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