1
EXHIBIT 10.6
[LOGO]
WESTPORT RESOURCES CORPORATION
ANNUAL INCENTIVE PLAN
2000
2
WESTPORT OIL AND GAS COMPANY
ANNUAL INCENTIVE PLAN
OVERVIEW
PARTICIPANTS
It is intended that selected business unit employees will be participants. This
will generally involve geologists, geophysicists, engineers, landmen, and
managers. However, the Plan permits the Administrator to add or exclude certain
employees, if that is desired.
TARGET BONUS POOL
o Determined for each business unit at the beginning of the year by the
Administrator.
o 25% of the distributable pool will be awarded based on a participant being
part of the Business Unit. Seventy-five percent (75%) of the distributable
pool will be awarded on a discretionary basis by the business unit heads
with approval of the Plan Administrator.
o The Administrator will determine the distributable pool conditional upon
meeting the Company Performance Threshold, with specific amounts dependent
upon the level to which individual business unit goals were met.
COMPANY PERFORMANCE THRESHOLD
o At the beginning of the year, the Administrator will establish one or
multiple goals, which will serve as an overall Company performance
threshold (the "Company Performance Threshold"). If this threshold is not
achieved, no payments will be required to be made, regardless of the
performance of any individual business unit.
BUSINESS UNIT GOALS
o Goals will be set at the beginning of the year for each business unit. It
is anticipated that FIVE goals based on value addition, asset growth, and
production increase will be used but these may vary (see sample worksheet)
from year to year.
o Each of the goals will be weighted as a percent of the total incentive,
i.e., 30%, 20%, 20%, 20% and 10%, respectively. If all of the goals are
achieved, 100% of the target incentive will be payable. (See graphs for
each goal which shows the gradation from the minimum target to the maximum
target.)
2000 Annual Incentive Plan
Page 2
3
PAYMENT
o At the year end, the Administrator will determine if the Company
Performance Threshold has been achieved. The goals of each of the business
units will be evaluated and the Administrator will then determine the
percentage of goals achieved. (See sample worksheet.)
o Responsible officers will then allocate the discretionary portions subject
to approval by the Chief Executive Officer and the Administrator.
o Payment made pursuant to the Plan may be made in cash or a combination of
cash and common stock, 90 days following the end of the Plan Year. The
disposition of any restricted common stock awarded pursuant to the Plan
will be governed by the terms of a Restricted Stock Agreement.
o Only whole shares of common stock will be paid. No fractional shares will
be paid; if fractional shares would otherwise be paid, the Restricted Stock
portion of the payment will be rounded to the next higher whole number of
shares, and the cash portion will be reduced proportionately.
EMPLOYMENT EVENTS
o If a participant retires, dies or becomes disable prior to payment, he/she
will receive a pro rata portion of the award.
o If a participant terminates for any other reason prior to payment, the
amount will be forfeited.
o The Administrator will review unit recommendations annually to determine
whether an employee will or will not participate in the Plan for each given
year.
ADMINISTRATOR
The Compensation Committee of the Board will have oversight responsibility for
the Plan.
2000 Annual Incentive Plan
Page 3
4
PLAN DOCUMENT
SECTION 1. PLAN ESTABLISHMENT AND PURPOSE
1.1 Establishment. Westport Oil and Gas Company, Inc. (the "Company"), a
Delaware corporation, hereby establishes an annual compensation program for
certain employees of its various business units, which shall be known as
the Westport Oil and Gas Company, Inc. Business Unit Annual Incentive Plan
(the "Plan").
1.2 Purpose. The purpose of the Plan is to maximize the success and
profitability of the business units by providing significant incentive
opportunities to certain employees assigned to the business unit when the
business unit achieves its annual goals.
SECTION 2. DEFINITIONS
2.1 Definitions. Whenever used herein, the following terms shall have their
respective meanings set forth below:
a. "Administrator" means the Compensation Committee of the Board of
Directors of Westport Oil and Gas Company, Inc., or the group or
individual designated by the Compensation Committee.
b. "Company" means Westport Oil and Gas Company, Inc., and any
subsidiaries.
c. "Disability" has the same meaning as provided in the long-term
disability plan maintained by the Company. In the event of a dispute,
the determination of Disability shall be made by the Administrator.
If, at any time during the period that this Plan is in operation, the
Company does not maintain a long-term disability plan, Disability
shall mean a physical or mental condition which, in the judgment of
the Administrator, permanently prevents a Participant from performing
his usual duties for the Company or such other position or job which
the Company makes available to him and for which the Participant is
qualified by reason of his education, training and experience. In
making its determination the Administrator may, but is not required
to, relay on advice of a physician competent in the area to which such
Disability relates. The Administrator may make the determination in
its sole discretion and any decision of the Administrator will be
binding on all parties.
d. "Participant" means any individual designated to participate in the
Plan pursuant to Subsection 4.1.
e. "Plan" means the Westport Oil and Gas Company, Inc. Business Unit
Annual Incentive Plan.
f. "Plan Year" means the 12-month period of January 1 to December 31.
2000 Annual Incentive Plan
Page 4
5
g. "Retirement" means the termination of employment with the Company by a
Participant who has attained the Normal Retirement Age. For purposes
of this Plan, such age shall be 62 years.
2.2 Gender and Number. Except when otherwise indicated by the context, words in
the masculine gender when used in the Plan shall include the feminine
gender, the singular shall include the plural, and the plural shall include
the singular.
SECTION 3. ADMINISTRATION. NO CONTROL AND NATURE OF INTEREST
3.1 Administration. The Administrator shall have the exclusive responsibility
for the general administration of the Plan according to the terms and
provisions of the Plan and shall have all the powers necessary to
accomplish these purposes; including, but not by way of limitation, the
right, power and authority:
a. To make rules and regulations for the administration of the Plan;
b. To construe all terms, provisions, conditions, and limitations of the
Plan;
c. To correct any defects, supply any omissions or reconcile any
inconsistencies that may appear in the Plan in the manner and to the
extent deemed expedient;
d. To determine all controversies relating to the administration of the
Plan, including, but not limited to, differences of opinion which may
arise between the Company or the Administrator and the Participants;
e. To resolve any questions necessary to promote the uniform
administration of the Plan; and
f. To appoint and to delegate to appropriate management employees any
ministerial duties required hereunder. In the event of such
appointment or delegation, the Administrator shall require regular
reporting by the individuals so appointed.
3.2 Administrator's Discretion. The Administrator, in exercising any power or
authority granted under this Plan, or in making any determination under
this Plan, shall perform or refrain from performing those acts in his sole
and absolute discretion and judgment. Any decision made by the
Administrator, or any refraining to act or any act taken by the
Administrator, in good faith shall be final and binding on all parties.
3.3 Liability and Indemnity of Administrator. The Administrator shall not be
liable for any act done or any determination made in good faith. The
Company shall, to the fullest extent permitted by law, indemnify and hold
the Administrator harmless from any and all claims, causes of action,
damages and expenses (including reasonable attorneys' fees and expenses)
incurred by the Administrator in connection with or otherwise related to
his or her service in such capacity.
2000 Annual Incentive Plan
Page 5
6
3.4 No Control and Nature of Interest. The granting of rights to Participants
under the provisions of the Plan represents only a contracted right to
receive compensation as determined by the Plan Administrator from time to
time. Accordingly, the Plan grants no right to, or interest in, either
express or implied, any equity position or ownership in the Company.
SECTION 4. ELIGIBILITY AND PARTICIPATION
4.1 Eligibility and Participation. It is intended that selected employees of
all business units shall be Participants. However, there may be instances
in which it is determined that a particular employee should not participate
in the Plan for a given year. For that reason, prior to the first day of
each Plan Year the Executive in charge of each business unit will provide
to the Administrator a list of key employees within the business unit as
well as a recommendation as to which of the listed employees should
participate in the Plan for that Plan Year. In the event that after the
beginning of the Plan Year, the Executive of a business unit determines
that an individual should become a Participant during the Plan Year, a
recommendation to that effect should be made to the Administrator. An
individual shall become a Participant only after having been approved by
the Administrator.
SECTION 5. INCENTIVE AWARDS
5.1 Establishing the Target Amount. Annually, for each business unit, the
Administrator shall determine the Target Bonus Amount for Award purposes.
This shall be called the "Target Amount".
5.2 Awarding Bonuses. Annually, after determining that the Company Performance
Threshold has been met and after determining the level of achievement of
performance goals by each Business Unit, the Administrator will confirm an
award to each Participant within each business unit a specified number of
Incentive Units. In confirming such award, the Administrator may rely upon
recommendations from appropriate management personnel within each business
unit or may make the award based solely upon the Administrator's
discretion. Each Participant will be notified of the Bonus Amount awarded
to him within 90 days of the end of the Plan Year.
5.3 Setting Performance Goals. Annually, the Administrator will also establish
the business goals which the business unit must achieve in order for the
payments to be made under the Plan. These shall be called "Performance
Goals". The Performance Goals will be quantifiable and may vary from year
to year. It is anticipated that multiple Performance Goals will be
established for each business unit. As a result, the Administrator will
also determine the weighting, expressed as a percentage, of each
Performance Goal. The weighted Performance Goal shall be called the
"Incentive Unit Percentage". The aggregate of all Incentive Unit
Percentages for a business unit will equal 100%.
5.4 Setting Company Performance Threshold. Annually, the Administrator will
also establish the Company performance which must be achieved before any
payments can be made under this Plan. This shall be called the "Company
Performance
2000 Annual Incentive Plan
Page 6
7
Threshold". If the Company Performance Threshold is not achieved, no
payments will be made for the Plan Year notwithstanding the fact that a
business unit may have achieved or exceeded one, or more, of its
Performance Goals for the Plan Year.
SECTION 6. PAYMENT OF INCENTIVE AMOUNTS
6.1 Calculation of Amount to be Paid. At the end of each Plan Year, the
Administrator will review each business unit's performance and determine
the extent to which each Performance Goal has been achieved. The sum of all
Incentive Unit Percentages for all of the Performance Goals that have been
achieved or exceeded, when multiplied by the Target Amount will equal the
Payable Target Amount.
6.2 Payment. Following the calculation of the Payable Target Amount for each
business unit, and if the Company Performance Threshold for the Plan Year
has been achieved, payment will be made to the Participants from that
business unit. Payment will be made within 90 days following the end of the
Plan Year. The form of the payment will be in cash or a combination of cash
and shares of Company Restricted Common Stock. The number of shares of
Company Restricted Common Stock to be paid will be determined by dividing
that portion of the payment amount which is to be paid in shares of Company
Restricted Common Stock by the share price on a calculation date determined
by the Administrator. In the event that the number of shares of Company
Restricted Common Stock which are to be paid to a Participant is minimal,
the Administrator, in his sole discretion, may determine that the entire
payment amount will be paid in cash. The determination of what constitutes
a minimal amount of shares will be determined by the Administrator in his
sole discretion.
SECTION 7. EMPLOYMENT EVENTS
7.1 Termination of Employment. In the event that the Participant is terminated
or terminates employment for any reason other than death, Disability or
Retirement, prior to payment of any amount which may be due under this
Plan, said Participant shall forfeit and have no right to receive any
amounts which otherwise might have been paid under this Plan.
7.2 Death, Disability, Retirement. In the event that the Participant terminates
employment as a result of death, Disability or Retirement, the Participant,
or the estate of the Participant, will be entitled to a payment based upon
the Achieved Unit Value multiplied by the Incentive Units awarded to such
Participant, but reduced by one-twelfth (1/12th) for each full month, by
which the Participant's death, Disability or Retirement precedes the end of
the Plan Year.
7.3 Participation After the Beginning of the Plan Year. In the event that an
individual becomes a Participant after the beginning of the Plan Year, the
Participant will be entitled to a payment, but reduced by one-twelfth
(1/12th) for each full month during which the individual was not a
Participant in the Plan.
2000 Annual Incentive Plan
Page 7
8
SECTION 8. LIMITATION OF RIGHTS
8.1 Limitation of Right. Nothing in this Plan shall be construed:
a. To give any Participant any right to be awarded an Incentive Unit
other than at the sole discretion of the Administrator;
b. To limit in any way the right of the Company to terminate a
Participant's employment with the Company at any time; or
c. To evidence any agreement or understanding, expressed or implied, that
the Company will employ a Participant in any particular capacity or
for any particular remuneration.
SECTION 9. DURATION OF PLAN
9.1 Duration of Plan. The Plan shall remain in effect indefinitely, subject to
the Company's right to terminate the Plan pursuant to Section 10 hereof.
SECTION 10. AMENDMENT, MODIFICATION AND TERMINATION OF PLAN
10.1 Amendment, Modification and Termination of Plan. The Company may at any
time terminate the Plan, and from time to time, may amend or modify it,
provided that no such action shall adversely affect any right or obligation
with respect to any awards granted but not paid.
SECTION 11. ALIENATION
11.1 Alienation. No benefit provided by this Plan shall be transferable by the
Participant except on the Participant's death, as provided in this Plan. No
right or benefit under this Plan shall be subject to anticipation,
alienation, sale, assignment, pledge, encumbrance, or charge. Any attempt
to anticipate, alienate, sell, assign, pledge, encumber, or charge any
right or benefit under this Plan shall be void. No right or benefit under
this Plan shall, in any manner, be liable for or subject to any debts,
contracts, liabilities or torts of the person entitled to the right or
benefit. If any Participant becomes bankrupt or attempts to anticipate,
alienate, assign, pledge, sell, encumber, or charge any right or benefit
under this Plan, then the right or benefit shall, in the sole discretion of
the Administrator, cease. In that event, the Company may hold or apply the
right or benefit, or any part of the right or benefit, for the benefit of
the Participant, his or her spouse, children, or dependents, the
beneficiary or any of them, in the manner or in the proportion that the
Administrator shall deem proper, in his sole discretion, but is not
required to do so.
2000 Annual Incentive Plan
Page 8
9
SECTION 12. TAX WITHHOLDING
12.1 Tax Withholding. Payments under the Plan shall be subject to applicable
federal, state and local tax withholding requirements.
SECTION 13. UNFUNDED PLAN
13.1 Unfunded Plan. The Plan shall be unfunded. The Company shall not be
required to segregate any assets that may be represented by an Incentive
Pool or Unit; the Company shall not be deemed to be a trustee of any
amounts to be paid to a Participant. Any liability of the Company to pay
any Participant with respect to an Achieved Incentive Amount shall be based
solely upon any contractual obligations created pursuant to the provisions
of the Plan; and no such obligation shall be deemed to be secured by any
pledge or encumbrance on any property of the Company. However, the Company
has the discretion at any time to segregate such assets that may be
represented by an incentive amount. The assets will at all times remain
property of the Company. The Participants and their beneficiaries shall at
all times be merely unsecured creditors of the Company.
SECTION 14. SUCCESSOR COMPANY
14.1 Successor Company. In the event of a merger, consolidation, combination, or
reorganization involving the Company and any other entity or corporation,
the Administrator shall not agree to such merger, consolidation,
combination, or reorganization unless and until the succeeding or
continuing business entity shall expressly assume the accrued and payable
obligations of the Company under this Plan, or other benefits to be paid to
Participants which in the Administrator's sole judgment are comparable.
SECTION 15. GOVERNING LAW
15.1 Governing Law. The Plan, and all agreements hereunder, shall be constructed
in accordance with and governed by the laws of the State of Colorado except
to the extent superseded by federal law.
SECTION 16. EFFECTIVE DATE
16.1 Effective Date. The Plan shall become effective as of January 1, 2000.
2000 Annual Incentive Plan
Page 9
10
SAMPLE CALCULATION WORKSHEET
BUSINESS UNIT Region A
INCENTIVE ACHIEVED
GOAL UNIT PERCENTAGE PERCENTAGE
- --------------- --------------- ---------------
NPV20
NEW RESERVES 30% -0-%
NPV10
PROVED RESERVE BASE 20% 20%
EFFECTIVE RESERVE ADDITIONS 20% 15%
BASE PROPERTY PRODUCTION FORECAST 20% 20%
WEDGE PRODUCTION FORECAST 10% 10%
--- ---
TOTAL 100% 65%
TARGET AMOUNT $1,000,000
TOTAL ACHIEVED PERCENT 65%
EQUALS
TARGET AMOUNT PAYABLE $ 650,000
TOTAL AMOUNT AVAILABLE $ 650,000
LESS: MANDATORY AMOUNTS $ 162,500
DISCRETIONARY AMOUNTS $ 487,500
2000 Annual Incentive Plan
Page 10
11
DEFINITIONS
ACTUAL RESERVE REPLACEMENT
Current year proved reserve additions divided by current year production.
BUSINESS UNIT ACQUISITIONS
Producing property acquisitions that are within existing focus areas. The cost
is within the business unit's capital budget.
CORPORATE ACQUISITIONS
Larger producing property or corporate acquisitions that might cross business
unit boundaries and the capital requirements are outside of the business unit's
budgets.
INCENTIVE PERFORMANCE WEIGHTING
The relative weight of each goal in achieving the total incentive, i.e., 35%,
20%, 15%, 20%, and 10%, respectively.
NPV20
Net Present Value at a 20% discount rate. An NPV20 exactly equal to zero would
indicate that a 20% rate of return was achieved. Proved reserves only shall be
considered in this calculation.
NET ASSET VALUE CHANGE
Third party proved reserves plus all remaining non-reserve balance sheet items
at the beginning of the year compared to year-end proved reserves and
non-reserve balance sheet items at the end of the year.
PERFORMANCE FACTOR
The degree to which each goal has been met (see "2000 Incentive Plan Goals"). No
credit will be given for results that are below a certain minimum threshold.
Above this threshold, a percentage of the incentive will be awarded depending on
the actual results. If results exceed the stated goal, additional credit will be
given up to the listed maximum amount.
RATE OF RETURN
This discount rate (or interest rate) at which the discounted present worth of
cash outflows exactly equals the discounted present worth of cash inflows. This
may also be stated as the discount rate at which the Net Present Value equals
zero.
RESERVE ADDITIONS
Proved reserves added as a result of exploration drilling, business unit
acquisitions, and development drilling or recompletions into zones previously
booked as probable, or possible.
VALUE ADDED INDEX OF 1
NPV10 on capita spent equal to capital spent (non-reserve capex considered at
cost).
2000 Annual Incentive Plan
Page 11
12
2000 INCENTIVE PLAN
COMPANY PERFORMANCE THRESHOLD
The Company performance thresholds for 2000 will be non-diminishment of net
asset value, the attainment of a value added index greater than 1.0, and the
achievement of positive net earnings. If these are met, then the business unit
incentive plan will be activated.
PARTICIPANTS
At the Plan Administrator's discretion, managers, geologists, geophysicists,
engineers, and landmen within each business unit may be included in the
incentive plan (see attached list).
BUSINESS UNIT GOALS
Five goals have been established for 2000.
GOAL #1: NPV20 EQUAL TO OR GREATER THAN ZERO ON RESERVE-ADD PROJECTS
The goal is to achieve an average 20% or better rate of return on all
of the reserve-add capital projects. At a 20% rate of return, the
NPV20 is zero by definition. Reserve-add projects are defined as any
capital projects that add reserves to the PROVED reserve base. This
includes drilling projects, business unit acquisitions, and drilling
or recompletions that prove up reserves previously defined as
probable or possible.
GOAL #2: THE CHANGE IN VALUE, NPV10, OF THE BEGINNING YEAR PROVED RESERVE BASE
(1/1/00 RESERVE REPORT [RR])
The goal is to maintain the value of the proved reserve base during
the year. Therefore, the year-end RR, adjusted for current year
reserve activity, will be compared with the beginning-year RR. These
will be compared with consistent oil and gas prices. All changes in
the RR, e.g., reserve revisions, production forecast revisions, lease
operating expense revisions, maintenance revisions, abandonment
revisions, project training revisions, capital revisions, and
property sales will affect the value of the reserve base.
GOAL #3: EFFECTIVE RESERVE ADDITIONS EQUAL TO 100% OF THE 2000 BUSINESS PLAN
The goal is to add the reserves that were stated in the 2000 Business
Plan. The challenge is to do it profitably. It would be easy to
replace reserves by spending a large amount of money on marginally
profitable acquisitions or drilling projects. All of the projects in
the business plan have a rate of return greater than 20%. Therefore,
the goal is to add the amount of oil and gas reserves that were
planned for by spending the planned capital. If the Board changes the
business plan so that more or less capital is actually spent, then
the reserve target will increase or decrease by the MCFE per dollar
spent ratio of the business plan.
2000 Annual Incentive Plan
Page 12
13
GOAL #4: 100% OF THE BASE PROPERTY PRODUCTION FORECAST OF THE YEAR IN THE
BUSINESS PLAN
The goal is for the base property production, for the current year,
to be equal to or exceed the forecast in the 2000 Business Plan.
GOAL #5: 100% OF THE WEDGE PRODUCTION FORECAST OF THE 2000 BUSINESS PLAN
The goal is for the wedge production to be equal to or exceed the
forecast in the 2000 Business Plan. If more or less capital is
actually spent than in the business plan, then the production target
will increase or decrease by the MCFE per dollar spent ratio of the
business plan. The production target will also be adjusted to account
for delays imposed by corporate capital budget constraints.
TARGET AMOUNTS
A bonus pool will be established for each business unit consisting of an amount
equal to 30% of the salary of the business unit manager and 20% of the salary of
all other Participants. Based on the weighting and the business unit's
performance on each goal, a composite percentage score will be established for
each business unit. If the composite score is greater than zero, then incentive
awards will be paid. The available bonus pool to be distributed will be the
product of the established bonus pool times the composite percentage score. Each
eligible member of a business unit that has a positive composite percentage
score will receive 25% of their pool contribution for being a member of a
successful business unit. For example, if a business unit has a composite
percentage score of 100%, then every eligible member of the business unit would
receive a minimum award equal to (20% of their salary) x (100% composite score )
x (25%) = 5% of their salary. The other 75% of the pool will be distributed to
the eligible members based on the relative contribution that each member was
determined to have made to the success of the business unit. There is no maximum
limit for this individual discretionary award. Discretionary awards greater than
that which is available from the pool can be awarded for extraordinary
performance. Based on the weighting and the maximum performance factor of the
five goals, a composite percentage score of 150% is possible. Therefore, if a
business unit achieved this score and everyone in the business unit was
determined to have contributed equally to the success, then everyone would
receive a bonus equal to (150%) x (20%) = 30% of one year's salary.
ACQUISITION BONUS POOL
Bonus payable on acquisitions shall be calculated at 0.25% of closing price and
shall be payable in equal amounts over two (2) years, depending on meeting
criteria below. The Participants to whom the bonus is allocated shall be at the
discretion of the Plan Administrator.
A. Achievement of values established in memorandum to the Board by the end of
the year and achievement of year 1 production volumes represented in
economics agreed to by the Board.
2000 Annual Incentive Plan
Page 13
14
B. Look back after year 2 comparing reserve volumes, LOE's and production
performance versus Board memo.
2000 Annual Incentive Plan
Page 14