-----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, TfzKSMiuh0uRUs67iRZ/RxPQ7TuWY6xNbqcmdiFShIrJh2WHoMX+i9rWcwYf650F v4rrwH50gyAwytbhm6aCJw== 0000950152-04-003819.txt : 20040510 0000950152-04-003819.hdr.sgml : 20040510 20040510171727 ACCESSION NUMBER: 0000950152-04-003819 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040510 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20100 FILM NUMBER: 04794183 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 FORMER COMPANY: FORMER CONFORMED NAME: BELDEN & BLAKE ENERGY CORP /OH DATE OF NAME CHANGE: 19920427 10-Q 1 l06844ae10vq.txt BELDEN & BLAKE CORPORATION 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2004 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to --------- --------- Commission File Number: 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 No.) 5200 Stoneham Road North Canton, Ohio 44720 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (330) 499-1660 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) 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. [X] Yes [ ] No Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No As of April 30, 2004, Belden & Blake Corporation had outstanding 10,454,644 shares of common stock, without par value, which is its only class of stock. BELDEN & BLAKE CORPORATION INDEX
PAGE ---- PART I Financial Information: Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003............................................. 1 Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 ......................... 2 Consolidated Statements of Shareholders' Equity (Deficit) for the three months ended March 31, 2004 and the years ended December 31, 2003 and 2002.................................... 3 Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 ......................... 4 Notes to Consolidated Financial Statements...................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 14 Item 4. Controls and Procedures......................................... 15 PART II Other Information Item 6. Exhibits and Reports on Form 8-K................................ 16
BELDEN & BLAKE CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 2004 2003 ----------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,673 $ 1,440 Accounts receivable, net 17,689 17,597 Inventories 894 786 Deferred income taxes 9,021 6,853 Other current assets 2,361 2,415 Fair value of derivatives 615 319 --------- --------- TOTAL CURRENT ASSETS 32,253 29,410 PROPERTY AND EQUIPMENT, AT COST Oil and gas properties (successful efforts method) 471,912 464,262 Gas gathering systems 15,256 15,264 Land, buildings, machinery and equipment 23,069 23,107 --------- --------- 510,237 502,633 Less accumulated depreciation, depletion and amortization 260,576 256,050 --------- --------- PROPERTY AND EQUIPMENT, NET 249,661 246,583 FAIR VALUE OF DERIVATIVES 794 755 OTHER ASSETS 6,942 7,163 --------- --------- $ 289,650 $ 283,911 ========= ========= LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ 4,213 $ 5,496 Accrued expenses 19,498 15,393 Current portion of long-term liabilities 729 729 Fair value of derivatives 20,880 14,765 --------- --------- TOTAL CURRENT LIABILITIES 45,320 36,383 LONG-TERM LIABILITIES Bank and other long-term debt 45,437 47,503 Senior subordinated notes 225,000 225,000 Other 4,727 4,629 --------- --------- 275,164 277,132 FAIR VALUE OF DERIVATIVES 10,320 9,723 DEFERRED INCOME TAXES 18,698 18,013 SHAREHOLDERS' DEFICIT Common stock without par value; $.10 stated value per share; authorized 58,000,000 shares; issued 10,674,803 and 10,610,450 shares (which includes 220,784 and 214,593 treasury shares, respectively) 1,045 1,040 Paid in capital 107,565 107,633 Deficit (148,604) (150,656) Accumulated other comprehensive loss (19,858) (15,357) --------- --------- TOTAL SHAREHOLDERS' DEFICIT (59,852) (57,340) --------- --------- $ 289,650 $ 283,911 ========= =========
See accompanying notes. 1 BELDEN & BLAKE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2004 2003 -------- -------- REVENUES Oil and gas sales $ 23,244 $ 19,427 Gas gathering, marketing, and oilfield service 5,774 8,104 Other 168 183 -------- -------- 29,186 27,714 EXPENSES Production expense 5,419 4,503 Production taxes 664 673 Gas gathering, marketing, and oilfield service 5,177 7,514 Exploration expense 2,077 2,242 General and administrative expense 1,235 1,174 Franchise, property and other taxes 86 71 Depreciation, depletion and amortization 4,947 4,331 Accretion expense 112 86 Derivative fair value (gain) loss (332) 277 -------- -------- 19,385 20,871 -------- -------- OPERATING INCOME 9,801 6,843 OTHER EXPENSE Interest expense 6,543 6,216 -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 3,258 627 Provision for income taxes 1,206 232 -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,052 395 Loss from discontinued operations, net of tax -- (24) -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,052 371 Cumulative effect of change in accounting principle, net of tax -- 2,397 -------- -------- NET INCOME $ 2,052 $ 2,768 ======== ========
See accompanying notes. 2 BELDEN & BLAKE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
ACCUMULATED OTHER TOTAL COMMON COMMON PAID IN COMPREHENSIVE EQUITY SHARES STOCK CAPITAL DEFICIT INCOME (DEFICIT) ------ ------- --------- ---------- ------------- ----------- JANUARY 1, 2002 10,290 $ 1,029 $ 107,402 $ (150,797) $ 15,087 $ (27,279) Comprehensive income (loss): Net income 2,465 2,465 Other comprehensive income, net of tax: Change in derivative fair value (5,518) (5,518) Reclassification adjustment for derivative (gain) loss reclassified into oil and gas sales (14,030) (14,030) ----------- Total comprehensive loss (17,083) ----------- Stock options exercised 65 7 (2) 5 Stock-based compensation 82 82 Repurchase of stock options (29) (29) Tax benefit of repurchase of stock options and stock options exercised 57 57 Treasury stock (59) (6) (392) (398) ------ ------- --------- ---------- ------------- ----------- DECEMBER 31, 2002 10,296 1,030 107,118 (148,332) (4,461) (44,645) Comprehensive (loss) income: Net loss (2,324) (2,324) Other comprehensive income, net of tax: Change in derivative fair value (17,439) (17,439) Reclassification adjustment for derivative (gain) loss reclassified into oil and gas sales 6,543 6,543 ----------- Total comprehensive loss (13,220) ----------- Stock options exercised 120 12 108 120 Stock-based compensation 326 326 Repurchase of stock options (48) (48) Tax benefit of repurchase of stock options and stock options exercised 170 170 Treasury stock (20) (2) (41) (43) ------ ------- --------- ---------- ------------- ----------- DECEMBER 31, 2003 10,396 1,040 107,633 (150,656) (15,357) (57,340) Comprehensive income (loss): Net income 2,052 2,052 Other comprehensive income, net of tax: Change in derivative fair value (6,985) (6,985) Reclassification adjustment for derivative (gain) loss reclassified into oil and gas sales 2,484 2,484 ----------- Total comprehensive loss (2,449) ----------- Stock options exercised 64 6 104 110 Stock-based compensation 19 19 Repurchase of stock options (283) (283) Tax benefit of repurchase of stock options and stock options exercised 116 116 Treasury stock (6) (1) (24) (25) ------ ------- --------- ---------- ------------- ----------- MARCH 31, 2004 (UNAUDITED) 10,454 $ 1,045 $ 107,565 $ (148,604) $ (19,858) $ (59,852) ====== ======= ========= ========== ============= ===========
See accompanying notes. 3 BELDEN & BLAKE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2004 2003 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations $ 2,052 $ 395 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation, depletion and amortization 4,947 4,331 Accretion 112 86 Loss on disposal of property and equipment 325 277 Amortization of derivatives and other noncash hedging activities (697) (446) Exploration expense 2,077 2,242 Deferred income taxes 1,206 206 Stock-based compensation 19 18 Change in operating assets and liabilities, net of effects of acquisition and disposition of businesses: Accounts receivable and other operating assets (286) (5,366) Inventories (108) (3) Accounts payable and accrued expenses 2,822 6,095 -------- -------- NET CASH PROVIDED BY CONTINUING OPERATIONS 12,469 7,835 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired -- (3,752) Disposition of businesses, net of cash -- 100 Proceeds from property and equipment disposals 41 118 Exploration expense (2,077) (2,242) Additions to property and equipment (8,024) (7,253) Decrease (increase) in other assets 144 (18) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (9,916) (13,047) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit 42,366 47,443 Repayment of long-term debt and other obligations (44,488) (43,549) Proceeds from stock options exercised 110 3 Repurchase of stock options (283) (22) Purchase of treasury stock (25) (10) -------- -------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (2,320) 3,865 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS 233 (1,347) NET INCREASE IN CASH AND CASH EQUIVALENTS FROM DISCONTINUED OPERATIONS -- 683 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,440 1,722 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,673 $ 1,058 ======== ========
See accompanying notes. 4 BELDEN & BLAKE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2004 (1) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Belden & Blake Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 2003. Certain reclassifications have been made to conform to the current presentation. (2) NEW ACCOUNTING PRONOUNCEMENTS In 2003, the Company was made aware of an issue regarding the application of provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. (SFAS) 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets," to oil and gas companies. The issue was whether SFAS 142 required registrants to reclassify costs associated with mineral rights, including both proved and unproved leasehold acquisition costs, as intangible assets in the balance sheet, apart from other capitalized oil and gas property costs. Historically, the Company and other oil and gas companies have included the cost of oil and gas leasehold interests as part of oil and gas properties and provided the disclosures required by SFAS 69, "Disclosures about Oil and Gas Producing Activities." This matter was referred to the Emerging Issues Task Force (EITF) in late 2003. Although the EITF has not issued formal guidance for oil and gas companies, at the March 2004 meeting, the Task Force reached a consensus that mineral rights for mining companies should be accounted for as tangible assets. In order to resolve this inconsistency, the Board directed the FASB staff to prepare a FASB Staff Position (FSP) that amended SFAS 141 and SFAS 142. FSP FAS 141-1 and 142-1 is effective for the first reporting period beginning after April 29, 2004. As the Company already includes these assets as part of its capitalized oil and gas properties the application of this FSP will not have an impact on the Company. (3) DERIVATIVES AND HEDGING The Company recognizes all derivative financial instruments as either assets or liabilities at fair value. The changes in fair value of derivative instruments not qualifying for designation as cash flow hedges that occur prior to maturity are initially reported in expense in the consolidated statements of operations as derivative fair value (gain) loss. All amounts recorded in this line item are ultimately reversed within the same line item and included in oil and gas sales revenues over the respective contract terms. Changes in the fair value of derivative instruments that are fair value hedges are offset against changes in the fair value of the hedged assets, liabilities, or firm commitments, through net income (loss). Changes in the fair value of derivative instruments that are cash flow hedges are recognized in other comprehensive income (loss) until such time as the hedged items are recognized in net income (loss). 5 The hedging relationship between the hedging instruments and hedged item must be highly effective in achieving the offset of changes in fair values or cash flows attributable to the hedged risk both at the inception of the contract and on an ongoing basis. The Company measures effectiveness at least on a quarterly basis. Ineffective portions of a derivative instrument's change in fair value are immediately recognized in net income (loss). If there is a discontinuance of a cash flow hedge because it is probable that the original forecasted transaction will not occur, deferred gains or losses are recognized in earnings immediately. 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 or oil price volatility and support the Company's capital expenditure plans. 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, collars or options. At March 31, 2004, the Company's derivative contracts were comprised of natural gas swaps, collars and options. Qualifying NYMEX based derivative contracts are designated as cash flow hedges. During the first quarters of 2004 and 2003, a net loss of $3.9 million ($2.5 million after tax) and a net loss of $6.1 million ($3.9 million after tax), respectively, were reclassified from accumulated other comprehensive income to earnings. The fair value of open hedges decreased $11.0 million ($7.0 million after tax) in the first quarter of 2004 and decreased $14.4 million ($9.1 million after tax) in the first quarter of 2003. At March 31, 2004, the estimated net loss in accumulated other comprehensive income that is expected to be reclassified into earnings within the next 12 months is approximately $20.5 million. The Company has partially hedged its exposure to the variability in future cash flows through December 2005. (4) STOCK-BASED COMPENSATION The Company measures expense associated with stock-based compensation under the provisions of Accounting Principles Board Opinion No. (APB) 25, "Accounting for Stock Issued to Employees" and its related interpretations. Under APB 25, no compensation expense is required to be recognized by the Company upon the issuance of stock options to key employees as the exercise price of the option is equal to the market price of the underlying common stock at the date of grant. For purposes of the pro forma disclosures required by SFAS 123, the estimated fair value of the options is amortized to expense over the options' vesting period. The changes in net income or loss as if the Company had applied the fair value provisions of SFAS 123 for the quarters ended March 31, 2004, and 2003 were not material. The changes in share value and the vesting of shares are reported as adjustments to compensation expense. The vesting of shares in the quarters ended March 31, 2004, and 2003, resulted in an increase in compensation expense of $19,000 and $18,000, respectively. (5) 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 marketing and gathering natural gas for delivery to intrastate and interstate gas transmission pipelines. The Company's operations are conducted entirely in the United States. 6 (6) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
THREE MONTHS ENDED MARCH 31, ----------------------------- (IN THOUSANDS) 2004 2003 ----- ------- CASH PAID DURING THE PERIOD FOR: Interest $ 981 $ 612 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX -- 2,397
(7) SUBSEQUENT EVENT In April 2004, the Company decided to dispose of its Arrow Oilfield Service Company ("Arrow") assets. The Company is currently negotiating purchase and sale agreements and expects the sale to be completed by the end of the second quarter. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION The information in this document includes forward-looking statements that are made pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Statements preceded by, followed by or that otherwise include the statements "should," "believe," "expect," "anticipate," "intend," "will," "continue," "estimate," "plan," "outlook," "may," "future," "projection," and variations of these statements and similar expressions are forward-looking statements. These forward-looking statements are based on current expectations and projections about future events. Forward-looking statements, and the business prospects of the Company are subject to a number of risks and uncertainties which may cause the Company's actual results in future periods to differ materially from the forward-looking statements contained herein. These risks and uncertainties include, but are not limited to, the Company's access to capital, the market demand for and prices of oil and natural gas, the Company's oil and gas production and costs of operation, results of the Company's future drilling activities, the uncertainties of reserve estimates, general economic conditions, new legislation or regulatory changes, changes in accounting principles, policies or guidelines and environmental risks. These and other risks are described in the Company's 10-K and 10-Q reports and other filings with the Securities and Exchange Commission ("SEC"). CRITICAL ACCOUNTING POLICIES The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States ("GAAP") and Securities and Exchange Commission ("SEC") guidance. See the "Notes to Consolidated Financial Statements" included in "Item 8. Financial Statements and Supplementary Data" in the Company's 2003 Form 10-K annual report filed with the SEC for a comprehensive discussion of the Company's significant accounting policies. GAAP requires information in financial statements about the accounting principles and methods used and the risks and uncertainties inherent in significant estimates including choices between acceptable methods. Following is a discussion of the Company's most critical accounting policies: SUCCESSFUL EFFORTS METHOD OF ACCOUNTING The accounting for and disclosure of oil and gas producing activities requires the Company's management to choose between GAAP alternatives and to make judgments about estimates of future uncertainties. The Company utilizes the "successful efforts" method of accounting for oil and gas producing 7 activities as opposed to the alternate acceptable "full cost" method. Under the successful efforts 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, exploratory dry hole costs and costs of carrying and retaining unproved properties, are expensed as incurred. The major difference between the successful efforts method of accounting and the full cost method is under the full cost method of accounting, such exploration costs and expenses are capitalized as assets, pooled with the costs of successful wells and charged against the net income (loss) of future periods as a component of depletion expense. OIL AND GAS RESERVES The Company's proved developed and proved undeveloped reserves are all located within the Appalachian and Michigan Basins in 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 assumptions used. Proved reserves represent estimated quantities of natural gas and oil 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 accuracy of a reserve estimate is a function of: -- the quality and quantity of available data; -- the interpretation of that data; -- the accuracy of various mandated economic assumptions; and -- the judgment of the persons preparing the estimate. The Company's proved reserve information included in the Company's 2003 Form 10-K is based on estimates prepared by independent petroleum engineers. Estimates prepared by others may be higher or lower than these estimates. CAPITALIZATION, DEPRECIATION, DEPLETION AND IMPAIRMENT OF LONG-LIVED ASSETS See the "Successful Efforts Method of Accounting" discussion above. 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 indicated, the costs are charged to expense. Gas gathering systems are stated at cost. Depreciation expense is computed using the straight-line method over 15 years. 8 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 expensed 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. Fair value is determined on management's outlook of future oil and natural gas prices and estimated future cash flows to be generated by the assets, discounted at a market rate of interest. Impairment of unproved properties is based on the estimated fair value of the property. DERIVATIVES AND HEDGING The Company recognizes all derivative financial instruments as either assets or liabilities at fair value. Derivative instruments that are not hedges must be adjusted to fair value through net income (loss). Changes in the fair value of derivative instruments that are fair value hedges are offset against changes in the fair value of the hedged assets, liabilities, or firm commitments, through net income (loss). Changes in the fair value of derivative instruments that are cash flow hedges are recognized in other comprehensive income (loss) until such time as the hedged items are recognized in net income (loss). Ineffective portions of a derivative instrument's change in fair value are immediately recognized in net income (loss). Deferred gains and losses on terminated commodity hedges will be recognized as increases or decreases to oil and gas revenues during the same periods in which the underlying forecasted transactions are recognized in net income (loss). The relationship between the hedging instruments and the hedged items must be highly effective in achieving the offset of changes in fair values or cash flows attributable to the hedged risk both at the inception of the contract and on an ongoing basis. The Company measures effectiveness on changes in the hedge's intrinsic value. The Company considers these hedges to be highly effective and expects there will be no ineffectiveness to be recognized in net income (loss) since the critical terms of the hedging instruments and the hedged forecasted transactions are the same. Ongoing assessments of hedge effectiveness will include verifying and documenting that the critical terms of the hedge and forecasted transaction do not change. The Company measures effectiveness on at least a quarterly basis. The Company's financial results and cash flows can be significantly impacted as commodity prices fluctuate widely in response to changing market conditions. To manage its exposure to natural gas or oil price volatility, the Company has entered into NYMEX based commodity derivative contracts, currently natural gas swaps and collars, and has designated the contracts for the special hedge accounting treatment permitted under SFAS 133. 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 service revenues are recognized when the goods or services have been provided. NEW ACCOUNTING PRONOUNCEMENTS In 2003, the Company was made aware of an issue regarding the application of provisions of SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets," to oil and 9 gas companies. The issue was whether SFAS 142 required registrants to reclassify costs associated with mineral rights, including both proved and unproved leasehold acquisition costs, as intangible assets in the balance sheet, apart from other capitalized oil and gas property costs. Historically, the Company and other oil and gas companies have included the cost of oil and gas leasehold interests as part of oil and gas properties and provided the disclosures required by SFAS 69, "Disclosures about Oil and Gas Producing Activities." This matter was referred to the EITF in late 2003. Although the EITF has not issued formal guidance for oil and gas companies, at the March 2004 meeting, the Task Force reached a consensus that mineral rights for mining companies should be accounted for as tangible assets. In order to resolve this inconsistency, the Board directed the FASB staff to prepare a FSP that amended SFAS 141 and SFAS 142. FSP FAS 141-1 and 142-1 is effective for the first reporting period beginning after April 29, 2004. As the Company already includes these assets as part of its capitalized oil and gas properties the application of this FSP will not have an impact on the Company. RESULTS OF OPERATIONS - FIRST QUARTERS OF 2004 AND 2003 COMPARED The following Management's Discussion and Analysis is based on the results of operations from continuing operations, unless otherwise noted. Accordingly, discontinued operations have been excluded. The following table sets forth certain information regarding the Company's net oil and natural gas production, revenues and expenses for the quarters indicated:
THREE MONTHS ENDED MARCH 31, --------------------- 2004 2003 --------- --------- PRODUCTION Gas (Mmcf) 4,036 3,443 Oil (Mbbls) 97 101 Total production (Mmcfe) 4,616 4,047 AVERAGE PRICE Gas (per Mcf) $ 4.99 $ 4.76 Oil (per Bbl) 32.05 30.09 Mcfe 5.04 4.80 AVERAGE COSTS (PER MCFE) Production expense 1.17 1.11 Production taxes 0.14 0.17 Depletion 0.82 0.78 OPERATING MARGIN (PER MCFE) 3.73 3.52
MMCF - MILLION CUBIC FEET MBBLS - THOUSAND BARRELS MMCFE - MILLION CUBIC FEET OF NATURAL GAS EQUIVALENT MCF - THOUSAND CUBIC FEET BBL - BARREL MCFE - THOUSAND CUBIC FEET OF NATURAL GAS EQUIVALENT OPERATING MARGIN (PER MCFE) - AVERAGE PRICE LESS PRODUCTION EXPENSE AND PRODUCTION TAXES
REVENUES Net operating revenues increased from $27.5 million in the first quarter of 2003 to $29.0 million in the first quarter of 2004. The increase was due to higher gas sales revenues of $3.8 million partially offset by lower revenues from gas gathering, marketing and oilfield service of $2.3 million. Gas volumes sold increased 593 Mmcf (17%) from 3.4 Bcf (billion cubic feet) in the first quarter of 2003 to 4.0 Bcf in the first quarter of 2004 resulting in an increase in gas sales revenues of approximately $2.8 million. Oil volumes sold decreased approximately 4,000 Bbls (4%) from 101,000 Bbls in the first quarter of 2003 to 97,000 Bbls in the first quarter of 2004 resulting in a decrease in oil sales revenues of approximately $125,000. The gas volume increase was primarily due to the production 10 from wells drilled in 2003 and 2004 including approximately 142 Mmcf from two Trenton Black River ("TBR") wells that began production in December 2003 and March 2004, respectively. The average price realized for the Company's natural gas increased $0.23 per Mcf to $4.99 per Mcf in the first quarter of 2004 compared to the first quarter of 2003 which increased gas sales revenues in the first quarter of 2004 by approximately $930,000. As a result of the Company's hedging activities, gas sales revenues were decreased by $3.5 million ($0.88 per Mcf) in the first quarter of 2004 and decreased by $6.1 million ($1.77 per Mcf) in the first quarter of 2003. The average price paid for the Company's oil increased from $30.09 per Bbl in the first quarter of 2003 to $32.05 per Bbl in the first quarter of 2004 which increased oil sales revenues by approximately $190,000. The operating margin from oil and gas sales (oil and gas sales revenues less production expense and production taxes) on a per unit basis increased from $3.52 per Mcfe in the first quarter of 2003 to $3.73 per Mcfe in the first quarter of 2004. The decrease in gas gathering, marketing and oilfield service revenues was primarily due to a $1.8 million decrease in oilfield service revenues and a $1.2 million decrease in gas marketing revenues partially offset by a $540,000 increase in gas gathering revenues. The decrease in oilfield service revenues was primarily due to a decrease in third-party drilling activities in Michigan in the first quarter of 2004. The lower marketing revenues were the result of decreased gas marketing activity partially offset by higher prices. The increase in gas gathering revenues was primarily due to higher margins on a gathering system in Pennsylvania. COSTS AND EXPENSES Production expense increased $916,000 (20%) from $4.5 million in the first quarter of 2003 to $5.4 million in the first quarter of 2004 primarily due to increased costs to stimulate production on declining wells in the higher oil and natural gas price environment. These efforts increased production volumes during the first quarter of 2004 but also had the effect of increasing the per unit cost. The average production cost increased from $1.11 per Mcfe in the first quarter of 2003 to $1.17 per Mcfe in the first quarter of 2004. The per unit increase was primarily due to the higher costs incurred during the first quarter of 2004 as discussed above partially offset by certain fixed costs spread over greater volumes in the first quarter of 2004. Production taxes decreased $9,000 from $673,000 in the first quarter of 2003 to $664,000 in the first quarter of 2004. Exploration expense decreased $165,000 from $2.2 million in the first quarter of 2003 to $2.1 million in the first quarter of 2004. General and administrative expense increased $61,000 from the first quarter of 2003 to the first quarter of 2004. The Company incurred $176,000 related to strategic advisory services in the first quarter of 2004. Depreciation, depletion and amortization increased by $616,000 from $4.3 million in the first quarter of 2003 to $4.9 million in the first quarter of 2004. This increase was primarily due to an increase in depletion. Depletion expense increased $628,000 (20%) from $3.1 million in the first quarter of 2003 to $3.8 million in the first quarter of 2004 due to higher gas volumes and a higher depletion rate per Mcfe. Depletion per Mcfe increased from $0.78 per Mcfe in the first quarter of 2003 to $0.82 per Mcfe in the first quarter of 2004, primarily due to higher production from higher cost wells. Derivative fair value (gain) loss was a loss of $277,000 in the first quarter of 2003 compared to a gain of $332,000 in the first quarter of 2004. The derivative fair value (gain) loss reflects the changes in fair value of certain derivative instruments that are not designated as cash flow hedges. 11 Interest expense increased $327,000 (5%) from $6.2 million in the first quarter of 2003 to $6.5 million in the first quarter of 2004. This increase was due to an increase in average outstanding borrowings partially offset by lower blended interest rates. Income tax expense increased $974,000 from $232,000 in the first quarter of 2003 to $1.2 million in the first quarter of 2004. The increase was due to an increase in income from continuing operations before income taxes and cumulative effect of change in accounting principle in the first quarter of 2004. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS The primary sources of cash in the three-month period ended March 31, 2004 have been from funds generated from operations and from borrowings under the Company's $100 million revolving credit facility (the "Revolver"). Funds used during this period were primarily used for operations, exploration and development expenditures, interest expense and repayment of debt. The Company's liquidity and capital resources are closely related to and dependent on the current prices paid for its oil and natural gas. The Company's operating activities provided cash flows of $12.5 million during the first quarter of 2004 compared to $7.8 million in the first quarter of 2003. The increase was primarily due to higher cash received for oil and gas revenues (net of hedging) of $3.8 million and changes in working capital items of $1.7 million. Cash flows used in investing activities decreased in the first quarter of 2004 primarily due to a $3.8 million acquisition in the first quarter of 2003 partially offset by $771,000 of increased capital expenditures in the first quarter of 2004. Cash flows used in financing activities in the first quarter of 2004 were primarily due to payments on the credit facility. Cash flows used in financing activities during the first quarter of 2003 were primarily due to borrowings on the credit facility to fund acquisition, exploration and development expenditures in the first quarter of 2003. The Company's current ratio at March 31, 2004 was .71 to 1. During the first three months of 2004, the working capital decreased $6.1 million from a deficit of $7.0 million at December 31, 2003 to a deficit of $13.1 million at March 31, 2004. The decrease was primarily due to a $5.8 million increase in the net current liability for the fair value of derivatives in the first three months of 2004 and a $4.1 million increase in accrued expenses partially offset by a $2.2 million increase in the deferred income taxes asset and a $1.3 million decrease in accounts payable. The $4.1 million increase in accrued expenses was primarily due to an increase in accrued interest expense. CAPITAL EXPENDITURES During the first three months of 2004, the Company invested approximately $5.3 million to drill 21 gross (19.8 net) development wells. All 21 of the wells were successfully completed as producers in the target formation. This cost excludes approximately $1.5 million related to 2 gross (1.0 net) TBR wells in progress as of March 31, 2004. If these wells are determined to be dry holes, their cost will be charged to exploratory dry hole expense in subsequent periods. The Company currently expects to spend approximately $36 million during 2004 on its drilling activities, including exploratory dry hole expense, and other capital expenditures. The Company intends to finance its planned capital expenditures through its available cash flow, available revolving credit line and the sale of non-strategic assets. At March 31, 2004, the Company had approximately $40.5 million available under the Revolver. The level of the Company's future cash flow will depend on a number of 12 factors including the demand for and price levels of oil and gas, the scope and success of its drilling activities and its ability to acquire additional producing properties. FINANCING AND CREDIT FACILITIES The Company has a $100 million revolving credit facility from Ableco Finance LLC and Wells Fargo Foothill, Inc. which matures on June 30, 2006. The Revolver bears interest at the prime rate plus two percentage points, payable monthly. At March 31, 2004, the interest rate was 6.00%. At March 31, 2004, the Company had $39.2 million of outstanding letters of credit. At March 31, 2004, the outstanding balance under the credit agreement was $45.3 million with $40.5 million of borrowing capacity available for general corporate purposes. The Revolver has a total commitment amount of $125 million including a letter of credit sub-limit of $55 million and a special letter of credit facility in the amount of $25 million which combined with the existing letter of credit sub-limit of $55 million would allow a total of $80 million in letters of credit. The Revolver's final maturity date is June 30, 2006. The Revolver is subject to certain financial covenants. These include a quarterly senior debt interest coverage ratio of 3.2 to 1 through March 31, 2006; and a senior debt leverage ratio of 2.7 to 1 through March 31, 2006. There is an early termination fee, equal to .125% of the Revolver, through June 30, 2005. There is no termination fee after June 30, 2005. The Company's agreement with its hedging counterparty requires letters of credit based on an initial collateral requirement plus any negative market value thereafter. The initial collateral requirement currently is approximately $10 million. At April 30, 2004, the Company's hedge position had a negative market value of approximately $28.3 million and the aggregate minimum letter of credit requirement was approximately $38.5 million. At April 30, 2004, the Company had a total of $42.2 million of outstanding letters of credit. The Company is required to hedge, through financial instruments or fixed price contracts, at least 20% but not more than 80% of its estimated hydrocarbon production, on a Mcfe basis, for the succeeding 12 months on a rolling 12-month basis. Based on the Company's hedges currently in place and its expected production levels, the Company is in compliance with this hedging requirement through September 2005. The Revolver is secured by security interests and mortgages against substantially all of the Company's assets and is subject to periodic borrowing base determinations. The borrowing base is the lesser of $100 million or the sum of (i) 65% of the present value of the Company's proved developed producing reserves subject to a mortgage; (ii) 45% of the present value of the Company's proved developed non-producing reserves subject to a mortgage; and (iii) 40% of the present value of the Company's proved undeveloped reserves subject to a mortgage. The price forecast used for calculation of the future net income from proved reserves is the three-year NYMEX strip for oil and natural gas as of the date of the reserve report. Prices beyond three years are held constant provided that the NYMEX strip price for natural gas shall not exceed $5.00 per Mmbtu (million British thermal units). Prices are adjusted for basis differential, fixed price contracts and financial hedges in place. The weighted average price at March 31, 2004, was $5.00 per Mcfe. The present value (using a 10% discount rate) of the Company's future net income at March 31, 2004, using the borrowing base price forecast, was $463 million. The present value under the borrowing base formula above was approximately $275 million for all proved reserves of the Company and $182 million for properties secured by a mortgage. The Revolver is subject to certain financial covenants. These include a senior debt interest coverage ratio of 3.2 to 1 and a senior debt leverage ratio of 2.7 to 1. EBITDA, as defined in the 13 Revolver, and consolidated interest expense on senior debt in these ratios are calculated quarterly based on the financial results of the previous four quarters. In addition, the Company is required to maintain a current ratio (including available borrowing capacity in current assets, excluding current debt and accrued interest from current liabilities and excluding any effects from the application of SFAS 133 to other current assets or current liabilities) of at least 1.0 to 1 and maintain liquidity of at least $5 million (cash and cash equivalents including available borrowing capacity). As of March 31, 2004, the Company's current ratio including the above adjustments was 4.26 to 1. The Company had satisfied all financial covenants as of March 31, 2004. 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. There were no interest rate swaps in the first three months of 2004 or 2003. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Among other risks, 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 may manage its interest rate risk through the use of interest rate swaps to hedge the interest rate exposure associated with the 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 no derivative financial instruments for managing interest rate risks in place as of March 31, 2004 or 2003. If market interest rates for short-term borrowings increased 1%, the increase in the Company's interest expense in the first quarter would be approximately $113,000. This sensitivity analysis is based on the Company's financial structure at March 31, 2004. 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 decreased $0.50 per Mcf, the Company's gas sales revenues for the quarter would decrease by $863,000, after considering the effects of the hedging contracts in place. The Company had no hedges or fixed price contracts on its oil production during 2004 or 2003. If the price of crude oil decreased $3.00 per Bbl, the Company's oil sales revenues for the quarter would decrease by $290,000. To manage its exposure to natural gas or oil price volatility, the Company may partially hedge its physical gas or oil 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, collars or options. The Company had net pretax losses on its hedging activities of $3.5 million in the first three months of 2004 and $6.1 million in the first three months of 2003. The Company's financial results and cash flows can be significantly impacted as commodity prices fluctuate widely in response to changing market conditions. Accordingly, the Company may 14 modify its fixed price contract and financial hedging positions by entering into new transactions or terminating existing contracts. The following table reflects the natural gas volumes and the weighted average prices under financial hedges (including settled hedges) and fixed price contracts at April 30, 2004:
NATURAL GAS SWAPS NATURAL GAS COLLARS FIXED PRICE CONTRACTS ---------------------------------- ------------------------------------ ------------------------- ESTIMATED NYMEX PRICE ESTIMATED ESTIMATED NYMEX PRICE WELLHEAD PRICE PER MMBTU WELLHEAD PRICE ESTIMATED WELLHEAD PRICE QUARTER ENDING BBTU PER MMBTU PER MCF BBTU FLOOR/CAP (1) PER MCF (1) MMCF PER MCF - ------------------ ----- ----------- -------------- ----- ------------- -------------- --------- -------------- June 30, 2004 2,040 $ 3.84 $ 3.99 1,080 $ 4.00 - 5.80 $ 4.15 - 5.95 37 $ 4.06 September 30, 2004 2,040 3.84 3.99 1,080 4.00 - 5.80 4.15 - 5.95 -- -- December 31, 2004 2,040 3.84 4.06 1,080 4.00 - 5.80 4.22 - 6.02 -- -- ----- ----------- -------------- ----- ------------- -------------- ---- -------------- 6,120 $ 3.84 $ 4.01 3,240 $ 4.00 - 5.80 $ 4.17 - 5.97 37 $ 4.06 ===== =========== ============== ===== ============= ============== ==== ============== March 31, 2005 1,500 $ 3.84 $ 4.09 1,500 $ 4.00 - 5.37 $ 4.25 - 5.62 June 30, 2005 1,500 3.73 3.88 1,500 4.00 - 5.37 4.15 - 5.52 September 30, 2005 1,500 3.73 3.88 1,500 4.00 - 5.37 4.15 - 5.52 December 31, 2005 1,500 3.73 3.95 1,500 4.00 - 5.37 4.22 - 5.59 ----- ----------- -------------- ----- ------------- -------------- 6,000 $ 3.76 $ 3.95 6,000 $ 4.00 - 5.37 $ 4.19 - 5.56 ===== =========== ============== ===== ============= ==============
MCF - THOUSAND CUBIC FEET MMBTU - MILLION BRITISH THERMAL UNITS MMCF - MILLION CUBIC FEET BBTU - BILLION BRITISH THERMAL UNITS (1) The NYMEX price per Mmbtu floor/cap and the estimated wellhead price per Mcf for the natural gas collars in 2004 assume the monthly NYMEX settles at $3.00 per Mmbtu or higher. If the monthly NYMEX settles at less than $3.00 per Mmbtu then the NYMEX price per Mmbtu will be the NYMEX settle plus $1.00 and the estimated wellhead price per Mcf will be the NYMEX settle plus $1.15 to $1.25. The NYMEX price per Mmbtu floor/cap and the estimated wellhead price per Mcf for the natural gas collars in 2005 assume the monthly NYMEX settles at $3.10 per Mmbtu or higher. If the monthly NYMEX settles at less than $3.10 per Mmbtu then the NYMEX price per Mmbtu will be the NYMEX settle plus $0.90 and the estimated wellhead price per Mcf will be the NYMEX settle plus $1.05 to $1.15. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this quarterly report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. During the quarter ended March 31, 2004, there have been no changes in the Company's internal controls over financial reporting, identified in connection with our evaluation thereof that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. 15 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1* Retention Plan. 31.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1* Audit Committee Charter. * Filed herewith (b) Reports on Form 8-K On February 9, 2004, the Company filed a Current Report on Form 8-K dated February 9, 2004, reporting under Item 5 related to the Company's significant wildcat discoveries in the Appalachian Trenton Black River trend and planned 2004 drilling in the area. On March 10, 2004, the Company filed a Current Report on Form 8-K dated March 9, 2004, reporting under Item 5 related to the Company's engagement of Randall & Dewey Partners, L.P., an oil and gas strategic advisory and consulting firm based in Houston, Texas, to assist the Company in evaluating its strategic alternatives. On March 24, 2004, the Company filed a Current Report on Form 8-K dated March 17, 2004, reporting under Item 9 related to the Company's operational outlook for 2004 and capital expenditure plan for 2004. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BELDEN & BLAKE CORPORATION Date: May 7, 2004 By: /s/ John L. Schwager ----------------------------------------- John L. Schwager, Director, President and Chief Executive Officer Date: May 7, 2004 By: /s/ Robert W. Peshek ----------------------------------------- Robert W. Peshek, Senior Vice President and Chief Financial Officer 17 EX-10.1 2 l06844aexv10w1.txt EXHIBIT 10.1 EXHIBIT 10.1 BELDEN & BLAKE CORPORATION RETENTION PLAN ARTICLE I. PURPOSE The Corporation and the Company believe that [I] reasonable steps should be taken to promote a stable management team during the crucial (and often tumultuous) period preceding and immediately following a Change in Control and [II] subject to the terms of this Plan, these objectives can best be met by providing key managers with the retention incentives described in this Plan. 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. Also, the form of any term will include all of its other forms. Other words and phrases also may be defined in the Plan text. SECTION 2.1 BASE SALARY. The term "Base Salary" shall mean, with respect to each Participant, the highest monthly rate of base compensation of such Participant in effect at any time during the Retention Period. "Base Salary" shall include any portion of the Participant's annual base compensation the receipt of which the Participant has elected to defer. SECTION 2.2 BOARD. The term "Board" shall mean the board of directors of the Corporation. SECTION 2.3 CAUSE. The term "Cause" shall mean that, during the Retention Period, the Participant 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 or her employment, before a Change in Control, with the Company or, after a Change in Control, the Change Entity; (b) intentional wrongful damage to property of, before a Change in Control, the Company or, after a Change in Control, the Change Entity; or (c) intentional wrongful disclosure of secret processes or confidential information of, before a Change in Control, the Company or, after a Change in Control, the Change Entity; and (ii) 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 Participant 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 Participant not in good faith and without reasonable belief that his or her action or omission was in the best interest, before a Change in Control, of the Company or, after a Change in Control, of the Change Entity. Notwithstanding the foregoing, the Participant shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the Board (or, after a Change in Control, the board of the Change Entity) then in office at a meeting of the Board (or, after a Change in Control, the board of the Change Entity) called and held for such purpose, after reasonable notice to the Participant and an opportunity for the Participant, together with his or her counsel (if the Participant chooses to have counsel present at such meeting), to be heard before the Board (or, after a Change in Control, the board of the Change Entity), finding that, in the good faith opinion of the Board (or, after a Change in Control, the board of the Change Entity), the Participant had committed an act constituting "Cause" as herein defined and specifying the particulars thereof in detail. Nothing herein will limit the right of the Participant or his beneficiaries to contest the validity or propriety of any such determination. SECTION 2.4 CHANGE ENTITY. The term "Change Entity" shall mean one or more related or unrelated corporations or unincorporated entities that, alone or in the aggregate and whether or not acting conjointly, engage in a transaction or series of transactions that constitute a Change in Control. SECTION 2.5 CHANGE IN CONTROL. The term "Change in Control" shall mean the earliest of any of the following that occurs or begins during the Effective Period: (i) Prior to the occurrence of an underwritten public offering of the Company's equity securities: (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 fifty percent (50%) or more of either the Corporation's then outstanding shares of common stock ("Outstanding Common Stock") or the combined voting power of the Corporation's then outstanding Voting Stock; (b) consummation of a complete liquidation or dissolution of the Corporation; or (c) consummation by the Corporation of a merger, consolidation or other reorganization of the Corporation with any other Person, other than: (1) 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 fifty percent (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 fifty percent (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 (2) 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 change in beneficial ownership of more than fifty percent (50%) of the Voting Stock of the Corporation or its successor. (ii) The consummation of an underwritten public offering after which the Permitted Holders have less than thirty percent (30%) of either the combined Outstanding Common Stock or the combined voting power of the Voting Stock of the Corporation; or (iii) Following the occurrence of an underwritten public offering of the Corporation's equity securities: (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) Permitted Holders or Persons who were beneficial owners of the Outstanding Common Stock and the Corporation's Voting Stock, respectively, immediately before the consummation of a merger, reorganization, consolidation, share exchange, transfer of assets or other transaction having similar effect involving the Corporation, own less than thirty percent (30%) of the Outstanding Common Stock and the Corporation's Voting Stock immediately after such transaction. (c) individuals who are members of the Board of the Corporation as of the Effective Date of this Plan (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 Plan 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 Plan, "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 Corporation's equity securities. 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 2.09 CORPORATION. The term "Corporation" shall mean the Belden & Blake Corporation, an Ohio corporation, and any Successor. For purposes of this Plan, any action to be undertaken hereunder by the Corporation may be undertaken only by the Board or any individual or individuals to whom the Board delegates the responsibility for such action. SECTION 2.10 DISABILITY. The term "Disability" shall mean a condition that (i) arose during or before the beginning of the Retention Period and (ii) entitles the affected Participant to a disability benefit under the Corporation's long-term disability program in effect at any time during the Retention Period. SECTION 2.11 EFFECTIVE DATE. The term "Effective Date" shall mean September 5, 2003. SECTION 2.12 EFFECTIVE PERIOD. The term "Effective Period" shall mean the period beginning on the Effective Date and ending on the Expiration Date. SECTION 2.13 EXPIRATION DATE. The term "Expiration Date" means December 31, 2006. SECTION 2.14 PARTICIPANT. The term "Participant" shall mean each person the Corporation designates as eligible to receive a Retention Bonus. SECTION 2.15 PLAN. The term "Plan" shall mean Belden & Blake Corporation Retention Plan. SECTION 2.16 RETENTION BONUS. The term "Retention Bonus" shall mean the amount payable as set forth in Sections 3.2 and 3.3. SECTION 2.17 RETENTION PERIOD. The term "Retention Period" shall mean the period beginning 183 consecutive calendar days before a Change in Control and ending 183 consecutive calendar days after a Change in Control. SECTION 2.18 RETIREMENT. The term "Retirement" shall mean a Severance on or after a Participant's 62nd birthday. SECTION 2.19 SEVERANCE. The term "Severance" means, at any time during the Retention Period, a termination of the employment relationship between a Participant and the Company (for any reason other than a direct transfer of the employment relationship between the Company and the Change Entity on account of the Change in Control) or a termination of the employment relationship between a Participant and the Change Entity after a Change in Control. However, a Participant will not be deemed to have Severed if, at any time during the Retention Period, (i) his or her employment relationship is transferred between the Corporation or the Change Entity and any Subsidiary or (ii) he or she is absent from active employment because of vacation, illness (other than Disability) or a leave of absence approved by his or her employer or protected by law. SECTION 2.20 SUBSIDIARY. The term "Subsidiary" shall mean (i) an entity in which, before or after the Change in Control, the Corporation directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock or (ii) an entity which, after the Change in Control, is related through common control with the Change Entity. SECTION 2.21 SUCCESSOR. The term "Successor" shall mean another corporation or unincorporated entity or group of corporations or unincorporated entities (whether or not also a Change Entity) 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 2.22 TRUST. The term "Trust" shall mean the trust created under a separate trust agreement between the Company and the Trustee. SECTION 2.23 TRUSTEE. The term "Trustee" shall mean the institution or individual that has agreed to serve as trustee of the fund created under Section 3.7. SECTION 2.24 VOTING STOCK. The term "Voting Stock" shall mean securities entitled to vote generally in the election of the Board. ARTICLE III. RETENTION BONUS SECTION 3.1 ELIGIBILITY. (i) A Participant will receive a Retention Bonus under the Plan if: (a) he or she does not Sever at any time during the Retention Period; (b) he or she Severs because of death, Disability or Retirement at any time during the Retention Period; or (c) within the Retention Period: (1) the Participant is Severed by the Company, the Corporation or the Change Entity other than for Cause; or (2) during the Retention Period, the Participant Severs voluntarily following the occurrence of any of the following events: (I) a reduction in the Participant's Base Salary or a material reduction or termination of medical benefit coverage to which the Participant or his dependents were entitled during the Retention Period, other than a nondiscriminatory reduction or termination of medical benefits that is uniformly applied to all employees of similar status; or (II) a change in the Participant's principal location of work to any location which is in excess of 40 miles from the location thereof immediately prior to the beginning of the Retention Period and to which the Participant does not agree in writing; or (III) a substantial and adverse change in the Participant's status or position as an employee of the Company, the Corporation or the Change Entity (when compared to his or her status or position immediately before the beginning of the Retention Period), or a substantial reduction in the duties and responsibilities exercised by the Participant immediately before the beginning of the Retention Period, except in connection with the Participant's Severance for Cause, Disability or death. (ii) Notwithstanding the provisions of Section 3.1(i), a Participant will not be eligible to receive a Retention Bonus if (a) the Participant's employment is Severed for Cause at any time during the Retention Period, or (b) the Participant is not an employee of the Company on the first day of the Retention Period. SECTION 3.2 BONUS POOL. Coincident with a Change in Control, the Corporation will transfer to the trust described in Section 3.7 the Bonus Pool. The amount of the Bonus Pool will be established by applying the appropriate formula from the following table: If the Change Proceeds Less Transaction Then, When the Bonus Pool is Stated as "X", the Formula Costs is . . . for Determining Bonus Pool, is . . . Less than $25,000,000 $00.00 At least $25,000,000 but less than X EQUALS (CHANGE PROCEEDS MINUS TRANSACTION COSTS MINUS $50,000,000 $25,000,000) MULTIPLIED BY .02. At least $50,000,000 but less than X EQUALS THE SUM OF (a) $500,000 PLUS (b) Y WHEN Y EQUALS $80,000,000 (CHANGE PROCEEDS MINUS TRANSACTION COSTS MINUS $50,000,000) MULTIPLIED BY .03. At least $80,000,000 but less than X EQUALS THE SUM OF (a) $1,400,000 PLUS (b) Y, WHEN Y EQUALS $200,000,000 (CHANGE PROCEEDS MINUS TRANSACTION COSTS MINUS $80,000,000) MULTIPLIED .04. ABOVE $200,000,000 $6,200,000.
(i) For these purposes of applying this formula: (a) the "Change Proceeds" will be the sum of: (1) the amount of cash received in connection with the Change in Control; plus (2) the fair market value of all securities and other property received (other than indebtedness assumed by the Change Entity) in connection with the Change in Control; plus (3) the fair market value of any of the Corporation's assets (including cash) distributed, sold or transferred to any party with or without consideration (including the Company and the Corporation but excluding the Change Entity) if that distribution, sale or transfer is undertaken in anticipation of or as a direct result of the Change in Control (including a liquidation of the Corporation). (b) "Fair market value" will mean: (1) in the case of securities that are traded on an exchange (including the NASDAQ National Market System), the reported "closing price" on the date of the Change in Control, assuming it is a trading date; otherwise on the next trading day or, in the case of securities traded over-the-counter with no reported closing price, the mean between the lowest bid and the highest asked prices on that quotation system on the date of the Change in Control assuming it is a trading day; otherwise on the next trading day. (2) in the case either of securities or other property that are not traded on an exchange, the value determined in good faith by the Board but in no event less than the greater of (I) any appraised value of that property utilized by the parties to the Change in Control to establish the value of the appraised property or (II) the value of that property disclosed, directly or indirectly, separately or as a component of other assets affected by the Change in Control, to the Corporation's shareholders in connection with the Change in Control. (c) "Transaction costs" will mean only those costs which are (1) incurred by the Corporation and/or the Company (but not the Change Entity) that are directly associated with consummating the Change in Control but not including any costs or liabilities incurred as a consequence of the Change in Control; and (2) deducted from the Change Proceeds prior to distributions to the shareholders of the Corporation. Costs that are directly associated with consummating the Change in Control include, but are not limited to, fees for financial advisors, fees due under the Transaction Advisory Agreement with TPG, investment bankers, accountants and attorneys for services directly related to the transaction. Costs that are incurred as a consequence of the Change in Control include, but are not limited to, payments made under employment agreements, change of control, severance or similar agreements or plans, including payments made under this plan, payments made to redeem senior subordinated notes subject to put or call provisions, or payments for early termination of credit agreements. (d) In the event of a complete disposition by the shareholders, it is the intention that the Bonus Pool will be determined based on the aggregate value that is received by the stockholders and stock option holders, after Transaction Costs in exchange for all of their stock or options. In the event of a disposition of less than all of the stock and options, the Change Proceeds will be the aggregate value as determined above. (e) Examples demonstrating the application of this section are presented in the attached Exhibit 3.2. SECTION 3.3 ALLOCATION OF BONUS POOL/FORFEITURES/PRORATION. The Bonus Pool will be allocated among Participants as provided on Exhibits separately prepared for each Participant, as in effect on the beginning of the Retention Period. If a Participant does not meet the eligibility requirements described in Section 3.1, his or her Retention Bonus will be irrevocably forfeited. A Participant who Retires, dies or becomes Disabled at any time during the Retention Period will receive a full Retention Bonus. Any amounts not allocated to Participants, including amounts forfeited but not reallocated ("Unallocated Amount"), shall be allocated among and paid to those shareholders and stock option holders that held stock or options immediately prior to the Change in Control ("Holder"). This allocation will be done by multiplying the Unallocated Amount by each Holder's "Interest" and dividing that amount by the sum of all Holder's Interests. For purposes of this allocation, the "Interest" of each Holder will be the sum of (i) the number of shares of the Corporation's stock he or she owned immediately prior to the Change in Control and (ii) the number of options the Holder held immediately prior to the Change in Control. SECTION 3.4 LIMITATION AND INDEMNIFICATION. (i) If any Participant is a "disqualified individual," as defined in Section 280G(c) of the Code, and the present value of any payments under this Plan is an "excess parachute payment" as defined in Section 280G(b) of the Code, when combined with the present value of any other payments attributable to the same Change in Control (or other change in control with which it is required to be aggregated), including the present value of any payments under any change in control agreement ("Change Agreement") between the Corporation and the Participant, that also are "parachute payments" with respect to the same Change in Control (or other change in control with which it is required to be aggregated), the Corporation will: (a) apply the procedures prescribed in Section 3.3 of the Participant's Change Agreement (The Belden & Blake Corporation 1999 Change in Control Protection Plan for Key Employees, dated August 12, 1999, including amendments thereto) but wholly without regard to the Retention Bonus; and (b) aggregate the parachute payments generated under the Change Agreement and the Retention Bonus to produce the Participant's Combined Parachute Payment; and (c) ascertain if the Participant's after-tax Combined Parachute Payment would be greater by (1) reducing (but not below zero) the Combined Parachute Payment to the amount necessary to avoid application of the excise taxes described in Section 4999 of the Code ("Reduced Parachute Payment") or (2) by distributing the full Combined Parachute Payment and (3) distribute the larger of these amounts. (d) If the Reduced Parachute Payment produces a larger after-tax amount than the full Combined Parachute Payment, the Participant may designate how the reduction is to be allocated between the Retention Bonus and the amounts otherwise payable under the Change Agreement. SECTION 3.5 MITIGATION. A Participant shall not be required to mitigate the amount of any payments under this Plan by seeking other employment or otherwise. SECTION 3.6 TIMING OF PAYMENT. Except as provided in Section 3.7, each Participant's Reduced or Combined Parachute Payment, whichever is applicable, shall not be made from any benefit plan funds, and shall constitute an unfunded unsecured obligation of the Company. Each Participant's Reduced or Combined Parachute Payment, whichever is applicable, (net of any income, excise or employment taxes which are required to be withheld from such payment) shall be paid in a lump sum on the last day of the Retention Period if the Participant has met the eligibility criteria described in Section 3.1, unless the Participant (i) was terminated without Cause (ii) died or (iii) Retired during the Retention Period, in which case the payment will be made on or before the later of (iv) ten (10) days after the Change of Control or (v) ten (10) days after the date of termination, with no reduction to reflect the acceleration of payment. SECTION 3.7 TRUST. As soon as practical after the Effective Date, the Corporation will establish a trust arrangement through which payments under this Plan will be made, although the Trust will not be funded until occurrence of a Change in Control. ARTICLE IV. SUCCESSORS, ASSIGNMENT, REMEDIES AND WITHHOLDING TAXES SECTION 4.1 SUCCESSORS AND BINDING EFFECT. (i) 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. (ii) The rights under the Plan shall inure to the benefit of and be enforceable by the Participant's personal or legal representatives, executors, administrators, successors, heirs, distributees and/or legatees. (iii) The rights under the Plan are personal in nature and neither the Company nor any Participant 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, a Participant'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. (iv) Except as provided in Section 3.7, the obligation of the Company to make payments hereunder shall represent an unsecured obligation of the Company. (v) The Corporation and each Participant 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 Participant 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 on the Expiration 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. However, no amendment, modification, change or termination adopted before the beginning of the Retention Period will be effective to the extent that it reduces or adversely affects any Participant's rights or benefits under this program unless (and only to the extent) that the affected Participant, after full disclosure of the effect of the amendment, agrees to that amendment in writing. Also, the Plan will automatically terminate on the Expiration Date or, if later, after all Plan payments have been made. ARTICLE VI. ADMINISTRATION OF THE PLAN SECTION 6.1 IN GENERAL. 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 Participants 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 "Participant" under the Plan and (ii) to determine whether a particular Participant is eligible to receive any payment under this Plan. SECTION 6.2 DELEGATION OF DUTIES. The Corporation may delegate any of its duties to the Committee, including, without limitation, duties with respect to the processing, review, investigation, approval and payment of any amount under this Plan. 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 ARBITRATION (i) Unless stated otherwise in this Plan, the parties agree that arbitration is the sole and exclusive remedy for each of them to resolve and redress any dispute, claim or controversy involving the interpretation of this Plan, including any claims for any tort, breach of contract, violation of public policy or discrimination, whether such claim arises under federal or state law. (ii) The parties intend that any arbitration award will be final and binding on them and that a judgment on the award may be entered in any court of competent jurisdiction, and enforcement may be had according to the terms of that award. This section will survive the termination or expiration of this Plan. (iii) Arbitration will be held in Stark County, Ohio, and will be conducted by a qualified arbitrator. The arbitrator will be mutually agreed upon by the parties and the arbitration will be conducted in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association or, if within 60 days of the initiation of any matter under this section the parties are unable to mutually agree upon an arbitrator, (a) the Company will ask the American Arbitration Association to appoint an arbitrator and (b) both parties agree to accept that appointment. The parties will have the right to conduct discovery pursuant to the Federal Rules of Civil Procedure; provided, however, that the arbitrator will have the authority to establish an expedited discovery schedule and to cutoff and to resolve any discovery disputes. The arbitrator will have no jurisdiction or authority to change any provision of this Plan by alterations of, additions to or subtractions from the terms of this Plan. The arbitrator's sole authority will be to interpret or apply any provision(s) of this Plan or any public law alleged to have been violated. (iv) Any claim or controversy not sought to be submitted to arbitration, in writing, within one year of the date the party asserting the claim knew, or through reasonable diligence should have known, of the facts giving rise to that party's claim, will be deemed waived and the party asserting the claim will have no further right to seek arbitration or recovery with respect to that claim or controversy. Both parties agree to comply strictly with the time limitation specified in this section. For purposes of this section, a claim or controversy is sought to be submitted to arbitration on the date the complaining party gives written notice to the other that (i) an issue has arisen or is likely to arise that, unless resolved otherwise, may be resolved through arbitration under this section and (ii) unless the issue is resolved otherwise, the complaining party intends to submit the matter to arbitration under the terms of this section. (v) The Company will bear the arbitrator's fee unless the arbitrator, acting under Federal Rule of Civil Procedure 54(b) and based on all the facts and circumstances, imposes some or all of these fees on the Participant. Each party will be responsible for its own attorney's fees. (vi) The parties acknowledge that, because arbitration is the exclusive remedy for resolving issues arising under this Plan, neither party may resort to any federal, state or local court or administrative agency concerning breaches of this Plan or any other matter subject to arbitration under this section, except as otherwise provided in this Plan, and that the decision of the arbitrator will be a complete defense to any suit, action or proceeding instituted in any federal, state or local court before any administrative agency with respect to any arbitrable claim or controversy. (vii) The Participant and the Company each waive the right to have a claim or dispute with one another decided in a judicial forum or by a jury, except as otherwise provided in this Plan. SECTION 6.5 REVOCABILITY OF ACTION. Any action taken by the Corporation with respect to the rights or benefits under the Plan of any employee which also is inconsistent with the terms of the Plan shall be revocable by the Corporation as to payments or distributions not yet made to such person, and acceptance of payments under this 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 payments under this Plan, the Corporation reserves the right to require any Participant to execute a receipt evidencing the amount and payment of such payment. SECTION 6.7 RELEASE. As a condition to participating in this Plan, each Participant must sign an acknowledgement in the form attached to this Agreement. 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 Change Entity or the Participant to have the Participant remain in the employment of the Company or the Change Entity at any time prior to a Change in Control. Any termination of employment of the Participant or the removal of the Participant 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 Participant 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 principles 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. Payments provided under this Plan are intended to be in addition to any payments due to any Participant under any other program maintained by the Company or the Change Entity and is specifically intended not to reduce or be applied to reduce benefits otherwise due under any program maintained by the Company or the Change Entity, including any change in control agreements or other severance programs. IN WITNESS WHEREOF, Belden & Blake Corporation has caused the Plan to be executed as of the 12th day of February, 2004. ATTEST: BELDEN & BLAKE CORPORATION /s/ Duane D. Clark By: /s/ John L. Schwager --------------------------- ------------------------------ Secretary John L. Schwager Title: President & Chief Executive Officer EXHIBIT 3.2 EXAMPLE CALCULATIONS OF THE BONUS POOL AMOUNT Change Proceeds $ 40,000,000 $ 75,000,000 $110,000,000 $225,000,000 Less Transaction Costs 10,000,000 10,000,000 10,000,000 10,000,000 Change Proceeds less Transaction Costs 30,000,000 65,000,000 100,000,000 215,000,000 Exclude amounts over $200,000,000 0 0 0 15,000,000 Change Proceeds less Transaction Costs 30,000,000 65,000,000 100,000,000 200,000,000 Less the threshold amount 25,000,000 50,000,000 80,000,000 80,000,000 Excess amount 5,000,000 15,000,000 20,000,000 120,000,000 Percentage on excess amount 2% 3% 4% 4% 100,000 450,000 800,000 4,800,000 Plus amount below threshold 0 500,000 1,400,000 1,400,000 Bonus Pool $ 100,000 $ 950,000 $ 2,200,000 $ 6,200,000
EX-31.1 3 l06844aexv31w1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES -OXLEY ACT OF 2002 I, John L. Schwager, certify that: 1. I have reviewed this report on Form 10-Q of Belden & Blake Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ John L. Schwager --------------------------------------------- John L. Schwager, Director, President and Chief Executive Officer EX-31.2 4 l06844aexv31w2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES -OXLEY ACT OF 2002 I, Robert W. Peshek, certify that: 1. I have reviewed this report on Form 10-Q of Belden & Blake Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ Robert W. Peshek --------------------------------------------- Robert W. Peshek, Senior Vice President and Chief Financial Officer EX-32.1 5 l06844aexv32w1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES -OXLEY ACT OF 2002 In connection with the Quarterly Report of Belden & Blake Corporation (the "Company") on Form 10-Q for the quarterly period ended March 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the knowledge of the undersigned: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 7, 2004 /s/ John L. Schwager --------------------------------------------- John L. Schwager, Director, President and Chief Executive Officer This certification accompanies the Form 10-Q and shall not be treated as having been filed as part of the Form 10-Q. EX-32.2 6 l06844aexv32w2.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES -OXLEY ACT OF 2002 In connection with the Quarterly Report of Belden & Blake Corporation (the "Company") on Form 10-Q for the quarterly period ended March 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the knowledge of the undersigned: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 7, 2004 /s/ Robert W. Peshek --------------------------------------------- Robert W. Peshek, Senior Vice President and Chief Financial Officer This certification accompanies the Form 10-Q and shall not be treated as having been filed as part of the Form 10-Q. EX-99.1 7 l06844aexv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 BELDEN AND BLAKE CORPORATION AUDIT COMMITTEE CHARTER AS AMENDED AND APPROVED BY THE BOARD OF DIRECTORS ON APRIL 29, 2004 ORGANIZATION This charter governs the operations of the audit committee. The committee shall review and reassess the charter at least annually and obtain the approval of the board of directors. The committee shall be members of, and appointed by, the board of directors and shall comprise at least three directors, each of whom are independent of management and the Company. Members of the committee shall be considered independent as long as they do not accept any consulting, advisory, or other compensatory fee from the Company and are not an affiliated person of the Company or its subsidiaries. Notwithstanding the foregoing, the Audit Committee may include one director who is not independent if the board of directors determines that membership on the Committee by the individual is required by the best interests of the Company and its stockholders, provided that such person is not a current officer or employee of the Company, or any immediate family member thereof. All committee members shall be financially literate, and at least one member shall be a "financial expert," as defined by SEC regulations. PURPOSE The audit committee shall provide assistance to the board of directors in fulfilling their oversight responsibility to the shareholders, potential shareholders, the investment community, and others relating to: the integrity of the Company's financial statements; the financial reporting process; the systems of internal accounting and financial controls; the performance of the Company's internal audit function and independent auditors; the independent auditor's qualifications and independence; and the Company's compliance with ethics policies and legal and regulatory requirements. In so doing, it is the responsibility of the committee to maintain free and open communication between the committee, independent auditors, the internal auditors, and management of the Company. In discharging its oversight role, the committee is empowered to investigate any matter brought to its attention with full access to all books, records, facilities, and personnel of the Company and the authority to engage independent counsel and other advisers as it determines necessary to carry out its duties. DUTIES AND RESPONSIBILITIES The primary responsibility of the audit committee is to oversee the Company's financial reporting process on behalf of the board and report the results of their activities to the board. Management is responsible for the preparation, presentation, and integrity of the Company's financial statements and for the appropriateness of the accounting principles and reporting policies that are used by the Company. The independent auditors are responsible for auditing the Company's financial statements and for reviewing the Company's unaudited interim financial statements. The committee, in carrying out its responsibilities, believes its policies and procedures should remain flexible, in order to best react to changing conditions and circumstances. The committee should take appropriate actions to set the overall corporate "tone" for quality financial reporting, sound business risk practices, and ethical behavior. The following shall be the principal duties and responsibilities of the audit committee. These are set forth as a guide with the understanding that the committee may supplement them as appropriate. The committee shall be directly responsible for the appointment and termination (subject, if applicable, to shareholder ratification), compensation, and oversight of the work of the independent auditors, including resolution of disagreements between management and the auditor regarding financial reporting. The committee shall pre-approve all audit and non-audit services provided by the independent auditors and shall not engage the independent auditors to perform the specific non-audit services proscribed by law or regulation. The committee may delegate pre-approval authority to a member of the audit committee. The decisions of any audit committee member to whom pre-approval authority is delegated must be presented to the full audit committee at its next scheduled meeting. At least annually, the committee shall obtain and review a report by the independent auditors describing: The firm's internal quality control procedures. Any material issues raised by the most recent internal quality control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues. All relationships between the independent auditor and the Company (to assess the auditor's independence). In addition, the committee shall set clear hiring policies for employees or former employees of the independent auditors that meet the SEC regulations and stock exchange listing standards. The committee shall discuss with the internal auditors and the independent auditors the overall scope and plans for their respective audits, including the adequacy of staffing and compensation. Also, the committee shall discuss with management, the internal auditors, and the independent auditors the adequacy and effectiveness of the accounting and financial controls, including the Company's policies and procedures to assess, monitor, and manage business risk, and legal and ethical compliance programs (e.g., Company's Code of Conduct). The committee shall meet separately periodically with management, the internal auditors, and the independent auditors to discuss issues and concerns warranting committee attention. The committee shall provide sufficient opportunity for the internal auditors and the independent auditors to meet privately with the members of the committee. The committee shall review with the independent auditor any audit problems or difficulties and management's response. The committee shall receive regular reports from the independent auditor on the critical policies and practices of the Company, and all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management. The committee shall review management's assertion on its assessment of the effectiveness of internal controls as of the end of the most recent fiscal year and the independent auditors' report on management's assertion. The committee shall review and discuss earnings press releases or Form 8-K's filed under Regulation F-D, as well as financial information and earnings guidance provided to analysts and rating agencies. The committee shall review the interim financial statements and disclosures under Management's Discussion and Analysis of Financial Condition and Results of Operations with management and the independent auditors prior to the filing of the Company's Quarterly Report on Form 10-Q. Also, the committee shall discuss the results of the quarterly review and any other matters required to be communicated to the committee by the independent auditors under generally accepted auditing standards. The chair of the committee may represent the entire committee for the purposes of this review. The committee shall review with management and the independent auditors the financial statements and disclosures under Management's Discussion and Analysis of Financial Condition and Results of Operations to be included in the Company's Annual Report on Form 10-K (or the annual report to shareholders if distributed prior to the filing of Form 10-K), including their judgment about the quality, not just the acceptability, of accounting principles, the reasonableness of significant judgments, and the clarity of the disclosures in the financial statements. Also, the committee shall discuss the results of the annual audit and any other matters required to be communicated to the committee by the independent auditors under generally accepted auditing standards. The committee shall establish procedures for the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters, and the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters. The committee shall receive corporate attorneys' reports of evidence of a material violation of securities laws or breaches of fiduciary duty. The committee shall perform an evaluation of its performance at least annually to determine whether it is functioning effectively. -----END PRIVACY-ENHANCED MESSAGE-----