1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1996 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________________to ______________________ Commission File Number: 0-20100 BELDEN & BLAKE CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-1686642 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5200 Stoneham Road North Canton, Ohio 44720 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (330) 499-1660 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Number of common shares of Belden & Blake Corporation Outstanding as of October 31, 1996 11,169,081 2 BELDEN & BLAKE CORPORATION INDEX - -------------------------------------------------------------------------------- Page ---- PART I Financial Information: - ------ Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1996 and 1 December 31, 1995 Consolidated Statements of Operations for the three and 3 nine months ended September 30, 1996 and 1995 Consolidated Statements of Shareholders' Equity for the 4 nine months ended September 30, 1996 and the years ended December 31, 1995 and 1994 Consolidated Statements of Cash Flows for the nine 5 months ended September 30, 1996 and 1995 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition 7 and Results of Operations PART II Other Information - ------- Item 6. Exhibits and Reports on Form 8-K 15 3 BELDEN & BLAKE CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands) SEPTEMBER 30, DECEMBER 31, 1996 1995 ================ ================ (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 11,293 $ 12,322 Accounts receivable, net 28,534 28,123 Inventories 9,575 9,253 Deferred income taxes 2,771 2,254 Other current assets 1,170 2,198 ---------------- ---------------- Total current assets 53,343 54,150 PROPERTY AND EQUIPMENT Oil and gas properties (successful efforts method) 255,395 235,344 Gas gathering systems 25,842 25,416 Land, buildings, machinery and equipment 30,529 29,977 ---------------- ---------------- 311,766 290,737 Less accumulated depreciation, depletion and amortization 79,526 59,209 ---------------- ---------------- PROPERTY AND EQUIPMENT, NET 232,240 231,528 OTHER ASSETS 10,817 11,620 ---------------- ---------------- $ 296,400 $ 297,298 ================ ================ The balance sheet at December 31, 1995 has been derived from the audited financial statements at that date but does not include all of the information and footnotes generally required by generally accepted accounting principles for complete financial statements. See accompanying notes. 1 4 BELDEN & BLAKE CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data) SEPTEMBER 30, DECEMBER 31, 1996 1995 ================ ================ (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 7,941 $ 11,004 Accrued expenses 20,651 23,811 Current portion of long-term liabilities 4,337 1,976 ---------------- ---------------- Total current liabilities 32,929 36,791 LONG-TERM LIABILITIES Bank and other long-term debt 60,204 67,223 Senior notes 31,111 35,000 Convertible subordinated debentures 6,800 6,800 Other 1,451 1,500 ---------------- ---------------- 99,566 110,523 DEFERRED INCOME TAXES 11,042 7,693 SHAREHOLDERS' EQUITY Common stock without par value; $.10 stated value per share; authorized 50,000,000 shares; issued and outstanding 11,169,081 and 11,136,496 shares 1,117 1,114 Preferred stock without par value; $100 stated value per share; authorized 8,000,000 shares; issued and outstanding 24,000 shares 2,400 2,400 Paid in capital 126,712 126,063 Retained earnings 22,698 12,820 Unearned portion of restricted stock (64) (106) ---------------- ---------------- TOTAL SHAREHOLDERS' EQUITY 152,863 142,291 ---------------- ---------------- $ 296,400 $ 297,298 ================ ================ The balance sheet at December 31, 1995 has been derived from the audited financial statements at that date but does not include all of the information and footnotes generally required by generally accepted accounting principles for complete financial statements. See accompanying notes. 2 5 BELDEN & BLAKE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited) THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1996 1995 1996 1995 ============== ============== ============== ============== REVENUES Oil and gas sales $ 19,075 $ 12,949 $ 57,265 $ 31,924 Gas marketing and gathering 9,835 9,212 31,624 26,916 Oilfield sales and service 7,661 6,200 18,583 12,455 Interest and other 813 1,674 2,554 2,088 -------------- -------------- -------------- -------------- 37,384 30,035 110,026 73,383 EXPENSES Production expense 4,712 3,725 13,197 8,263 Production taxes 748 659 2,259 1,432 Cost of gas and gathering expense 8,221 7,507 26,348 22,759 Oilfield sales and service 6,832 5,587 16,984 11,654 Exploration expense 1,548 1,579 4,421 3,392 General and administrative expense 1,193 1,052 3,806 3,066 Interest expense 1,763 1,561 5,587 4,013 Depreciation, depletion and amortization 7,240 5,469 21,941 12,845 -------------- -------------- -------------- -------------- 32,257 27,139 94,543 67,424 -------------- -------------- -------------- -------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 5,127 2,896 15,483 5,959 Provision for income taxes 1,502 1,063 5,031 2,195 -------------- -------------- -------------- -------------- INCOME FROM CONTINUING OPERATIONS 3,625 1,833 10,452 3,764 LOSS FROM DISCONTINUED OPERATIONS (439) (678) (439) (954) -------------- -------------- -------------- -------------- NET INCOME $ 3,186 $ 1,155 $ 10,013 $ 2,810 ============== ============== ============== ============== PER COMMON SHARE: CONTINUING OPERATIONS $ 0.32 $ 0.18 $ 0.92 $ 0.45 DISCONTINUED OPERATIONS (0.04) (0.07) (0.04) (0.12) -------------- -------------- -------------- -------------- NET INCOME $ 0.28 $ 0.11 $ 0.88 $ 0.33 ============== ============== ============== ============== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,171 9,741 11,168 7,993 ============== ============== ============== ============== See accompanying notes. 3 6 BELDEN & BLAKE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands) UNEARNED COMMON COMMON PREFERRED PAID IN RETAINED RESTRICTED SHARES STOCK STOCK CAPITAL EARNINGS STOCK TOTAL ======== =========== =========== ============ ========== =========== ============= JANUARY 1, 1994 7,053 $ 706 $ 2,400 $ 69,865 $ 4,216 $ (330) $ 76,857 Stock issued 32 3 385 388 Net income 3,843 3,843 Preferred stock dividend (180) (180) Restricted stock 129 105 234 - -------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1994 7,085 709 2,400 70,379 7,879 (225) 81,142 Stock issued 4,028 403 55,264 55,667 Net income 5,121 5,121 Preferred stock dividend (180) (180) Stock options exercised 2 -- 25 25 Employee stock bonus 22 2 251 253 Restricted stock 144 119 263 - -------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 11,137 1,114 2,400 126,063 12,820 (106) 142,291 Net income 10,013 10,013 Preferred stock dividend (135) (135) Stock options exercised 2 -- 31 31 Employee stock bonus 26 2 419 421 Restricted stock 4 1 195 42 238 Other 4 4 - -------------------------------------------------------------------------------------------------------------------- (UNAUDITED) SEPTEMBER 30, 1996 11,169 $ 1,117 $ 2,400 $ 126,712 $ 22,698 $ (64) $ 152,863 ==================================================================================================================== See accompanying notes. 4 7 BELDEN & BLAKE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) NINE MONTHS ENDED SEPTEMBER 30 -------------------------------------- 1996 1995 ---------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,013 $ 2,810 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 21,941 13,261 Loss on disposal of property and equipment 393 183 Deferred income taxes 2,832 1,140 Deferred compensation and stock grants 840 790 Change in operating assets and liabilities, net of effects of purchases of businesses: Accounts receivable and other operating assets 791 (11,237) Inventories (322) 943 Accounts payable and accrued expenses (1,449) 7,009 ---------------- ----------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 35,039 14,899 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired (4,490) (90,098) Proceeds from property and equipment disposals 2,128 183 Additions to property and equipment (24,269) (14,042) Increase in other assets (500) (1,076) ---------------- ----------------- NET CASH USED IN INVESTING ACTIVITIES (27,131) (105,033) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit and long-term debt 12,105 66,000 Repayment of long-term debt and other obligations (20,907) (17,268) Proceeds from sale of common stock -- 59,438 Common stock placement cost -- (3,579) Preferred stock dividends (135) (135) ---------------- ----------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (8,937) 104,456 ---------------- ----------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,029) 14,322 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 12,322 3,649 ---------------- ----------------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 11,293 $ 17,971 ================ ================= CASH PAID DURING THE PERIOD FOR: INTEREST $ 6,472 $ 3,936 INCOME TAXES 1,069 599 NON-CASH INVESTING AND FINANCING ACTIVITIES: Acquisition of assets in exchange for long-term obligations -- 15,394 See accompanying notes. 5 8 BELDEN & BLAKE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (UNAUDITED) SEPTEMBER 30, 1996 - ------------------------------------------------------------------------------- (1) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Belden & Blake Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1995. (2) ACQUISITIONS In July 1996, the Company acquired working interests averaging 40% in 17 producing wells, four proved undeveloped locations and 7,000 undeveloped leasehold acres in Ohio from North American Gas Investment Trust for $1.2 million. The Company operates the wells and owns the remaining working interests. The interests acquired had estimated proved developed reserves of 0.6 Bcf (billion cubic feet) of natural gas and 53,000 Bbls (barrels) of oil at January 1, 1996. In August 1996, the Company acquired working interests in 209 wells in Ohio from various NYLife Energy Investors partnerships for $2.5 million. The Company has operated the wells on behalf of the NYLife partnerships since 1990. The interests acquired had estimated proved developed reserves of 3.5 Bcf of natural gas and 152,000 Bbls of oil at July 1, 1996. In September 1996, the Company acquired a 100% working interest in 97 natural gas wells and a 23 mile, ten inch pipeline in the Shrewsbury Field located in northwestern Kentucky for $560,000. The wells had estimated proved developed gas reserves at July 1, 1996, of 1.9 Bcf. (3) CHANGE IN ACCOUNTING PRINCIPLE In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement 121 in the first quarter of 1996. The Company's estimate of undiscounted cash flows indicated that such carrying amounts of assets are expected to be recovered. However, it is possible that the estimates may change in the future resulting in the write-down of assets to fair value. 6 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ------------------------------------------------------ (4) SALE OF TAX CREDIT PROPERTIES In February and March 1996, the Company sold certain interests that qualify for the nonconventional fuel source tax credit. The interests were sold in two separate transactions for approximately $750,000 and $100,000, respectively, in cash and a volumetric production payment under which 100% of the cash flow from the properties will go to the Company until approximately 11.7 Bcf and 3.4 Bcf, respectively, 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. (5) HEDGING ACTIVITIES As a result of certain 1995 acquisitions, the Company has several contracts to sell gas at indexed prices. The Company may, from time to time, partially hedge these contract prices by selling futures contracts on the NYMEX. The Company began partially hedging its gas price exposure in January 1996. For the first half of 1996, the Company incurred a $258,000 pretax loss on its hedging activities due to rapidly rising gas prices during the period. At September 30, 1996, the Company did not have any open futures contracts. (6) DISCONTINUED OPERATIONS The Company made the decision to sell Engine Power Systems, Inc. (EPS), a wholly-owned subsidiary, in September 1995. To date, the Company has been unsuccessful finding a buyer for EPS despite an active marketing effort. In September 1996, the Company revised its estimate of the loss on discontinuance of EPS and recognized an additional charge of $675,000 ($439,000 net of tax benefit) to write-down various assets and inventories to estimated realizable value and to establish a provision for estimated costs of asset disposals and future losses related to EPS. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- RESULTS OF OPERATIONS - THIRD QUARTERS OF 1996 AND 1995 COMPARED OIL AND GAS SALES. Oil and gas sales increased $6.1 million (47%) in the third quarter of 1996 compared to the same period of 1995 due to an increase in oil and gas volumes sold and a higher average price paid for the Company's oil and gas. Oil volumes increased 16,000 Bbls (10%) from 165,000 Bbls in the third quarter of 1995 to 181,000 Bbls in the third quarter of 1996 resulting in an increase in oil sales of approximately $265,000. Gas volumes increased 1.4 Bcf (29%) from 4.9 Bcf in the third quarter of 1995 to 6.3 Bcf in the third quarter of 1996 resulting in an increase in gas sales of approximately $3.0 million. These volume increases were primarily due to production from properties acquired and wells drilled in 1995 and 1996. The average price paid for the Company's oil increased from $16.27 per barrel in the third quarter of 1995 to $20.14 per barrel in the third quarter of 1996 which increased oil sales by approximately $700,000. The average price paid for the Company's natural gas increased $.35 per Mcf 7 10 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (CONTINUED) --------------------------------- (thousand cubic feet) to $2.46 per Mcf in the third quarter of 1996 compared to the third quarter of 1995 which increased gas sales in the third quarter of 1996 by approximately $2.2 million. GAS MARKETING AND GATHERING REVENUE. Gas marketing and gathering revenue increased $623,000 (7%) from $9.2 million in the third quarter of 1995 to $9.8 million in the third quarter of 1996 due to an increase in the volume of gas purchased from third parties and resold, an increase in the average selling price of gas and an increase in gas gathering revenues. OILFIELD SALES AND SERVICE REVENUE. Oilfield sales and service revenue increased $1.5 million (24%) from $6.2 million in the third quarter of 1995 to $7.7 million in the third quarter of 1996. This increase was primarily due to increased third party oilfield service revenue. INTEREST AND OTHER REVENUE. Interest and other revenue decreased $861,000 (51%) from $1.7 million in the third quarter of 1995 to $813,000 in the third quarter of 1996 due to the recognition in the third quarter of 1995 of anticipated proceeds from contract rejection claims that were filed in the bankruptcy proceedings of Columbia Gas Transmission Corporation partially offset by income in 1996 from incentive production payments associated with certain properties operated by Ward Lake. PRODUCTION EXPENSE. Production expense increased $1.0 million (26%) from $3.7 million in the third quarter of 1995 to $4.7 million in the third quarter of 1996. This increase was largely due to the increased production discussed above. The average production cost in the third quarter of 1995 and 1996 remained consistent at $.64 per Mcfe (equivalent Mcf of natural gas). PRODUCTION TAXES. Production taxes increased $89,000 (14%) from $659,000 in the third quarter of 1995 to $748,000 in the third quarter of 1996. This increase was primarily due to the increased production volumes discussed above. COST OF GAS AND GATHERING EXPENSE. Cost of gas and gathering expense increased $714,000 (10%) from $7.5 million in the third quarter of 1995 to $8.2 million in the third quarter of 1996 due to an increase in volumes of gas purchased from third parties and an increase in the cost of gas. OILFIELD SALES AND SERVICE EXPENSE. Oilfield sales and service expense increased $1.2 million (22%) from $5.6 million in the third quarter of 1995 to $6.8 million in the third quarter of 1996 primarily as a result of the increased cost of goods sold associated with the increased sales described above. EXPLORATION EXPENSE. Exploration expense in the third quarter of 1996 was consistent with the third quarter of 1995. GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased $141,000 (13%) from $1.1 million in the third quarter of 1995 to $1.2 million in the third quarter of 1996 primarily due to an increase in franchise taxes and an increase in estimated profit sharing and bonuses for 1996. INTEREST EXPENSE. Interest expense increased $202,000 (13%) from $1.6 million in the third quarter of 1995 to $1.8 million in the third quarter of 1996. This increase was primarily due to higher average debt balances incurred to finance the 1995 acquisitions. 8 11 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS (CONTINUED) ------------------------------------ DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and amortization increased by $1.7 million (32%) from $5.5 million in the third quarter of 1995 to $7.2 million in the third quarter of 1996. Depletion expense increased $1.3 million (31%) from $4.2 million in the third quarter of 1995 to $5.5 million in the third quarter of 1996. This increase was primarily due to the increased production volumes described above. Depletion per Mcfe increased from $.72 per Mcfe in the third quarter of 1995 to $.75 per Mcfe in the third quarter of 1996. This increase was primarily the result of proved reserves added through acquisitions and drilling at a higher cost per Mcfe. INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. Income from continuing operations before income taxes increased $2.2 million (77%) from $2.9 million in the third quarter of 1995 to $5.1 million in the third quarter of 1996. The operating income from the oil and gas operations segment increased $1.7 million (47%) from $3.8 million in the third quarter of 1995 to $5.5 million in the third quarter of 1996. The increase was attributable to the items discussed above. The operating income from the oilfield sales and service segment increased $190,000 (55%) from $348,000 in the third quarter of 1995 to $538,000 in the third quarter of 1996. INCOME FROM CONTINUING OPERATIONS. Income from continuing operations increased $1.8 million (98%) from $1.8 million in the third quarter of 1995 to $3.6 million in the third quarter of 1996. This increase in income from continuing operations was primarily the result of the items discussed above. Provision for income taxes from continuing operations increased $439,000 (41%) from $1.1 million in the third quarter of 1995 to $1.5 million in the third quarter of 1996. This increase was attributable to an increase in income from continuing operations before income taxes partially offset by a decrease in the effective tax rate. Income from continuing operations on a per share basis increased from $.18 per share in the third quarter of 1995 to $.32 per share in the third quarter of 1996. This increase was primarily the result of the factors discussed above. LOSS FROM DISCONTINUED OPERATIONS. Loss from discontinued operations was $1.1 million ($678,000 net of tax benefit or $.07 per share) in the third quarter of 1995 compared to $675,000 ($439,000 net of tax benefit or $.04 per share) in the third quarter of 1996. In September 1996, the Company revised its estimate of the loss on discontinuance of EPS and recognized an additional charge to write-down various assets and inventories to estimated realizable value and to establish a provision for estimated costs of asset disposals and future losses related to EPS. RESULTS OF OPERATIONS - NINE MONTHS OF 1996 AND 1995 COMPARED OIL AND GAS SALES. Oil and gas sales increased $25.3 million (79%) in the first nine months of 1996 compared to the same period of 1995 due to an increase in oil and gas volumes sold and a higher average price paid for the Company's oil and gas. Oil volumes increased 132,000 Bbls (32%) from 407,000 Bbls in the first nine months of 1995 to 539,000 Bbls in the first nine months of 1996 resulting in an increase in oil sales of approximately $2.2 million. Gas volumes increased 7.5 Bcf (68%) from 11.1 Bcf in the first nine months of 1995 to 18.6 Bcf in the first nine months of 1996 resulting in an increase in gas sales of approximately $17.0 million. These volume increases were primarily due to production from properties acquired and wells drilled in 1995 and 1996. 9 12 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS (CONTINUED) ------------------------------------- The average price paid for the Company's oil increased from $16.83 per barrel in the first nine months of 1995 to $19.44 per barrel in the first nine months of 1996 which increased oil sales by approximately $1.4 million. The average price paid for the Company's natural gas increased $.25 per Mcf to $2.51 per Mcf in the first nine months of 1996 compared to the first nine months of 1995 which increased gas sales in the first nine months of 1996 by approximately $4.7 million. GAS MARKETING AND GATHERING REVENUE. Gas marketing and gathering revenue increased $4.7 million (17%) from $26.9 million in the first nine months of 1995 to $31.6 million in the first nine months of 1996 due to an increase in the volume of gas marketed, an increase in the average selling price of gas and an increase in gas gathering revenues. OILFIELD SALES AND SERVICE REVENUE. Oilfield sales and service revenue increased $6.1 million (49%) from $12.5 million in the first nine months of 1995 to $18.6 million in the first nine months of 1996. This increase was primarily due to the sales generated by the three oilfield sales and service companies acquired by the Company in 1995 and increased third party oilfield service revenue. INTEREST AND OTHER REVENUE. Interest and other revenue increased $466,000 (22%) from $2.1 million in the first nine months of 1995 to $2.6 million in the first nine months of 1996 primarily due to the recognition of income in 1996 from incentive production payments associated with certain properties operated by Ward Lake partially offset by the recognition in the third quarter of 1995 of anticipated proceeds from contract rejection claims that were filed in the bankruptcy proceedings of Columbia Gas Transmission Corporation. PRODUCTION EXPENSE. Production expense increased $4.9 million (60%) from $8.3 million in the first nine months of 1995 to $13.2 million in the first nine months of 1996. This increase was largely due to the increased production discussed above. The average production cost in the first nine months of 1996 was $.60 per Mcfe compared to $.61 per Mcfe in the first nine months of 1995. PRODUCTION TAXES. Production taxes increased $827,000 (58%) from $1.4 million in the first nine months of 1995 to $2.3 million in the first nine months of 1996. This increase was primarily due to the increased production volumes discussed above. COST OF GAS AND GATHERING EXPENSE. Cost of gas and gathering expense increased $3.5 million (16%) from $22.8 million in the first nine months of 1995 to $26.3 million the first nine months of 1996 due to an increase in volumes of gas purchased and an increase in the cost of gas. OILFIELD SALES AND SERVICE EXPENSE. Oilfield sales and service expense increased $5.3 million (46%) from $11.7 million in the first nine months of 1995 to $17.0 million in the first nine months of 1996 primarily as a result of the increased cost of goods sold associated with increased sales resulting from the acquisitions described above. EXPLORATION EXPENSE. Exploration expense increased $1.0 million (30%) from $3.4 million in the first nine months of 1995 to $4.4 million in the first nine months of 1996 primarily due to higher levels of geological, geophysical and leasing activity and increases in the size of the technical staff in conjunction with increased drilling activity. 10 13 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ------------------------------------------------------------ AND RESULTS OF OPERATIONS (CONTINUED) ------------------------------------- GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased $740,000 (24%) from $3.1 million in the first nine months of 1995 to $3.8 million in the first nine months of 1996 primarily due to an increase in franchise taxes and an increase in estimated profit sharing and bonuses for 1996. INTEREST EXPENSE. Interest expense increased $1.6 million (39%) from $4.0 million in the first nine months of 1995 to $5.6 million in the first nine months of 1996. This increase was primarily due to higher average debt balances incurred to finance the 1995 acquisitions. DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and amortization increased by $9.1 million (71%) from $12.8 million in the first nine months of 1995 to $21.9 million in the first nine months of 1996. Depletion expense increased $7.3 million (75%) from $9.6 million in the first nine months of 1995 to $16.9 million in the first nine months of 1996. This increase was primarily due to the increased production volumes described above. Depletion per Mcfe increased from $.71 per Mcfe in the first nine months of 1995 to $.77 per Mcfe in the first nine months of 1996. This increase was primarily the result of proved reserves added through acquisitions and drilling at a higher cost per Mcfe. INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. Income from continuing operations before income taxes increased $9.5 million (160%) from $6.0 million in the first nine months of 1995 to $15.5 million in the first nine months of 1996. The operating income from the oil and gas operations segment increased $8.7 million (95%) from $9.1 million in the first nine months of 1995 to $17.8 million in the first nine months of 1996. The increase was attributable to the items discussed above. The operating income from the oilfield sales and service segment increased $613,000 (515%) from $119,000 in the first nine months of 1995 to $732,000 in the first nine months of 1996. INCOME FROM CONTINUING OPERATIONS. Income from continuing operations increased $6.7 million (178%) from $3.8 million in the first nine months of 1995 to $10.5 million in the first nine months of 1996. This increase in income from continuing operations was primarily the result of the items discussed above. Provision for income taxes from continuing operations increased $2.8 million (129%) from $2.2 million in the first nine months of 1995 to $5.0 million in the first nine months of 1996. This increase was attributable to an increase in income from continuing operations before income taxes partially offset by a decrease in the effective tax rate. Income from continuing operations on a per share basis increased from $.45 per share in the first nine months of 1995 to $.92 per share in the first nine months of 1996. This increase was primarily the result of the factors discussed above. LOSS FROM DISCONTINUED OPERATIONS. Loss from discontinued operations was $1.5 million ($954,000 net of tax benefit or $.12 per share) in the first nine months of 1995 compared to $675,000 ($439,000 net of tax benefit or $.04 per share) in the first nine months of 1996. In September 1996, the Company revised its estimate of the loss on discontinuance of EPS and recognized an additional charge to write-down various assets and inventories to estimated realizable value and to establish a provision for estimated costs of asset disposals and future losses related to EPS. 11 14 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ---------------------------------------------------------------- AND RESULTS OF OPERATIONS (CONTINUED) ----------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The Company's working capital is closely related to and dependent on the current prices paid for its oil and gas. The Company's current ratio at September 30, 1996 was 1.62 to 1.00. During the first nine months of 1996, working capital increased $3.0 million from $17.4 million to $20.4 million. The increase was primarily due to a reduction in accounts payable and accrued expenses ($6.2 million) partially offset by an increase in the current portion of long-term liabilities ($2.4 million) attributable to the first principal payment on the senior notes due on September 30, 1997. The Company's operating activities provided cash flow of $35.0 million during the first nine months of 1996. On May 25, 1995, the Company's revolving bank facility was amended. The facility was increased to $200 million, the maturity date was extended to March 31, 1999, and the borrowing base was increased to $81 million. The borrowing base is calculated by the bank group and is based on the cash flows generated by the Company's proved developed reserves, gas gathering systems and other corporate assets. Generally, the Company can expect to have the borrowing base increased by at least 50% of the present value before income taxes (discounted at 10% per annum) of any proved developed reserves added through acquisition or drilling. On February 16, 1996, the Company's revolving bank facility was further amended. The maturity date was extended to March 31, 2001 and the LIBOR interest rate option was modified to decrease from LIBOR + 2% to a range of LIBOR + 1-1/4% to LIBOR + 3/4% as outstanding balances decrease in relation to the borrowing base. Outstanding balances under the facility incur interest at the Company's choice of either: (1) the one, two or three-month LIBOR + 1.25% (6.91% for the three-month LIBOR interest rate option at September 30, 1996) or (2) the bank's prime rate (8.25% at September 30, 1996). At September 30, 1996, the Company had $60 million outstanding under this facility. The amended facility will continue to restrict the sale of assets to no more than 15% of shareholders' equity in any one year and will require the Company to maintain certain levels of net worth, working capital and debt service coverage. When market conditions are favorable, the Company may enter into interest rate swap arrangements, whereby a portion of the Company's floating rate exposure is exchanged for a fixed interest rate. The Company had no such derivative financial instruments at September 30, 1996. During 1993, the Company placed $35 million of 7% fixed-rate senior notes with five insurance companies in a private placement. These notes, which are interest-only for four years, mature on September 30, 2005. Equal annual principal payments of $3,888,888 will be required on each September 30 commencing in 1997. The senior note agreement limits the Company's senior debt to 50% of the Company's discounted present value (at 10%) of its oil and gas reserves plus the net book value of its gas gathering systems. 12 15 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ---------------------------------------------------------------- RESULTS OF OPERATIONS (CONTINUED) --------------------------------- Other terms and covenants are substantially the same as those contained in the $200 million revolving credit facility. The Company seeks to replace its production and expand its reserve base through the acquisition of producing oil and gas properties, development drilling in the shallow blanket formations and exploratory and development drilling in the less developed and deeper formations in the Appalachian, Michigan and Illinois Basins. The Company's acquisition activities in 1996 are discussed in Note (2) to the Consolidated Financial Statements. The Company plans to drill approximately 200 gross wells in 1996. The following table summarizes the Company's drilling activities for the nine months ended September 30, 1996. 1996 DRILLING RESULTS NINE MONTHS ENDED SEPTEMBER 30, 1996 ------------------------------------------- GROSS NET ------------------- ------------------- Development wells Shallow blanket formations Productive 79 64.5 Dry -- -- Less developed and deeper formations Productive 26 18.5 Dry 12 7.1 Exploratory wells Productive -- -- Dry 3 1.4 The shallow blanket formation wells were drilled in Michigan to the Antrim Shale formation; in New York and Pennsylvania to the Medina Sandstone formation; in New York to the Bass Island Sandstone formation; and in West Virginia to the Devonian Shale formation. The wells drilled to the less developed and deeper formations were drilled to the Dundee Carbonate and Niagaran Carbonate formations in Michigan; to the Beekmantown Dolomite, Rose Run Sandstone and Trempealeau Sandstone formations in Ohio; and to the Onondaga Limestone and Oriskany Sandstone formations in Pennsylvania. The Company currently expects to spend approximately $28 million during 1996 on its direct drilling activities and approximately $9 million for other capital expenditures. Through September 30, 1996, the Company had expended approximately $18.0 million on its direct drilling activities to drill 120 gross (91.5 net) wells. Reserves discovered totaled an estimated 21.4 Bcf equivalent. The Company's acquisition program is expected to be financed with any available cash flow over $37 million and with its available bank credit line. The Company believes that its existing sources of working capital are sufficient to satisfy all currently anticipated working capital requirements. 13 16 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ---------------------------------------------------------------- AND RESULTS OF OPERATIONS (CONTINUED) ----------------------------------------- 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 gas, its ability to acquire additional producing properties and the scope and success of its drilling activities. The Company intends to finance such activities principally through its available cash flow, through additional borrowings and, to the extent necessary, the issuance of additional common or preferred stock. 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 future production and costs of operation, the market demand for, and prices of, oil and natural gas, results of the Company's future drilling and gas marketing activity, the uncertainties of reserve estimates, environmental risks, 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. 14 17 - ------------------------------------------------------------------------------- PART II Other information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index (b) Reports on Form 8-K None 15 18 - ------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BELDEN & BLAKE CORPORATION Date: November 5, 1996 By: /S/ Max L. Mardick -------------------------- ---------------------------------- Max L. Mardick, Director, President, and Chief Operating Officer Date: November 5, 1996 By: /S/ Ronald E. Huff --------------------------- --------------------------------- Ronald E. Huff, Director, Senior Vice President and Chief Financial Officer 16 19 EXHIBIT INDEX NO. DESCRIPTION - --- ----------- 10.1 Amended and Restated Employment Agreement between the Company and Henry S. Belden IV 10.2 Severance Agreement between the Company and Max L. Mardick 10.3 Form of Severance Agreement between the Company and the following officers: Ronald E. Huff, Ronald L. Clements and Joseph M. Vitale 10.4 Form of Severance Agreement between the Company and the following officers and managerial personnel: Dennis D. Belden, James C. Ewing, Charles P. Faber, Tommy L. Knowles, Donald A. Rutishauser, L. H. Sawatsky, Leo A. Schrider and Dean A. Swift 10.5 Severance Pay Plan for Key Employees of Belden & Blake Corporation 11. Computation of Earnings Per Common and Common Equivalent Shares 27. Financial Data Schedule