-----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, SXQvSiVuBL4AsafajIkgW8UF4keDMcCAWr8cFGAHSenQE2z8NoDqOsOSEltpRlOR t8gLAuIsz0lN8FvbsMuC3w== 0000950152-00-002218.txt : 20000329 0000950152-00-002218.hdr.sgml : 20000329 ACCESSION NUMBER: 0000950152-00-002218 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELDEN & BLAKE CORP /OH/ CENTRAL INDEX KEY: 0000880114 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 341686642 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20100 FILM NUMBER: 580839 BUSINESS ADDRESS: STREET 1: 5200 STONEHAM RD STREET 2: P O BOX 2500 CITY: NORTH CANTON STATE: OH ZIP: 44720 BUSINESS PHONE: 3304991660 MAIL ADDRESS: STREET 1: 5200 STONEHAM RD STREET 2: P O BOX 2500 CITY: NORTH CANTON STATE: OH ZIP: 44720 10-K405 1 BELDEN & BLAKE CORPORATION 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-20100 BELDEN & BLAKE CORPORATION (Exact name of registrant as specified in its charter) OHIO 34-1686642 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5200 STONEHAM ROAD NORTH CANTON, OHIO 44720 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (330) 499-1660 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, WITHOUT PAR VALUE (Title of Class) 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- As of February 29, 2000, Belden & Blake Corporation had outstanding 10,256,487 shares of common stock, without par value, which is its only class of stock. The common stock of Belden & Blake Corporation is not traded on any exchange and, therefore, its aggregate market value and the value of shares held by non-affiliates cannot be determined. DOCUMENTS INCORPORATED BY REFERENCE None. 2 PART I - ------ Item 1. BUSINESS -------- Belden & Blake Corporation (the "Company") was acquired by TPG Partners II L.P. ("TPG") and certain other investors on June 27, 1997 ("the Acquisition"). For financial reporting purposes, the Acquisition is considered effective June 30, 1997 and the operations of the Company prior thereto and thereafter are respectively classified as predecessor company and successor company operations. The operations of the successor company represent 100% of the businesses of the predecessor. Therefore, certain operational data for the twelve months ended December 31, 1997 have been presented on a combined basis because such information is comparable to the historical data of the predecessor and the current data of the successor. The historical financial statements of the successor company and its predecessor are presented separately as described in Note 1 to the Consolidated Financial Statements included under Item 8. GENERAL Belden & Blake Corporation, an Ohio corporation, is an independent energy company engaged in producing oil and natural gas; exploring for and developing oil and gas reserves; acquiring and enhancing the economic performance of producing oil and gas properties; and gathering natural gas for delivery to intrastate and interstate gas transmission pipelines. Until 1995, the Company conducted business exclusively in the Appalachian Basin where it has operated since 1942 through several predecessor entities. It is currently one of the largest exploration and production companies operating in the Appalachian Basin in terms of reserves, acreage held and wells operated. In early 1995, the Company commenced production and drilling operations in the Michigan Basin through the acquisition of Ward Lake Drilling, Inc. ("Ward Lake"), an independent energy company, which owns and operates oil and gas properties in Michigan's lower peninsula. In September 1996, the Company entered the Illinois Basin by acquiring a natural gas gathering system and the Shrewsbury Gas Field in western Kentucky. At December 31, 1999, the Company operated in Ohio, Pennsylvania, New York, West Virginia, Michigan and Kentucky. At December 31, 1999, the Company's net production was approximately 68.4 Mmcf (million cubic feet) of natural gas and 1,864 Bbls (barrels) of oil per day. At that date the Company owned interests in 7,867 gross (6,891 net) productive oil and gas wells in Ohio, Pennsylvania, New York, West Virginia, Michigan and Kentucky with proved reserves totaling 306.7 Bcf (billion cubic feet) of natural gas and 6.7 Mmbbl (million barrels) of oil. The estimated future net cash flows from these reserves had a present value (discounted at 10 percent) before income taxes of approximately $267.5 million at December 31, 1999. At December 31, 1999, the Company operated approximately 7,565 wells, including wells operated for third parties. At that date, the Company held leases on 1,148,625 gross (1,006,977 net) acres, including 624,001 gross (523,307 net) undeveloped acres. The Company owned and operated approximately 2,750 miles of gas gathering systems with access to the commercial and industrial gas markets of the northeastern United States at December 31, 1999. The Company's production and reserves have grown principally through the acquisition of producing properties and related gas gathering facilities and exploration and development of its own acreage. From its formation in March 1992 through December 31, 1999, the Company acquired for $158.3 million producing properties with 235.2 Bcfe (billion cubic feet of natural gas equivalent) of 1 3 proved developed reserves at an average cost of $0.67 per Mcfe (thousand cubic feet of natural gas equivalent) and spent $21.8 million to acquire and develop additional gas gathering facilities. During the period from 1992 through 1999, the Company drilled 1,075 gross (813.5 net) wells at an aggregate cost of approximately $152.0 million for the net wells. This drilling added 159.8 Bcfe to the Company's proved reserves. The Company originally budgeted $28 million of capital expenditures to drill approximately 251 wells in 1999. However, due to a borrowing base deficiency which occurred in January 1999, the Company reduced its drilling budget to accommodate only those wells which had commenced drilling before the borrowing base reduction and those wells in which it had contractual obligations to participate. As a result of the reduction, the Company only participated in drilling 18 gross (4.8 net) wells in 1999 at a direct cost of approximately $840,000 for the net wells. This greatly diminished drilling activity in 1999 added 0.49 Bcfe of proved developed reserves at an average cost of $1.71 per Mcfe. Proved developed reserves added through drilling in 1999 represented approximately 2% of 1999 production. The Company maintains its corporate offices at 5200 Stoneham Road, North Canton, Ohio 44720. Its telephone number at that location is (330) 499-1660. Unless the context otherwise requires, all references herein to the "Company" are to Belden & Blake Corporation, its subsidiaries and predecessor entities. SIGNIFICANT EVENTS In July 1998, the Company began development of a major expansion of its gas marketing capability with the objective of substantially increasing the number of commercial and industrial customers served, the volumes of natural gas sold and the Company's future net operating margins from natural gas sales. The expansion included the selection and installation of systems and technology to enhance the efficiency of the gas marketing operation. The Company expensed $732,000 in 1998 and $208,000 in 1999 relating to this expansion project. In conjunction with the planned expansion of its gas marketing capability, the Company formed Belden Energy Services Company ("BESCO"), a wholly-owned subsidiary, in September 1998. See Note 4 to the Consolidated Financial Statements. On January 15, 1999, the Company was notified that the several lenders under its revolving credit agreement had reduced the Company's borrowing base from $170 million to $126 million. The Company's outstanding borrowings on that date exceeded the redetermined borrowing base by $28 million. In order to satisfy the borrowing base deficiency, the Company immediately reduced its capital expenditures to the minimum required to maintain prudent operations of its producing oil and gas properties and gas gathering systems. In March 1999, the Company began a rigorous review of its strategic direction given the Company's high debt level and greatly diminished liquidity. In the course of reviewing its strategic direction, the Company determined that its diminished financial position and liquidity would prevent it from effectively expanding its gas marketing business given the need for additional systems, more personnel and credit. As a result of this determination, the gas marketing expansion project was abandoned in 1999. The Company's Chief Executive Officer ("CEO"), retired from the Company on June 1, 1999. John L. Schwager, former CEO and President of Alamco, Inc., an Appalachian Basin exploration and production company, was engaged as the new CEO. Mr. Schwager's mission, as established by the Company's Board of Directors, was to attempt to sell non strategic, non core assets, using any proceeds to reduce debt; and further, to concentrate the Company's available resources on its core exploration and 2 4 production business. Mr. Schwager was elected to the Board of Directors in August 1999 and was appointed to the additional position of President upon the departure of the former President in September 1999. In July 1999, the Company developed plans to transfer certain non strategic producing and non producing oil and gas assets to a proposed $100 million to $120 million royalty trust and sell the royalty trust units in a public offering. The Company planned to use the proceeds from the sale of royalty trust units to reduce bank debt. In August 1999, the Company abandoned the proposed royalty trust because of the withdrawal of the lead underwriter. Approximately $374,000 of costs associated with the project were written off in the third quarter of 1999. In August 1999, the Company and its wholly-owned subsidiary, The Canton Oil and Gas Company ("COG") sold Target Oilfield Pipe and Supply Company ("TOPS"), a wholly-owned subsidiary of COG, to an oilfield supply company for approximately $4 million. Proceeds from the sale were used to reduce the Company's bank debt. The Company recorded a $2.8 million loss on the sale in the third quarter of 1999. TOPS operated retail sales outlets in the Appalachian and Michigan Basins from which it sold a broad range of oilfield supplies and equipment. See Note 4 to the Consolidated Financial Statements. In September 1999, the Company implemented a plan to reduce costs and improve operating efficiencies. The plan included actions to bring the Company's employment level in line with current and anticipated future staffing needs which resulted in staff reductions of approximately 10%. Including employee reductions through attrition and the sale of subsidiaries, total Company employment was reduced by approximately 25% in 1999. In October 1999, the Company solicited offers for the sale of Peake Energy, Inc. ("Peake"), a wholly owned exploration and production subsidiary with operations in West Virginia and Kentucky. See Subsequent Events. In November 1999, the Company sold BESCO, its Ohio retail natural gas marketing subsidiary, to FirstEnergy Corp. ("FirstEnergy"), an electric utility holding company also engaged in oil and gas production and natural gas marketing. Proceeds from the sale were used to reduce the Company's bank debt. In the future, the Company's Ohio natural gas production not committed to existing sales contracts will be sold on the wholesale market. See Note 4 to the Consolidated Financial Statements. In December 1999, the Company and its lenders further amended the senior revolving credit agreement. The revolving credit commitment in the amended agreement provides for a $75 million revolving portion which matures on June 27, 2002 and a $50 million term portion which matures on March 31, 2000. The borrowing base on the revolving portion of the credit facility will remain at $75 million until the earlier of (i) the sale of Peake; and (ii) the redetermination of the borrowing base in the ordinary course, pursuant to the terms of the existing credit agreement. 3 5 RECENT DEVELOPMENTS SUBSEQUENT EVENTS On March 17, 2000, the Company sold the stock of Peake, a wholly owned subsidiary, to North Coast Energy, Inc. ("North Coast"), an independent oil and gas company, with an effective date of January 1, 2000. The sale included substantially all of the Company's oil and gas properties in West Virginia and Kentucky. The sale resulted in net proceeds of approximately $69 million. At December 31, 1999, using SEC pricing parameters, Peake had proved developed reserves of approximately 66.5 Bcfe and proved undeveloped reserves of approximately 3.7 Bcfe. Peake's reserves represented 20.2% of the Company's total proved reserves. In March 2000, the Company obtained the unanimous consent of its bank group to further amend the revolving credit agreement to establish a borrowing base of $62.7 million and to forego the May 2000 borrowing base redetermination. The next scheduled borrowing base redetermination is in November 2000. DESCRIPTION OF BUSINESS OVERVIEW The Company conducts operations in the United States in one reportable segment which is exploration and production. Founded in 1942, the Company is actively engaged in producing oil and natural gas; exploring for and developing oil and gas reserves; acquiring and enhancing the economic performance of producing oil and gas properties; and gathering natural gas for delivery to intrastate and interstate gas transmission pipelines. The Company operates principally in the Appalachian and Michigan Basins (a region which includes Ohio, Pennsylvania, New York, West Virginia and Michigan) where it is one of the largest oil and gas companies in terms of reserves, acreage held and wells operated. The Appalachian Basin is the oldest and geographically one of the largest oil and gas producing regions in the United States. Although the Appalachian Basin has sedimentary formations indicating the potential for oil and gas reservoirs to depths of 30,000 feet or more, oil and natural gas is currently produced primarily from shallow, highly developed blanket formations at depths of 1,000 to 5,500 feet. Drilling success rates of the Company and others drilling in these formations historically have exceeded 90% with production generally lasting longer than 20 years. The combination of long-lived production and high drilling success rates at these shallower depths has resulted in a highly fragmented, extensively drilled, low technology operating environment in the Appalachian Basin. As a result, there has been only limited testing or development of the formations below the existing shallow production in the Appalachian Basin. The Company believes that there are significant exploration and development opportunities in these less developed formations for those operators with the capital, technical expertise and ability to assemble the large acreage positions needed to justify the use of advanced exploration and production technologies. In January 1995, the Company purchased Ward Lake Drilling, Inc., a privately-held energy company headquartered in Gaylord, Michigan, and commenced operations in the Michigan Basin. The Company's primary objective in acquiring Ward Lake was to allow the Company to pursue exploration and production opportunities in the Michigan Basin with an established operating company that provided 4 6 the critical mass to operate efficiently. Ward Lake currently operates 743 wells producing approximately 51 Mmcf (21 Mmcf net) of natural gas per day in Michigan. The Company's rationale for entering the Michigan Basin was based on geologic and operational similarities to the Appalachian Basin, geographic proximity to the Company's operations in the Appalachian Basin and proximity to premium gas markets. Geologically, the Michigan Basin resembles the Appalachian Basin with shallow blanket formations and deeper formations with greater reserve potential. Operationally, economies of scale and cost containment are essential to operating profitability. The operating environment in the Michigan Basin is also highly fragmented with substantial acquisition opportunities. Most of the Company's production in the Michigan Basin is derived from the shallow (700 to 1,700 feet) blanket Antrim Shale formation which has not been extensively developed. Success rates for companies drilling to this formation have exceeded 90%, with production often lasting as long as 20 years. The Michigan Basin also contains deeper formations with greater reserve potential. The Company has also established production from certain of these deeper formations through its drilling operations. Because the production rate from Antrim Shale wells is relatively low, cost containment is a crucial aspect of operations. In contrast to the shallow, highly developed blanket formations in the Appalachian Basin, the operating environment in the Antrim Shale is more capital intensive because of the low natural reservoir pressures and the high initial water content of the formation. The proximity of the Appalachian and Michigan Basins to large commercial and industrial natural gas markets has generally resulted in premium wellhead gas prices that since 1992 have averaged $0.35 per Mcf (thousand cubic feet) above the New York Mercantile Exchange's ("NYMEX") annual price for gas delivered at the Henry Hub in Louisiana. The Company's average wellhead gas price in 1999 was $0.23 per Mcf above the NYMEX's Henry Hub price. BUSINESS STRATEGY The Company seeks to increase shareholder value by increasing reserves, production and cash flow through a balanced program of exploration and development drilling and strategic acquisitions. In 1999, the Company conducted a rigorous examination of its business strategy to take into consideration its high debt level and greatly diminished liquidity. As a result, the Company has determined that it will concentrate its available resources on its core exploration and production business. The Company also recognizes the necessity of replacing its production with reserve additions through drilling and acquisitions in order to sustain its existence over the longer term. The key elements of the Company's current strategy are as follows: o IMPROVE THE COMPANY'S FINANCIAL POSITION. At December 31, 1999, the Company had $128 million of bank debt outstanding with a weighted average interest rate of 9.43%, and $225 million of senior subordinated notes bearing interest at 9.875%. At that date, the Company had a deficit in shareholders' equity of $51.6 million. The Company intends to sell non strategic assets and use the proceeds, along with a portion of its available cash flow to reduce its debt burden and enhance liquidity. The Company may also consider attempting to restructure portions of its existing debt to further reduce the amount of debt outstanding. o MAINTAIN A BALANCED DRILLING PROGRAM. The Company intends to maintain its production and reserves through a balanced program of developmental and exploratory drilling. The Company 5 7 believes that there are significant exploration and development opportunities in the less developed or deeper formations in the Appalachian and Michigan Basins and has identified numerous development and exploratory drilling locations in the deeper formations of these Basins. The company's drilling budget in 2000 is approximately $16.1 million, which will fund the drilling of approximately 125 gross (99 net) wells. o UTILIZE ADVANCED TECHNOLOGY. The combination of long-lived production and high drilling success rates at the shallow depths has resulted in a highly fragmented, extensively drilled, low technology operating environment in the Appalachian Basin. The Company has been applying more advanced technology, including 3-D seismic, horizontal drilling, advanced fracturing techniques and enhanced oil recovery methods. The Company is implementing these techniques to improve drilling success rates, reserves discovered per well, production rates, reserve recovery rates and total economics in its operating areas. o IMPROVE PROFIT MARGINS. To become one of the most efficient operators in the Appalachian and Michigan Basins, the Company intends to improve its profit margins on the production from existing and acquired properties through advanced production technologies, operating efficiencies, mechanical improvements and the use of enhanced recovery techniques. Through its production field offices in Ohio, Pennsylvania, New York and Michigan, the Company continuously reviews its properties, especially recently acquired properties, to determine what actions can be taken to reduce operating costs and/or improve production. The Company has successfully reduced field level costs through improved operating practices such as computerized production scheduling and the use of hand-held computers to gather field data. On acquired properties, further efficiencies may be realized through improvements in production scheduling and reductions in oilfield labor. Actions that may be taken to improve production include modifying surface facilities and redesigning downhole equipment. o PURSUE CONSOLIDATION OPPORTUNITIES. The energy industry is experiencing a general trend toward consolidation. The Appalachian and Michigan Basins are highly fragmented with the potential for significant consolidation. The Company believes this fragmented environment provides the basis for acquisition opportunities as capital constrained operators, the majority of which are privately held, seek liquidity or operating capital. The Company intends to use its geographic and technical expertise, low cost structure and decentralized organization to pursue additional strategic acquisitions in its areas of operations. The Company intends to finance such acquisitions using its available cash flow or additional debt. o EXPAND NATURAL GAS GATHERING. The Company's extensive gas gathering systems are integral to the Company's low cost structure and high revenues per unit of gas production. It is the Company's intention to expand its gas gathering systems to further improve the rate of return on the Company's drilling and development activities. The Company has excellent business relationships with a number of utilities and industrial end users located within the Company's operating areas, providing it with a direct outlet for much of its natural gas production. 6 8 OIL AND GAS OPERATIONS AND PRODUCTION Operations. The Company operates substantially all of the wells in which it holds working interests. It seeks to maximize the value of its properties through operating efficiencies associated with economies of scale and through operating cost reductions, advanced production technology, mechanical improvements and/or the use of enhanced and secondary recovery techniques. The Company currently maintains production field offices in Ohio, Pennsylvania, New York and Michigan. Through these offices, the Company continuously reviews its properties, especially recently acquired properties, to determine what action can be taken to reduce operating costs and/or improve production. The Company also uses secondary recovery techniques, which typically involve methods of oil extraction in which external energy sources are applied to extract additional production. The Company's principal secondary recovery technique in Ohio and Pennsylvania has been waterflooding. The Company has also provided its own oilfield services for more than 30 years in order to assure quality control and operational and administrative support to its exploration and production operations. Arrow Oilfield Service Company ("Arrow"), the Company's service division, provides the Company and third party customers with necessary oilfield services such as well workovers, well completions, brine hauling and disposal and oil trucking. Production, Sales Prices and Costs. The following table sets forth certain information regarding the Company's net oil and natural gas production, revenues and expenses for the years indicated:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- ------- Production: Gas (Bcf) 17.0 25.4 27.2 30.1 27.0 Oil (Mbbl - thousand barrels) 556 719 753 768 713 Average sales price: Gas (per Mcf) $ 2.21 $ 2.56 $ 2.65 $ 2.57 $ 2.50 Oil (per Bbl) 16.78 20.24 18.10 12.61 16.57 Average production costs per Mcfe (including production taxes) 0.68 0.72 0.78 0.77 0.81 Total oil and gas revenues (in thousands) 46,853 79,491 85,756 87,055 79,299 Total production expenses (in thousands) 13,816 21,266 24,668 26,725 25,240
Gas Gathering. The Company currently operates approximately 1,830 miles of natural gas gathering lines in Ohio, Pennsylvania, New York and Michigan which are connected directly to various intrastate and interstate natural gas transmission systems. The interconnections with these pipelines afford the Company potential marketing access to numerous major gas markets. The Company's gas gathering revenues totaled $5.0 million in 1999. Direct costs associated with gas gathering in 1999 totaled $1.7 million. 7 9 EXPLORATION AND DEVELOPMENT The Company's exploration and development activities include development drilling in the highly developed or blanket formations and development and exploratory drilling in the less developed formations of the Appalachian and Michigan Basins. The Company's strategy is to develop a balanced portfolio of drilling prospects that includes lower risk wells with a high probability of success and higher risk wells with greater economic potential. The Company has an extensive inventory of acreage on which to conduct its exploration and development activities. The Company originally budgeted $28 million of capital expenditures to drill approximately 251 wells in 1999. On January 15, 1999, the Company was notified that the several lenders under its revolving credit agreement had reduced the Company's borrowing base from $170 million to $126 million. The Company's outstanding borrowings on that date exceeded the redetermined borrowing base by $28 million. In order to satisfy the borrowing base deficiency, the Company immediately reduced its capital expenditures on drilling to only those wells which had commenced drilling before the borrowing base reduction and those wells in which it had a contractual obligations to participate. As a result of the reduction, the Company only participated in drilling 18 gross (4.8 net) wells in 1999 at a direct cost of approximately $840,000 for the net wells. This greatly diminished drilling activity in 1999 added 0.49 Bcfe of proved developed reserves at an average cost of $1.71 per Mcfe. Proved developed reserves added through drilling in 1999 represented approximately 2% of 1999 production. The results of this drilling activity is shown in the table on page 13. In 2000, the Company expects to spend $16.1 million on development and exploratory drilling of 125 gross (99 net) wells. The Company believes that its diversified portfolio approach to its drilling activities results in more consistent and predictable economic results than might be experienced with a less diversified or higher risk drilling program profile. Highly Developed Formations. In general, the highly developed or blanket formations found in the Appalachian and Michigan Basins are widespread in extent and hydrocarbon accumulations are not dependent upon local stratigraphic or structural trapping. Drilling success rates exceed 90%. The principal risk of such wells is uneconomic recoverable reserves. The highly developed formations in the Appalachian Basin are relatively tight reservoirs that produce 20% to 30% of their recoverable reserves in the first year and 40% to 50% of their total recoverable reserves in the first three years, with steady declines thereafter. Average well lives range from 15 years to 25 years or more. The Antrim Shale formation, the principal shallow blanket formation in the Michigan Basin, is characterized by high formation water production in the early years of a well's productive life with water production decreasing over time. Antrim Shale wells typically produce at rates of 100 Mcf to 125 Mcf per day for several years, with modest declines thereafter. Gas production often increases in the early years as the producing formation becomes less water saturated. Average well lives are 20 years or more. The Company plans to drill 26 gross (26 net) wells to the Antrim Shale formation in 2000. Producing natural gas in the form of methane from coalbed formations is becoming a more common practice, particularly in Pennsylvania. In 1998, the Company completed its second project area near Connellsville, PA, with the completion of 12 coalbed methane wells. This brings the Company's 8 10 total wells producing from this type of reservoir to 62. Because of financial constraints, the Company did not drill any coalbed methane wells in 1999. With over 60,000 acres under lease in the coal seam fairway, the Company believes that substantial additional opportunities exist for coalbed methane drilling. The Company currently plans to drill 15 gross (12.5 net) coalbed methane wells in 2000. Certain typical characteristics of the highly developed or blanket formations drilled by the Company in recent years are described below:
Range of Range of Average Average Drilling Gross Reserves Range of and Completion per Completed Well Depths Costs per Well Well (1) ----------- ---------------- ---------------- (in feet) (in thousands) (in Mmcfe) Ohio 1,200-5,500 $ 75-145 80-150 West Virginia 1,300-6,000 140-180 150-500 Pennsylvania: Coalbed Methane 900-1,800 100-125 150-250 Clarendon 1,100-2,000 45-55 30-50 Medina 5,000-6,200 170-210 150-300 New York 3,000-5,000 100-150 75-300 Michigan 1,000-1,200 200-250 400-600 Kentucky 1,200-1,800 90-110 125-250
(1) Million cubic feet equivalent Less Developed Formations. The Appalachian Basin has productive and potentially productive sedimentary formations to depths of 30,000 feet or more, but the combination of long-lived production and high drilling success rates in the shallow formations has curbed the development of the deeper formations in the basin. The Company believes it possesses the technological expertise and the acreage position needed to explore the deeper formations in a cost effective manner. The less developed formations in the Appalachian Basin include the Knox sequence of sandstones and dolomites which includes the Rose Run, Beekmantown and Trempealeau productive zones, at depths ranging from 2,500 feet to 8,000 feet. The geographical boundaries of the Knox sequence, which lies approximately 2,000 feet below the highly developed Clinton Sandstone, are generally well defined in Ohio with less definition in New York and Pennsylvania. Nevertheless, the Knox group has been only lightly explored, with fewer than 2,500 wells drilled to this sequence of formations during the past 10 years. The Company began testing the Knox sequence in 1989 by selecting certain wells that were targeted to be completed to the Clinton formation and drilling them an additional 2,000 feet to 2,500 feet to test the Knox formations. In 1991, the Company began using seismic analysis and other geophysical tools to select drilling locations specifically targeting the Knox formations. Since 1991, the Company has added to its technical staff to enhance its ability to develop drilling prospects in the Knox and other less developed formations in the Appalachian Basin and the deeper formations in the Michigan Basin. 9 11 All of the wells drilled by the Company in 1999 were Knox formation wells, the majority of which were higher risk, exploratory tests. As a result, the success rate and reserves discovered per well were lower than the Company's historical experience. For the data in the tables that follow, "gross" refers to the total wells or acres in which the Company owns a working interest and "net" refers to gross wells or acres multiplied by the percentage working interest it owns. The following table shows the Company's drilling results in the Knox sequence:
Drilling Results in the Knox Formations ------------------------------------------------------------------------------- Average Gross Wells Drilled Wells Completed (1) Reserves per ------------------ -------------------- Completed Well Period Gross Net Gross Net (Mmcfe) - ------------ ----- --- ----- --- ------- 1989-1990 18 14.5 5 4.0 456 1991 11 10.3 5 4.7 170 1992 15 12.5 8 6.4 285 1993 30 20.2 16 8.8 360 1994 25 14.2 17 9.8 389 1995 34 16.3 18 8.8 343 1996 38 22.0 25 15.5 422 1997 54 26.6 30 16.4 450 1998 47 22.7 26 11.4 370 1999 18 4.8 9 2.1 320 - ------------
(1) Completed as producing wells in the Knox formations. The Company's historical experience is that the average Knox well produces 20% to 25% of its recoverable reserves in the first year of production and approximately 50% of its recoverable reserves in the first three years with a steady decline thereafter. Wells in the Knox formations have an expected productive life ranging from 10 to 20 years. 10 12 The following table shows the Company's production from Knox formation wells since 1995:
PRODUCING WELLS AND PRODUCTION FROM KNOX FORMATIONS --------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Number of wells in production: Gross 66 82 112 140 131 Net 41.5 58.9 75.6 88.0 74.8 Percent of total net wells 0.7% 0.9% 1.0% 1.2% 1.1% Annual production (net): Gas (Mmcf) 1,624 2,788 3,600 4,111 2,603 Oil (Mbbl) 74.9 78.2 111.2 181.9 161.5 Combined (Mmcfe) 2,074 3,257 4,267 5,202 3,572 Percent of total combined production 10% 11% 13% 15% 11%
Productive Knox wells represented approximately 1.1% of the Company's total productive wells at December 31, 1999. Production from Knox wells in 1999, however, equaled 11% of the Company's total production on an Mcfe basis. The significant reduction in the Company's Knox drilling activity in 1999, coupled with normal decline rates, resulted in a 31% decline in production from the Knox formation in 1999. The Company plans to drill or participate in joint ventures to drill 43 gross (19.7 net) wells to the Knox formation in 2000. In addition, the Company has also tested the more prolific Niagaran Carbonate, Trenton/Black River Carbonates, Onondaga Limestone, Oriskany Sandstone and Newburg Sandstone formations. Within recent years, other operators have identified a deep play with significant reserve potential in the Trenton/Black River formations in New York. Based on historical information available in public records, wells drilled in this play have reserves in the range of 1.0 to 2.0 Bcf of natural gas per well. Since 1997, Belden & Blake has acquired significant seismic data and has substantially enhanced its acreage position in areas believed to have production potential in the Trenton/Black River formations. Currently, the Company has in excess of 24,000 acres in this prospect area and has identified 36 potential well locations to test the Trenton/Black River formations. 11 13 The Company is well positioned to exploit the undeveloped potential of these deeper, less developed formations in the future with substantially all of its leased acreage overlying potential deeper, less developed formation drilling locations. In addition to its planned Knox formation drilling, the Company plans to drill approximately 5 gross (4.3 net) wells to these other deep formations in 2000. Certain typical characteristics of the less developed or deeper formations drilled by the Company in recent years are described below:
Average Drilling Costs ---------------- Average Gross Range of Dry Completed Reserves per Formation Location Well Depths Hole Well Completed Well - ------------------- -------- ----------- ---- ---- -------------- (in feet) (in thousands) (in Mmcfe) Knox formations OH, NY 2,500-8,000 $120 $240 300-500 Trenton/Black River Carbonates NY 5,000-8,000 400 600 1,000-2,000 Niagaran Carbonate MI 4,500-5,500 275 525 900-1,200 Onondaga Limestone PA 4,000-5,500 150 250 200-750 Oriskany Sandstone PA, NY 4,500-7,000 150 300 300-1,000
12 14 Drilling Results. The following table sets forth drilling results with respect to wells drilled during the past five years:
HIGHLY DEVELOPED OR BLANKET FORMATIONS (1) LESS DEVELOPED OR DEEPER FORMATIONS (2) ------------------------------------------------ --------------------------------------------------- 1995 1996 1997 1998 1999 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Productive: Gross 106 153 187 189 -- 23(3) 34 39(4) 29(5) 9(6) Net 92.5 126.3 156.5 167.0 -- 11.5 22.2 24.5 14.2 2.1 Dry: Gross 4 2 7 3 -- 22 18 28 28 9 Net 3.2 2.0 6.3 2.5 -- 10.7 10.2 12.3 15.5 2.7 Reserves developed- net (Bcfe) 18.5 32.7 32.8 32.3 -- 5.2 7.7 9.0 3.0 0.5 Approximate cost (in millions) $15.1 $ 22.2 $ 31.2 $ 28.4 $ -- $ 5.3 $ 9.0 $ 9.3 $ 7.6 $0.8
(1) Consists of wells drilled to the Berea and Clinton Sandstone formations in Ohio, the Berea Sandstone, Devonian Brown Shale, Ravencliff Sandstone and Big Lime Limestone formations in West Virginia, the Clarendon, Upper Devonian, Coalbed Methane and Medina formations in Pennsylvania, the Medina Sandstone formation in New York, the New Albany Shale formation in Kentucky and the Antrim Shale formation in Michigan. (2) Consists of wells drilled to the Trenton Limestone and Knox formations in Ohio, the Niagaran and Dundee Carbonates in Michigan, the Oriskany Sandstone and Onondaga Limestone formations in Pennsylvania, and the Oriskany Sandstone, Onondaga Limestone, Trenton/Black River Carbonates and Knox formations in New York. (3) Two additional wells which were dry in the Knox formations were subsequently completed in the shallower Clinton formation. One additional well which was dry in the Oriskany formation was subsequently completed in the shallower Berea/Shale formations. (4) Three additional wells which were dry in the Knox formations were subsequently completed in shallower formations. (5) Two additional wells which were dry in the Knox formations were subsequently completed in the shallower Clinton formation. (6) One additional well which was dry in the Knox formations was subsequently completed in shallower formations. 13 15 ACQUISITION OF PRODUCING PROPERTIES The Company employs a disciplined approach to acquisition analysis that requires input and approval from all key areas of the Company. These areas include field operations, exploration and production, finance, legal, land management and environmental compliance. Although the Company often reviews in excess of 50 acquisition opportunities per year, this disciplined approach can result in uneven annual spending on acquisitions. The following table sets forth information pertaining to acquisitions completed during the period 1992 through 1999. Despite several attractive opportunities, the Company was unable to make any significant acquisitions in 1999 because of a lack of available capital.
Proved Developed Reserves ----------------------------------- Number of Purchase Oil Gas Combined Period Transactions Price (1) (Mbbl) (Mmcf) (Mmcfe) ------ ------------ --------- ------ ------ ------- (in thousands) 1992 5 $ 23,733 466 41,477 44,273 1993 8 3,883 119 4,121 4,835 1994 11 20,274 223 26,877 28,215 1995 6 77,388 1,850 97,314 108,414 1996 3 4,103 205 6,000 7,230 1997 10 21,295 101 32,800 33,406 1998 3 7,640 34 8,574 8,778 1999 -- -- -- -- -- -- -------- ----- ------- ------- Total 46 $158,316 2,998 217,163 235,151 == ======== ===== ======= =======
- ---------- (1) Represents the portion of the purchase price allocated to proved developed reserves. DISPOSITION OF ASSETS During 1999, the Company performed a rigorous review of its strategic direction given the Company's high debt level and greatly diminished liquidity. As a result, certain non strategic businesses and properties were disposed to reduce the Company's debt. The Company continues to evaluate its non strategic producing and non producing oil and gas assets for possible future disposition. In August 1999, the Company and its wholly-owned subsidiary, COG, sold TOPS, a wholly-owned subsidiary of COG, to an oilfield supply company for approximately $4 million. Proceeds from the sale were used to reduce the Company's bank debt. The Company recorded a $2.8 million loss on the sale in the third quarter of 1999. TOPS operated retail sales outlets in the Appalachian and Michigan Basins from which it sold a broad range of oilfield supplies and equipment. In November 1999, the Company sold its BESCO subsidiary to FirstEnergy, an electric utility holding company also engaged in oil and gas production and natural gas marketing. Proceeds from the sale were used to reduce the Company's bank debt. BESCO was the Company's retail natural gas 14 16 marketing outlet in Ohio. In the future, the Company's Ohio natural gas production not committed to existing sales contracts will be sold on the wholesale market. During 1999, the Company sold 315 gross (298.1 net) wells representing an estimated 1.0 Bcfe of oil and gas reserves for $1.3 million. EMPLOYEES As of February 29, 2000, the Company had 429 full-time employees, including 277 oil and gas exploration and production employees, 16 petroleum engineers, 8 geologists, 2 geophysicists, 96 oilfield service employees and 30 general and administrative employees. COMPETITION AND CUSTOMERS The oil and gas industry is highly competitive. Competition is particularly intense with respect to the acquisition of producing properties and the sale of oil and gas production. There is competition among oil and gas producers as well as with other industries in supplying energy and fuel to end users. The competitors of the Company in oil and gas exploration, development and production include major integrated oil and gas companies as well as numerous independent oil and gas companies, individual proprietors, natural gas pipelines and their affiliates. Many of these competitors possess and employ financial and personnel resources substantially in excess of those available to the Company. Such competitors may be able to pay more for desirable prospects or producing properties and to evaluate, bid for and purchase a greater number of properties or prospects than the financial or personnel resources of the Company will permit. The ability of the Company to add to its reserves in the future will depend on the availability of capital, the ability to exploit its current developed and undeveloped lease holdings and the ability to select and acquire suitable producing properties and prospects for future exploration and development. No customer accounted for more than 10% of consolidated revenues during the years ended December 31, 1999 and 1998, or the six months ended June 30, 1997 and December 31, 1997. REGULATION Regulation of Production. In all states in which the Company is engaged in oil and gas exploration and production, its activities are subject to regulation. Such regulations may extend to requiring drilling permits, spacing of wells, the prevention of waste and pollution, the conservation of oil and natural gas, and other matters. Such regulations may impose restrictions on the production of oil and natural gas by reducing the rate of flow from individual wells below their actual capacity to produce which could adversely affect the amount or timing of the Company's revenues from such wells. Moreover, future changes in local, state or federal laws and regulations could adversely affect the operations of the Company. Environmental Regulation. The Company's operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas, and 15 17 impose substantial liabilities for pollution resulting from the Company's operations. Management believes the Company is in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on the Company. Regulation of Sales and Transportation. The Federal Energy Regulatory Commission regulates the transportation and sale for resale of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy Act of 1978 (the "NGPA"). In the past, the federal government has regulated the prices at which oil and natural gas could be sold. Currently, sales by producers of natural gas and all sales of crude oil and condensate in natural gas liquids can be made at uncontrolled market prices. ITEM 2. PROPERTIES ---------- OIL AND GAS RESERVES The following table sets forth the Company's proved oil and gas reserves as of December 31, 1997, 1998 and 1999 determined in accordance with the rules and regulations of the Securities and Exchange Commission. Proved reserves are the estimated quantities of oil and gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.
December 31, ------------------------------- 1997 1998 1999 ---- ---- ---- Estimated proved reserves Gas (Bcf) 291.6 315.3 306.7 Oil (Mbbl) 5,552 4,243 6,699
See Note 17 to the Consolidated Financial Statements for more detailed information regarding the Company's oil and gas reserves. The following table sets forth the estimated future net cash flows from the proved reserves of the Company and the present value of such future net cash flows as of December 31, 1999 determined in accordance with the rules and regulations of the Securities and Exchange Commission. Estimated future net cash flows (before income (in thousands) taxes) attributable to estimated production during 2000 $ 48,123 2001 36,385 2002 41,714 2003 and thereafter 418,943 -------- Total $545,165 ======== Present value before income taxes (discounted at 10% per annum) $267,511 ======== Present value after income taxes (discounted at 10% per annum) $216,888 ========
16 18 Estimated future net cash flows represent estimated future gross revenues from the production and sale of proved reserves, net of estimated production costs (including production taxes, ad valorem taxes, operating costs, development costs and additional capital investment). Estimated future net cash flows were calculated on the basis of prices and costs estimated to be in effect at December 31, 1999 without escalation, except where changes in prices were fixed and readily determinable under existing contracts. The following table sets forth the weighted average year-end prices for oil and gas.
December 31, ------------------------------------- 1997 1998 1999 ---- ---- ---- Gas (per Mcf) $ 2.73 $2.49 $ 2.61 Oil (per Bbl) 14.59 9.73 23.47
IMPAIRMENT OF OIL AND GAS PROPERTIES AND OTHER ASSETS As described in Note 2 to the Consolidated Financial Statements, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. As demonstrated by the table in the preceding section, the decline in oil and natural gas prices from 1997 to 1998 was significant and negatively impacted the quantity and value of the Company's oil and gas reserves. Given the impairment indicator at December 31,1998, the Company computed the expected future undiscounted cash flows, employing methods consistent with those utilized to determine the estimated future net cash flows from proved reserves discussed above. For those assets in which the sum of the expected future undiscounted cash flows was less than the carrying amount, an impairment loss was recognized for the difference between the fair value and the carrying amount of the asset, with fair value determined based on discounted cash flow analysis, sale of similar properties or recent offers for specific assets. As a result of this evaluation, the Company recorded total impairment charges of $160.7 million (pre-tax) in 1998, consisting of $148.0 million relating to producing properties and related assets, $5.8 million for unproved properties and $6.9 million relating to other long-lived assets. The magnitude of the impairment charge was impacted by the Acquisition in 1997, in which the allocation of the purchase price at fair value resulted in a significant increase in the book value of the Company's assets. 17 19 PRODUCING WELL DATA As of December 31, 1999, the Company owned interests in 7,867 gross (6,891 net) producing oil and gas wells and operated approximately 7,565 wells, including wells operated for third parties. By operating a high percentage of its properties, the Company is able to control expenses, capital allocation and the timing of development activities in the areas in which it operates. As of December 31, 1999, the Company's net production was approximately 68.4 Mmcf of natural gas and 1,864 Bbls of oil per day. The following table summarizes by state the Company's productive wells at December 31, 1999:
December 31, 1999 ------------------------------------------------------- Gas Wells Oil Wells Total --------------- --------------- --------------- State Gross Net Gross Net Gross Net - ------------- ----- --- ----- --- ----- --- Ohio 1,487 1,334 1,807 1,705 3,294 3,039 West Virginia 1,395 1,290 376 373 1,771 1,663 Pennsylvania 641 516 398 391 1,039 907 New York 858 839 7 7 865 846 Michigan 785 325 5 3 790 328 Kentucky 108 108 -- -- 108 108 ----- ----- ----- ----- ----- ----- 5,274 4,412 2,593 2,479 7,867 6,891 ===== ===== ===== ===== ===== =====
ACREAGE DATA The following table summarizes by state the Company's gross and net developed and undeveloped leasehold acreage at December 31, 1999:
December 31, 1999 ------------------------------------------------------------------------- Developed Acreage Undeveloped Acreage Total Acreage ------------------- --------------------- ----------------------- State Gross Net Gross Net Gross Net - ------------- ----- --- ----- --- ----- --- Ohio 320,794 290,406 226,045 182,849 546,839 473,255 West Virginia 64,894 63,428 119,784 75,305 184,678 138,733 Pennsylvania 43,270 35,633 167,682 160,266 210,952 195,899 New York 70,000 68,537 69,006 66,693 139,006 135,230 Michigan 13,216 13,216 35,152 31,909 48,368 45,125 Kentucky 12,450 12,450 6,332 6,285 18,782 18,735 ------- ------- ------- --------- --------- --------- 524,624 483,670 624,001 523,307 1,148,625 1,006,977 ======= ======= ======= ========= ========= =========
18 20 Item 3. LEGAL PROCEEDINGS ----------------- The Company is involved in several lawsuits arising in the ordinary course of business. The Company believes that the result of such proceedings, individually or in the aggregate, will not have a material adverse effect on the Company's financial position or the results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- Not applicable. PART II - ------- Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED ----------------------------------------------------- STOCKHOLDER MATTERS ------------------- There is no established public trading market for the Company's equity securities. The number of record holders of the Company's equity securities at February 29, 2000 was as follows: Number of Title of Class Record Holders - ---------------------------------------- -------------------- Common Stock 10 DIVIDENDS No dividends have been paid on the Company's Common Stock. 19 21 Item 6. SELECTED FINANCIAL DATA -----------------------
PREDECESSOR COMPANY | SUCCESSOR COMPANY ----------------------------------- | ----------------------------------------- AS OF OR FOR THE YEAR SIX MONTHS | SIX MONTHS AS OF OR FOR THE YEAR ENDED DECEMBER 31, ENDED | ENDED ENDED DECEMBER 31, --------------------- JUNE 30, | DECEMBER 31, ---------------------- (IN THOUSANDS) 1995 1996 1997 | 1997 1998 1999 -------- -------- ---------- | ------------ --------- ---------- | OPERATIONS: | Revenues $110,067 $153,235 $79,397 | $ 84,126 $ 154,839 $135,738 Depreciation, depletion | and amortization 19,717 29,752 15,366 | 31,694 68,488 41,412 Impairment of oil and gas | properties and other assets -- -- -- | -- 160,690 -- Income (loss) from | continuing operations 6,260 15,194 (9,873) | (11,372) (130,550) (18,303) Preferred dividends paid 180 180 45 | -- -- -- BALANCE SHEET DATA: | AS OF 12/31/97 | -------------- Working capital 17,359 22,110 | 19,846 (6,268) (43,032) Oil and gas properties and | gathering systems, net 216,848 222,127 | 491,183 319,013 285,081 Total assets 297,298 303,763 | 599,320 418,605 350,695 Long-term liabilities, | less current portion 110,523 97,642 | 355,649 354,382 303,731 Preferred stock 2,400 2,400 | -- -- -- Total shareholders' equity | (deficit) 142,291 158,918 | 96,858 (33,014) (51,590)
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- As described in the accompanying Notes to Consolidated Financial Statements, on March 27, 1997 the Company entered into a merger agreement with TPG which resulted in all of the Company's common stock being acquired by TPG and certain other investors on June 27, 1997 in a transaction accounted for as a purchase. For financial reporting purposes, the Acquisition is considered effective June 30, 1997 and the operations of the Company prior to July 1, 1997 are classified as predecessor company operations. The consolidated balance sheets at December 31, 1998 and 1999 include the application of purchase accounting to measure the Company's assets and liabilities at fair value. Debt incurred to finance the Acquisition and related transaction costs are reflected in the December 31, 1997, 1998 and 1999 financial statements. A vertical black line is shown in the financial statements to separate the results of operations of the predecessor and successor companies. The allocation of the purchase price at fair value resulted in a significant increase in the book value of the Company's assets. The increase in the book value of assets resulted in materially higher charges for depreciation, depletion and amortization in the second half of 1997 and all of 1998 and 1999. As described in Note 2 to the Consolidated Financial Statements, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Due to sustained significantly lower oil and natural gas prices in 1998, the quantity and value of the Company's oil and gas reserves were negatively impacted. Given this impairment indicator, the Company computed the expected future undiscounted cash flows, employing methods consistent with those utilized to determine the estimated future net cash flows from proved reserves discussed in Note 17 to the Consolidated Financial Statements. For those assets in which the sum of the expected future undiscounted cash flows was less than the carrying amount, an impairment 20 22 loss was recognized for the difference between the fair value and the carrying amount of the asset, with fair value determined based on discounted cash flow analysis, sale of similar properties or recent offers for specific assets. As a result of this evaluation, the Company recorded total impairment charges of $160.7 million (pre-tax) in 1998, consisting of $148.0 million relating to producing properties and related assets, $5.8 million for unproved properties and $6.9 million relating to other long-lived assets. The magnitude of the impairment charge was impacted by the Acquisition in 1997, in which the allocation of the purchase price at fair value resulted in a significant increase in the book value of the Company's assets. The impairment charge resulted in a significant decrease in the book value of the Company's assets which resulted in significantly lower charges for depreciation, depletion and amortization in 1999 compared to 1998. The Company incurred transaction costs associated with the Acquisition of $16.8 million. These costs were expensed in the second quarter of 1997. As a result of the Acquisition, the Company is highly leveraged, resulting in materially higher interest charges in the second half of 1997 and all of 1998 and 1999. These higher interest charges are expected to continue in subsequent accounting periods. The Company's principal business is producing oil and natural gas, exploring for and developing oil and gas reserves, acquiring and enhancing the economic performance of producing oil and gas properties, and gathering natural gas for delivery to intrastate and interstate gas transmission pipelines. The Company operates principally in Ohio, Pennsylvania, New York and Michigan. The Company utilizes the "successful efforts" method of accounting for its oil and gas properties. Under this method, property acquisition and development costs and productive exploration costs are capitalized while non-productive exploration costs, which include dry holes, expired leases and delay rentals, are expensed as incurred. Capitalized costs related to proved properties are depleted using the unit-of-production method. No gains or losses are recognized upon the disposition of oil and gas properties except in extraordinary transactions. Sales proceeds are credited to the carrying value of the properties. Maintenance and repairs are expensed and expenditures which enhance the value of properties are capitalized. The Company provides oilfield services to its own operations and to third parties. Oilfield service provided to the Company's own operations are provided at cost and all intercompany revenues and expenses are eliminated in consolidation. 21 23 RESULTS OF OPERATIONS As a result of the Acquisition, the results of operations for the periods subsequent to June 30, 1997 are not necessarily comparable to those prior to July 1, 1997. The following table combines the six-month predecessor company period ended June 30, 1997 with the six-month successor company period ended December 31, 1997 for purposes of the discussion of year-end results (dollars are stated in thousands and as a percentage of revenue).
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------- 1999 1998 1997 --------------------- ------------------------- ----------------------- REVENUES Oil and gas sales $ 79,299 58.4% $ 87,055 56.2% $ 85,756 52.4% Gas gathering, marketing, and oilfield sales and service 51,443 37.9 63,358 40.9 74,577 45.6 Other 4,996 3.7 4,426 2.9 3,190 2.0 --------------------- ------------------------- ---------------------- 135,738 100.0 154,839 100.0 163,523 100.0 EXPENSES Production expense 21,980 16.2 23,739 15.3 21,496 13.2 Production taxes 3,260 2.4 2,986 1.9 3,172 1.9 Gas gathering, marketing, and oilfield sales and service 46,954 34.6 56,813 36.7 65,805 40.1 Exploration expense 6,442 4.7 9,982 6.5 10,360 6.3 General and administrative expense 5,412 4.0 4,536 2.9 4,258 2.6 Franchise, property and other taxes 652 0.5 1,084 0.7 1,875 1.2 Depreciation, depletion and amortization 41,412 30.5 68,488 44.2 47,060 28.8 Impairment of oil and gas properties and other assets -- -- 160,690 103.8 -- -- Interest expense 34,302 25.3 32,903 21.2 19,132 11.7 Net loss on sale of subsidiaries and other nonrecurring expense 4,806 3.5 373 0.3 -- -- Transaction-related expenses -- -- -- -- 16,758 10.3 --------------------- ------------------------- ---------------------- 165,220 121.7 361,594 233.5 189,916 116.1 --------------------- ------------------------- ---------------------- LOSS BEFORE INCOME TAXES (29,482) (21.7) (206,755) (133.5) (26,393) (16.1) Income tax benefit (11,179) (8.2) (76,205) (49.2) (5,148) (3.1) --------------------- ------------------------- ---------------------- NET LOSS $(18,303) (13.5)% $(130,550) (84.3)% $(21,245) (13.0)% ===================== ========================= ====================== EBITDAX $ 57,480 42.3% $ 65,681 42.4% $ 66,917 40.9%
1999 COMPARED TO 1998 Net loss decreased $112.3 million (86%) from a loss of $130.6 million in 1998 to a loss of $18.3 million in 1999. This decrease was the result of the $160.7 million asset impairment in 1998, a $27.1 million decrease in depreciation, depletion and amortization expense and a $3.6 million decrease in exploration expense. These decreases in expense were offset by a $4.4 million increase in net loss on sale of subsidiaries and other nonrecurring expense, a decrease in the income tax benefit of $65.0 million primarily due to the decrease in loss before income taxes and a $8.3 million decrease in the Company's operating margin primarily due to decreases in natural gas prices and the volume of oil and natural gas sold offset by an increase in the average price paid for the Company's oil. The volume decrease was due to the natural production decline of the wells and curtailment of drilling due to capital constraints caused by the reduction in the Company's borrowing base. Earnings before interest, income taxes, depreciation, depletion, amortization, exploration expense and other nonrecurring items ("EBITDAX") decreased $8.2 million (12%) from $65.7 million in 1998 to $57.5 million in 1999. This was primarily due to the $8.3 million decrease in the Company's operating margin discussed above. 22 24 Total revenues decreased $19.1 million (12%) in 1999 compared to 1998 due to the sale of the Company's TOPS subsidiary and decreases in natural gas prices and the volume of oil and natural gas sold offset by an increase the average price paid for the Company's oil. Oil volumes decreased approximately 55,000 Bbls (7%) from 768,000 Bbls in 1998 to 713,000 Bbls in 1999 resulting in a decrease in oil sales of approximately $697,000. Gas volumes decreased 3.1 Bcf (10%) from 30.1 Bcf in 1998 to 27.0 Bcf in 1999 resulting in a decrease in gas sales of approximately $8.1 million. These volume decreases were primarily due to the natural production decline of the wells and curtailment of drilling due to capital constraints caused by the reduction in the Company's borrowing base. The average price paid for the Company's oil increased from $12.61 per barrel in 1998 to $16.57 per barrel in 1999 which increased oil sales by approximately $2.8 million. The average price paid for the Company's natural gas decreased $.07 per Mcf to $2.50 per Mcf in 1999 compared to 1998 which decreased gas sales in 1999 by approximately $1.9 million. As a result of the Company's hedging activities, gas sales were enhanced by $1.0 million ($.04 per Mcf) and $1.3 million ($.04 per Mcf) in 1999 and 1998, respectively. Production expense decreased $1.7 million (7%) from $23.7 million in 1998 to $22.0 million in 1999. The average production cost increased from $.68 per Mcfe in 1998 to $.70 per Mcf in 1999 primarily due to decreased volumes. Production taxes increased approximately $273,000 in 1999 compared to 1998. Average production taxes increased from $.09 per Mcfe in 1998 to $.10 per Mcfe in 1999. General and administrative expense increased approximately $876,000 in 1999 compared to 1998. This increase was the result of increased compensation and bonus, costs associated with executive transitions and Year 2000 ("Y2K") related costs. Exploration expense decreased by $3.6 million (35%) from $10.0 million in 1998 to $6.4 million in 1999 as a result of the curtailment of the Company's drilling program previously discussed. Depreciation, depletion and amortization decreased by $27.1 million (40%) from $68.5 million in 1998 to $41.4 million in 1999. Depletion expense decreased $28.8 million (50%) from $57.7 million in 1998 to $28.9 million in 1999. Depletion per Mcfe decreased from $1.66 per Mcfe in 1998 to $.92 per Mcfe in 1999. These decreases were primarily the result of the $160.7 million write-down of certain permanently impaired assets in the fourth quarter of 1998. Interest expense increased $1.4 million (4%) from $32.9 million in 1998 to $34.3 million in 1999. This increase was due to an increase in average outstanding borrowings and higher blended interest rates. The Company incurred $972,000 and $499,000 in additional interest expense during 1999 and 1998, respectively, related to interest rate swaps. Net loss on sale of subsidiaries and other nonrecurring expense increased from $373,000 in 1998 to $4.8 million in 1999 due to a $2.8 million loss on the sale of the Company's TOPS subsidiary, $2.4 million in employee reduction costs and a $507,000 increase in costs associated with abandoned acquisition efforts and an abandoned public offering of a royalty trust in 1999, offset by a $1.3 million gain on the sale of the Company's BESCO subsidiary. 23 25 1998 COMPARED TO 1997 Net loss increased $109.4 million from a loss of $21.2 million in 1997 to a loss of $130.6 million in 1998. This increase was the result of the $160.7 million asset impairment, a $21.4 million increase in depreciation, depletion and amortization expense from significant increases in the book value of property, equipment and other assets as a result of the purchase accounting associated with the Acquisition discussed above and an increase of $13.8 million in interest expense. These increases in expense were offset by the $16.8 million of transaction-related expenses in 1997 and an increase in the income tax benefit of $71.1 million. This increase in the income tax benefit was primarily due to the increase in loss before income taxes combined with a change in the effective tax rate due to the nondeductibility of certain transaction-related expenses and a decrease in the utilization of nonconventional fuel source tax credits in 1998. EBITDAX was $65.7 million in 1998 compared to $66.9 million in 1997. Total revenues decreased $8.7 million (5%) in 1998 compared to 1997. Gross operating margins decreased $3.0 million (4%) in 1998 compared to 1997. Oil volumes increased 15,000 Bbls (2%) from 753,000 Bbls in 1997 to 768,000 Bbls in 1998 resulting in an increase in oil sales of approximately $272,000. Gas volumes increased 2.9 Bcf (11%) from 27.2 Bcf in 1997 to 30.1 Bcf in 1998 resulting in an increase in gas sales of approximately $7.8 million. These volume increases were primarily due to production from properties acquired and wells drilled in 1997 and 1998. The average price paid for the Company's oil decreased from $18.10 per barrel in 1997 to $12.61 per barrel in 1998 which decreased oil sales by approximately $4.2 million. The average price paid for the Company's natural gas decreased $.08 per Mcf to $2.57 per Mcf in 1998 compared to 1997 which decreased gas sales in 1998 by approximately $2.4 million. Production expense increased $2.2 million (10%) from $21.5 million in 1997 to $23.7 million in 1998. The average production cost of $.68 per Mcfe in 1998 was consistent when compared to the same period in 1997. Production taxes decreased $186,000 from $3.2 million in 1997 to $3.0 million in 1998. Average production taxes decreased from $.10 per Mcfe in 1997 to $.09 per Mcfe in 1998. Depreciation, depletion and amortization increased by $21.4 million (46%) from $47.1 million in 1997 to $68.5 million in 1998. Depletion expense increased $19.2 million (50%) from $38.5 million in 1997 to $57.7 million in 1998. Depletion per Mcfe increased from $1.21 per Mcfe in 1997 to $1.66 per Mcfe in 1998. These increases were primarily the result of significant increases in the book value of property, equipment and other assets as a result of the purchase accounting associated with the Acquisition discussed above. Interest expense increased $13.8 million (72%) from $19.1 million in 1997 to $32.9 million in 1998. This increase was due to substantial additional debt incurred primarily to finance the Acquisition. 24 26 LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity and capital resources are closely related to and dependent on the current prices for its oil and natural gas. The Company's current ratio at December 31, 1999 was .45 to 1.00. During 1999, working capital decreased $36.7 million from a deficit of $6.3 million to a deficit of $43.0 million. The decrease was primarily due to an increase in current portion of long-term liabilities of $21.6 million, a net decrease in working capital of $9.7 million due to the sales of the Company's TOPS and BESCO subsidiaries and a $6.2 million decrease in cash. The Company's operating activities provided cash flows of $19.8 million during 1999. On June 27, 1997, the Company entered into a senior revolving credit agreement with several lenders. These lenders committed, subject to compliance with the borrowing base, to provide the Company with revolving credit loans of up to $200 million, of which $25 million will be available for the issuance of letters of credit. The credit agreement is a senior revolving credit facility which is secured by substantially all of the Company's assets. The borrowing base is determined by an evaluation of the Company's proved developed reserves, proved undeveloped reserves and related processing and gathering assets and other assets of the Company, adjusted by the engineering committee of the banks in accordance with their standard oil and gas lending practices. If less than 75% of the borrowing base is utilized, the borrowing base will be redetermined annually. If more than 75% of the borrowing base is utilized, the borrowing base will be redetermined semi-annually. The Company's borrowing base at December 31, 1998 was $170 million. On January 15, 1999, the Company's borrowing base was redetermined at $126 million. The Company had $154 million outstanding under this agreement at December 31, 1998 which resulted in a borrowing base deficiency of $28 million. The Company agreed with the lenders to reduce this deficiency by $14 million on March 22, 1999 and by $14 million on May 10, 1999. On March 22, 1999, the Company made the $14 million payment to reduce the outstanding amount under the credit agreement to $140 million. On May 10, 1999, the Company and its lenders further amended the credit agreement to increase the Company's borrowing base to $136 million, subject to redetermination in November 1999, and the Company paid $4 million to reduce the outstanding loan balance to $136 million. The funds for these payments were provided by internally generated cash flow and $14 million in term loans provided by Chase Manhattan Bank. The Company was further required to make additional payments of $5 million on the earlier of the receipt of aggregate proceeds from asset sales totaling $5 million or August 10, 1999 and $5 million on November 9, 1999, which would lower the borrowing base and outstanding balance to $126 million. The Company paid $5 million on July 29, 1999 and $6 million on September 10, 1999 to reduce the outstanding balance to $125 million at September 30, 1999. Future borrowing base revisions will require approval from all lenders and any deficiency must be repaid within 30 days of the effective date of the redetermination. The amended agreement increased the interest rate to LIBOR (London Interbank Offered Rate) plus 2.5% and provided certain covenant ratio relief. The Company paid approximately $2 million in fees to the lenders and expenses associated with the amendment. On December 14, 1999, the Company and its bank group further amended the credit agreement. The revolving credit commitment in the amended agreement provides for a $75 million revolving portion which matures on June 27, 2002 and a $50 million term portion which matures on March 31, 2000. The borrowing base on the revolving portion will remain at $75 million until the earlier of (i) the sale of Peake and (ii) the redetermination of the borrowing base in the ordinary course, pursuant to the terms of 25 27 the existing credit agreement. The Company paid approximately $900,000 in fees to the lenders and expenses associated with the amendment and wrote off $1.9 million of unamortized deferred loan costs due to the modification of the borrowing base. The amended agreement also increased the interest rate from LIBOR plus 2.5% to LIBOR plus 3.5% until the $50 million term portion is paid in full and thereafter a range of LIBOR plus 2.5% to 3.0% based on the percent of the borrowing base usage. The amendment also replaced certain financial covenants with a minimum EBITDA (EBITDAX) test. Proceeds from the Peake sale will be used to repay and permanently reduce the revolving credit commitment by an amount equal to the proceeds up to $60 million and 25% of the proceeds in excess of $60 million. The reduction in the revolving credit commitment shall be applied, first, to the term portion and, second, to the revolving portion. In March 2000, the Company obtained the unanimous consent of its bank group to further amend the revolving credit agreement to establish a borrowing base of $62.7 million and to forego the May 2000 borrowing base redetermination. The next scheduled borrowing base redetermination is in November 2000. At December 31, 1999, the outstanding balance under the credit agreement was $114 million. This included $64 million under the revolving portion of the facility and $50 million under the term portion. The outstanding balances under the agreement incur interest at the Company's choice of several indexed rates, the most favorable being 9.50% at December 31, 1999. The Company's $14 million in term loans from Chase Manhattan Bank are due on January 1, 2001 with interest payable at LIBOR plus 2.5%. If the bank group materially reduces the borrowing base there is no assurance that the Company could meet the required repayment obligation. The Company expects to be able to meet its 2000 debt service requirements through internally generated cash flow, the sale of non strategic assets and additional debt. The credit agreement contains a number of covenants that, among other things, restricts the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, prepay other indebtedness or amend certain debt instruments, pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, change the business conducted by the Company or its subsidiaries, make capital expenditures or engage in certain transactions with affiliates and otherwise restricts certain corporate activities. In addition, under the credit agreement, the Company is required to maintain specified financial ratios and tests, including minimum interest coverage ratios and maximum leverage ratios. The agreement requires a minimum working capital ratio of 1.00 to 1.00. As of December 31, 1999, the Company's working capital ratio was .45 to 1.00. As part of the May 10, 1999 amendment, the Company and its lenders have agreed to exclude the current portion of certain long term debt from this calculation. After making these adjustments the working capital ratio as of December 31, 1999 was 1.25 to 1.00. The Company issued $225 million of 9.875% Senior Subordinated Notes on June 27, 1997. The notes mature June 15, 2007. Interest is payable semiannually on June 15 and December 15 of each year. The notes are general unsecured obligations of the Company and are subordinated in right of payment to senior debt. Except as otherwise described below, the notes are not redeemable prior to June 15, 2002. Thereafter, the notes are subject to redemption at the option of the Company at specific redemption prices. Prior to June 15, 2000, the Company may, at its option, on any one or more occasions, redeem up to 40% of the original aggregate principal amount of the notes at a redemption price equal to 109.875% of the principal amount, plus accrued and unpaid interest, if any on the redemption date, with all or a portion of net proceeds of public sales of common stock of the Company; provided that at least 60% of the original aggregate principal amount of the notes remains outstanding immediately after the occurrence of such redemption; and provided, further, that such redemption shall occur within 60 days of the date of the closing of the related sale of common stock of the Company. Prior to June 15, 2002, the notes may be redeemed as a whole at the option of the Company upon the occurrence of a change in control. 26 28 The notes were issued pursuant to an indenture which contains certain covenants that limit the ability of the Company and its subsidiaries to incur additional indebtedness and issue stock, pay dividends, make distributions, make investments, make certain other restricted payments, enter into certain transactions with affiliates, dispose of certain assets, incur liens securing indebtedness of any kind other than permitted liens, and engage in mergers and consolidations. The Company currently expects to spend approximately $18 million during 2000 on its drilling activities and other capital expenditures. The Company intends to finance such activities, as well as its acquisition program, through its available cash flow, available revolving credit line or additional debt. The level of the Company's cash flow in the future will depend on a number of factors including the demand and price levels for oil and natural gas, its ability to acquire additional producing properties and the scope and success of its drilling activities. From time to time the Company may enter into interest rate swaps to hedge the interest rate exposure associated with the credit facility, whereby a portion of the Company's floating rate exposure is exchanged for a fixed interest rate. During October 1997, the Company entered into two interest rate swap arrangements covering $90 million of debt. The Company swapped $40 million of floating three-month LIBOR for a fixed rate of 7.485% (which includes an applicable margin of 1.5%) for three years, extendible at the institution's option for an additional two years. The Company also swapped $50 million of floating three-month LIBOR for a fixed rate of 7.649% (which includes an applicable margin of 1.5%) for five years. During June 1998, the Company entered into a third interest rate swap covering $50 million of debt. The Company swapped $50 million of floating rate three-month LIBOR for a fixed rate of 7.2825% (which includes an applicable margin of 1.5%) for three years. On December 27, 1999, the Company terminated $20 million of the third interest rate swap. On March 21, 2000, the Company terminated the second swap and the remainder of the third swap for a total of $80 million. Effective with the May 10, 1999 amendment to the credit agreement, the applicable margin relating to these swaps was increased from 1.5% to 2.5%. Effective with the December 14, 1999 amendment to the credit agreement, the applicable margin relating to these swaps was increased from 2.5% to a range up to 3.5%. To manage its exposure to natural gas price volatility, the Company may partially hedge its physical gas sales prices by selling futures contracts on the NYMEX or by selling NYMEX based commodity derivative contracts which are placed with major financial institutions that the Company believes are minimal credit risks. The contracts may take the form of futures contracts, swaps or options. The Company had a pretax gain on its hedging activities of $1.0 million in 1999 and a pretax gain of $1.3 million in 1998. As of December 31, 1999, the Company had hedged 9.1 Bcf of 2000 and 2001 natural gas production at a weighted average NYMEX price of $2.41 per Mcf which represented a net unrealized gain of $300,000. On February 22, 2000, the Company entered into a transaction which effectively terminated 2.1 Bcf of these hedges. As of February 29, 2000, the Company had hedges totaling 6.0 Bcf and an estimated net unrealized loss of $2.5 million on its natural gas hedging activities. INFLATION AND CHANGES IN PRICES During 1997, the price paid for the Company's crude oil increased from $22.50 per barrel at year-end 1996 to a high of $23.50 per barrel in early 1997, then decreased to a low of $14.25 at year-end 1997, with an average price of $18.10 per barrel. During 1998, the price paid for the Company's crude oil increased to a high of $14.50 per barrel in January, then decreased to a low of $8.50 per barrel in December and increased to $9.25 per barrel at year-end 1998, with an average price of $12.61 per barrel. During 1999, the price paid for the Company's crude oil increased from a low of $9.25 per barrel at year- end 1998 to a high of $23.25 per barrel at year-end 1999, with an average price of $16.57 per barrel. The 27 29 average price of the Company's natural gas decreased from $2.65 per Mcf in 1997 to $2.57 per Mcf in 1998, then decreased to $2.50 per Mcf in 1999. The price of oil and natural gas has a significant impact on the Company's results of operations. Oil and natural gas prices fluctuate based on market conditions and, accordingly, cannot be predicted. As a result of increased competition among drilling contractors and suppliers and continuing low levels of drilling activity in the Company's operating area, costs to drill, complete and service wells have remained relatively constant in recent years. Historically, a large portion of the Company's natural gas has been sold subject to long-term fixed price contracts. In 1999, the Company shifted its price risk management procedures to reduce reliance on fixed price contracts. Currently, a large portion of its natural gas is sold subject to market sensitive contracts. Natural gas price risk is mitigated (hedged) by the utilization of over-the-counter NYMEX swaps. Natural gas price hedging decisions are made in the context of the Company's strategic objectives, taking into account the changing fundamentals of the natural gas marketplace. YEAR 2000 The Company engaged in a comprehensive project of assessment, remediation, testing and implementation of necessary modifications to its key applications (which consist of third party software, hardware and embedded chip systems, as well as internally developed computer applications). The Y2K rollover date passed with no apparent disruptions experienced by the Company's systems and processes. It is possible that third parties may have experienced disruptions which have not yet impacted the Company, but could in the future. Accordingly, the Company is prepared to implement contingency plans should any disruptions occur. As of December 31, 1999, the Company had incurred expenses in 1999 and 1998 of $297,000 and $10,000 respectively, and does not expect to incur any remaining material costs in 2000. The Company only tracked incremental expenses related to its Y2K project. Costs of the Y2K project related to employees of the Company, including their direct salaries and benefits, have not been included in the estimated costs of the project. Costs of new systems for which the principal justification is improved business functionality, rather than Y2K compliance, were capitalized. FORWARD-LOOKING INFORMATION The forward-looking statements regarding future operating and financial performance contained in this report involve risks and uncertainties that include, but are not limited to, the Company's availability of capital, production and costs of operation, the market demand for, and prices of, oil and natural gas, results of the Company's future drilling, the uncertainties of reserve estimates, environmental risks, availability of financing and other factors detailed in the Company's filings with the Securities and Exchange Commission. Actual results may differ materially from forward-looking statements made in this report. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- The Company is exposed to interest rate and commodity price risks. The interest rate risk relates to existing debt under the Company's revolving credit facility as well as any new debt financing needed to fund capital requirements. The Company manages its interest rate risk through the use of interest rate swaps to hedge the interest rate exposure associated with the 28 30 credit agreement, whereby a portion of the Company's floating rate exposure is exchanged for a fixed interest rate. A portion of the Company's long-term debt consists of senior subordinated notes where the interest component is fixed. The Company had derivative financial instruments for managing interest rate risks in place as of December 31, 1999 and 1998. The principal amount of the swaps totaled $120 million and $140 million at December 31, 1999 and 1998, respectively. If market interest rates for short-term borrowings increased 1%, the increase in the Company's interest expense, after considering the effects of its interest rate swap and cap agreements, would be immaterial. This sensitivity analysis is based on the Company's financial structure at December 31, 1999. The commodity price risk relates to natural gas and crude oil produced, held in storage and marketed by the Company. The Company's financial results can be significantly impacted as commodity prices fluctuate widely in response to changing market forces. From time to time the Company may enter into a combination of futures contracts, commodity derivatives and fixed-price physical contracts to manage its exposure to commodity price volatility. The fixed-price physical contracts generally have terms of a year or more. The Company employs a policy of hedging gas production sold under NYMEX based contracts by selling NYMEX based commodity derivative contracts which are placed with major financial institutions that the Company believes are minimal credit risks. The contracts may take the form of futures contracts, swaps or options. If NYMEX gas prices increased $.25 per Mcf, the Company's gas sales would increase $2.7 million, after considering the effects of the hedging contracts in place at December 31, 1999. This sensitivity analysis is based on the Company's 1999 gas sales volumes. The information included in this Item is considered to constitute "forward looking statements" for purposes of the statutory safe harbor provided in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Forward-Looking Information" in Item 7 of this Report. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- The Index to Consolidated Financial Statements and Schedules on page F-1 sets forth the financial statements included in this Annual Report on Form 10-K and their location herein. Schedules have been omitted as not required or not applicable because the information required to be presented is included in the financial statements and related notes. The financial statements have been prepared by management in conformity with generally accepted accounting principles. Management is responsible for the fairness and reliability of the financial statements and other financial data included in this report. In the preparation of the financial statements, it is necessary to make informed estimates and judgments based on currently available information on the effects of certain events and transactions. The Company maintains accounting and other controls which management believes provide reasonable assurance that financial records are reliable, assets are safeguarded, and that transactions are properly recorded. However, limitations exist in any system of internal control based upon the recognition that the cost of the system should not exceed benefits derived. The Company's independent auditors, Ernst & Young LLP, are engaged to audit the financial statements and to express an opinion thereon. Their audit is conducted in accordance with generally accepted auditing standards to enable them to report whether the financial statements present fairly, in all 29 31 material respects, the financial position and results of operations in accordance with accounting principles generally accepted in the United States. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE ----------------------------------- Not applicable. PART III - -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- Executive officers and directors of the Company as of February 29, 2000 were as follows:
Name Age Position - ---- --- -------- John L. Schwager 51 President, Chief Executive Officer and Director Joseph M. Vitale 58 Senior Vice President Legal, General Counsel, Secretary and Director Tommy L. Knowles 49 Senior Vice President Exploration and Production Leo A. Schrider 61 Senior Vice President Technical Development Robert W. Peshek 45 Vice President Finance and Chief Financial Officer Duane D. Clark 44 Vice President Gas Marketing James C. Ewing 57 Vice President Human Resources Charles P. Faber 58 Vice President Corporate Development Henry S. Belden IV 60 Director Lawrence W. Kellner 41 Director Max L. Mardick 65 Director William S. Price, III 44 Director Gareth Roberts 47 Director David M. Stanton 37 Director
30 32 All executive officers of the Company serve at the pleasure of its Board of Directors. None of the executive officers of the Company is related to any other executive officer or director. The Board of Directors consists of eight members each of whom is elected annually to serve one year terms. The business experience of each executive officer and director is summarized below. JOHN L. SCHWAGER has been Chief Executive Officer of Belden & Blake Corporation since June of 1999. Mr. Schwager was elected to the Board of Directors in August of 1999 and was appointed to the additional position of President upon the departure of the former President in September 1999. He has over 30 years of diversified experience in the oil and gas industry. Prior to joining Belden & Blake, he spent two years as President of AnnaCarol Enterprises, Inc., an energy consulting firm specializing in financial and engineering advisory services to exploration and production sector companies. From 1984 to 1997, he was employed by Alamco, Inc., an Appalachian Basin exploration and production company, serving as President and Chief Executive Officer from 1987 to 1997; Executive Vice President from May 1987 to October 1987; and, Senior Vice President - Operations from 1984 to 1987. He also served as Chairman of the Board of TGX Corporation and led TGX out of bankruptcy in 1992. From 1980 to 1984, Mr. Schwager was employed as the Vice President of Production for Callon Petroleum Company in Natchez, Mississippi. From 1970 to 1980, he worked for Shell Oil Company in New Orleans in both engineering and supervisory positions. He last worked at Shell as a Division Drilling Superintendent in the Offshore Division. Mr. Schwager graduated from the University of Missouri at Rolla in 1970 with a Bachelor of Science Degree in Petroleum Engineering. He is a past president and director of the Independent Oil and Gas Association of West Virginia. He also was the cofounder of the Oil and Gas Political Action Committee of West Virginia, serving as cochairman for many years. JOSEPH M. VITALE has been Senior Vice President Legal of the Company since 1989 and has served as its General Counsel since 1974. He has been a director of the Company since 1991. He holds a BS degree from John Carroll University and a JD degree from Case Western Reserve Law School. He is a member of the Ohio Oil and Gas Association, the Stark County, Ohio State and American Bar Associations, and the Interstate Oil Compact Commission. Mr. Vitale is a past Chairman of the Natural Resources Law Committee of the Ohio State Bar Association. TOMMY L. KNOWLES has been Senior Vice President of Exploration and Production of the Company since 1997. Previously he served as Vice President of Production from 1996 to 1997. He has 26 years of petroleum engineering and production experience. Prior to joining Belden & Blake, Mr. Knowles served as President of FWA Drilling Company, a subsidiary of Texas Oil & Gas Corporation. From 1982 to 1988 he worked for TXO Production Corporation in Sacramento, California, serving in various management positions including Vice President; from 1979 to 1982 he held the position of Drilling and Production Manager for Texas Oil & Gas Corporation; and, from 1973 to 1979 he held various engineering, supervisory and management positions with Exxon Corporation. Mr. Knowles holds a BS degree in Mechanical Engineering from the University of Texas at Austin where he graduated with honors. He is a member of the Society of Petroleum Engineers and the Ohio Oil & Gas Association. LEO A. SCHRIDER has been Senior Vice President of Technical Development since 1993. He previously served as Senior Vice President of Exploration, Drilling and Engineering for the Company since 1986. Mr. Schrider is a Petroleum Engineer with more than 35 years of experience in oil and gas production, principally in the Appalachian Basin. Prior to joining Belden & Blake in 1981, he served as Assistant and Deputy Director of Morgantown Energy Technology Center from 1976 to 1980. From 31 33 1973 to 1976, Mr. Schrider served as Project Manager of the Laramie Energy Research Center. He has also held various research positions with the U.S. Department of Energy in Wyoming and West Virginia. Mr. Schrider received his BS degree from the University of Pittsburgh in 1961 and did graduate work at West Virginia University. He has published more than 35 technical papers on oil and gas production. He was an Adjunct Professor at West Virginia University and also served as a member of the International Board of Directors of the Society of Petroleum Engineers. In 1994, Mr. Schrider was elected to the Board of Directors of the Petroleum Technology Transfer Council and currently serves as its chairman. ROBERT W. PESHEK has served as Vice President of Finance for the Company since 1997 and in 1999 was appointed Chief Financial Officer. Previously, he served as Corporate Controller and Tax Manager from 1994 to 1997. Prior to joining Belden & Blake, Mr. Peshek served as a Senior Manager of the Tax Department at Ernst & Young LLP from 1981 to 1994. He is a Certified Public Accountant with extensive experience in taxation, finance, accounting and auditing. Mr. Peshek holds a Bachelor of Business Administration degree in Accounting from Kent State University where he graduated with honors. His professional affiliations include the American Institute of Certified Public Accountants and the Ohio Society of Certified Public Accountants. DUANE D. CLARK has been Vice President of Gas Marketing for the Company since 1997. Previously, he served as General Manager of Gas Marketing from 1996 to 1997. He joined the Company in 1995 as a Gas Marketing Analyst. Prior to joining Belden & Blake, Mr. Clark held various management positions with Quaker State Corporation from 1978 to 1995. He has 22 years of experience in the oil and gas industry . Mr. Clark received his BA degree in Mathematics and Economics from Ohio Wesleyan University. His professional affiliations include the Ohio Oil and Gas Association, the Independent Oil and Gas Association of West Virginia and the Pennsylvania Oil and Gas Association. JAMES C. EWING has been Vice President of Human Resources for the Company since 1997. He previously served as Human Resources Manager. Mr. Ewing joined Belden & Blake in April of 1986 and has 14 years of experience in the oil and gas industry and more than 20 years of experience in the Human Resource field. Prior to joining Belden & Blake, he was the Director of Personnel for the Union Metal Manufacturing Company from 1978 to 1986. Mr. Ewing holds a Bachelor of Arts degree in Psychology from West Liberty State College. He is a member of the Society for Human Resource Management. He is a founder and current member of the Stark County Health Care Coalition; President of the Stark County Historical Society; and, Chairman of the Business Advisory Board and adjunct faculty member of Kent State University. CHARLES P. FABER has been Vice President of Corporate Development for the Company since 1993. He previously served as Senior Vice President of Capital Markets from 1988 to 1993. Prior to joining Belden & Blake, Mr. Faber was employed as Senior Vice President of Marketing for Heritage Asset Management from 1986 to 1988. From 1983 to 1986 he served as President and Chief Executive Officer of Samson Properties, Incorporated. Mr. Faber holds a BA degree in Marketing and an MBA in Finance from the University of Wisconsin where he graduated with honors. He is a member of the Independent Petroleum Association of America and the Ohio Oil and Gas Association. HENRY S. BELDEN IV served as Chairman and Chief Executive Officer of the Company from 1982 to 1997. He resigned as Chairman and Chief Executive Officer upon the Acquisition, and was appointed to serve on the Board of Directors upon consummation of the Acquisition. Mr. Belden has been involved in oil and gas production since 1955 and associated with Belden & Blake since 1967. 32 34 Prior to joining Belden & Blake, he was employed by Ashland Oil & Refining Company and Halliburton Services, Incorporated. Mr. Belden attended Florida State University and the University of Akron and is a member of the 25-Year Club of the Petroleum Industry and the Board of Trustees of the Ohio Oil and Gas Association. He is also a member of the Regional Advisory Board of the Independent Petroleum Association of America and a director and a member of the Executive Committee of the Pennsylvania Grade Crude Oil Association. He is a member of the Interstate Oil Compact Commission. Other professional memberships include the World Business Council and the Association of Ohio Commodores. He is a director of KeyBank-Canton District and Phoenix Packaging Corporation. LAWRENCE W. KELLNER has been Executive Vice President and Chief Financial Officer of Continental Airlines, Inc. since November 1996. Previously, he served as Senior Vice President and Chief Financial Officer at Continental from June 1995 to November 1996. Prior to joining Continental, he was Executive Vice President and Chief Financial Officer of American Savings Bank, F.A. from November 1992 to May 1995. Mr. Kellner graduated magna cum laude with a Bachelor of Science, Business Administration degree from the University of South Carolina. MAX L. MARDICK was President and Chief Operating Office of the Company from 1990 to 1997, a director from 1992 to 1997 and a director of predecessor companies from 1988 to 1992. He resigned as President and Chief Operating Officer upon consummation of the Acquisition and was appointed to serve on the Board of Directors upon consummation of the Acquisition. He previously served as Executive Vice President and Chief Operating Officer from 1988 to 1990. Mr. Mardick is a Petroleum Engineer with more than 35 years of experience in domestic and international production, engineering, drilling operations and property evaluation. Prior to joining Belden & Blake, he was employed for more than 30 years by Shell Oil Company in various engineering, supervisory and senior management positions, including: Manager, Property Acquisitions and Business Development (1986-1988); Production Manager for Shell's Onshore and Eastern Divisions (1981-1986); Production Manager of Shell's Rocky Mountain Division (1980-1981); Operations Manager (1977-1980); and Engineering Manager (1975-1977). Mr. Mardick holds a BS degree in Petroleum Engineering from the University of Kansas. He is a member of the Society of Petroleum Engineers and the Ohio Oil and Gas Association. He has served as Vice Chairman of the Alabama-Mississippi section of the Mid-Continent Oil and Gas Association. WILLIAM S. PRICE, III, who became a director upon consummation of the Acquisition, was a founding partner of Texas Pacific Group in 1993. Prior to forming Texas Pacific Group, Mr. Price was Vice President of Strategic Planning and Business Development for G.E. Capital, and from 1985 to 1991 he was employed by the management consulting firm of Bain & Company, attaining partnership status and acting as co-head of the Financial Services Practice. Mr. Price is a 1978 graduate of Stanford University and received a JD degree from the Boalt Hall School of Law at the University of California, Berkeley. Mr. Price serves on the Boards of Directors of Beringer Wine Estates Holdings, Inc., Continental Airlines, Inc., Del Monte, Inc., Denbury Resources, Inc., FirstWorld Communications, Inc., and several private companies. GARETH ROBERTS is President, Chief Executive Officer and a Director of Denbury Resources, Inc. ("Denbury"), and is the founder of the operating subsidiary of Denbury, which was founded in April 1990. Mr. Roberts has 25 years of experience in the exploration and development of oil and gas properties with Texaco, Inc., Murphy Oil Corporation and Coho Resources, Inc. His expertise is particularly focused in the Gulf Coast region where he specializes in the acquisition and development of old fields with low productivity. Mr. Roberts holds honors and masters degrees in Geology and Geophysics from St. Edmund Hall, Oxford University. 33 35 DAVID M. STANTON, who became a director upon consummation of the Acquisition, is a partner of Francisco Partners. From 1994 to 1999, he was a partner with Texas Pacific Group. From 1991 until he joined Texas Pacific Group in 1994, Mr. Stanton was a venture capitalist with Trinity Ventures, where he specialized in information technology, software and telecommunications investing. Mr. Stanton earned a BS degree in Chemical Engineering from Stanford University and received an MBA from the Stanford Graduate School of Business. Mr. Stanton serves on the Boards of Directors of Denbury Resources, Globespan, GT Com, ON Semiconductor, Paradyne Networks and Zilog. 34 36 Item 11. EXECUTIVE COMPENSATION ---------------------- The following table shows the annual and long-term compensation for services in all capacities to the Company during the fiscal years ended December 31, 1999, 1998 and 1997 of the Company's Chief Executive Officer and its other four most highly compensated executive officers. SUMMARY COMPENSATION TABLE
Long-Term Compensation Annual Compensation Awards -------------------------------------------- ------------- Other No. of Shares Name and Annual Underlying All Other Principal Position Year Salary Bonus Compensation Options/SARs Compensation(1) - ----------------------------- ---- ------ ----- ------------ ------------ --------------- John L. Schwager 1999 $173,077 $300,000 $ -- 139,383 $113,358(2) President and Chief Executive Officer Ronald L. Clements Chief 1999 159,600 -- -- -- 745,344(3) Executive Officer until 1998 318,462 11,354 -- -- 18,840 June 30, 1999 1997 239,154 84,390 -- 137,366 14,625 Ronald E. Huff 1999 180,000 -- -- -- 1,019,931(4) Chief Financial Officer 1998 265,385 9,462 -- -- 17,662 until September 3, 1999 1997 208,646 83,192 -- 137,366 13,767 Joseph M. Vitale 1999 180,000 57,416 -- 55,000(5) 8,084 Senior Vice President Legal, 1998 186,493 52,525 -- -- 14,248 General Counsel and Secretary 1997 168,800 66,627 -- 54,946 11,863 Tommy L. Knowles 1999 172,009 17,201 -- 55,000(5) 7,878 Senior Vice President of 1998 175,158 6,244 -- -- 14,444 Exploration and Production 1997 167,154 46,563 -- 54,946 72,009 Leo A. Schrider 1999 133,000 13,300 -- 55,000(6) 7,635 Senior Vice President of 1998 137,962 12,719 -- -- 11,669 Technical Development 1997 128,504 20,065 -- 20,000 10,046
- ---------- (1) Represents contributions of cash and Common Stock to the Company's 401(k) Profit Sharing Plan for the account of the named executive officer (2) Includes moving expenses of $113,358. (3) Includes payment of $738,060 made under terms of a retirement and noncompetition agreement with the named executive officer. (4) Includes payment of $1,012,430 made under terms of severance arrangement with the named executive officer. (5) Includes options for 54,946 shares originally granted in 1997 and repriced in 1999 plus options for 54 shares granted in 1999. (6) Includes options for 20,000 shares originally granted in 1997 and repriced in 1999 plus options for 35,000 shares granted in 1999. 35 37 OPTION/SAR GRANTS IN LAST FISCAL YEAR
Number of Percentage/Total Shares Options/SARs Underlying Granted to Exercise or Options/SARs Employees in Base Price Expiration Grant Date Name Granted (1) Fiscal Year per Share Date Value (2) - ---------------- ----------- ----------- --------- ---- --------- John L. Schwager 139,383 22.40% $0.01 05/31/09 $27,877 Joseph M. Vitale 55,000 8.84% 0.01 09/30/09 11,000 Tommy L. Knowles 55,000 8.84% 0.01 09/30/09 11,000 Leo A. Schrider 55,000 8.84% 0.01 09/30/09 11,000
(1) Options granted in 1999 and 1997 were 303,491 and 652,624, respectively. Options totaling 318,892 were repriced in 1999. Refer to 10 Year Option/SAR Repricing table below for additional information. These options are exercisable beginning twelve months after the date of grant or repricing, with 25% of the shares covered thereby becoming exercisable at that time and an additional 12.5% becoming exercisable on each successive three month anniversary date. The options were granted for a term of ten years, subject to earlier termination on cessation of employment. (2) This is a hypothetical valuation using the Black-Scholes valuation method. The Company's use of this model should not be considered as an endorsement of its accuracy at valuing options. All stock option valuation methods, including the Black-Scholes model, require a prediction about the future movement of the stock price. Since all options are granted at an exercise price equal to the market value of the Company's common Stock, as determined by the Company on that date, no value will be realized if there is no appreciation in the market price of the stock. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUE
Value of Unexercised Number of Unexercised In-the Money Options/SARs at FY-End Options/SARs at FY-End ---------------------- ---------------------- Shares Acquired Value Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- ----------- -------- ----------- ------------- ----------- ------------- John L. Schwager -- $ -- -- 139,383 $ -- $27,876 Ronald L. Clements -- -- 31,168 -- 3,428 -- Ronald E. Huff 31,168 -- -- -- -- -- Joseph M. Vitale -- -- -- 55,000 -- 11,000 Tommy L. Knowles -- -- -- 55,000 -- 11,000 Leo A. Schrider -- -- -- 55,000 -- 11,000
36 38 10-YEAR OPTION/SAR REPRICINGS
Number of Number of Months of Shares Market Exercise Original Underlying Price of Price at Term Date Options/SARs Stock at Time of New Remaining at of Repriced or Time of Repricing or Exercise Date of Name Repricing Amended Repricing (1) Amendment Price Repricing (2) - --------------------------- --------- ------- ------------- --------- ----- ------------- Joseph M. Vitale 10/01/99 54,946 $0.01 $10.82 $0.01 98 Senior Vice President Legal, General Counsel and Secretary Tommy L. Knowles 10/01/99 54,946 0.01 10.82 0.01 98 Senior Vice President of Exploration and Production Leo A. Schrider 10/01/99 20,000 0.01 10.82 0.01 98 Senior Vice President of Technical Development Duane D. Clark 10/01/99 15,000 0.01 10.82 0.01 98 Vice President of Gas Marketing James C. Ewing 10/01/99 15,000 0.01 10.82 0.01 98 Vice President of Human Resources Charles P. Faber 10/01/99 25,000 0.01 10.82 0.01 98 Vice President of Corporate Development Robert W. Peshek 10/01/99 25,000 0.01 10.82 0.01 98 Vice President of Finance and Chief Financial Officer
(1) Based on information contained in the Stock Option plan options cannot be issued for more than fair market value at the time of a grant. Since the Company's stock is not actively traded, the Company has determined the value of the stock at 10/01/1999 to be $.01 per share. (2) Original options were granted on 12/01/97. These options vested 25% per year and were valid for a period of ten years or 120 months. Options were repriced twenty two months after the original grant date leaving 98 months remaining from the original grant date. COMPENSATION OF DIRECTORS The outside directors of the Company are compensated for their services at $7,500 per quarter. Directors employed by the Company or affiliated with TPG are not compensated for their services. EMPLOYMENT AND SEVERANCE AGREEMENTS The Company has severance agreements with Messrs. Clements, Huff and Vitale which entitle each of them to receive a lump sum severance payment equal to 300% of the sum of (i) his respective annual base salary at the highest rate in effect for any period prior to his employment termination plus (ii) his highest annual bonus and incentive compensation during the three-year period preceding a change in control, in the event of the termination of his employment by the Company other than for "cause" (as defined therein) or his resignation in response to a substantial reduction in responsibilities, authority, position, compensation or location of his place of employment prior to June 27, 2000. In addition, each of them would be entitled to receive an additional payment sufficient to cover any excise tax imposed by 37 39 Section 4999 of the Code on the severance payments or other payment considered "contingent on a change in ownership or control" of the Company within the meaning of Section 280G of the Code. In connection with the termination of his employment on September 3, 1999, Mr. Huff received severance pay of $997,050 and will continue to participate in the Company's employee welfare plans for a period of three years. Mr. Clements received no severance pay or benefits under his severance agreement on the termination of his employment because of his decision to retire voluntarily on June 30, 1999. Messrs. Clements and Huff each entered into employment agreements dated as of June 27, 1997 (the "Employment Agreements") providing for their employment as Chief Executive Officer and President, respectively, of the Company on an at-will basis with no fixed or minimum term. Prior to the termination of their employment, the Employment Agreements provided for an annual base salary of not less than $300,000 payable to Mr. Clements and $250,000 payable to Mr. Huff. Messrs. Clements and Huff were each entitled to earn an annual bonus of up to 50% of his annual base salary subject to the attainment of certain goals set by the Company's Board of Directors. Each of Messrs. Clements and Huff agreed to continue to hold, and not surrender, certain stock options previously granted to him under the Company's Stock Option Plan, thereby foregoing the right to receive $334,220 each in cash upon the surrender of such options on consummation of the Acquisition. Under the Employment Agreements Messrs. Clements and Huff were each granted additional options to purchase 31,168 shares of common stock of the Company constituting 1.25% of the outstanding common stock (on a fully-diluted basis) at a per share option price of $10.82 which was equivalent to the price paid by TPG in connection with the Acquisition. The options vest over a four-year period, with one-fourth (1/4) vesting one year after the date of grant and the balance at the rate of one-twelfth (1/12) at the end of each quarter thereafter during the continuation of employment with the Company. The Employment Agreements provided for certain call options and rights of first refusal in connection with the shares of common stock obtainable upon the exercise of stock options. In connection with his retirement as Chief Executive Officer and a director of the Company, Mr. Clements entered into a retirement and noncompetition agreement with the Company dated as of May 26, 1999 under which Mr. Clements agreed that, for a period of two (2) years from June 30, 1999, he will not engage in or be associated with, as a consultant, employer, employee, director, stockholder, partner, financial backer affiliate or otherwise, the ownership or operation of any enterprise relating to the exploration, drilling and/or production of oil or gas in the Appalachian, Michigan or Illinois basins. In addition, Mr. Clements agreed that during such two-year period, he will not employ, solicit for employment or endeavor to entice away from employment any person who is employed by the Company or any of its affiliates. In consideration of such agreements, the Company agreed to pay Mr. Clements $725,000 in installments of $350,000 on July 1, 1999, $250,000 on January 3, 2000 and $125,000 on July 1, 2000, and to continue to provide the same health care and fringe benefits he was receiving at the time of his retirement for such two-year period. John L. Schwager entered into an Employment Agreement effective as of June 1, 1999 providing for his employment as Chief Executive Officer of the Company at an annual base salary of not less than $300,000, and entitling him to an annual bonus of up to 100% of his annual base salary subject to the attainment of certain goals to be agreed upon annually by Mr. Schwager and the Board of Directors. The Company agreed to reimburse Mr. Schwager for expenses incurred in connection with his relocation to Canton, Ohio, including any loss on the sale of his former residence. If his employment is terminated by the Company without "cause" (as defined in the agreement) or if Mr. Schwager resigns in response to a substantial and adverse change in his status or position or a substantial reduction in duties, responsibilities or base salary or a relocation of his place of work or a sale of the Company, Mr. Schwager will be entitled to severance pay equal to three times his total compensation for the previous calendar year, or if such termination occurs in 2000, three times his total annualized 1999 compensation. Mr. Schwager 38 40 would also be entitled to receive an additional payment (the "gross up") sufficient to cover any tax imposed by Section 4999 of the Internal Revenue Code on the severance payments and the gross up. In addition, Mr. Schwager received options to purchase 139,383 shares of common stock of the Company at a price of $0.01 per share, subject to upward adjustment in the event of the sale by the Company of new equity securities to TPG Partners II or its affiliates for at least $30 million, in which case he will receive additional options for such number of shares as will, when added to 139,383, equal 1.25% of the Company's outstanding stock. In such event, the exercise price of all options shall be equal to the fair market value of the underlying shares. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1999, the Compensation and Organizational Committee of the Board of Directors consisted of William S. Price, III, Henry S. Belden IV and Gareth Roberts, all of whom are outside directors. No executive officer of the Company was a director or member of the compensation committee of any entity of which a member of the Company's Board of Directors or its Compensation and Organizational Committee was or is an executive officer. 39 41 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The following table sets forth certain information as of February 29, 2000 regarding the beneficial ownership of the Company's common stock by each person who beneficially owns more than five percent of the Company's outstanding common stock, each director, the chief executive officer and the four other most highly compensated executive officers and by all directors and executive officers of the Company, as a group:
FIVE PERCENT SHAREHOLDERS NUMBER OF SHARES PERCENTAGE OF SHARES ------------------------- ---------------- -------------------- TPG Advisors II, Inc. 201 Main Street, Suite 2420 Fort Worth, Texas 76102 9,353,038(1) 89.1% State Treasurer of the State of Michigan, Custodian of the Public School Employees' Retirement System, State Employees Retirement System, Michigan State Police Retirement System and Michigan Judges Retirement System 554,376 5.3% OFFICERS AND DIRECTORS ---------------------- William S. Price, III 9,353,038 (1) 89.1% Henry S. Belden IV 63,360 (2) * John L. Schwager -0- -0- Ronald L. Clements 35,513 (3) * Ronald E. Huff -0- -0- Lawrence W. Kellner -0- -0- Max L. Mardick 39,387 (2) * Tommy L. Knowles -0- -0- Gareth Roberts -0- -0- Carter T. Funk 35,000 (2) * David M. Stanton -0- -0- Leo A. Schrider -0- -0- Joseph M. Vitale -0- -0- All directors and executive officers (16) as a group 9,594,981 91.4%
*Less than 1% (1) Neither TPG Advisors II, Inc. nor Mr. Price is the record owner of any shares of the Company's common stock. Mr. Price is, however, a director, executive officer and shareholder of TPG Advisors II, Inc., which is the general partner of TPG GenPar II, L.P., which in turn is the general partner of each of TPG II, TPG Investors II, L.P. and TPG Parallel II, L.P. which are the direct beneficial owners of 7,976,645, 832,047 and 544,346 shares of common stock, respectively. (2) Consists of shares subject to stock options exercisable within 60 days. (3) Includes 31,168 shares subject to stock options exercisable within 60 days. 40 42 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In connection with the Acquisition, the Company entered into a Transaction Advisory Agreement with TPG Partners II, L.P. pursuant to which TPG Partners II, L.P. received a cash financial advisory fee of $5.0 million upon the closing of the Acquisition as compensation for its services as financial advisor in connection with the Acquisition. TPG Partners II, L.P. also will be entitled to receive (but, at its discretion, may waive) fees of up to 1.5% of the "transaction value" for each subsequent transaction (a tender offer, acquisition, sale, merger, exchange offer, recapitalization, restructuring or other similar transaction) in which the Company is involved. The term "transaction value" means the total value of any subsequent transaction, including, without limitation, the aggregate amount of the funds required to complete the subsequent transaction (excluding any fees payable pursuant to the Transaction Advisory Agreement and fees, if any, paid to any other person or entity for financial advisory, investment banking, brokerage or any other similar services rendered in connection with such transaction) including the amount of any indebtedness, preferred stock or similar items assumed (or remaining outstanding). The Transaction Advisory Agreement shall continue until the earlier of (i) 10 years from the execution date or (ii) the date on which TPG Partners II, L.P. and its affiliates cease to own, beneficially, directly or indirectly, at least 25% of the voting power of the securities of the Company. In management's opinion, the fees provided for under the Transaction Advisory Agreement reasonably reflect the benefits received and to be received by the Company. Messrs. Belden and Mardick have each entered into non-competition agreements with the Company dated March 27, 1997 (the "Non-Competition Agreements"), which became effective contemporaneously with consummation of the Acquisition. Pursuant to the terms of the Non-Competition Agreements, Messrs. Belden and Mardick have each agreed, for a period of three (3) years from June 27, 1997 that he will not, in any county in the United States in which the Company does business, directly or indirectly, either for himself or as a member of a partnership or as a shareholder, investor, agent, associate or consultant engage in any business in which the Company is engaged immediately prior to June 27, 1997. Messrs. Belden and Mardick have each further agreed that he will not, directly or indirectly, make any misleading or untrue statement that disparages or would have the effect of disparaging the Company or any of its affiliates or employees or of adversely affecting the reputation, business or credit rating of the Company or any of its affiliates or employees, and that, for a period of three years from June 27, 1997, he will not, directly or indirectly, interfere with, or take any action that would have the effect of interfering with, the contractual and other relationships between the Company or any of its affiliates and any of its or their employees, customers or suppliers. In consideration of such agreements, Mr. Belden will receive $2,400,616.44 and Mr. Mardick will receive $983,711.16 in each case payable in 36 monthly installments. 41 43 PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ---------------------------------------------------------------- (a) Documents filed as a part of this report: 1. Financial Statements The financial statements listed in the accompanying Index to Consolidated Financial Statements and Schedules are filed as part of this Annual Report on Form 10-K. 2. Financial Statement Schedules No financial statement schedules are required to be filed as part of this Annual Report on Form 10-K. 3. Exhibits No. Description - --- ----------- 2.1 Agreement and Plan of Merger dated as of March 27, 1997 by and among TPG Partners II, BB Merger Corp. and Belden & Blake Corporation --incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-4 (Registration No. 333-33407) 3.1 Amended and Restated Articles of Incorporation of Belden & Blake Corporation (fka Belden & Blake Energy Corporation)--incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4 (Registration No. 333-33407) 3.2 Code of Regulations of Belden & Blake Corporation--incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4 (Registration No. 333-33407) 4.1 Indenture dated as of June 27, 1997 between the Company, the Subsidiary Guarantors and LaSalle National Bank, as trustee, relating to the Notes --incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4 (Registration No. 333-33407) 4.2 Registration Rights Agreement dated as of June 27, 1997 between the Company, the Guarantors and Chase Securities, Inc.--incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-4 (Registration No. 333-33407) 4.3 Form of 9 7/8% Senior Subordinated Notes due 2007, Original Notes (included in Exhibit 4.1)--incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-4 (Registration No. 333-33407) 42 44 4.4 Form of 9 7/8% Senior Subordinated Notes due 2007, Exchange Notes (included in Exhibit 4.1)--incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-4 (Registration No. 333-33407) 10.1 Credit Agreement dated as of June 27, 1997 by and among the Company, each of the Lenders named therein and The Chase Manhattan Bank, as Agent --incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-4 (Registration No. 333-33407) 10.2 Transaction Advisory Agreement dated as of June 27, 1997 by and between the Company and TPG Partners II, L.P. --incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-4 (Registration No. 333-33407) 10.3 Employment Agreement dated as of June 27, 1997 by and between the Company and Ronald L. Clements --incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-4 (Registration No. 333-33407) 10.3(b)* Retirement and noncompetition agreement dated May 26, 1999 by and between the Company and Ronald L. Clements 10.4 Employment Agreement dated as of June 27, 1997 by and between the Company and Ronald E. Huff --incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-4 (Registration No. 333-33407) 10.5 Belden & Blake Corporation 1997 Non-Qualified Stock Option Plan--incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-4 (Registration No. 333-33407) 10.6 Form of Severance Agreement between the Company and the following officers: Ronald E. Huff, Ronald L. Clements and Joseph M. Vitale-- incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 10.7* Change in Control Severance Pay Plan for Key Employees of the Company dated August 12, 1999. 10.8* Severance Pay Plan for Employees of Belden & Blake Corporation dated August 12, 1999. 10.9(a) 1991 Stock Option Plan of the Company--incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-4 (Registration No. 33-43209) 10.9(b) 1991 Stock Option Plan of the Company (as amended)--incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-62785) 10.10* Employment Agreement dated June 1, 1999 and amended November 1, 1999 by and between the Company and John L. Schwager. 21* Subsidiaries of the Registrant 43 45 27* Financial Data Schedule *Filed herewith (b) Reports on Form 8-K On December 15, 1999, the Company filed a Current Report on Form 8-K dated December 15, 1999 relating to the Company's amended revolving credit agreement and to its semiannual interest payment on its senior subordinated notes. (c) Exhibits required by Item 601 of Regulation S-K Exhibits required to be filed by the Company pursuant to Item 601 of Regulation S-K are contained in the Exhibits listed under Item 14(a)3. (d) Financial Statement Schedules required by Regulation S-X The items listed in the accompanying index to financial statements are filed as part of this Annual Report on Form 10-K. 44 46 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) 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. BELDEN & BLAKE CORPORATION March 24, 2000 By: /s/ John L. Schwager - -------------- ------------------------------------- Date John L. Schwager, Director, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ John L. Schwager Director, President March 24, 2000 - ------------------------- and Chief Executive Officer -------------- John L. Schwager (Principal Executive Officer) Date /s/ Robert W. Peshek Vice President Finance and March 24, 2000 - ------------------------- Chief Financial Officer -------------- Robert W. Peshek (Principal Financial and Date Accounting Officer) /s/ Joseph M. Vitale Senior Vice President Legal, March 24, 2000 - ------------------------- General Counsel, Secretary -------------- Joseph M. Vitale and Director Date /s/ Henry S. Belden IV * Director March 24, 2000 - ------------------------- -------------- Henry S. Belden IV Date /s/ Lawrence W. Kellner * Director March 24, 2000 - ------------------------- -------------- Lawrence W. Kellner Date /s/ Max L. Mardick * Director March 24, 2000 - ------------------------- -------------- Max L. Mardick Date /s/ William S. Price, III Director March 24, 2000 - ------------------------- -------------- William S. Price, III Date
45 47
/s/ Gareth Roberts Director March 24, 2000 - ------------------------- -------------- Gareth Roberts Date /s/ David M. Stanton * Director March 24, 2000 - ------------------------- -------------- David M. Stanton Date *By: /s/ Joseph M. Vitale March 24, 2000 -------------------- -------------- Attorney-in-Fact Date
46 48 BELDEN & BLAKE CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES ITEM 14(a) (1) AND (2)
PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------- Report of Independent Auditors ........................................................................ F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998 .......................................... F-3 Consolidated Statements of Operations: Years ended December 31, 1999 and 1998 (Successor Company) Six months ended December 31, 1997 (Successor Company) Six months ended June 30, 1997 (Predecessor Company) ............................................... F-4 Consolidated Statements of Shareholders' Equity (Deficit): Years ended December 31, 1999 and 1998 (Successor Company) Six months ended December 31, 1997 (Successor Company) Six months ended June 30, 1997 (Predecessor Company) ............................................... F-5 Consolidated Statements of Cash Flows: Years ended December 31, 1999 and 1998 (Successor Company) Six months ended December 31, 1997 (Successor Company) Six months ended June 30, 1997 (Predecessor Company) ............................................... F-6 Notes to Consolidated Financial Statements ............................................................ F-7
All financial statement schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements. F-1 49 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors Belden & Blake Corporation We have audited the accompanying consolidated balance sheets of Belden & Blake Corporation ("Successor Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for the years ended December 31, 1999 and 1998 and the six month period ended December 31, 1997 ("Successor periods"). We have also audited the accompanying consolidated statements of operations, shareholders' equity (deficit) and cash flows of Belden & Blake Corporation ("Predecessor Company") for the six month period ended June 30, 1997 ("Predecessor period"). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Belden & Blake Corporation at December 31, 1999 and 1998 and the consolidated results of their operations and their cash flows for the Successor periods and the Predecessor periods in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Cleveland, Ohio March 17, 2000 F-2 50 BELDEN & BLAKE CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------------ 1999 1998 --------- --------- ASSETS - ------ CURRENT ASSETS Cash and cash equivalents $ 4,536 $ 10,691 Accounts receivable, net 25,301 33,204 Inventories 2,106 9,200 Deferred income taxes 2,006 2,449 Other current assets 1,154 3,384 --------- --------- TOTAL CURRENT ASSETS 35,103 58,928 PROPERTY AND EQUIPMENT, AT COST Oil and gas properties (successful efforts method) 534,515 535,837 Gas gathering systems 22,193 22,008 Land, buildings, machinery and equipment 24,242 28,551 --------- --------- 580,950 586,396 Less accumulated depreciation, depletion and amortization 280,047 246,689 --------- --------- PROPERTY AND EQUIPMENT, NET 300,903 339,707 OTHER ASSETS 14,689 19,970 --------- --------- $ 350,695 $ 418,605 ========= ========= LIABILITIES AND SHAREHOLDERS' DEFICIT - ------------------------------------- CURRENT LIABILITIES Accounts payable $ 4,132 $ 6,458 Accrued expenses 23,024 29,373 Current portion of long-term liabilities 50,979 29,365 --------- --------- TOTAL CURRENT LIABILITIES 78,135 65,196 LONG-TERM LIABILITIES Bank and other long-term debt 78,161 126,178 Senior subordinated notes 225,000 225,000 Other 570 3,204 --------- --------- 303,731 354,382 DEFERRED INCOME TAXES 20,419 32,041 SHAREHOLDERS' DEFICIT Common stock without par value; $.10 stated value per share; authorized 58,000,000 shares; issued and outstanding 10,260,457 and 10,110,915 shares 1,026 1,011 Paid in capital 107,609 107,897 Deficit (160,225) (141,922) --------- --------- TOTAL SHAREHOLDERS' DEFICIT (51,590) (33,014) --------- --------- $ 350,695 $ 418,605 ========= =========
See accompanying notes. F-3 51 BELDEN & BLAKE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
| PREDECESSOR SUCCESSOR COMPANY | COMPANY ----------------------------------------- | ----------- YEAR YEAR SIX MONTHS | SIX MONTHS ENDED ENDED ENDED | ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, | JUNE 30, 1999 1998 1997 | 1997 ------------ ------------ ------------ | ---------- | REVENUES | Oil and gas sales $ 79,299 $ 87,055 $ 44,165 | $41,591 Gas gathering, marketing, and oilfield sales and service 51,443 63,358 38,255 | 36,322 Other 4,996 4,426 1,706 | 1,484 -------- --------- -------- | ------- 135,738 154,839 84,126 | 79,397 EXPENSES | Production expense 21,980 23,739 11,338 | 10,158 Production taxes 3,260 2,986 1,525 | 1,647 Gas gathering, marketing, and oilfield sales and service 46,954 56,813 33,529 | 32,276 Exploration expense 6,442 9,982 5,980 | 4,380 General and administrative expense 5,412 4,536 1,813 | 2,445 Franchise, property and other taxes 652 1,084 967 | 908 Depreciation, depletion and amortization 41,412 68,488 31,694 | 15,366 Impairment of oil and gas properties | and other assets -- 160,690 -- | -- Interest expense 34,302 32,903 15,417 | 3,715 Net loss on sale of subsidiaries and other | nonrecurring expense 4,806 373 -- | -- Transaction-related expenses -- -- -- | 16,758 -------- --------- -------- | ------- 165,220 361,594 102,263 | 87,653 -------- --------- -------- | ------- | LOSS BEFORE INCOME TAXES (29,482) (206,755) (18,137) | (8,256) (Benefit) provision for income taxes (11,179) (76,205) (6,765) | 1,617 -------- --------- -------- | ------- NET LOSS $(18,303) $(130,550) $(11,372) | $(9,873) ======== ========= ======== | =======
See accompanying notes. F-4 52 BELDEN & BLAKE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
SUCCESSOR COMPANY PREDECESSOR COMPANY ----------------- ------------------- RETAINED UNEARNED TOTAL COMMON COMMON COMMON COMMON PREFERRED PAID IN EARNINGS RESTRICTED EQUITY SHARES STOCK SHARES STOCK STOCK CAPITAL (DEFICIT) STOCK (DEFICIT) ------ ------ ------- ------- --------- --------- --------- ---------- --------- PREDECESSOR COMPANY: JANUARY 1, 1997 -- $ -- 11,232 $ 1,123 $ 2,400 $ 128,035 $ 27,395 $(35) $ 158,918 Net loss (9,873) (9,873) Preferred stock redeemed (2,400) (2,400) Preferred stock dividend (45) (45) Subordinated debentures converted to common stock 275 27 5,523 5,550 Stock options exercised and surrendered and related tax benefit 1 -- 1,596 1,596 Employee stock bonus 36 4 926 930 Restricted stock activity 17 35 52 Redemption of common stock (11,544) (1,154) (136,097) (17,477) (154,728) Sale of common stock 10,000 1,000 107,230 108,230 SUCCESSOR COMPANY: - ---------------------------------------------------------------------------------------------------------------------------------- JUNE 30, 1997 10,000 1,000 -- -- -- 107,230 -- -- 108,230 Net loss (11,372) (11,372) - ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1997 10,000 1,000 -- -- -- 107,230 (11,372) -- 96,858 Employee stock bonus 111 11 667 678 Net loss (130,550) (130,550) - ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1998 10,111 1,011 -- -- -- 107,897 (141,922) -- (33,014) Employee stock bonus 118 12 (288) (276) Stock options exercised 31 3 3 Net loss (18,303) (18,303) - ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1999 10,260 $1,026 -- $ -- $ -- $ 107,609 $(160,225) $ -- $ (51,590) ==================================================================================================================================
See accompanying notes. F-5 53 BELDEN & BLAKE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
| PREDECESSOR SUCCESSOR COMPANY | COMPANY ------------------------------------------ | ----------- YEAR YEAR SIX MONTHS | SIX MONTHS ENDED ENDED ENDED | ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, | JUNE 30, 1999 1998 1997 | 1997 ------------ ------------ ------------ | ---------- | CASH FLOWS FROM OPERATING ACTIVITIES: | Net loss $(18,303) $(130,550) $(11,372) | $ (9,873) Adjustments to reconcile net loss to net cash | provided by operating activities: | Depreciation, depletion and amortization 41,412 68,488 31,694 | 15,366 Impairment of oil and gas properties and other assets -- 160,690 -- | -- Transaction-related expenses -- -- -- | 15,903 Exploration expense 6,442 9,982 5,980 | 4,380 Deferred income taxes (11,179) (75,702) (6,379) | 3,125 Loss on disposal of property and equipment 1,657 100 51 | 356 Deferred compensation and stock grants (565) 993 380 | 1,756 Change in operating assets and liabilities, net of | effects of purchases of businesses: | Accounts receivable and other operating assets 5,814 3,203 (5,280) | 1,237 Inventories 2,413 (261) 597 | 112 Accounts payable and accrued expenses (7,867) (1,689) (4,064) | 4,800 -------- --------- -------- | --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 19,824 35,254 11,607 | 37,162 | CASH FLOWS FROM INVESTING ACTIVITIES: | Acquisition of businesses, net of cash acquired -- (11,827) (14,276) | (9,263) Disposition of businesses, net of cash 7,887 -- -- | -- Proceeds from property and equipment disposals 3,011 4,082 785 | 704 Exploration expense (6,442) (9,982) (5,980) | (4,380) Additions to property and equipment (2,996) (38,165) (23,663) | (18,419) Decrease (Increase) in other assets 2,140 (1,294) (274) | (9,496) -------- --------- -------- | --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,600 (57,186) (43,408) | (40,854) | CASH FLOWS FROM FINANCING ACTIVITIES: | Proceeds from revolving line of credit and long-term debt -- -- -- | 46,000 Proceeds from new credit agreement 21,000 44,000 24,020 | 104,000 Proceeds from senior subordinated notes -- -- -- | 225,000 Sale of common stock -- -- -- | 108,230 Repayment of long-term debt and other obligations (50,582) (17,929) (2,989) | (140,325) Payment to shareholders and optionholders -- -- -- | (312,164) Transaction-related expenses -- -- -- | (15,903) Preferred stock redeemed -- -- -- | (2,400) Preferred stock dividends -- -- -- | (45) Proceeds from sale of common stock and stock options 3 -- -- | 15 -------- --------- -------- | --------- NET CASH (USED IN) PROVIDED BY | FINANCING ACTIVITIES (29,579) 26,071 21,031 | 12,408 -------- --------- -------- | --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,155) 4,139 (10,770) | 8,716 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,691 6,552 17,322 | 8,606 -------- --------- -------- | --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,536 $ 10,691 $ 6,552 | $ 17,322 ======== ========= ======== | =========
See accompanying notes. F-6 54 BELDEN & BLAKE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) MERGER On March 27, 1997, Belden & Blake Corporation (the "Company") signed a definitive merger agreement with TPG Partners II, L.P. ("TPG"), a private investment partnership, pursuant to which TPG and certain other investors acquired the Company in an all-cash transaction valued at $440 million (the "Acquisition"). Under the terms of the agreement, TPG and such investors paid $27 per share for all common shares outstanding plus an additional amount to redeem certain stock options held by directors and employees. The transaction was completed on June 27, 1997 and for financial reporting purposes has been accounted for as a purchase effective June 30, 1997. The Acquisition resulted in a new basis of accounting reflecting estimated fair values for assets and liabilities at that date. Accordingly, the financial statements for the periods subsequent to June 30, 1997 are presented on the Company's new basis of accounting, while the results of operations for the period ended June 30, 1997 reflects the historical results of the predecessor company. A vertical black line is presented to separate the financial statements of the predecessor and successor companies. The following table presents the actual results of operations for the years ended December 31, 1999 and 1998 and the unaudited pro forma results of operations for the year ended December 31, 1997 as if the Acquisition occurred at the beginning of 1996 (in thousands):
Pro Forma Actual (unaudited) -------------------------- ----------- 1999 1998 1997 -------- --------- -------- Total revenues $135,738 $ 154,839 $163,523 Net loss (18,303) (130,550) (19,970)
The unaudited pro forma information presented above assumes the transaction-related expenses were incurred prior to the period presented and does not purport to be indicative of the results that actually would have been obtained if the Acquisition had been consummated at the beginning of 1996 and is not intended to be a projection of future results or trends. In connection with the Acquisition, the Company entered into a Transaction Advisory Agreement with TPG pursuant to which TPG received a cash financial advisory fee of $5.0 million for services as financial advisor in connection with the Acquisition. The fee is included in the $16.8 million of transaction-related expenses. TPG also will be entitled to receive (but, at its discretion, may waive) fees of up to 1.5% of the transaction value for each subsequent transaction (a tender offer, acquisition, sale, merger, exchange offer, recapitalization, restructuring or other similar transaction) entered into by the successor company. Certain former officers entered into non-competition agreements with the Company dated March 27, 1997, which became effective contemporaneously with consummation of the Acquisition. These agreements have a term of 36 months and had a total value of $3.0 million at June 27, 1997. The obligation for these agreements is included in the balance sheet. F-7 55 (2) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS - -------- The Company operates in the oil and gas industry. The Company's principal business is the production, development, acquisition and gathering of oil and gas reserves. Sales of oil are ultimately made to refineries. Sales of natural gas are ultimately made to gas utilities and industrial consumers in Ohio, Michigan, West Virginia, Pennsylvania, New York and Kentucky. The price of oil and natural gas has a significant impact on the Company's working capital and results of operations. PRINCIPLES OF CONSOLIDATION AND FINANCIAL PRESENTATION - ------------------------------------------------------ The accompanying consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to conform to the presentation in 1999. USE OF ESTIMATES IN THE FINANCIAL STATEMENTS - -------------------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts. Significant estimates used in the preparation of the Company's financial statements which could be subject to significant revision in the near term include estimated oil and gas reserves. Although actual results could differ from these estimates, significant adjustments to these estimates historically have not been required. CASH EQUIVALENTS - ---------------- For purposes of the statements of cash flows, cash equivalents are defined as all highly liquid debt instruments purchased with an initial maturity of three months or less. CONCENTRATIONS OF CREDIT RISK - ----------------------------- Credit limits, ongoing credit evaluation and account monitoring procedures are utilized to minimize the risk of loss. Collateral is generally not required. Expected losses are provided for currently and actual losses have been within management's expectations. INVENTORIES - ----------- Inventories of material, pipe and supplies are valued at average cost. Crude oil and natural gas inventories are stated at the lower of average cost or market. PROPERTY AND EQUIPMENT - ---------------------- The Company utilizes the "successful efforts" method of accounting for its oil and gas properties. Under this method, property acquisition and development costs and certain productive exploration costs are capitalized while non-productive exploration costs, which include certain geological and geophysical costs, dry holes, expired leases and delay rentals, are expensed as incurred. Capitalized costs related to proved properties are depleted using the unit-of-production method. Depreciation, depletion and amortization of proved oil and gas properties is calculated on the basis of estimated recoverable reserve quantities. These estimates can change based on economic or other factors. No gains or losses are recognized upon the disposition of oil and gas properties except in extraordinary transactions. Sales proceeds are credited to the carrying value of the properties. Maintenance and repairs are expensed, and expenditures which enhance the value of properties are capitalized. Unproved oil and gas properties are stated at cost and consist of undeveloped leases. These costs are assessed periodically to determine whether their value has been impaired, and if impairment is F-8 56 indicated, the costs are charged to expense. During 1998, the Company recorded a $5.8 million impairment which wrote-down unproved oil and gas properties to their estimated fair value. Gas gathering systems are stated at cost. Depreciation expense is computed using the straight-line method over 15 years. Property and equipment are stated at cost. Depreciation of non-oil and gas properties is computed using the straight-line method over the useful lives of the assets ranging from 3 to 15 years for machinery and equipment and 30 to 40 years for buildings. When assets other than oil and gas properties are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to income as incurred, and significant renewals and betterments are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and the carrying amount of the asset. In performing the review for long-lived asset recoverability during 1998, the Company recorded $148.0 million and $6.9 million of impairments which wrote-down producing properties and other assets, respectively, to their estimated fair value. Fair value was based on estimated future cash flows to be generated by the assets, discounted at a market rate of interest. INTANGIBLE ASSETS - ----------------- Intangible assets totaling $13.0 million at December 31, 1999, include deferred debt issuance costs, goodwill and other intangible assets and are being amortized over 25 years or the shorter of their respective terms. REVENUE RECOGNITION - ------------------- Oil and gas production revenue is recognized as production and delivery take place. Oil and gas marketing revenues are recognized when title passes. Oilfield sales and service revenues are recognized when the goods or services have been provided. INCOME TAXES - ------------ The Company uses the liability method of accounting for income taxes. Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred income taxes also are recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes. STOCK-BASED COMPENSATION - ------------------------ The Company measures expense associated with stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Belden & Blake Corporation common stock held in the 401k plan is subject to variable plan accounting. The changes in share value are reported as adjustments to compensation expense. The reduction in share value in 1999 and 1998 resulted in a reduction in compensation expense of $858,000 and $403,000, respectively. (3) NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. ("SFAS") 133, "Accounting for Derivative Instruments and Hedging F-9 57 Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133, as amended, is effective for fiscal years beginning after June 15, 2000. On adoption, the provisions of SFAS 133 must be applied prospectively as the cumulative effect of an accounting change. The Company has not determined the impact that SFAS 133 will have on its financial statements and has not determined the timing of or method of adoption of SFAS 133. (4) SALE OF SUBSIDIARIES In August 1999, the Company and its wholly-owned subsidiary, The Canton Oil and Gas Company ("COG"), completed a stock sale of Target Oilfield Pipe and Supply ("TOPS"), a wholly-owned subsidiary of COG, to an oilfield supply company. The buyer purchased all of the issued and outstanding shares of capital stock of TOPS from COG. The Company recorded a $2.8 million loss on the sale in 1999. In November 1999, the Company sold Belden Energy Services Company ("BESCO"), its Ohio retail natural gas marketing subsidiary, to FirstEnergy Corp. ("FirstEnergy"). BESCO was the Company's retail natural gas marketing outlet in Ohio. In the future, that portion of the Company's Ohio natural gas production not committed to existing sales contracts will be sold on the wholesale market. The Company recorded a $1.3 million gain on the sale in 1999. (5) ACQUISITIONS The following acquisitions were accounted for as purchase business combinations. Accordingly, the results of operations of the acquired businesses are included in the Company's consolidated statements of operations from the date of the respective acquisitions. During 1998, the Company acquired working interests in oil and gas wells in Ohio, West Virginia, Michigan and New York for approximately $7.6 million. Estimated proved developed reserves associated with the wells totaled 8.8 Bcfe (billion cubic feet of natural gas equivalent) net to the Company's interest at the time of acquisition. The Company also acquired undeveloped properties and other assets for $4.2 million. On March 19, 1998, the Company entered into an agreement in principle with FirstEnergy to form an equally-owned joint venture to be named FE Holdings L.L.C. ("FE Holdings") to engage in the exploration, development, production, transportation and marketing of natural gas. Formation of the joint venture was subject to the negotiation and execution of a definitive joint venture agreement. The Company was unable to reach agreement with FirstEnergy regarding certain terms of the joint venture agreement and in June 1998, the Company determined it would not participate in the proposed joint venture. Costs of $373,000 related to the proposed formation of the joint venture and to due diligence associated with a proposed acquisition by FE Holdings were written-off to other nonrecurring expense in 1998. During 1997, the Company acquired working interests in oil and gas wells in Ohio, Pennsylvania, West Virginia and Michigan for approximately $13.5 million for the successor company's six months ended December 31, 1997 and $7.8 million for the predecessor company's six months ended June 30, 1997. Estimated proved developed reserves associated with the wells totaled 32.8 Bcf (billion cubic feet) of natural gas and 101,000 Bbls (barrels) of oil net to the Company's interest at the time of the acquisitions. The pro forma effects of 1999, 1998 and 1997 (predecessor and successor periods) acquisitions were not material. F-10 58 (6) OTHER NONRECURRING EXPENSE In August 1999, the Company abandoned an acquisition effort and a proposed public offering of a royalty trust. Approximately $880,000 of costs associated with these efforts were written off in 1999. In September 1999, the Company implemented a plan to reduce costs and improve operating efficiencies. The plan included actions to bring the Company's employment level in line with current and anticipated future staffing needs which resulted in staff reductions of approximately 10%. The Company recorded a charge of $2.4 million in 1999 for severance and other costs associated with implementing this plan. (7) DETAILS OF BALANCE SHEETS
DECEMBER 31, ----------------------- 1999 1998 -------- -------- (IN THOUSANDS) ACCOUNTS RECEIVABLE Accounts receivable $ 13,280 $ 17,859 Allowance for doubtful accounts (1,215) (1,430) Oil and gas production receivable 12,626 16,182 Current portion of notes receivable 610 593 -------- -------- $ 25,301 $ 33,204 ======== ======== INVENTORIES Oil $ 1,552 $ 1,710 Natural gas 27 974 Material, pipe and supplies 527 6,516 -------- -------- $ 2,106 $ 9,200 ======== ======== PROPERTY AND EQUIPMENT, GROSS OIL AND GAS PROPERTIES Producing properties $506,266 $507,652 Non-producing properties 7,078 7,040 Other 21,171 21,145 -------- -------- $534,515 $535,837 ======== ======== LAND, BUILDINGS, MACHINERY AND EQUIPMENT Land, buildings and improvements $ 6,592 $ 8,540 Machinery and equipment 17,650 20,011 -------- -------- $ 24,242 $ 28,551 ======== ======== ACCRUED EXPENSES Accrued expenses $ 9,500 $ 12,796 Accrued drilling and completion costs 615 4,217 Accrued income taxes 190 241 Ad valorem and other taxes 3,733 3,570 Compensation and related benefits 2,324 2,752 Undistributed production revenue 6,662 5,797 -------- -------- $ 23,024 $ 29,373 ======== ========
F-11 59 (8) LONG-TERM DEBT Long-term debt consists of the following (in thousands):
DECEMBER 31, --------------------- 1999 1998 -------- -------- Revolving line of credit $114,000 $154,000 Term loans 14,000 -- Senior subordinated notes 225,000 225,000 Other 180 276 -------- -------- 353,180 379,276 Less current portion 50,019 28,098 -------- -------- Long-term debt $303,161 $351,178 ======== ========
On June 27, 1997, the Company completed a private placement (pursuant to Rule 144A) of $225 million of 9 7/8% Senior Subordinated Notes, Series A, which mature on June 15, 2007. The notes were issued under an indenture which requires interest to be paid semiannually on June 15 and December 15 of each year, commencing December 15, 1997. The notes are subordinate to the senior revolving credit agreement and the term loans. In September 1997, the Company completed a registration statement on Form S-4 providing for an exchange offer under which each Series A Senior Subordinated Note would be exchanged for a Series B Senior Subordinated Note. The terms of the Series B Notes are the same in all respects as the Series A Notes except that the Series B Notes have been registered under the Securities Act of 1933 and therefore will not be subject to certain restrictions on transfer. The notes are redeemable in whole or in part at the option of the Company, at any time on or after June 15, 2002, at the redemption prices set forth below plus, in each case, accrued and unpaid interest, if any, thereon.
YEAR PERCENTAGE ---- ---------- 2002......................................... 104.938% 2003......................................... 103.292% 2004......................................... 101.646% 2005 and thereafter.......................... 100.000%
Prior to June 15, 2000, the Company may, at its option, on any one or more occasions, redeem up to 40% of the original aggregate principal amount of the notes at a redemption price equal to 109.875% of the principal amount, plus accrued and unpaid interest, if any, on the redemption date, with all or a portion of net proceeds of public sales of common stock of the Company; provided that at least 60% of the original aggregate principal amount of the notes remains outstanding immediately after the occurrence of such redemption; and provided, further, that such redemption shall occur within 60 days of the date of the closing of the related sale of common stock of the Company. The indenture under which the subordinated notes were issued contains certain covenants that limit the ability of the Company and its subsidiaries to incur additional indebtedness and issue stock, pay dividends, make distributions, make investments, make certain other restricted payments, enter into certain transactions with affiliates, dispose of certain assets, incur liens securing indebtedness of any kind other than permitted liens, and engage in mergers and consolidations. On June 27, 1997, the Company also entered into a senior revolving credit agreement with several lenders. These lenders committed, subject to compliance with the borrowing base, to provide the Company with revolving credit loans of up to $200 million, of which $25 million will be available for the F-12 60 issuance of letters of credit. The credit agreement is a senior revolving credit facility which is secured by substantially all of the Company's assets. The borrowing base is determined by an evaluation of the Company's proved developed reserves, proved undeveloped reserves and related processing and gathering assets and other assets of the Company, adjusted by the engineering committee of the bank in accordance with their standard oil and gas lending practices. If less than 75% of the borrowing base is utilized, the borrowing base will be redetermined annually. If more than 75% of the borrowing base is utilized, the borrowing base will be redetermined semiannually. The Company's borrowing base at December 31, 1998 was $170 million. On January 15, 1999, the Company's borrowing base was redetermined at $126 million. The Company had $154 million outstanding under this agreement at December 31, 1998 which resulted in a borrowing base deficiency of $28 million. The Company agreed with the lenders to reduce this deficiency by $14 million on March 22, 1999 and by the remaining $14 million on May 10, 1999. On March 22, 1999, the Company made the $14 million payment to reduce the outstanding amount under the credit agreement to $140 million. On May 10, 1999, the Company and its lenders further amended the credit agreement to increase the Company's borrowing base to $136 million, subject to redetermination in November 1999, and the Company paid $4 million to reduce the outstanding loan balance to $136 million. The funds for these payments were provided by internally generated cash flow and $14 million in term loans provided by Chase Manhattan Bank. The Company was further required to make additional payments of $5 million on the earlier of the receipt of aggregate proceeds from asset sales totaling $5 million or August 10, 1999 and $5 million on November 9, 1999, which would lower the borrowing base and outstanding balance to $126 million. The Company paid $5 million on July 29, 1999 and $6 million on September 10, 1999 to reduce the outstanding balance to $125 million at September 30, 1999. Future borrowing base revisions require approval from all lenders and any deficiency must be repaid within 30 days of the effective date of the redetermination. The amended agreement increased the interest rate to LIBOR (London Interbank Offering Rate) plus 2.5% and provided certain covenant ratio relief. The Company paid approximately $2 million in fees to the lenders and expenses associated with the amendment. On December 14, 1999, the Company and its bank group further amended the credit agreement. The revolving credit commitment in the amended agreement provides for a $75 million revolving portion which matures on June 27, 2002 and a $50 million term portion which matures on March 31, 2000. The borrowing base on the revolving portion will remain at $75 million until the earlier of (i) the sale of Peake Energy, Inc. ("Peake") (See Note 21) and (ii) the redetermination of the borrowing base in the ordinary course, pursuant to the terms of the existing credit agreement. The Company paid approximately $900,000 in fees to the lenders and expenses associated with the amendment and wrote off $1.9 million of unamortized deferred loan costs due to the modification of the borrowing base. The amended agreement also increased the interest rate from LIBOR plus 2.5% to LIBOR plus 3.5% until the $50 million term portion is paid in full and thereafter a range of LIBOR plus 2.5% to 3.0% based on the percent of the borrowing base usage. The amendment also replaced certain financial covenants with a minimum EBITDA (EBITDAX) test. Proceeds from the Peake sale will be used to repay and permanently reduce the revolving credit commitment by an amount equal to the proceeds up to $60 million and 25% of the proceeds in excess of $60 million. The reduction in the revolving credit commitment shall be applied, first, to the term portion and, second, to the revolving portion. In March 2000, the Company obtained the unanimous consent of its bank group to further amend the revolving credit agreement to establish a borrowing base of $62.7 million and to forego the May 2000 borrowing base redetermination. The next scheduled borrowing base redetermination is in November 2000. At December 31, 1999, the outstanding balance under the credit agreement was $114 million. This included $64 million under the revolving portion of the facility and $50 million under the term portion. The outstanding balances under the agreement incur interest at the Company's choice of several indexed rates, the most favorable being 9.50% at December 31, 1999. The Company's $14 million in F-13 61 term loans from Chase Manhattan Bank are due on January 1, 2001 with interest payable at LIBOR plus 2.5%. If the bank group materially reduces the borrowing base there is no assurance that the Company could meet the required repayment obligation. The Company expects to be able to meet its 2000 debt service requirements through internally generated cash flow, the sale of non strategic assets and additional debt. The credit agreement contains a number of covenants that, among other things, restricts the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, prepay other indebtedness or amend certain debt instruments, pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, change the business conducted by the Company or its subsidiaries, make capital expenditures or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. In addition, under the credit agreement, the Company is required to maintain specified financial ratios and tests, including minimum interest coverage ratios and maximum leverage ratios. The agreement requires a minimum working capital ratio of 1.00 to 1.00. As of December 31, 1999 the Company's working capital ratio was .45 to 1.00. As part of the May 10, 1999 amendment, the Company and its lenders have agreed to exclude the current portion of certain long term debt from this calculation. After making these adjustments the working capital ratio as of December 31, 1999 was 1.25 to 1.00. From time to time the Company may enter into interest rate swaps to hedge the interest rate exposure associated with the credit facility, whereby a portion of the Company's floating rate exposure is exchanged for a fixed interest rate. During October 1997, the Company entered into two interest rate swap arrangements covering $90 million of debt. The Company swapped $40 million of floating three-month LIBOR for a fixed rate of 7.485% (which includes an applicable margin of 1.5%) for three years, extendible at the institution's option for an additional two years. The Company also swapped $50 million of floating three-month LIBOR for a fixed rate of 7.649% (which includes an applicable margin of 1.5%) for five years. During June 1998, the Company entered into a third interest rate swap covering $50 million of debt. The Company swapped $50 million of floating rate three-month LIBOR for a fixed rate of 7.2825% (which includes an applicable margin of 1.5%) for three years. On December 27, 1999 the Company terminated $20 million of the third interest rate swap. Effective with the May 10, 1999 amendment to the credit agreement, the applicable margin relating to these swaps was increased from 1.5% to 2.5%. Effective with the December 14, 1999 amendment to the credit agreement, the applicable margin relating to these swaps was increased from 2.5% to 3.5%. On April 3, 1997, the Company gave notice of redemption of all of the outstanding 9.25% convertible subordinated debentures for 104% of face value. Redemption of these debentures occurred June 10, 1997 when holders of the debentures elected to convert them into 275,425 shares of common stock in the predecessor company. At December 31, 1999, the aggregate long-term debt maturing in the next five years is as follows: $50,019,000 (2000); $14,019,000 (2001); $64,019,000 (2002); $19,000 (2003); $4,000 (2004); and $225,100,000 (2005 and thereafter). (9) LEASES The Company leases certain computer equipment, vehicles and office space under noncancelable agreements with lease periods of one to five years. Rent expense amounted to $1.9 million, $2.2 million and $1.0 million for the successor company's years ended December 31, 1999 and 1998 and six months ended December 31, 1997, respectively, and $1.0 million for the predecessor company's six months ended June 30, 1997. Future commitments under leasing arrangements were not significant at December 31, 1999. F-14 62 (10) SHAREHOLDERS' EQUITY In November 1998 and 1997, the Company awarded 118,274 and 110,915 shares of successor company common stock, respectively, to employees as profit sharing and bonuses. These shares were issued in each subsequent year. On December 31, 1992, the Company issued 24,000 shares of Class II Serial Preferred Stock with a stated value of $100 per share. In preference to shares of predecessor company common stock, each share was entitled to cumulative cash dividends of $7.50 per year, payable quarterly. The Preferred Stock was subject to redemption at $100 per share at any time by the Company and was convertible into predecessor company common stock, at the holder's election, at any time after five years from the date of issuance at a conversion price of $15.00 per predecessor company common share. Holders of the Preferred Stock were entitled to one vote per preferred share. On March 31, 1997, the Company redeemed all of the outstanding Class II Series A preferred stock for $2.4 million in cash. (11) STOCK OPTION PLANS In connection with the Acquisition, certain executives of the predecessor company had agreed that they would not exercise or surrender certain stock options granted under the Company's 1991 stock option plan having an aggregate value of $1.8 million at June 27, 1997, based on the intrinsic value of the options (the difference between the exercise price of the options and a purchase price of $27 per share). These options were exchanged for 165,083 in new stock options of the successor company based on the intrinsic value of the predecessor company's options at the date of the transaction. As of December 31, 1999 there were 133,915 of these options outstanding. Under the Company's 1991 employee stock option plan the Company was authorized to issue up to 1,070,000 shares of common stock to officers and employees. All options outstanding under the 1991 plan were surrendered for cash in the Acquisition except for options to purchase 133,915 shares which are currently outstanding. No additional options may be granted under the 1991 plan. The Company has a 1997 non-qualified stock option plan under which it is authorized to issue up to 1,000,000 shares of common stock to officers and employees. The exercise price of options may not be less than the fair market value of a share of common stock on the date of grant. Options expire on the tenth anniversary of the grant date unless cessation of employment causes earlier termination. As of December 31, 1999, options to purchase 622,383 shares were outstanding under the plan. These options become exercisable as to one fourth of the shares one year from the date of grant and an additional one twelfth of the shares on every three month anniversary thereafter. The Company has a Non-Employee Directors Stock Option Plan authorizing the issuance of up to 120,000 shares of common stock. The exercise price of options under the Plan is equal to the fair market value on the date of grant. Options expire on the tenth anniversary of the grant date. The options become exercisable on the anniversary of the grant date at a rate of one third of the shares each year. No options may be granted under this plan and no options were outstanding at December 31, 1999. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123, "Accounting for Stock-Based Compensation" requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense is recognized when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant. There were no options granted in 1998. There were 303,491 options granted in 1999 and 318,892 options were repriced in 1999 which had an immaterial effect on compensation expense in 1999. F-15 63 Pro forma information regarding net income is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997 and 1999, respectively: risk-free interest rates of 6.1% and 6.2%; volatility factor of the expected market price of the Company's common stock of near zero; dividend yield of zero; and a weighted-average expected life of the option of seven years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The changes in net loss for the successor company's years ended December 31, 1999 and 1998 and six months ended December 31, 1997 were not material. The Company's pro forma information for the predecessor company's six months ended June 30, 1997 was a net loss of $12.4 million. The effects of applying Statement 123 for providing pro forma disclosures are not indicative of future amounts until the new rules are applied to all outstanding, nonvested awards. Stock option activity under the three plans consisted of the following:
SUCCESSOR COMPANY | PREDECESSOR COMPANY ------------------------ | ------------------------- WEIGHTED | WEIGHTED AVERAGE | AVERAGE NUMBER OF EXERCISE | NUMBER OF EXERCISE SHARES PRICE | SHARES PRICE --------- -------- | --------- -------- | BALANCE AT DECEMBER 31, 1996 | 803,500 16.31 Exercised | (937) 16.38 Surrendered | (598,063) 15.61 Re-quantified and repriced 165,083 $ .10 | (204,500) 18.34 Granted 652,624 10.82 | -- --------- | -------- BALANCE AT DECEMBER 31, 1997 817,707 8.66 | -- --------- | ======== BALANCE AT DECEMBER 31, 1998 817,707 8.66 | --------- | Granted 303,491 1.26 | Forfeitures (333,632) 10.82 | Exercised (31,268) .13 | Reissued and repriced (318,892) 10.82 | Reissued and repriced 318,892 .01 | --------- | BALANCE AT DECEMBER 31, 1999 756,298 .53 | ========= | OPTIONS EXERCISABLE AT DECEMBER 31, 1999 133,915 $ .10 | =========
The weighted average fair value of options granted during 1999 was $.50. No options were granted in 1998. The F-16 64 weighted average fair value of options granted during 1997 was $1.98. The exercise price for the options outstanding as of December 31, 1999 ranged from $.01 to $10.82 per share. At December 31, 1999 the weighted average remaining contractual life of the outstanding options is 9.3 years. (12) TAXES The (benefit) provision for income taxes on continuing operations includes the following (in thousands):
| PREDECESSOR SUCCESSOR COMPANY | COMPANY --------------------------------------- | ----------- SIX MONTHS | SIX MONTHS YEAR ENDED DECEMBER 31, ENDED | ENDED ----------------------- DECEMBER 31, | JUNE 30, 1999 1998 1997 | 1997 -------- -------- ------------ | ---------- | CURRENT | Federal $ -- $ (503) $ (345) | $(1,397) State -- -- (41) | (111) -------- -------- ------- | ------- -- (503) (386) | (1,508) DEFERRED | Federal (10,449) (69,976) (6,038) | 2,945 State (730) (5,726) (341) | 180 -------- -------- ------- | ------- (11,179) (75,702) (6,379) | 3,125 -------- -------- ------- | ------- TOTAL $(11,179) $(76,205) $(6,765) | $ 1,617 ======== ======== ======= | =======
The effective tax rate for continuing operations differs from the U.S. federal statutory tax rate as follows:
| PREDECESSOR SUCCESSOR COMPANY | COMPANY ----------------------------- | ----------- YEAR ENDED SIX MONTHS | SIX MONTHS DECEMBER 31, ENDED | ENDED -------------- DECEMBER 31, | JUNE 30, 1999 1998 1997 | 1997 ---- ---- ------------ | ---------- | Statutory federal income tax rate 35.0% 35.0% 35.0% | 35.0% Increases (reductions) in taxes resulting from: | State income taxes, net of federal tax | benefit 2.0 2.0 2.0 | (.8) Nonconventional fuel source tax credits -- -- -- | (3.8) Transaction-related expenses -- -- -- | (49.9) Statutory depletion -- -- 0.5 | -- Other, net 0.9 (0.1) (0.2) | -- ---- ---- ---- | ----- Effective income tax rate for the period 37.9% 36.9% 37.3% | (19.5)% ==== ==== ==== | =====
F-17 65 Significant components of deferred income tax liabilities and assets are as follows (in thousands):
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ Deferred income tax liabilities: Property and equipment, net $48,619 $55,017 Other, net 625 534 ------- ------- Total deferred income tax liabilities 49,244 55,551 Deferred income tax assets: Accrued expenses 1,446 2,178 Inventories 17 15 Net operating loss carryforwards 30,014 24,515 Tax credit carryforwards 699 744 Other, net 708 483 Valuation allowance (2,053) (1,976) ------- ------- Total deferred income tax assets 30,831 25,959 ------- ------- Net deferred income tax liability $18,413 $29,592 ======= ======= Long-term liability $20,419 $32,041 Current asset (2,006) (2,449) ------- ------- Net deferred income tax liability $18,413 $29,592 ======= =======
SFAS No. 109 requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. The valuation allowance at December 31, 1999 relates principally to certain net operating loss carryforwards which management estimates will expire before they can be utilized. At December 31, 1999, the Company had approximately $81 million of net operating loss carryforwards available for federal income tax reporting purposes. Approximately $1 million of the net operating loss carryforwards are limited as to their annual utilization as a result of prior ownership changes. These net operating loss carryforwards, if unused, will expire from 2001 to 2006. The remaining net operating loss carryforwards will expire in 2012 and 2019. The Company has alternative minimum tax credit carryforwards of approximately $700,000 which have no expiration date. The Company has approximately $700,000 of statutory depletion carryforwards, which have no expiration date. (13) PROFIT SHARING AND RETIREMENT PLANS The Company has a non-qualified profit sharing arrangement under which the Company contributes discretionary amounts determined by the compensation committee of its Board of Directors. Amounts are allocated to substantially all employees based on relative compensation. The Company contributed $845,000, $938,000 and $749,500 for the successor company's years ended December 31, 1999 and 1998 and six months ended December 31, 1997, respectively, and $588,900 for the predecessor company's six months ended June 30, 1997 to the profit sharing plan. The 1999 amount was paid in cash. For the 1998 and 1997 periods one half was paid in cash and one half was paid in shares of the Company's common stock contributed into each eligible employee's 401(k) plan account. Additional discretionary bonuses are also made. The Company has a qualified defined contribution plan (a 401(k) plan) covering substantially all of the employees of the Company. Under the plan, an amount equal to 2% of participants' compensation is contributed by the Company to the plan each year. Eligible employees may also make voluntary F-18 66 contributions which the Company matches $.50 for every $1.00 contributed up to 6% of an employee's annual compensation. Prior to January 1, 1998, the Company matched $.25 for every $1.00 contributed up to 6% of an employee's annual compensation. Retirement plan expense amounted to $830,000, $867,000 and $285,000 for the successor company's years ended December 31, 1999 and 1998 and six months ended December 31, 1997, respectively, and $266,000 for the predecessor company's six months ended June 30, 1997. The Company also has non-qualified deferred compensation plans which permit certain key employees to elect to defer a portion of their compensation. (14) COMMITMENTS AND CONTINGENCIES The Company is involved in various legal actions arising in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the financial position of the Company. (15) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
| PREDECESSOR SUCCESSOR COMPANY | COMPANY ------------------------------------------ | ----------- SIX MONTHS | SIX MONTHS YEAR ENDED DECEMBER 31, ENDED | ENDED ----------------------- DECEMBER 31, | JUNE 30, (IN THOUSANDS) 1999 1998 1997 | 1997 ------- ------- ------------ | ---------- | CASH PAID DURING THE PERIOD FOR: | Interest $34,426 $32,048 $13,867 | $4,153 Income taxes, net of refunds -- (1,970) (1,517) | 288 NON-CASH INVESTING AND FINANCING ACTIVITIES: | Acquisition of assets in exchange for | long-term liabilities 125 415 -- | 792 Non-compete agreement and related | obligation 705 -- -- | -- Debentures converted to common stock -- -- -- | 5,550
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of the financial instruments disclosed herein is not representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences, if any, of realization or settlement. The amounts in the financial statements for cash equivalents, accounts receivable and notes receivable approximate fair value due to the short maturities of these instruments. The recorded amounts of outstanding bank and other long-term debt approximate fair value because interest rates are based on LIBOR or the prime rate or due to the short maturities. The $225 million in senior subordinated notes had an approximate fair value of $108 million at December 31, 1999 based on rates available for similar instruments. The estimated fair value of interest rate swaps was an unrealized gain of $1.2 million at December 31, 1999 based on current market prices. From time to time the Company may enter into a combination of futures contracts, commodity derivatives and fixed-price physical contracts to manage its exposure to natural gas price volatility. The Company employs a policy of hedging gas production sold under New York Mercantile Exchange ("NYMEX") based contracts by selling NYMEX based commodity derivative contracts which are placed with major financial institutions that the Company believes are minimal credit risks. The contracts may take the form of futures contracts, swaps or options. Under the deferral method, gains and losses on F-19 67 these instruments are deferred on the balance sheet and are included as an adjustment to gas revenue for the production being hedged in the contract month. The Company incurred pre-tax gains on its hedging activities of $1.2 million in 1999, $1.5 million in 1998 and a loss on its hedging activities of $116,000 in 1997. As of December 31, 1999, the Company had hedged 9.1 Bcf of 2000 and 2001 natural gas production at a weighted average NYMEX price of $2.41 per Mcf (thousand cubic feet) which represented a net unrealized gain of $300,000. On February 22, 2000, the Company entered into a transaction which effectively terminated 2.1 Bcf of these hedges. As of February 29, 2000, the Company had hedges totaling 6.0 Bcf and an estimated net unrealized loss of $2.5 million on its natural gas hedging activities. (17) SUPPLEMENTARY INFORMATION ON OIL AND GAS ACTIVITIES The following disclosures of costs incurred related to oil and gas activities are presented in accordance with SFAS 69.
| PREDECESSOR SUCCESSOR COMPANY | COMPANY ---------------------------------------- | ----------- SIX MONTHS | SIX MONTHS YEAR ENDED DECEMBER 31, ENDED | ENDED ----------------------- DECEMBER 31, | JUNE 30, (IN THOUSANDS) 1999 1998 1997 | 1997 ------ ------- ------------ | ---------- | Acquisition costs | Proved properties $ -- $ 9,194 $13,501 | $ 9,249 Unproved properties 855 1,857 1,342 | 1,267 Developmental costs 186 30,090 21,822 | 11,322 Exploratory costs 6,442 9,982 5,980 | 4,380
The amounts reflected in the above table do not include the effects of purchase accounting which resulted from the Acquisition. See Note 1. PROVED OIL AND GAS RESERVES (UNAUDITED) The Company's proved developed and proved undeveloped reserves are all located within the United States. The Company cautions that there are many uncertainties inherent in estimating proved reserve quantities and in projecting future production rates and the timing of development expenditures. In addition, estimates of new discoveries are more imprecise than those of properties with a production history. Accordingly, these estimates are expected to change as future information becomes available. Material revisions of reserve estimates may occur in the future, development and production of the oil and gas reserves may not occur in the periods assumed, and actual prices realized and actual costs incurred may vary significantly from those used. Proved reserves represent estimated quantities of natural gas, crude oil and condensate that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made. Proved developed reserves are proved reserves expected to be recovered through wells and equipment in place and under operating methods being utilized at the time the estimates were made. The estimates of proved developed reserves have been reviewed by independent petroleum engineers. The estimates of proved undeveloped reserves were prepared by the Company's petroleum F-20 68 engineers and the December 31, 1998 and 1999 proved undeveloped reserves have been reviewed by independent petroleum engineers. The following table sets forth changes in estimated proved and proved developed reserves for the periods indicated:
SUCCESSOR COMPANY PREDECESSOR COMPANY TOTAL -------------------------- ---------------------------- --------------------------- OIL GAS OIL GAS OIL GAS (BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF) --------- ----------- ---------- ------------ ---------- ----------- DECEMBER 31, 1996 7,388,906 288,603,353 7,388,906 288,603,353 Extensions and discoveries 244,242 26,550,917 282,999 12,142,158 527,241 38,693,075 Purchase of reserves in place 78,149 20,093,436 71,905 13,191,547 150,054 33,284,983 Sale of reserves in place (12,780) (400,196) (21,196) (337,814) (33,976) (738,010) The Acquisition 6,514,982 276,776,629 (6,514,982) (276,776,629) Revisions of previous estimates (899,930) (16,909,297) (826,900) (24,075,426) (1,726,830) (40,984,723) Production (372,651) (14,466,129) (380,732) (12,747,189) (753,383) (27,213,318) --------- ----------- ---------- ------------ ---------- ----------- DECEMBER 31, 1997 5,552,012 291,645,360 -- -- 5,552,012 291,645,360 Extensions and discoveries 255,101 29,330,826 255,101 29,330,826 Purchase of reserves in place 33,899 20,295,868 33,899 20,295,868 Sale of reserves in place (21,209) (6,939,240) (21,209) (6,939,240) Revisions of previous estimates (808,599) 11,066,042 (808,599) 11,066,042 Production (768,415) (30,139,996) (768,415) (30,139,996) --------- ----------- ---------- ------------ ---------- ----------- DECEMBER 31, 1998 4,242,789 315,258,860 -- -- 4,242,789 315,258,860 Extensions and discoveries 12,530 416,442 12,530 416,442 Purchase of reserves in place -- -- -- -- Sale of reserves in place (29,445) (632,049) (29,445) (632,049) Revisions of previous estimates 3,185,892 18,636,407 3,185,892 18,636,407 Production (713,146) (26,988,410) (713,146) (26,988,410) --------- ----------- ---------- ------------ ---------- ----------- DECEMBER 31, 1999 6,698,620 306,691,250 -- -- 6,698,620 306,691,250 ========= =========== ========== ============ ========== =========== PROVED DEVELOPED RESERVES December 31, 1997 4,830,163 251,851,000 4,830,163 251,851,000 ========= =========== ========= =========== December 31, 1998 3,973,772 280,668,600 3,973,772 280,668,600 ========= =========== ========= =========== DECEMBER 31, 1999 5,897,504 267,941,800 5,897,504 267,941,800 ========= =========== ========= ===========
F-21 69 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES (UNAUDITED) The following tables, which present a standardized measure of discounted future net cash flows and changes therein relating to proved oil and gas reserves, are presented pursuant to SFAS No. 69. In computing this data, assumptions other than those required by the FASB could produce different results. Accordingly, the data should not be construed as representative of the fair market value of the Company's proved oil and gas reserves. The following assumptions have been made: - Future revenues were based on year-end oil and gas prices. Future price changes were included only to the extent provided by existing contractual agreements. - Production and development costs were computed using year-end costs assuming no change in present economic conditions. - Future net cash flows were discounted at an annual rate of 10%. - Future income taxes were computed using the approximate statutory tax rate and giving effect to available net operating losses, tax credits and statutory depletion. The standardized measure of discounted future net cash flows relating to proved oil and gas reserves is presented below:
DECEMBER 31, ---------------------------------------- 1999 1998 1997 --------- --------- --------- (IN THOUSANDS) Estimated future cash inflows (outflows) Revenues from the sale of oil and gas $ 957,046 $ 818,401 $ 876,464 Production and development costs (411,881) (340,321) (355,165) --------- --------- --------- Future net cash flows before income taxes 545,165 478,080 521,299 Future income taxes (124,561) (102,358) (130,306) --------- --------- --------- Future net cash flows 420,604 375,722 390,993 10% timing discount (203,716) (167,059) (171,273) --------- --------- --------- Standardized measure of discounted future net cash flows $ 216,888 $ 208,663 $ 219,720 ========= ========= =========
F-22 70 The principal sources of changes in the standardized measure of future net cash flows are as follows (the successor and predecessor periods are combined in 1997 for purposes of this presentation):
YEAR ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Beginning of year $208,663 $219,720 $259,229 Sale of oil and gas, net of production costs (54,059) (60,330) (61,088) Extensions and discoveries, less related estimated future development and production costs 1,233 30,821 54,979 Purchase of reserves in place less estimated future production costs -- 10,528 33,233 Sale of reserves in place less estimated future production costs (578) (3,373) (588) Revisions of previous quantity estimates 31,128 (673) (43,111) Net changes in prices and production costs 32,836 (30,512) (73,956) Change in income taxes (2,729) 24,977 19,618 Accretion of 10% timing discount 25,656 29,259 35,596 Changes in production rates (timing) and other (25,262) (11,754) (4,192) -------- -------- -------- End of year $216,888 $208,663 $219,720 ======== ======== ========
(18) INDUSTRY SEGMENT FINANCIAL INFORMATION The Company operates in one reportable segment, as an independent energy company engaged in producing oil and natural gas; exploring for and developing oil and gas reserves; acquiring and enhancing the economic performance of producing oil and gas properties and gathering natural gas for delivery to intrastate and interstate gas transmission pipelines. The Company's operations are conducted entirely in the United States. MAJOR CUSTOMERS - --------------- No customer accounted for more than 10% of consolidated revenue during the years ended December 31, 1999 and 1998 and the six months ended June 30, 1997 and December 31, 1997. F-23 71 (19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The results of operations for the four quarters of 1999 and 1998 are shown below (in thousands).
FIRST SECOND THIRD FOURTH ------- ------- ------- --------- 1999 ---- Sales and other operating revenues $34,253 $33,099 $30,686 $ 32,704 Gross profit 1,523 1,516 2,297 4,879 Net loss (4,157) (4,854) (7,691) (1,601) FIRST SECOND THIRD FOURTH ------- ------- ------- --------- 1998 ---- Sales and other operating revenues $39,126 $37,614 $34,803 $ 38,870 Gross loss (680) (3,773) (3,646) (4,092) Net loss (6,271) (8,230) (8,086) (107,963)(1)
(1) The net loss in the fourth quarter of 1998 includes pre-tax impairment losses of $160.7 million. See note 2. (20) SALE OF TAX CREDIT PROPERTIES In March 1998, the Company sold certain interests that qualify for the nonconventional fuel source tax credit. The interests were sold for approximately $730,000 in cash and a volumetric production payment under which 100% of the cash flow from the properties will go to the Company until approximately 10.8 Bcf of gas has been produced and sold. In addition to receiving 100% of the cash flow from the properties, the Company will receive quarterly incentive payments based on production from the interests. The Company has the option to repurchase the interests at a future date. (21) SUBSEQUENT EVENTS On March 17, 2000, the Company sold the stock of Peake, a wholly owned subsidiary, to North Coast Energy, Inc. ("North Coast"), an independent oil and gas company, with an effective date of January 1, 2000. The sale included substantially all of the Company's oil and gas properties in West Virginia and Kentucky. The sale resulted in net proceeds of approximately $69 million. At December 31, 1999, using SEC pricing parameters, Peake had proved developed reserves of approximately 66.5 Bcfe and proved undeveloped reserves of approximately 3.7 Bcfe. Peake's reserves represented 20.2% of the Company's total proved reserves. In March 2000, the Company obtained the unanimous consent of its bank group to further amend the revolving credit agreement to establish a borrowing base of $62.7 million and to forego the May 2000 borrowing base redetermination. The next scheduled borrowing base redetermination is in November 2000. F-24 EX-10.3.B 2 EXHIBIT 10.3(B) 1 Exhibit 10.3(b) RETIREMENT AND NONCOMPETITION AGREEMENT This Retirement and Noncompetition Agreement (this "AGREEMENT") is entered into as of May __, 1999, by and between Belden & Blake Corporation, an Ohio corporation (the "COMPANY") and Ronald L. Clements, a natural person ("CLEMENTS") and, with respect to SECTION 8 only, TPG Partners II, L.P. ("TPG"). RECITALS A. Clements is currently serving as the Chief Executive Officer of the Company and is a member of the Board of Directors of the Company. B. Clements desires to retire from his employment with the Company and from his positions as an officer and a director of the Company. C. The parties desire to enter into this Agreement to establish certain terms under which Clements is leaving the Company. NOW, THEREFORE, in consideration of the premises set forth above and the covenants contained in this Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by the parties, the parties hereby agree as follows: AGREEMENT 1. RETIREMENT DATE. Clements' retirement from his positions as an officer and a director of the Company and any other positions with the Company or any employee benefit plan or trust of the Company shall be effective as of the earlier of (i) the date upon which a new Chief Executive Officer commences employment with the Company, and (ii) June 30, 1999 (the "RETIREMENT DATE"). Notwithstanding the foregoing, Clements' employment with the Company shall terminate on June 30, 1999 (the "EFFECTIVE DATE"). 2. NONCOMPETITION PAYMENT. (a) PAYMENT. In consideration for Clements' undertaking in accordance with this Agreement, the Company shall pay to Clements a payment of Seven Hundred Twenty-Five Thousand Dollars ($725,000) (the "NONCOMPETITION PAYMENT"). The Noncompetition Payment shall be paid in three installments. The first installment of Three Hundred Fifty Thousand Dollars ($350,000) shall be paid on July 1, 1999. The second installment of Two Hundred Fifty Thousand Dollars ($250,000) shall be paid on January 3, 2000. The third installment of One Hundred Twenty-Five Thousand Dollars ($125,000) shall be paid on July 1, 2000. The Company will issue an IRS Form 1099 with respect to the Noncompetition Payment. (b) INDEMNIFICATION. Clements agrees that he will be solely responsible for all state and federal taxes, if any, associated with the Noncompetition Payment, and Clements agrees to indemnify the Company for, and to hold it harmless from, any liability, taxes, penalties, 2 costs or attorneys' fees it may incur in connection with any failure to withhold any tax, social security, FICA or any other amounts associated with the Noncompetition Payment to Clements. 3. RETIREMENT PAYMENTS AND BENEFITS. (a) SALARY PAYMENT. (i) Regardless of whether the Retirement Date is earlier than the Effective Date, Clements shall continue to earn and the Company shall continue to pay to Clements the prorated amount of his current annual base salary through the Effective Date (the "SALARY PAYMENT"). The Salary Payment shall be paid to Clements at the Company's regular payroll intervals. (ii) Clements acknowledges that he is responsible for paying any and all taxes relating to the Salary Payment. Notwithstanding the foregoing, in its discretion, the Company may withhold from the Salary Payment federal, state and other income taxes required to be withheld or paid under applicable law, and deduct appropriate amounts as may be required by applicable law. (b) HEALTH CARE BENEFITS. Clements shall be eligible to continue to participate, at his current participation and contribution levels, in the Company's health care programs during the two-year period beginning on the Effective Date and ending on the second anniversary of the Effective Date. (c) CLUB MEMBERSHIP. The Company shall pay, on behalf of Clements, Clements' monthly club membership dues to Glenmoor Country Club that become due and payable during the period beginning on the Effective Date and ending on the second anniversary of the Effective Date. The Company agrees that it shall not terminate Clements' membership to Glenmoor County Club prior to the second anniversary of the Effective Date. (d) DEFERRED STOCK BONUS PROGRAM. In accordance with Section 6(a) of that certain Belden & Blake Corporation Deferred Stock Bonus Program, upon the Effective Date, the Company shall exercise its option to cause the trustee to deliver to Clements within thirty (30) days of the Effective Date one or more stock certificates for the number of shares of common stock of the Company credited to Clements' Deferred Share Bonus Account. The parties agree that there are 4,345 shares of common stock in Clements' Deferred Stock Bonus Account. (e) NO OTHER PAYMENTS. Clements agrees and acknowledges that the foregoing payments and benefits described in this SECTION 3 and the Noncompetition Payment are the only amounts which he shall receive or be entitled to receive as of the Effective Date, and he waives any and all claims he may have to any other payments or benefits including, but not limited to, salary, wages, bonus or any other form of incentive or severance pay. More specifically, Clements agrees and acknowledges that by virtue of his decision to retire voluntarily, he is not entitled to any benefits or pay pursuant to any employment agreement between Clements and the Company, or the Severance Agreement dated as of October 25, 1996 2 3 between Clements and the Company, or pursuant to any other severance agreement or arrangement. 4. 1997 OPTIONS. The following options (the "1997 OPTIONS") granted to Clements under the Belden & Blake Corporation Stock Option Plan pursuant to the Nonqualified Stock Option Agreement dated June 27, 1997 (the "NONQUALIFIED OPTION AGREEMENT") are currently outstanding:
Number of Shares of Common Stock Date of Grant Underlying Option Exercise Price Vesting Schedule ------------- ----------------- -------------- ---------------- 6/27/97 137,366 $10.82 Options vest and are exercisable as to 34,341.5 shares on 6/27/98 and as to an additional 8,585.38 on each three month anniversary thereafter
5. ROLLOVER OPTIONS. The following options (the "ROLLOVER OPTIONS") granted to Clements under the Belden & Blake Corporation Stock Option Plan pursuant to the Employee Stock Option Agreements dated May 28, 1994, August 24, 1995 and August 26, 1996 all of which are amended by that certain letter agreement dated June 27, 1997 by and between the Company and Clements (collectively, the "ROLLOVER STOCK OPTION AGREEMENTS") are currently outstanding: Number of Shares of Common Stock UNDERLYING Option Exercise Price Vesting Schedule ------ -------------- ---------------- 31,168 $0.10 Fully Vested 6. ADDITIONAL STOCK OPTIONS. Clements does not own any options to purchase shares of common stock of the Company other than the 1997 Options and the Rollover Options. 7. OPTION PUT. The parties agree and acknowledge that (i) the Option Put set forth in Section 11 of the Rollover Stock Option Agreements pertains only to the Rollover Options and is not amended or terminated hereby and (ii) the 1997 Options do not contain an option put or any other right to require the Company to repurchase from Clements the 1997 Options. 8. TAG-ALONG RIGHT OF CLEMENTS. (a) PROPOSAL. Subject to SECTION 8(c) hereof, if TPG proposes to sell seventy-five percent (75%) or more of its holdings of the Company's common stock, on a fully-diluted, fully-converted basis, to a third-party offeror (a "PROPOSAL"), TPG shall deliver a notice (the "TAG-ALONG NOTICE") with respect to such Proposal to Clements summarizing the 3 4 pertinent information about the Proposal, including the purchase price (the "TAG-ALONG PRICE"), together with a copy of any writing between TPG and the third party offeror necessary to establish the terms of such Proposal. (b) ELECTION NOTICE. Clements shall have a period of ten (10) business days after delivery of the Tag-Along Notice within which to deliver written notice (the "ELECTION NOTICE") to TPG of Clements' desire to participate in the transaction described in the Proposal, in which event Clements will be entitled to sell to the third party offeror up to the number of shares he owns beneficially as a result of an exercise of any or all of his vested 1997 Options or is entitled to receive upon exercise of his vested 1997 Options. If Clements delivers the Election Notice to TPG within such ten (10) business day period he shall be obligated to sell the amount of shares designated in such Election Notice to the third party offeror pursuant to the terms and conditions of the Proposal, and the number of shares to be sold by TPG may be reduced accordingly. (c) LIMITATIONS ON TAG-ALONG RIGHT. (i) Notwithstanding anything herein to the contrary, Clements may not elect to have any shares included in such sale (1) if the exercise of his Tag-Along Right would result in a sale by TPG of less than seventy-five percent (75%) of its holdings of Company common stock, on a fully-diluted, fully-converted basis, to a third-party offeror, and (2) unless he takes all actions as the third party offeror shall reasonably request to vest in the third party offeror title to such shares free and clear of all liens, charges and encumbrances of any kind. (ii) Clements' Tag-Along Right described in this SECTION 8 is a one-time right only and such right shall be extinguished upon the earlier of (1) Clements' participation in a sale described in a Proposal or (2) Clements' failure to deliver an Election Notice within ten (10) business days of receiving a Proposal from TPG. TPG's obligations with respect to the delivery of a Tag-Along Notice to Clements shall terminate upon the extinguishment of Clements' Tag-Along Right pursuant to this Section 8(c)(ii). 9. EMPLOYMENT AGREEMENT. That certain Employment Agreement dated as of June 27, 1997 (the "EMPLOYMENT AGREEMENT") by and between the Company and Clements is hereby amended to delete Section 4(c) (Purchase Rights) in its entirety. 10. INTERESTS IN 401(k) PLAN AND DEFERRED COMPENSATION PLAN. Clements may continue to hold contributions made by him or on his behalf in the Belden & Blake 401(k) Profit Sharing Plan and pursuant to the Nonqualified Voluntary Deferred Compensation Agreement dated as of November 30, 1994 by and between Clements and the Company as amended by that certain Amendment dated as of May 24, 1999 by and between Clements and the Company (the "DEFERRED COMPENSATION PLAN"), subject to the express provisions of such plans. 11. COVENANTS OF CLEMENTS. 4 5 (a) NON-COMPETITION. For a period (the "COVENANT PERIOD"), commencing on the Effective Date and ending on the second anniversary of the Effective Date, Clements will not, directly or indirectly: (i) invest in (other than as a passive investor in securities of a publicly traded entity whose holdings therein do not exceed 5% of such securities outstanding or in real estate), engage in or be associated with as a consultant, employer, employee, agent, director, stockholder, partner, financial backer, affiliate or otherwise, the ownership or operation of any enterprise relating to the exploration, drilling and/or production of oil and/or gas in the Appalachian, Michigan and/or Illinois basins; provided, however, that if the agreement contained in this subsection 10(a)(i) is more restrictive than permitted by the law in the jurisdiction in which the enforcement of this Agreement is sought, such agreement shall be limited to the extent limited by law; or (ii) employ, solicit for employment, or endeavor in any way to entice away from employment by the Company or any of its affiliates, any person who is employed on the date hereof or during the Covenant Period by any of them, or (ii) engage, solicit for engagement, or endeavor in any way to entice away from the engagement of the Company or any of its affiliates any client or potential client of the Company on the date hereof or during the Covenant Period. (b) TRADE SECRETS. Clements will not use or disclose any Trade Secrets (as defined under applicable law) of the Company, its parent or any of their respective subsidiaries, for so long as the pertinent information or data remain Trade Secrets, whether or not the Trade Secrets are in written or tangible form. 12. RELEASE. (a) RELEASE. As consideration for the payments and benefits described herein, Clements hereby releases the Company and its predecessors, successors, affiliates and their respective officers, directors, employees, agents, shareholders, attorneys, representatives and assigns from any and all claims or lawsuits (including, for example, but without limitation, equal employment claims, wrongful discharge claims, breach of contract and tort claims, and claims under the Age Discrimination in Employment Act) he may have that are based on employment of Clements by the Company, the termination of such employment, or on any other event or omission occurring prior to the date of this Agreement. (b) CIVIL CODE SECTION 1542. Clements waives any and all rights he may have under California Civil Code Section 1542 or any other comparable provision of state or federal law. Section 1542 provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. 5 6 Notwithstanding the provisions of Section 1542, and for the purpose of implementing a full and complete release and discharge of all claims, Clements expressly acknowledges that this release is intended to include all claims which Clements does not know or suspect to exist in his favor at this time, and that this release contemplates extinguishment of such claims. 13. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement shall be governed by the laws of the State of Ohio, without regard to conflict of laws principles. (b) MODIFICATIONS AND AMENDMENTS. This Agreement may not be modified, changed or supplemented, nor may any obligations hereunder be waived, except by written instrument signed by the party to be charged. (c) ENTIRE AGREEMENT. This Agreement sets forth the entire agreement between the parties with respect to the subject matter hereof and, with the exception of the Employment Agreement (as amended hereby), the Nonqualified Option Agreement, the Rollover Stock Option Agreements, the Deferred Compensation Plan, each of which shall remain in full force and effect, supersedes all prior written or oral and all contemporaneous oral agreements, statements and understandings by and between the Company and Clements. Clements acknowledges that he is not relying on any statement or representation of the Company or Texas Pacific Group, or their respective employees or agents with respect to the subject matter, basis or effect of this Agreement. (d) SEVERABILITY. In the event that any provision of this Agreement is found to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and all other provisions of this Agreement shall be deemed valid and enforceable to the maximum extent possible. (e) NOTICES. Any notice, demand or other communication required, permitted or desired to be given hereunder shall be in writing and shall be deemed effectively given upon personal delivery, facsimile transmission (with confirmation of receipt), delivery by reputable overnight delivery service (delivery, postage or freight charges prepaid) or on the fourth day following deposit in the United States mail (if sent by certified or registered mail, return receipt requested, delivery, postage or freight charges prepaid), in each case duly addressed to the Company at its headquarters or to Employee at his address of record listed with the Company. (f) HEADINGS. The section headings herein are intended for reference and shall not by themselves determine the construction or interpretation of this Agreement. (g) CONSTRUCTION. This Agreement shall be construed without regard to any presumption or rule requiring construction against the party causing such instrument or any portion thereof to be drafted. No rule of strict construction will be applied for or against either of the parties hereto. 6 7 (h) COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be an original but all of which shall constitute one and the same instrument. (i) EFFECT ON SUCCESSORS IN INTEREST. This Agreement shall be binding upon the parties and upon their heirs, administrators, representatives, executors and permitted assigns, and shall inure to the benefit of the parties and each of them, and to their heirs, administrators, representatives, executors and assigns. (j) ARBITRATION. Any dispute regarding the application, interpretation or breach of this Agreement or pertaining to Clements' employment or termination of employment with the Company shall be resolved by final and binding arbitration before the American Arbitration Association ("AAA") in accordance with AAA's National Rules for the Resolution of Employment Disputes. Attorney's fees and costs and may be awarded, in the discretion of the Arbitrator, to the prevailing party in any dispute, and any resolution, opinion or order of the Arbitrator may be entered as a judgment in a court of competent jurisdiction. (k) REVOCATION PERIOD. Clements shall have twenty-one (21) days from receipt of this Agreement to consider this Agreement, and seven (7) days following the signing of this Agreement to revoke it in writing, and this Agreement shall not be effective or enforceable until the revocation period has expired. (l) ACKNOWLEDGMENT. Clements acknowledges that he fully understands his right to discuss this Agreement with an attorney, that he has carefully read and fully understands this entire Agreement and that he is voluntarily entering into this Agreement. 14. EXHIBITS. Attached hereto are true, complete and accurate copies of the following documents concerning the 1997 Options and the Rollover Options: (a) EXHIBIT A - Belden & Blake Corporation Stock Option Plan; (b) EXHIBIT B - Form of Employee Stock Option Agreement used for the Employee Stock Option Agreements dated May 28, 1994, August 24, 1995 and August 26, 1996 and the Letter Agreement dated June 27, 1997 by and between the Company and Clements amending the same; and (c) EXHIBIT C - Nonqualified Stock Option Agreement dated June 27, 1997. 7 8 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement effective as of the date set forth above. RONALD L. CLEMENTS Dated: May 24, 1999 /s/ Ronald L. Clements ------------------------------- Ronald L. Clements BELDEN & BLAKE CORPORATION, AN OHIO CORPORATION Dated: May 26, 1999 By: /s/ Ronald E. Huff ---------------------------- Title: President and CFO ------------------------- Name: Ronald E. Huff With respect to SECTION 8 only TPG PARTNERS II, L.P. By: TPG GenPar II, L.P. By: TPG Advisors II, Inc. Dated: May 24, 1999 By: /s/ David M. Stanton ---------------------------- Title: Vice-President ------------------------- 8 EX-10.7 3 EXHIBIT 10.7 1 Exhibit 10.7 BELDEN & BLAKE CORPORATION 1999 CHANGE IN CONTROL PROTECTION PLAN FOR KEY EMPLOYEES Article I. GENERAL STATEMENT OF PURPOSE. This Belden & Blake Corporation 1999 Change in Control Severance Pay Plan for Key Employees is designed to assure fair treatment of Key Employees (as defined below) in the event of a Change in Control (as defined below). In such circumstances, it would permit Key Employees to make critical career decisions in an atmosphere free of time pressure and financial uncertainty, increasing their willingness to remain with Belden & Blake Corporation notwithstanding the outcome of a possible Change in Control. Article II. DEFINITIONS. Where the following words and phrases appear in the Plan, they shall have the respective meanings set forth below, unless their context clearly indicates otherwise: Section 2.1 APPLICABLE PERIOD. Each Key Employee shall be notified in writing of his or her Applicable Period. Section 2.2 BASE SALARY. The term "Base Salary" shall mean, with respect to each Key Employee, the monthly rate of base compensation of such Key Employee in effect immediately prior to the Change in Control or at such higher rate as may be in effect immediately prior to the Key Employee's termination of employment. "Base Salary" shall include any portion of the Key Employee's annual base compensation the receipt of which the Key Employee has elected to defer. Section 2.3 BOARD. The term "Board" shall mean the board of directors of the Corporation. Section 2.4 CAUSE. The term "Cause" shall mean that, prior to any termination of employment pursuant to Section 3.1, the Key Employee shall have committed: (i) (a) an intentional act of fraud, embezzlement or theft in connection with his or her duties or in the course of his employment with the Company; (b) intentional wrongful damage to property of the Company; or (c) intentional wrongful disclosure of secret processes or confidential information of the Company; and (ii) and any such act shall have been materially harmful to the Company. For purposes of the Plan, no act or failure to act on the part of the Key Employee shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done or omitted to be done by the Key Employee not in good faith and without reasonable belief that his or her action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Key Employee shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the Key Employee a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the Board then in office at a meeting of the Board called and held for such purpose, after reasonable notice to the Key Employee and an opportunity for the Key Employee, together with his counsel (if the Key Employee chooses to have counsel present at such meeting), to be heard before the 2 Board, finding that, in the good faith opinion of the Board, the Key Employee had committed an act constituting "Cause" as herein defined and specifying the particulars thereof in detail. Nothing herein will limit the right of the Key Employee or his beneficiaries to contest the validity or propriety of any such determination. Section 2.5 CHANGE IN CONTROL. The term "Change in Control" shall mean the following and shall be deemed to occur if: (i) Prior to the occurrence of an underwritten public offering of the Company's equity securities, any of the following events occurs: (A) Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended) (each, a "Person"), other than a Permitted Holder, becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of 50% or more of either the then outstanding shares of common stock ("Outstanding Common Stock") or the combined voting power of the Corporation's then outstanding Voting Stock; or (B) Consummation by the Corporation of the sale or other disposition by the Corporation of all or substantially all of the Corporation's assets or a merger, consolidation or other reorganization of the Corporation with any other Person, other than: (3) a merger, consolidation or other reorganization that would result in the Voting Stock of the Corporation outstanding immediately prior thereto (or, in the case of a reorganization or merger or consolidation that is preceded or accomplished by an acquisition or series of related acquisitions by any person, by tender or exchange offer or otherwise, of Voting Stock representing 50% or more of the combined voting power of all securities of the Corporation, immediately prior to such acquisition or the first acquisition in such series of acquisitions) continuing to represent, either by remaining outstanding or by being converted into voting securities of another entity, more than 50% of the combined voting power of the Voting Stock of the Corporation or such other entity outstanding immediately after such reorganization or merger or consolidation (or series of related transactions involving such a reorganization or merger or consolidation), or (4) a merger, consolidation or other reorganization effected to implement a recapitalization or reincorporation of the Corporation (or similar transaction) that does not result in a material change in beneficial ownership of the Voting Stock of the Corporation or its successor. 3 (ii) following the occurrence of an underwritten public offering of the Corporation's equity securities, any of the following events occur: (A) the acquisition in one or more transactions by any Person, other than a Permitted Holder, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of greater than thirty percent (30%) of the Outstanding Common Stock or the Corporation's Voting Stock; or (B) the consummation of a merger, reorganization, consolidation, share exchange, transfer of assets or other transaction having similar effect involving the Corporation, unless, following such transaction, stock possessing at least fifty percent (50%) of the Outstanding Common Stock and the outstanding Voting Stock of the Corporation resulting from such transaction is beneficially owned, directly or indirectly, by Permitted Holders, or Persons who were beneficial owners of the Outstanding Common Stock and the Corporation's Voting Stock, respectively, immediately prior to such transaction; or (C) individuals who are members of the Board of the Corporation as of the Effective Date of this Agreement (the "Incumbent Directors") cease for any reason to constitute at least a majority of the members of the Board; provided, however, that any individual becoming a director subsequent to the date of this Agreement whose appointment to the Board or nomination for election by the Corporation was approved by a vote of at least a majority of the Incumbent Directors then in office (unless such appointment or election was at the request of an unrelated third party who has taken steps reasonably calculated to result in a Change in Control as described in paragraphs (A) or (B) above and who has indicated publicly an intent to seek control of the Corporation) shall be treated from the date of his or her appointment or election as an Incumbent Director; or (D) consummation of a complete liquidation or dissolution of the Corporation. For purposes of this Agreement, "Permitted Holders" means (i) TPG Partners II, L.P., TPG Parallel II, L.P. and TPG Investors II, L.P. (the "Investors"), (ii) any investment partnership or fund management by the principals of TPG II, (iii) any partners of the Investors, (iv) members of the immediate family of the persons described in (iii) and trusts for the benefit of members of their immediate family, (iv) the respective affiliates (within the meaning ascribed to such term in Rule 405 of the Securities Act of 1933, as amended) of Persons described in this Section 2.5, and (v) any Person acting in the capacity of an underwriter in connection with a public or private offering of the 4 Corporation's equity securities. Notwithstanding any provision of this Section 2.5 to the contrary, a Change in Control shall not be deemed to occur as a result of the Company's formation of a royalty trust or the transfer of assets of the Company to such a royalty trust. Section 2.6 CODE. The term "Code" shall mean the Internal Revenue Code of 1986, as amended. Section 2.7 COMMITTEE. The term "Committee" shall mean the Compensation Committee of the Board. Section 2.8 COMPANY. The term "Company" shall mean the Corporation and its Subsidiaries. Section 2.9 CORPORATION. The term "Corporation" shall mean the Belden & Blake Corporation, an Ohio corporation, and any Successor. Section 2.10 DATE OF TERMINATION. The term "Date of Termination" shall mean the effective date of a Key Employee's termination of employment other than termination for Cause. Section 2.11 EFFECTIVE DATE. The term "Effective Date" shall mean August 12, 1999. Section 2.12 KEY EMPLOYEE. The term "Key Employee" shall mean each of the employees of the Company who is notified in writing of his or her eligibility to participate in this Plan. Notwithstanding the foregoing, employees who would otherwise be Key Employees shall not be Key Employees for purposes of the Plan if they have entered into an employment agreement, severance agreement or similar arrangement with the Company providing for the payment of severance compensation in specified circumstances following a Change in Control. Section 2.13 PLAN. The term "Plan" shall mean Belden & Blake Corporation 1999 Change in Control Protection Plan for Key Employees. Section 2.14 SEVERANCE PAY. The term "Severance Pay" shall mean the amount payable as set forth in Section 3.2 of the Plan. Section 2.15 SUBSIDIARY. The term "Subsidiary" shall mean an entity in which the Corporation directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock. Section 2.16 SUCCESSOR. The term "Successor" shall mean another corporation or unincorporated entity or group of corporations or unincorporated entities that acquires ownership, directly or indirectly, of all or substantially all of the assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise. Section 2.17 VOTING STOCK. The term "Voting Stock" shall mean securities entitled to vote generally in the election of directors. Article III. SEVERANCE BENEFITS Section 3.1 ELIGIBILITY. (a) A Key Employee will be eligible for Severance Pay under the Plan if within six (6) months prior to the occurrence of a Change of Control or within two (2) years after the occurrence of a Change in Control: (i) The Key Employee's employment with the Company is terminated by the Company other than for Cause; or (ii) The Key Employee resigns from his or her employment with the Company following the occurrence of any of the following events: (A) A reduction in the Key Employee's Base Salary in effect immediately prior to the Change in Control or a material reduction or termination of medical benefit coverage to which the Key Employee or his dependents were entitled immediately prior to the Change in Control; 5 or (B) The Company requires the Key Employee to change his or her principal location of work to any location which is in excess of 40 miles from the location thereof immediately prior to the Change in Control; or (C) a substantial and adverse change in the Key Employee's status or position as a key employee of the Company, or a substantial reduction in the duties and responsibilities previously exercised by the Key Employee, except in connection with the termination of the Key Employee's employment for Cause or permanent disability, or as a result of the Key Employee's death. (b) Notwithstanding the provisions of Section 3.1(a), a Key Employee will not be eligible for Severance Pay under the Plan if the Key Employee's employment with the Company is terminated by the Company prior to the occurrence of a Change in Control under circumstances constituting "cause" as defined in the Belden & Blake Corporation 1999 Severance Pay Plan. Section 3.2 SEVERANCE PAY. Each Key Employee who is terminated under the circumstances described in Section 3.1 shall, within five (5) business days after such termination, receive Severance Pay from the Company in a lump sum payment (the "Severance Payment") in an amount equal to the Key Employee's Base Salary times the number of months in the Applicable Period. Section 3.3 LIMITATION AND INDEMNIFICATION. (a) Notwithstanding anything in the Plan to the contrary, the Company shall not be obligated to pay to any Key Employee any amount of money which is in excess of the then maximum amount which the Company can deduct for federal income tax purposes. (b) Without limiting the generality of paragraph (a) of this Section, if any Key Employee is a "disqualified individual", as defined in Section 280G(c) of the Code, the present value of payments under the Plan made to the Key Employee shall not in the aggregate be greater than the excess, if any, of (i) 299% of the Key Employee's "base amount", as determined under Section 280G of the Code, over (ii) the aggregate present value of all payments outside of this Plan that are in the nature of compensation (other than the payments under the Plan) to or for the Key Employee's benefit that are considered "contingent on a change" in ownership or control of the Corporation as determined under Section 280G(b)(2) of the Code. If the application of the preceding sentence should require a reduction in benefits, such reduction shall be implemented by reducing any cash benefits to the extent necessary. In each case, the reductions shall be made starting with the latest payment. In no event, however, will any benefit be reduced to the extent such benefit is specifically excluded by Section 280G(b) of the Code as a "parachute payment" or as an "excess parachute payment". Any decisions regarding the requirement or implementation of such reductions shall be made by tax counsel selected by the Corporation's independent accountants and acceptable to the Key Employee. (c) Unless otherwise prohibited by applicable law, if, notwithstanding the application of paragraph (b) of this Section, an amount paid to the Key Employee under the Plan is subject to the excise tax imposed by Section 4999 of the Code, the Company shall pay to the Key Employee an additional amount in cash (the "Additional Payment") equal to the amount 6 necessary to cause the aggregate remuneration received by the Key Employee under the Plan, including such additional cash payment (net of all federal, state and local income taxes and all taxes payable as the result of the application of Sections 280G and 4999 of the Code to be equal to the aggregate remuneration the Key Employee would have received, excluding such Additional Payment (net of all federal, state and local income taxes), as if Sections 280G and 4999 of the Code had not been enacted into law. Section 3.4 MITIGATION. A Key Employee shall not be required to mitigate the amount of any Severance Payment provided for in the Plan by seeking other employment or otherwise. Section 3.5 TIMING OF SEVERANCE PAY, ETC. Severance Pay and any Additional Payment shall not be included as earnings for the purpose of calculating contributions or benefits under any employee benefit plan of the Company. Severance Pay and the Additional Payment shall not be made from any benefit plan funds, and shall constitute an unfunded unsecured obligation of the Company. Severance Pay shall be paid in a lump sum on the Date of Termination or promptly thereafter. The Additional Payment shall be paid in a lump sum as soon as practicable after the amount of such Payment has been calculated. Severance Pay and the Additional Payment shall be net of any income, excise or employment taxes which are required to be withheld from such payment. Section 3.6 RELEASE. Payment of the Severance Pay and any Additional Payment as set forth in Section 3.2 and Section 3.3 (c) respectively, to a Key Employee is conditioned upon the Key Employee executing and delivering a release satisfactory to the Corporation releasing the Company from any and all claims, demands, damages, actions and/or causes of action whatsoever, which he or she may have had on account of the termination of his or her employment, including, but not limited to claims of discrimination, including on the basis of sex, race, age, national origin, religion, or handicapped status (with all applicable periods during which the Employee may revoke the release or any provision thereof having expired), and any and all claims, demands and causes of action for retirement (other than under the Belden & Blake Corporation Employees 401(k) Profit Sharing Plan or under any "welfare benefit plan" of the Company (as the term "welfare benefit plan" is defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended)), severance or other termination pay. Such release shall not, however, apply to the ongoing obligations of the Company arising under the Plan, or rights of indemnification the Employee may have under the Company's policies or by contract or by statute. Section 3.7 CONFIDENTIALITY; CONFIDENTIAL INFORMATION. Payment of Severance Pay and any Additional Payment as set forth in Section 3.2 and Section 3.3(c), respectively, to a Key Employee is conditioned upon the Key Employee agreeing in writing with the Company that: (a) The Key Employee acknowledges and agrees that in the performance of his of her duties as an employee of the Company, he or she was brought into frequent contact with, had access to, and became informed of confidential and proprietary information of the Company and/or information which is a trade secret of the Company (collectively, "Confidential Information"), as more fully described in Subsection (b) of this Section. The Key Employee acknowledges and agrees that the Confidential Information of the Company gained by the Key Employee during his association with the Company was developed by and/or for the 7 Company through substantial expenditure of time, effort and money and constitutes valuable and unique property of the Company. (b) The Key Employee will keep in strict confidence, and will not, directly or indirectly, at any time, disclose, furnish, disseminate, make available, use or suffer to be used in any manner any Confidential Information of the Company without limitation as to when or how the Key Employee may have acquired such Confidential Information. The Key Employee specifically acknowledges that Confidential Information includes any and all information, whether reduced to writing (or in a form from which information can be obtained, translated, or derived into reasonably usable form), or maintained in the mind or memory of the Key Employee and whether compiled or created by the Company, which derives independent economic value from not being readily known to or ascertainable by proper means by others who can obtain economic value from the disclosure or use of such information, that reasonable efforts have been put forth by the Company to maintain the secrecy of Confidential Information, that such Confidential Information is and will remain the sole property of the Company, and that any retention or use by the Key Employee of Confidential Information after the termination of the Key Employee's employment with and services for the Company shall constitute a misappropriation of the Company's Confidential Information. (c) The Key Employee further agrees that he or she shall return, within ten (10) days of the effective date of his or her termination as an employee of the Company, in good condition, all property of the Company then in his or her possession, including, without limitation, (i) property, documents and/or all other materials (including copies, reproductions, summaries and/or analyses) which constitute, refer or relate to Confidential Information of the Company, (ii) keys to Company property, (iii) files and (iv) blueprints or other drawings. (d) The Key Employee further acknowledges and agrees that his or her obligation of confidentiality shall survive until and unless such Confidential Information of the Company shall have become, through no fault of the Key Employee, generally known to the public or the Key Employee is required by law (after providing the Company with notice and opportunity to contest such requirement) to make disclosure. The Key Employee's obligations under this Subsection are in addition to, and not in limitation or preemption of, all other obligations of confidentiality which the Key Employee may have to the Company under general legal or equitable principles or statutes. Article IV. SUCCESSORS, ASSIGNMENT, REMEDIES AND WITHHOLDING TAXES Section 4.1 SUCCESSORS AND BINDING EFFECT. (a) The Company shall require any Successor to assume and agree to perform the obligations under the Plan in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. The Plan shall be binding upon and inure to the benefit of the Company and any Successor to the Company, but shall not otherwise be assignable, transferable or delegable by the Company. (b) The rights under the Plan shall inure to the benefit of and be enforceable by the Key Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees and/or legatees. (c) The rights under the Plan are personal in nature and neither the Company nor any Key Employee shall, without the consent of the other, assign, transfer or delegate the Plan or any rights or obligations hereunder except as expressly provided in this Section. Without limiting the 8 generality of the foregoing, a Key Employee's right to receive payments hereunder shall not be assignable, transferable or delegable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by his or her will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section, the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. (d) The obligation of the Company to make payments hereunder shall represent an unsecured obligation of the Company. (e) The Corporation and each Key Employee recognize that each party will have no adequate remedy at law for breach by the other of any of the agreements contained herein and, in the event of any such breach, the Corporation and each Key Employee hereby agree and consent that the other shall be entitled to a decree of specific performance, mandamus or other appropriate remedy to enforce performance of obligations under the Plan. Section 4.2 WITHHOLDING OF TAXES. The Company may withhold from any amounts payable under the Plan all federal, state, city or other taxes as shall be required pursuant to any law or government regulation or ruling. Article V. DURATION, AMENDMENT AND TERMINATION Section 5.1 DURATION. If a Change in Control has not occurred, the Plan shall expire three (3) years from the Effective Date, unless extended for an additional period or periods by resolution adopted by the Board in its discretion at any time during the term of the Plan. Section 5.2 AMENDMENT. The Corporation reserves the right, at any time prior to the occurrence of a Change in Control, to amend, modify, change or terminate this Plan or any award hereunder at any time with or without notice or any liability to Key Employees. The Plan shall not be amended, modified, changed or terminated after the occurrence of a Change in Control without the written consent of each Key Employee. Article VI. ADMINISTRATION OF THE PLAN Section 6.1 IN GENERAL. For the purposes of the Employee Retirement Income Security Act of 1974, the Plan shall be administered by the Corporation, which shall be named fiduciary under the Plan. The Corporation shall have the sole and absolute discretion to interpret where necessary all provisions of the Plan (including, without limitation, by supplying omissions from, correcting deficiencies in, or resolving inconsistencies or ambiguities, in the language of the Plan), to determine the rights and status under the Plan of Key Employees or other persons, to resolve questions or disputes arising under the Plan and to make any determinations with respect to the benefits payable hereunder and the persons entitled thereto as may be necessary for the purposes of the Plan. Without limiting the generality of the forgoing, the Corporation is hereby granted the authority (i) to determine whether a particular employee is a "Key Employee" under the Plan and (ii) to determine whether a particular Key Employee is eligible for Severance Pay and any Additional Payment under the Plan. Section 6.2 DELEGATION OF DUTIES. The Corporation may delegate any of its administrative duties, including, without limitation, duties with respect to the processing, review, investigation, approval and payment of Severance Pay and any Additional Payment, to named administrator or administrators. 9 Section 6.3 REGULATIONS. The Corporation shall promulgate any rules and regulations it deems necessary in order to carry out the purposes of the Plan or to interpret the terms and conditions of the Plan; provided, however, that no rule, regulation or interpretation shall be contrary to the provisions of the Plan. Section 6.4 CLAIMS PROCEDURE. The Corporation shall determine the rights of any employee of the Company to any Severance Pay or an any Additional Payment hereunder. (a) Any employee or former employee of the Company who believes that he or she is entitled to receive Severance Pay and any Additional Payment under the Plan, including other than that initially determined by the Corporation, may file a claim in writing with the Vice President of Human Resources of the Corporation. The Corporation shall, no later than ninety (90) days after the receipt of a claim, either allow or deny the claim by written notice to the claimant. If a claimant does not receive written notice of the Corporation's decision on his or her claim within such 90-day period, the claim shall be deemed to have been denied in full. A denial or partial of a claim by the Company shall be dated (the "Determination Date"), signed by the Corporation and written in a manner calculated to be understood by the claimant and shall include: (i) the specific reason or reasons for the denial; (ii) specific reference to pertinent Plan provisions on which the denial is based; (iii) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure. (b) A claimant whose claim is denied (or his of her duly authorized representative) may, within sixty (60) days after receipt of denial of his or her claim, request a review of such denial by the Corporation by filing with the Secretary of the Corporation a written request for review of his or her claim. If the claimant does not file a request for review with the Corporation within such 60-day period, then the claimant shall be deemed to have acquiesced in the original decision of the Corporation on his or her claim. If a written request for review is so filed within such 60-day period, then the Corporation shall conduct a full and fair review of such claim. During such full review, the claimant or his or her duly authorized representative shall be given the opportunity to review documents that are pertinent to his or her claim and to submit issues and comments in writing. The Corporation shall notify the claimant of its decision on review within sixty (60) days after receipt of a request for review unless special circumstances, including the advisability of a hearing, require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of a request for review. All applicable governmental regulations regarding claims and review shall be observed by the Corporation in connection with its administration of the Plan. Notice of the decision on review shall be in writing signed by the Corporation and written in a manner calculated to be understood by the claimant and shall include: (i) the specific reason or reasons for the decision; and (ii) specific references to the pertinent Plan provisions on which the decision is based. If the decision on review is not furnished to the claimant within such 60-day period, the claim shall be deemed to have been denied on review. All decisions of the Corporation on review are final. Section 6.5 REVOCABILITY OF ACTION. Any action taken by the Corporation 10 with respect to the rights or benefits under the Plan of any employee shall be revocable by the Corporation as to payments or distributions not yet made to such person, and acceptance of Severance Pay and any Additional Payment under the Plan constitutes acceptance of and agreement to the Corporation making any appropriate adjustments in future payments or distributions to such person to offset any excess or underpayment previously made to him or her. Section 6.6 EXECUTION OF RECEIPT. Upon receipt of any Severance Pay and any Additional Payment hereunder, the Corporation reserves the right to require any Key Employee to execute a receipt evidencing the amount and payment of such Severance Pay and any Additional Payment. Article VII. MISCELLANEOUS Section 7.1 NO RIGHT TO EMPLOYMENT. Nothing expressed or implied in the Plan shall create any right or duty on the part of the Company or the Key Employee to have the Key Employee remain in the employment of the Company at any time prior to a Change in Control. Any termination of employment of the Key Employee or the removal of the Key Employee from the office or position in the Company prior to a Change in Control but following the commencement of any discussion with any third person that ultimately results in a Change in Control shall be deemed to be a termination or removal of the Key Employee after a Change in Control for purposes of the Plan. Section 7.2 GOVERNING LAW. The validity, interpretation, construction and performance of the Plan shall be governed by the laws of the State of Ohio, without giving effect to the principals of conflict of laws of such State. Section 7.3 VALIDITY. If any provisions of the Plan or the application of any provision hereof to any person or circumstance is held invalid, unenforceable or otherwise illegal, the remainder of the Plan and the application of such provision to any other person or circumstances shall not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent (and only to the extent) necessary to make it enforceable, valid and legal. Section 7.4 CAPTIONS. The captions in the Plan are for convenience of reference only and do not define, limit or describe the scope or intent of the Plan or any part hereof and shall not be considered in any construction hereof. Section 7.5 OTHER PLANS. This Plan and the Belden & Blake Corporation 1999 Change in Control Protection Plan for Regular Employees are intended to replace in their entirety as of the Effective Date the Belden & Blake Corporation Severance Pay Plan, effective October 1, 1996, the Severance Pay Plan for Key Employees of Belden & Blake Corporation (Tier I Employees), effective October 1, 1996, and the Severance Agreements, dated as of October 25, 1996, between the Corporation and certain employees designated as Tier II or Tier III Employees. Such prior Plans and Agreements are terminated as of the Effective Date. Individual Severance Agreements between the Corporation and certain employees designated as Tier III Employees shall remain in effect in accordance with their respective terms until the expiration date thereof, June 27, 2000. Section 7.6 PLAN INFORMATION. (a) PLAN SPONSOR: The plan is sponsored by Belden & Blake Corporation; Telephone: (330) 499-1660. 11 (b) PLAN ADMINISTRATOR: Belden & Blake Corporation is the plan administrator. The plan administrator makes the rules and regulations necessary to administer the plan. The plan administrator shall have the responsibility and discretionary authority to interpret the terms of this Plan, to determine eligibility for benefits and to determine the amount of the benefits. The interpretations and determinations of the plan administrator shall be final and binding, unless determined by a court of competent jurisdiction to be arbitrary and capricious. (c) AGENT FOR LEGAL PROCESS: Joseph M. Vitale is the agent for service of legal process. Any communications should be sent to Joseph M. Vitale at the following address: Belden & Blake Corporation 5200 Stoneham Road North Canton, Ohio 47720 Legal process may also be served on the plan administrator at the following address: Belden & Blake Corporation 5200 Stoneham Road North Canton, Ohio 47720 (d) PLAN YEAR: The records of the plan are kept on a calendar year basis. (e) IDENTIFICATION NUMBER: If an employee needs to discuss the plan with a federal government agency, he should reference the plan number, 511. Belden & Blake Corporation's employer identification number is 34-1021371. IN WITNESS WHEREOF, Belden & Blake Corporation has caused the Plan to be executed as of the 12th day of August 1999. ATTEST: BELDEN & BLAKE CORPORATION By: /s/John L. Schwager Title: Chief Executive Officer EX-10.8 4 EXHIBIT 10.8 1 Exhibit 10.8 BELDEN & BLAKE CORPORATION 1999 SEVERANCE PAY PLAN Article I. GENERAL STATEMENT OF PURPOSE This is the Severance Pay Plan of Belden & Blake Corporation. The purpose of the Plan is to provide financial benefits to certain employees of the Company who lose their positions with the Company involuntarily without Cause, as described herein. Article II. DEFINITIONS. Where the following words and phrases appear in the Plan, they shall have the respective meanings set forth below, unless their context clearly indicates otherwise: Section 2.1 APPLICABLE PERIOD. The term "Applicable Period" shall mean a period equal to two (2) weeks for each year of service (not less than 2 weeks or more than 8 weeks) with the Company, unless an Eligible Employee is notified in writing that his or her Applicable Period shall consist of a different period. For this purpose, years of service with the Company shall be based on the total number of years and fractional years of continuous service with the Company from the Eligible Employee's most recent date of hire with the Company. For purposes of the preceding sentence, continuous service shall also include periods of employment with an entity or affiliate thereof acquired by the Company or with any entity or affiliate thereof from which the Company acquired assets that occurred immediately preceding the Eligible Employee's date of hire with the Company. Section 2.2 BASE PAY. The term "Base Pay" shall mean, with respect to each Employee, the annual base compensation of such Employee at the rate in effect immediately prior to the Date of Termination. 2 Section 2.3 BOARD. The term "Board" shall mean the board of directors of the Corporation. Section 2.4 CAUSE. The term "Cause" shall mean the occurrence of any of the following as determined by the CEO in his sole discretion: (i) Failure or neglect by an Employee to perform the duties of his or her position; (ii) Failure of an Employee to obey orders given by the Company or supervisors; (iii) Misconduct in connection with the performance of any of an Employee's duties, including, without limitation, misappropriation of funds or property of the Company, securing or attempting to secure personally any profit in connection with any transaction entered into on behalf of the Company, misrepresentation to the Company, or any violation of law or regulations on Company premises or to which the Company is subject; (iv) Commission by an Employee of an act involving moral turpitude, dishonesty, theft or unethical business conduct, or conduct that impairs or injures the reputation of, or harms, the Company; (v) Disloyalty on the part of an Employee, including without limitation, aiding a competitor; (vi) Failure by an Employee to devote his or her full time and best efforts to the Company's business and affairs; (vii) Failure by an Employee to work exclusively for the Company; (viii)Failure by an Employee to fully cooperate in any investigation by the Company; (ix) Any breach by an Employee of this Agreement or Company rules; or 2 3 (x) Any other act of misconduct by an Employee. Section 2.5 CEO. The term "CEO" shall mean the Chief Executive Officer of the Corporation. Section 2.6 COMPANY. The term "Company" shall mean the Corporation and its Subsidiaries. Section 2.7 CORPORATION. The term "Corporation" shall mean the Belden & Blake Corporation, an Ohio corporation, and any Successor. Section 2.8 DATE OF TERMINATION. The term "Date of Termination" shall mean the effective date of an Employee's termination of employment. Section 2.9 EFFECTIVE DATE. The term "Effective Date" shall mean August 1, 1999. Section 2.10 ELIGIBLE EMPLOYEE. The term "Eligible Employee" shall mean any Employee who meets the requirements in Section 3.1 to receive Severance Pay under this Plan. Section 2.11 EMPLOYEE. The term "Employee" shall mean any employee of the Company who is actively employed or on an approved leave of absence, excluding, however, part-time, leased, temporary, casual or special employees of the Company. Notwithstanding the foregoing, any Employee whose employment terminates in circumstances under which he or she is eligible for benefits under the Belden & Blake Corporation 1999 Change in Control Severance Pay Plan for Key Employees or by the Belden & Blake Corporation 1999 Change in Control Severance Pay Plan for Regular Employees shall receive benefits under such other plan and not this Plan. Section 2.12 PLAN. The term "Plan" shall mean the Belden & Blake Corporation 1999 Severance Pay Plan for Employees, as the same may be amended from time to time. Section 2.13 SEVERANCE PAY. The term "Severance Pay" shall mean the amount 3 4 payable as set forth in Section 3.2 of the Plan. Section 2.14 SUBSIDIARY. The term "Subsidiary" shall mean an entity in which the Corporation directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock. Section 2.15 SUCCESSOR. The term "Successor" shall mean another corporation or unincorporated entity or group of corporations or unincorporated entities that acquires ownership, directly or indirectly, of all or substantially all of the assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise. Section 2.16 VOTING STOCK. The term "Voting Stock" shall mean securities entitled to vote generally in the election of directors. Article III. SEVERANCE PAY. Section 3.1 ELIGIBILITY. It is the policy of the Company to provide Severance Pay to Employees whose employment is terminated involuntarily by the Company other than for Cause. If an Employee resigns, abandons his job, fails to return from an approved leave of absence, initiates termination on any similar basis, or whose termination occurs by reason of his or her death or disability or in any other manner except an involuntary termination by the Company without Cause, the Employee will not be an Eligible Employee under this Plan. In addition, an Employee will not be an Eligible Employee under this Plan if he or she is terminated by the Company for Cause. Section 3.2 AMOUNT OF SEVERANCE PAY. The Severance Pay payable to an Eligible Employee shall consist of continuation of such Eligible Employee's Base Pay following the Date of Termination for the duration of the Applicable Period. Eligible Employees shall receive their Severance Pay in installments commencing with the month immediately following the month in which the Date of Termination occurs and continuing for the Applicable Period. Such payment shall be coincident with the Company's then-current payroll cycle. Payment of Severance Pay, 4 5 as described in this Section, shall be conditioned upon the execution and delivery by the Eligible Employee of a release, as described in Section 3.3, and subject to the completion of any period of revocation permitted by such release providing the Eligible Employee does not revoke the release during such revocation period. Section 3.3 RELEASE. Payment of the Severance Pay set forth in Section 3.2 to an Eligible Employee is conditioned upon the Eligible Employee executing and delivering a release in form and substance satisfactory to the Corporation releasing the Company and its affiliates from any and all claims, demands, damages, actions and/or causes of action whatsoever, which he or she may have had on account of the termination of his or her employment, including, but not limited to claims of discrimination, including on the basis of sex, race, age, national origin, religion, or handicapped status (with all applicable periods during which the Eligible Employee may revoke the release or any provision thereof having expired), and any and all claims, demands and causes of action for retirement (other than under the Belden & Blake Corporation Employees 401(k) Profit Sharing Plan or under any "welfare benefit plan" of the Company (as the term "welfare benefit plan" is defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended)), severance or other termination pay. Such release shall not, however, apply to the ongoing obligations of the Company arising under the Plan, or rights of indemnification the Eligible Employee may have under the Company's policies or by contract or by statute. Article IV. SUCCESSORS, ASSIGNMENT, SOURCES OF FUNDS AND WITHHOLDING TAXES Section 4.1 SUCCESSORS AND BINDING EFFECT. (a) The Company shall require any Successor to assume and agree to perform the obligations under the Plan in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. The Plan shall be binding upon and inure to the benefit of the Company and any Successor to the Company, but shall not otherwise be assignable, transferable or delegable by the Company. 5 6 (b) The rights under the Plan are personal in nature and neither the Company nor any Employee shall, without the consent of the other, assign, transfer or delegate the Plan or any rights or obligations hereunder except as expressly provided in this Section. Without limiting the generality of the foregoing, an Employee's right to receive payments hereunder shall not be assignable, transferable or delegable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by his or her will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section, the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. (c) The obligation of the Company to make payments hereunder shall represent an unfunded, unsecured obligation of the Company payable from its general assets. Section 4.2 WITHHOLDING OF TAXES. The Company may withhold from any amounts payable under the Plan all federal, state, city or other taxes as shall be required pursuant to any law or government regulation or ruling. Article V. AMENDMENT AND TERMINATION The Corporation reserves the right, by action of the Board or the CEO, to amend, modify, change or terminate this Plan or any award hereunder at any time with or without notice of any liability to Employees; provided, however, that no such action shall adversely affect the rights to Severance Pay of any Eligible Employee whose Date of Termination occurs before such action is taken by the Company. Article VI. ADMINISTRATION OF THE PLAN Section 6.1 IN GENERAL. For purposes of the Employee Retirement Income Security Act of 1974, the Plan shall be administered by the Corporation, which shall be named fiduciary under the Plan. The Corporation shall have the sole and absolute discretion to interpret where necessary all provisions of the Plan (including, without limitation, by supplying omissions from, correcting deficiencies in, or resolving inconsistencies or ambiguities, in the language of 6 7 the Plan), to determine the rights and status under the Plan of Employees or other persons, to resolve questions or disputes arising under the Plan and to make any determinations with respect to the benefits payable hereunder and the persons entitled thereto as may be necessary for the purposes of the Plan. Without limiting the generality of the forgoing, the Corporation is hereby granted the authority (i) to determine whether a particular employee is an "Employee" under the Plan and (ii) to determine whether a particular Employee is eligible for Severance Pay under the Plan. Section 6.2 DELEGATION OF DUTIES. The Corporation may delegate any of its administrative duties, including, without limitation, duties with respect to the processing, review, investigation, approval and payment of Severance Pay, to named administrator or administrators. Section 6.3 REGULATIONS. The Corporation shall promulgate any rules and regulations it deems necessary in order to carry out the purposes of the Plan or to interpret the terms and conditions of the Plan; provided, however, that no rule, regulation or interpretation shall be contrary to the provisions of the Plan. Section 6.4 CLAIMS PROCEDURE. The Corporation shall determine the rights of any employee of the Company to any Severance Pay hereunder. (a) Any employee or former employee of the Company who believes that he or she is entitled to receive Severance Pay under the Plan, including other than that initially determined by the Corporation, may file a claim in writing with the Vice President of Human Resources of the Corporation. The Corporation shall, no later than ninety (90) days after the receipt of a claim, either allow or deny the claim by written notice to the claimant. If a claimant does not receive written notice of the Corporation's decision on his or her claim within such 90-day period, the claim shall be deemed to have been denied in full. A denial or partial denial of a claim shall be dated (the "Determination Date"), signed by the Corporation and written in a manner calculated to be understood by the claimant and shall include: (i) the specific reason or reasons for the denial; 7 8 (ii) specific reference to pertinent Plan provisions on which the denial is based; (iii) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure. (b) A claimant whose claim is denied (or his of her duly authorized representative) may, within sixty (60) days after receipt of denial of his or her claim, request a review of such denial by the Corporation by filing with the Secretary of the Corporation a written request for review of his or her claim. If the claimant does not file a request for review with the Corporation within such 60-day period, then the claimant shall be deemed to have acquiesced in the original decision of the Corporation on his or her claim. If a written request for review is so filed within such 60-day period, then the Corporation shall conduct a full and fair review of such claim. During such full review, the claimant or his or her duly authorized representative shall be given the opportunity to review documents that are pertinent to his or her claim and to submit issues and comments in writing. The Corporation shall notify the claimant of its decision on review within sixty (60) days after receipt of a request for review unless special circumstances, including the advisability of a hearing, require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of a request for review. All applicable governmental regulations regarding claims and review shall be observed by the Corporation in connection with its administration of the Plan. Notice of the decision on review shall be in writing signed by the Corporation and written in a manner calculated to be understood by the claimant and shall include: (i) the specific reason or reasons for the decision; and (ii) specific references to the pertinent Plan provisions on which the decision is based. If the decision on review is not furnished to the claimant within such 60-day period, the claim shall be deemed to have been denied on review. All decisions of the Corporation on review are final. 8 9 Article VII. MISCELLANEOUS Section 7.1 NO RIGHT TO EMPLOYMENT. Nothing expressed or implied in the Plan shall create any right or duty on the part of the Company or the Employee to have the Employee remain in the employment of the Company. The Employee is an employee at will and the Company may terminate him or her at any time for any reason. Section 7.2 GOVERNING LAW. The validity, interpretation, construction and performance of the Plan shall be governed by the laws of the State of Ohio, without giving effect to the principals of conflict of laws of such State. Section 7.3 VALIDITY. If any provisions of the Plan or the application of any provision hereof to any person or circumstance is held invalid, unenforceable or otherwise illegal, the remainder of the Plan and the application of such provision to any other person or circumstances shall not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent (and only to the extent) necessary to make it enforceable, valid and legal. Section 7.4 CAPTIONS. The captions in the Plan are for convenience of reference only and do not define, limit or describe the scope or intent of the Plan or any part hereof and shall not be considered in any construction hereof. Section 7.5 PLAN INFORMATION. (a) PLAN SPONSOR: The plan is sponsored by Belden & Blake Corporation; Telephone: (330) 499-1660. (b) PLAN ADMINISTRATOR: Belden & Blake Corporation is the plan administrator. The plan administrator makes the rules and regulations necessary to administer the plan. The plan administrator shall have the responsibility and discretionary authority to interpret the terms of this Plan, to determine eligibility for benefits and to determine the amount of the benefits. The 9 10 interpretations and determinations of the plan administrator shall be final and binding, unless determined by a court of competent jurisdiction to be arbitrary and capricious. (c) AGENT FOR LEGAL PROCESS: Joseph M. Vitale is the agent for service of legal process. Any communications should be sent to Joseph M. Vitale at the following address: Belden & Blake Corporation 5200 Stoneham Road North Canton, Ohio 47720 Legal process may also be served on the plan administrator at the following address: Belden & Blake Corporation 5200 Stoneham Road North Canton, Ohio 47720 (d) PLAN YEAR: The records of the plan are kept on a calendar year basis. (e) IDENTIFICATION NUMBER: If an employee needs to discuss the plan with a federal government agency, he should reference the plan number, 512. Belden & Blake Corporation's employer identification number is 34-1021371. IN WITNESS WHEREOF, Belden & Blake Corporation has caused the Plan to be executed as of the 12th day of August, 1999. ATTEST: BELDEN & BLAKE CORPORATION By:/s/John L. Schwager Title: Chief Executive Officer ------------------------------- 10 EX-10.10 5 EXHIBIT 10.10 1 Exhibit 10.10 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into effective as of the 1st day of June, 1999 (the "Effective Date") by and between Belden & Blake Corporation, an Ohio corporation ("Employer"), and John L. Schwager ("Executive"). WHEREAS, Employer desires to employ Executive as its Chief Executive Officer, and Executive desires to be so employed by Employer, upon the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employer and Executive, intending to be legally bound, agree as follows: 1. EMPLOYMENT. Employer hereby employs Executive as its Chief Executive Officer upon the terms and conditions and for the compensation herein provided. Executive hereby agrees to be so employed and to fulfill the duties of Chief Executive Officer. Executive shall also serve as a member of Employer's Board of Directors. 2. DUTIES AND POWER. For so long as Executive is employed by Employer, Executive agrees as follows: to devote his full and exclusive business time and attention to the business of Employer and of any subsidiaries or affiliates of Employer (excluding reasonable vacations and sick leave in accordance with Employer's policies consistent with his position) and to perform all duties in a professional and prudent manner. As Chief Executive Officer, Executive shall report directly to the Board of Directors of Employer, have no other officer or employee of Employer senior to him and have full power, authority, duties and responsibilities customarily associated with the position as Chief Executive Officer, including, without limitation, authority, direction and control over day-to-day business, financial and personnel matters of Employer, subject to the lawful and reasonable policies and guidelines as may be established by the Board of Directors of Employer. Executive agrees to devote his full business time to the performance of services hereunder and not to engage in any other activity or own any interest that would conflict with the interest of Employer or would interfere with his responsibilities to Employer and the performance of his duties hereunder; provided, however, that: (i) passive investments of less than 5% of the outstanding securities of any corporation shall be deemed not to violate this provision; (ii) Executive may engage in activities involving charitable, educational, religious, industry, trade and similar types of organizations, speaking engagements and similar type activities to the extent that such other activities do not detract from the performance by Executive of his duties and obligations hereunder; and (iii) Executive may serve as an outside director of other companies to the extent that such service does not involve a conflict of interest and does not detract in any material respect from the performance by Executive of his duties and obligations hereunder. Without limiting the generality of the foregoing, TPG Partners II, L.P. has approved, subject to approval of Employer's Board of Directors, Executive's continued affiliation with Moncrief & Willingham Advisors. Executive shall perform his duties at Employer's office in North Canton, Ohio, except that a reasonable amount of business-related 2 travel may be required. 3. COMPENSATION AND BENEFITS. For all services rendered by Executive pursuant to this Agreement, Employer shall compensate Executive as follows: (a) BASE COMPENSATION. Subject to the terms and conditions set forth herein, Employer (or, at Employer's option, any subsidiary or affiliate of Employer for which Executive also provides services hereunder) shall pay to Executive a salary of at least $300,000 per annum (such annual compensation as it may be increased from time to time shall be referred to herein as the "Base Compensation"). Executive's Base Compensation will be paid in accordance with Employer's customary payroll practices (but not less frequently than monthly), and will be prorated based upon the number of days elapsed in any partial year. Base Compensation shall be reviewed annually by the Compensation Committee of Employer's Board of Directors and may be increased at the sole discretion of such Committee. (b) BONUS. Executive may be awarded an annual bonus based on the attainment of certain goals to be agreed upon by Executive and Employer's Board of Directors on or before March 1 of the applicable year (but on or before December 31, 1999 in the case of the goals for 1999). Such annual bonus is targeted to be 50% of Executive's Base Compensation (the "Target Bonus"), but may be increased (up to a maximum of 100% of Base Compensation) or decreased by the Board of Directors in its discretion depending on the extent to which the goals are exceeded or not met. (c) BENEFITS. Executive shall be entitled, as an employee of Employer, to employee retirement and welfare benefits, perquisites and other executive benefits substantially comparable to those employee benefits made available to the senior executive management of Employer, including, but not limited to, 401(k) plan and medical benefit plan participation and no less than four weeks of vacation per year. For purposes of the vacation entitlement, Executive shall receive credit for his prior 29 years of service in the industry. Executive shall be entitled to reimbursement by Employer for financial and tax planning advisory services at rates customary to the local area, not to exceed $25,000 on an annual basis. (d) EXPENSES. Executive shall be entitled to reimbursement by Employer for his ordinary and necessary business expenses incurred in the performance of his duties under this Agreement if supported by reasonable documentation as required by Employer in accordance with its usual practices. (e) COUNTRY CLUB MEMBERSHIP. Executive shall be entitled to utilize Employer's membership at Glenmoor Country Club at Employer's expense. Executive will be responsible for all expenses incurred by him in connection with his use of the Country Club except for expenses that are payable or reimbursable under Section 3(d). (f) RELOCATION. Employer will reimburse Executive for his actual and reasonable relocation expenses incurred in connection with Executive's relocation to Canton, Ohio pursuant to Employer's relocation policy. In addition to those expenses normally reimbursable under said relocation policy, Employer will reimburse Executive for his reasonable temporary living -2- 3 expenses for up to 4 months in an amount not to exceed $5,000 per month and for commuting expenses between West Virginia and Ohio for up to four months at the standard IRS reimbursement rate of $.31 per mile. In addition, Employer shall reimburse Executive for all reasonable closing costs associated with the sale of Executive's West Virginia residence (the "Current Residence") and closing costs associated with Executive's purchase and financing of a new primary residence in Ohio. For purposes of this Section, "closing costs" shall mean loan origination fees, loan discount fees, appraisal fees, credit report fees, assumption fees, settlement or closing fees, title examination fees, title insurance binder, document preparation fees, notary fees, attorneys' fees, real estate brokers' commissions, title insurance fees, recording fees, tax stamps, transfer taxes, survey fees and costs of pest, radon and home inspections. In addition, Employer shall pay Executive an amount determined by its accountants to be equal to Executive's federal, state and local taxes on the foregoing reimbursements (the "Tax Gross-up") and the federal, state and local taxes on the Tax Gross-up, all to the end that Executive be held harmless, on an after-tax basis, from the tax impact thereof. Executive will use his best efforts (which, for purposes of this Agreement, shall mean reasonable efforts) on and after the date of execution of this Agreement to sell his Current Residence. In the event that Executive does not sell or have an agreement to sell the Current Residence before September 1, 1999, Employer shall offer to purchase the Current Residence from Executive for $233,500.00 in cash. In addition, Employer shall offer to purchase the Current Residence from Executive for $233,500.00 in cash if prior to September 1, 1999 Executive has an agreement to sell the Current Residence but such sale is not consummated prior to October 31, 1999. If Executive shall accept such offer of Employer, the closing of such purchase and sale shall occur no later than one hundred twenty (120) days from the Effective Date. If prior to September 1, 1999 Executive receives an offer from a third party to purchase the Current Residence for less than $233,500, and if, with the consent of Employer, Executive accepts such offer, Employer shall pay to Executive in cash an amount equal to the shortfall plus a Tax Gross-up and the federal, state and local taxes on the Tax Gross-up, all to the end that Executive be held harmless, on an after-tax basis, from the tax impact on the shortfall payment. (g) LEGAL EXPENSES. Employer will reimburse Executive for reasonable attorneys' fees incurred in connection with review of this Agreement by Executive's attorney. (h) LIABILITY FOR TAXES. Except as otherwise provided in Section 3(f) and Section 4(f), Employer shall have no liability for any tax liability of Executive attributable to any payment made under this Agreement except for customary employer liability for federal and state employee taxes (e.g., social security, Medicare, etc.). Employer may withhold from any such payment such amounts as may be required by applicable provisions of the Internal Revenue Code, other tax laws, and the rules and regulations of the Internal Revenue Service and other tax agencies in effect at the time of any such payment. 4. TERMINATION OF EMPLOYMENT. (a) EMPLOYMENT AT WILL. The parties acknowledge and agree that Executive's employment hereunder is employment at will. Notwithstanding any other provision contained in this Agreement, either Executive or Employer may terminate Executive's employment hereunder -3- 4 at any time with or without Cause (as defined below) at its or his election upon prior written notice (a "Termination Notice") to the other. A Termination Notice shall be effective upon delivery to the other party and the termination shall be effective as of the date set forth in such Termination Notice (hereinafter, the "Termination Date'). (b) DEFINITION OF "CAUSE". For purposes of this Agreement, the term "Cause" shall mean Executive's personal dishonesty, fraud or deceit, willful misconduct, a serious breach of a fiduciary duty involving personal profit, conviction of a felony (including via a guilty or nolo contendere plea), willful neglect of duties by Executive or material breach by Executive of the provisions of Sections 2, 6, 7 or 8 of this Agreement; provided, however, that unsatisfactory job performance shall not be considered Cause for termination of the Executive's employment by the Company. Executive shall be afforded a reasonable opportunity to cure any willful neglect of his duties and any other alleged material breach of this Agreement according to the following terms. Employer's Board of Directors shall give Executive written notice stating with reasonable specificity the nature of the circumstances determined by the Board of Directors in good faith to constitute willful neglect or other material breach. Executive shall have thirty (30) days from his receipt of such notice to cure such circumstances or such breach if such breach is reasonably susceptible of cure. If, in the reasonable good faith judgment of the Board of Directors, the alleged breach is not reasonably susceptible to cure, or such circumstances or material breach has not been satisfactorily cured within such thirty (30) day cure period, such neglect of duties or material breach shall thereupon constitute "Cause" hereunder. (c) TERMINATION WITHOUT CAUSE. Employer may terminate Executive's employment under this Agreement at any time with or without any Cause shown. Upon any such termination without Cause, Executive shall be entitled to the following: (i) Executive shall receive severance pay as follows: (A) If Executive is terminated during 1999, then he will be paid $1,350,000 which is equal to three years of salary ($900,000) plus three years of Target Bonus ($450,000); (B) If Executive is terminated during 2000, then he will be paid three times the sum of his annualized 1999 W-2 compensation from Employer and the annualized bonus, if any, earned by Executive for 1999 but not paid until 2000. W-2 Compensation shall refer to the wages and other compensation reported by Employer to the Internal Revenue Service on IRS Form W-2. (C) If Executive is terminated after 2000, he will be paid an amount equal to three times his total W-2 compensation from Employer for the previous calendar year. W-2 compensation shall refer to the wages and other compensation reported by Employer to the Internal Revenue Service on IRS Form W-2. (ii) Executive will be eligible to elect to continue, for himself and his eligible -4- 5 dependents, health benefits in accordance with the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. All of the above severance payments and benefits shall be subject to normal withholding of taxes and other authorized deductions. Executive acknowledges and agrees that the provisions of this Section 4(c) state his entire and exclusive rights, entitlements and remedies against Employer, its successors, assigns, affiliates, employees and representatives for termination without any Cause shown by Employer; provided, however, that the Executive also shall be entitled to receive all salary, bonus, benefits and expense reimbursement which have accrued as of the Termination Date. As a material inducement to Employer to enter into this Agreement, Executive represents that he will make no other claims in any such event. (d) TERMINATION FOR DEATH OR PERMANENT DISABILITY. In the event that Executive's employment by Employer is terminated because of death or Permanent Disability (as defined below), then, subject to all applicable laws, Executive (or Executive's estate) shall be entitled to receive only that salary, bonus, benefits and expense reimbursements which have accrued as of the Termination Date. For purposes of this Agreement, "Permanent Disability" shall mean the inability of Executive, by reason of any ailment or illness, or physical or mental condition, to devote substantially all of his time during normal business hours to the daily performance of Executive's duties as required under this Agreement for a continuous period of six (6) months, as reflected in the opinions of three qualified physicians, one of which has been selected by Employer, one of which has been selected by Executive, and one of which has been selected by the other two physicians, jointly. (e) TERMINATION FOR CAUSE OR TERMINATION BY THE EXECUTIVE. In the event that Executive elects to terminate his employment under this Agreement (except as otherwise provided below), or if Executive is terminated for Cause, then Executive shall not be entitled to receive any severance pay or compensation except such base compensation, benefits, bonuses and expense reimbursement as shall have accrued prior to the Termination Date. Notwithstanding any provision of this Agreement to the contrary, in the event Executive elects to terminate his employment either (i) at any time following the occurrence of any event constituting Good Reason (as defined below) or (ii) within the thirty (30)-day period beginning six (6) months after the occurrence of a Change of Control (as defined below in Section 5(g)(iii)) regardless of the reason for such termination, such termination shall be deemed to constitute a termination by Employer without Cause, and Executive shall be entitled to all of the payments and benefits set forth in Section 4(c). For purposes of this Agreement, "Good Reason" means any of the following: (i) a substantial and adverse change in Executive's status or position as Chief Executive Officer and a key employee of Employer, or a substantial reduction in the duties and responsibilities previously exercised by Executive, or any failure to reappoint or reelect Executive to, such position, except in connection with the termination of Executive's employment for Cause or Permanent Disability, or as a result of Executive's death; (ii) a reduction (other than for Cause) by Employer in Executive's Base Compensation; (iii) a relocation of Executive's principal place of work to any location that is more than 25 miles from Canton, Ohio; (iv) a sale or other exchange or transfer (whether by merger, reorganization or otherwise) of substantially all of the shares or assets of Employer; or (v) a material breach of the -5- 6 provisions of this Agreement by Employer. Notwithstanding the foregoing, a termination of employment by Executive will be deemed to be for "Good Reason" only if Executive elects to terminate employment within ninety (90) days after he knows or should know that an event constituting Good Reason has occurred; provided, however, that Executive's continued employment following the occurrence of such an event shall not constitute consent to, or a waiver of rights with respect to, any other event constituting Good Reason hereunder. Executive acknowledges and agrees that the provisions of this Section state his entire and exclusive rights, entitlements and remedies against the Employer, its successors, assigns, affiliates and representatives if he elects to terminate his employment and/or is terminated with Cause. As a material inducement to Employer to enter into this Agreement, Executive represents to Employer that he will make no other claim in any such event. (f) CERTAIN ADDITIONAL PAYMENTS BY EMPLOYER. (i) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any economic benefit or payment or distribution by Employer to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code or any Applicable Interest and Penalties (as defined below) with respect to such excise tax (such excise tax, together with any Applicable Interest and Penalties, are hereinafter collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment (a "Gross-Up-Payment") in an amount such that after payment by Executive of all taxes (including any Applicable Interest and Penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. For purposes of this Agreement, "Applicable Interest and Penalties" means all interest and penalties payable by Executive with respect to excise tax imposed under Section 4999 of the Internal Revenue Code other than interest or penalties determined by the Accounting Firm (as defined below) to be primarily attributable to unreasonable delay on the part of Executive. (ii) Subject to the provisions of Section 4(f)(iii), all determinations required to be made under this Section 4(f), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by Employer's regular outside independent public accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations both to Employer and Executive within 15 business days of the Effective Date of Termination, if applicable, or such earlier time as is requested by Employer. The initial Gross-Up Payment, if any, as determined pursuant to this Section 4(f)(ii), shall be paid to Executive within 5 days of the receipt of the Accounting Firm's determination. Any -6- 7 determination by the Accounting Firm shall be binding upon Employer and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by Employer should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that Employer exhausts its remedies pursuant to Section 4(f)(iii) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by Employer to or for the benefit of Executive. (iii) Executive shall notify Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by Employer of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the later of either (i) the date Executive has actual knowledge of such claim, or (ii) ten days after the Internal Revenue Service issues to Executive either a written report proposing imposition of the Excise Tax or a statutory notice of deficiency with respect thereto, and shall apprise Employer of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the thirty-day period following the date on which he gives such notice to Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If Employer notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) give Employer any information reasonably requested by Employer relating to such claim, (ii) take such action in connection with contesting such claim as Employer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by Employer, (iii) cooperate with Employer in good faith in order effectively to contest such claim, (iv) permit Employer to participate in any proceedings relating to such claim; provided, however, that Employer shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such contest. Without limitation of the foregoing provisions of this Section 4(f)(iii), Employer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to request or accede to a request for an extension of the statute of limitations with respect only to -7- 8 the tax claimed, or pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Employer shall determine; provided, however, that if Employer directs Executive to pay such claim and sue for a refund, Employer shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations requested or acceded to by Executive at Employer's request and relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, Employer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by Executive of an amount advanced by Employer pursuant to Section 4(f)(iii), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to Employer's complying with the requirements of Section 4(f)(iii)) promptly pay to Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by Employer pursuant to Section 4(f)(iii), a determination is made that Executive shall not be entitled to any refund with respect to such claim and Employer does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (v) In the event that any state or municipality or subdivision thereof shall subject any Payment to any special tax which shall be in addition to the generally applicable income tax imposed by such state, municipality, or subdivision with respect to receipt of such Payment, the foregoing provisions of this Section 4(f) shall apply, mutatis mutandis, with respect to such special tax. 5. STOCK OPTION. (a) TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. Subject to the terms and -8- 9 conditions of this Agreement, Employer hereby grants to Executive an option ("Option") to purchase 139,383 shares of common stock of Employer (the "Option Shares"), which number Employer represents equals one and one-quarter percent (1.25%) of the outstanding common stock of Employer as of the date hereof (calculated on a fully-diluted basis and assuming exercise and conversion of all outstanding or committed options, warrants and convertible securities). The Option granted pursuant to this first paragraph of Section 5(a) is referred to in this Agreement as the "Initial Option." Upon the date of completion of the issuance and sale by Employer to the Permitted Holders (as defined in Section 5(g) below) after the date hereof of new equity securities (excluding issuances associated with currently outstanding or committed convertible securities) for an aggregate purchase price of at least $30 million (the "Trigger Date"), Employer will increase, on a one-time basis, the foregoing number of Option Shares to that number equal to one and one-quarter percent (1.25%) of the outstanding common stock of Employer on the Trigger Date (calculated on a fully-diluted basis and assuming exercise and conversion of all then outstanding or committed options, warrants and convertible securities, including those issued or issuable in connection with any such issuance and sale of equity securities). The supplemental Option granted pursuant to this second paragraph of Section 5(a) is referred to in this Agreement as the "Supplemental Option." References in this Agreement to the "Option" shall be deemed to include both the Initial Option and the Supplemental Option. (b) VESTING. One-fourth (1/4) of the Option Shares (I.E., 34,845 shares) shall vest and be exercisable on the first anniversary of the date of this Agreement and one-twelfth (1/12) of the remaining Option Shares (I.E., 8,711 shares) shall vest and be exercisable at the end of each three (3) month period thereafter until all Option Shares have vested, provided, however, in order for Option Shares eligible to vest for any period to vest, Executive must have remained an executive or member of the Board of Directors of Employer from the date hereof through the last day of the relevant period. The Board of Directors of Employer, in its discretion, may from time to time accelerate the vesting of any or all of the Option Shares. The Supplemental Option shall be vested and shall vest in the future as though it had been granted on the date hereof (i.e., one-fourth (1/4) of such additional Option Shares shall vest and be exercisable on the first anniversary of the date of this Agreement and one-twelfth (1/12) of the remaining additional Option Shares shall vest and be exercisable at the end of each three (3) month period thereafter.) (c) EXERCISE PRICE AND METHOD OF PAYMENT. (i) EXERCISE PRICE. The exercise price of the Option (the "Exercise Price") shall be, in the case of the Initial Option, $0.01 per share, provided however, that upon the grant of the Supplemental Option, the Exercise Price shall be adjusted to an amount as is determined by Executive and the Compensation Committee of the Board of Directors to be the fair market value of the underlying Option Shares as of the date of the Trigger Date. The parties shall negotiate in good faith to determine the adjusted Exercise -9- 10 Price within sixty (60) days of the date of grant of the Supplemental Option (the "Negotiation Period"), and if the parties fail to agree within such time, the adjusted Exercise Price shall be determined in accordance with the appraisal procedures set forth below as promptly as practicable. The parties shall agree on an independent investment banking or appraisal firm of national repute (an "Appraiser") within thirty (30) days after the last day of the Negotiation Period, and if the parties fail to agree on an Appraiser within such 30-day period, each party shall select an independent Appraiser within twenty (20) days after the last day of such 30-day period. The two (2) Appraisers so selected shall each independently determine the fair market value of the Option Shares, and if the difference between the two appraisals does not exceed twenty percent (20%) of the lower of the two appraisals, the adjusted Exercise Price shall be conclusively deemed to be the average of the two appraisals. If the difference between the two appraisals exceeds twenty percent (20%) of the lower of the two appraisals, the two Appraisers shall select a third independent Appraiser who shall independently value the Option Shares and whose appraisal shall be conclusively deemed to be the fair market value of the Option Shares and such value shall be the adjusted Exercise Price. In determining the "fair market value," Employer shall be valued on a going-concern basis. Employer shall pay the fees and expenses of the Appraisers. (ii) METHOD OF PAYMENT. Payment of the Exercise Price per share, together with payment of any tax withholding amounts, is due in full upon exercise of any or all vested Option Shares. Executive may elect, to the extent permitted by applicable statutes and regulations, to make payment of the Exercise Price and the tax withholding amounts under one of the following alternatives: (A) Payment of the exercise price per share in cash (including check) at the time of exercise; (B) Payment by delivery of already-owned shares of common stock of Employer, owned free and clear of any liens, claims, encumbrances or security interests, or by having withheld shares of common stock otherwise issuable upon exercise of the Option, which common stock shall be valued at its fair market value on the date of exercise; or (C) Payment by any combination of the methods of payment permitted by Sections 5(c)(ii)(A) and 5(c)(ii)(B). (iii) WHOLE SHARES. This Option may not be exercised for any number of Option Shares which would require the issuance of anything other than -10- 11 whole shares. (d) APPLICABLE LAWS OR REGULATIONS. ------------------------------ (i) Executive acknowledges and understands that neither the Option, the Option Shares nor any other of the securities of Employer have been registered under the Securities Act of 1933, as amended (the "Act"), or qualified under any state securities laws or regulations ("Blue Sky Laws") in reliance upon the nonpublic offering exemption from the registration requirements of the Act and similar exemptions under the Blue Sky Laws. Executive hereby acknowledges and agrees that he is acquiring the Option and any Option Shares which he may subsequently acquire, solely for his own account and not with a view to or for sale in connection with any distribution of the Option or Option Shares, and that Executive either (A) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the proposed investment and therefore has the capacity to protect his own interests in connection with the acquisition of the Option Shares, or (B) has a preexisting personal or business relationship with Employer or one or more of its officers, directors or controlling persons. In the event Executive exercises any of this Option as provided herein, Executive consents to the placement of any and all legends on any certificates evidencing ownership of the Option Shares and all restrictions on transfer of the Option Shares which may, in the determination of Employer or its counsel, be appropriate or required by law. (ii) Employer's obligations to sell and deliver Option Shares are subject to, and conditional upon, such compliance as Employer deems necessary or advisable with federal and state laws, rules and regulations applying to the authorization, issuance, listing or sale of securities, and this Option may not be exercised unless (A) the Option Shares have been registered under a then currently effective registration statement under the Act, or (B) a determination is made by counsel to Employer that such registration is not required under applicable securities laws. (iii) Executive shall indemnify, defend and hold harmless Employer and its officers, directors and stockholders from and against any and all claims, demands, losses, costs, expenses (including without limitation attorney's fees) that arise from, relate to or result from any breach of, or failure of Executive to perform, any of Executive's representations, warranties or covenants set forth in Section 5(d)(i). (e) TERM. (i) The term of this Option commences on the date hereof and shall automatically expire on June 1, 2009 (the "Expiration Date") unless this -11- 12 Option expires sooner as set forth below. In no event may this option be exercised on or after the Expiration Date. (ii) This option shall terminate prior to the Expiration Date as follows: (A) If Executive ceases to be an employee or director of Employer, whichever last occurs, for any reason other than death, retirement or disability, this Option may be exercised (to the extent that Executive was entitled to exercise the same on the date of such cessation) within a period of three (3) months following such cessation, but not later than the expiration date described in Section 5(e)(i), and upon expiration of such period, this Option shall terminate; PROVIDED, HOWEVER, that this Option will immediately terminate if Executive's employment is terminated by Employer for Cause. (B) If Executive ceases to be an employee or director of Employer, whichever last occurs, by reason of death, retirement or permanent disability, the Option may be exercised (to the extent Executive was entitled to exercise the same on the date of such death, retirement or permanent disability) within a period of twelve (12) months following such cessation, but not later than the expiration date described in Section 5(e)(i), and upon expiration of such period, this Option shall terminate. (f) EXERCISE. (i) This Option may be exercised by Executive from time to time, to the extent Option Shares have vested, by delivering a notice of exercise in the form set forth in Exhibit A hereto, or such other form then designated by Employer (the "Notice of Exercise") together with the aggregate exercise price to the corporate secretary of Employer, or to such other person as Employer may designate, during regular business hours, together with such additional documents as Employer may then require in its discretion. The date of exercise shall be the date of Employer's receipt of the Notice of Exercise. (ii) By exercising this Option, Executive agrees that: (A) as a precondition to the completion of any exercise of this Option, Employer may require Executive to enter an arrangement providing for the payment by Executive to Employer of any tax withholding obligation of Employer arising by reason of: (1) the exercise of this Option; (2) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise; or (3) the disposition of shares acquired upon such exercise. -12- 13 Executive also agrees that any exercise of this Option has not been completed and that Employer is under no obligation to issue any common stock to Executive until such an arrangement is established or Employer's tax withholding obligations are satisfied, as reasonably determined by Employer; and (B) Employer (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any equity securities of Employer under the Act, require that Executive not sell or otherwise transfer or dispose of any shares of common stock or other securities of Employer during such period (not to exceed one hundred eighty (180) days or, if less, the period of time any other executive officer of Employer is so restricted) following the effective date of the registration statement of Employer filed under the Act as may be requested by Employer or the representative of the underwriters. Executive further agrees that Employer may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. (g) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. (i) In the event of any change in the number or nature of issued and outstanding shares of common stock of Employer by reason of any stock dividend, stock split, recapitalization, merger, rights offering, share exchange or other change in the corporate or capital structure of Employer, which increases, decreases, or exchanges the shares of common stock of Employer for a different number or kind of shares or other securities, an appropriate and proportionate adjustment (to the extent necessary or appropriate, as determined by the Board of Directors of Employer, in its discretion) shall be made in (A) the number of shares or other securities subject to the Option, and (B) the Exercise Price. (ii) In the event of a merger, consolidation, sale or exchange of all or substantially all of the assets of Employer, or other corporate reorganization of Employer, other than a Change in Control (as hereinafter defined), the Board of Directors of Employer, in its discretion, may, but is not obligated to do, either of the following: (A) pay in cash the difference between the Exercise Price and the consideration receivable in the transaction by a holder of common stock of Employer for the number of Option Shares unexercised, whether or not vested, or (B) provide that Executive shall receive, upon exercise of the Option, the stock or other securities, cash or property to which Executive would have been entitled if Executive had exercised the Option and had been a holder of record of shares of common stock of employer on the record date fixed for -13- 14 determination of holders of shares of common stock of Employer entitled to receive such stock or other securities, cash or property at the same aggregate price as the aggregate Exercise Price of the Option Shares, with adjustments as set forth in Section 5(g)(i). (iii) In the event of a Change in Control, all Option Shares shall immediately become exercisable in full. For purposes of this Agreement, a "Change in Control" shall mean the following and shall be deemed to occur if: (A) Prior to the occurrence of an underwritten public offering of the Company's equity securities, any of the following events occurs: (x) Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended) (each, a "Person"), other than a Permitted Holder, becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of 50% or more of either the then outstanding shares of common stock ("Outstanding Common Stock") or the combined voting power of Employer's then outstanding securities entitled to vote generally in the election of directors ("Employer Voting Securities"); or (y) Consummation by Employer of the sale or other disposition by Employer of all or substantially all of Employer's assets or a merger, consolidation or other reorganization of Employer with any other Person, other than: (1) a merger, consolidation or other reorganization that would result in the voting securities of Employer outstanding immediately prior thereto (or, in the case of a reorganization or merger or consolidation that is preceded or accomplished by an acquisition or series of related acquisitions by any person, by tender or exchange offer or otherwise, of voting securities representing 50% or more of the combined voting power of all securities of Employer, immediately prior to such acquisition or the first acquisition in such series of acquisitions) continuing to represent, either by remaining outstanding or by being converted into voting securities of another entity, more than 50% of the combined voting power of the voting securities of Employer or such other entity outstanding immediately after such reorganization or merger or -14- 15 consolidation (or series of related transactions involving such a reorganization or merger or consolidation), or (2) a merger, consolidation or other reorganization effected to implement a recapitalization or reincorporation of Employer (or similar transaction) that does not result in a material change in beneficial ownership of the voting securities of Employer or its successor. (B) following the occurrence of an underwritten public offering of Employer's equity securities, any of the following events occur: (w) the acquisition in one or more transactions by any Person, other than a Permitted Holder, becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of greater than thirty percent (30%) of the Outstanding Common Stock or Employer Voting Securities; or (x) the consummation of a merger, reorganization, consolidation, share exchange, transfer of assets or other transaction having similar effect involving Employer, unless, following such transaction, stock possessing at least fifty percent (50%) of the Outstanding Common Stock and the outstanding Employer Voting Securities of the corporation resulting from such transaction is beneficially owned, directly or indirectly, by Permitted Holders, or Persons who were beneficial owners of the Outstanding Common Stock and Employer Voting Securities, respectively, immediately prior to such transaction; or (y) individuals who are members of the Board of Directors of Employer as of the Effective Date of this Agreement (the "Incumbent Directors") cease for any reason to constitute at least a majority of the members of the Board; provided, however, that any individual becoming a director subsequent to the date of this Agreement whose appointment to the Board or nomination for election by Employer was approved by a vote of at least a majority of the Incumbent Directors then in office (unless such appointment or election was at the request of an unrelated third party who has taken steps reasonably calculated to result in a Change in Control as described in paragraphs (w) or (x) above and who has indicated publicly an intent to -15- 16 seek control of Employer) shall be treated from the date of his or her appointment or election as an Incumbent Director; or (z) consummation of a complete liquidation or dissolution of Employer. For purposes of this Agreement, "Permitted Holders" means (i) TPG Partners II, L.P., TPG Parallel II, L.P. and TPG Investors II, L.P. (the "Investors"), (ii) any investment partnership or fund management by the principals of TPG II, (iii) any partners of the Investors, (iv) members of the immediate family of the persons described in (iii) and trusts for the benefit of members of their immediate family, (iv) the respective affiliates (within the meaning ascribed to such term in Rule 405 of the Securities Act of 1933, as amended) of Persons described in (i) through (iv), and (v) any Person acting in the capacity of an underwriter in connection with a public or private offering of Employer's equity securities. (h) DELIVERY OF CERTIFICATES, RIGHTS IN OPTION SHARES. Upon the due exercise of the Option in accordance with the provisions of this Agreement, Employer shall deliver to the Executive at the main office of Employer, or such other place as shall be mutually acceptable, a certificate or certificates representing such shares of common stock to which the Option shall have been so exercised. Neither Executive, his estate nor his transferees by will or the laws of descent and distribution shall be, or have any rights or privileges of, a stockholder of Employer with respect to any Option Shares issuable upon exercise of the Option, unless and until certificates representing such Option Shares shall have been issued and delivered. (i) TRANSFERABILITY. This Option is not transferable, except by will or by the laws of descent and distribution, and is exercisable only by Executive during the life of Executive. Notwithstanding the foregoing, by delivering written notice to Employer, in a form satisfactory to Employer, Executive may designate a third party who, in the event of the death of Executive, shall thereafter be entitled to exercise this Option. (j) NO EMPLOYMENT RIGHT. Nothing in this Option shall be deemed to create in any way whatsoever any obligation on the part of Executive to continue in the employ of Employer, or of Employer to continue employment of Executive with Employer. In addition, nothing in this Option shall obligate Employer or any affiliate of Employer, or their respective stockholders, board of directors, officers, or employees to continue any relationship which Executive might have as a director or consultant for Employer or affiliate of Employer. 6. NONDISCLOSURE. (a) CONFIDENTIAL INFORMATION. Executive hereby acknowledges that in connection with his employment by Employer he will be exposed to and may obtain certain information (including, without limitation, procedures, memoranda, notes, records and customer and supplier lists whether such information has been or is made, developed or compiled by Executive or otherwise has been or is made available to him) regarding the business and operations of Employer and its subsidiaries or affiliates. Executive further acknowledges that such -16- 17 information and procedures are unique, valuable, considered trade secrets and deemed proprietary by Employer. For purposes of this Agreement, such information and procedures shall be referred to as "Confidential Information," except that the following shall not be considered Confidential Information: (i) information disclosed on a non-confidential basis to third parties by Employer (but not by Executive in violation of this Agreement), (ii) information released from confidential treatment by written consent of Employer, and (iii) information lawfully available to the general public. (b) USE OF CONFIDENTIAL INFORMATION. Executive agrees that all Confidential Information is and will remain the property of Employer. Executive further agrees, except as otherwise required by law and for disclosures occurring in the good faith performance of his duties for Employer, while employed by Employer hereunder and thereafter, to hold in the strictest confidence all Confidential Information, and not to, directly or indirectly, duplicate, sell, use, lease, commercialize, disclose or otherwise divulge to any person or entity any portion of the Confidential Information or use any Confidential Information for his own benefit or profit or allow any person, entity or third party, other than Employer and authorized executives of the same, to use or otherwise gain access to any Confidential Information. (c) TRADE SECRET. It is the intention of the parties that to the extent any Confidential Information may constitute a "trade secret" as defined by Ohio law, then, in addition to the remedies set forth in this Agreement, Employer may elect to bring an action against Executive in the case of any actual or threatened misappropriation of any such trade secret by Executive. (d) NO REMEDY AT LAW. Regardless of whether any of the Confidential Information shall constitute a trade secret as defined by Ohio law, Executive expressly recognizes and agrees that the restrictions contained in this Section 6 represent a reasonable and necessary protection of the legitimate interests of Employer, that his failure to observe and comply with his covenants and agreements herein will cause irreparable harm to Employer, that it is and will continue to be difficult to ascertain the harm and damages to Employer that such a failure by Executive could cause, and that a remedy at law for such failure by Executive will be inadequate. 7. NON-INTERFERENCE, NON-SOLICITATION AND NON-COMPETITION COVENANTS. (a) ACKNOWLEDGMENT OF ACCESS. Pursuant to this Agreement, Executive has agreed to become Chief Executive Officer of Employer and to comply with the non-disclosure provisions contained in Section 6 hereof. Executive recognizes and acknowledges that he will be given access to certain of Employer's Confidential Information (as defined in Section 6(a)), and have access to and authority to develop relationships with customers of Employer because of his position and status as Employer's Chief Executive Officer, which he would not otherwise attain. In consideration of the foregoing, Executive agrees to comply with the terms of this Section 7. (b) RESTRICTED PERIOD. The restraints imposed by this Section 7 shall apply during any period that Executive continues to receive payment of Base Compensation hereunder, and for a period of one year thereafter (the "Restricted Period"); provided, however, that, notwithstanding anything contained herein to the contrary, the restraints imposed by this Section 7 shall not apply following the termination of Executive's employment with Employer by Employer without -17- 18 Cause. In the event that any Court having jurisdiction should find that the Restricted Period is so long and/or the scope (distance) (as set forth below) is so broad as to constitute an undue hardship on Executive, then, in such event only, the Restricted Period and area limitations shall be valid for the maximum time and area for which they could be legally made and enforced. (c) COVENANT. During the Restricted Period, Executive shall not, as an executive (other than as an executive of Employer or an affiliate thereof), employee, employer, stockholder, officer, director, partner, consultant, advisor, proprietor, lender, provider of capital or other ownership, operational or management capacity, directly or indirectly, (i) solicit or hire any employee of Employer or otherwise interfere with or disrupt the employment relationship between Employer and any employee, (ii) solicit or do business with (A) Employer's customers with whom Employer did business while Executive was employed under this Agreement, or (B) individuals or entities who Executive met as a result of his position with Employer while Executive was employed under this Agreement, that (in the case of either clause (A) or (B)) results in competition with Employer in any county, parish or other comparable jurisdiction within a state, province or nation located in North America in which any of such customers have operations (other than customers whose business relationship with Employer has terminated for at least 90 days) or in which Employer has conducted business while Executive was employed under this Agreement (collectively, the "Restricted Area"), or (iii) be associated with any entity engaged in the business of oil and/or gas exploration, development, production, distribution and/or marketing in the Restricted Area that results in competition with Employer (but excluding association due to ownership of less than 5% of the outstanding securities of any such entity). (d) REASONABLENESS. Executive expressly recognizes and agrees that the restraints imposed by this Section 7 are (i) reasonable as to time, geographic limitation and scope of activity to be restrained; (ii) reasonably necessary to the enjoyment by Employer of the value of its assets and to protect its legitimate interests; and (iii) not oppressive. Executive further expressly recognizes and agrees that the restraints imposed by this Section 7 represent a reasonable and necessary restriction for the protection of the legitimate interests of Employer, that the failure by the Executive to observe and comply with the covenants and agreements in this Section 7 will cause irreparable harm to Employer, that it is and will continue to be difficult to ascertain the harm and damages to Employer that such a failure by the Executive would cause, that the consideration received by the Executive for entering into these covenants and agreements is fair, that the covenants and agreements and their enforcement will not deprive Executive of his ability to earn a reasonable living in the oil and gas industry or otherwise, and that Executive has acquired knowledge and skills in his field that will allow him to obtain employment without violating these covenants and agreements. Executive further expressly acknowledges that he has been encouraged to and has consulted independent counsel, and has reviewed and considered this Agreement with that counsel before executing this Agreement. 8. MEMORANDA, NOTES, RECORDS, ETC. All memoranda, notes, records, software, customer lists or other documents (including, but not limited to, those in electronic form) made or compiled by Executive or otherwise made available to him concerning the business of Employer or its subsidiaries or affiliates shall be Employer's property and shall be delivered to Employer upon the expiration or termination of Executive's employment hereunder or at any -18- 19 other time upon request by Employer, and Executive shall retain no copies of those documents; provided, however, that Executive may retain copies of personal information and information concerning his compensation and benefits entitlements and other employee rights. Executive shall never at any time have or claim any right, title or interest in any material or matter of any sort prepared for or used in connection with the business or promotion of Employer. 9. ENFORCEMENT. The parties hereto recognize that the covenants of Executive hereunder are special, unique and of extraordinary character. Accordingly, it is the intention of the parties that, in addition to any other rights and remedies which Employer may have in the event of any breach of this Agreement, Employer shall be entitled, and hereby is expressly and irrevocably authorized by Executive, INTER ALIA, to demand and obtain specific performance, including without limitation temporary and permanent injunctive relief, and all other appropriate equitable relief against Executive in order to enforce against Executive, or in order to prevent any breach or any threatened breach by Executive of, the covenants and agreements contained herein. In case of any breach of this Agreement, nothing herein contained shall be construed to prevent Employer from seeking such other remedy in the courts as it may elect or invoke. 10. MISCELLANEOUS. (a) NON-DELEGATION OF DUTIES. Executive may not delegate the performance of any of his obligations or duties hereunder, or assign any rights hereunder, without the prior written consent of Employer. Any such purported delegation or assignment in the absence of such written consent shall be null and void with no force or effect. Notwithstanding the foregoing, nothing herein shall prevent Executive from the appropriate delegation of tasks to other executives, employees, assistants and other service providers. (b) BINDING EFFECT. This Agreement shall be binding on and inure to the benefit of the parties hereto and their respective heirs, representatives, successors and permitted assigns and any receiver, trustee in bankruptcy or representative of the creditors of each such person. Employer shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a significant portion of its assets, by agreement in form and substance satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform this Agreement if no such succession had taken place. Regardless whether such agreement is executed, this Agreement shall be binding upon any successor of Employer in accordance with the operation of law and such successor shall be deemed the "Employer" for purposes of this Agreement. (c) SURVIVAL OF COVENANTS. Notwithstanding anything contained in this Agreement, in the event Executive's employment is terminated for any reason whatsoever, the covenants and agreements of Executive contained in Sections 4, 5, 6, 7, 8, 9 and 10, and the covenants of Employer contained in Sections 4 and 5 hereof shall survive any such termination and shall not lapse except as provided herein. (d) SEVERABILITY/MODIFICATION. If any term or provision of this Agreement is held or deemed to be invalid or unenforceable, in whole or in part, by a court of competent jurisdiction, -19- 20 such term or provision shall be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement. (e) GOVERNING LAW. This Agreement is entered into in Ohio, and the construction, validity and interpretation of this Agreement shall be governed by the laws of the State of Ohio without regard to the laws of conflicts of laws thereof. (f) ARBITRATION. In the event of any dispute, controversy or claim between Employer and Executive arising out of or relating to the interpretation, application or enforcement of any provision of this Agreement (other than with respect to provisions under Section 4(f) of this Agreement), either Employer or Executive may, by written notice to the other, require such dispute or difference to be submitted to arbitration. The arbitrator shall be selected by agreement of the parties or, if they do not agree on an arbitrator within 30 days after one party has notified the other of his or its desire to have the question settled by arbitration, then the arbitrator shall be selected pursuant to the procedures of the American Arbitration Association (the "AAA") in Canton, Ohio. The determination reached in such arbitration shall be final and binding on all parties. Enforcement of the determination by such arbitrator may be sought in any court of competent jurisdiction. Unless otherwise agreed by the parties, any such arbitration shall take place in Canton, Ohio, and shall be conducted in accordance with the Commercial Arbitration Rules of the AAA. (g) EFFECTIVENESS; ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire understanding and agreement between the parties relating to the subject matter hereof, and it supersedes all previous and contemporaneous negotiations, commitments, writings and understandings. Neither this Agreement nor any provision hereof may be waived, modified, amended, changed, discharged or terminated, except by an agreement in writing signed by the party against whom enforcement of any waiver, modification, change, amendment, discharge or termination is sought. (h) NOTICES. Any notice required or permitted to be given under the provisions of this Agreement shall be in writing and shall be deemed to have been duly given on the date of delivery if delivered personally to the party to whom notice is to be given (or to the appropriate address below), or on the third day after mailing if mailed to the party to whom notice is to be given by certified or registered mail, return receipt requested, postage prepaid, or by courier, addressed as follows, or to such other person at such other address as any party may request in writing to the other party to this Agreement: TO EXECUTIVE: John L. Schwager c/o Belden & Blake Corporation 5200 Stoneham Road North Canton, Ohio 47720 TO EMPLOYER: Belden & Blake Corporation 5200 Stoneham Road North Canton, Ohio 47720 -20- 21 Any party may change its address for purposes of this paragraph by giving the other parties written notice of the new address in the manner set forth above. (i) HEADINGS. The section headings herein are for convenience only and shall not be used in interpreting or construing this Agreement. (j) INDEMNIFICATION. Employer shall defend and hold Executive harmless to the fullest extent permitted by applicable law in connection with any civil or criminal claim, action, suit, investigation or proceeding arising out of or relating to performance by Executive of services for, or action of Executive as a director, officer or employee of Employer, or of any other person or enterprise at the request of Employer. Expenses incurred by Executive in defending any such claim, action, suit, investigation or proceeding shall be paid by Employer in advance of the final disposition thereof upon the receipt by Employer of an undertaking by or on behalf of Executive to repay said amount if it shall ultimately be determined that Executive is not entitled to be indemnified hereunder; provided, however, that this indemnification arrangement shall not apply to a nonderivative action commenced by Employer against Executive. The foregoing shall be in addition to, and shall not be deemed to limit in any respect, any indemnification rights Executive may have by law, contract, charter, by-law or otherwise. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement to be effective as of the Effective Date. EXECUTIVE: /s/ John L. Schwager --------------------------- John L. Schwager EMPLOYER: BELDEN & BLAKE CORPORATION, an Ohio Corporation By: /s/ William S. Price, III ------------------------------- Title: Chairman, Compensation Committee of the Board of Directors -21- 22 EXHIBIT A NOTICE OF EXERCISE Belden & Blake Corporation Date of Exercise: Ladies and Gentlemen: This constitutes notice under my stock option that I elect to purchase the number of shares for the price set forth below. Stock option dated Number of shares as to which option is exercised Certificates to be issued in name of: Total exercise price: $ Cash payment delivered herewith: $ By this exercise, I agree (i) to provide such additional documents as Executive may reasonably require and (ii) to provide for the payment by me to Executive of your withholding obligation, if any, relating to the exercise of this option. I hereby make the following certifications and representations with respect to the number of shares of Common Stock of Employer listed above (the "SHARES"), which are being acquired by me for my own account upon exercise of the Option as set forth above: I acknowledge that the Shares have not been registered under the Securities Act of 1933, as amended (the "ACT"), and are deemed to constitute "restricted securities" under Rule 701 and "control securities" under Rule 144 promulgated under the Act. I warrant and represent to Employer that I have no present intention of distributing or selling said Shares, except as permitted under the Act and any applicable state securities laws. I further acknowledge that I will not be able to resell the Shares for at least ninety (90) days after the stock of Employer becomes publicly traded (i.e., subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934) under Rule 701 and -22- 23 that more restrictive conditions apply to affiliates of Employer under Rule 144. I further acknowledge that all certificates representing any of the Shares subject to the provisions of the Option shall have endorsed thereon appropriate legends reflecting the foregoing limitations, as well as any legends reflecting restrictions pursuant to Employer's Articles of Incorporation, Bylaws and/or applicable securities laws. I further agree that, if required by Employer (or a representative of the underwriters) in connection with an underwritten registration of the offering of any securities of Employer under the Act, I will not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of Employer during such period (not to exceed one hundred eighty (180) days or, if less, the period of time any other executive officer of Employer is so restricted) following the effective date of the registration statement of Employer filed under the Act (the "EFFECTIVE DATE") as may be requested by Employer or the representative of the underwriters. I further agree that Employer may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. Very truly yours, John L. Schwager -23- 24 AMENDMENT TO EMPLOYMENT AGREEMENT --------------------------------- THIS AMENDMENT TO EMPLOYMENT AGREEMENT is dated the 1st day of November, 1999 by and between Belden & Blake Corporation, an Ohio corporation ("Employer"), and John L. Schwager ("Executive"). WHEREAS, Employer and Executive are parties to an Employment Agreement, dated as of June 1, 1999 (the "Employment Agreement"), and the parties hereto have agreed to amend certain provisions of the Employment Agreement on the terms set forth below. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: 1. The last sentence of Section 3(c) of the Employment Agreement is hereby amended to read in its entirety as follows: "Executive shall be entitled to reimbursement by Employer for financial and tax planning advisory services at rates customary to the local area and for uninsured expenses associated with an annual physical examination by a physician selected by him, provided that the foregoing reimbursements shall not in the aggregate exceed $25,000 on an annual basis." 2. The last sentence of Section 3(f) of the Employment Agreement is hereby amended to read in its entirety as follows: "If prior to September 1, 1999 Executive receives an offer from a third party to purchase the Current Residence for less than $233,500, and if, with the consent of Employer, Executive accepts such offer, Employer shall pay to Executive in cash an amount equal to the shortfall plus a Tax Gross-up and the federal, state and local taxes on the Tax Gross-up, all to the end that Executive be held harmless, on an after-tax basis, from the tax impact on the shortfall payment." 3. Section 3(g) of the Employment Agreement is hereby amended by adding the following at the end thereof: "In addition, Employer shall pay Executive an amount determined by its accountants to be equal to Executive's federal, state and local taxes on the foregoing reimbursements (the "Tax Gross-up") and the federal, state and local taxes on the Tax Gross-up, all to the end that Executive be held harmless, on an after-tax basis, from the tax impact thereof." 4. The last two sentences of Section 4(b) of the Employment Agreement are hereby amended to read in their entirety as follows: 25 "Executive shall have thirty (30) days from his receipt of such notice to cure such circumstances or such breach if such breach is reasonably susceptible to cure. If, in the reasonable good faith judgment of the Board of Directors, the alleged breach is not reasonably susceptible to cure, or such circumstances or material breach has not been satisfactorily cured within such thirty (30) day cure period, such neglect of duties or material breach shall thereupon constitute `Cause' hereunder." 5. The second and third sentences of Section 4(e) of the Employment Agreement are amended and a new fourth sentence has been added to such section as follows: "Notwithstanding any provision of this Agreement to the contrary, in the event Executive elects to terminate his employment either (i) following the occurrence of any event constituting Good Reason (as defined below) or (ii) within the thirty (30)-day period beginning six (6) months after the occurrence of a Change of Control (as defined below in Section 5(g)(iii)) regardless of the reason for such termination, such termination shall be deemed to constitute a termination by Employer without Cause, and Executive shall be entitled to all of the payments and benefits set forth in Section 4(c). For purposes of this Agreement, "Good Reason means any of the following: (i) a substantial and adverse change in Executive's status or position as Chief Executive Officer and a key employee of Employer, or a substantial reduction in the duties and responsibilities previously exercised by Executive, or any failure to reappoint or reelect Executive to, such position, except in connection with the termination of Executive's employment for Cause or Permanent Disability, or as a result of Executive's death; (ii) a reduction (other than for Cause) by Employer in Executive's Base Compensation; (iii) a relocation of Executive's principal place of work to any location that is more than 25 miles from Canton, Ohio; (iv) a sale or other exchange or transfer (whether by merger, reorganization or otherwise) of substantially all of the shares or assets of Employer; or (v) a material breach of the provisions of this Agreement by Employer. Notwithstanding the foregoing, a termination of employment by Executive will be deemed to be for `Good Reason' only if Executive elects to terminate employment within ninety (90) days after he knows or should know that an event constituting Good Reason has occurred; provided, however, that Executive's continued employment following the occurrence of such an event shall not constitute consent to, or a waiver of rights with respect to, any other event constituting Good Reason hereunder." 6. The first sentence of Section 4(f)(ii) is hereby amended to read in its entirety as follows: " Subject to the provisions of Section 4(f)(iii), all determinations required to be made under this Section 4(f), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by Employer's regular outside independent public accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations both to Employer and Executive within 15 business days of the -2- 26 Effective Date of Termination, if applicable, or such earlier time as is requested by Employer." 7. The first sentence of Section 5(b) is hereby amended to read in its entirety as follows: One-fourth (1/4) of the Option Shares (I.E., 34,845 shares) shall vest and be exercisable on the first anniversary of the date of this Agreement and one-twelfth (1/12) of the remaining Option Shares (I.E., 8,711 shares) shall vest and be exercisable at the end of each three (3) month period thereafter until all Option Shares have vested, provided, however, in order for Option Shares eligible to vest for any period to vest, Executive must have remained an executive or member of the Board of Directors of Employer from the date hereof through the last day of the relevant period. 8. RATIFICATION. Except as specifically amended hereby, the Employment Agreement, and all of the terms and conditions thereof, are hereby ratified and confirmed and shall remain in full force and effect. IN WITNESS WHEREOF, Employer has caused this Agreement to be executed by its duly authorized officers, and Executive has signed this Agreement, all as of the day and year first above written. EXECUTIVE: /s/ John L. Schwager ------------------------------------ John L. Schwager EMPLOYER: BELDEN & BLAKE CORPORATION, an Ohio Corporation By: /s/ William S. Price, III ------------------------------------ William S. Price, III Chairman Title: Compensation & Organizational Committee ------------------------------------ -3- EX-21 6 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARY STATE OF INCORPORATION - ----------------------------- ------------------------------------ The Canton Oil & Gas Company Ohio Ward Lake Drilling, Inc. Michigan Peake Energy, Inc. Delaware As of December 31, 1999, the other subsidiaries included in the registrant's consolidated financial statements, and all other subsidiaries considered in the aggregate as a single subsidiary, did not constitute a significant subsidiary. EX-27 7 EXHIBIT 27
5 0000880114 BELDEN & BLAKE CORPORATION 1,000 U.S. DOLLARS YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 4,536 0 25,301 0 2,106 35,103 580,950 280,047 350,695 78,135 303,731 0 0 1,026 (52,616) 350,695 130,742 135,738 72,194 72,194 58,724 0 34,302 (29,482) (11,179) (18,303) 0 0 0 (18,303) 0 0
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