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The following is an excerpt from a 10-K405 SEC Filing, filed by BELDEN & BLAKE CORP /OH/ on 3/27/1998.
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BELDEN & BLAKE CORP /OH/ - 10-K405 - 19980327 - BUSINESS

Item 1. BUSINESS

Throughout this report, the "Company" refers to Belden & Blake Corporation ("Successor Company") and its predecessor which were acquired by TPG Partners II L.P. on March 27, 1997 (see Significant Events under this Item). 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 has been presented on a combined basis because such information is comparable to the historical data of the predecessor.

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 (the "Company"), is primarily engaged in producing oil and natural gas, acquiring and enhancing the economic performance of producing oil and gas properties, exploring for and developing natural gas and oil reserves and gathering and marketing natural gas. Until 1995, the Company conducted business exclusively in the Appalachian Basin where it has operated since 1942 through several predecessor entities. It is now 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 operations in the Michigan Basin through the acquisition of Ward Lake Drilling, Inc. ("Ward Lake"), an exploration and production 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 the Shrewsbury Field in northwestern Kentucky.

At December 31, 1997, the Company owned interests in 8,070 gross (7,232 net) productive gas and oil wells in Ohio, West Virginia, Pennsylvania, New York, Michigan and Kentucky with proved reserves totaling 291.6 Bcf (billion cubic feet) of gas and 5.6 Mmbbl (million barrels) of oil. The estimated future net revenues from these reserves had a present value before income taxes of approximately $292.6 million at December 31, 1997. At that date, the Company held leases on 1,250,226 gross (1,081,558 net) acres, including 625,450 gross (520,691 net) undeveloped acres.

At December 31, 1997, the Company operated more than 7,900 wells, including wells operated for third parties. The Company owned and operated approximately 3,000 miles of gas gathering systems with access to the commercial and industrial gas markets of the northeastern United States at December 31, 1997. At December 31, 1997, the Company's net production was approximately 83 Mmcf (million cubic feet) of gas and 1,980 Bbls (barrels) of oil per day. At that date, the Company was marketing approximately 141 Mmcf of gas per day, consisting of its own production and gas purchased from third parties.

The Company has 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 1992 through December 31, 1997, the Company has acquired for $150.7 million producing properties with 226.4 Bcfe (billion cubic feet of natural gas equivalent) of proved developed reserves at an average cost of $.67 per Mcfe (thousand cubic feet of natural gas equivalent) and spent $20.5 million to acquire and develop additional gas gathering facilities. During the period from 1992 through 1997, the Company

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drilled 808 gross (609.5 net) wells at an aggregate cost of approximately $115.2 million for the net wells. This drilling added 124.0 Bcfe to the Company's proved reserves. During 1997, the Company drilled 261 gross (199.6 net) wells at a direct cost of approximately $40.5 million for the net wells. The 1997 drilling activity added 41.9 Bcfe of proved reserves at an average cost of $.97 per Mcfe. Reserves added through drilling in 1997 represent approximately 132% of 1997 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

On March 27, 1997, 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. 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 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.

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 new credit agreement. 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.

RECENT DEVELOPMENTS

SUBSEQUENT EVENTS

On March 19, 1998, the Company entered into an agreement with FirstEnergy Corp. ("FirstEnergy") to form an equally owned joint venture to be named FE Holdings, L.L.C. ("FE Holdings") to engage in the exploration for, development, production, transportation and marketing of natural gas. Under the agreement, the Company proposes to contribute its gas marketing division to FE Holdings and provide FE Holdings with its gas marketing, operational and management expertise.

FirstEnergy, a diversified energy services holding company headquartered in Akron, Ohio, comprises the nation's twelfth largest investor-owned electric utility system. Its electric utility operating companies -- Ohio Edison Company and its subsidiary, Pennsylvania Power Company; The Illuminating Company; and Toledo Edison Company -- serve 2.2 million customers within 13,200 square miles of northern and central Ohio and western Pennsylvania. FirstEnergy produces approximately $5 billion in annual revenues and owns more than $18 billion in assets, including ownership in 18 power plants. In an expansion of its energy-related products and services, FirstEnergy in December 1997 acquired Roth Bros.,

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Inc., and RPC Mechanical, Inc., which form one of the nation's largest providers of engineered heating, ventilating and air-conditioning equipment and energy management and control systems.

The joint venture is expected to substantially expand the Company's market outlet for its production of natural gas and more fully utilize the capabilities and capacity of the Company's Gas Marketing Division. The venture will allow FirstEnergy to offer its customers total energy services, including natural gas, electricity and related energy products and services.

The Company and FirstEnergy have also agreed to have FE Holdings acquire Marbel Energy Corporation ("Marbel"), a privately-held, fully integrated natural gas company headquartered in Canton, Ohio. Marbel owns interests in more than 1,800 gas and oil wells and holds interests in more than 200,000 undeveloped acres in eastern and central Ohio. Marbel's subsidiaries include MB Operating Company, Inc., a natural gas exploration and production company, and Northeast Ohio Operating Companies, Inc. ("NOOC"), a public utility holding company based in Lancaster, Ohio. NOOC owns and operates over 1,300 miles of gas gathering lines and a local gas distribution company with more than 3,000 customers in eastern and central Ohio.

The acquisition of Marbel will provide FE Holdings with a base of exploration, development and production capability, along with utility transportation and distribution capability. Marbel's net production in 1997 was approximately 6.3 Bcfe. At September 30, 1997, Marbel had estimated proved developed oil and gas reserves of 55.7 Bcfe.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The Company operates in two industry segments: (1) oil and gas production and distribution and (2) oilfield sales and service. Oilfield sales are generated by its wholly-owned subsidiary, Target Oilfield Pipe and Supply Company ("TOPS") and oilfield services are provided by its Arrow Oilfield Service division ("Arrow"). The financial information with respect to the industry segments is shown in Note 16 to the Consolidated Financial Statements.

DESCRIPTION OF BUSINESS

OVERVIEW

The Company, founded in 1942, is actively engaged in the acquisition, exploration, development, production, gathering and marketing of oil and gas in the Appalachian, Michigan and Illinois Basins. The Company operates principally in the Appalachian and Michigan Basins where it is now one of the largest oil and gas companies in terms of reserves, acreage held and wells operated. It commenced operations in the Illinois Basin in September 1996.

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 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

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Appalachian Basin. As of December 31, 1997, there were over 10,000 independent operators of record and approximately 180,000 producing oil and gas wells in Ohio, West Virginia, Pennsylvania and New York. There has been only limited testing or development of the formations below the existing shallow production in the Appalachian Basin. Fewer than 2,000 wells have been drilled to a depth greater than 7,500 feet, and fewer than 100 wells have been drilled to a depth greater than 12,500 feet in the entire Appalachian Basin. As a result, 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 exploration and production company headquartered in Gaylord, Michigan, and commenced operations in the Michigan Basin. At the time of purchase, Ward Lake operated approximately 500 Antrim Shale gas wells in Michigan's lower peninsula. The Company's primary objective in acquiring Ward Lake was to allow the Company to pursue opportunities in the Michigan Basin with an established operating company that provided the critical mass to operate efficiently. Ward Lake currently operates approximately 600 wells in Michigan.

In September 1996, the Company commenced operations in the Illinois Basin by acquiring a 100% working interest in 98 natural gas wells and an extensive gas gathering system in the Shrewsbury Field located in northwestern Kentucky.

The Company's rationale for entering the Michigan and Illinois Basins was based on their geologic and operational similarities to the Appalachian Basin and their geographic proximity to the Company's operations in the Appalachian Basin. Geologically, the Michigan and Illinois Basins resemble 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 each of these basins 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. The Michigan Basin has approximately 300 operators of record, most of which are private companies, and more than 8,000 producing wells. 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 Company's production in the Illinois Basin is primarily from the New Albany Shale formation, which is a stratigraphic equivalent of the Antrim Shale formation. The New Albany Shale has likewise not been widely developed. The New Albany Shale has similar operating characteristics to shale formations in the adjacent Appalachian and Michigan Basins from which the Company is currently producing.

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 1986 have ranged from $0.31

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to $1.30 per Mcf (thousand cubic feet) above national wellhead prices. The Company's average wellhead gas price in 1997 was $0.42 per Mcf above the estimated average national wellhead price.

BUSINESS STRATEGY

The Company seeks to increase reserves, production and cash flow through a balanced program of exploration and development drilling and strategic acquisitions. The key elements of the Company's strategy are as follows:

- MAINTAIN A BALANCED DRILLING PROGRAM. It is the Company's intention to expand production and reserves through a balanced program of developmental and exploratory drilling. The Company 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 the Appalachian and Michigan Basins. The Company's drilling budget in 1998 is approximately $38 million, which will fund the drilling of approximately 274 wells.

- 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, the size of average discovery, production rates, reserve recovery rates and total economics in its operating areas.

- PURSUE CONSOLIDATION OPPORTUNITIES. There is a continuing trend toward consolidation in the energy industry in general. The basins in which the Company operates are highly fragmented. The Company believes this provides the basis for significant acquisition opportunities as capital constrained operators, the majority of which are privately held, seek liquidity or operating capital. The Company intends to capitalize on its geographic knowledge, technical expertise, low cost structure and decentralized organization to pursue additional strategic acquisitions in its area of operations. The Company's acquisition strategy focuses on acquiring producing properties that: (i) are properties in which the Company already owns an interest and operates or that are strategically located in relation to its existing operations, (ii) can be enhanced through operating cost reductions, advanced production technologies, mechanical improvements, recompleting or reworking wells and / or the use of enhanced and secondary recovery techniques, (iii) provide development and exploratory drilling opportunities or opportunities to improve the Company's acreage position,
(iv) have the potential for increased revenues resulting from the Company's gas marketing capabilities, or (v) are of sufficient size to allow the Company to operate efficiently in new areas.

- EXPAND GAS GATHERING AND MARKETING. The Company's extensive gas gathering systems and regional natural gas marketing operation 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 relationships with a large number of utilities and industrial end users located within the Company's operating areas. The Company's gas marketing operation provides a ready market for increased production, allowing the Company to shift sales from third-party gas to its own production. See: RECENT DEVELOPMENTS and SUBSEQUENT EVENTS.

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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, gas marketing, 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 1997.

                                                                           Proved Developed Reserves (2)
                                                                  -------------------------------------------------
                    Number of                Purchase                Oil              Gas              Combined
  Period           Transactions             Price (1)               (Mbbl)           (Mmcf)             (Mmcfe)
 -----------      ---------------      ---------------------      -----------      -----------       --------------
                                          (in thousands)
  1992                    5                $      23,733                 466           41,477               44,273
  1993                    8                        3,883                 119            4,121                4,835
  1994                   11                       20,274                 223           26,877               28,215
  1995                    6                       77,388               1,850           97,314              108,414
  1996                    3                        4,103                 205            6,000                7,230
  1997                   10                       21,295                 101           32,800               33,406
                  ---------------      ---------------------      -----------      -----------       --------------
 Total                   43                $     150,676               2,964          208,589              226,373
                  ===============      =====================      ===========      ===========       ==============
------------

(1) Represents the portion of the purchase price allocated to proved developed reserves.

(2) Mbbl - thousand barrels Mmcf - million Mmcfe - million cubic cubic feet feet equivalent

During 1997, the Company acquired for approximately $21.3 million working interests in 2,365 oil and gas wells in Ohio, Pennsylvania, Michigan and West Virginia. Estimated proved developed reserves associated with the wells total 32.8 Bcf of natural gas and 101,000 Bbls of oil net to the Company's interest at the time of the acquisitions.

OIL AND GAS OPERATIONS AND PRODUCTION
Operations. The Company serves as the operator of substantially all of the wells in which it holds working interests. The Company 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.

Through its production field offices in Ohio, West Virginia, Pennsylvania, New York, Michigan and Kentucky, 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 has 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.

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The Company may also implement enhanced and secondary recovery techniques. Secondary recovery methods typically involve all methods of oil extraction in which extrinsic energy sources are applied to extract additional reserves. The principal secondary recovery technique used by the Company is waterflooding, which the Company has used in Ohio and Pennsylvania.

Production. The following table sets forth certain information regarding oil and gas production from the Company's properties:

                                                          YEAR ENDED DECEMBER 31
                                        -----------------------------------------------------------
                                           1993        1994        1995        1996        1997
                                        ----------   ---------  ----------  ----------   ----------
Production:
     Oil (thousands of Bbls)                  453         496         556         719          753
     Gas (Bcf)                                7.4         9.6        17.0        25.4         27.2
Average sales price:
     Oil (per Bbl)                        $ 17.15     $ 15.98     $ 16.78     $ 20.24       $18.10
     Gas (per Mcf)                           2.55        2.58        2.21        2.56         2.65
Average production costs per Mcfe
(including production taxes)                 0.71        0.73        0.68        0.72         0.78
Total oil and gas revenues
(in thousands)                             26,631      32,574      46,853      79,491       85,756
Total production expenses
(in thousands)                              7,119       9,184      13,816      21,266       24,668

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, Michigan and Illinois 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.

In 1997, the Company drilled 194 gross (162.8 net) wells to highly developed or shallow blanket formations in its six state operating area at a direct cost of approximately $31.2 million for the net wells. The Company also drilled 67 gross (36.8 net) wells to less developed and deeper formations in 1997 at a direct cost of approximately $9.3 million for the net wells. The result of this drilling activity is shown in the tables on page 11.

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, Michigan and Illinois Basins are widespread in extent and hydrocarbon accumulations are

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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 in subsequent years. 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.

In the Illinois Basin, the highly developed or shallow blanket formations include the New Albany Shale formation as well as the Mississippian sandstones. Production characteristics of the New Albany Shale are very similar to the Devonian Shale from which the Company produces in West Virginia.

Certain typical characteristics of the highly developed or blanket formations drilled by the Company in 1997 are described below:

                                                                      Range of                     Range of
                                                                  Average Drilling              Average Gross
                                          Range of                 and Completion                  Reserves
                                        Well Depths                Costs per Well                  per Well
                                    ---------------------       ----------------------       ---------------------
                                         (in feet)                 (in thousands)                 (in Mmcfe)
Ohio                                    1,200-5,500                   $ 65-140                      80-150
West Virginia                           1,300-6,000                    100-220                     150-500
Pennsylvania:
     Coalbed Methane                      900-1,800                     75-100                     180-250
     Clarendon                          1,100-2,000                      35-45                       30-50
     Medina                             5,000-6,200                    150-200                     180-300
New York                                3,000-5,000                    100-150                      75-300
Michigan                                1,000-1,200                    200-250                     400-600
Kentucky                                1,200-1,800                     90-120                     125-250

The Company plans to drill approximately 208 wells to highly developed or blanket formations in 1998.

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.

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The less developed formations in the Appalachian Basin include the Knox sequence of sandstones and dolomites which includes the Rose Run, Beekmantown and Trempeleau 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 2,000 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 substantially 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. The following table shows the Company's drilling results in the Knox sequence:

                                                    Drilling Results in the Knox Formations
                             --------------------------------------------------------------------------------------
                                                                                                 Average Gross
                                                                                                  Reserves per
                                 Wells Drilled                Wells Completed (1)                Completed Well
                             ----------------------          -----------------------
  Period                      Gross          Net              Gross           Net                   (Mmcfe)
 -----------------           --------      --------          --------        -------          ---------------------
  1989-1990                       18          14.5                 5            4.0                   456
  1991                            11          10.3                 5            4.7                   170
  1992                            15          12.5                 8            6.4                   285
  1993                            30          20.2                16            8.8                   360
  1994                            25          14.2                17            9.8                   389
  1995                            34          16.3                18            8.8                   343
  1996                            38          22.0                25           15.5                   422
  1997                            54          26.6                30           16.4                   450

------------

(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 25 years.

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As shown in the following table, the Company's production from Knox formation wells has increased steadily as additional wells have been drilled.

                                            PRODUCING WELLS AND PRODUCTION FROM KNOX FORMATIONS
                                  --------------------------------------------------------------------
                                    1993          1994           1995          1996           1997
                                  ----------   -----------   -------------  ------------  ------------
Number of wells in production:
    Gross                            23            41              66            82            112
    Net                            20.6          29.7            41.5          58.9           75.6
    Percent of total net wells      0.7 %         0.8 %           0.7 %         0.9 %          1.0 %
Annual production (net):
    Oil (Mbbl)                     13.9          67.1            74.9          78.2          111.2
    Gas (Mmcf)                      731         1,041           1,624         2,788          3,600
    Combined (Mmcfe)                814         1,444           2,074         3,257          4,267
    Percent of total combined
    production                        8 %          11 %            10 %          11 %           13 %

Productive Knox wells represented approximately 1% of the Company's total productive wells at December 31, 1997. Production from Knox wells in 1997, however, equaled 13% of the Company's total production on an Mcfe basis.

The Company is well positioned to exploit the undeveloped potential of the Knox formations in the future. At December 31, 1997, it held leases on approximately 598,000 net acres overlying potential Knox drilling locations. The Company plans to drill or participate in joint ventures to drill 48 gross (28.2 net) wells to the Knox formations in 1998.

In addition, the Company has also tested the Niagaran Carbonate, Dundee Carbonate, Onondaga Limestone, Oriskany Sandstone and Newburg Sandstone formations. The Company plans to drill approximately 18 gross (16 net) wells to these formations in 1998. Certain typical characteristics of the less developed or deeper formations drilled by the Company in 1997 are described below:

                                                                             Average
                                                                          Drilling Costs              Average
                                                                   --------------------------          Gross
                                                  Range of           Dry        Completed            Reserves
Formation                     Location           Well Depths        Hole           Well              per Well
--------------------------    ------------     ----------------    --------   ---------------   ---------------
                                                  (in feet)             (in thousands)              (in Mmcfe)
Knox formations               OH, NY             2,500-8,000         $130           $240                 450
Niagaran Carbonate            MI                 4,500-5,500          275            525               1,200
Dundee Carbonate              MI                 3,000-3,500          330            500                 750
Onondaga Limestone            PA                 4,000-5,500          100            190                 400
Oriskany Sandstone            PA, NY             4,500-7,000          150            225                 500
Newburg Sandstone             WV                 5,500-6,000          175            275               1,000

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Drilling Results. The following table sets forth drilling results with respect to wells drilled during the past five years:

                        HIGHLY DEVELOPED OR BLANKET FORMATIONS (1)       LESS DEVELOPED OR DEEPER FORMATIONS (2)
                        --------------------------------------------    ------------------------------------------
                           1993    1994     1995       1996    1997       1993    1994    1995    1996     1997
                           ----    ----     ----       ----    ----       ----    ----    ----    ----     ----
Productive:
   Gross                     42      58      106        153      187         16(3)   22(4)   23(5)    34       39(6)
   Net                     31.4    45.6     92.5      126.3    156.5        8.8    12.7    11.5     22.2     24.5
Dry:
   Gross                      2       2        4          2        7         14      10      22       18       28
   Net                      0.7     0.4      3.2        2.0      6.3       11.4     4.8    10.7     10.2     12.3
Reserves discovered-
net (Mmcfe)               3,019   4,813   18,474     32,664   32,840      3,173   5,196   5,194    7,740    9,017
Approximate cost (in
thousands)               $4,847  $5,762  $15,079    $22,198  $31,242     $3,413  $5,509  $5,284   $9,029   $9,277

(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 and 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 and the Oriskany Sandstone and Onondaga Limestone formations in Pennsylvania and the Oriskany Sandstone, Onondaga Limestone 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.

(4) One additional well which was dry in the Knox formations was subsequently completed in the shallower Clinton formation.

(5) 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.

(6) Three additional wells which were dry in the Knox formations were subsequently completed in shallower formations.

GAS GATHERING AND MARKETING

Gas Gathering. The Company operates approximately 3,000 miles of natural gas gathering lines in Ohio, West Virginia, Pennsylvania, New York, Michigan and Kentucky which are tied directly to various interstate natural gas transmission systems. The interconnections with these interstate pipelines afford the Company potential marketing access to numerous major gas markets. The Company earned gathering revenues of $6.7 million in 1997. Direct costs associated with gas gathering in 1997 totaled approximately $1.7 million.

Gas Marketing. The major industrial centers of Akron, Buffalo, Canton, Chicago, Cleveland, Detroit and Pittsburgh are all located in close proximity to the Company's operations and provide a large potential market for direct natural gas sales. At present, the Company markets directly to approximately 225 customers in a six-state area. The Company focuses its gas marketing efforts on small to mid-sized industrial customers that require more service and have the potential to generate higher margins per Mcf than large industrial users.

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The Company sells the gas it produces to its commercial and industrial customers, local distribution companies and on the spot market. In addition to its own production, the Company buys gas from other producers and third parties and resells it. At December 31, 1997, the Company marketed approximately 141 Mmcf of gas per day of which approximately 53% consisted of its own production. Gas sold by the Company to end users and local distribution companies is usually sold pursuant to contracts which extend for periods of one or more years at either fixed prices or market sensitive prices. Gas sold on the spot market is generally priced on the basis of a regional index. Since late 1995, the Company has attempted to maintain a balance between gas volumes sold under fixed price contracts and volumes sold under market sensitive contracts. At December 31, 1997, approximately 50% of the gas marketed by the Company was at fixed prices and 50% was at market sensitive prices. This contract strategy is intended to reduce price volatility and place a partial floor under the price received while still maintaining the potential for gains from upward movement in market sensitive prices.

The Company has a policy which governs its ability to trade in the financial futures markets. The Company may, from time to time, partially hedge its physical gas sales prices by selling futures contracts on the New York Merchantile Exchange ("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. At December 31, 1997, the Company had 310 open futures contracts covering 1998, at an average price of $2.37 per Mcf. To offset these hedges, the Company has contracted for the physical delivery of gas into various pipelines in its producing areas at a NYMEX price plus a fixed basis. On February 6, 1998 the Company entered into an identical arrangement as above for 144 futures contracts covering June 1998 through May 1999, at an average NYMEX price of $2.44.

The following table shows the type of buyer for gas marketed by the Company at December 31, 1997:

                                           Marketed Gas
                                     -------------------------
                                     Mmcf per       Percent
Purchaser                               Day         of Total
---------------------------------    -----------   -----------
End users                                  59.2           42%
Local distribution companies               53.6           38%
Spot markets                               28.2           20%
                                     -----------   -----------
Total                                     141.0          100%
                                     ===========   ===========

OILFIELD SALES AND SERVICE

The Company has 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. In 1992, Arrow Oilfield Service Company, a separate service division, was organized. Arrow provides the Company and third party customers with necessary oilfield services such as well workovers, well completions, brine hauling and disposal and oil trucking. Arrow is currently the largest oilfield service company in Ohio. In 1997, approximately 54% of Arrow's revenues were generated by sales to third parties.
Target Oilfield Pipe & Supply Company, a wholly-owned subsidiary of the Company, operates retail sales outlets in the Appalachian and Michigan Basins from which it sells a broad range of equipment, including pipe, tanks, fittings, valves and pumping units. The Company originally entered the oilfield

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supply business to ensure the quality and availability of supplies for its own operations. In 1997, approximately 70% of TOPS' revenues were generated by sales to third parties.

The Company plans to expand its oilfield sales and service business through continued growth in its six-state market area.

EMPLOYEES

As of February 27, 1998, the Company had 625 full-time employees, including 220 oilfield sales and service employees, 321 oil and gas production employees, 19 petroleum engineers, 9 geologists and 3 geophysicists.

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 users.

The competitors of the Company in oil and gas exploration, development, production and marketing include major integrated oil and gas companies as well as numerous independent oil and gas companies, individual proprietors, natural gas pipelines and their affiliates and natural gas marketers and brokers. 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 be dependent on its ability to exploit its current developed and undeveloped lease holdings and its ability to select and acquire suitable producing properties and prospects for future exploration and development.

During the years ended December 31, 1996 and 1997 there was no customer which accounted for 10% or more of the Company's consolidated revenues. The only customer which accounted for 10% or more of the Company's consolidated revenues during the year ended December 31, 1995 was The East Ohio Gas Company with purchases of $11.1 million.

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 natural gas and oil, and other matters. Such regulations may impose restrictions on the production of natural gas and oil 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

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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 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 (the "FERC") 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 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.

BROKERAGE PARTNERS