outstanding
at December 31, 2000.
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------------
WEIGHTED AVERAGE NUMBER NUMBER
OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AT WEIGHTED
DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
RANGE OF PRICES 2000 LIFE EXERCISE PRICE 2000 EXERCISE PRICE
- --------------- -------------- ----------- -------------- -------------- --------------
$4.88-$6.50........... 347,900 8.18 $ 5.00 71,499 $ 4.99
$7.41-$8.81........... 387,750 9.11 $ 7.69 9,299 $ 7.57
$9.19-$17.63.......... 386,000 7.45 $10.47 154,596 $10.52
$18.88-$22.94......... 582,000 6.19 $19.56 391,799 $19.54
$24.06-$29.00......... 62,500 5.57 $26.85 52,399 $26.85
</Table>
As permitted by SFAS No. 123, Belco applies APB Opinion No. 25 and related
Interpretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recognized for the Plans. Had compensation costs
been determined based on the fair value at the grant dates consistent with the
method of SFAS No. 123, Belco's pro forma net income (loss) for the three years
ended December 31, 2000 would have been reduced to the pro forma amounts
indicated below (in thousands, except for per share amounts):
<Table>
<Caption>
1998 1999 2000
--------- -------- --------
Net Income (Loss) Available to Common Stock As
Reported.......................................... $(152,963) $(15,484) $(53,791)
Pro Forma......................................... $(154,625) $(15,886) $(54,386)
Basic and Diluted Net Income (Loss) Per Share As
Reported.......................................... $ (4.85) $ (0.49) $ (1.71)
Pro Forma......................................... $ (4.90) $ (0.50) $ (1.73)
</Table>
The fair value of grants was estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions used in 1998, 1999 and 2000, respectively: risk-free interest
F-65
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
rate of 5.60, 5.43 and 6.67 percent, expected volatility of 49.0, 48.3 and 47.4
percent, expected lives of 6.0 years and no dividend yield.
Under the Stock Incentive Plan, participants may be granted stock without
cost (restricted stock). During 1998, 1999 and 2000, Belco granted 34,700,
200,000 and 10,000 shares, respectively, of restricted stock with a weighted
average fair value based on the price of Belco's stock on the date of grant of
$15.69, $5.09 and $4.94 per share, respectively. At December 31, 2000, 182,600
shares remained unvested, net of shares forfeited. The restrictions on
disposition lapse 20% each year and non-vested shares must be forfeited in the
event employment ceases. Unearned compensation was charged for the market value
of the restricted shares at the date the shares were issued. The unearned
compensation is shown as a reduction of stockholders' equity in the accompanying
consolidated balance sheet and is being amortized ratably as the restrictions
lapse. During 1998, 1999 and 2000, $344,100, $512,000 and $512,000,
respectively, was charged to costs and expenses relating to the Plan.
NOTE 13 -- NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities" which was amended by Financial Accounting
Standards No. 138 ("SFAS 138") in June 1999. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. It
also requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows derivatives gains and losses to offset
related results on the hedged item in the income statement, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. We will fully adopt SFAS 133 on
January 1, 2001, the effective date as amended by SFAS 138. SFAS 133 is expected
to increase volatility of stockholder's equity, reporting earnings (losses) and
other comprehensive income. The current preliminary impact of full compliance
with SFAS 133 on financial statements as if the implementation were to have
occurred December 31, 2000, Belco would record an additional $17.5 million in
current assets, $2.0 million in non-current assets, $52.2 million in current
liabilities and $12.7 million in non-current liabilities related to Belco's
existing oil and gas hedges based on the forward price curve in effect at
December 31, 2000. These contracts should also qualify for hedge accounting
treatment under SFAS 133. The total potential net liability of $45.4 million
related to qualifying hedge instruments would be charged to Other Comprehensive
Income and appear in the equity section of the balance sheet. This amount
combined with amounts previously recorded on the balance sheet representing the
non-cash mark-to-market unrealized losses in the net amount of $162.8 million as
of December 31, 2000 represents the full potential exposure of Belco's CPRM
related activities that may or may not be realized as they are dependent on
future commodity prices. After adoption, Belco will be required to recognize any
hedge ineffectiveness in the income statement each period. In addition, Belco
has three interest rate swaps that will be effected by SFAS 133. We currently
believe these swaps will not qualify for hedge accounting and as a result, Belco
will be required to record an additional $6.6 million in non-current liabilities
with the offsetting charge to the income statement.
F-66
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
NOTE 14 -- SUPPLEMENTAL QUARTERLY FINANCIAL DATA:
<Table>
<Caption>
QUARTERS
-------------------------------------------
FIRST SECOND THIRD FOURTH
-------- --------- -------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999
Revenues..................................... $32,220 $ 35,093 $37,456 $ 35,855
Costs and Expenses........................... $37,159 $ 45,272 $52,040 $ 19,384
Net Income (Loss)............................ $(3,212) $ (6,617) $(9,480) $ 10,709
Basic and Diluted Net Income (Loss) Per
Common Share............................... $ (0.16) $ (0.26) $ (0.35) $ 0.29
2000
Revenues..................................... $40,159 $ 45,188 $41,470 $ 39,568
Costs and Expenses........................... $54,155 $ 79,444 $51,001 $ 55,276
Net Income (Loss)............................ $(9,097) $(22,267) $(6,195) $(10,210)
Basic and Diluted Net Income (Loss) Per
Common Share............................... $ (0.34) $ (0.76) $ (0.25) $ (0.36)
</Table>
The sum of the individual quarterly pro forma basic and diluted net income
(loss) per share amounts may not agree with year-to-date pro forma basic and
diluted net income per share as each period's computation is based on the
weighted average number of common shares outstanding during that period. In
addition, certain potentially dilutive securities were not included in certain
of the quarterly computations of diluted net income per common share because to
do so would have been antidilutive.
NOTE 15 -- SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCING
ACTIVITIES (UNAUDITED):
CAPITALIZED COSTS
The following table sets forth the capitalized costs and related
accumulated depreciation, depletion and amortization relating to Belco's oil and
gas production, exploration and development activities as of December 31, 1999
and 2000 (in thousands):
<Table>
<Caption>
1999 2000
---------- ----------
Proved properties........................................... $1,008,261 $1,185,686
Unproved properties......................................... 71,075 68,979
---------- ----------
Total capitalized costs................................ 1,079,336 1,254,665
Less -- Accumulated depreciation, depletion and
amortization.............................................. (619,446) (674,735)
---------- ----------
Net capitalized costs....................................... $ 459,890 $ 579,930
========== ==========
</Table>
COSTS NOT BEING AMORTIZED
The following table sets forth a summary of unproved oil and gas property
costs not being amortized at December 31, 2000, by the year in which such costs
were incurred (in thousands):
<Table>
<Caption>
1995 1996 1997 1998 1999 2000 TOTAL
---- ---- ------- ------ ------ ------- -------
Leasehold and seismic.............. $251 $168 $49,831 $2,957 $5,292 $10,480 $68,979
</Table>
F-67
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
COSTS INCURRED
The following table sets forth the costs incurred in oil and gas
acquisition, exploration and development activities as of December 31, 1998,
1999 and 2000 (in thousands):
<Table>
<Caption>
1998 1999 2000
-------- ------- --------
Property Acquisitions Costs --
Proved.............................................. $ 56,695 $17,608 $ 79,532
Unproved............................................ 14,414 10,390 11,991
Exploration costs..................................... 18,597 10,943 21,442
Development costs..................................... 37,969 29,576 66,310
Capitalized interest.................................. 5,123 4,881 7,570
Property sales........................................ (6,292) (215) (11,517)
-------- ------- --------
Total costs incurred............................. $126,506 $73,183 $175,328
======== ======= ========
</Table>
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
The following table sets forth revenue and direct cost information relating
to Belco's oil and gas exploration and production activities as of December 31,
1998, 1999 and 2000 (in thousands):
<Table>
<Caption>
1998 1999 2000
--------- -------- --------
Oil and gas revenues (including commodity price risk
management activities)............................ $ 130,088 $139,490 $165,434
Costs and expenses --
Lease operating expenses.......................... 33,615 29,854 33,290
Production taxes.................................. 7,232 9,314 14,464
Impairment of oil and gas properties.............. 229,000 -- --
Depreciation, depletion and amortization.......... 54,863 52,833 55,289
Non-cash change in fair value of derivatives...... (18,912) 34,094 103,610
--------- -------- --------
Results of operations from producing activities
before income taxes............................... (175,710) 13,395 (41,219)
Provision (benefit) for income taxes................ (61,498) 4,688 (14,427)
--------- -------- --------
Results of operations from producing activities..... $(114,212) $ 8,707 $(26,792)
========= ======== ========
Amortization rate per Mcf equivalent, recurring..... $ 0.88 $ 0.88 $ 0.86
========= ======== ========
</Table>
OIL AND GAS RESERVE INFORMATION
The following summarizes the policies used by Belco in preparing the
accompanying oil and gas reserves and the standardized measure of discounted
future net cash flows relating to proved oil and gas reserves and the changes in
such standardized measure from period to period.
Proved reserves are estimated quantities of crude oil and natural gas 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.
Proved oil and gas reserve quantities and the related discounted future net
cash flows as of December 31, 2000 are based on internal estimates and audited
by Miller & Lents, independent petroleum engineers.
F-68
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Estimated reserve quantities for 1998 and 1999 were based upon independent
reports prepared by Miller & Lents. Such estimates have been prepared in
accordance with guidelines established by the Securities and Exchange Commission
(SEC).
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of Belco.
The reserve data set forth herein represent only estimates. Reserve engineering
is a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact way, and the accuracy of any reserve
estimate is a function of the quality of available data and of engineering and
geological interpretation and judgment. As a result, estimates made by different
engineers often vary. In addition, results of drilling, testing and production
subsequent to the date of an estimate may justify revision of such estimates,
and such revisions may be material. Accordingly, reserve estimates are often
different from the quantities of oil and gas that are ultimately recovered.
The standardized measure of discounted future net cash flows from
production of proved reserves was developed by first estimating the quantities
of proved reserves and the future periods during which they are expected to be
produced based on year end economic conditions. The estimated future cash flows
from proved reserves were then determined based on year end prices, except in
those instances where fixed contracts provide for a higher or lower amount.
Estimates of future cash flows applicable to oil and gas commodity hedges have
been prepared by Belco and are reflected in future cash flows from proved
reserves with such estimates based on prices in effect as of the date of the
reserve report. Additionally, future cash flows were reduced by estimated
production costs, costs to develop and produce the proved reserves, and when
significant, certain abandonment costs, all based on year end economic
conditions. Future net cash flows have been discounted by 10 percent in
accordance with SEC guidelines.
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair value of Belco's oil
and gas reserves. An estimate of fair value would also take into account, among
other things, the recovery of reserves not presently classified as proved,
anticipated future changes in prices and costs and a discount factor more
representative of the time value of money and the risks inherent in reserve
estimates.
Under SEC rules, companies that follow full-cost accounting methods are
required to make quarterly "ceiling test" calculations. Under this test, proved
oil and gas property costs may not exceed the present value of estimated future
net revenues from proved reserves, discounted at 10 percent, as adjusted for
related tax effects and deferred tax reserves. Application of these rules during
periods of relatively low oil and gas prices, even if of short-term duration,
may result in write-downs.
F-69
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES
<Table>
<Caption>
DECEMBER 31,
-------------------------------------
1998 1999 2000
---------- ---------- -----------
(IN THOUSANDS)
Future cash inflows............................. $1,215,691 $1,945,175 $ 5,139,439
Future production costs......................... (405,171) (588,932) (977,369)
Future development costs........................ (99,342) (110,091) (184,305)
---------- ---------- -----------
Future net inflows before income taxes.......... 711,178 1,246,152 3,977,765
Discount at 10% annual rate..................... (350,562) (619,610) (1,721,378)
---------- ---------- -----------
Discounted future net cash flows before income
taxes......................................... 360,616 626,542 2,256,387
Pro forma discounted future income taxes(1)..... (7,457) (161,213) (590,383)
---------- ---------- -----------
Standardized measure of discounted future net
cash flows.................................... $ 353,159 $ 465,329 $ 1,666,004
========== ========== ===========
</Table>
- ---------------
(1) The estimated undiscounted future income taxes related to future net inflows
were $32.6, $354.5 and $1,309.2 million for the years 1998, 1999 and 2000,
respectively.
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<Table>
<Caption>
1998 1999 2000
--------- --------- ----------
(IN THOUSANDS)
BALANCE, BEGINNING OF YEAR........................ $ 426,208 $ 353,159 $ 465,329
Sales and transfers of oil and gas produced, net
of production costs............................. (83,353) (100,075) (209,916)
Net change in sales price and production costs.... (142,014) 239,549 1,430,220
Extensions and discoveries........................ 29,730 65,424 101,596
Purchases of minerals in place.................... 66,409 21,346 118,390
Sale of reserves in place......................... (1,401) (112) (13,633)
Changes in estimated future development costs..... 21,382 33,925 24,303
Revisions in quantities........................... (39,163) (8,841) (147,218)
Accretion of discount............................. 51,040 36,062 62,654
Other, principally revisions in estimates of
timing of production............................ (53,923) (21,352) 263,449
Change in income taxes............................ 78,244 (153,756) (429,170)
--------- --------- ----------
BALANCE, END OF YEAR.............................. $ 353,159 $ 465,329 $1,666,004
========= ========= ==========
</Table>
F-70
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
RESERVE QUANTITY INFORMATION
PROVED RESERVES
<Table>
<Caption>
OIL GAS
------- -------
(MBBLS) (MMCF)
Balance at December 31, 1996................................ 3,327 284,992
------ -------
Purchases of minerals in place............................ 45,646 44,855
Extensions, discoveries and other additions............... 2,004 39,248
Revisions of previous estimates........................... 1,478 (22,200)
Production................................................ (1,295) (49,710)
------ -------
Balance at December 31, 1997................................ 51,160 297,185
------ -------
Purchases of minerals in place............................ 9,800 25,903
Extensions, discoveries and other additions............... 249 34,279
Revisions of previous estimates........................... (3,775) (33,977)
Sales of minerals in place................................ (203) (649)
Production................................................ (4,177) (37,208)
------ -------
Balance at December 31, 1998................................ 53,054 285,533
------ -------
Purchases of minerals in place............................ 1,066 20,982
Extensions, discoveries and other additions............... 3,342 57,881
Revisions of previous estimates........................... (947) (2,322)
Sales of minerals in place................................ -- (189)
Production................................................ (3,439) (39,737)
------ -------
Balance at December 31, 1999................................ 53,076 322,148
====== =======
Purchases of minerals in place............................ 8,346 57,726
Extensions, discoveries and other additions............... 4,289 76,433
Revisions of previous estimates........................... (1,316) (33,128)
Sales of minerals in place................................ (2,982) (1,009)
Production................................................ (3,922) (40,847)
------ -------
Balance at December 31, 2000................................ 57,491 381,323
====== =======
PROVED DEVELOPED RESERVES
December 31, 1996........................................... 2,070 184,904
December 31, 1997........................................... 41,255 226,071
December 31, 1998........................................... 41,475 213,449
December 31, 1999........................................... 42,352 224,143
December 31, 2000........................................... 40,642 231,380
</Table>
F-71
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31, 2000 JUNE 30, 2001
----------------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 2,666 $ 1,587
Accounts receivable....................................... 43,192 26,761
Assets from commodity price risk management activities.... 15,721 6,557
Prepaid expenses.......................................... 4,372 1,547
Other current assets...................................... 1,911 2,303
---------- ----------
Total current assets................................ 67,862 38,755
---------- ----------
Property and Equipment:
Oil and gas properties at cost based on full cost
accounting --
Proved oil and gas properties........................... 1,185,686 1,240,050
Unproved oil and gas properties......................... 68,979 75,146
Less -- Accumulated depreciation, depletion and
amortization.......................................... (674,735) (703,143)
---------- ----------
Net oil and gas property.................................. 579,930 612,053
---------- ----------
Building and other equipment.............................. 9,159 9,305
Less -- Accumulated depreciation........................ (3,914) (4,692)
---------- ----------
Net building and other equipment.......................... 5,245 4,613
---------- ----------
Other Assets.............................................. 4,337 6,493
---------- ----------
Total assets........................................ $ 657,374 $ 661,914
========== ==========
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable.......................................... $ 25,443 $ 29,088
Liabilities from commodity price risk management
activities.............................................. 124,981 43,809
Accrued interest.......................................... 7,695 7,537
Accrued expenses.......................................... 8,926 --
Other liabilities......................................... 2,546 9,906
---------- ----------
Total current liabilities........................... 169,591 90,340
---------- ----------
Long-Term Debt.............................................. 402,033 409,656
Deferred Income Taxes....................................... 7,933 33,643
Liabilities from Commodity Price Risk Management
Activities................................................ 17,417 21,210
Stockholders' Equity:
6 1/2% Convertible Preferred stock, $.01 par value;
10,000,000 shares authorized; 3,273,600 and 2,930,000
issued and outstanding at December 31, 2000 and June 30,
2001, respectively...................................... 33 29
Common stock ($.01 par value, 120,000,000 shares
authorized; 32,342,315 and 32,957,150 shares issued and
outstanding at December 31, 2000 and June 30, 2001,
respectively)........................................... 323 330
Additional paid-in capital................................ 292,635 292,719
Other comprehensive income (loss)......................... -- (9,540)
Retained earnings (deficit)............................... (230,902) (174,930)
Unearned compensation..................................... (936) (790)
Notes receivable for equity interest...................... (753) (753)
---------- ----------
Total stockholders' equity.......................... 60,400 107,065
---------- ----------
Total liabilities and stockholders' equity.......... $ 657,374 $ 661,914
========== ==========
</Table>
The accompanying notes are an integral part of these condensed financial
statements.
F-72
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
---------------------
2000 2001
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
Revenues:
Oil and gas sales, net of hedging activities.............. $ 97,842 $127,778
Non-hedge commodity price risk management activities cash
settlements(a)......................................... (12,995) (47,685)
Interest and other........................................ 500 145
-------- --------
Net revenues........................................... 85,347 80,238
Costs and expenses:
Oil and gas operating expenses............................ 15,201 19,079
Production taxes.......................................... 7,522 10,881
Depreciation, depletion and amortization.................. 28,166 29,192
General and administrative................................ 3,145 3,565
Interest expense.......................................... 13,602 14,571
Non-cash change in fair value of derivatives.............. 65,963 (91,836)
-------- --------
Total costs and expenses............................... 133,599 (14,548)
-------- --------
Income (loss) before income taxes........................... (48,252) 94,786
Provision (benefit) for income taxes........................ (16,888) 33,175
-------- --------
Net income (loss) before cumulative effect of change in
accounting principle...................................... (31,364) 61,611
Cumulative effect of change in accounting
principle -- net.......................................... -- (4,324)
-------- --------
Net income (loss)........................................... (31,364) 57,287
Preferred stock dividends(b)................................ 3,152 2,585
-------- --------
Net income (loss) available to common stock................. $(34,516) $ 54,702
======== ========
Per share data:
Basic:
-- Net income (loss) before cumulative change in
accounting principle.................................. $ (1.11) $ 1.80
======== ========
-- Net income (loss)................................... $ (1.11) $ 1.67
======== ========
Diluted:
-- Net income (loss) before cumulative change in
accounting principle.................................. $ (1.11) $ 1.70
======== ========
-- Net income (loss)................................... $ (1.11) $ 1.58
======== ========
Average number of common shares used in computation:
-- Basic............................................... 31,200 32,721
======== ========
-- Diluted............................................. 31,200 36,302
======== ========
</Table>
- ---------------
(a) Includes cash premiums received and settlements.
(b) Cumulative preferred stock dividends in the amount of $1.3 million for the
three months ended June 30, 2001 were neither declared nor paid.
The accompanying notes are an integral part of these condensed financial
statements.
F-73
BELCO OIL & GAS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED COMPREHENSIVE
--------------- --------------- PAID-IN UNEARNED EARNINGS INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) (LOSS)
------ ------ ------ ------ ---------- ------------ --------- -------------
(IN THOUSANDS)
(UNAUDITED)
BALANCE, DECEMBER 31, 2000... 3,274 $33 32,342 $323 $292,635 $(936) $(230,902) $ --
Exchanges of Preferred Stock
to Common Stock............ (344) (4) 602 7 (3) -- -- --
Exercise of Stock Options.... -- -- 7 -- 36 -- -- --
Restricted Stock Issued...... -- -- 6 -- 51 (51) -- --
Restricted Stock Amortized... -- -- -- -- -- 197 -- --
Cumulative change in
accounting principle....... -- -- -- -- -- -- -- --
Comprehensive Income:
Net Income................... -- -- -- -- -- -- 57,287 57,287
-------
Unrealized hedge gains
(losses)................. -- -- -- -- -- -- -- --
-------
Total other comprehensive
income................... -- -- -- -- -- -- -- 13,972
-------
Comprehensive Income......... -- -- -- -- -- -- -- $71,259
=======
Preferred Dividend Paid...... -- -- -- -- -- -- (1,315)
----- --- ------ ---- -------- ----- ---------
BALANCE, JUNE 30, 2001....... 2,930 $29 32,957 $330 $292,719 $(790) $(174,930)
===== === ====== ==== ======== ===== =========
<Caption>
ACCUMULATED NOTES
OTHER RECEIVABLE
COMPREHENSIVE FOR EQUITY
INCOME INTEREST TOTAL
------------- ---------- --------
(IN THOUSANDS)
(UNAUDITED)
BALANCE, DECEMBER 31, 2000... $ -- $(753) $ 60,400
Exchanges of Preferred Stock
to Common Stock............ -- -- --
Exercise of Stock Options.... -- -- 36
Restricted Stock Issued...... -- -- --
Restricted Stock Amortized... -- -- 197
Cumulative change in
accounting principle....... (23,512) -- (23,512)
Comprehensive Income:
Net Income................... -- -- 57,287
Unrealized hedge gains
(losses)................. 13,972 13,972
Total other comprehensive
income................... -- -- --
Comprehensive Income......... -- -- --
Preferred Dividend Paid...... -- -- (1,315)
-------- ----- --------
BALANCE, JUNE 30, 2001....... $ (9,540) $(753) $107,065
======== ===== ========
</Table>
The accompanying notes are an integral part of these condensed financial
statements.
F-74
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 2001
----------- -----------
(IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (31,364) $ 57,287
Adjustments to reconcile net income (loss) to net
operating cash inflows --
Depreciation, depletion and amortization............... 28,166 29,192
Deferred tax expense (benefit)......................... (16,888) 33,175
Commodity price risk management activities............. 15,081 (8,420)
Other.................................................. 312 134
Cumulative change in accounting principle, net of
tax................................................... -- 4,324
Changes in operating assets and liabilities --
Commodity price risk management...................... 50,882 (83,416)
Accounts receivable, oil and gas..................... (233) 16,371
Commodity Price Risk Management related funds on
deposit............................................. (6,350) --
Other current assets................................. (2,934) 2,240
Accounts payable and accrued liabilities............. 7,833 1,921
--------- ---------
Net operating cash inflows........................ 44,505 52,808
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures.................. (46,765) (60,008)
Purchases of oil and gas properties....................... (68,699) (803)
Proceeds from sale of oil and gas properties.............. 1,017 279
Proceeds from sale of securities.......................... -- 289
Proceeds from sale of other assets........................ -- 27
Other property additions.................................. (298) (187)
Changes in other assets................................... 69 (294)
--------- ---------
Net investing cash outflows....................... (114,676) (60,697)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock option exercise....................... -- 36
Repurchase of bonds....................................... (2,850) --
Repurchases of preferred stock............................ (302) --
Long-term borrowings...................................... 188,200 112,800
Long-term debt repayments................................. (110,700) (104,800)
Preferred dividend paid................................... (3,152) (1,315)
Other..................................................... 1 89
--------- ---------
Net financing cash inflows........................ 71,197 6,810
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 1,026 (1,079)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 2,105 2,666
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 3,131 $ 1,587
========= =========
</Table>
The accompanying notes are an integral part of these condensed financial
statements.
F-75
BELCO OIL & GAS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
We have prepared the financial statements included herein, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
These financial statements reflect all adjustments which are, in the opinion of
management, necessary to present a fair statement of the results for the interim
periods, on a basis consistent with the annual audited financial statements. All
such adjustments are of a normal recurring nature. The results of operations for
the interim period are not necessarily indicative of the results to be expected
for an entire year. Certain information, accounting policies, and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations, although we believe that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with our Form 10-K for the calendar year 2000, which
includes financial statements and notes thereto. Certain reclassifications have
been made to prior year amounts to conform to the current year presentation.
NOTE 2 -- USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates with regard to these financial statements include the
estimated fair value of oil and gas commodity price risk management contracts
and the estimate of proved oil and gas reserve volumes and the related
discounted future net cash flows therefrom.
NOTE 3 -- COMMODITY PRICE RISK MANAGEMENT ACTIVITIES (OR CPRM)
We periodically enter into commodity price risk management transactions
such as swaps and options in order to manage our exposure to oil and gas price
volatility. All CPRM data is presented in accordance with requirements of
Statement of Financial Accounting Standards No. 133 which became effective
January 1, 2001. Gains and losses related to hedges of our oil and gas
production that qualify for hedge accounting treatment are deferred and
recognized as revenues as the associated production occurs.
We use the mark-to-market method of accounting for instruments that do not
qualify for hedge accounting treatment. Under mark-to-market accounting, those
contracts that do not qualify for hedge accounting treatment are reflected at
market value at the end of the period with resulting unrealized gains and losses
recorded as assets and liabilities in the consolidated balance sheet. Under such
method, changes in the market value of outstanding financial instruments are
recognized as unrealized gain or loss in the period of change.
The tables and related notes set forth in this footnote and summarized
below provide details about the volumes and prices of all open Belco CPRM
commitments, hedge and non-hedge, as of June 30, 2001. Since most of the
contracts covering a substantial portion of the committed volumes were entered
into in 1997 and early 1998 when commodity prices were substantially below
current commodity price levels, it is not possible to estimate future average
prices to be realized given the broad ranges covering both volumes and prices
committed at different points in time. A summary of committed volumes and prices
by year (last six months
F-76
BELCO OIL & GAS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for 2001), assuming the NYMEX forward curve reference prices for oil and gas as
of June 30, 2001 is as follows:
<Table>
<Caption>
AVERAGE
VOLUME REALIZED
YEAR PER DAY PRICE
---------------- ------- --------
OIL --
Barrels per day................................. 2001(last 6 mos.) 6,000 $20.24
2002 5,400 $20.84
2003 2,100 $19.93
</Table>
<Table>
<Caption>
GAS --
MMBtu per day................................... 2001(last 6 mos.) 58,000 $ 1.70
2002 32,000 $ 2.91
2003 3,700 $ 3.69
</Table>
For the six months ended June 30, 2001, we recorded, as required by
existing accounting rules, non-hedge commodity price risk management cash
settlements paid out by us in the amount of $15.7 million and $45.1 million in
unrealized non-cash mark-to-market gains. This compares to $7.5 million in cash
settlements paid by us and $43.8 million in unrealized non-cash mark-to-market
losses reported for the 2000 comparable period. No letters of credit were
outstanding at June 30, 2001.
At June 30, 2001, Belco's consolidated balance sheet reflects $56.2 million
in potential price risk management net liabilities consisting of $49.1 million
related to commodities and $7.1 million related to interest rate swaps. The full
potential net liabilities may or may not be realized as they are dependent on
future commodity price and interest rate behavior.
The following table and notes thereto cover Belco's pricing and notional
volumes on open natural gas and oil commodity hedges as of June 30, 2001:
<Table>
<Caption>
PRODUCTION PERIODS
---------------------------
REMAINDER
OF 2001 2002 2003
--------- ------ ------
GAS --
Price swaps sold -- receive fixed price (thousand
MMBtu)(1)........................................... -- -- 1,363
Average price, per MMBtu............................ $ -- -- $ 3.69
Price swaps bought -- pay fixed price (thousand
MMBtu)(1)........................................... (4,140) (460) --
Average price, per MMBtu............................ $ 4.46 $ 4.47 --
------- ------ ------
Sub-total -- net swap volume (thousand MMBtu)..... (4,140) (460) 1,363
------- ------ ------
Collars sold (thousand MMBtu)(2)....................... 4,600 5,925 3,650
Average floor price, per MMBtu...................... $ 1.91 $ 2.73 $ 2.85
Average ceiling price, per MMBtu.................... $ 2.85 $ 3.14 $ 4.91
Puts bought (thousand MMBtu)(3)........................ -- 3,650 --
Average price per MMBtu............................. -- $ 3.13 --
Calls bought (thousand MMBtu)(3)....................... (460) -- --
Average price per MMBtu............................. $ 6.00 -- --
</Table>
F-77
BELCO OIL & GAS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
PRODUCTION PERIODS
---------------------------
REMAINDER
OF 2001 2002 2003
--------- ------ ------
OIL --
Price swaps sold -- receive fixed price (MBbls)(1)..... 525 840 480
Average price, per Bbl.............................. $ 19.81 $20.29 $20.60
Price swaps bought -- pay fixed price (MBbls)(1)....... -- -- --
Average price, per Bbl................................. -- -- --
------- ------ ------
Sub-total -- net swap volumes..................... 525 840 480
------- ------ ------
Collars sold (MBbls)(2)................................ 120 300 90
Average floor price, per Bbl........................ $ 18.75 $19.60 $21.00
Average ceiling price per Bbl....................... $ 22.68 $25.10 $24.63
</Table>
- ---------------
(1) For any particular swap sold transaction, the Counterparty is required to
make a payment to Belco in the event that the NYMEX Reference Price for any
settlement period is less than the swap price for such hedge, and Belco is
required to make a payment to the Counterparty in the event that the NYMEX
Reference Price for any settlement period is greater than the swap price for
such hedge. Conversely, swaps bought require Belco to make a payment to the
Counterparty in the event that the NYMEX Reference Price for any settlement
period is less than the swap price for such hedge, and the Counterparty is
required to make a payment to Belco in the event that the NYMEX Reference
Price for any settlement period is greater than the swap price for such
hedge.
(2) For any particular collar transaction, the Counterparty is required to make
a payment to Belco if the average NYMEX Reference Price for the reference
period is below the floor price for such transaction, and Belco is required
to make payment to the Counterparty if the average NYMEX Reference Price is
above the ceiling price for such transaction.
(3) Calls or puts bought in return for Belco's payment of a premium require the
Counterparty to make a payment to Belco in the event that the NYMEX
Reference Price on any settlement period is greater than the call price or
less than the put price.
NON-HEDGING TRANSACTIONS
We use the mark-to-market method of accounting for instruments that do not
qualify for hedge accounting treatment. The second quarter 2001 results of
operations included an aggregate non-cash pre-tax gain of $45.1 million related
to these activities resulting from the net change in value of Belco's mark-to-
market portfolio of non-hedge price risk management activities.
F-78
BELCO OIL & GAS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table and notes thereto cover Belco's pricing and notional
volumes on open natural gas and oil financial instruments at June 30, 2001, that
do not qualify for hedge accounting:
<Table>
<Caption>
PRODUCTION PERIODS
---------------------------
REMAINDER
OF 2001 2002 2003
--------- ------ ------
GAS(1) --
Price Swaps Sold -- receive fixed price (thousand
MMBtu)(3).............................................. 10,580 -- --
Average price, per MMBtu............................... $ 2.55 -- --
Price Swaps Bought -- pay fixed price (thousand
MMBtu)(3).............................................. (690) -- --
Average price, per MMBtu............................... $ 4.15 -- --
------- ------ ------
Sub-total net swap volume (thousand MMBtu)........... 9,890 -- --
------- ------ ------
Puts Sold (thousand MMBtu)(2)............................. (1,380) -- --
Average price, per MMBtu............................... $ 4.34 -- --
Extension Swaps Sold -- receive fixed price (thousand
MMBtu)................................................. -- 3,650 --
Average price, per MMBtu............................... -- $ 2.65 --
Calls sold (thousand MMBtu)(2)............................ 1,702 4,380 --
Average price, per MMBtu............................... $ 3.30 $ 2.95 --
OIL --
Price Swaps Sold -- receive fixed price (MBbls)(3)........ 60 -- --
Average price, per Bbl................................. $ 17.25 -- --
Calls Sold (MBbls)(2)..................................... 330 720 --
Average price, per Bbl................................. $ 20.55 $22.00 --
Puts Sold (MBbls)(2)...................................... (90) -- --
Average price, per Bbl................................. $ 16.00 -- --
Extension Swaps Sold, receive fixed price (MBbls)(3)...... -- 300 300
Average price, per Bbl................................. -- $18.86 $18.86
Extension Collars Sold(4)................................. 60 -- --
Average floor price.................................... $ 17.50 -- --
Average ceiling price.................................. $ 20.35 -- --
</Table>
- ---------------
(1) Belco sells the majority of its Wyoming gas at prices based on the Northwest
Pipeline Rocky Mountain Index and has entered into basis swaps that require
the Counterparty to make a payment to Belco in the event that the NYMEX
Reference Price per MMBtu for a reference period exceeds the Northwest
Pipeline Rocky Mountain Index Price by more than a stated differential and
requires Belco to make a payment to the Counterparty in the event that the
NYMEX Reference Price exceeds the Northwest Pipeline Rocky Mountain Index
Price by less than a stated differential (or in the event that the Northwest
Pipeline Rocky Mountain Index Price is greater than the NYMEX Reference
Price). Natural gas volumes covered by basis transactions include 10,000
MMBtu/d at $0.27 for the year 2001.
Belco sells the majority of its East Texas gas at prices based on the Katy
and Houston Ship Channel Indices and has entered into basis swaps that
require the Counterparty to make a payment to Belco in the event that the
NYMEX Reference Price per MMBtu for a reference period exceeds the Katy and
Houston Ship Channel Indices Prices by more than a stated differential and
requires Belco to make a payment to the Counterparty in the event that the
NYMEX Reference Price exceeds the Katy and
F-79
BELCO OIL & GAS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Houston Ship Channel Indices Prices by less than a stated differential (or
in the event that the Katy and Houston Ship Channel Indices Prices are
greater than the NYMEX Reference Price). Natural gas volumes covered by
basis transactions include 25,000 MMBtu/d at $0.02 for Katy and 5,000
MMBtu/d at $0.005 (over the NYMEX Reference Price) for Houston Ship Channel
for the year 2001.
(2) Calls or puts are sold under written option contracts in return for a
premium received by Belco upon initiation of the contract. Belco is required
to make a payment to the Counterparty in the event that the NYMEX Reference
Price for any settlement period is greater than the price of the call sold,
or less than the price of the put sold. Conversely, calls or puts bought in
return for Belco's payment of a premium require the Counterparty to make a
payment to Belco in the event that the NYMEX Reference Price on any
settlement period is greater than the call price or less than the put price.
(3) For any particular swap sold transaction, the Counterparty is required to
make a payment to Belco in the event that the NYMEX Reference Price for any
settlement period is less than the swap price for such instrument and Belco
is required to make a payment to the Counterparty in the event that the
NYMEX Reference Price for any settlement period is greater than the swap
price for such instrument. Conversely, swaps bought require Belco to make a
payment to the counterparty in the event that the NYMEX Reference Price for
any settlement period is less than the swap price for such hedge, and the
counterparty is required to make a payment to Belco in the event that the
NYMEX Reference Price for any settlement period is greater than the swap
price for such hedge.
(4) For any particular collar transaction, the Counterparty is required to make
a payment to Belco if the average NYMEX Reference Price for the reference
period is below the floor price for such transaction, and Belco is required
to make payment to the Counterparty if the average NYMEX Reference Price is
above the ceiling price for such transaction.
NOTE 4 -- CAPITAL STOCK
From January 1, 2000 through June 30, 2001, we exchanged 1,034,600 shares
of our 6 1/2% convertible preferred stock for 1,844,010 shares of our common
stock. The preferred shares that were exchanged had a liquidation preference
value of $25.9 million.
As previously reported, Belco's credit facility and the indentures
governing its subordinated debt restrict the payment of dividends. As a result
of recording substantial unrealized non-cash mark-to-market losses in prior
periods as required by existing accounting rules, dividends on Belco's preferred
stock may be limited or prohibited by the restriction contained in Belco's
10 1/2% bond indenture. Payment of the June 2001 dividend on Belco's preferred
stock was not permitted. The declaration and payment of subsequent dividends
will be contingent upon the sale of equity interests or sufficient net income to
restore dividend payment capacity under the indenture. Reported second quarter
and first six months of 2001 net income, as defined in the 10 1/2% bond
indenture, was sufficient to restore this dividend payment capacity. The Board
of Directors declared a preferred dividend at a special board meeting held on
August 10, 2001.
F-80
BELCO OIL & GAS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INCOME (LOSS) PER COMMON SHARE
A reconciliation of the components of basic and diluted net income (loss)
per common share for the six months ended June 30, 2000 and 2001 is presented in
the table below (in thousands, except per share amounts):
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
------------------
2000 2001
-------- -------
Basic net income (loss) per share:
Net income (loss) before cumulative effect of change in
accounting principle................................... $(31,364) $61,611
Cumulative change in accounting principle -- net.......... -- (4,324)
-------- -------
Net income (loss)......................................... (31,364) 57,287
Less: Preferred stock dividends(1)........................ (3,152) (2,585)
-------- -------
Income (loss) attributable to common shareholders......... $(34,516) $54,702
======== =======
Weighted average shares of common stock outstanding.... 31,200 32,721
======== =======
Basic net income (loss) per share before cumulative
effect of change in accounting principle............. $ (1.11) $ 1.80
======== =======
Basic net income (loss) per share......................... $ (1.11) $ 1.61
======== =======
Diluted net income (loss) per share:
Net income (loss) before cumulative effect of change in
accounting principle................................... $(31,364) $61,611
Cumulative change in accounting principle................. -- (4,324)
-------- -------
Net income (loss)......................................... (31,364) 57,287
Less: Preferred stock dividends(2)........................ (3,152) (2,585)
-------- -------
Income (loss) attributable to common shareholders......... $(34,516) $54,702
======== =======
Diluted weighted average shares of common stock
outstanding.......................................... 31,200 36,302
======== =======
Diluted net income (loss) per share before cumulative
effect of change in accounting principle............. $ (1.11) $ 1.70
======== =======
Diluted net income (loss) per share.................. $ (1.11) $ 1.58
======== =======
Weighted average sales of common stock outstanding.......... 31,200 32,721
Effect of dilutive securities:
Stock options(3).......................................... -- 272
Preferred stock(3)........................................ -- 3,309
-------- -------
Diluted weighted average shares of common stock
outstanding............................................... 31,200 36,302
======== =======
</Table>
- ---------------
(1) Cumulative preferred stock dividends in the amount of $1.3 million for the
three months ended June 30, 2001 were neither declared nor paid.
(2) Amounts are not included in the computation of diluted net income (loss) per
share for 2001, because to do so would have been antidilutive.
F-81
BELCO OIL & GAS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) Amounts are not included in the computation of diluted net income (loss) per
share for 2000, because to do so would have been antidilutive.
NOTE 5 -- LONG TERM DEBT
Long term debt consists of the following at December 31, 2000 and June 30,
2001 (in thousands):
<Table>
<Caption>
DECEMBER 31, JUNE 30,
2000 2001
------------ --------
Revolving credit facility due 2004.......................... $141,000 $149,000
8 7/8% Senior Subordinated Notes due 2007................... 147,000 147,000
10 1/2% Senior Subordinated Notes due 2006, including
premium totaling approximately $4.7 and $5.0 million for
2001 and 2000, respectively............................... 114,033 113,656
-------- --------
Total Debt............................................. 402,033 409,656
Less: Current maturities.................................... -- --
-------- --------
Long term debt.............................................. $402,033 $409,656
======== ========
</Table>
As of June 30, 2001, Belco's effective interest rate on the outstanding
balance of $149.0 million on its line of credit was approximately 6.0% per
annum.
There were no outstanding letters of credit at June 30, 2001.
Total cash interest expense paid for the six months ended June 30, 2001 was
approximately $17.6 million. Interest capitalized during the first six months of
2001 was $3.6 million.
NOTE 6 -- NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities" which was amended by Financial Accounting
Standards No. 138 ("SFAS 138") in June 1999. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. It
also requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows derivatives gains and losses to offset
related results on the hedged item in the income statement, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. We adopted SFAS 133 on January 1,
2001, the effective date as amended by SFAS 138. SFAS 133 will increase
volatility of stockholder's equity, reporting earnings (losses) and other
comprehensive income. The impact of compliance with SFAS 133 on the financial
statements was that we recorded an additional $17.5 million in current assets,
$2.0 million in non-current assets, $43.0 million in current liabilities and
$12.7 million in non-current liabilities related to Belco's existing oil and gas
hedges based on the forward price curve in effect at December 31, 2000. These
contracts qualified for hedge accounting treatment under SFAS 133. The total
potential net liability of $36.2 million ($23.5 million net of tax) related to
qualifying hedge instruments was charged to Other Comprehensive Income and
appears in the equity section of the balance sheet. After adoption, Belco was
required to recognize any hedge ineffectiveness in the income statement which
resulted in a charge of $355,000 for the six months ended June 30, 2001. In
addition, Belco has three interest rate swaps that were affected by SFAS 133.
These swaps did not qualify for hedge accounting and as a result, Belco recorded
an additional $6.6 million ($4.3 million net of tax) in non-current liabilities
with the offsetting charge to the income statement.
F-82
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Westport Resources Corporation:
We have audited the accompanying statements of revenues and direct
operating expenses for the oil and natural gas properties of Equitable
Production (Gulf) Company (the "EPGC Properties") for the years ended December
31, 1998 and 1999. These statements are the responsibility of EPGC's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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.
The statements of revenues and direct operating expenses for the EPGC
Properties were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission as described in Note 1,
and are not intended to be a complete presentation of revenues and expenses.
In our opinion, the statements referred to above present fairly, in all
material respects, the revenues and direct operating expenses for the EPGC
Properties for the years ended December 31, 1998 and 1999, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado
June 15, 2000.
F-83
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE EPGC PROPERTIES
<Table>
<Caption>
FOR THE
THREE MONTHS
ENDED
FOR THE YEAR ENDED MARCH 31,
DECEMBER 31, 2000
------------------- ------------
1998 1999
-------- -------- (UNAUDITED)
Oil and natural gas revenue................................. $45,803 $64,872 $18,932
Direct operating expenses................................... 10,030 7,215 1,215
------- ------- -------
Revenues in excess of direct operating expenses............. $35,773 $57,657 $17,717
======= ======= =======
</Table>
The accompanying notes are an integral part of these statements.
F-84
NOTES TO STATEMENTS OF REVENUES
AND DIRECT OPERATING EXPENSES FOR
THE EPGC PROPERTIES
1. BASIS OF PRESENTATION:
On April 7, 2000, Westport Oil and Gas Company, Inc. ("Westport Oil and
Gas") merged with Equitable Production (Gulf) Company ("EPGC"). The transaction
was effected by a merger between a newly-formed subsidiary of EPGC and Westport
Oil and Gas, resulting in Westport Oil and Gas becoming a wholly-owned
subsidiary of EPGC, which subsequently changed its name to Westport Resources
Corporation. The merger had an October 1, 1999 effective date. EPGC was an
indirect subsidiary of Equitable Resources, Inc. ("Equitable") formed to hold
interests in Equitable's Gulf of Mexico oil and natural gas properties,
including 37 producing properties and 30 undeveloped blocks (the "EPGC
Properties"). The merger was accounted for using purchase accounting with
Westport Oil and Gas as the surviving entity.
The accompanying statements of revenues and direct operating expenses were
derived from the historical accounting records of the EPGC Properties and
reflect the revenues and direct operating expenses of EPGC's 37 producing
properties. The statements do not include depreciation, depletion and
amortization, general and administrative expenses, income taxes or interest
expense as these costs may not be comparable to the expenses expected to be
incurred by the combined company.
2. SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED):
Supplemental oil and natural gas reserve information related to the EPGC
Properties is reported in compliance with FASB Statement No. 69, "Disclosures
about Oil and Gas Producing Activities." Net proved oil and natural gas reserves
and the discounted future net cash flows related to those reserves were prepared
by EPGC's petroleum engineers and audited by Netherland, Sewell & Associates,
Inc. at December 31, 1997 and 1998. For December 31, 1999, the report was
prepared by Netherland, Sewell & Associates, Inc. Information presented in that
report was the basis for the net proved oil and natural gas reserve and
standardized measure disclosures presented below.
The following tables set forth information for the years ended December 31,
1998 and 1999, with respect to changes in the proved reserves for the EPGC
Properties.
<Table>
<Caption>
1998 1999
----------------- -----------------
OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF)
------- ------- ------- -------
Total Proved Reserves:
Beginning of year............................. 3,357 84,926 4,681 86,648
Production.................................... (614) (18,782) (761) (23,100)
Revisions of previous estimates............... 282 (4,195) (652) 8,821
Extensions, discoveries and other additions... 1,661 24,699 1,141 41,939
Purchases of reserves in place................ -- -- -- --
Sale of reserves in place..................... -- -- (50) (1,758)
----- ------- ----- -------
End of year................................... 4,686 86,648 4,359 112,550
===== ======= ===== =======
</Table>
At December 31, 1998 and 1999, proved developed reserves were estimated to
be 3,171,863 and 2,421,913, respectively, barrels of oil and 75,467,573 and
91,945,596, respectively, Mcf of natural gas.
F-85
NOTES TO STATEMENTS OF REVENUES
AND DIRECT OPERATING EXPENSES FOR
THE EPGC PROPERTIES -- (CONTINUED)
Information with respect to the estimated discounted future net cash flows
for the EPGC Properties for the years ended December 31, 1998 and 1999, is as
follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
---------- ----------
(IN THOUSANDS)
Future cash flows........................................... $215,350 $361,475
Future production costs..................................... (75,702) (48,296)
Future development costs.................................... (28,525) (58,025)
-------- --------
Future net cash flows before tax............................ 111,123 255,154
Future income taxes......................................... -- (52,578)
-------- --------
Future net cash flows after tax............................. 111,123 202,576
Annual discount at 10%...................................... (19,041) (38,916)
-------- --------
Standardized measure of discounted future net cash flows.... $ 92,082 $163,660
======== ========
</Table>
The calculated weighted average sales prices utilized for the purposes of
estimating the proved reserves and future net revenue of the EPGC Properties
were $2.30 per Mcf of natural gas and $25.60 per barrel of oil at December 31,
1999 and $1.97 per Mcf of natural gas and $9.62 per barrel of oil at December
31, 1998.
Principal changes in the estimated discounted future net cash flows for the
EPGC Properties for the years ended December 31, 1998 and 1999, are as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
---------- ----------
(IN THOUSANDS)
Beginning of year........................................... $119,577 $ 92,082
Oil and natural gas sales, net of production costs........ (35,525) (55,844)
Net changes in anticipated prices and production costs.... (84,392) 48,741
Extensions and discoveries, less related costs............ 45,423 83,188
Changes in estimated future development costs............. 16,783 14,000
Revision of quantity estimates............................ (2,385) 7,129
Purchases of minerals in place............................ -- --
Sales of minerals in place................................ -- 2,096
Accretion of discount..................................... 11,958 9,208
Net change in income taxes................................ 17,508 (31,624)
Changes in production rates and other..................... 3,135 (5,316)
-------- --------
End of year................................................. $ 92,082 $163,660
======== ========
</Table>
F-86
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$275,000,000
OFFER TO EXCHANGE
[WESTPORT LOGO]
WESTPORT RESOURCES CORPORATION
8 1/4% SENIOR SUBORDINATED NOTES DUE 2001
-------------------------
PROSPECTUS
-------------------------
February 5, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNEX A
LETTER OF TRANSMITTAL
WESTPORT RESOURCES CORPORATION
OFFER TO EXCHANGE ITS 8 1/4% SENIOR SUBORDINATED NOTES DUE 2011
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING 8 1/4% SENIOR SUBORDINATED NOTES DUE 2011
THAT WERE ISSUED AND SOLD IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER THE SECURITIES ACT
Pursuant to the Prospectus dated February 5, 2002
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON MARCH 8, 2002, UNLESS THE OFFER IS EXTENDED. TENDERS MAY BE WITHDRAWN
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
The Exchange Agent for the Exchange Offer is:
The Bank of New York
<Table>
By Registered or Certified By Hand or Overnight Delivery: Facsimile Transmissions:
Mail: The Bank of New York (Eligible Institutions Only)
The Bank of New York Reorganization Department (212) 235-2261
Reorganization Department 15 Broad Street, 16(th) Floor
15 Broad Street, 16(th) Floor New York, New York 10005 To Confirm by Telephone or
New York, New York 10005 Attn: Kin Lau for Information Call:
Attn: Kin Lau Kin Lau
(212) 235-2358
</Table>
------------------------
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A
NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
This Letter of Transmittal is to be completed either if (a) certificates
are to be forwarded herewith or (b) tenders are to be made pursuant to the
procedures for tender by book-entry transfer set forth under "The Exchange
Offer -- Procedures for Tendering Old Notes" in the Prospectus and an Agent's
Message (as defined below) is not delivered. Certificates, or book-entry
confirmation of a book-entry transfer of such Old Notes into the Exchange
Agent's account at The Depository Trust Company ("DTC"), as well as this Letter
of Transmittal (or facsimile thereof), properly completed and duly executed,
with any required signature guarantees, and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at its address set
forth herein on or prior to the Expiration Date. Tenders by book-entry transfer
also may be made by delivering an Agent's Message in lieu of this Letter of
Transmittal. The term "book-entry confirmation" means a confirmation of a book-
entry transfer of Old Notes into the Exchange Agent's account at DTC. The term
"Agent's Message" means a message, transmitted by DTC to and received by the
Exchange Agent and forming a part of a book-entry confirmation, which states
that DTC has received an express acknowledgment from the tendering participant,
which acknowledgment states that such participant has received and agrees to be
bound by this Letter of Transmittal and that Westport Resources Corporation, a
Nevada corporation (the "Company"), may enforce this Letter of Transmittal
against such participant.
Holders (as defined below) of Old Notes whose certificates (the
"Certificates") for such Old Notes are not immediately available or who cannot
deliver their Certificates and all other required documents to the Exchange
A-1
Agent on or prior to the Expiration Date (as defined in the Prospectus) or who
cannot complete the procedures for book-entry transfer on a timely basis, must
tender their Old Notes according to the guaranteed delivery procedures set forth
in "The Exchange Offer -- Procedures for Tendering Old Notes" in the Prospectus.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
A-2
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
ALL TENDERING HOLDERS COMPLETE THIS BOX:
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES
- ------------------------------------------------------------------------------------------------------------------
IF BLANK, PLEASE PRINT NAME AND ADDRESS OLD NOTES
OF REGISTERED HOLDER(S) (ATTACH ADDITIONAL LIST IF NECESSARY)
- ------------------------------------------------------------------------------------------------------------------
AGGREGATE PRINCIPAL AMOUNT OF
CERTIFICATE PRINCIPAL AMOUNT OLD NOTES TENDERED
NUMBER(S)* OF OLD NOTES (IF LESS THAN ALL)**
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TOTAL:
- ------------------------------------------------------------------------------------------------------------------
* Need not be completed by book-entry Holders.
** Old Notes may be tendered in whole or in part in multiples of $1,000. All Old Notes held shall be deemed
tendered unless a lesser number is specified in this column. See Instruction 4.
- ------------------------------------------------------------------------------------------------------------------
</Table>
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE
THE FOLLOWING:
Name of Tendering Institution
-----------------------------------------------
DTC Account Number ------------------- Transaction Code Number --------------
[ ] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING
(SEE INSTRUCTION 1):
Name(s) of Registered Holder(s)
---------------------------------------------
Window Ticket Number (if any)
-----------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
--------------------------
Name of Institution that Guaranteed Delivery
--------------------------------
If Guaranteed Delivery is to be made by Book-Entry Transfer:
Name of Tendering Institution
-----------------------------------------------
DTC Account Number ------------------- Transaction Code Number --------------
[ ] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OLD NOTES
ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE.
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
-----------------------------------------------------------------------
Address:
--------------------------------------------------------------------
A-3
Ladies and Gentlemen:
The undersigned hereby tenders to Westport Resources Corporation, a Nevada
corporation (the "Company"), the above described principal amount of the
Company's 8 1/4% Senior Subordinated Notes due 2011 (the "Old Notes") in
exchange for an equivalent amount of the Company's 8 1/4% Senior Subordinated
Notes due 2011 (the "Exchange Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), upon the terms and
subject to the conditions set forth in the Prospectus dated February 5, 2002 (as
the same may be amended or supplemented from time to time, the "Prospectus"),
receipt of which is hereby acknowledged, and in this Letter of Transmittal
(which, together with the Prospectus, constitute the "Exchange Offer").
Subject to and effective upon the acceptance for exchange of all or any
portion of the Old Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Old Notes as is being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent as its agent and attorney-in-fact (with full knowledge that
the Exchange Agent is also acting as agent of the Company in connection with the
Exchange Offer) with respect to the tendered Old Notes, with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest) subject only to the right of withdrawal described in
the Prospectus, to (i) deliver Certificates for Old Notes to the Company
together with all accompanying evidences of transfer and authenticity to, or
upon the order of, the Company, upon receipt by the Exchange Agent, as the
undersigned's agent, of the Exchange Notes to be issued in exchange for such Old
Notes, (ii) present Certificates for such Old Notes for transfer, and to
transfer the Old Notes on the books of the Company, and (iii) receive for the
account of the Company all benefits and otherwise exercise all rights of
beneficial ownership of such Old Notes, all in accordance with the terms and
conditions of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, sell, assign and transfer the Old
Notes tendered hereby and that, when the same is accepted for exchange, the
Company will acquire good, marketable and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances, and that the Old
Notes tendered hereby are not subject to any adverse claims or proxies. The
undersigned will, upon request, execute and deliver any additional documents
deemed by the Company or the Exchange Agent to be necessary or desirable to
complete the exchange, assignment and transfer of the Old Notes tendered hereby,
and the undersigned will comply with its obligations under the Registration
Rights Agreement. The undersigned has read and agrees to all of the terms of the
Exchange Offer.
The name(s) and address(es) of the registered Holder(s) of the Old Notes
tendered hereby should be printed above, if they are not already set forth
above, as they appear on the Certificates representing such Old Notes. The
Certificate number(s) and the Old Notes that the undersigned wishes to tender
should be indicated in the appropriate boxes above.
If any tendered Old Notes are not exchanged pursuant to the Exchange Offer
for any reason, or if Certificates are submitted for more Old Notes than are
tendered or accepted for exchange, Certificates for such nonexchanged or
nontendered Old Notes will be returned (or, in the case of Old Notes tendered by
book-entry transfer, such Old Notes will be credited to an account maintained at
DTC), without expense to the tendering Holder, promptly following the expiration
or termination of the Exchange Offer.
The undersigned understands that tenders of Old Notes pursuant to any one
of the procedures described in "The Exchange Offer -- Procedures for Tendering
Old Notes" in the Prospectus and in the instructions attached hereto will, upon
the Company's acceptance for exchange of such tendered Old Notes, constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer. The undersigned recognizes
that, under certain circumstances set forth in the Prospectus, the Company may
not be required to accept for exchange any of the Old Notes tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby directs that the Exchange Notes be
issued in the name(s) of the undersigned or, in the case of a book-entry
transfer of Old Notes, that such Exchange Notes be credited to the account
indicated above maintained at DTC. If applicable, substitute Certificates
representing Old Notes not exchanged or not accepted for exchange will be issued
A-4
to the undersigned or, in the case of a book-entry transfer of Old Notes, will
be credited to the account indicated above maintained at DTC. Similarly, unless
otherwise indicated under "Special Delivery Instructions," please deliver
Exchange Notes to the undersigned at the address shown below the undersigned's
signature.
By tendering Old Notes and executing this Letter of Transmittal or
effecting delivery of an Agent's Message in lieu thereof, the undersigned hereby
represents and agrees that (i) the undersigned is not an "affiliate" of the
Company, (ii) any Exchange Notes to be received by the undersigned are being
acquired in the ordinary course of its business, (iii) the undersigned has no
arrangement or understanding with any person to participate in a distribution
(within the meaning of the Securities Act) of Exchange Notes to be received in
the Exchange Offer, and (iv) if the undersigned is not a broker-dealer, the
undersigned is not engaged in, and does not intend to engage in, a distribution
(within the meaning of the Securities Act) of such Exchange Notes. The Company
may require the undersigned, as a condition to the undersigned's eligibility to
participate in the Exchange Offer, to furnish to the Company (or an agent
thereof) in writing information as to the number of "beneficial owners" within
the meaning of Rule 13d-3 under the Exchange Act on behalf of whom the
undersigned holds the Old Notes to be exchanged in the Exchange Offer. If the
undersigned is a broker-dealer that will receive Exchange Notes for its own
account in exchange for Old Notes, it represents that the Old Notes to be
exchanged for Exchange Notes were acquired by it as a result of market-making
activities or other trading activities and acknowledges that it will deliver a
Prospectus in connection with any resale of such Exchange Notes; however, by so
acknowledging and by delivering a Prospectus, the undersigned will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed that, subject to the provisions of the Registration
Rights Agreement, the Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer (as defined below) in
connection with resales of Exchange Notes received in exchange for Old Notes,
where such Old Notes were acquired by such Participating Broker-Dealer for its
own account as a result of market-making activities or other trading activities,
for a period ending 180 days after the effective date of the registration
statement relating to the Exchange Notes (the "Effective Date") (subject to
extension under certain limited circumstances described in the Prospectus) or,
if earlier, when all such Exchange Notes have been disposed of by such
Participating Broker-Dealer. In that regard, each broker-dealer who acquired Old
Notes for its own account as a result of market-making or other trading
activities (a "Participating Broker-Dealer"), by tendering such Old Notes and
executing this Letter of Transmittal or effecting delivery of an Agent's Message
in lieu thereof, agrees that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in the Prospectus untrue in any material
respect or which causes the Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
therein, in light of the circumstances under which they were made, not
misleading or of the occurrence of certain other events specified in the
Registration Rights Agreement, such Participating Broker-Dealer will suspend the
sale of Exchange Notes pursuant to the Prospectus until the Company has amended
or supplemented the Prospectus to correct such misstatement or omission and has
furnished copies of the amended or supplemented Prospectus to the Participating
Broker-Dealer or the Company has given notice that the sale of the Exchange
Notes may be resumed, as the case may be. If the Company gives such notice to
suspend the sale of the Exchange Notes, it shall extend the 180-day period
referred to above during which Participating Broker-Dealers are entitled to use
the Prospectus in connection with the resale of Exchange Notes by the number of
days during the period from and including the date of the giving of such notice
to and including the date when Participating Broker-Dealers shall have received
copies of the supplemented or amended Prospectus necessary to permit resales of
the Exchange Notes or to and including the date on which the Company has given
notice that the sale of Exchange Notes may be resumed, as the case may be.
As a result, a Participating Broker-Dealer who intends to use the
Prospectus in connection with resales of Exchange Notes received in exchange for
Old Notes pursuant to the Exchange Offer must notify the Company, or cause the
Company to be notified, on or prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be given in the space provided
above or may be delivered to the Exchange Agent at the address set forth in the
Prospectus under "The Exchange Offer -- Exchange Agent."
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
herein conferred or agreed to be conferred in this Letter of Transmittal shall
survive the death or incapacity of the undersigned and any obligation of the
undersigned hereunder shall be binding upon the heirs,
A-5
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except as
stated in the Prospectus, this tender is irrevocable.
The undersigned, by completing the box entitled "Description of Old Notes"
above and signing this letter, will be deemed to have tendered the Old Notes as
set forth in such box.
SPECIAL ISSUANCE INSTRUCTIONS
(SIGNATURE GUARANTEE REQUIRED --
SEE INSTRUCTION 2)
TO BE COMPLETED ONLY if Exchange Notes or Old Notes not tendered are to be
issued in the name of someone other than the registered Holder of the Old Notes
whose name(s) appear(s) above.
[ ] Old Notes not tendered to:
[ ] Exchange Notes to:
Name
---------------------------------------------------------------------------
(PLEASE PRINT)
Address
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
- --------------------------------------------------------------------------------
(TAX IDENTIFICATION OR
SOCIAL SECURITY NUMBER)
SPECIAL DELIVERY INSTRUCTIONS
(SIGNATURE GUARANTEE REQUIRED --
SEE INSTRUCTION 2)
TO BE COMPLETED ONLY if Exchange Notes or Old Notes not tendered are to be
sent to someone other than the registered Holder of the Old Notes whose name(s)
appear(s) above, or such registered Holder at an address other than that shown
above.
[ ] Old Notes not tendered to:
[ ] Exchange Notes to:
Name
---------------------------------------------------------------------------
(PLEASE PRINT)
Address
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
A-6
IMPORTANT
HOLDERS: SIGN HERE
(PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURE(S) OF HOLDER(S)
Date:
--------------------
(Must be signed by the registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Old Notes hereby tendered or on a security position
listing or by person(s) authorized to become registered holder(s) by
certificates and documents transmitted herewith. If signature is by trustee,
executor, administrator, guardian, attorney-in-fact, officer of corporation or
other person acting in a fiduciary or representative capacity, please provide
the following information and see Instruction 2 below.)
Name(s): -----------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT)
Capacity (full title): ---------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Address: -----------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number: ------------------------------------------------
(SEE SUBSTITUTE FORM W-9 HEREIN)
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTION 2 BELOW)
Authorized Signature: ----------------------------------------------------------
Name: --------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Title: -------------------------------------------------------------------------
Name of Firm: ------------------------------------------------------------------
Address: -----------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number: ------------------------------------------------
Date: --------------------
A-7
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. Delivery of Letter of Transmittal and Certificates; Guaranteed Delivery
Procedures. This Letter of Transmittal is to be completed either if (a)
Certificates are to be forwarded herewith or (b) tenders are to be made pursuant
to the procedures for tender by book-entry transfer set forth in "The Exchange
Offer -- Procedures for Tendering Old Notes" in the Prospectus and an Agent's
Message is not delivered. Certificates, or timely confirmation of a book-entry
transfer of such Old Notes into the Exchange Agent's account at DTC, as well as
this Letter of Transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature guarantees, and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
at its address set forth herein on or prior to the Expiration Date. Tenders by
book-entry transfer may also be made by delivering an Agent's Message in lieu
thereof. Old Notes may be tendered in whole or in part in integral multiples of
$1,000.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter of
Transmittal and all other required documents to the Exchange Agent on or prior
to the Expiration Date or (iii) who cannot complete the procedures for delivery
by book-entry transfer on a timely basis, may tender their Old Notes by properly
completing and duly executing a Notice of Guaranteed Delivery pursuant to the
guaranteed delivery procedures set forth in "The Exchange Offer -- Procedures
for Tendering Old Notes" in the Prospectus. Pursuant to such procedures: (i)
such tender must be made by or through an Eligible Institution (as defined
below); (ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form made available by the Company, must be
received by the Exchange Agent on or prior to the Expiration Date; and (iii) the
Certificates (or a book-entry confirmation) representing all tendered Old Notes,
in proper form for transfer, together with a Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees and any other documents required by this Letter of Transmittal, must
be received by the Exchange Agent within three New York Stock Exchange trading
days after the date of execution of such Notice of Guaranteed Delivery, all as
provided in "The Exchange Offer -- Procedures for Tendering Old Notes" in the
Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice of Guaranteed
Delivery. For Old Notes to be properly tendered pursuant to the guaranteed
delivery procedure, the Exchange Agent must receive a Notice of Guaranteed
Delivery on or prior to the Expiration Date. As used herein and in the
Prospectus, "Eligible Institution" means a firm or other entity identified in
Rule 17Ad-15 under the Exchange Act as "an eligible guarantor institution,"
including (as such terms are defined therein) (i) a bank; (ii) a broker, dealer,
municipal securities broker or dealer or government securities broker or dealer;
(iii) a credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association.
The method of delivery of Certificates, this Letter of Transmittal and all
other required documents is at the option and sole risk of the tendering Holder,
and the delivery will be deemed made only when actually received by the Exchange
Agent. If delivery is by mail, then registered mail with return receipt
requested, properly insured, or overnight delivery service is recommended. In
all cases, sufficient time should be allowed to ensure timely delivery.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering Holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
2. Guarantee of Signatures. No signature guarantee on this Letter of
Transmittal is required if:
i. this Letter of Transmittal is signed by the registered Holder
(which term, for purposes of this document, shall include any
participant in DTC whose name appears on a security position
listing as the owner of the Old Notes (the "Holder")) of Old Notes
tendered herewith, unless such Holder(s) has completed either the
box entitled "Special Issuance Instructions" or the box entitled
"Special Delivery Instructions" above, or
A-8
ii. such Old Notes are tendered for the account of a firm that is an
Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal. See Instruction 5.
3. Inadequate Space. If the space provided in the box captioned
"Description of Old Notes" is inadequate, the Certificate number(s) and/or the
principal amount of Old Notes and any other required information should be
listed on a separate signed schedule that is attached to this Letter of
Transmittal.
4. Partial Tenders and Withdrawal Rights. Tenders of Old Notes will be
accepted only in integral multiples of $1,000. If less than all the Old Notes
evidenced by any Certificate submitted are to be tendered, fill in the principal
amount of Old Notes which are to be tendered in the box entitled "Principal
Amount of Old Notes Tendered." In such case, new Certificate(s) for the
remainder of the Old Notes that were evidenced by your old Certificate(s) will
only be sent to the Holder of the Old Notes, promptly after the Expiration Date.
All Old Notes represented by Certificates delivered to the Exchange Agent will
be deemed to have been tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date. In order for a withdrawal to be
effective on or prior to that time, a written or facsimile transmission of such
notice of withdrawal must be timely received by the Exchange Agent at one of its
addresses set forth above or in the Prospectus on or prior to the Expiration
Date. Any such notice of withdrawal must specify the name of the person who
tendered the Old Notes to be withdrawn, the aggregate principal amount of Old
Notes to be withdrawn, and (if Certificates for Old Notes have been tendered)
the name of the registered Holder of the Old Notes as set forth on the
Certificate for the Old Notes, if different from that of the person who tendered
such Old Notes. If Certificates for the Old Notes have been delivered or
otherwise identified to the Exchange Agent, then prior to the physical release
of such Certificates for the Old Notes, the tendering Holder must submit the
serial numbers shown on the particular Certificates for the Old Notes to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by an
Eligible Institution, except in the case of Old Notes tendered for the account
of an Eligible Institution. If Old Notes have been tendered pursuant to the
procedures for book-entry transfer set forth in the Prospectus under "The
Exchange Offer -- Procedures for Tendering Old Notes," the notice of withdrawal
must specify the name and number of the account at DTC to be credited with the
withdrawal of Old Notes, in which case a notice of withdrawal will be effective
if delivered to the Exchange Agent by written. telegraphic, telex or facsimile
transmission. Withdrawals of tenders of Old Notes may not be rescinded. Old
Notes properly withdrawn will not be deemed validly tendered for purposes of the
Exchange Offer, but may be retendered at any subsequent time on or prior to the
Expiration Date by following any of the procedures described in the Prospectus
under "The Exchange Offer -- Procedures for Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
The Company, any affiliates or assigns of the Company, the Exchange Agent or any
other person shall not be under any duty to give any notification of any
irregularities in any notice of withdrawal or incur any liability for failure to
give any such notification. Any Old Notes that have been tendered but that are
withdrawn will be returned to the Holder thereof without cost to such Holder
promptly after withdrawal.
5. Signatures on Letter of Transmittal, Assignments and Endorsements. If
this Letter of Transmittal is signed by the registered Holder(s) of the Old
Notes tendered hereby, the signature(s) must correspond exactly with the name(s)
as written on the face of the Certificate(s) without alteration, enlargement or
any change whatsoever.
If any Old Notes tendered hereby are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different name(s) on several
Certificates, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
A-9
such persons should so indicate when signing and, unless waived by the Company,
must submit proper evidence satisfactory to the Company, in its sole discretion,
of each such person's authority to so act.
When this Letter of Transmittal is signed by the registered owner(s) of the
Old Notes listed and transmitted hereby, no endorsement(s) of Certificate(s) or
separate bond power(s) is required unless Exchange Notes are to be issued in the
name of a person other than the registered Holder(s). Signature(s) on such
Certificate(s) or bond power(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Old Notes listed, the Certificates must be endorsed
or accompanied by appropriate bond powers, signed exactly as the name or names
of the registered owner(s) appear(s) on the Certificates, and also must be
accompanied by such opinions of counsel, certifications and other information as
the Company or the Trustee for the Old Notes may require in accordance with the
restrictions on transfer applicable to the Old Notes. Signatures on such
Certificates or bond powers must be guaranteed by an Eligible Institution.
6. Special Issuance and Delivery Instructions. If Exchange Notes are to be
issued in the name of a person other than the signer of this Letter of
Transmittal, or if Exchange Notes are to be sent to someone other than the
signer of this Letter of Transmittal or to an address other than that shown
above, the appropriate boxes on this Letter of Transmittal should be completed.
Certificates for Old Notes not exchanged will be returned by mail or, if
tendered by book-entry transfer, by crediting the account indicated above
maintained at DTC. See Instruction 4.
7. Irregularities. The Company will determine, in its sole discretion, all
questions as to the form of documents, validity, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance of which, or exchange for which may, in the view
of counsel to the Company be unlawful. The Company also reserves the absolute
right, subject to applicable law, to waive any of the conditions of the Exchange
Offer set forth in the Prospectus under "The Exchange Offer -- Conditions of the
Exchange Offer" or any conditions or irregularities in any tender of Old Notes
of any particular Holder whether or not similar conditions or irregularities are
waived in the case of other Holders. The Company's interpretation of the terms
and conditions of the Exchange Offer (including this Letter of Transmittal and
the instructions hereto) will be final and binding. No tender of Old Notes will
be deemed to have been validly made until all irregularities with respect to
such tender have been cured or waived. The Company, any affiliates or assigns of
the Company, the Exchange Agent, or any other person shall not be under any duty
to give notification of any irregularities in tenders or incur any liability for
failure to give such notification.
8. Questions, Requests for Assistance and Additional Copies. Questions and
requests for assistance may be directed to the Exchange Agent at its address and
telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Prospectus, the Notice of Guaranteed Delivery and the
Letter of Transmittal may be obtained from the Exchange Agent or from your
broker, dealer, commercial bank, trust company or other nominee.
9. 30% Backup Withholding; Substitute Form W-9. Under the U.S. Federal
income tax law, a Holder whose tendered Old Notes are accepted for exchange is
required to provide the Exchange Agent with such Holder's correct taxpayer
identification number ("TIN"). The Holder's TIN may be provided on an IRS Form
W-9 or a Substitute Form W-9 as furnished below. If the Exchange Agent is not
provided with the correct TIN, payments to such Holders or other payees with
respect to Old Notes exchanged pursuant to the Exchange Offer may be subject to
30% backup withholding. In addition, the Internal Revenue Service (the "IRS")
may subject the Holder or other payee to penalties for failure to provide a
valid TIN or for providing false information in connection with a request for a
TIN.
The box in Part 2 of the Substitute Form W-9 may be checked if the
tendering Holder has not been issued a TIN and has applied for a TIN or intends
to apply for a TIN in the near future. If the box in Part 2 is checked, the
Holder or other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below in order to avoid backup withholding.
Notwithstanding that the box in Part 2 is checked and the Certificate of
Awaiting Taxpayer Identification Number is completed, the Exchange Agent will
withhold 30% of all payments made prior to the time a properly certified TIN is
provided to the Exchange Agent. The Exchange Agent will retain
A-10
such amounts withheld during the 60-day period following the date of the
Substitute Form W-9. If the Holder furnishes the Exchange Agent with its TIN
within 60 days after the date of the Substitute Form W-9, the amounts retained
during the 60-day period will be remitted to the Holder and no further amounts
shall be retained or withheld from payments made to the Holder thereafter. If,
however, the Holder has not provided the Exchange Agent with its TIN within such
60-day period, amounts withheld will be remitted to the IRS as backup
withholding. In addition, 30% of all payments made thereafter will be withheld
and remitted to the IRS until a correct TIN is provided.
The Holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered owner of
the Old Notes or of the last transferee appearing on the transfers attached to,
or endorsed on, the Old Notes. If the Old Notes are registered in more than one
name or are not in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.
Certain Holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to the backup
withholding and reporting requirements. Such Holders should nevertheless
complete the Substitute Form W-9 attached below, and write "EXEMPT" on the face
thereof, to avoid possible erroneous backup withholding. A foreign person may
qualify as an exempt recipient by submitting a properly completed IRS Form W-8,
signed under penalties of perjury, attesting to that Holder's exempt status.
Please consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
Holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather,
the U.S. Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
10. Waiver of Conditions. The Company reserves the absolute right to waive
satisfaction of any or all conditions enumerated in the Prospectus.
11. No Conditional Tenders. No alternative, conditional or contingent
tenders will be accepted. All tendering Holders of Old Notes, by execution of
this Letter of Transmittal, shall waive any right to receive notice of the
acceptance of Old Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
12. Lost, Destroyed or Stolen Certificates. If any Certificate(s)
representing Old Notes have been lost, destroyed or stolen, the Holder should
promptly notify the Exchange Agent. The Holder will then be instructed as to the
steps that must be taken in order to replace the Certificate(s). This Letter of
Transmittal and related documents cannot be processed until the procedures for
replacing lost, destroyed or stolen Certificate(s) have been followed.
13. Security Transfer Taxes. Holders who tender their Old Notes for
exchange will not be obligated to pay any transfer taxes in connection
therewith. If, however, Exchange Notes are to be delivered to, or are to be
issued in the name of, any person other than the registered Holder of the Old
Notes tendered, or if a transfer tax is imposed for any reason other than the
exchange of Old Notes in connection with the Exchange Offer, then the amount of
any such transfer tax (whether imposed on the registered Holder or any other
persons) will be payable by the tendering Holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering Holder.
A-11
PAYER'S NAME: THE BANK OF NEW YORK
<Table>
- --------------------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1 - PLEASE PROVIDE YOUR TIN IN THE
FORM W-9 BOX AT RIGHT AND CERTIFY BY SIGNING AND TIN: ------------------------------
DEPARTMENT OF THE TREASURY DATING BELOW. Social Security Number or
INTERNAL REVENUE SERVICE Employer Identification Number
- --------------------------------------------------------------------------------------------------------------------------
PART 2 - TIN Applied For [ ]
PAYER'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER ("TIN")
- --------------------------------------------------------------------------------------------------------------------------
CERTIFICATION: Under penalties of perjury, I certify that:
(1) the number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued
to me); and
(2) I am not subject to backup withholding either because: (a) I have not been notified by the Internal Revenue Service
(the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends, or
(b) the IRS has notified me that I am no longer subject to backup withholding.
CERTIFICATE INSTRUCTIONS -- You must cross out item (2) above if you have been notified by the IRS that you are subject
to backup withholding because of underreporting of interest or dividends on your tax return. However, if after being
notified by the IRS that you were subject to backup withholding, you received another notification from the IRS that you
were no longer subject to backup withholding, do not cross out item (2). (Also see instructions in the enclosed
Guidelines.)
- --------------------------------------------------------------------------------------------------------------------------
Signature ---------------------------------------------------------------- Date----------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</Table>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 30% OF ANY PAYMENTS MADE TO YOU IN CONNECTION WITH THE EXCHANGE OFFER.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU ARE AWAITING
(OR WILL SOON APPLY FOR) A TAXPAYER IDENTIFICATION NUMBER
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of the
exchange, thirty percent (30%) of all reportable payments made to me thereafter
will be withheld until I provide a number.
Signature --------------------------------------------- Date -----------------
A-12
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER. -- Social Security numbers have nine digits separated by two hyphens:
i.e. 000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e. 00-0000000. The table below will help determine the number
to give the payer.
<Table>
- ------------------------------------------------------------
GIVE THE
SOCIAL SECURITY
FOR THIS TYPE OF ACCOUNT: NUMBER OF --
- ------------------------------------------------------------
1. An individual's account The individual
2. Two or more individuals (joint The actual owner of
account) the account or, if
combined funds, any
one of the
individuals(1)
3. Husband and wife (joint account) The actual owner of
the account or, if
joint funds, either
person(1)
4. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
5. Adult and minor (joint account) The adult or, if
the minor is the
only contributor,
the minor(1)
6. Account in the name of guardian or The ward, minor, or
committee for a designated ward, incompetent
minor, or incompetent person person(3)
7. a. The usual revocable savings The grantor-
trust account (grantor is also trustee(1)
trustee)
b. So-called trust account that is The actual owner(1)
not a legal or valid trust
under State law
8. Sole proprietorship account The Owner(4)
- ------------------------------------------------------------
- ------------------------------------------------------------
GIVE THE EMPLOYER
IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF --
- ------------------------------------------------------------
9. A valid trust, estate, or pension The legal entity
trust (Do not furnish the
identifying number
of the personal
representative or
trustee unless the
legal entity itself
is not designated
in the account
title.)(5)
10. Corporate account The corporation
11. Religious, charitable, or The organization
educational organization account
12. Partnership account held in the The partnership
name of the business
13. Association, club, or other tax- The organization
exempt organization
14. A broker or registered nominee The broker or
nominee
15. Account with the Department of The public entity
Agriculture in the name of a
public entity (such as a State or
local government, school district,
or prison) that receives
agricultural program payments
- ------------------------------------------------------------
</Table>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circled the name of the legal trust, estate, or pension
trust.
NOTE:If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
A-13
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER OF SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include the
following:
- A corporation.
- A financial institution.
- An organization exempt from tax under section 501(a), or an individual
retirement plan, or a custodial account under section 403(6)(7).
- The United States or any agency or instrumentality thereof.
- A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- A foreign government, a political subdivision of a foreign government, or any
agency or instrumentality thereof.
- An international organization or any agency, or instrumentality thereof.
- A registered dealer in securities or commodities registered in the U.S. or a
possession of the U.S.
- A real estate investment trust.
- A common trust fund operated by a bank under section 584(a)
- An exempt charitable remainder trust under section 664, or a non-exempt trust
described in section 4947.
- An entity registered at all times under the Investment Company Act of 1940.
- A foreign central bank of issue.
- A middleman known in the investment community as a nominee or listed in the
most recent publication of the American Society of Corporate Secretaries,
Inc. Nominee List.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- Payments to nonresident aliens subject to withholding under section 1441.
- Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
- Payments of patronage dividends where the amount received is not paid in
money.
- Payments made by certain foreign organizations.
Payments of interest not generally subject to backup withholding include the
following:
- Payments of interest on obligations issued by individuals.
Note: You may be subject to backup withholding if this interest is $600 or
more and is paid in the course of the payer's trade or business and you have
not provided your correct taxpayer identification number to the payer.
- Payments of tax-exempt interest (including exempt-in-interest dividends under
section 852).
- Payments described in section 6049(b)(5) to non-resident aliens.
- Payments on tax-free covenant bonds under section 1451.
- Payments made by certain foreign organizations.
- Mortgage interest paid to the payer.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO
SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends,
that are not subject to information reporting are also not subject to backup
withholding. For details see section 6041, 6041A, 6042, 6044, 6045, 6049, 6050A,
and 6050N and their regulations.
PRIVACY ACT NOTICE. -- Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. IRS uses the numbers for identification
purposes and to help verify the accuracy of your return. Payers must be given
the numbers whether or not recipients are required to file tax returns. Payers
must generally withhold 30% of taxable interest, dividend, and certain other
payments to a payee who does not furnish a taxpayer identification number to a
payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE
A-14
ANNEX B
NOTICE OF GUARANTEED DELIVERY
WESTPORT RESOURCES CORPORATION
OFFER TO EXCHANGE ITS 8 1/4% SENIOR SUBORDINATED NOTES DUE 2011
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING 8 1/4% SENIOR SUBORDINATED NOTES DUE 2011
THAT WERE ISSUED AND SOLD IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER THE SECURITIES ACT
PURSUANT TO THE PROSPECTUS DATED FEBRUARY 5, 2002
This Notice of Guaranteed Delivery, or one substantially equivalent to this
form, must be used to accept the Exchange Offer (as defined below) if (i)
certificates for the Company's 8 1/4% Senior Subordinated Notes due 2011 (the
"Old Notes") are not immediately available, (ii) Old Notes, the Letter of
Transmittal and all other required documents cannot be delivered to The Bank of
New York (the "Exchange Agent") on or prior to the Expiration Date or (iii) the
procedures for delivery by book-entry transfer cannot be completed on a timely
basis. This Notice of Guaranteed Delivery may be delivered by hand, overnight
courier or mail, or transmitted by facsimile transmission, to the Exchange
Agent. See "The Exchange Offer -- Procedures for Tendering Old Notes" in the
Prospectus. In addition, in order to utilize the guaranteed delivery procedure
to tender Old Notes pursuant to the Exchange Offer, a completed, signed and
dated Letter of Transmittal relating to the Old Notes (or facsimile thereof)
must also be received by the Exchange Agent on or prior to the Expiration Date.
Capitalized terms not defined herein have the meanings assigned to them in the
Prospectus.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON MARCH 8, 2002, UNLESS THE OFFER IS EXTENDED. TENDERS MAY BE
WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
The Exchange Agent for the Exchange Offer is:
The Bank of New York
<Table>
By Registered or Certified Mail: By Hand or Overnight Delivery: Facsimile Transmissions:
The Bank of New York The Bank of New York (Eligible Institutions Only)
Reorganization Department Reorganization Department (212) 235-2261
15 Broad Street, 16(th) Floor 15 Broad Street, 16(th) Floor
New York, New York 10005 New York, New York 10005 To Confirm by Telephone or
Attn: Kin Lau Attn: Kin Lau for Information Call:
Kin Lau
(212) 235-2358
</Table>
------------------------
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
B-1
Ladies and Gentlemen:
The undersigned hereby tenders to Westport Resources Corporation, a Nevada
corporation (the "Company"), upon the terms and subject to the conditions set
forth in the Prospectus dated February 5, 2002 (as the same may be amended or
supplemented from time to time, the "Prospectus"), and the related Letter of
Transmittal (which together constitute the "Exchange Offer"), receipt of which
is hereby acknowledged, the aggregate principal amount of Old Notes set forth
below pursuant to the guaranteed delivery procedures set forth in the Prospectus
under the caption "The Exchange Offer -- Procedures for Tendering Old Notes."
Aggregate Principal Amount -------- Name(s) of Registered
Holder(s): --------
Amount Tendered: $ ---------------* -----------------------------------------
Certificate No(s) (if available): --------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
$ ----------------------------------------------------------------------------
(TOTAL PRINCIPAL AMOUNT REPRESENTED BY OLD NOTES CERTIFICATE(S))
If Old Notes will be tendered by book-entry transfer, provide the following
information:
DTC Account Number: ----------------------------------------------------------
Date: ------------------------------------------------------------------------
-----------------
* Must be in integral multiples of $1,000.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned.
PLEASE SIGN HERE
<Table>
X --------------------------- X ---------------------------
X --------------------------- X ---------------------------
Signature(s) of Owner(s) or Date
Authorized Signatory
</Table>
Area Code and Telephone Number: ----------------------------------------------
Must be signed by the holder(s) of the Old Notes as their name(s)
appear(s) on certificates for Old Notes or on a security position listing, or
by person(s) authorized to become registered holder(s) by endorsement and
documents transmitted with this Notice of Guaranteed Delivery. If signature is
by a trustee, executor, administrator, guardian, attorney-in-fact, officer or
other person acting in a fiduciary or representative capacity, such person
must set forth his or her full title below and, unless waived by the Company,
provide proper evidence satisfactory to the Company of such person's authority
to so act.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s): ---------------------------------------------------------------------
----------------------------------------------------------------------
Capacity: --------------------------------------------------------------------
Address(es): -----------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
B-2
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein): (i) a bank; (ii)
a broker, dealer, municipal securities broker, government securities broker or
government securities dealer, (iii) a credit union; (iv) a national securities
exchange, registered securities association or clearing agency; or (v) a
savings association that is a participant in a Securities Transfer Association
(each of the foregoing being referred to as an "Eligible Institution"), hereby
guarantees to deliver to the Exchange Agent, at one of its addresses set forth
above, either the Old Notes tendered hereby in proper form for transfer, or
confirmation of the book-entry transfer of such Old Notes to the Exchange
Agent's account at The Depository Trust Company ("DTC"), pursuant to the
procedures for book-entry transfer set forth in the Prospectus, in either case
together with one or more properly completed and duly executed Letter(s) of
Transmittal (or facsimile thereof) and any other required documents within
three New York Stock Exchange trading days after the date of execution of this
Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal (or facsimile thereof) and the Old Notes tendered hereby to the
Exchange Agent within the time period set forth above and that failure to do
so could result in a financial loss to the undersigned.
<Table>
- --------------------------------------------- ---------------------------------------------
Name of Firm Authorized Signature
- --------------------------------------------- ---------------------------------------------
Address Title
- ---------------------------------------------
Zip Code (Please Type or Print)
Area Code and Telephone Number: ------------- Date: ---------------------------------------
</Table>
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
B-3
ANNEX C
NOTICE TO INVESTORS
WESTPORT RESOURCES CORPORATION
OFFER TO EXCHANGE ITS
8 1/4% SENIOR SUBORDINATED NOTES DUE 2011
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING
8 1/4% SENIOR SUBORDINATED NOTES DUE 2011
THAT WERE ISSUED AND SOLD IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER THE SECURITIES ACT
THIS OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH 8, 2002
UNLESS EXTENDED BY WESTPORT RESOURCES CORPORATION IN ITS SOLE DISCRETION (THE
"EXPIRATION DATE"). TENDERS OF NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE
EXPIRATION DATE.
To our clients:
Enclosed for your consideration is a Prospectus, dated February 5, 2002 (as
the same may be amended from time to time, the "PROSPECTUS"), and a Letter of
Transmittal (the "LETTER OF TRANSMITTAL ") relating to the offer by Westport
Resources Corporation (the "COMPANY") to exchange (the "EXCHANGE OFFER") its
8 1/4% Senior Subordinated Notes due 2011 (the "EXCHANGE NOTES") for an equal
principal amount of its 8 1/4% Senior Subordinated Notes due 2011 (the "OLD
NOTES") upon the terms and conditions set forth in the Prospectus and in the
related Letter of Transmittal. As set forth in the Prospectus, the terms of the
Exchange Notes are identical in all material respects to those of the Old Notes
except for transfer restrictions, registration rights and rights to additional
interest that do not apply to the Exchange Notes and will contain different
administrative terms. The Exchange Offer is subject to certain customary
conditions. See "The Exchange Offer" in the Prospectus. The Old Notes may be
tendered only in integral multiples of $1,000.
The material is being forwarded to you as the beneficial owner of Old Notes
carried by us for your account or benefit but not registered in your name. An
exchange of any Old Notes may only be made by us as the registered holder and
pursuant to your instructions. Therefore, the Company urges beneficial owners of
Old Notes registered in the name of a broker, dealer, commercial bank, trust
company or other nominee to contact such holder promptly if they wish to
exchange the Old Notes in the Exchange Offer.
Accordingly, we request instructions as to whether you wish us to exchange
any or all such Old Notes held by us for your account or benefit, pursuant to
the terms and conditions set forth in the Prospectus and Letter of Transmittal.
We urge you to read carefully the Prospectus and Letter of Transmittal before
instructing us to exchange your Old Notes.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to exchange Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. THE EXCHANGE OFFER EXPIRES AT 5:00 P.M., NEW
YORK CITY TIME, ON MARCH 8, 2002, UNLESS EXTENDED. Tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
Your attention is directed to the following:
1. The Exchange Offer is for the exchange of $1,000 principal amount of
the Exchange Notes for each $1,000 principal amount of Old Notes. The
terms of the Exchange Notes are identical in all material respects to
the Old Notes except that the Exchange Notes will not contain certain
transfer restrictions relating to the Old Notes and will not contain
certain provisions relating to an increase in the interest rate under
certain circumstances relating to, among other things, the timing of
the Exchange Offer.
2. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE "THE
EXCHANGE OFFER -- CONDITIONS TO THE EXCHANGE OFFER" IN THE
PROSPECTUS.
C-1
3. The Exchange Offer and withdrawal rights will expire at 5:00 p.m.,
New York City time, on March 8, 2002, unless extended.
4. The Company has agreed to pay the expenses of the Exchange Offer.
5. Any transfer taxes incident to the transfer of the Old Notes from the
tendering holder to the Company will be paid by the Company, except
as provided in the Prospectus and the Letter of Transmittal.
The Exchange Offer is not being made to, nor will exchanges be accepted
from or on behalf of, holders of Old Notes residing in any jurisdiction in which
the making of the Exchange Offer or acceptance thereof would not be in
compliance with the laws of such jurisdiction.
If you wish to exchange any or all of your Old Notes held by us for your
account or benefit, please so instruct us by completing, executing and returning
to us the instruction form that appears below. THE ACCOMPANYING LETTER OF
TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATIONAL PURPOSES ONLY AND MAY NOT BE
USED BY YOU TO EXCHANGE OLD NOTES HELD BY US AND REGISTERED IN OUR NAME FOR YOUR
ACCOUNT OR BENEFIT.
C-2
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of Westport
Resources Corporation.
THIS WILL INSTRUCT YOU TO EXCHANGE THE AGGREGATE PRINCIPAL AMOUNT OF OLD
NOTES INDICATED BELOW (OR, IF NO AGGREGATE PRINCIPAL AMOUNT IS INDICATED BELOW,
ALL OLD NOTES) HELD BY YOU FOR THE ACCOUNT OR BENEFIT OF THE UNDERSIGNED,
PURSUANT TO THE TERMS OF AND CONDITIONS SET FORTH IN THE PROSPECTUS AND THE
LETTER OF TRANSMITTAL.
[ ] Please TENDER my Old Notes by you for the account or benefit of the
undersigned. I have identified on a signed schedule attached hereto the
principal amount of Old Notes to be tendered if I wish to tender less than
all of my Old Notes.
[ ] Please DO NOT TENDER my Old Notes held by you for the account of the
undersigned.
---------------------------------------
Signature(s)
---------------------------------------
Please print name(s) here
---------------------------------------
---------------------------------------
---------------------------------------
Please type or print address
---------------------------------------
Area Code and Telephone Number
Date: ---------------------------, 2002
---------------------------------------
Taxpayer Identification or
Social Security Number
---------------------------------------
My Account Number with You
UNLESS OTHERWISE INDICATED, IT WILL BE ASSUMED THAT ALL OF YOUR OLD NOTES ARE TO
BE EXCHANGED.
C-3
ANNEX D
NOTICE TO BROKER DEALERS
WESTPORT RESOURCES CORPORATION
OFFER TO EXCHANGE ITS
8 1/4% SENIOR SUBORDINATED NOTES DUE 2011
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING
8 1/4% SENIOR SUBORDINATED NOTES DUE 2011
THAT WERE ISSUED AND SOLD IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER THE SECURITIES ACT
February 7, 2002
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Westport Resources Corporation, a Nevada corporation (the "COMPANY"), is
offering upon the terms and conditions set forth in the Prospectus, dated
February 5, 2002 (as the same may be amended from time to time, the
"PROSPECTUS"), and in the related Letter of Transmittal enclosed herewith, to
exchange (the "EXCHANGE OFFER") its 8 1/4% Senior Subordinated Notes due 2011
(the "EXCHANGE NOTES") for an equal principal amount of its 8 1/4% Senior
Subordinated Notes due 2011 (the "OLD NOTES"). As set forth in the Prospectus,
the terms of the Exchange Notes are identical in all material respects to those
of the Old Notes except for transfer restrictions, registration rights and
rights to additional interest that do not apply to the Exchange Notes and will
contain different administrative terms. Old Notes may only be tendered in
integral multiples of $1,000.
THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE "THE EXCHANGE
OFFER -- CONDITIONS OF THE EXCHANGE OFFER" IN THE PROSPECTUS.
Enclosed herewith for your information and forwarding to your clients are
copies of the following documents:
1. The Prospectus, dated February 5, 2002.
2. A Letter of Transmittal to exchange the Old Notes for your use and
for the information of your clients. Facsimile copies of the Letter
of Transmittal may be used to exchange the Old Notes.
3. A form of letter which may be sent to your clients for whose accounts
you hold the Old Notes registered in your name or in the name of your
nominee, with space provided for obtaining such client's instructions
with regard to the Exchange Offer.
4. A Notice of Guaranteed Delivery.
5. Guidelines of the Internal Revenue Service for Certification of
Taxpayer Identification Number on Substitute Form W-9.
YOUR PROMPT ATTENTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS
PROMPTLY AS POSSIBLE. PLEASE NOTE THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON MARCH 8, 2002, UNLESS EXTENDED. PLEASE FURNISH COPIES OF
THE ENCLOSED MATERIALS TO THOSE OF YOUR CLIENTS FOR WHOM YOU HOLD OLD NOTES
REGISTERED IN YOUR NAME OR YOUR NOMINEE AS QUICKLY AS POSSIBLE.
In most cases, exchanges of the Old Notes accepted for exchange pursuant to
the Exchange Offer will be made only after timely receipt by the Exchange Agent
of (a) certificates representing such Old Notes, (b) the Letter of Transmittal
(or facsimile thereof) properly completed and duly executed with any required
signature guarantees, and (c) any other documents required by the Letter of
Transmittal.
If holders of the Old Notes wish to tender, but it is impracticable for
them to forward their certificates for the Old Notes prior to the expiration of
the Exchange Offer or to comply with the book-entry transfer procedures on a
timely basis, a tender may be offered by following the guaranteed delivery
procedure described in the Prospectus under "The Exchange Offer -- Procedures
for Tendering Old Notes."
D-1
The Exchange Offer is not being made to (nor will tenders be accepted from
or on behalf of) holders of Old Notes residing in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
The Company will not pay any fees or commissions to brokers, dealers or
other persons for soliciting exchanges of the Old Notes pursuant to the Exchange
Offer. The Company will pay or cause to be paid any transfer taxes payable on
the transfer of the Old Notes to it, except as otherwise provided in Instruction
13 of the Letter of Transmittal.
Questions and requests for assistance with respect to the Exchange Offer or
for copies of the Prospectus and Letter of Transmittal may be directed to the
Exchange Agent at its address set forth in the Prospectus.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON TO BE DEEMED TO BE THE AGENT OF THE COMPANY, OR ANY
AFFILIATE THEREOF, OR AUTHORIZE YOU OR ANY OTHER PERSON TO GIVE ANY INFORMATION
OR MAKE ANY REPRESENTATION ON BEHALF OF ANY OF THEM WITH RESPECT TO THE EXCHANGE
OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
D-2