-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fy6+LMaAtvWeVfYRPw48kpN6ytw0RxTacq3gXpTT+elZsN+CA5R+9Ius9Jz3cayP sLDfots+VorPIhIWdEs1Uw== 0000950134-02-005248.txt : 20020513 0000950134-02-005248.hdr.sgml : 20020513 ACCESSION NUMBER: 0000950134-02-005248 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTPORT RESOURCES CORP /NV/ CENTRAL INDEX KEY: 0000889005 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 133869719 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14256 FILM NUMBER: 02644061 BUSINESS ADDRESS: STREET 1: 767 FIFTH AVE STREET 2: 46TH FL CITY: NEW YORK STATE: NY ZIP: 10153 BUSINESS PHONE: 2126442200 MAIL ADDRESS: STREET 1: 767 FIFTH AVE STREET 2: 46TH FL CITY: NEW YORK STATE: NY ZIP: 10153 FORMER COMPANY: FORMER CONFORMED NAME: BELCO OIL & GAS CORP DATE OF NAME CHANGE: 19960207 10-Q 1 d96815e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-14256 WESTPORT RESOURCES CORPORATION (Exact Name of Registrant as specified in its charter) NEVADA 13-3869719 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.)
410 SEVENTEENTH STREET, SUITE 2300 DENVER, COLORADO 80202 (Address of principal executive offices) (Zip Code) (303) 573-5404 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 52,127,866 shares of the issuer's common stock, par value $0.01 per share, were outstanding as of May 1, 2002. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WESTPORT RESOURCES CORPORATION TABLE OF CONTENTS
PAGE ---- PART I -- FINANCIAL INFORMATION...................................... 2 Item 1. Financial Statements........................................ 2 Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001....................................... 2 Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 (unaudited)................... 3 Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 (unaudited)................... 4 Notes to Consolidated Financial Statements.................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................................ 24 PART II -- OTHER INFORMATION......................................... 25 Item 1. Legal Proceedings........................................... 25 Item 2. Changes in Securities and Use of Proceeds................... 25 Item 3. Defaults Upon Senior Securities............................. 25 Item 4. Submission of Matters to a Vote of Security Holders......... 25 Item 5. Other Information........................................... 25 Item 6. Exhibits and Reports on Form 8-K............................ 25 Signatures........................................................... 27
1 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WESTPORT RESOURCES CORPORATION CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2002 2001 ------------- -------------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current Assets: Cash and cash equivalents................................. $ 37,967 $ 27,584 Accounts receivable, net.................................... 40,300 61,808 Derivative assets......................................... 2,009 7,832 Prepaid expenses.......................................... 7,991 5,474 ---------- ---------- Total current assets................................ 88,267 102,698 ---------- ---------- Property and equipment, at cost: Oil and natural gas properties, successful efforts method: Proved properties....................................... 1,507,674 1,446,331 Unproved properties..................................... 108,149 105,539 ---------- ---------- 1,615,823 1,551,870 Less accumulated depletion, depreciation and amortization... (328,112) (280,737) ---------- ---------- Net oil and gas properties.......................... 1,287,711 1,271,133 ---------- ---------- Building and other office furniture and equipment........... 8,643 8,099 Less accumulated depreciation............................... (3,253) (3,028) ---------- ---------- Net building and other office furniture and equipment........................................... 5,390 5,071 ---------- ---------- Other assets: Long-term derivative assets............................... 1,632 612 Goodwill.................................................. 214,844 214,844 Other assets.............................................. 9,576 9,858 ---------- ---------- Total other assets.................................. 226,052 225,314 ---------- ---------- Total assets........................................ $1,607,420 $1,604,216 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 34,393 $ 47,901 Accrued expenses.......................................... 28,550 30,294 Ad valorem taxes payable.................................. 8,131 6,930 Derivative liabilities.................................... 17,613 3,289 Income taxes payable...................................... 564 550 Other current liabilities................................. -- 369 ---------- ---------- Total current liabilities........................... 89,251 89,333 ---------- ---------- Long-term debt.............................................. 471,915 429,224 Deferred income taxes....................................... 141,077 158,005 Long term derivative liabilities............................ 11,607 5,956 Other liabilities........................................... 1,568 1,402 ---------- ---------- Total liabilities................................... 715,418 683,920 ---------- ---------- Stockholders' equity: 6 1/2% Convertible preferred stock, $.01 par value; 10,000,000 shares authorized; 2,930,000 issued and outstanding at March 31, 2002 and December 31, 2001, respectively............................................ 29 29 Common stock, $0.01 par value; 70,000,000 authorized; 52,121,373 and 52,092,691 shares issued and outstanding at March 31, 2002 and, December 31, 2001, respectively............................................ 521 521 Additional paid-in capital................................ 880,306 877,960 Treasury stock-at cost; 30,000 shares at March 31, 2002 and December 31, 2001, respectively..................... (408) (408) Retained earnings......................................... 12,666 33,330 Accumulated other comprehensive income.................... (1,112) 8,864 ---------- ---------- Total stockholders' equity.......................... 892,002 920,296 ---------- ---------- Total liabilities and stockholders' equity.......... $1,607,420 $1,604,216 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 2 WESTPORT RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, ------------------------- 2002 2001 ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Operating revenues: Oil and natural gas sales................................. $ 77,012 $ 96,655 Hedge settlements......................................... 3,935 (1,725) Commodity price risk management activities: Non-hedge settlements.................................. 1,084 76 Non-hedge change in fair value of derivatives.......... (9,253) 2,097 -------- -------- Net revenues...................................... 72,778 97,103 -------- -------- Operating costs and expenses: Lease operating expenses.................................. 19,675 10,473 Production taxes.......................................... 5,865 3,518 Transportation costs...................................... 2,652 1,395 Exploration............................................... 10,342 2,611 Depletion, depreciation and amortization.................. 47,589 20,241 Impairment of unproved properties......................... 959 1,004 Stock compensation expense................................ 1,881 545 General and administrative................................ 5,934 3,522 -------- -------- Total operating expenses.......................... 94,897 43,309 -------- -------- Operating income (loss)........................... (22,119) 53,794 -------- -------- Other income (expense): Interest expense.......................................... (8,371) (290) Interest income........................................... 80 363 Change in fair value of interest rate swap................ 226 (322) Other..................................................... (482) 48 -------- -------- Income (loss) before income taxes........................... (30,666) 53,593 Benefit (provision) for income taxes: Current................................................... -- (1,277) Deferred.................................................. 11,193 (18,284) -------- -------- Total benefit (provision) for income taxes........ 11,193 (19,561) -------- -------- Net income (loss)......................................... (19,473) 34,032 Preferred stock dividends................................... 1,190 -- -------- -------- Net income (loss) available to common stockholders.......... $(20,663) $ 34,032 ======== ======== Weighted average number of common shares outstanding: Basic..................................................... 52,081 38,436 ======== ======== Diluted................................................... 52,081 39,250 ======== ======== Net income (loss) per common share: Basic..................................................... $ (.40) $ .89 ======== ======== Diluted................................................... $ (.40) $ .87 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 WESTPORT RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, --------------------- 2002 2001 --------- --------- (IN THOUSANDS) (UNAUDITED) Cash flows from operating activities: Net income (loss)......................................... $(19,473) $ 34,032 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion, depreciation and amortization................ 47,589 20,241 Exploratory dry hole costs.............................. 4,781 1,201 Impairment of unproved properties....................... 959 1,004 Deferred income taxes................................... (11,193) 18,284 Stock compensation expense.............................. 1,881 545 Change in fair value of derivatives..................... 9,027 (1,102) Amortization of derivative liabilities.................. (2,668) -- Amortization of deferred financing fees................. 262 -- Changes in assets and liabilities, net of effects of acquisitions: Decrease in accounts receivable....................... 21,705 4,113 Increase in prepaid expenses.......................... (2,554) (1,079) Increase (decrease) in accounts payable............... (13,851) 976 Increase in ad valorem taxes payable.................. 816 1,888 Increase (decrease) in income taxes payable........... (44) 977 Increase (decrease) in accrued expenses............... 3,928 (6,860) Decrease in other liabilities......................... (65) (2) -------- -------- Net cash provided by operating activities................... 41,100 74,218 -------- -------- Cash flows from investing activities: Additions to property and equipment....................... (37,024) (20,196) Proceeds from sales of assets............................. 147 -- Acquisitions of oil and gas properties.................... (37,981) (611) Other..................................................... (27) -- -------- -------- Net cash used in investing activities....................... (74,885) (20,807) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock.................... 393 -- Proceeds from issuance of long-term debt.................. 45,000 -- Preferred stock dividends paid............................ (1,190) -- Financing fees............................................ (35) -- -------- -------- Net cash provided by financing activities................... 44,168 -- -------- -------- Net increase in cash and cash equivalents................... 10,383 53,411 Cash and cash equivalents, beginning of period.............. 27,584 20,154 -------- -------- Cash and cash equivalents, end of period.................... $ 37,967 $ 73,565 ======== ======== Supplemental cash flow information: Cash paid for interest.................................... $ 5,830 $ 113 ======== ======== Cash paid for income taxes................................ $ 44 $ 300 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 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 owned a majority of the outstanding Westport common stock immediately after 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 March 31, 2002 and the results of its 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 the Company's December 31, 2001 audited financial statements set forth in the Company'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 March 31, 2002. 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 rate of interest announced by JP Morgan Chase Bank, formerly known as The Chase Manhattan Bank, as its 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 .125% to 1.50% based upon the ratio of total debt to EBITDAX. As of March 31, 2002, the Company had borrowings of $80 million outstanding with a weighted average interest rate of 3.30%, outstanding letters of credit issued of approximately $3.8 million and available unused borrowing capacity of approximately $316.2 million under the Revolving Credit Facility. 5 WESTPORT RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8 7/8% SENIOR SUBORDINATED NOTES DUE 2007 In connection with the Merger, the Company assumed $147 million face amount of Belco's 8 7/8% Senior Subordinated Notes due 2007. On November 1, 2001, approximately $24.3 million face amount of the notes was tendered to the Company 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 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 was equal to the redemption cost. 8 1/4% SENIOR SUBORDINATED NOTES DUE 2011 On November 5, 2001, the Company completed the private placement of $275 million of 8 1/4% Senior Subordinated Notes due 2011 pursuant to Rule 144A under the Securities Act of 1933, as amended. 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. On March 14, 2002, the Company completed the exchange of these notes for new notes with substantially identical terms, except that the new notes are generally freely tradeable. INTEREST RATE SWAPS-HEDGES On November 21, 2001, the Company entered into two separate interest rate swaps to hedge the fair value of a portion of the 8 7/8% Senior Subordinated Notes and 8 1/4% Senior Subordinated Notes. The swap on the 8 7/8% Senior Subordinated Notes has a notional amount of $122.7 million and an expiration date of September 15, 2007. Under this swap agreement, the Company pays the counterparty a variable rate (LIBOR +3.44%) and receives a fixed rate (8 7/8%). Beginning on September 15, 2002 the counterparty has the option to terminate the swap early on any date subject to an early termination fee ranging from 4.438% at September 15, 2002 to 0% on or after September 15, 2005. The early termination dates and fees mirror the prepayment terms and prepayment penalties included in the indenture related to the 8 7/8% Senior Subordinated Notes. The swap on the 8 1/4% Senior Subordinated Notes has a notional amount of $100.0 million and an expiration date of November 1, 2011. Under the swap agreement, the Company pays the counterparty a variable rate (LIBOR +2.42%) and receives a fixed rate (8 1/4%). Beginning on November 1, 2006 the counterparty has the option to terminate the swap on any date beginning on November 1, 2006, subject to an early termination fee ranging from $4.125 million at November 1, 2006 to $0 on or after November 1, 2009. The early termination dates and fees mirror the prepayment terms and prepayment penalties included in the indenture related to the 8 1/4% Senior Subordinated Notes. The Company has documented and designated these interest rate swaps as hedges of the fair value of a portion of the 8 7/8% Senior Subordinated Notes and 8 1/4% Senior Subordinated Notes. Because these swaps meet the conditions to qualify for the "short cut" method of assessing effectiveness under the provisions of SFAS 133, the change in the fair value of the debt is assumed to equal the change in the fair value of the interest rate swaps. As such, there is no ineffectiveness assumed to exist between the interest rate swaps and the Senior Subordinated Notes. 4. COMMODITY DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company periodically enters into commodity price risk management ("CPRM") transactions to manage its exposure to oil and gas price volatility. CPRM transactions may take the form of futures contracts, swaps or options. All CPRM transactions are accounted for in accordance with requirements of SFAS No. 133 which the Company adopted on January 1, 2001. Accordingly, unrealized gains and losses related to 6 WESTPORT RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the change in fair market value of derivative contracts which qualify and are designated as cash flow hedges are recorded as other comprehensive income or loss and such amounts are reclassified to oil and gas sales revenues as the associated production occurs. Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at market value in the consolidated balance sheet, and the associated unrealized gains and losses are recorded as current income or expense in the consolidated statement of operations. While such derivative contracts do not qualify for hedge accounting, management believes these contracts can be utilized as an effective component of CPRM activities. Upon adoption of SFAS No. 133 on January 1, 2001, the Company recorded a derivative liability of approximately $4.7 million for the fair market value of its derivative instruments designated as cash flow hedges and a corresponding loss of approximately $3.1 million (net of tax effect of $1.6 million) as a cumulative effect of a change in accounting principle in other comprehensive income. For the three months ended March 31, 2002, the Company reclassified approximately $3.9 million of hedging gains from accumulated other comprehensive income to oil and gas sales revenues. The hedging gains reclassified to revenues include realized gains of $1.5 million. For the three months ended March 31, 2002, the Company recorded non-hedge CPRM settlements of $1.1 million and an unrealized change in fair value of non-hedge derivatives of ($9.3) million. The non-hedge CPRM settlements include realized gains of $0.9 million. The Company recognized increases in oil and natural gas revenues of $3.9 million and $1.7 million from settled hedging agreements for the three months ended March 31, 2002 and 2001, respectively. As of March 31, 2002, the Company had approximately 2.7 Mbbls of oil and 18.0 Bcf of natural gas subject to CPRM contracts for the remainder of 2002. The 2002 contracts have weighted average floor prices of $21.99 per barrel and $2.91 per Mmbtu, with weighted average ceiling prices of $24.80 per barrel and $3.10 per Mmbtu, respectively. The Company has approximately 2.2 Mbbls of oil and 4.6 Bcf of natural gas subject to CPRM contracts for 2003. The 2003 contracts have weighted average floor prices of $21.45 per barrel and $3.20 per Mmbtu, with weighted average ceiling prices of $23.08 per barrel and $5.30 per Mmbtu, respectively. The contracts discussed above represent both the Company's hedge and non-hedge positions as of March 31, 2002. The summary tables below provide details about the volumes and prices of all open CPRM, hedge and non-hedge commitments, as of March 31, 2002.
2002 2003 ------ ------ HEDGES GAS Price Swaps Sold-receive fixed price (thousand Mmbtu)(1)............................................. 6,944 -- Average price, per Mmbtu............................. $ 2.96 -- Collars Sold (thousand Mmbtu)(2)....................... 4,590 913 Average floor price, per Mmbtu....................... $ 2.53 $ 3.00 Average ceiling price, per Mmbtu..................... $ 3.10 $ 6.50 Puts Purchased (thousand Mmbtu)(3)..................... 2,750 -- Average price, per Mmbtu............................. $ 3.13 --
7 WESTPORT RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002 2003 ------ ------ OIL Price Swaps Sold-receive fixed price (Mbbls)(1)........ 495 785 Average price, per bbl............................... $20.51 $20.98 Collars Sold (Mbbls)(2)................................ 165 -- Average floor price, per bbl......................... $19.82 -- Average ceiling price, per bbl....................... $25.93 -- NON-HEDGES GAS Calls Sold (thousand Mmbtu)(3)......................... 1,925 -- Average price, per Mmbtu............................. $ 3.27 -- Three-way Collars (Mmbtu)(2)(4)........................ 1,800 3,650 Three-way average floor price, per Mmbtu............. $ 2.40 $ 2.50 Average floor price, per Mmbtu....................... $ 3.00 $ 3.25 Average ceiling price, per Mmbtu..................... $ 3.40 $ 5.00 OIL Calls Sold (Mbbls)(3).................................. 135 -- Average price, per bbl............................... $22.00 -- Price Swaps Sold-receive fixed price (Mbbls)(1)........ 225 300 Average price, per bbl............................... $18.86 $18.86 Three-way Collars (Mbbls)(2)(4)........................ 1,645 1,095 Three-way average floor price, per bbl............... $18.92 $18.43 Average floor price, per bbl......................... $23.09 $22.50 Average ceiling price, per bbl....................... $27.02 $25.73
- --------------- (1) For any particular swap sold transaction, the counterparty is required to make a payment to Westport in the event that the NYMEX Reference Price for any settlement period is less than the swap price for such hedge, and Westport 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. (2) For any particular collar transaction, the counterparty is required to make a payment to Westport if the average NYMEX Reference Price for the reference period is below the floor price for such transaction, and Westport is required to make payment to the counterparty if the average NYMEX Reference Price is above the ceiling price of such transaction. (3) Calls or puts are sold under written option contracts in return for a premium received by Westport upon the initiation of the contract. Westport 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 Westport's payment of a premium require the counterparty to make a payment to Westport 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) Three-way collars are settled as described in footnote (2) above, with the following exception: if the NYMEX Reference Price falls below the three-way floor price, the average floor price is adjusted by the amount by which the NYMEX Reference Price is below the three-way floor price. For example on a three-way oil collar, if the NYMEX Reference Price is $18.00 per Bbl during the term of the 2002 three-way collars, then the average floor price would be $22.17 per Bbl. 8 WESTPORT RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. ACCUMULATED OTHER 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 components of other comprehensive income for the three months ended March 31, 2002 are as follows (in thousands):
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2002 MARCH 31, 2001 ------------------ ------------------ Net income (loss)................................ $(20,663) $34,032 Other comprehensive income Cumulative effect of change in accounting principle................................... (3,100) (3,100) Change in fair value of derivative hedging instruments................................. 5,814 4,091 Enron non-cash settlements reclassified to income...................................... 369 -- Hedge settlements reclassified to income....... (4,195) (1,095) -------- ------- Other comprehensive income.................. (1,112) (104) Comprehensive income (loss)...................... $(21,775) $33,928
6. RECENT ACCOUNTING PRONOUNCEMENTS 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 is to be reviewed at least annually for impairment. The effective date of this statement is January 1, 2002. The impact of the adoption and implementation of SFAS 142 on the Company's financial statements has not been determined, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. 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 adopted SFAS 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 adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have an effect on the Company's financial position or results of operations. 7. SEGMENT INFORMATION The Company operates in three geographic divisions: Northern, which manages properties in the Rocky Mountain region; Southern, which manages properties in the West Texas/Mid-Continent area and the onshore Gulf Coast regions; and Gulf of Mexico, which manages the offshore properties. All three areas are engaged in the production, development, acquisition and exploration of oil and natural gas properties. The Company evaluates segment performance based on the profit or loss from operations before income taxes. 9 WESTPORT RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Corporate general and administrative expenses are unallocated. Consolidated and segment financial information is as follows:
FOR THE THREE MONTHS ENDED MARCH 31, ------------------------------------------------------------- GULF OF CORPORATE AND NORTHERN SOUTHERN MEXICO UNALLOCATED CONSOLIDATED -------- -------- -------- ------------- ------------ (IN THOUSANDS) 2002 Revenues(1)................... $25,303 $29,838 $ 21,871 $(4,234) $ 72,778 DD&A.......................... 11,071 19,773 16,637 108 47,589 Profit (loss)................. 1,132 (6,401) (10,627) (6,224) (22,120) Expenditures for assets, net......................... 47,194 9,005 18,441 365 75,005 2001 Revenues(1)................... 27,225 13,578 55,852 448 97,103 DD&A.......................... 3,865 2,219 14,072 85 20,241 Profit (loss)................. 13,652 8,137 33,801 (1,796) 53,794 Expenditures for assets, net......................... 2,752 2,732 15,076 247 20,807
- --------------- (1) Corporate and unallocated revenues consist of non-hedge and hedge settlements, and non-hedge change in fair value of derivatives. 8. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF SUBSIDIARY GUARANTORS On November 5, 2001 the Company completed a private placement of the 8 1/4% Senior Subordinated Notes due 2011, which were subsequently exchanged on March 14, 2002 for new notes with substantially identical terms (see Note 3). 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. 10 WESTPORT RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET MARCH 31, 2002
PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED -------- ---------- ------------ ------------ (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents............................ $ 10,699 $ 27,268 $ -- $ 37,967 Accounts receivable, net............................. 12,904 27,396 -- 40,300 Intercompany receivable.............................. 436,448 -- (436,448) -- Derivative assets.................................... 2,009 -- -- 2,009 Prepaid expenses..................................... 1,873 6,118 -- 7,991 -------- ---------- --------- ---------- Total current assets.......................... 463,933 60,782 (436,448) 88,267 -------- ---------- --------- ---------- Property and equipment, at cost: Oil and gas properties, successful efforts method: Proved properties.................................. 293,941 1,213,733 -- 1,507,674 Unproved properties................................ 25,947 82,202 -- 108,149 Building and other office furniture and equipment.... 593 8,050 -- 8,643 -------- ---------- --------- ---------- 320,481 1,303,985 -- 1,624,466 Less accumulated depletion, depreciation and amortization....................................... (91,687) (239,678) -- (331,365) -------- ---------- --------- ---------- Net property and equipment.................... 228,794 1,064,307 -- 1,293,101 -------- ---------- --------- ---------- Other Assets: Long-term derivative assets.......................... 1,632 -- -- 1,632 Goodwill............................................. -- 214,844 -- 214,844 Other assets......................................... 9,520 56 -- 9,576 -------- ---------- --------- ---------- Total other assets............................ 11,152 214,900 -- 226,052 -------- ---------- --------- ---------- Total assets.................................. $703,879 $1,339,989 $(436,448) $1,607,420 ======== ========== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable..................................... $ 5,916 $ 28,477 $ -- $ 34,393 Accrued expenses..................................... 17,599 10,951 -- 28,550 Ad valorem taxes payable............................. 47 8,084 -- 8,131 Intercompany payable................................. -- 436,448 (436,448) -- Derivative liabilities............................... 16,881 732 -- 17,613 Income taxes payable................................. (203) 767 -- 564 Other liabilities.................................... -- -- -- -- -------- ---------- --------- ---------- Total current liabilities..................... 40,240 485,459 (436,448) 89,251 -------- ---------- --------- ---------- Long-term debt......................................... 351,437 120,478 -- 471,915 Deferred income taxes.................................. 19,963 121,114 -- 141,077 Long-term derivative liabilities....................... 8,470 3,137 -- 11,607 Other liabilities...................................... -- 1,568 -- 1,568 -------- ---------- --------- ---------- Total liabilities............................. 420,110 731,756 (436,448) 715,418 -------- ---------- --------- ---------- Stockholders' equity Preferred stock...................................... -- 29 -- 29 Common stock......................................... 385 139 (3) 521 Additional paid-in capital........................... 277,896 602,407 3 880,306 Treasury stock....................................... (408) -- -- (408) Retained earnings.................................... 7,008 5,658 -- 12,666 Accumulated other comprehensive income............... (1,112) -- -- (1,112) -------- ---------- --------- ---------- Total stockholders' equity.................... 283,769 608,233 -- 892,002 -------- ---------- --------- ---------- Total liabilities and stockholders' equity.... $703,879 $1,339,989 $(436,448) $1,607,420 ======== ========== ========= ==========
11 WESTPORT RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002
PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED -------- ---------- ------------ ------------ (IN THOUSANDS) Operating revenues: Oil and natural gas sales..................... $ 10,577 $ 66,435 $ -- $ 77,012 Hedge settlements............................. 3,935 -- -- 3,935 Non-hedge settlements......................... 1,084 -- -- 1,084 Non-hedge change in fair value of derivatives................................ (9,253) -- -- (9,253) -------- -------- ----- -------- Net revenues.......................... 6,343 66,435 -- 72,778 -------- -------- ----- -------- Operating expenses: Lease operating expense....................... 2,301 17,374 -- 19,675 Production taxes.............................. 2 5,863 -- 5,865 Transportation costs.......................... (28) 2,680 -- 2,652 Exploration................................... 5,143 5,199 -- 10,342 Depletion, depreciation and amortization...... 8,671 38,918 -- 47,589 Impairment of proved properties............... -- -- -- -- Impairment of unproved properties............. -- 959 -- 959 Stock compensation expense.................... 1,881 -- -- 1,881 General and administrative.................... 1,586 4,348 -- 5,934 -------- -------- ----- -------- Total operating expenses.............. 19,556 75,341 -- 94,897 -------- -------- ----- -------- Operating income...................... (13,213) (8,906) -- (22,119) -------- -------- ----- -------- Other income (expense): Interest expense.............................. (5,504) (2,867) -- (8,371) Interest income............................... 35 45 -- 80 Change in interest rate swap fair value....... -- 226 -- 226 Other......................................... (769) 287 -- (482) -------- -------- ----- -------- Income (loss) before income taxes............... (19,451) (11,215) -- (30,666) -------- -------- ----- -------- Provision for income taxes: Current....................................... -- -- -- -- Deferred...................................... 7,100 4,093 -- 11,193 -------- -------- ----- -------- Total provision for income taxes...... 7,100 4,093 -- 11,193 Net income (loss)............................... (12,351) (7,122) -- (19,473) -------- -------- ----- -------- Preferred stock dividends....................... 1,190 -- -- 1,190 -------- -------- ----- -------- Net income (loss) available to common stock..... $(13,541) $ (7,122) $ -- $(20,663) ======== ======== ===== ========
12 WESTPORT RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002
PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED -------- ---------- ------------ ------------ (IN THOUSANDS) Cash flows from operating activities: Net income (loss).................................... $(12,351) $ (7,122) $ -- $(19,473) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion, depreciation and amortization........... 8,670 38,919 -- 47,589 Exploration dry hole costs......................... 14 4,767 -- 4,781 Impairment of proved properties.................... -- 959 -- 959 Deferred income taxes.............................. (7,100) (4,093) -- (11,193) Stock compensation expense......................... 1,881 -- -- 1,881 Change in derivative fair value of derivatives..... 19,222 (10,195) -- 9,027 Amortization of derivative liabilities............. (2,668) -- -- (2,668) Amortization of deferred financing fees............ 344 (82) -- 262 Changes in asset and liabilities, net of effects of acquisitions: Decrease (increase) in accounts receivable....... 5,783 15,922 -- 21,705 Decrease in prepaid expenses..................... 237 (2,791) -- (2,554) Increase (decrease) in accounts payable.......... (7,856) (5,995) -- (13,851) Decrease in ad valorem taxes payable............. 47 769 -- 816 Increase in income taxes payable................. -- (44) -- (44) Increase (decrease) in accrued expenses.......... 6,086 (2,158) -- 3,928 Decrease in other liabilities.................... -- (65) -- (65) -------- -------- -------- -------- Net cash provided by operating activities..... 12,309 28,791 -- 41,100 -------- -------- -------- -------- Cash flows from investing activities: Additions to property and equipment.................. (10,298) (26,726) -- (37,024) Proceeds from sales of assets........................ -- 147 -- 147 Increase in intercompany receivable.................. (49,284) -- 49,284 -- Other acquisitions................................... -- (37,981) -- (37,981) Other................................................ -- (27) -- (27) -------- -------- -------- -------- Net cash used in investing activities......... (59,582) (64,587) 49,284 (74,885) -------- -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock............... 393 -- -- 393 Proceeds from issuance of long-term debt............. 45,000 -- -- 45,000 Preferred stock dividend............................. (1,190) -- -- (1,190) Financing fees....................................... (35) -- -- (35) Increase in intercompany payable..................... -- 49,284 (49,284) -- -------- -------- -------- -------- Net cash provided by (used in) financing activities.................................. 44,168 49,284 (49,284) 44,168 -------- -------- -------- -------- Net increase in cash and cash equivalents.............. (3,105) 13,488 -- 10,383 Cash and cash equivalents, beginning of year........... 13,804 13,780 -- 27,584 -------- -------- -------- -------- Cash and cash equivalents, end of year................. $ 10,699 $ 27,268 $ -- $ 37,967 ======== ======== ======== ========
13 WESTPORT RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2001
PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED -------- ---------- ------------ ------------ (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents............................ $ 13,804 $ 13,780 $ -- $ 27,584 Accounts receivable, net............................. 18,687 43,121 -- 61,808 Intercompany receivable.............................. 387,164 -- (387,164) -- Derivative assets.................................... -- 7,832 -- 7,832 Prepaid expenses..................................... 2,110 3,364 -- 5,474 -------- ---------- --------- ---------- Total current assets.......................... 421,765 68,097 (387,164) 102,698 -------- ---------- --------- ---------- Property and equipment, at cost: Oil and gas properties, successful efforts method: Proved properties.................................. 281,868 1,164,463 -- 1,446,331 Unproved properties................................ 23,978 81,561 -- 105,539 Building and other office furniture and equipment.... 487 7,612 -- 8,099 -------- ---------- --------- ---------- 306,333 1,253,636 -- 1,559,969 Less accumulated depletion, depreciation and amortization....................................... (83,016) (200,749) -- (283,765) -------- ---------- --------- ---------- Net property and equipment.................... 223,317 1,052,887 -- 1,276,204 -------- ---------- --------- ---------- Other Assets: Long-term derivative assets.......................... -- 612 -- 612 Goodwill............................................. -- 214,844 -- 214,844 Other assets......................................... 9,830 28 -- 9,858 -------- ---------- --------- ---------- Total other assets............................ 9,830 215,484 -- 225,314 -------- ---------- --------- ---------- Total assets.................................. $654,912 $1,336,468 $(387,164) $1,604,216 ======== ========== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable..................................... $ 14,254 $ 33,647 $ -- $ 47,901 Accrued expenses..................................... 7,648 22,646 -- 30,294 Ad valorem taxes payable............................. -- 6,930 -- 6,930 Intercompany payable................................. -- 387,164 (387,164) -- Derivative liabilities............................... -- 3,289 -- 3,289 Income taxes payable................................. (131) 681 -- 550 Other liabilities...................................... -- 369 -- 369 -------- ---------- --------- ---------- Total current liabilities..................... 21,771 454,726 (387,164) 89,333 -------- ---------- --------- ---------- Long-term debt......................................... 307,147 122,077 -- 429,224 Deferred income taxes.................................. 27,063 130,942 -- 158,005 Long-term derivative liabilities....................... 2,853 3,103 -- 5,956 Other liabilities...................................... -- 1,402 -- 1,402 -------- ---------- --------- ---------- Total liabilities............................. 358,834 712,250 (387,164) 683,920 -------- ---------- --------- ---------- Stockholders' equity: Preferred stock...................................... -- 29 -- 29 Common stock......................................... 385 139 (3) 521 Additional paid-in capital........................... 275,550 602,407 3 877,960 Treasury stock....................................... (408) -- -- (408) Retained earnings.................................... 20,551 12,779 -- 33,330 Accumulated other comprehensive income............... -- 8,864 -- 8,864 -------- ---------- --------- ---------- Total stockholders' equity.................... 296,078 624,218 -- 920,296 -------- ---------- --------- ---------- Total liabilities and stockholders' equity.... $654,912 $1,336,468 $(387,164) $1,604,216 ======== ========== ========= ==========
14 WESTPORT RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001
PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED ------- ---------- ------------ ------------ (IN THOUSANDS) Operating revenues: Oil and natural gas sales...................... $36,530 $ 60,125 $ -- $ 96,655 Hedge settlements.............................. -- (1,725) -- (1,725) Non-hedge settlements.......................... -- 76 -- 76 Non-hedge change in fair value of derivatives................................. -- 2,097 -- 2,097 ------- -------- ----- -------- Net revenues........................... 36,530 60,573 -- 97,103 ------- -------- ----- -------- Operating expenses: Lease operating expense........................ 1,760 8,713 -- 10,473 Production taxes............................... 5 3,513 -- 3,518 Transportation costs........................... 348 1,047 -- 1,395 Exploration.................................... 2,327 284 -- 2,611 Depletion, depreciation and amortization....... 10,486 9,755 -- 20,241 Impairment of unproved properties.............. 466 538 -- 1,004 Stock compensation expense..................... 545 -- -- 545 General and administrative..................... 1,953 1,569 -- 3,522 ------- -------- ----- -------- Total operating expenses............... 17,890 25,419 -- 43,309 ------- -------- ----- -------- Operating income....................... 18,640 35,154 -- 53,794 ------- -------- ----- -------- Other income (expense): Interest expense............................... -- (290) -- (290) Interest income................................ 195 168 -- 363 Change in interest rate swap fair value........ -- (322) -- (322) Other.......................................... 57 (9) -- 48 ------- -------- ----- -------- Income (loss) before income taxes................ 18,892 34,701 -- 53,593 ------- -------- ----- -------- Provision for income taxes: Current........................................ -- (1,277) -- (1,277) Deferred....................................... (6,896) (11,388) -- (18,284) ------- -------- ----- -------- Total provision for income taxes....... (6,896) (12,665) -- (19,561) Net income (loss)................................ $11,996 $ 22,036 $ -- $ 34,032 ======= ======== ===== ========
15 WESTPORT RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001
PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED -------- ---------- ------------ ------------ (IN THOUSANDS) Cash flows from operating activities: Net income (loss).................................... $ 11,996 $ 22,036 $ -- $ 34,032 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion, depreciation and amortization........... 10,486 9,755 -- 20,241 Exploration dry hole costs......................... 1,153 48 -- 1,201 Impairment of proved properties.................... 466 538 -- 1,004 Deferred income taxes.............................. 6,896 11,388 -- 18,284 Stock compensation expense......................... 545 -- -- 545 Change in derivative fair value of derivatives..... -- (1,102) -- (1,102) Changes in asset and liabilities, net of effects of acquisitions: Decrease (increase) in accounts receivable....... 2,532 1,581 -- 4,113 Decrease in prepaid expenses..................... (799) (280) -- (1,079) Increase (decrease) in accounts payable.......... 5,987 (5,011) -- 976 Decrease in ad valorem taxes payable............. -- 1,888 -- 1,888 Increase in income taxes payable................. -- 977 -- 977 Increase (decrease) in accrued expenses.......... (1,867) (4,993) -- (6,860) Decrease in other liabilities.................... -- (2) -- (2) -------- -------- -------- -------- Net cash provided by operating activities..... 37,395 36,823 -- 74,218 -------- -------- -------- -------- Cash flows from investing activities: Additions to property and equipment.................. (11,383) (8,813) -- (20,196) Decrease in intercompany receivable.................. 15,177 -- (15,177) -- Other acquisitions................................... -- (611) -- (611) Other................................................ -- -- -- -- -------- -------- -------- -------- Net cash used in investing activities......... 3,794 (9,424) (15,177) (20,807) -------- -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock............... -- -- -- -- Proceeds from issuance of long-term debt............. -- -- -- -- Preferred stock dividend............................. -- -- -- -- Financing fees....................................... -- -- -- -- Decrease in intercompany payable..................... -- (15,177) 15,177 -- -------- -------- -------- -------- Net cash provided by (used in) financing activities.................................. -- (15,177) 15,177 -- -------- -------- -------- -------- Net increase in cash and cash equivalents.............. 41,189 12,222 -- 53,411 Cash and cash equivalents, beginning of year........... 12,458 7,696 -- 20,154 -------- -------- -------- -------- Cash and cash equivalents, end of year................. $ 53,647 $ 19,918 $ -- $ 73,565 ======== ======== ======== ========
16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of Westport's financial condition and results of operation are based upon consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our significant accounting policies are described in Note 1 to our consolidated financial statements as set forth in our Form 10-K. In response to SEC Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we have identified certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management. We analyze our estimates, including those related to oil and gas revenues, oil and gas properties, fair value of derivative instruments, income taxes and contingencies and litigation, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of its consolidated financial statements: - Revenue Recognition. We follow 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. - Successful Efforts Accounting. We account for our 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 our oil and natural gas properties are located within the continental United States, the Gulf of Mexico and Canada. - Proved Reserve Estimates. Estimates of our proved reserves included in this report are prepared in accordance with GAAP and SEC guidelines. The accuracy of a reserve estimate is a function of: - the quality and quantity of available data; - the interpretation of that data; - the accuracy of various mandated economic assumptions; and - the judgment of the persons preparing the estimate. Our proved reserve information included in this report is based on estimates we prepared. Estimates prepared by others may be higher or lower than our estimates. Because these estimates depend on many assumptions, all of which may substantially differ from actual results, reserve estimates may be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify material revisions to the estimate. Our stockholders should not assume that the present value of future net cash flows is the current market value of our estimated proved reserves. In accordance with SEC requirements, we based the estimated discounted future net cash flows from proved reserves on prices and costs on the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of the estimate. Our estimates of proved reserves materially impact depletion expense. If the estimates of proved reserves decline, the rate at which we record depletion expense increases, reducing net income. Such a decline may result from lower market prices, which may make it uneconomic to drill for and produce 17 higher cost fields. In addition, the decline in proved reserve estimates may impact the outcome of our assessment of our oil and gas producing properties for impairment. - Impairment of Proved Oil and Gas Properties. We review our long-lived proved properties to be held and used whenever management judges that events or circumstances indicate that the recorded carrying value of the properties may not be recoverable. Management assesses whether or not an impairment provision is necessary based upon management's outlook of future commodity prices and net cash flows that may be generated by the properties. Proved oil and gas properties are reviewed for impairment on a field-by-field basis, which is the lowest level at which depletion of proved properties is calculated. - Impairment of Unproved Oil and Gas Properties. Management periodically assesses individually significant unproved oil and gas properties for impairment, on a project-by-project basis. Management's assessment of the results of exploration activities, commodity price outlooks, planned future sales or expiration of all or a portion of such projects impact the amount and timing of impairment provisions. - Commodity Derivative Instruments and Hedging Activities. We periodically enter into commodity derivative contracts and fixed-price physical contracts to manage our exposure to oil and natural gas price volatility. We primarily utilize price swaps, futures contracts or collars, which are generally placed with major financial institutions or with counterparties of high credit quality that we believe 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 we receive. On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Under SFAS No. 133 all derivative instruments are recorded on the balance sheet at fair value. Changes in the derivative's fair value are recognized currently in earnings unless specific hedge accounting criteria are met. For qualifying cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income (loss) to the extent the hedge is effective. For qualifying fair value hedges, the gain or loss on the derivative is offset by related results of the hedged item in the income statement. Gains and losses on hedging instruments included in accumulated other comprehensive income (loss) are reclassified to oil and natural gas sales revenue in the period that the related production is delivered. Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at market value in the consolidated balance sheet, and the associated unrealized gains and losses are recorded as current expense or income in the consolidated statement of operations. While such derivative contracts do not qualify for hedge accounting, management believes these contracts can be utilized as an effective component of CPRM activities. 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. Our results of operations are significantly impacted by the prices of oil and natural gas, which are volatile. 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. 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 18 applicable taxing authorities as a percentage of revenues. However, properties located in Federal waters offshore are generally not subject to production taxes. Transportation costs are comprised of costs paid to a carrier to deliver oil or natural gas to a specified delivery point. In some cases we receive a payment from the purchases of our oil and natural gas which is net of gas transportation costs and in other instances we pay the costs of transportation. 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 twice each year. 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. We assess our proved properties on a field-by-field basis for impairment, in accordance with the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of," whenever events or circumstances indicate that the capitalized costs of oil and natural gas properties may not be recoverable. When making such assessments, we compare the expected undiscounted future net revenues on a field-by-field basis with the related net capitalized costs at the end of each year. 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 discounted future net revenues based on escalated prices. Reserve categories used in the impairment analysis for all periods considered are categories of proven reserves and probable and possible reserves, which were risk adjusted based on our drilling plans and history of successfully developing those types of reserves. We periodically assess our unproved properties to determine if any such properties have been impaired. Such assessment is based on, among other things, the fair value of properties located in the same area as the unproved property and our intent to pursue additional exploration opportunities on such property. Stock compensation expense consists of noncash charges resulting from the application of the provisions of FASB Interpretation No. 44 to certain stock options granted to employees, issuance of restricted stock to certain employees and a one time expense related to the repurchase of employee stock options in March 2000. General and administrative expenses consist primarily of salaries and related benefits, 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. MERGERS On August 21, 2001, the stockholders of Belco approved the Agreement and Plan of Merger, dated as of June 8, 2001, between Belco and 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 owned a majority of the outstanding Westport common stock immediately after 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. 19 RESULTS OF OPERATIONS As indicated above, the Merger 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 following table sets forth certain operational data for the periods presented: SUMMARY DATA
FOR THE THREE MONTHS ENDED MARCH 31, --------------------- 2002 2001 --------- --------- (IN THOUSANDS) Production Oil (Mbbls)............................................... 1,805 926 Natural gas (Mmcf)........................................ 20,078 10,529 Mmcfe..................................................... 30,907 16,085 Average Daily Production Oil (Mbbls/d)............................................. 20.1 10.3 Natural gas (Mmcf/d)...................................... 223.1 117.0 Mmcfe/d................................................... 343.4 178.7 Average Prices Oil (per bbl)............................................. $ 18.32 $ 25.58 Natural gas (per Mcf)..................................... 2.19 6.93 Hedging effect (per Mcfe)................................... 0.13 (0.11) Oil and natural gas sales................................... $77,012 $96,655 Lease operating expense..................................... 19,675 10,473 Per Mcfe.................................................. 0.64 0.65 General and administrative costs............................ 5,934 3,522 Per Mcfe.................................................. 0.19 0.22 Depletion, depreciation and amortization.................... 47,589 20,241 Per Mcfe.................................................. 1.54 1.26
The discussion below includes a comparison of our results of operations for the three months ended March 31, 2002 and 2001. Revenues. Oil and natural gas revenues for the three months ended March 31, 2002 decreased by $19.6 million, or 20%, from $96.6 million to $77.0 million, compared to the three months ended March 31, 2001. Production from the acquired Belco properties caused revenues to increase $34.0 million. The increase from the Belco properties was offset by a decrease from the Old Westport properties of $53.6 million resulting from decreases of 68% in realized natural gas prices and 28% in realized oil prices, excluding the effects of hedging. Production volumes increased 14.8 Bcfe from 16.1 Bcfe to 30.9 Bcfe. Acquired Belco properties accounted for 13.5 Bcfe of the increase. Production volumes also increased 2.3 Bcfe from recent discoveries in the Gulf of Mexico. The increases were partially offset by an interruption of service of the pipeline transporting gas from the West Cameron 180/198 complex. For the three months ended March 31, 2002, hedging transactions had the effect of increasing oil and natural gas revenues by $3.9 million, or $0.13 per Mcfe. For the three months ended March 31, 2001, hedging transactions had the effect of decreasing oil and natural gas revenues $1.7 million, or $0.11 per Mcfe. Commodity Price Risk Management Activities. The Company recorded a net loss of $9.3 million in the non-hedge change in fair value of derivatives, compared to a $2.1 million gain for the three months ended 20 March 31, 2001. Non-hedge settlements of derivatives for the three months ended March 31, 2002 increased $1.0 million from $0.1 million to $1.1 million, compared to the same period in 2001. The gains and losses relate to settlements of derivatives and changes in fair value on derivatives that under SFAS No. 133 do not qualify for hedge accounting. Lease Operating Expense. Lease operating expense for the three months ended March 31, 2002 increased by $9.2 million, or 88%, from $10.5 million to $19.7 million, compared to the same period in 2001. Lease operating expenses from the acquired Belco properties accounted for $9.0 million of the increase. On a per Mcfe basis, lease operating expense decreased from $0.65 to $0.64 in the 2001 and 2002 periods, respectively. Production Taxes. Production taxes for the three months ended March 31, 2002 increased by $2.3 million, or 67%, from $3.5 million to $5.9 million, compared to the same period in 2001. Production taxes on the acquired Belco properties accounted for $3.9 million of the increase. The increase from the Belco properties was partially offset by the decrease in oil and natural gas revenues. As a percent of oil and natural gas revenues (excluding the effects of hedges), production taxes increased from 3.6% to 7.6%. The increase in production taxes as a percent of revenue is primarily the result of the Belco acquisition, which increased the number of onshore properties that are subject to production taxes. Transportation Costs. Transportation costs for the three months ended March 31, 2002 increased by $1.3 million, or 90%, from $1.4 million to $2.7 million, compared to the same period in 2001. The acquired Belco properties accounted for $0.7 million of the increase. The remaining increase was primarily due to additional offshore wells that started producing in the latter part of 2001 and in 2002 and a one time reclass adjustment related to certain coalbed methane wells. Exploration Costs. Exploration costs for the three months ended March 31, 2002 increased by $7.7 million from $2.6 million to $10.3 million, compared to the same period in 2001. Dry hole costs increased $3.6 million as a result of two unsuccessful exploratory wells one drilled in the Gulf of Mexico and the other in Wyoming during the three months ended March 31, 2002 compared to one unsuccessful exploratory well drilled in the Gulf of Mexico in the prior year at a lower cost. Purchases of Gulf of Mexico 3-D seismic data increased $4.0 million during the three months ended March 31, 2002 compared to the same period in 2001. Depletion, Depreciation and Amortization (DD&A) Expense. DD&A expense increased $27.3 million, or 135%, during the three months ended March 31, 2002, from $20.2 million to $47.5 million, compared to the same period in 2001. Acquired Belco properties accounted for $21.1 million of the increase. An increase of $4.5 million was related to recent discoveries in the Gulf of Mexico and the remaining increase was due to additions in oil and natural gas properties. On a per Mcfe basis, DD&A expense increased from $1.26 to $1.54 primarily due to recent discoveries in the Gulf of Mexico and acquired Belco properties, which have higher DD&A expense per Mcfe compared to properties in the same period in 2001. Also, a decrease in reserves at December 31, 2001 as a result of lower commodity prices at December 31, 2001 compared to December 31, 2000 caused an increase in DD&A on a per Mcfe basis. Impairment of Unproved Properties. During the three months ended March 31, 2002 and 2001, we recognized unproved property impairments of $1.0 million on offshore leases, as a result of an assessment of the exploration opportunities existing on such properties. Stock Compensation Expense. During the three months ended March 31, 2002, we recognized $1.8 million of stock compensation expense as a result of applying FASB Interpretation No. 44 and recorded $0.1 million in expense related to the issuance of restricted stock. During the three months ended March 31, 2001, we recorded $0.4 million of stock compensation expense as a result of applying FASB Interpretation No. 44 and $0.1 million related to the issuance of restricted stock. General and Administrative (G&A) Expense. G&A expense increased $2.4 million, or 68%, during the three months ended March 31, 2002, from $3.5 million to $5.9 million, compared to the same period in 2001. The Merger accounted for $1.5 million of the increase. The majority of the remaining increase was related to payroll costs such as salaries and benefits, resulting from an increase in staff. G&A expense per Mcfe of production decreased to $0.19 in the first quarter of 2002 from $0.22 for the first quarter of 2001. 21 Other Income (Expense). Other expense for the three months ended March 31, 2002 was $8.5 million compared to $0.2 million for the three months ended March 31, 2001. Interest expense increased $8.1 million during the three months ended March 31, 2002, as a result of the increase in the debt balance relating to the Merger. Other income (expense) increased $0.2 million primarily due to a payment of a natural gas processing settlement and changes in fair values on interest rate swap contracts that were not designated as hedges for accounting purposes. Income Taxes. We recorded a deferred income tax benefit of $11.2 million for the three months ended March 31, 2002 due to a net loss. For the three months ended March 31, 2001, we recorded income tax expense of $19.6 million ($18.3 million deferred and $1.3 million current). Net Income (Loss). Net loss for the three months ended March 31, 2002 was $19.5 million compared to net income of $34.0 million for the three months ended March 31, 2001. The variance was primarily attributable to increases of $51.6 million in operating expenses, $8.3 million in other expenses and a decrease of $24.3 million in net revenues partially offset by a decrease of $30.7 million in provision for income taxes. 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 $41.1 million for the three months ended March 31, 2002 compared to $74.2 million for the three months ended March 31, 2001. Operating cash flow in the three month period decreased compared to the prior period due to decreased oil and natural gas prices, and higher operating and other expenses. Cash flow used in investing activities was $74.9 million for the three months ended March 31, 2002 compared to $20.8 million for the three months ended March 31, 2001. Of this total, $37.0 million was used for exploitation and exploration activities and $38 million was used for acquisitions, offset by proceeds from sales of properties of $0.2 million. Investing activities for the three months ended March 31, 2001 included $20.2 million for exploitation and exploration activities and $0.6 million for acquisitions. Net cash from financing activities was $44.2 million for the three months ended March 31, 2002 compared to no financing activities for the three months ended March 31, 2001. Financing activities for the three months ended March 31, 2002 consisted of $45 million in borrowings utilized for the acquisition and development of oil and natural gas properties and $0.4 million from issuance of common stock offset by a $1.2 million preferred stock dividend payment. FINANCING ACTIVITY REVOLVING CREDIT FACILITY The Company entered into 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 March 31, 2002. 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 rate of interest announced by JP Morgan Chase Bank, formerly known as The Chase Manhattan Bank, as its 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. 22 As of March 31, 2002, we had borrowings and letters of credit issued of approximately $83.8 million outstanding under the Revolving Credit Facility with an average interest rate of 3.30% and available unused borrowing capacity of approximately $316.2 million. 8 7/8% SENIOR SUBORDINATED NOTES DUE 2007 In connection with the Merger, we assumed $147 million face amount of Belco's 8 7/8% Senior Subordinated Notes due 2007. On November 1, 2001, approximately $24.3 million face amount of the 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 Rule 144A under the Securities Act of 1933, as amended. The notes are non-callable until November 1, 2006, when we have 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. On March 14, 2002, we completed the exchange of these notes for new notes with substantially identical terms, except that the new notes are generally freely tradeable. CAPITAL EXPENDITURES We anticipate that our capital expenditures for 2002 will be approximately $170 million. We anticipate that our primary cash requirements for 2002 will include funding acquisitions, funding development projects and general working capital needs. 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 and we therefore do not budget for them. We expect to fund our capital expenditure activities, which include acquisition, development of and exploration on our oil and natural gas properties through cash flow from operations and available capacity under the Revolving Credit Facility. We believe that borrowings under the Revolving Credit Facility, projected operating cash flows and cash on hand will be sufficient 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. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Our disclosure and analysis in this report, including information incorporated by reference, 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 financial condition, results of 23 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 report that address 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 report 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 report, including the risks outlined under "Risk Factors" in our report on Form 10-K 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our market risk exposures relate primarily to commodity prices and interest rates. We enter into various transactions involving commodity price risk management activities 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 March 31, 2002, we had substantial derivative financial instruments outstanding and related to our price risk management program. See "Note 4" to our consolidated financial statements in Item 1 of this Report for additional details on our oil and natural gas related transactions in effect as of March 31, 2002. For more information on our interest rate swaps in effect as of March 31, 2002, see "Note 3" to our consolidated financial statements in Item 1 of this Report. 24 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) During the quarter ended March 31, 2002, we issued 32,299 shares of Common Stock, of which 13,018 shares were issued in connection with the exercise of options granted pursuant to the EPGC Directors' Stock Option Plan and 19,281 shares were issued in connection with the exercise of options granted pursuant to the Belco 1996 Stock Incentive Plan. (b) On March 28, 2002 we paid the first quarter dividend for 2002 of $0.40625 per share per quarter on our 6 1/2% Convertible Preferred Stock. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The following exhibits are filed as part of this Form 10-Q: 2.1 Agreement and Plan of Merger, dated as of March 9, 2000, by and among Westport Oil and Gas Company, Inc., Westport Energy Corporation, Equitable Production Company, Equitable Production (Gulf) Company and EPGC Merger Sub Corporation (incorporated by reference to Exhibit 2.1 to the registration statement on Form S-1, Registration No. 333-40422), filed with the Securities and Exchange Commission on June 29, 2000). 2.2 Agreement and Plan of Merger, dated as of June 8, 2001, by and among Belco Oil & Gas Corp. and Westport Resources Corporation (incorporated by reference to Exhibit 2.1 to the registration statement on Form S-4/A, (Registration No. 333-64320), filed with the Securities and Exchange Commission on July 24, 2001). 3.1 Amended Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the registration statement on Form 8-A/A, filed with the Securities and Exchange Commission on August 31, 2001). 3.2 Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the registration statement on Form 8-A/A, filed with the Securities and Exchange Commission on August 31, 2001). 4.1 Specimen Certificate for shares of Common Stock of the Company (incorporated by reference to Exhibit 4.1 to the registration statement on Form 8-A/A, filed with the Securities and Exchange Commission on August 31, 2001). 4.2 Specimen Certificate for shares of 6 1/2% Convertible Preferred Stock of the Company (incorporated by reference to Exhibit 4 to the registration statement on Form 8-A/A, filed with the Securities and Exchange Commission on August 31, 2001). 10.1* Employment Agreement, effective April 1, 2002, between the Company and Donald D. Wolf. 10.2* Employment Agreement, effective April 1, 2002, between the Company and Barth E. Whitham.
- --------------- * filed herewith 25 (b) Reports on Form 8-K (i) A report on Form 8-K, filed with the Securities and Exchange Commission on January 4, 2002, regarding the Company's operational and financial guidance for 2002. (ii) A report on Form 8-K, filed with the Securities and Exchange Commission on April 15, 2002, regarding changes in the Company's independent public accountants. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WESTPORT RESOURCES CORPORATION By: /s/ DONALD D. WOLF ------------------------------------ Name: Donald D. Wolf Title: Chairman of the Board and Chief Executive Officer Date: May 13, 2002 By: /s/ LON MCCAIN ------------------------------------ Name: Lon McCain Title: Vice President, Chief Financial Officer and Treasurer Date: May 13, 2002 27 EXHIBIT INDEX 2.1 Agreement and Plan of Merger, dated as of March 9, 2000, by and among Westport Oil and Gas Company, Inc., Westport Energy Corporation, Equitable Production Company, Equitable Production (Gulf) Company and EPGC Merger Sub Corporation (incorporated by reference to Exhibit 2.1 to the registration statement on Form S-1, Registration No. 333-40422), filed with the Securities and Exchange Commission on June 29, 2000). 2.2 Agreement and Plan of Merger, dated as of June 8, 2001, by and among Belco Oil & Gas Corp. and Westport Resources Corporation (incorporated by reference to Exhibit 2.1 to the registration statement on Form S-4/A, (Registration No. 333-64320), filed with the Securities and Exchange Commission on July 24, 2001). 3.1 Amended Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the registration statement on Form 8-A/A, filed with the Securities and Exchange Commission on August 31, 2001). 3.2 Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the registration statement on Form 8-A/A, filed with the Securities and Exchange Commission on August 31, 2001). 4.1 Specimen Certificate for shares of Common Stock of the Company (incorporated by reference to Exhibit 4.1 to the registration statement on Form 8-A/A, filed with the Securities and Exchange Commission on August 31, 2001). 4.2 Specimen Certificate for shares of 6 1/2% Convertible Preferred Stock of the Company (incorporated by reference to Exhibit 4 to the registration statement on Form 8-A/A, filed with the Securities and Exchange Commission on August 31, 2001). 10.1* Employment Agreement, effective April 1, 2002, between the Company and Donald D. Wolf. 10.2* Employment Agreement, effective April 1, 2002, between the Company and Barth E. Whitham.
- --------------- * filed herewith EX-10.1 3 d96815ex10-1.txt EMPLOYMENT AGREEMENT - DONALD D. WOLF EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of April 1, 2002 by and between WESTPORT RESOURCES CORPORATION, a Nevada corporation, whose address is Suite 2300, 410 17th Street, Denver, Colorado 80202 (the "Westport"), and DONALD D. WOLF, whose address is 16401 Rocky Point Lane, Morrison, Colorado 80465 ("Officer"). RECITALS WHEREAS, the Officer is a key employee of Westport and serves as Westport's Chairman of the Board and Chief Executive Officer, and Westport and the Officer desire to set forth herein the terms and conditions of the Officer's employment and his compensation in the event of a termination of the Officer's employment in connection with a Change in Control or otherwise. WHEREAS, in the event of a Change in Control, the Officer may be vulnerable to dismissal without regard to quality of the Officer's service, and Westport believes that it is in the best interests of Westport to enter into this Agreement in order to ensure fair treatment of the Officer and to reduce the distractions and other adverse effects upon such the Officer's performance which are inherent in such a Change in Control. NOW, THEREFORE, for and in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: AGREEMENT 1. Definitions. For purposes hereof, the following terms shall have the following meanings: (a) "Affiliate" shall mean, with respect to any Person (as defined herein), any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such Person. A Person shall be deemed to control another Person for purposes of this definition if such Person possesses, directly or indirectly, the power (i) to vote the securities or other ownership interests having ordinary voting power to elect a majority of the Board of Directors of a corporation or other Persons performing similar functions for any other type of Person, or (ii) to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract, as general partner, as trustee or otherwise. (b) "Bonus Amount" shall mean the average of the annual bonuses earned by the Officer for the three calendar years in which bonuses were paid preceding the year of Officer's termination, or if the Officer has been employed by the Westport for less than three calendar years prior to termination, the average for such lesser period of time (excluding years in which bonuses were not paid). The Board of Directors shall determine, taking into consideration Westport performance, target bonus amounts and other factors, the Bonus Amount of the Officer if the Officer has not been employed by the Westport for a period of time during which bonuses have been paid. (c) "Cause" shall mean: (i) the Officer's material breach of any terms of this Agreement; (ii) the Officer's willful and continued failure to perform his or her job duties and responsibilities; (iii) the Officer's dishonesty towards, fraud upon, crime against, deliberate or attempted injury or bad faith action with respect to Westport or any of its Affiliates; or (iv) the Officer's conviction for any felony crime (whether in connection with Westport's or any of its Affiliates' affairs or otherwise); provided, however, that with respect to clauses (i) and (ii), no such breach or failure shall constitute Cause unless such breach or failure continues after 30 days following written notice by Westport the Officer of such breach or failure setting forth with specificity the nature of such breach or failure. (d) "Change in Control" shall have occurred if (a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "1934 Act")), other than a trustee or other fiduciary holding securities under an Officer benefit plan of Westport or the current beneficial owners or their Affiliates (as defined herein) are or become the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of more than one-half of the then outstanding voting stock of Westport; or (b) there occurs a merger or consolidation of Westport with any other corporation, other than a merger of consolidation which would result in the voting securities of Westport outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least a majority of the combined voting power of the voting securities of Westport or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders approve a plan of complete liquidation of Westport or an agreement for the sale or disposition by Westport of all or substantially all of Westport's assets. (e) "Disability" shall mean a physical or mental infirmity which impairs the Officer's ability to perform substantially his or her duties for a period of one hundred eighty (180) consecutive days. (f) "Good Reason" shall include any of the following: (i) Westport's assignment to the Officer of duties inconsistent with, or a substantial alteration in the nature of, the Officer's responsibilities in effect immediately prior to the Change in Control; (ii) (A) a reduction in either the Officer's salary or target bonus (if a target bonus has been established for the Officer) as each is in effect on the date of a Change in Control, or (B) the discontinuance or material adverse alteration of any material pension, welfare or fringe benefit enjoyed by Officer on the date of a Change in Control, unless such action relates to a discontinuance of benefits on a management-wide or company-wide basis; 2 (iii) Westport's relocation of the Officer to any place in excess of 50 miles from the Officer's place of employment immediately prior to the Change in Control without the Officer's written consent, except for reasonably required travel by the Officer on Westport's business; (iv) any material breach by Westport of any provision of this Agreement, if such material breach has not been cured within 30 days following written notice by the Officer to Westport of such breach setting forth with specificity the nature of the breach; or (v) any failure by Westport to obtain the assumption of this Agreement by any successor (by merger, consolidation or otherwise) or assign of Westport. (g) "Person" shall mean any individual, partnership, joint venture, firm, Westport, corporation, association, trust or other enterprise or any government or political subdivision or any agent, department or instrumentality thereof. (h) "Qualifying Termination" shall mean (i) a termination by the Officer of the Officer's employment with Westport for Good Reason within one year after the occurrence of a Change in Control or (ii) a termination of Officer's employment without Cause by Westport within one year after the occurrence of a Change in Control, or (iii) a termination of Officer's employment without Cause by Westport within six (6) months prior to the date of a Change in Control if the Officer reasonably demonstrates that such termination (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control or (B) otherwise arose in connection with, or in anticipation of, a Change in Control which has been threatened or proposed provided that, in either case, a Change in Control shall actually have occurred. Neither a termination of Officer's employment due to Disability nor a termination of Officer's employment due to death shall constitute a Qualifying Termination. (i) "Voluntary Termination" shall mean termination by Officer of Officer's employment with Westport, but shall not include constructive termination by Westport by reason of material breach of this Agreement by Westport. Voluntary Termination shall include a termination of Officer by Westport after its receipt of a notice of an otherwise Voluntary Termination from Officer. 2. Service. (a) Position. Officer agrees to be employed by and to serve Westport as Chairman and Chief Executive Officer, and Westport agrees to employ and retain Officer in such capacity in accordance with the terms of this Agreement. Officer shall have powers as determined by Westport's Board of Directors and duties commensurate with his position as Chairman and Chief Executive Officer of Westport. (b) Duties. The Officer shall assume and discharge the responsibilities of the Chairman and Chief Executive Officer (as set forth in the Bylaws of Westport), as well as such other responsibilities as may be assigned to him by the Board of Directors of Westport. Officer 3 shall perform his responsibilities to the best of his abilities, shall comply with the general management policies of Westport as announced by the Board of Directors from time to time and shall devote all of his business time, skill and attention to the good faith best efforts performance of his responsibilities and the affairs of Westport. The Officer will engage in no other business or activity for compensation during the term of this Agreement except with the prior written consent of Westport. The Officer shall always be subject to the directions of the Board of Directors, to whom Officer shall report directly, in the performance of his responsibilities, and nothing herein shall affect the power of the Board of Directors to limit, alter, restrict, or remove the authority of the Officer. Officer's principal place of business with respect to his services to Westport shall be at its offices located in the Denver, Colorado metropolitan area or other location reasonably acceptable to Officer. Officer shall be required at various times to travel as part of his duties. 3. Term of Employment. (a) Basic Term. The initial term of employment of Officer by Westport shall be from the date hereof through May 31, 2005 (the "Term") unless terminated earlier pursuant to this Agreement. If a Change in Control has not occurred within the Term of this Agreement, this Agreement shall automatically expire. Following the Term, this Agreement may be renewed only by written agreement of the parties for successive one-year periods. (b) Change of Control. If a Qualifying Termination occurs during the Term, this Agreement shall continue in full force and effect and shall not terminate until the Officer shall have received the severance compensation provided hereunder. 4. Salary, Benefits and Bonus Compensation. (a) Base Salary. Commencing January 1, 2002, Westport agrees to pay to Officer a "Base Salary" of $381,516.96 per annum, payable on Westport's regularly established payroll payment dates. The Base Salary shall be subject to modification for each calendar year or portion thereof determined in the sole discretion of the Board of Directors. In the absence of and until any salary determination by the Board, Officer's Base Salary for a particular calendar year shall be identical to Officer's Base Salary in effect on December 31st of the immediately preceding calendar year. (b) Benefits. (i) Officer Benefits. Officer shall be eligible to participate in such of Westport's benefit and compensation plans as may be generally available to employees of Westport, including participation in Westport's health insurance plan, bonus plan, and its 401(k) program. All such benefit plans may be amended or discontinued in the sole discretion of Westport. (ii) Business Expenses. Westport shall reimburse Officer for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement, including travel and entertainment expenses. Officer shall present monthly to Westport an 4 itemized account of such expenses in such form as may be required by Westport. (iii) Auto. Officer shall be provided with an appropriate Westport automobile to be used for business purposes in the course of performing his duties described in Section 1(b). The automobile may also be used by the Officer for personal travel, and, in such event, the Officer shall maintain records regarding automobile use as required by federal tax regulations. The Officer's records of automobile use shall be available to Westport upon request. (iv) Vacation and Health Club. Officer shall be entitled to vacation time generally available to executive employees of Westport (but no less than four weeks per year), during which vacation time his compensation shall be paid in full. Officer shall be eligible to use Westport's health club membership and Petroleum Club membership. (v) Stock Option. In addition to the stock options previously granted to Officer by Westport, Officer shall be granted stock options in such amounts and for such vesting periods as shall be determined by the Compensation Committee of the Board of Directors of Westport pursuant to Westport's Stock Incentive Plan (the "Plan"). Such grants shall be evidenced by stock option agreements to be entered into by and between Westport and Officer pursuant to the Plan. (vi) Severance. If, prior to May 31, [2005], Officer is subject to a termination of his employment by Westport other than for Cause, Westport shall pay Officer a sum equal to three times Officer's then applicable annual Base Salary and three times the average of the last three years' bonuses. (c) Other Benefits. Nothing in this Article 4 shall be deemed to limit or restrict any right or benefit of Officer under Westport's Certificate of Incorporation, Bylaws or other documents or agreements of Westport applicable to Officer. 5. Termination of Employment. (a) Termination for Cause. Termination for Cause of Officer's employment may be effected by Westport at any time without liability except as specifically set forth in this Section 5(a). The termination shall be effected by written notification to Officer and shall be effective as of the time set forth in such notice. At the effective time of a termination for Cause, Officer immediately shall be paid all accrued Base Salary and any reasonable and necessary business expenses incurred by Officer in connection with his duties hereunder, all to the effective date of termination. In addition, Officer shall be entitled to benefits under any benefit plans of Westport in which Officer is a participant to the full extent of Officer's rights under such plans. (b) Termination Other Than for Cause. Westport may effect a termination of the Officer's employment other than for Cause at any time for any or no reason upon giving written notice to Officer of such termination and without liability except as specifically set forth in this Section 5(b). Expiration of the Term of this Agreement shall not be deemed a termination other than for Cause within the meaning of this paragraph. The termination shall be effective as 5 of the time set forth in such notice. At the effective date of any termination other than for Cause, upon the Officer's execution of a "Release and Confidentiality Agreement" substantially in the form attached hereto as Exhibit A, Officer shall immediately be paid all accrued Base Salary, severance payments pursuant to Section 4(b)(vi) and any reasonable and necessary business expenses incurred by Officer in connection with his duties hereunder, all to the effective date of termination. In addition, Officer shall be entitled to benefits under any benefit plans of Westport in which Officer is a participant to the full extent of Officer's rights under such plans. (c) Disability. If, during the term of this Agreement, Officer, in the reasonable judgment of the Board of Directors of Westport, has failed to perform his duties under this Agreement on account of illness or physical or mental disability, which condition renders Officer incapable of performing the duties of this office, and such condition continues for a period of more than three (3) months, Westport shall have the right to terminate Officer's employment hereunder by written notification to Officer. In the event of such termination, Westport shall pay to Officer all accrued Base Salary and any reasonable and necessary business expenses incurred by Officer in connection with his duties hereunder, all to the effective date of termination, and severance payments pursuant to Section 4(b)(vi). In addition, Officer shall be entitled to benefits under any benefit plans of Westport in which Officer is a participant to the full extent of Officer's rights under such plans. (d) Death. In the event of Officer's death during the Term of this Agreement, Officer's employment shall be deemed to have terminated as of the last day of the month during which his death occurs, and Westport shall pay promptly to his estate all accrued Base Salary and any reasonable and necessary business expenses incurred by Officer in connection with his duties hereunder, all to the effective date of termination. Officer's estate shall also be entitled to benefits under any benefit plans of Westport in which Officer is a participant to the full extent of Officer's rights under such plans. (e) Voluntary Termination. In the event of a Voluntary Termination by Officer, Westport shall immediately pay all accrued Base Salary and any reasonable and necessary business expenses incurred by Officer in connection with his duties hereunder, all to the effective date of termination. In addition, Officer shall be entitled to benefits under any benefit plans of Westport in which Officer is a participant to the full extent of Officer's rights under such plans. (f) Qualifying Termination. If a Qualifying Termination occurs, the Officer shall immediately be paid all earned and accrued salary due and owing to the Officer, any bonus compensation to the extent earned, vested deferred compensation (other than pension plan or profit sharing plan benefits, which will be paid in accordance with the applicable plan), any benefits then due under any plans of Westport in which the Officer is a participant, any accrued and unpaid vacation pay and any appropriate business expenses incurred by the Officer in connection with his duties, all to the date of termination (collectively, "Accrued Compensation"). The Officer shall also be entitled to the severance compensation described in Section 6. 6. Severance Compensation Upon a Qualifying Termination. The Officer shall be entitled to the following upon a Qualifying Termination under the conditions set forth below: 6 (a) Condition to Payment of Severance Compensation. Upon the Officer's execution of a "Release and Confidentiality Agreement" substantially in the form attached hereto as Exhibit A, Westport shall pay to the Officer severance compensation in an aggregate amount equal to three times the sum of the Officer's Base Salary and the Bonus Amount (the "Severance Amount"). (b) Computation and Payment of Severance Amount. The Severance Amount shall be computed by using the higher of the salary paid to the Officer: (a) immediately preceding the Change in Control, or (b) immediately preceding the Officer's Qualifying Termination. The Severance Amount shall be paid without prejudice to the Officer's right to receive all Accrued Compensation. The Severance Amount shall be paid to the Officer in a lump sum within thirty (30) days of the execution of the Release and Confidentiality Agreement. The Severance Amount shall be paid irrespective of the Officer's employment status with any other organization or self-employment; provided, however, that if the Officer should violate the terms of the Release and Confidentiality Agreement, Westport shall be under no further obligation to continue the payments or benefits hereunder. (c) Certain Welfare Benefits. For a number of months equal to thirty-six (36) (the "Continuation Period"), Westport shall at its expense continue on behalf of the Officer and his or her dependents and beneficiaries the life insurance, disability, medical, dental and hospitalization coverages and benefits provided to the Officer immediately prior to the Change in Control or, if greater, the coverages and benefits provided at any time thereafter. The coverages and benefits (including deductibles and costs) provided in this Section 4(c) during the Continuation Period shall be no less favorable to the Officer and his or her dependents and beneficiaries, than the most favorable of such coverages and benefits referred to above. Westport's obligation hereunder with respect to the foregoing coverages and benefits shall be reduced to the extent that the Officer obtains any such coverages and benefits pursuant to a subsequent employer's benefit plans, in which case Westport may reduce any of the coverages or benefits it is required to provide the Officer hereunder so long as the aggregate coverages and benefits of the combined benefit plans is no less favorable to the Officer than the coverages and benefits required to be provided hereunder. Neither this Section 6(c) nor any other provision of this Agreement shall be interpreted so as to reduce any amounts otherwise payable, or in any way diminish the Officer's rights as an Officer of Westport, whether existing now or hereafter, under any benefit, incentive, retirement, stock option, stock bonus, stock purchase plan, or any employment agreement or other plan or arrangement. (d) Equity Grants. Immediately prior to a Change in Control, (i) all options granted by Westport to the Officer shall be 100% vested and immediately exercisable, and the exercise term thereof shall end upon the earlier of: the first anniversary of the date of termination of employment and the end of the original exercise term, and (ii) all restrictions shall lapse with respect to all grants of restricted stock held by Officer. 7 7. Excise Tax Limitation. (a) Gross-Up Payment. In the event it shall be determined that any payment or distribution of any type to or for the benefit of the Officer, by Westport, any Affiliate, any person who acquires ownership or effective control of Westport or ownership of a substantial portion of Westport's assets (within the meaning of Section 280G of the Code and the regulations thereunder) or any affiliate of such Person, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the "Total Payments"), is or will be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), then the Officer shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Officer of all taxes (including any interest or penalties imposed with respect to such taxes), including any income tax, employment tax or Excise Tax, imposed upon the Gross-Up Payment, the Officer retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. Notwithstanding the foregoing provisions of this Section 7(a), if it shall be determined that the Officer is entitled to a Gross-Up Payment, but that the Total Payments would not be subject to the Excise Tax if the Total Payments were reduced by an amount that is less than 10% of the portion of the Total Payments that would be treated as "parachute payments" under Section 280G of the Code, then the amounts payable to the Officer under this Agreement shall be reduced to the maximum amount that could be paid to the Officer without giving rise to the Excise Tax (the "Safe Harbor Cap"), and no Gross-Up Payment shall be made to the Officer. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing first the payment under Section 6(a), unless an alternative method of reduction is elected by the Officer. For purposes of reducing the Total Payments to the Safe Harbor Cap, only amounts payable under this Agreement (and no other amounts) shall be reduced. (b) Determination by Accountant. All mathematical determinations, and all determinations as to whether any of the Total Payments are "parachute payments" (within the meaning of Section 280G of the Code), that are required to be made under this Section, including determinations as to whether a Gross-Up Payment is required, the amount of such Gross-Up Payment, the reduction of the Total Payments to the Safe Harbor Cap, amounts relevant to the last sentence of this Section 7(b), and the assumptions to be utilized in arriving at such determinations, shall be made at Westport's expense by an independent nationally recognized accounting firm selected by Westport (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation to Westport and the Officer by no later than ten (10) days following the Termination Date, if applicable, or such earlier time as is requested by Westport or the Officer (if the Officer reasonably believes that any of the Total Payments may be subject to the Excise Tax). If the Accounting Firm determines that no Excise Tax is payable by the Officer, it shall furnish the Officer and Westport with a written statement that such Accounting Firm has concluded that no Excise Tax is payable (including the reasons therefor) and that the Officer has substantial authority not to report any Excise Tax on his or her federal income tax return. If a Gross-Up Payment is determined to be payable, it shall be paid to the Officer within twenty (20) days after the Determination (and all accounting calculations and other material supporting the Determination) is delivered to Westport by the Accounting Firm. Any determination by the Accounting Firm shall be binding upon Westport and the Officer, absent manifest error. As a result of uncertainty in the application of Section 4999 of the Code at the time of the Determination 8 by the Accounting Firm hereunder, it is possible that Gross-Up Payments not made by Westport should have been made ("Underpayment"), or that Gross-Up Payments will have been made by Westport which should not have been made ("Overpayments"). In either such event, the Accounting Firm shall determine the amount of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount of such Underpayment shall be promptly paid by Westport to or for the benefit of the Officer. In the case of an Overpayment, the Officer shall, at the direction and expense of Westport, take such steps as are reasonably necessary (including the filing of returns and claims for refund), follow reasonable instructions from, and procedures established by, Westport, and otherwise reasonably cooperate with Westport to correct such Overpayment, provided, however, that (i) the Officer shall not in any event be obligated to return to Westport an amount greater than the net after-tax portion of the Overpayment that he or she has retained or has recovered as a refund from the applicable taxing authorities and (ii) this provision shall be interpreted in a manner consistent with the intent to make the Officer whole, on an after-tax basis, from the application of the Excise Tax, it being understood that the correction of an Overpayment may result in the Officer repaying to Westport an amount which is less than the Overpayment. (c) Internal Revenue Service Claims. The Officer shall notify Westport in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by Westport of the Gross-up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Officer is informed in writing of such claim and shall apprise Westport of the nature of such claim and the date on which such claim is requested to be paid. The Officer shall not pay such claim prior to the expiration of the 30-day period following the date on which he or she gives such notice to Westport (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If Westport notifies the Officer in writing prior to the expiration of such period that it desires to contest such claim, the Officer shall: (i) give Westport any information reasonably requested by Westport relating to such claim, (ii) take such action in connection with contesting such claim as Westport shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by Westport, (iii) cooperate with Westport in good faith in order effectively to contest such claim, and (iv) permit Westport to participate in any proceedings relating to such claim; provided, however, that Westport shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Officer harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 7(c), 9 Westport shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Officer to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Officer agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Westport shall determine; provided, however, that if Westport directs the Officer to pay such claim and sue for a refund, Westport shall advance the amount of such payment to the Officer, on an interest-free basis, and shall indemnify and hold the Officer harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitation relating to payment of taxes for the taxable year of the Officer with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, Westport's control of the contest shall be limited solely to such contested amount. Furthermore, Westport's control of the contest shall be limited to issues with respect to which a Gross-up Payment would be payable hereunder and the Officer shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 8. Nature of Rights. The Officer shall have the status of a mere unsecured creditor of Westport with respect to his right to receive any payment under this Agreement. This Agreement shall constitute a mere promise by the Westport to make payments in the future of the benefits provided for herein. It is the intention of the parties hereto that the arrangements reflected in this Agreement shall be treated as unfunded for tax purposes and, if it should be determined that Title I of ERISA is applicable to this Agreement, for purposes of Title I of ERISA. Nothing in this Agreement shall prevent or limit the Officer's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by Westport and for which the Officer may qualify, nor shall anything herein limit or reduce such rights as the Officer may have under any other agreements with Westport. Amounts which are vested benefits or which the Officer is otherwise entitled to receive under any plan or program of Westport shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 9. Full Settlement. Westport's obligation to provide the payments and benefits provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which Westport may have against the Officer or others. In no event shall the Officer be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Officer under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Officer obtains other employment except as set forth in Section 6(c) with respect to certain welfare benefits. Westport agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses (collectively, "Legal Fees") which the Officer may reasonably incur as a result of any contest (including as a result of any contest by the Officer about the amount of any payment pursuant to this Agreement) by Westport, the Officer or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof, plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the 10 Internal Revenue Code of 1986, as amended (the "Code"); provided, however, that Westport shall not pay the Legal Fees: (A) to the extent they were incurred with respect to a claim brought by the Officer in bad faith and/or (B) to the extent they were incurred where a determination has been made (either by a court or as part of a settlement agreement) that the Officer is not entitled to substantially all the amounts claimed by Officer whether or not such claims were made in bad faith. 10. Protection of Westport's Business. (a) No Competition. Officer shall not, for twelve (12) months following the Voluntary Termination of his employment, work as an employee or independent contractor or become an investor or owner in or lender to any business, corporation, partnership or other entity (a "Competing Business") where such employment with, investment in or service to the Competing Business would aid, entail or result in such Competing Business' competition with Westport in any project or transaction of Westport of which Officer was aware or should have been aware during the term of his employment with Westport. (b) No Hire of Other Officers or Contractors. Officer agrees that for a period of twelve (12) months from and after the date following the termination of his employment, whether for Cause or by Voluntary Termination or by expiration of the Term or by Qualifying Termination or otherwise, he shall not, directly or indirectly, as an employee of or consultant to any Person, or for himself or on behalf of, or in connection with, any Person, solicit or attempt to solicit, direct or take away any Person who was an employee, agent, or contractor of Westport at any time during the twelve-month period prior to the termination of Officer's employment or who is an employee, agent or contractor for Westport during the twelve-month period following the termination of Officer's employment; provided, however, that this provision shall not apply to the solicitation or attempted solicitation of any Person known in the industry in which Westport is engaged to have performed services in the industry generally and not as an employee of any single entity in the industry. Westport may waive the restriction contained in this Section 10(b) as to any employee at any time, but any such waiver shall not be considered a waiver of the future application of this provision nor shall it be considered a waiver as to any employee other than the one to whom it applies. 11. Confidentiality. (a) Confidential Information and Materials. All of the Confidential Information and Materials, as defined herein, are and shall continue to be the exclusive confidential property and trade secrets of Westport. Such Confidential Information and Materials shall include only such information that is proprietary to Westport and shall not include any information that becomes part of the public domain through no fault of Officer. Confidential Information and Materials have been or will be disclosed to Officer solely by virtue of his employment with Westport and solely for the purpose of assisting him in performing his duties for Westport. "Confidential Information and Materials" refers to the non-public organization structure and ownership of Westport, its shareholders, its advisors and advisors to its shareholders, its affiliates and the affiliates of any of its shareholders and their advisors and all information belonging to or used by Westport or Westport's clients or associates relating to 11 internal operations, procedures and policies, finances, income, profits, business strategies, pricing, billing information, compensation and other personnel information, client contacts, sales lists, employee lists, geotechnical information of every sort and character, technology, land status, exploration and acquisition plans and programs, costs, marketing plans, developmental plans, drilling plans, inventions, computer program manuals, computer programs, and computer system designs (to the extent such manuals, programs and designs are created by or for Westport and are not off-the-shelf manuals, programs and designs) and trade secrets of every kind and character, whether or not they constitute a trade secret under applicable law and whether developed by Officer during or after business hours. (b) Non-disclosure and Non-use. Officer may use Confidential Information and Material while an employee of Westport and in the course of that employment to the extent deemed necessary by the Board of Directors for the performance of Officer's responsibilities or as otherwise required by law. Such permission expires upon termination of his employment with the Company or on notice from Westport. Officer shall not, either during or after his employment with Westport, disclose any Confidential Information or Materials to any person, firm, corporation, association or other entity for any reason or purpose unless expressly permitted by Westport in writing or unless required by law to be disclosed. Officer shall not use, in any manner other than to further Westport's business, any Confidential Information or Materials. Upon termination of his employment, Officer shall immediately return all Confidential Information or Materials or other property of Westport, its associates or its potential associates in his possession or control. 12. Remedies. (a) Equitable Remedies. The service rendered by Officer to Westport and the information disclosed to Officer during his employment are of a unique and special character, and any breach of Sections 10 or 11 hereof will cause Westport irreparable injury and damage which will be extremely difficult to quantify. The parties agree that because of unquantified risks and intangibles which are impossible to measure, Westport will be entitled to, in addition to all other remedies available to it, injunctive relief to prevent a breach and to secure the enforcement of all provisions of Sections 10 and 11. Injunctive relief may be granted immediately upon the commencement of any such action without notice to Officer, which notice Officer hereby specifically waives. (b) Arbitration. In the event any controversy arises with respect to this Agreement, it shall be arbitrated in accordance with the rules and procedures of the American Arbitration Association with the following limitations: (i) The laws of the State of Colorado shall be applied to the interpretation and resolution of the controversy. The location of the arbitration shall be in the Denver Metropolitan Area of Colorado. (ii) The parties shall be entitled to conduct expedited discovery proceedings in accordance with the Colorado Rules of Civil Procedure and such rights of 12 discovery may be enforced by the appropriate court by filing a petition for compliance, in regard to which the parties hereto agree to abide timely and fully. The discovery period shall in no event exceed a period of sixty (60) days from the date the arbitration response is filed by the responding party. (iii) Arbitration procedures shall be conducted substantially in accordance with the Rules of Civil Procedure in the State of Colorado and the Rules of Evidence of said State. (iv) The award of arbitration may be reduced to judgment in accordance with the rules of Civil Procedure of the State of Colorado and/or the rules or laws of any other jurisdiction and the Colorado Uniform Arbitration Act. (v) In the event one party willfully, after ten (10) days notice of his failure or refusal, fails or refuses to comply timely with the arbitration procedure, that party shall be deemed to have conclusively waived its right to participate in the arbitration and the nondefaulting party may either proceed to arbitration, the decision of which shall be binding upon the defaulting party, or may proceed in an action in court. (vi) The prevailing party in any arbitration may be entitled to an award of attorneys' fees and all costs to be paid by the losing party in the arbitration as determined by the arbitrators. (vii) In the event a court of competent jurisdiction or panel of arbitrators finds any of the provisions of this section 12(b) to be so overbroad as to be unenforceable, it is the parties' intent that with respect to such jurisdiction such provision be reduced in scope by the Court, but only to the extent deemed necessary by the Court or arbitrators to render the provision reasonable and enforceable, keeping in mind that it is the parties' intent to give the Company the broadest possible legal protection. (viii) In no event shall any monetary dispute between the parties be arbitrated or litigated until there is an aggregated dollar amount of not less than $10,000.00 in dispute. 13. Miscellaneous. (a) Severability. Should a court or other body of competent jurisdiction determine that any provision of this Agreement is excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible. (b) Withholding. All compensation and benefits to the Officer hereunder shall be reduced by all federal, state, local and other withholdings and similar taxes and payments required by applicable law. Westport may withhold amounts due it from Officer from amounts due under this Agreement to Officer. 13 (c) Entire Agreement; Modification; Waiver. This Agreement represents the entire agreement between the parties and supersedes any prior agreements between the parties, written or oral, with respect to the subject matter covered hereby, including without limitation the Employment Agreement between the Officer and Westport dated as of May 8, 2000. This Agreement may be amended, modified, superseded or canceled, and any of the terms hereof may be waived, only by a written instrument executed by each party hereto or, in the case of a waiver, by the party waiving compliance. The failure of any party at any time or times to require performance of any provision hereof shall not affect such party's right at a latter time to enforce the same. No waiver by any party of the breach of any provision contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such breach or of any other term of this Agreement. (d) Applicable Law. This Agreement shall be construed under and governed by the laws of the State of Colorado. (e) Successors and Assigns. This Agreement shall be binding upon, and shall issue to the benefit of, Westport's successors and assigns and the Officer's heirs and assigns. (f) Nontransferability by Officer. Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Officer, his or her beneficiaries or legal representatives, except by will or by the laws of descent and distribution. (g) Notices. All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery, or first-class mail, certified or registered with return receipt requested, or by commercial overnight courier or by facsimile and shall be deemed to have been duly given upon hand delivery, three (3) days after mailing, the first business day following delivery to a commercial overnight courier or upon receipt of a facsimile, addressed as follows If to the Company: Westport Resources Corporation. 410 Seventeenth Street, #2300 Denver, Colorado 80202 Attn: General Counsel Facsimile: (303) 573-5609 with a copy to: Dr. Richard J. Haas Partners Attention: Mr. Michael Russell Dukes Court 32 Duke Street St. James London UK SW1Y 6DF Facsimile: 011-44-207-321-5242 14 Equitable Resources Energy Co. One Oxford Centre, Suite 3300 Pittsburgh, PA 15219 Attention: Mr. Murry Gerber Facsimile: (412) 553-5731 Belfer Management, LLC 767 Fifth Avenue, 46th Floor New York, NY 10153 Attention: Mr. Robert Belfer Facsimile: (212) 644-2396 If to Officer: Donald D. Wolf 16401 Rocky Point Lane Morrison, Colorado 80465 Facsimile: 303-573-5609 Any party may change such party's address for notices by notice given pursuant to this Section 13(g). (h) Survival of Westport's Obligation. Westport's obligations hereunder shall not be terminated by reason of any liquidation, dissolution, bankruptcy, cessation of business or similar event relating to Westport. This Agreement shall not be terminated by any merger or consolidation or other reorganization of Westport. In the event any such merger, consolidation or reorganization shall be accomplished by transfer of stock or by transfer of assets or otherwise, the provisions of this Agreement shall be binding upon and insure to the benefit of the surviving or resulting corporation or person. This Agreement shall be binding upon and inure to the benefit of the executors, administrators, heirs, successors and assigns of the parties; provided, however, that except as provided in this Section, this Agreement shall not be assignable either by Westport or by Officer. (i) Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same Agreement. 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of April 1, 2002. WESTPORT RESOURCES CORPORATION By: /s/ Barth E. Whitham ------------------------------ Name: Barth E. Whitham Title: President OFFICER: /s/ Donald D. Wolf --------------------------------- Name: Donald D. Wolf 16 EX-10.2 4 d96815ex10-2.txt EMPLOYMENT AGREEMENT - BARTH E. WHITHAM EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of April 1, 2002 by and between WESTPORT RESOURCES CORPORATION, a Nevada corporation, whose address is Suite 2300, 410 17th Street, Denver, Colorado 80202 (the "Westport"), and BARTH E. WHITHAM, whose address is 16760 Wild Plum Circle, Morrison, Colorado 80465 ("Officer"). RECITALS WHEREAS, the Officer is a key employee of Westport and serves as Westport's President and Chief Operating Officer, and Westport and the Officer desire to set forth herein the terms and conditions of the Officer's employment and his compensation in the event of a termination of the Officer's employment in connection with a Change in Control or otherwise. WHEREAS, in the event of a Change in Control, the Officer may be vulnerable to dismissal without regard to quality of the Officer's service, and Westport believes that it is in the best interests of Westport to enter into this Agreement in order to ensure fair treatment of the Officer and to reduce the distractions and other adverse effects upon such the Officer's performance which are inherent in such a Change in Control. NOW, THEREFORE, for and in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: AGREEMENT 1. Definitions. For purposes hereof, the following terms shall have the following meanings: (a) "Affiliate" shall mean, with respect to any Person (as defined herein), any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such Person. A Person shall be deemed to control another Person for purposes of this definition if such Person possesses, directly or indirectly, the power (i) to vote the securities or other ownership interests having ordinary voting power to elect a majority of the Board of Directors of a corporation or other Persons performing similar functions for any other type of Person, or (ii) to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract, as general partner, as trustee or otherwise. (b) "Bonus Amount" shall mean the average of the annual bonuses earned by the Officer for the three calendar years in which bonuses were paid preceding the year of Officer's termination, or if the Officer has been employed by the Westport for less than three calendar years prior to termination, the average for such lesser period of time (excluding years in which bonuses were not paid). The Board of Directors shall determine, taking into consideration Westport performance, target bonus amounts and other factors, the Bonus Amount of the Officer if the Officer has not been employed by the Westport for a period of time during which bonuses have been paid. (c) "Cause" shall mean: (i) the Officer's material breach of any terms of this Agreement; (ii) the Officer's willful and continued failure to perform his or her job duties and responsibilities; (iii) the Officer's dishonesty towards, fraud upon, crime against, deliberate or attempted injury or bad faith action with respect to Westport or any of its Affiliates; or (iv) the Officer's conviction for any felony crime (whether in connection with Westport's or any of its Affiliates' affairs or otherwise); provided, however, that with respect to clauses (i) and (ii), no such breach or failure shall constitute Cause unless such breach or failure continues after 30 days following written notice by Westport the Officer of such breach or failure setting forth with specificity the nature of such breach or failure. (d) "Change in Control" shall have occurred if (a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "1934 Act")), other than a trustee or other fiduciary holding securities under an Officer benefit plan of Westport or the current beneficial owners or their Affiliates (as defined herein) are or become the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of more than one-half of the then outstanding voting stock of Westport; or (b) there occurs a merger or consolidation of Westport with any other corporation, other than a merger of consolidation which would result in the voting securities of Westport outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least a majority of the combined voting power of the voting securities of Westport or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders approve a plan of complete liquidation of Westport or an agreement for the sale or disposition by Westport of all or substantially all of Westport's assets. (e) "Disability" shall mean a physical or mental infirmity which impairs the Officer's ability to perform substantially his or her duties for a period of one hundred eighty (180) consecutive days. (f) "Good Reason" shall include any of the following: (i) Westport's assignment to the Officer of duties inconsistent with, or a substantial alteration in the nature of, the Officer's responsibilities in effect immediately prior to the Change in Control; (ii) (A) a reduction in either the Officer's salary or target bonus (if a target bonus has been established for the Officer) as each is in effect on the date of a Change in Control, or (B) the discontinuance or material adverse alteration of any material pension, welfare or fringe benefit enjoyed by Officer on the date of a Change in Control, unless such action relates to a discontinuance of benefits on a management-wide or company-wide basis; 2 (iii) Westport's relocation of the Officer to any place in excess of 50 miles from the Officer's place of employment immediately prior to the Change in Control without the Officer's written consent, except for reasonably required travel by the Officer on Westport's business; (iv) any material breach by Westport of any provision of this Agreement, if such material breach has not been cured within 30 days following written notice by the Officer to Westport of such breach setting forth with specificity the nature of the breach; or (v) any failure by Westport to obtain the assumption of this Agreement by any successor (by merger, consolidation or otherwise) or assign of Westport. (g) "Person" shall mean any individual, partnership, joint venture, firm, Westport, corporation, association, trust or other enterprise or any government or political subdivision or any agent, department or instrumentality thereof. (h) "Qualifying Termination" shall mean (i) a termination by the Officer of the Officer's employment with Westport for Good Reason within one year after the occurrence of a Change in Control or (ii) a termination of Officer's employment without Cause by Westport within one year after the occurrence of a Change in Control, or (iii) a termination of Officer's employment without Cause by Westport within six (6) months prior to the date of a Change in Control if the Officer reasonably demonstrates that such termination (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control or (B) otherwise arose in connection with, or in anticipation of, a Change in Control which has been threatened or proposed provided that, in either case, a Change in Control shall actually have occurred. Neither a termination of Officer's employment due to Disability nor a termination of Officer's employment due to death shall constitute a Qualifying Termination. (i) "Voluntary Termination" shall mean termination by Officer of Officer's employment with Westport, but shall not include constructive termination by Westport by reason of material breach of this Agreement by Westport. Voluntary Termination shall include a termination of Officer by Westport after its receipt of a notice of an otherwise Voluntary Termination from Officer. 2. Service. (a) Position. Officer agrees to be employed by and to serve Westport as President and Chief Operating Officer, and Westport agrees to employ and retain Officer in such capacity in accordance with the terms of this Agreement. Officer shall have powers as determined by Westport's Board of Directors and duties commensurate with his position as President and Chief Operating Officer of Westport. (b) Duties. The Officer shall assume and discharge the responsibilities of the President and Operating Executive Officer (as set forth in the Bylaws of Westport), as well as such other responsibilities as may be assigned to him by the Board of Directors of Westport. 3 Officer shall perform his responsibilities to the best of his abilities, shall comply with the general management policies of Westport as announced by the Board of Directors from time to time and shall devote all of his business time, skill and attention to the good faith best efforts performance of his responsibilities and the affairs of Westport. The Officer will engage in no other business or activity for compensation during the term of this Agreement except with the prior written consent of Westport. The Officer shall always be subject to the directions of the Board of Directors, to whom Officer shall report directly, in the performance of his responsibilities, and nothing herein shall affect the power of the Board of Directors to limit, alter, restrict, or remove the authority of the Officer. Officer's principal place of business with respect to his services to Westport shall be at its offices located in the Denver, Colorado metropolitan area or other location reasonably acceptable to Officer. Officer shall be required at various times to travel as part of his duties. 3. Term of Employment. (a) Basic Term. The initial term of employment of Officer by Westport shall be from the date hereof through May 31, 2005 (the "Term") unless terminated earlier pursuant to this Agreement. If a Change in Control has not occurred within the Term of this Agreement, this Agreement shall automatically expire. Following the Term, this Agreement may be renewed only by written agreement of the parties for successive one-year periods. (b) Change of Control. If a Qualifying Termination occurs during the Term, this Agreement shall continue in full force and effect and shall not terminate until the Officer shall have received the severance compensation provided hereunder. 4. Salary, Benefits and Bonus Compensation. (a) Base Salary. Commencing January 1, 2002, Westport agrees to pay to Officer a "Base Salary" of $263,868.96 per annum, payable on Westport's regularly established payroll payment dates. The Base Salary shall be subject to modification for each calendar year or portion thereof determined in the sole discretion of the Board of Directors. In the absence of and until any salary determination by the Board, Officer's Base Salary for a particular calendar year shall be identical to Officer's Base Salary in effect on December 31st of the immediately preceding calendar year. (b) Benefits. (i) Officer Benefits. Officer shall be eligible to participate in such of Westport's benefit and compensation plans as may be generally available to employees of Westport, including participation in Westport's health insurance plan, bonus plan, and its 401(k) program. All such benefit plans may be amended or discontinued in the sole discretion of Westport. (ii) Business Expenses. Westport shall reimburse Officer for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement, including travel and entertainment expenses. Officer shall present monthly to Westport an 4 itemized account of such expenses in such form as may be required by Westport. (iii) Auto. Officer shall be provided with an appropriate Westport automobile to be used for business purposes in the course of performing his duties described in Section 1(b). The automobile may also be used by the Officer for personal travel, and, in such event, the Officer shall maintain records regarding automobile use as required by federal tax regulations. The Officer's records of automobile use shall be available to Westport upon request. (iv) Vacation and Health Club. Officer shall be entitled to vacation time generally available to executive employees of Westport (but no less than four weeks per year), during which vacation time his compensation shall be paid in full. Officer shall be eligible to use Westport's health club membership and Petroleum Club membership. (v) Stock Option. In addition to the stock options previously granted to Officer by Westport, Officer shall be granted stock options in such amounts and for such vesting periods as shall be determined by the Compensation Committee of the Board of Directors of Westport pursuant to Westport's Stock Incentive Plan (the "Plan"). Such grants shall be evidenced by stock option agreements to be entered into by and between Westport and Officer pursuant to the Plan. (vi) Severance. If, prior to May 31, [2005], Officer is subject to a termination of his employment by Westport other than for Cause, Westport shall pay Officer a sum equal to three times Officer's then applicable annual Base Salary and three times the average of the last three years' bonuses. (c) Other Benefits. Nothing in this Article 4 shall be deemed to limit or restrict any right or benefit of Officer under Westport's Certificate of Incorporation, Bylaws or other documents or agreements of Westport applicable to Officer. 5. Termination of Employment. (a) Termination for Cause. Termination for Cause of Officer's employment may be effected by Westport at any time without liability except as specifically set forth in this Section 5(a). The termination shall be effected by written notification to Officer and shall be effective as of the time set forth in such notice. At the effective time of a termination for Cause, Officer immediately shall be paid all accrued Base Salary and any reasonable and necessary business expenses incurred by Officer in connection with his duties hereunder, all to the effective date of termination. In addition, Officer shall be entitled to benefits under any benefit plans of Westport in which Officer is a participant to the full extent of Officer's rights under such plans. (b) Termination Other Than for Cause. Westport may effect a termination of the Officer's employment other than for Cause at any time for any or no reason upon giving written notice to Officer of such termination and without liability except as specifically set forth in this Section 5(b). Expiration of the Term of this Agreement shall not be deemed a termination other than for Cause within the meaning of this paragraph. The termination shall be effective as 5 of the time set forth in such notice. At the effective date of any termination other than for Cause, upon the Officer's execution of a "Release and Confidentiality Agreement" substantially in the form attached hereto as Exhibit A, Officer shall immediately be paid all accrued Base Salary, severance payments pursuant to Section 4(b)(vi) and any reasonable and necessary business expenses incurred by Officer in connection with his duties hereunder, all to the effective date of termination. In addition, Officer shall be entitled to benefits under any benefit plans of Westport in which Officer is a participant to the full extent of Officer's rights under such plans. (c) Disability. If, during the term of this Agreement, Officer, in the reasonable judgment of the Board of Directors of Westport, has failed to perform his duties under this Agreement on account of illness or physical or mental disability, which condition renders Officer incapable of performing the duties of this office, and such condition continues for a period of more than three (3) months, Westport shall have the right to terminate Officer's employment hereunder by written notification to Officer. In the event of such termination, Westport shall pay to Officer all accrued Base Salary and any reasonable and necessary business expenses incurred by Officer in connection with his duties hereunder, all to the effective date of termination, and severance payments pursuant to Section 4(b)(vi). In addition, Officer shall be entitled to benefits under any benefit plans of Westport in which Officer is a participant to the full extent of Officer's rights under such plans. (d) Death. In the event of Officer's death during the Term of this Agreement, Officer's employment shall be deemed to have terminated as of the last day of the month during which his death occurs, and Westport shall pay promptly to his estate all accrued Base Salary and any reasonable and necessary business expenses incurred by Officer in connection with his duties hereunder, all to the effective date of termination. Officer's estate shall also be entitled to benefits under any benefit plans of Westport in which Officer is a participant to the full extent of Officer's rights under such plans. (e) Voluntary Termination. In the event of a Voluntary Termination by Officer, Westport shall immediately pay all accrued Base Salary and any reasonable and necessary business expenses incurred by Officer in connection with his duties hereunder, all to the effective date of termination. In addition, Officer shall be entitled to benefits under any benefit plans of Westport in which Officer is a participant to the full extent of Officer's rights under such plans. (f) Qualifying Termination. If a Qualifying Termination occurs, the Officer shall immediately be paid all earned and accrued salary due and owing to the Officer, any bonus compensation to the extent earned, vested deferred compensation (other than pension plan or profit sharing plan benefits, which will be paid in accordance with the applicable plan), any benefits then due under any plans of Westport in which the Officer is a participant, any accrued and unpaid vacation pay and any appropriate business expenses incurred by the Officer in connection with his duties, all to the date of termination (collectively, "Accrued Compensation"). The Officer shall also be entitled to the severance compensation described in Section 6. 6. Severance Compensation Upon a Qualifying Termination. The Officer shall be entitled to the following upon a Qualifying Termination under the conditions set forth below: 6 (a) Condition to Payment of Severance Compensation. Upon the Officer's execution of a "Release and Confidentiality Agreement" substantially in the form attached hereto as Exhibit A, Westport shall pay to the Officer severance compensation in an aggregate amount equal to three times the sum of the Officer's Base Salary and the Bonus Amount (the "Severance Amount"). (b) Computation and Payment of Severance Amount. The Severance Amount shall be computed by using the higher of the salary paid to the Officer: (a) immediately preceding the Change in Control, or (b) immediately preceding the Officer's Qualifying Termination. The Severance Amount shall be paid without prejudice to the Officer's right to receive all Accrued Compensation. The Severance Amount shall be paid to the Officer in a lump sum within thirty (30) days of the execution of the Release and Confidentiality Agreement. The Severance Amount shall be paid irrespective of the Officer's employment status with any other organization or self-employment; provided, however, that if the Officer should violate the terms of the Release and Confidentiality Agreement, Westport shall be under no further obligation to continue the payments or benefits hereunder. (c) Certain Welfare Benefits. For a number of months equal to thirty-six (36) (the "Continuation Period"), Westport shall at its expense continue on behalf of the Officer and his or her dependents and beneficiaries the life insurance, disability, medical, dental and hospitalization coverages and benefits provided to the Officer immediately prior to the Change in Control or, if greater, the coverages and benefits provided at any time thereafter. The coverages and benefits (including deductibles and costs) provided in this Section 4(c) during the Continuation Period shall be no less favorable to the Officer and his or her dependents and beneficiaries, than the most favorable of such coverages and benefits referred to above. Westport's obligation hereunder with respect to the foregoing coverages and benefits shall be reduced to the extent that the Officer obtains any such coverages and benefits pursuant to a subsequent employer's benefit plans, in which case Westport may reduce any of the coverages or benefits it is required to provide the Officer hereunder so long as the aggregate coverages and benefits of the combined benefit plans is no less favorable to the Officer than the coverages and benefits required to be provided hereunder. Neither this Section 6(c) nor any other provision of this Agreement shall be interpreted so as to reduce any amounts otherwise payable, or in any way diminish the Officer's rights as an Officer of Westport, whether existing now or hereafter, under any benefit, incentive, retirement, stock option, stock bonus, stock purchase plan, or any employment agreement or other plan or arrangement. (d) Equity Grants. Immediately prior to a Change in Control, (i) all options granted by Westport to the Officer shall be 100% vested and immediately exercisable, and the exercise term thereof shall end upon the earlier of: the first anniversary of the date of termination of employment and the end of the original exercise term, and (ii) all restrictions shall lapse with respect to all grants of restricted stock held by Officer. 7 7. Excise Tax Limitation. (a) Gross-Up Payment. In the event it shall be determined that any payment or distribution of any type to or for the benefit of the Officer, by Westport, any Affiliate, any person who acquires ownership or effective control of Westport or ownership of a substantial portion of Westport's assets (within the meaning of Section 280G of the Code and the regulations thereunder) or any affiliate of such Person, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the "Total Payments"), is or will be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), then the Officer shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Officer of all taxes (including any interest or penalties imposed with respect to such taxes), including any income tax, employment tax or Excise Tax, imposed upon the Gross-Up Payment, the Officer retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. Notwithstanding the foregoing provisions of this Section 7(a), if it shall be determined that the Officer is entitled to a Gross-Up Payment, but that the Total Payments would not be subject to the Excise Tax if the Total Payments were reduced by an amount that is less than 10% of the portion of the Total Payments that would be treated as "parachute payments" under Section 280G of the Code, then the amounts payable to the Officer under this Agreement shall be reduced to the maximum amount that could be paid to the Officer without giving rise to the Excise Tax (the "Safe Harbor Cap"), and no Gross-Up Payment shall be made to the Officer. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing first the payment under Section 6(a), unless an alternative method of reduction is elected by the Officer. For purposes of reducing the Total Payments to the Safe Harbor Cap, only amounts payable under this Agreement (and no other amounts) shall be reduced. (b) Determination by Accountant. All mathematical determinations, and all determinations as to whether any of the Total Payments are "parachute payments" (within the meaning of Section 280G of the Code), that are required to be made under this Section, including determinations as to whether a Gross-Up Payment is required, the amount of such Gross-Up Payment, the reduction of the Total Payments to the Safe Harbor Cap, amounts relevant to the last sentence of this Section 7(b), and the assumptions to be utilized in arriving at such determinations, shall be made at Westport's expense by an independent nationally recognized accounting firm selected by Westport (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation to Westport and the Officer by no later than ten (10) days following the Termination Date, if applicable, or such earlier time as is requested by Westport or the Officer (if the Officer reasonably believes that any of the Total Payments may be subject to the Excise Tax). If the Accounting Firm determines that no Excise Tax is payable by the Officer, it shall furnish the Officer and Westport with a written statement that such Accounting Firm has concluded that no Excise Tax is payable (including the reasons therefor) and that the Officer has substantial authority not to report any Excise Tax on his or her federal income tax return. If a Gross-Up Payment is determined to be payable, it shall be paid to the Officer within twenty (20) days after the Determination (and all accounting calculations and other material supporting the Determination) is delivered to Westport by the Accounting Firm. Any determination by the Accounting Firm shall be binding upon Westport and the Officer, absent manifest error. As a result of uncertainty in the application of Section 4999 of the Code at the time of the Determination 8 by the Accounting Firm hereunder, it is possible that Gross-Up Payments not made by Westport should have been made ("Underpayment"), or that Gross-Up Payments will have been made by Westport which should not have been made ("Overpayments"). In either such event, the Accounting Firm shall determine the amount of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount of such Underpayment shall be promptly paid by Westport to or for the benefit of the Officer. In the case of an Overpayment, the Officer shall, at the direction and expense of Westport, take such steps as are reasonably necessary (including the filing of returns and claims for refund), follow reasonable instructions from, and procedures established by, Westport, and otherwise reasonably cooperate with Westport to correct such Overpayment, provided, however, that (i) the Officer shall not in any event be obligated to return to Westport an amount greater than the net after-tax portion of the Overpayment that he or she has retained or has recovered as a refund from the applicable taxing authorities and (ii) this provision shall be interpreted in a manner consistent with the intent to make the Officer whole, on an after-tax basis, from the application of the Excise Tax, it being understood that the correction of an Overpayment may result in the Officer repaying to Westport an amount which is less than the Overpayment. (c) Internal Revenue Service Claims. The Officer shall notify Westport in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by Westport of the Gross-up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Officer is informed in writing of such claim and shall apprise Westport of the nature of such claim and the date on which such claim is requested to be paid. The Officer shall not pay such claim prior to the expiration of the 30-day period following the date on which he or she gives such notice to Westport (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If Westport notifies the Officer in writing prior to the expiration of such period that it desires to contest such claim, the Officer shall: (i) give Westport any information reasonably requested by Westport relating to such claim, (ii) take such action in connection with contesting such claim as Westport shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by Westport, (iii) cooperate with Westport in good faith in order effectively to contest such claim, and (iv) permit Westport to participate in any proceedings relating to such claim; provided, however, that Westport shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Officer harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 7(c), 9 Westport shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Officer to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Officer agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Westport shall determine; provided, however, that if Westport directs the Officer to pay such claim and sue for a refund, Westport shall advance the amount of such payment to the Officer, on an interest-free basis, and shall indemnify and hold the Officer harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitation relating to payment of taxes for the taxable year of the Officer with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, Westport's control of the contest shall be limited solely to such contested amount. Furthermore, Westport's control of the contest shall be limited to issues with respect to which a Gross-up Payment would be payable hereunder and the Officer shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 8. Nature of Rights. The Officer shall have the status of a mere unsecured creditor of Westport with respect to his right to receive any payment under this Agreement. This Agreement shall constitute a mere promise by the Westport to make payments in the future of the benefits provided for herein. It is the intention of the parties hereto that the arrangements reflected in this Agreement shall be treated as unfunded for tax purposes and, if it should be determined that Title I of ERISA is applicable to this Agreement, for purposes of Title I of ERISA. Nothing in this Agreement shall prevent or limit the Officer's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by Westport and for which the Officer may qualify, nor shall anything herein limit or reduce such rights as the Officer may have under any other agreements with Westport. Amounts which are vested benefits or which the Officer is otherwise entitled to receive under any plan or program of Westport shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 9. Full Settlement. Westport's obligation to provide the payments and benefits provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which Westport may have against the Officer or others. In no event shall the Officer be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Officer under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Officer obtains other employment except as set forth in Section 6(c) with respect to certain welfare benefits. Westport agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses (collectively, "Legal Fees") which the Officer may reasonably incur as a result of any contest (including as a result of any contest by the Officer about the amount of any payment pursuant to this Agreement) by Westport, the Officer or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof, plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the 10 Internal Revenue Code of 1986, as amended (the "Code"); provided, however, that Westport shall not pay the Legal Fees: (A) to the extent they were incurred with respect to a claim brought by the Officer in bad faith and/or (B) to the extent they were incurred where a determination has been made (either by a court or as part of a settlement agreement) that the Officer is not entitled to substantially all the amounts claimed by Officer whether or not such claims were made in bad faith. 10. Protection of Westport's Business. (a) No Competition. Officer shall not, for twelve (12) months following the Voluntary Termination of his employment, work as an employee or independent contractor or become an investor or owner in or lender to any business, corporation, partnership or other entity (a "Competing Business") where such employment with, investment in or service to the Competing Business would aid, entail or result in such Competing Business' competition with Westport in any project or transaction of Westport of which Officer was aware or should have been aware during the term of his employment with Westport. (b) No Hire of Other Officers or Contractors. Officer agrees that for a period of twelve (12) months from and after the date following the termination of his employment, whether for Cause or by Voluntary Termination or by expiration of the Term or by Qualifying Termination or otherwise, he shall not, directly or indirectly, as an employee of or consultant to any Person, or for himself or on behalf of, or in connection with, any Person, solicit or attempt to solicit, direct or take away any Person who was an employee, agent, or contractor of Westport at any time during the twelve-month period prior to the termination of Officer's employment or who is an employee, agent or contractor for Westport during the twelve-month period following the termination of Officer's employment; provided, however, that this provision shall not apply to the solicitation or attempted solicitation of any Person known in the industry in which Westport is engaged to have performed services in the industry generally and not as an employee of any single entity in the industry. Westport may waive the restriction contained in this Section 10(b) as to any employee at any time, but any such waiver shall not be considered a waiver of the future application of this provision nor shall it be considered a waiver as to any employee other than the one to whom it applies. 11. Confidentiality. (a) Confidential Information and Materials. All of the Confidential Information and Materials, as defined herein, are and shall continue to be the exclusive confidential property and trade secrets of Westport. Such Confidential Information and Materials shall include only such information that is proprietary to Westport and shall not include any information that becomes part of the public domain through no fault of Officer. Confidential Information and Materials have been or will be disclosed to Officer solely by virtue of his employment with Westport and solely for the purpose of assisting him in performing his duties for Westport. "Confidential Information and Materials" refers to the non-public organization structure and ownership of Westport, its shareholders, its advisors and advisors to its shareholders, its affiliates and the affiliates of any of its shareholders and their advisors and all information belonging to or used by Westport or Westport's clients or associates relating to 11 internal operations, procedures and policies, finances, income, profits, business strategies, pricing, billing information, compensation and other personnel information, client contacts, sales lists, employee lists, geotechnical information of every sort and character, technology, land status, exploration and acquisition plans and programs, costs, marketing plans, developmental plans, drilling plans, inventions, computer program manuals, computer programs, and computer system designs (to the extent such manuals, programs and designs are created by or for Westport and are not off-the-shelf manuals, programs and designs) and trade secrets of every kind and character, whether or not they constitute a trade secret under applicable law and whether developed by Officer during or after business hours. (b) Non-disclosure and Non-use. Officer may use Confidential Information and Material while an employee of Westport and in the course of that employment to the extent deemed necessary by the Board of Directors for the performance of Officer's responsibilities or as otherwise required by law. Such permission expires upon termination of his employment with the Company or on notice from Westport. Officer shall not, either during or after his employment with Westport, disclose any Confidential Information or Materials to any person, firm, corporation, association or other entity for any reason or purpose unless expressly permitted by Westport in writing or unless required by law to be disclosed. Officer shall not use, in any manner other than to further Westport's business, any Confidential Information or Materials. Upon termination of his employment, Officer shall immediately return all Confidential Information or Materials or other property of Westport, its associates or its potential associates in his possession or control. 12. Remedies. (a) Equitable Remedies. The service rendered by Officer to Westport and the information disclosed to Officer during his employment are of a unique and special character, and any breach of Sections 10 or 11 hereof will cause Westport irreparable injury and damage which will be extremely difficult to quantify. The parties agree that because of unquantified risks and intangibles which are impossible to measure, Westport will be entitled to, in addition to all other remedies available to it, injunctive relief to prevent a breach and to secure the enforcement of all provisions of Sections 10 and 11. Injunctive relief may be granted immediately upon the commencement of any such action without notice to Officer, which notice Officer hereby specifically waives. (b) Arbitration. In the event any controversy arises with respect to this Agreement, it shall be arbitrated in accordance with the rules and procedures of the American Arbitration Association with the following limitations: (i) The laws of the State of Colorado shall be applied to the interpretation and resolution of the controversy. The location of the arbitration shall be in the Denver Metropolitan Area of Colorado. (ii) The parties shall be entitled to conduct expedited discovery proceedings in accordance with the Colorado Rules of Civil Procedure and such rights of 12 discovery may be enforced by the appropriate court by filing a petition for compliance, in regard to which the parties hereto agree to abide timely and fully. The discovery period shall in no event exceed a period of sixty (60) days from the date the arbitration response is filed by the responding party. (iii) Arbitration procedures shall be conducted substantially in accordance with the Rules of Civil Procedure in the State of Colorado and the Rules of Evidence of said State. (iv) The award of arbitration may be reduced to judgment in accordance with the rules of Civil Procedure of the State of Colorado and/or the rules or laws of any other jurisdiction and the Colorado Uniform Arbitration Act. (v) In the event one party willfully, after ten (10) days notice of his failure or refusal, fails or refuses to comply timely with the arbitration procedure, that party shall be deemed to have conclusively waived its right to participate in the arbitration and the nondefaulting party may either proceed to arbitration, the decision of which shall be binding upon the defaulting party, or may proceed in an action in court. (vi) The prevailing party in any arbitration may be entitled to an award of attorneys' fees and all costs to be paid by the losing party in the arbitration as determined by the arbitrators. (vii) In the event a court of competent jurisdiction or panel of arbitrators finds any of the provisions of this section 12(b) to be so overbroad as to be unenforceable, it is the parties' intent that with respect to such jurisdiction such provision be reduced in scope by the Court, but only to the extent deemed necessary by the Court or arbitrators to render the provision reasonable and enforceable, keeping in mind that it is the parties' intent to give the Company the broadest possible legal protection. (viii) In no event shall any monetary dispute between the parties be arbitrated or litigated until there is an aggregated dollar amount of not less than $10,000.00 in dispute. 13. Miscellaneous. (a) Severability. Should a court or other body of competent jurisdiction determine that any provision of this Agreement is excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible. (b) Withholding. All compensation and benefits to the Officer hereunder shall be reduced by all federal, state, local and other withholdings and similar taxes and payments required by applicable law. Westport may withhold amounts due it from Officer from amounts due under this Agreement to Officer. 13 (c) Entire Agreement; Modification; Waiver. This Agreement represents the entire agreement between the parties and supersedes any prior agreements between the parties, written or oral, with respect to the subject matter covered hereby, including without limitation the Employment Agreement between the Officer and Westport dated as of May 8, 2000. This Agreement may be amended, modified, superseded or canceled, and any of the terms hereof may be waived, only by a written instrument executed by each party hereto or, in the case of a waiver, by the party waiving compliance. The failure of any party at any time or times to require performance of any provision hereof shall not affect such party's right at a latter time to enforce the same. No waiver by any party of the breach of any provision contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such breach or of any other term of this Agreement. (d) Applicable Law. This Agreement shall be construed under and governed by the laws of the State of Colorado. (e) Successors and Assigns. This Agreement shall be binding upon, and shall issue to the benefit of, Westport's successors and assigns and the Officer's heirs and assigns. (f) Nontransferability by Officer. Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Officer, his or her beneficiaries or legal representatives, except by will or by the laws of descent and distribution. (g) Notices. All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery, or first-class mail, certified or registered with return receipt requested, or by commercial overnight courier or by facsimile and shall be deemed to have been duly given upon hand delivery, three (3) days after mailing, the first business day following delivery to a commercial overnight courier or upon receipt of a facsimile, addressed as follows If to the Company: Westport Resources Corporation. 410 Seventeenth Street, #2300 Denver, Colorado 80202 Attn: General Counsel Facsimile: (303) 573-5609 with a copy to: Dr. Richard J. Haas Partners Attention: Mr. Michael Russell Dukes Court 32 Duke Street St. James London UK SW1Y 6DF Facsimile: 011-44-207-321-5242 14 Equitable Resources Energy Co. One Oxford Centre, Suite 3300 Pittsburgh, PA 15219 Attention: Mr. Murry Gerber Facsimile: (412) 553-5731 Belfer Management, LLC 767 Fifth Avenue, 46th Floor New York, NY 10153 Attention: Mr. Robert Belfer Facsimile: (212) 644-2396 If to Officer: Barth E. Whitham 16760 Wild Plum Circle Morrison, Colorado 80465 Facsimile: 303-573-5609 Any party may change such party's address for notices by notice given pursuant to this Section 13(g). (h) Survival of Westport's Obligation. Westport's obligations hereunder shall not be terminated by reason of any liquidation, dissolution, bankruptcy, cessation of business or similar event relating to Westport. This Agreement shall not be terminated by any merger or consolidation or other reorganization of Westport. In the event any such merger, consolidation or reorganization shall be accomplished by transfer of stock or by transfer of assets or otherwise, the provisions of this Agreement shall be binding upon and insure to the benefit of the surviving or resulting corporation or person. This Agreement shall be binding upon and inure to the benefit of the executors, administrators, heirs, successors and assigns of the parties; provided, however, that except as provided in this Section, this Agreement shall not be assignable either by Westport or by Officer. (i) Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same Agreement. 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of April 1, 2002. WESTPORT RESOURCES CORPORATION By: /s/ Barth E. Whitham ---------------------------------------- Name: Barth E. Whitham Title: President OFFICER: /s/ Barth E. Whitham ------------------------------------------- Name: Barth E. Whitham -----END PRIVACY-ENHANCED MESSAGE-----