-----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, ArAPzrlNBdjNhQ9qDRqbKA1t5H17etpkcnpp+Hm9hBjk7lV5DaUE7ufHhqtAYqzX PySZwDTeC1cMZUHbeZvZFg== 0000927356-97-001357.txt : 19971115 0000927356-97-001357.hdr.sgml : 19971115 ACCESSION NUMBER: 0000927356-97-001357 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKWEST HYDROCARBON INC CENTRAL INDEX KEY: 0001019756 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 841352233 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21353 FILM NUMBER: 97717433 BUSINESS ADDRESS: STREET 1: 5613 DTC PARKWAY STREET 2: SUITE 400 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3032908700 MAIL ADDRESS: STREET 1: 5613 DTC PARKWAY STREET 2: SUITE 400 CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 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 1-11566 MARKWEST HYDROCARBON, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 84-1352233 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 155 INVERNESS DRIVE WEST, SUITE 200, ENGLEWOOD, CO 80112-5004 (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 303-290-8700 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 --- --- The registrant had 8,479,101 shares of common stock, $.01 per share par value, outstanding as of November 10, 1997. ================================================================================ ===============================================================================
PART I - FINANCIAL INFORMATION Page ------------------- Item 1. Consolidated Financial Statements Consolidated Balance Sheet at September 30, 1997 and December 31, 1996............................................. 1 Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 1997 and 1996................. 2 Consolidated Statement of Cash Flows for the Three and Nine Months Ended September 30, 1997 and 1996...................... 3 Notes to the Consolidated Financial Statements................. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 6 PART II - OTHER INFORMATION Item 1. Legal Proceedings................................................. 13 Item 6. Exhibits and Reports on Form 8-K.................................. 13 SIGNATURES................................................................. 14
PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements MARKWEST HYDROCARBON, INC. CONSOLIDATED BALANCE SHEET (000S, EXCEPT SHARE DATA)
September 30, 1997 December 31, ASSETS (Unaudited) 1996 -------------------------------- Current assets: Cash and cash equivalents.............................................. $ -- $ 4,401 Receivables............................................................ 8,749 9,755 Inventories............................................................ 7,419 5,632 Prepaid feedstock...................................................... 3,098 1,831 Other assets........................................................... 498 458 ----------- ---------- Total current assets................................................ 19,764 22,077 Property and equipment: Gas processing, gathering, storage and marketing equipment............. 48,027 46,416 Oil and gas properties and equipment................................... 7,205 3,731 Land, buildings and other equipment.................................... 9,250 4,478 Construction in progress............................................... 13,044 5,831 ----------- ---------- 77,526 60,456 Less: accumulated depreciation, depletion and amortization............. (14,619) (12,316) ----------- ---------- Total property and equipment, net................................... 62,907 48,140 Intangible assets, net of accumulated amortization of $276 and $315 respectively.................................................. 500 380 Note receivable and other assets........................................... 9,938 7,657 ----------- ---------- Total assets............................................................... $ 93,109 $ 78,254 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable................................................. $ 1,937 $ 5,382 Accrued liabilities.................................................... 4,625 4,643 Current portion of long-term debt...................................... 156 156 ----------- ---------- Total current liabilities........................................... 6,718 10,181 Long-term debt............................................................. 22,969 11,257 Deferred income taxes...................................................... 5,175 3,977 Minority interest.......................................................... 9,113 9,175 Stockholders' equity: Preferred stock, par value $0.01, 5,000,000 shares authorized, 0 shares issued and outstanding......................................... -- -- Common stock, par value $0.01, 20,000,000 shares authorized, 8,510,173 shares issued, 8,485,268 shares outstanding........................... 85 85 Additional paid-in capital............................................. 42,582 42,237 Retained earnings...................................................... 6,792 1,342 Treasury stock......................................................... (325) -- ----------- ---------- Total stockholders' equity.................................. 49,134 43,664 ----------- ---------- Total liabilities and stockholders' equity................................. $ 93,109 $ 78,254 =========== ==========
The accompanying notes are an integral part of these financial statements. 1 MARKWEST HYDROCARBON, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (000S, EXCEPT PER SHARE DATA)
For the three months ended For the nine months ended September 30, September 30, 1997 1996 1997 1996 --------------- ---------------- ---------------- -------------- Revenues: Appalachia plant revenue...................... $ 9,560 $10,543 $39,847 $28,876 Terminal and marketing revenue................ 2,650 3,976 10,930 13,798 Michigan transportation and treating revenue.. 2,103 -- 3,344 -- Oil and gas revenue........................... 425 74 695 237 Interest income............................... 65 26 406 69 Other income.................................. 210 342 508 643 --------------- ---------------- ---------------- -------------- Total revenue........................... 15,013 14,961 55,730 43,623 --------------- ---------------- ---------------- -------------- Costs and expenses: Appalachia feedstock purchases................ 4,664 5,882 19,225 14,420 Terminal and marketing purchases.............. 2,393 3,372 10,879 12,055 Michigan feedstock purchases.................. 1,036 -- 1,036 -- Operating expenses............................ 2,849 1,365 7,605 4,216 General and administrative expenses........... 1,636 1,238 5,467 3,507 Depreciation, depletion and amortization...... 825 783 2,408 2,111 Interest expense, net of capitalized interest. 395 378 726 887 --------------- ---------------- ---------------- -------------- Total costs and expenses................ 13,798 13,018 47,346 37,196 --------------- ---------------- ---------------- -------------- Income before minority interest and income taxes.. 1,215 1,943 8,384 6,427 Minority interest in net loss of subsidiary....... 30 -- 252 -- --------------- ---------------- ---------------- -------------- Income before income taxes........................ 1,245 1,943 8,636 6,427 Provision for income taxes: Current....................................... (544) -- 2,001 -- Deferred...................................... 922 -- 1,185 -- --------------- ---------------- ---------------- -------------- 378 -- 3,186 -- --------------- ---------------- ---------------- -------------- Net income........................................ $ 867 $ 1,943 $ 5,450 $ 6,427 =============== ================ ================ ============== Earnings per share of common stock (A)............ $0.10 $0.15 $0.64 $0.50 =============== ================ ================ ============== Weighted average number of outstanding shares of common stock (A)................................. 8,485 7,908 8,485 7,908 =============== ================ ================ ============== Pro forma net income (Note 4) Historical income before income taxes......... N/A $ 1,943 N/A $ 6,427 Provision for income taxes.................... N/A 738 N/A 2,442 --------------- -------------- Net income.................................... N/A $ 1,205 N/A $ 3,985 ================ ==============
(A) Pro forma for 1996 (see Note 4). The accompanying notes are an integral part of these financial statements. 2 MARKWEST HYDROCARBON, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (000S)
For the three months For the nine months ended September 30, ended September 30, 1997 1996 1997 1996 -------------- -------------- -------------- ----------- Reconciliation of net income to net cash provided by operating activities: Net income............................................ $ 867 $ 1,943 $ 5,450 $ 6,427 Add income items that do not affect working capital: Depreciation, depletion and amortization........... 825 783 2,408 2,111 Deferred income taxes.............................. 922 -- 1,185 -- Gain on sale of assets............................. -- -- (75) -- -------------- -------------- -------------- --------- 2,614 2,726 8,968 8,538 -------------- -------------- -------------- --------- Adjustments to working capital: (Increase) decrease in accounts receivable........ (187) (1,432) 1,006 3,686 (Increase) in inventories......................... (4,499) (3,443) (1,787) (4,174) (Increase) in prepaid feedstock and other assets.. (1,447) (1,323) (1,307) (1,735) (Decrease) increase in accounts payable and accrued liabilities.............................. (958) 205 (4,523) 1,128 -------------- -------------- -------------- --------- (7,091) (5,993) (6,611) (1,095) -------------- -------------- -------------- --------- Net cash (used in) provided by operating activities.................................... (4,477) (3,267) 2,357 7,443 Cash flows from investing activities: Capital expenditures.............................. (8,450) (960) (16,170) (2,902) Increase in intangible assets, note receivable and other assets................................. (513) (1,748) (2,401) (2,336) Other............................................. 206 -- 62 -- -------------- -------------- -------------- --------- Net cash used in investing activities......... (8,757) (2,708) (18,509) (5,238) Cash flows from financing activities: Proceeds from long-term debt...................... 13,000 8,790 22,920 13,640 Repayment of long-term debt....................... (57) -- (11,207) (10,000) Partners' distributions........................... -- (973) -- (4,192) Other............................................. 105 (158) 38 (158) -------------- -------------- -------------- --------- Net cash provided by (used in) financing activities................................... 13,048 7,659 11,751 (710) -------------- -------------- -------------- --------- Net (decrease) increase in cash and cash equivalents....... (186) 1,684 (4,401) 1,495 Cash and cash equivalents at beginning of period........... 186 572 4,401 761 -------------- -------------- -------------- --------- Cash and cash equivalents at end of period................. $ -- $ 2,256 $ -- $ 2,256 ============== ============== ============== =========
The accompanying notes are an integral part of these financial statements. 3 NOTE 1. GENERAL The consolidated financial statements include the accounts of MarkWest Hydrocarbon, Inc. ("MarkWest" or the "Company") and its wholly-owned subsidiaries, MarkWest Resources, Inc. ("Resources") and MarkWest Michigan, Inc. ("Michigan"). All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and note disclosures required by generally accepted accounting principles for complete financial statements. The interim consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 1996 included in the Company's Form 10-K, as filed with the Securities and Exchange Commission. In the opinion of management, all adjustments necessary for a fair statement of the results for the unaudited interim periods have been made. These adjustments consist only of normal recurring adjustments. The effective corporate tax rate for interim periods is based on the estimated annual effective corporate tax rate, excluding certain nonrecurring or unusual events. The effective tax rate varies from statutory rates due primarily to tax credits and intangible development costs. Certain prior year amounts have been reclassified to conform to the 1997 presentation. NOTE 2. REORGANIZATION The Company was incorporated in June 1996 to act as the successor to MarkWest Hydrocarbon Partners, Ltd. (the "Partnership"). Effective October 7, 1996, the Partnership reorganized (the "Reorganization") and the existing general and limited partners exchanged 100% of their interests in the Partnership for 5,725,000 common shares of the Company. An additional 2,400,000 shares of common stock were offered for public sale, totaling 8,125,000 shares outstanding as of October 15, 1996. The over-allotment of 360,000 shares was also exercised during October, resulting in a total of 8,485,000 shares outstanding at October 31, 1996. This transaction was a reorganization of entities under common control, and accordingly, it was accounted for at historical cost. NOTE 3. SIGNIFICANT BUSINESS ACQUISITIONS Prior to July 1, 1996, the Partnership owned 49% of MarkWest Coalseam Development Company LLC (formerly MarkWest Coalseam Joint Venture) ("Coalseam"), a natural gas development venture, and MW Gathering LLC ("Gathering"), a natural gas gathering venture. Effective July 1, 1996, Gathering was merged into Coalseam. Simultaneously, the Partnership formed MarkWest Resources Inc. ("Resources"), and Coalseam distributed 49% of its assets to Resources and 51% to MAK-J Energy Partners, Ltd. (formerly MarkWest Energy Partners, Ltd.), a partnership whose general partner is a corporation owned and controlled by the President of the Company. The consolidated financial statements reflect Resources' 49% proportionate share of the underlying oil and gas assets, liabilities, revenues and expenses. Effective May 6, 1996, the Partnership acquired the right to earn up to a 60% interest for $16.8 million in a newly formed venture, West Shore Processing, LLC ("West Shore"). The most significant asset of West Shore is Basin Pipeline LLC, which was contributed by the Partnership's venture partner, Michigan Energy Company, LLC. The West Shore agreement is structured so that the Company's ownership interest increases as capital expenditures for the benefit of West Shore are made by the Company. The Company completed its earn-in of a 60% interest in the venture in the second quarter of 1997, through the funding of capital expenditures totaling approximately $16.8 million. NOTE 4. PRO FORMA INFORMATION Prior to the Reorganization, the Company was organized as a partnership and consequently, was not subject to income tax. A pro forma provision for income taxes and pro forma net income for the three and nine months ended 4 September 30, 1996 have been presented for purposes of comparability as if the Company had been a taxable entity. In addition, the Company's historical capital structure is not indicative of its current structure and, accordingly, historical net income per common share has not been presented. Pro forma net income per common share for the three and nine months ended September 30, 1996 has been computed using the weighted average number of common and common equivalent shares outstanding for the fourth quarter of 1996 following the Company's initial public offering. NOTE 5. LONG TERM DEBT Effective June 20, 1997, the Company replaced its existing financing agreements with a new credit facility (the "credit facility") with the Bank of Montreal, as agent, NationsBank and Colorado National Bank. The credit facility allows the Company to borrow up to $55 million pursuant to a revolving loan commitment. The revolving loan commitment converts to a reducing loan commitment on May 31, 1999. The reducing loan commitment reduces ratably on a quarterly basis to zero by May 31, 2003. Interest rates are based on either the agent bank's prime rate plus 1% or the London Interbank Offered Rate (LIBOR), plus an applicable margin of between 50 and 150 basis points, based upon the Company's debt to capitalization ratio. As of September 30, 1997, approximately $22.9 million was outstanding. Of the total debt outstanding, $18.9 million bears interest at 6.125% and $4.0 million bears interest at 6.185%. The debt is secured by a first mortgage on the Company's major assets. The loan agreement restricts certain activities and requires the maintenance of certain financial ratios and other conditions. As a direct result of entering into a new credit facility, the Company wrote off previously deferred financing costs associated with the previous credit facility of approximately $235,000 in the second quarter of 1997. NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement No. 128 ("SFAS 128"), "Earnings Per Share". This Statement is effective for financial statements issued for periods ending after December 15, 1997. Earlier adoption is not permitted. SFAS 128 requires dual presentation of basic and diluted EPS for entities with complex capital structures. The impact of adopting SFAS 128 will not have a material effect on the Company's earnings per share calculation. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934) reflecting the expectations, plans and objectives of management for operations of the Company. Such statements are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to these expectations involve judgments with respect to, among other things, future drilling success in the vicinity of the company's Michigan operations and future economic, competitive and market conditions, including the price of propane, other natural gas liquids and natural gas, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Accordingly, there can be no assurance that the forward-looking statements included in the Form 10-Q will prove to be accurate. Inclusion of such information should not be regarded as a representation by the Company or any other person that the expectations, plans and objectives of the Company will be realized. GENERAL MarkWest Hydrocarbon, Inc. ("MarkWest" or the "Company") provides compression, gathering, treatment, processing and natural gas liquids ("NGL") extraction services to natural gas producers and pipeline companies and fractionates NGLs into marketable products for sale to third parties. The Company also purchases, stores and markets natural gas and NGLs. Historically, the majority of the Company's operating income has been derived from gas processing, NGL fractionation and NGL sales in its Appalachia core area. In the near future, an increasing portion of the Company's revenues is expected to be derived from transportation and treating revenues from the Company's Michigan operations, as production volumes and throughput in Michigan are expected to grow significantly beginning in the second half of 1998 (see further discussion below under "Michigan"). In its Appalachia core area, NGL prices and the volume of liquids extracted, fractionated, and sold are the primary determinants of revenues. Prices of NGLs typically do not vary directly with natural gas prices, but more closely follow the prices of crude oil. In addition to sales of NGLs processed by the Company, the Company generates income from the purchase and resale of NGLs as part of its terminal and marketing activities, and provides marketing activities in support of its company-owned facilities and production. The Company also currently operates two propane terminals. A significant portion of the Company's revenues are derived from the sale of natural gas liquids, particularly propane. The strongest demand for propane and the highest propane sales margins generally occur during the winter heating season. As a result, the Company realizes the greatest proportion of its annual income during the first and fourth quarters of the year. APPALACHIA As previously announced, in April 1997, the Federal Energy Regulatory Commission approved Columbia Gas Transmission Corporation's rate case. As part of this rate case, MarkWest and Columbia signed a letter agreement ("the Agreement") which will allow the Company to acquire and operate two additional facilities from Columbia, the Boldman and Cobb NGL Extraction plants. Boldman is currently owned by MarkWest and leased to and operated by Columbia. Cobb will be acquired and operated by MarkWest. Implementation of the Agreement began during the second quarter. Definitive agreements are in progress, and MarkWest began contracting for processing services directly with producers in June 1997. Upon completion, the financial impact of this transaction for MarkWest will be that the term of NGLs committed to Siloam from these facilities will be extended from 2003 to 2009, and the arrangement will provide the opportunity to target potential NGL production increases at these facilities. Studies have begun to evaluate either upgrading or replacing the Cobb facility. NGL production at MarkWest's Siloam Plant in Kentucky remained about constant at 26.4 million gallons for the third quarter, compared to the same quarter in 1996. Sales volumes of NGLs for the third quarter decreased 12 percent to 20.9 million gallons, compared to the same period in 1996. In 1996, a cold winter started early in the 6 heating season, increasing demand and prices for propane. Several other factors influenced third quarter 1997 results. Lower sales volumes were offset by increased processing fee revenue. The impact of lower propane prices was more than offset by favorably priced advanced purchases of natural gas. Third quarter results also reflect lower terminal sales volumes. MICHIGAN Gas volumes through MarkWest's 60-percent-owned sour gas pipeline and plant in western Michigan more than tripled to 12.8 million cubic feet per day (mmcfd) in the third quarter. This volume, increased through another company's gas well completed late in the second quarter of 1997, is up from the 3.9 mmcfd reported in 1996. A third company announced two new discoveries in the third quarter of 1997, with a combined flow rate of 15 mmcfd, and announced plans to drill four more prospects in 1998. These well results, combined with a pending application with the Michigan Public Service Commission to extend the pipeline, are causing increased drilling activity and acreage acquisitions in the area. The Company's new natural gas liquids plant is expected to start up operations in the fourth quarter of 1997, and will allow the Company to sell propane and other liquids directly into higher-priced markets. In addition, two 3-D seismic programs were completed this year with drilling expected to begin in the fourth quarter. MarkWest has a 17.5 percent working interest in the first program, which covers 27 square miles. The second program covers 50 square miles. Drilling success resulting from these programs could add significantly to pipeline and NGL throughput in 1998. MarkWest plans to extend the pipeline and connect it to these wells, other shut- in wells and future wells to be drilled in 1998. Pipeline route selection and permitting activities for this extension are underway. As a result of these developments, the Company commenced detailed studies to expand the capacity in the pipeline and NGL plant to 50 mmcfd from 35 mmcfd. OUTLOOK It is expected that the results from the fourth quarter of 1997 and the first quarter of 1998 will reflect more normal price levels when compared to the near record-high price levels experienced in the fourth quarter of 1996 and the first quarter of 1997. Propane prices rose dramatically in the fourth quarter of 1996 due to an early cold start to the winter and a Mexican plant explosion, which had a detrimental impact on imported propane volumes into the United States. The Company was able to extend the benefit from these high price levels by entering into various hedge contracts which positively affected the Company's results in the first quarter of 1997. As of the end of the third quarter of 1997, the Company has entered into various hedge contracts for the upcoming fourth quarter which lock in natural gas prices in Appalachia on 65% of the Company's expected purchases. These hedge contracts are expected to limit the Company's risk of price fluctuations for its natural gas purchases throughout the fourth quarter of 1997. However, a significant portion of the Company's revenues, and as a result, its gross margins, remain dependent upon the sales price of propane, which fluctuates with the winter weather conditions and other supply and demand determinants. Currently, MarkWest has an annual sensitivity to NGL prices equal to $1.0 million in pretax income for every $0.01/gallon change in NGL prices and an annual sensitivity to natural gas prices equal to $1.0 million in pretax income for every $0.10/mmbtu change in natural gas prices. As of the end of the third quarter, the Company has not entered into significant hedge contracts for its expected natural gas purchases in the first quarter of 1998 and beyond. As a result, the Company will be subject to price risk on both natural gas and propane prices in the first quarter of 1998 and beyond. The Company's future results are expected to be positively affected by volumes through MarkWest's 60-percent-owned sour gas pipeline and plant in Western Michigan which more than tripled to 12.8 mmcfd in the third quarter of 1997. This increase in volumes due to significant drilling success in the area, together with the start up of the Company's new natural gas liquids plant expected in the fourth quarter of 1997, is expected to add substantial production volumes and related revenues as described above. 7
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, OPERATING STATISTICS 1997 1996 % CHANGE 1997 1996 % CHANGE ---------------------------------------------------------------------- Fee gas processed (mmbtu) 13,667,349 8,663,134 58% 41,039,676 22,485,510 83% NGL production - Siloam plant (gallons) 26,440,651 26,265,662 1% 76,318,338 69,359,365 10% NGLs marketed - Siloam plant (gallons) 20,851,267 23,648,355 (12%) 70,721,011 64,250,073 10% Terminal throughput (gallons) 5,842,224 6,257,409 (6%) 19,127,090 24,694,593 (22%) Michigan pipeline throughput (mcf) 1,175,060 359,343 227% 2,018,408 780,841 158% Gas production (mcf) 133,253 26,950 394% 309,887 77,376 300%
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996 The Company reported net income of $867,000 or $0.10 per share on revenues of $15.0 million for the third quarter of 1997. This compares to pro forma net income of $1.2 million or $0.15 per share on revenues of $15.0 million for the same period in 1996. Net income for the three months ended September 30, 1997 decreased primarily due to reduced gross margins from the Company's Appalachia terminals, as a result of warmer weather during the third quarter of 1997 compared to the third quarter of 1996, reducing volumes sold. GROSS MARGIN ANALYSIS (IN MILLIONS)
APPALACHIA PLANTS 1997 1996 Variance Volume Price ----------------------------------------------------------------------------- Plant revenue $ 9.6 $10.5 $(0.9) $(0.6) $(0.3) Feedstock costs 4.7 5.9 1.2 0.7 0.5 ----------------------------------------------------------------------------- Gross margin $ 4.9 $ 4.6 $ 0.3 $ 0.1 $ 0.2 =============================================================================
The Company's third quarter 1997 Appalachia plant revenues decreased from the third quarter of 1996, primarily due to a 12% decrease in sales volumes during the quarter. The decrease in volumes can be attributed to the Company's efforts to build the necessary inventory levels for the upcoming winter heating season. The remaining decrease is due to more normal propane price levels in 1997 compared to above average price levels in the previous year. Appalachia plant feedstock costs decreased in the third quarter of 1997 as compared to the third quarter of 1996, primarily due to lower NGL sales volumes. The remaining variance was due to a decrease in unit prices in the third quarter of 1997 from the same quarter in 1996, primarily as a result of favorably priced advance purchases of natural gas in 1997.
APPALACHIA TERMINALS 1997 1996 Variance Volume Price ----------------------------------------------------------------------------- Terminal and marketing revenue $ 2.7 $ 4.0 $(1.3) $(1.2) $(0.1) Terminal and marketing purchases 2.4 3.4 1.0 1.0 -- ----------------------------------------------------------------------------- Gross margin $ 0.3 $ 0.6 $(0.3) $(0.2) $(0.1) =============================================================================
Terminal and marketing revenue for the third quarter of 1997 decreased primarily as a result of a 6% volume decrease caused by the warm weather experienced in the third quarter of 1997, compared to the cold early start to winter experienced in the same quarter in 1996, and due to the lack of non- terminal sales in 1997. The Company's third quarter 1997 terminal and marketing purchases decreased from the same quarter in 1996 as a result of the volume decrease. 8
MICHIGAN 1997 1996 Variance --------------------------------------------- Transportation and treatment revenue $2.1 $ -- $2.1 Feedstock purchases 1.0 -- 1.0 --------------------------------------------- Gross margin $1.1 $ -- $1.1 =============================================
At September 30, 1996, the Company had earned an 11.3% interest in the Michigan project, which was accounted for under the equity method of accounting. Accordingly, the Company's respective share of income in the Michigan project, which was approximately $169,000 for the third quarter of 1996, was reflected in other income during 1996. Michigan transportation and treatment revenue and feedstock purchases increased for the third quarter of 1997, reflecting higher 1997 volumes as described above. The Company incurs operating expenses, general and administrative costs and interest expense on debt funding the capital program, all as described below. OIL AND GAS REVENUE Oil and gas revenue increased to $425,000 for the third quarter of 1997 as compared to $74,000 for the third quarter of 1996, an increase of $351,000. Gas production from all of the Company's properties during the three months ended September 30, 1997 increased 400% from the three months ended September 30, 1996, reflecting new production from the Company's capital program. COSTS AND EXPENSES Operating expenses increased $1.4 million to $2.8 million for the third quarter of 1997, as compared to the third quarter of 1996. The increase was principally driven by the Company's new operations in Michigan, which commenced in May 1996. General and administrative expenses increased $400,000 to $1.6 million for the third quarter of 1997 from $1.2 million for the third quarter of 1996. The increase was attributable to administrative support activities related to the new operations in Michigan and to costs incurred in connection with being a public company in 1997. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 The Company reported net income of $5.5 million or $0.64 per share on revenues of $55.7 million for the nine months ended September 30, 1997. This compares to pro forma net income of $4.0 million or $0.50 per share on revenues of $43.6 million for the same period in 1996. Net income for the nine months ended September 30, 1997 increased primarily due to increased sales margins and volumes at the Company's Siloam plant during the first two quarters of 1997. This was partially offset by a decrease in sales margins and volumes at the Company's Appalachia terminals for the nine months ended September 30, 1997, as compared to the nine months ended September 30, 1996. GROSS MARGIN ANALYSIS (IN MILLIONS)
APPALACHIA PLANTS 1997 1996 Variance Volume Price ----------------------------------------------------------------------------- Plant revenue $39.8 $28.9 $10.9 $ 3.1 $ 7.8 Feedstock costs 19.2 14.4 (4.8) (1.4) (3.4) ----------------------------------------------------------------------------- Gross margin $20.6 $14.5 $ 6.1 $ 1.7 $ 4.4 =============================================================================
The Company's Appalachia plant revenues for the nine months ended September 30, 1997 increased primarily as a result of higher sales prices for NGLs compared with the same period in 1996, as a result of the factors described in "Outlook" above. The remaining increase was caused by a 10% increase in NGL sales volumes during the first nine months of 1997 compared to the first nine months of 1996. 9 Appalachia plant feedstock costs increased for the nine months ended September 30, 1997, compared to plant feedstock for the same period in 1996 primarily as a result of higher natural gas prices during the first nine months of 1997. The remaining increase in feedstock costs was related to higher NGL production and sales volumes in the first nine months of 1997, compared to the first nine months of 1996.
APPALACHIA TERMINALS 1997 1996 Variance Volume Price ----------------------------------------------------------------------------- Terminal and marketing revenue $10.9 $13.8 $(2.9) $(2.7) $(0.2) Terminal and marketing purchases 10.9 12.1 1.2 2.3 (1.1) ----------------------------------------------------------------------------- Gross margin $ -- $ 1.7 $(1.7) $(0.4) $(1.3) =============================================================================
Terminal results in 1997 have been adversely affected by two factors. First, beginning in the fourth quarter of 1996, there was a significant appreciation in propane prices as described above in "Outlook". As a result, the Company entered 1997 with higher-than-normally priced propane inventories. The first quarter of 1997 saw sales prices decline rapidly as the supply and demand characteristics returned to normal levels. Second, weather has been warmer in 1997, resulting lower sales volumes during the nine months ended September 30, 1997.
MICHIGAN 1997 1996 Variance ---------------------------------------------- Transportation and treatment revenue $ 3.3 $ -- $3.3 Feedstock purchases 1.0 -- 1.0 ---------------------------------------------- Gross margin $ 2.3 $ -- $2.3 ==============================================
At September 30, 1996, the Company had earned an 11.3% interest in the Michigan project, which was accounted for under the equity method of accounting. Accordingly, the Company's respective share of income in the Michigan project, which was approximately $169,000 for the nine months ended September 30, 1996, was reflected in other income during 1996. Michigan transportation and treating revenue and feedstock purchases increased for the nine months ended September 30, 1997, reflecting higher 1997 volumes as described above. The Company incurs operating expenses, general and administrative costs and interest expense on debt funding the capital program, all as described below. OIL AND GAS REVENUE Oil and gas revenue increased to $695,000 for the nine months ended September 30, 1997 compared to $237,000 for the nine months ended September 30, 1996, an increase of $458,000. Gas production from all of the Company's properties during the nine months ended September 30, 1997 increased 300% from the previous year, reflecting new production from the Company's capital program. INTEREST INCOME Interest income increased $337,000, to $406,000 for the nine months ended September 30, 1997, compared to interest income of $69,000 for the nine months ended September 30, 1996. This increase resulted primarily from interest income earned in the first six months of 1997 on the long-term note receivable, which earned interest at a rate of 5.98%. COSTS AND EXPENSES Operating expenses increased $3.4 million, or 81%, to $7.6 million for the nine months ended September 30, 1997 as compared to operating expenses of $4.2 million for the nine months ended September 30, 1996. The increase was principally driven by the Company's operations in Michigan, which commenced in May 1996. 10 General and administrative expenses increased $2.0 million to $5.5 million for the nine months ended September 30, 1997, compared to general and administrative expenses of $3.5 million for the nine months ended September 30, 1996. This increase was attributable to administrative support activities related to the new operations in Michigan and to costs incurred in connection with being a public company in 1997. Depreciation and amortization increased approximately $300,000, or 14%, to $2.4 million for the nine months ended September 30, 1997, compared to depreciation and amortization expense of $2.1 million for the same period in 1996. This increase was principally due to increased depreciation attributable to the Company's new Michigan operations. INTEREST EXPENSE Interest expense decreased $161,000 to $726,000 for the nine months ended September 30, 1997, compared to interest expense of $887,000 for the same period in 1996, primarily as a result of the lower cost of the Company's new credit facility (see further discussion below under "Liquidity and Capital Resources"). LIQUIDITY AND CAPITAL RESOURCES The Company's sources of liquidity and capital resources historically have been net cash provided by operating activities; proceeds from issuance of long-term debt; and in 1996, an initial public offering of equity. The Company's principal uses of cash have been to fund operations, capital expenditures and acquisitions. For the nine months ended September 30, 1997, net cash flow provided from operations, before adjustments for working capital, increased to $9.0 million from $8.5 million for the nine months ended September 30, 1996. The Company invested $6.6 million in working capital in the nine months ended September 30, 1997, compared to $1.1 million invested in the nine months ended September 30, 1996. This was primarily caused by a higher accounts receivable balance at September 30, 1997 related to the Company's Michigan operations and a decrease in 1997 in accounts payable and accrued liabilities, primarily related to tax payments made in 1997, offset by a smaller build in inventories for the nine months ended September 30, 1997 when compared to the same time period in 1996. Cash used in investing activities increased $13.3 million for the nine months ended September 30, 1997 to $18.5 million, as compared to cash used in investing activities of $5.2 million for the nine months ended September 30, 1996, mainly due to $16.2 million of capital expenditures funded by the Company during the first three quarters of 1997. The Company's 1997 capital program is discussed further below. Financing activities during the third quarter of both 1997 and 1996 principally consisted of borrowings and repayments on long-term debt. Financing Facilities New Credit Facility Effective June 20, 1997, the Company replaced its existing financing agreement with a new credit facility (the "credit facility") with the Bank of Montreal, as agent, NationsBank and Colorado National Bank. The credit facility allows the Company to borrow up to $55 million, subject to borrowing base calculations, pursuant to a revolving loan commitment. The revolving loan commitment converts to a reducing loan commitment on May 31, 1999. The reducing loan commitment reduces ratably on a quarterly basis to zero by May 21, 2003. Interest rates are based on either the agent bank's prime rate plus 1% or the London Interbank Offered Rate (LIBOR), plus an applicable margin of between 50 and 150 basis points, based upon the Company's debt to capitalization ratio. As of September 30, 1997, approximately $22.9 million was outstanding. Of the total debt outstanding, $18.9 million bears interest at 6.125% and $4.0 million bears interest at 6.185%. 11 The loan agreement contains affirmative and negative covenants customary in commercial lending transactions, including maintenance of a specified tangible net worth, ratio of total funded debt to capitalization, total funded debt to trailing twelve month EBITDA and current ratio. Resources Revolver Loan The Company had a revolving facility with Colorado National Bank with a maximum borrowing base of $5.8 million as of March 31, 1997. This facility was canceled by the Company, effective April 25, 1997. At September 30, 1997, the Company had $32.1 million of available credit and working capital of $13.0 million. The Company believes that cash flows generated by its operations and existing credit facilities will be sufficient to meet its anticipated cash needs for working capital and capital expenditures, other than acquisitions, if any, for the next 12 months. Capital Investment Program On July 1, 1997, the Company closed on the purchase of a 44,000 square-foot office building in Englewood, Colorado, with the objective of reducing the Company's effective office costs. The four year old building will serve as MarkWest's corporate headquarters. MarkWest will occupy approximately half of the building and lease out the remainder. The cost of the building and tenant improvements will total approximately $5.6 million, to be financed initially from the Company's line of credit, and to be converted to long-term financing later in 1997. Of the total cost, $4.6 million has been expended in the nine months ended September 30, 1997. In addition, the Company expects to spend approximately $17.0 million during 1997, including approximately $10.0 million in the Michigan Core Area in order to complete construction of a pipeline and a new liquids facility, with the balance being allocated for projects in the Appalachian Core Area and exploration projects. For the nine months ended September 30, 1997, the Company made capital expenditures totaling approximately $11.6 million. RISK MANAGEMENT ACTIVITIES The Company's primary hedging objectives are to meet or exceed budgeted gross margins by locking in budgeted or above-budgeted prices in the financial derivatives markets and to protect margins from precipitous declines. The Company maintains a three-person committee of senior management that oversees all hedging activity. MarkWest employs three general risk management strategies. First, the Company contracts for future purchases of natural gas at a predetermined BTU differential based upon a basket of Gulf Coast NGL prices (or a substitute for propane such as crude oil). Second, MarkWest protects margins by purchasing natural gas contracts while simultaneously selling propane contracts of approximately the same BTU value. Third, the Company purchases propane futures contracts to hedge future sales of propane at the Company's terminals or gas plants. MarkWest enters into futures transactions in two ways: (1) on the New York Mercantile Exchange ("NYMEX"); and (2) future gas purchases are negotiated with natural gas suppliers and are structured to provide similar risk protections as NYMEX futures. Gains and loss related to qualifying hedges, as defined by Statement of Financial Accounting Standards No. 80, "Accounting for Futures Contracts", of firm commitments or anticipated transactions are recognized in plant revenue and feedstock purchases upon execution of the hedged physical transaction. Under internal guidelines, speculative transactions are prohibited. In addition to these risk management tools, MarkWest is able to use its liquids storage facilities to inventory product during lower-priced periods for resale during higher-priced periods. Also, MarkWest has contractual arrangements to purchase certain quantities of its natural gas feedstock in advance of physical needs. During the three and nine months ended September 30, 1997, a $0 and $1.0 million gain, respectively, were recognized in operating income on the settlement of propane and natural gas futures, compared to gains of $36,000 12 and $107,000 recognized during the three and nine months ended September 30, 1996, respectively. Financial instrument gains and losses on hedging activities were generally offset by amounts realized from the sale of the underlying products in the physical market. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement No. 128 ("SFAS 128"), "Earnings Per Share". This Statement is effective for financial statements issued for periods ending after December 15, 1997. Earlier adoption is not permitted. SFAS 128 requires dual presentation of basic and diluted EPS for entities with complex capital structures. The impact of adopting SFAS 128 will not have a material effect on the Company's earnings per share calculation. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In April 1997, Domain Energy Corporation and EnCap Investments, L.C. informed the Company that they had purported to transfer their interests in Michigan Energy Company, LLC ("MEC") and Michigan Production Company to Energy Acquisition Corp. MEC holds a minority interest in West Shore. In April 1997, the Company commenced arbitration proceedings pursuant to the Participation, Ownership and Operating Agreement for West Shore, to challenge the transfer of the interest in MEC. The arbitration demand also asserted claims involving certain West Shore operating issues generated by MEC's actions subsequent to the challenged transfer. Domain Energy Corporation, EnCap Investments, L.C. and other entities participating in the transfer transaction, named as Respondents in the arbitration, subsequently filed an action in Harris County, Texas seeking a declaration that the transfer transaction was proper and challenging the arbitrability of the Company's claims concerning the transfer. The Texas State Court action also sought an issuance of an injunction against the arbitration proceeding during the pendency of the declaratory judgment action. To facilitate prompt resolution of the West Shore operating issue claims initially asserted in the arbitration and additional issues which have arisen since April, the Company amended the arbitration demand in July 1997 to withdraw, without prejudice, its challenge to the transfer transaction. The Company believes the transfer issue will be resolved by alternative means. On October 16, 1997, the Harris County Texas Court entered a notice of intent to dismiss the Domain action, discussed above, for want of prosecution. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 MarkWest Hydrocarbon, Inc. 1997 Severance Plan 27 - Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1997. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MarkWest Hydrocarbon, Inc. (Registrant) Date: November 12, 1997 By: /s/ Gerald A. Tywoniuk -------------------------------- Gerald A. Tywoniuk Chief Financial Officer and Vice President of Finance (On Behalf of the Registrant and as Principal Financial and Accounting Officer) 14 EX-10.1 2 1997 SEVERENCE PLAN EXHIBIT 10.1 MARKWEST HYDROCARBON, INC. 1997 SEVERANCE PLAN Section 1. Purpose. ------- MarkWest Hydrocarbon, Inc. has adopted this 1997 Severance Plan (the "Plan") for the purpose of providing a financial incentive for certain employees of MarkWest Hydrocarbon, Inc. and its subsidiaries (collectively the "Company") and to enable the Company to retain such employees and to attract other well- qualified candidates. Section 2. Effective Date. -------------- The Plan shall be effective as of July 2, 1997. Section 3. Definitions. ----------- As used in the Plan, the following terms shall have the meanings set forth below: (a) "Base Salary" shall mean the Covered Employee's annualized base salary at the time that such employee's employment with the Company terminates. (b) "Board of Directors" shall mean the Board of Directors of MarkWest Hydrocarbon, Inc. (c) "Cause" shall mean (1) the conviction of a Covered Employee of any act constituting a felony under the laws of any state or of the United States, or a crime involving moral turpitude that causes harm to the Company, (2) willful misconduct by a Covered Employee causing material harm to the Company, (3) substantial and material failure to perform required duties which is not cured within 30 days after receiving written notice from the Company describing the failure to perform and stating that the Company will consider the continuation of such failure to perform as cause for termination, or (4) any of the reasons for termination of employment by the Company set forth in the Company's employee handbook, as may be amended from time to time. (d) "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. (e) "COBRA Benefits" shall mean the payment by the Company on behalf of an Eligible Employee of insurance premiums necessary to continue such employee's health insurance coverage under the Company's insurance plan following the termination of his or her employment with the Company pursuant to COBRA; provided, however, that the term "COBRA Benefits" shall not include any payments resulting from an increase in insurance premiums due to the provision of health insurance to the spouse or any dependents of the Eligible Employee to the extent that such dependents were not covered by the Company's health insurance policy on the date that such employee's employment with the Company terminated. In addition, the term COBRA Benefits shall include the payment by the Company on behalf of any Three Year Eligible Employee who is an Executive Officer and a Director, pursuant to Section 4(b)(1) of the Plan, of insurance premiums necessary to continue such employee's health insurance coverage under the Company's insurance plan following the termination of his or her employment with the Company beyond the term required by COBRA. (f) "Company" shall mean MarkWest Hydrocarbon, Inc., a Delaware corporation, and all of its subsidiaries. For this purpose, a subsidiary shall mean any entity in an unbroken chain of entities beginning with MarkWest Hydrocarbon, Inc. if each of the entities other than the last entity in the unbroken chain holds an ownership interest representing 50 percent or more of the total combined voting power of all classes of ownership interest in one of the other entities in such chain. (g) "Covered Employee" shall mean any executive officer of the Company or any other key employee of the Company designated by the Chief Executive Officer and the Chief Operating Officer of MarkWest Hydrocarbon, Inc., in their sole discretion, as being covered by the Plan. (h) "Director" shall mean a Covered Employee that is a member of the Board of Directors of MarkWest Hydrocarbon, Inc. (i) "Disability" shall mean the termination of the Covered Employee's employment due to mental or physical disability, such disability being determined by a competent medical authority acceptable to the Company. (j) "Eligible Employee" shall mean a Covered Employee that is either a One Year Eligible Employee or a Three Year Eligible Employee. (k) "Executive Officer" shall mean a Covered Employee that the Board of Directors determines to be an executive officer of the Company. (l) "Good Reason" shall mean (1) a material reduction in a Covered Employee's duties or functions from those that such an officer or key employee would normally perform or that the Covered Employee had been performing or (2) a change in control of the Company of a nature that would be required to be -2- reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, whether or not the Company is then subject to such reporting requirements; provided, however, that, in either case, the Company has not cured the events constituting Good Reason within 10 days after receiving written notice from the Covered Employee describing such Good Reason. (m) "Incentive Compensation Plan" shall mean the MarkWest Hydrocarbon, Inc. 1996 Incentive Compensation Plan, as amended. (n) "Minimum Covenant Period" shall mean the greater of (i) eighteen (18) months or (ii) the Severance Period. (o) "One Year Eligible Employee" shall mean a Covered Employee that has been employed by the Company for a consecutive period of at least one (1) year but less than three (3) years. (p) "Plan" shall mean the MarkWest Hydrocarbon, Inc. 1997 Severance Plan as set forth herein. (q) "Severance Payments" shall mean any payments made pursuant to Section 4 of the Plan. (r) "Severance Period" shall mean the time period during which an Eligible Employee receives Severance Payments. (s) "Stock Incentive Plan" shall mean the MarkWest Hydrocarbon, Inc. 1996 Stock Incentive Plan, as amended. (t) "Three Year Eligible Employee" shall mean a Covered Employee that has been employed by the Company for a consecutive period of at least three (3) years. Section 4. Severance Payments. ------------------ (a) Eligibility. No person shall be eligible to receive any Severance Payments under the Plan unless such person is an Eligible Employee at the time of termination of his or her employment with the Company. No employee shall be considered a participant under the Plan until such time as their employment terminates under circumstances that entitle him or her to Severance Payments under Plan, and such participation shall end when all Severance Payments such employee may be entitled to receive have been paid. -3- (b) Termination Without Cause or Resignation for Good Reason. If an Eligible Employee resigns for Good Reason or such employee's employment with the Company is terminated without Cause, the Eligible Employee shall be entitled to receive Severance Payments from the Company in accordance with the following schedule: (i) any Three Year Eligible Employee that is both an Executive Officer and a Director shall be entitled to receive Base Salary and COBRA Benefits for a period of twenty-four (24) months; provided, however, that the payment by the Company of COBRA Benefits beyond the period during which the Company is required to provide insurance coverage to such employee pursuant to COBRA shall be subject to approval by the Company's insurance carrier. (ii) any One Year Eligible Employee that is both an Executive Officer and a Director shall be entitled to receive Base Salary and COBRA Benefits for a period of twelve (12) months; (iii) any Three Year Eligible Employee that is an Executive Officer, but not a Director, shall be entitled to receive Base Salary and COBRA Benefits for a period of eighteen (18) months; (iv) any One Year Eligible Employee that is an Executive Officer, but not a Director, shall be entitled to receive Base Salary and COBRA Benefits for a period of nine (9) months; (v) any Three Year Eligible Employee that is neither an Executive Officer nor a Director shall be entitled to receive Base Salary and COBRA Benefits for a period of twelve (12) months; and (vi) any One Year Eligible Employee that is neither an Executive Officer nor a Director shall be entitled to receive Base Salary and COBRA Benefits for a period of six (6) months. (c) Disability. If an Eligible Employee's employment with the Company is terminated by reason of such employee's death or Disability, the Eligible Employee (or his or her representative) shall be entitled to receive the same Severance Payments that such employee would have been entitled to receive if the Eligible Employee resigned for Good Reason or such employee's employment with the Company was terminated without Cause. (d) Voluntary Resignation. If an Eligible Employee voluntarily resigns, the Eligible Employee shall be entitled to receive Severance Payments from the Company in accordance with the following schedule: -4- (i) any Three Year Eligible Employee that is both an Executive Officer and a Director shall be entitled to receive Base Salary and COBRA Benefits for a period of six (6) months; (ii) any One Year Eligible Employee that is both an Executive Officer and a Director shall be entitled to receive Base Salary and COBRA Benefits for a period of three (3) months; (iii) any Three Year Eligible Employee that is an Executive Officer, but not a Director, shall be entitled to receive Base Salary and COBRA Benefits for a period of four (4) months and two (2) weeks; (iv) any One Year Eligible Employee that is an Executive Officer, but not a Director, shall be entitled to receive Base Salary and COBRA Benefits for a period of two (2) months and one (1) week; (v) any Three Year Eligible Employee that is neither an Executive Officer nor a Director shall be entitled to receive Base Salary and COBRA Benefits for a period of three (3) months; and (vi) any One Year Eligible Employee that is neither an Executive Officer nor a Director shall be entitled to receive Base Salary and COBRA Benefits for a period of one (1) month and two (2) weeks. (e) Termination for Cause. If the Company terminates the employment of an Eligible Employee for Cause, such employee shall not be entitled to receive any Severance Payments. (f) Limitations on Amount of Severance Payments. Notwithstanding any provision to the contrary in any other portion of the Plan, the aggregate amount of Severance Payments to be paid to an Eligible Employee shall in no event exceed twice such employee's annual compensation during the year immediately preceding the termination of his or her employment with the Company. Annual compensation for purposes of determining the foregoing limitation means the total compensation, including wages, salary, bonus and any other benefit of monetary value, whether paid in the form of cash or otherwise, which was paid as consideration for the Eligible Employee's services during the year, or which should have been so paid at such employee's usual rate and compensation if such employee had been employed by the Company for the entire year. To the extent that a Severance Payment would exceed the foregoing limitation, payment under the Plan shall be modified. (g) Limitations on COBRA Benefits. The payment by the Company of COBRA Benefits to an Eligible Employee pursuant to this Section 4 shall only -5- commence upon a proper election by such employee to receive insurance coverage pursuant to COBRA and shall cease immediately if, at any time thereafter, such employee becomes covered by another health insurance plan or otherwise becomes ineligible to receive coverage pursuant to COBRA. Such payments shall in no event extend the period of time during which such employee is eligible to receive coverage under the Company's health insurance plan pursuant to COBRA. Notwithstanding the foregoing, the Company will pay COBRA Benefits beyond the period during which the Company is required to provide insurance coverage pursuant to COBRA to a Three Year Eligible Employee who is an Executive Officer and a Director in accordance with Section 4(b)(1) of the Plan, subject to the approval of the Company's insurance carrier. (h) Termination of Service Period. Regardless of whether an Eligible Employee receives Severance Payments pursuant to the Plan following the termination of his or her employment with the Company, such person shall not be considered an employee of the Company for any purpose following such termination. The receipt of Severance Payments following the termination of employment shall in no event extend the vesting period of any awards granted to an Eligible Employee pursuant to the Stock Incentive Plan or make such person eligible to receive bonus payments from the Company pursuant to the Incentive Compensation Plan, or otherwise, for any period after the termination of such person's employment with the Company. (i) Method of Payment. All Severance Payments shall be paid in accordance with the Company's normal payroll policies over the course of the Severance Period. All Severance Payments are subject to any required withholding. In no event shall Severance Payments be made beyond twenty-four (24) months after the termination of the Eligible Employee's employment with the Company. To the extent that Severance Payments are to be made after the death of the Eligible Employee, payment will be made to the personal representative of such employee's estate or, if there is no estate, in accordance with applicable law. Section 5. Non-Competition, Non-Solicitation and Confidentiality ----------------------------------------------------- Agreement. - --------- Notwithstanding any provision to the contrary in any other portion of the Plan, no Eligible Employee shall be entitled to receive any Severance Payments pursuant to the Plan unless such employee is party to an effective and legally enforceable agreement with the Company pursuant to which he or she is bound to covenants of non-competition, non-solicitation and confidentiality for the time period commencing on the termination of his or her employment with the Company and continuing for a period of time no less than the Minimum Covenant Period. Such covenants shall be upon such terms and provisions as the Company may determine in its sole discretion, provided that the covenant of non- -6- competition shall be limited to the geographic regions in which the Company conducts its business at the time that the Eligible Employee's employment with the Company is terminated. In addition, no Covered Employee shall be eligible for any further awards under the Stock Incentive Plan unless such employee is party to an effective and legally enforceable agreement containing the terms and provisions described above. Section 6. Waiver and Release. ------------------ Notwithstanding any provision to the contrary in any other portion of the Plan, no Eligible Employee shall be entitled to receive any Severance Payments pursuant to the Plan until such employee has executed and delivered (i) an agreement with the Company prospectively waiving any employment-related claims that he or she may have against the Company and (ii) a release, releasing the Company from any such claims. Section 7. Claims Procedure. ---------------- (a) General. If a Covered Employee believes that he or she may be entitled to benefits, or the Covered Employee is in disagreement with any determination that has been made with respect to the Plan, the Covered Employee may present a claim to the Company. (b) Making a Claim. A Covered Employee's claim must be written and must be delivered to the Company. Within ninety (90) days after delivery of such claim, the Covered Employee shall receive either: (i) a decision; or (ii) a notice describing special circumstances requiring a specified amount of additional time (but no more than one hundred and eighty (180) days from the date of delivery of such claim) to reach a decision. If such claim is wholly or partially denied, the Covered Employee shall receive a written notice specifying: (i) the reasons for denial; (ii) the Plan provisions on which such denial is based; and (iii) any additional information needed from the Covered Employee in connection with the claim and the reason such information is needed. The Covered Employee shall also receive a written statement providing the information contained in Section 7(c) below concerning the Covered Employee's right to request a review. (c) Requesting Review of a Denied Claim. A Covered Employee may request that a denied claim be reviewed. Such request for review must be written and must be delivered to the Company within sixty (60) days after the Covered Employee receives the written notice that the Covered Employee's claim was denied. Such request for review may (but is not required to) include issues and comments that the Covered Employee wants considered in the review. The Covered Employee may examine pertinent Plan documents by making a request to the Company. Within sixty (60) days after delivery by the Covered Employee of the -7- Covered Employee's request for review, the Company shall receive either: (i) a decision; or (ii) a notice describing special circumstances requiring a specified amount of additional time (but no more than one hundred and twenty (120) days from the date of delivery of such request for review) to reach a decision. The decision shall be in writing and shall specify the Plan provisions on which it is based. (d) Decisions. All decisions on claims and on reviews of denied claims will be made by the Company. The Company may, in its sole discretion, hold one or more hearings. If a Covered Employee does not receive a decision within the specified time, the Covered Employee should assume that the claim was denied or re-denied on the date the specified time expired. The Company reserves the right to delegate, in whole or in part, its authority to make decisions under the Plan. Section 8. Miscellaneous. ------------- (a) Amendment, Suspension or Termination. The Board of Directors may, from time to time and at any time, amend, suspend or terminate, in whole or in part, any or all of the provisions of the Plan; provided, however, that no such action shall adversely affect the right of any Eligible Employee with respect to any Severance Payment he or she may have become entitled to hereunder prior to the effective date of such amendment, suspension, or termination. (b) Determinations. The Company shall make such determinations as may be required from time to time in the administration of the Plan. The Company shall have the sole discretion, authority and responsibility to interpret and construe the Plan and to determine all factual and legal questions under the Plan, including, without limitation, all questions regarding the entitlement of employees of the Company to participate in the Plan and the amount of any benefits they may be eligible to receive thereunder. (c) Limitations. This Plan is not to be construed as constituting a contract of employment. Nothing contained herein shall affect or impair the Company's right to terminate the employment of a Covered Employee. All Severance Payments shall be paid out of the general funds of the Company. An Eligible Employee shall not have any secured or preferred interest by way of a trust, escrow, lien or otherwise in any specific asset of the Company for any unpaid Severance Payments. The Company will not make any contributions to fund the Plan. (d) Indemnification. No member of the Board of Directors or employee of the Company shall have any liability for any decision or action if made or done in good faith, nor for any error or miscalculation unless such error or miscalculation is a result of fraud, deliberate disregard of the terms of the Plan, or -8- gross neglect. The Company shall indemnify each such director or employee acting in good faith, pursuant to the terms of the Plan, against any loss or expense arising therefrom. (e) Spendthrift Provisions. No Covered Employee shall have any transmissible interest in the Plan nor shall any Covered Employee have any power to anticipate, alienate, dispose of, pledge or encumber any rights under the Plan, nor shall the Company recognize any assignment thereof, either in whole or in part, nor shall the Plan or any Severance Payments be subject to attachment, garnishment, execution following judgment or other legal process. (f) Plan Administrator. The Company shall be the administrator of the Plan. (g) Service of Legal Process. The Secretary of the Company is designated as the appropriate and exclusive agent for the receipt of service of process directed to the Plan in any legal proceeding involving the Plan. (h) Type of Plan. The Plan is a severance pay employee welfare benefit plan. The Plan is not an employee pension benefit plan. (i) Governing law. The terms of this Plan shall, except to the extent that federal law controls, be governed by and construed in accordance with the laws of the State of Colorado. -9- EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS ON PAGES 1 AND 2OF THE COMPANY'S 1997 FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 SEP-30-1997 0 0 8,749 0 7,419 19,764 77,526 (14,619) 93,109 6,718 23,125 0 0 85 49,049 93,109 54,121 55,730 31,140 31,140 16,206 0 726 8,636 3,186 5,450 0 0 0 5,450 0.64 0
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