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