NORTH COAST ENERGY INC / DE/
EXHIBIT 10.40
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<TYPE>EX-10.40
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<FILENAME>l02018aexv10w40.txt
<DESCRIPTION>EXHIBIT 10.40
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                                                                 Exhibit 10.40

                            NORTH COAST ENERGY, INC.

                         1999 EMPLOYEE STOCK OPTION PLAN


North Coast Energy, Inc. (the "Company") hereby adopts a stock option plan for
eligible employees of the Company and its subsidiary corporations pursuant to
the following terms and provisions.

1.  Purpose of the Plan. The purpose of this plan (the "Plan") is to provide
additional incentive to such key employees of the Company and its subsidiary
corporations as may be designated for participation herein by encouraging them
to acquire a new or an additional share ownership in the Company, thus
increasing their proprietary interest in the Company's business and providing
them with an increased personal interest in the Company's continued success and
progress and to attract and retain individuals with experience and/or ability
for the Company. These objectives will be promoted through the grant of options
to acquire shares of the Company's common stock pursuant to the terms of the
Plan. It is intended that eligible employees may be granted, simultaneously or
from time to time, "incentive stock options" under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or other stock options, but no
provision of the Plan is intended or shall be construed to grant employees
alternative rights in incentive stock options and other stock options so as to
prevent options granted as incentive stock options under the Plan from
qualifying as such options within the meaning of Section 422 of the Code. In
this Plan, the terms "employees of the Company", "employment by the Company",
and "in the employ of the Company", shall be deemed to include employees of,
employment by, and in the employ of, a "subsidiary corporation" or "parent
corporation" of the Company, as those terms are defined in Section 424 of the
Code.

2.  Effective Date of the Plan. The Plan shall become effective as of October
18, 1999, the date of adoption by the Board of Directors of the Company, subject
to approval by holders of shares representing a majority of the outstanding
voting stock of the Company present at a meeting of stockholders called for that
purpose.

3.  Administration of the Plan. The Plan shall be administered by the Stock
Option and Compensation Committee of the Board of Directors of the Company (the
"Committee") as appointed from time to time by the Board of Directors from among
its members, none of whom shall be eligible to be granted stock options under
the Plan and each of whom shall be (a) a "disinterested person" within the
meaning of Rule 16b-3(c)(2)(i) under the Securities Exchange Act of 1934, as
amended (the "34 Act") and (b) an "outside director" within the meaning of
Section 162(m)(4) of the Code.

Subject to the terms and conditions of the Plan, the Committee shall be
authorized:

         (a)      To select the key employees to whom options may be granted;

         (b)      To determine the number of shares of Common Stock to be
                  covered by any option;

         (c)      To determine the time or times when options will be granted;

         (d)      To determine the time or times when each option may be
                  exercised;

         (e)      To determine at the time of grant of an option under the Plan
                  whether and to what extent such option is an incentive stock
                  option entitled to the benefits of Section 422 of Code;

         (f)      To determine whether stock appreciation rights shall be made
                  part of any option grant to any key employee employed by the
                  Company and to approve such stock appreciation


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                  rights made part of any option grant to any key employee
                  employed by any subsidiary corporation of the Company pursuant
                  to Section 8 hereof;

         (g)      To prescribe the form of the option agreements to be granted
                  under the Plan; and

         (h)      To establish such other provisions of the option agreements
                  not contrary to the terms and conditions of the Plan or, where
                  the option is an incentive stock option, of Section 422 of the
                  Code as the Committee may deem necessary or desirable.

4.  Employees Eligible for Options. Options may be granted from time to time in
the discretion of the Committee only to such key employees of the Company or of
a subsidiary corporation of the Company as may be designated by the Committee
whose initiative and efforts contribute or may be expected to contribute to the
Company's continued growth and future success, including key employees who may
also be members of the Board of Directors or officers, subject to the
restrictions herein contained. Members of the Committee shall not be eligible to
participate in this Plan, or to receive options under it, while serving on the
Committee. The Committee may grant more than one option, with or without stock
appreciation rights, to the same employee. No option shall be granted to any
employee during any period of time when he is on leave of absence.

5.  Shares Subject to the Plan. The shares to be issued upon the exercise of
options granted under the Plan shall be shares of common stock, par value $.01
per share of the Company ("Common Stock"). Either treasury or authorized and
unissued shares of Common Stock, or both, in such amount or amounts, within the
maximum limits of the Plan, as the Board of Directors shall from time to time
determine, may be so issued. All shares of Common Stock which are the subject of
any lapsed, expired or terminated options may be made available for reoffering
under the Plan to any eligible employee. In the event a stock appreciation right
is granted in conjunction with an option pursuant to Section 8 and such stock
appreciation right is thereafter exercised in whole or in part, then such option
or the portion thereof to which the duly exercised stock appreciation right
relates shall be deemed to have been exercised. The shares of Common Stock which
otherwise would have been issued upon exercise of such option may be made
available for reoffering under the Plan to any eligible employee.

Subject to the provisions of the next succeeding paragraph of this Section 5,
the aggregate number of shares of Common Stock for which options may be granted
under the Plan shall be eight hundred thousand (800,000) shares of Common Stock.

In the event that subsequent to the date of adoption of the Plan by the Board of
Directors the authorized number of shares of Common Stock should, as a result of
a stock split, stock dividend, combination or exchange of shares, exchange for
other securities, reclassification, reorganization, redesignation, merger,
consolidation, recapitalization or other such change, be increased or decreased
or changed into or exchanged for a different number or kind of shares of stock
or other securities of the Company or of another corporation, then (i) there
shall automatically be substituted for each share of Common Stock subject to an
unexercised option (in whole or in part) granted under the Plan and each share
of Common Stock available for additional grants of options under the Plan the
number and kind of shares of stock or other securities into which each
outstanding share of Common Stock shall be changed or for which each such share
of Common Stock shall be exchanged, (ii) the option price per share of Common
Stock or unit of securities shall be increased or decreased proportionately so
that the aggregate purchase price for the securities subject to the option shall
remain the same as immediately prior to such event, and (iii) the Board shall
make such other adjustments to the securities subject to options and the
provisions of the Plan and option agreements as may be appropriate and
equitable. Any such adjustment may provide for the elimination of fractional
shares.

6.       Option Provisions.

         (a)      Option price. The option price per share of Common Stock which
                  is the subject of an incentive stock option under the Plan
                  shall be determined by the Committee at the time of grant but
                  shall not be less than one hundred percent (100%) of the fair
                  market value of the


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                  Company's shares of Common Stock on the date such an option is
                  granted; provided, however, that if the employee to whom an
                  option is granted is at the time of the grant of the option an
                  owner as defined in Section 425(d) of the Code of more than
                  ten percent (10%) of the total combined voting power of all
                  classes of stock of the Company or any subsidiary corporation
                  (a "Substantial Shareholder") the option price per share of
                  Common Stock shall be determined by the Committee from time to
                  time but shall never be less than one hundred ten percent
                  (110%) of the fair market value of the Company's shares of
                  Common Stock on the date such an option is granted. The option
                  price per share of Common Stock under each option granted
                  pursuant to the Plan which is not an incentive stock option
                  shall be determined by the Committee at the time of grant but
                  shall not be less than fifty percent (50%) of the fair market
                  value of the Company's shares of Common Stock on the date such
                  option is granted. Such fair market value shall be determined
                  in accordance with procedures to be established by the
                  Committee. The day on which the Committee approves the
                  granting of an option shall be considered the date on which
                  such option is granted.

         (b)      Period of option. The Committee shall determine when each
                  option is to expire but no option shall be exercisable for a
                  period of more than ten (10) years from the date upon which
                  the option is granted; provided, however, no incentive stock
                  option granted to an employee who is a Substantial Shareholder
                  at the time of the grant of such option shall be exercisable
                  after the expiration of five (5) years from the date of the
                  grant of the option.

         (c)      Limitation on exercise and transfer of options. No option
                  granted hereunder shall be transferable except (i) by the Last
                  Will and Testament of the employee to whom it is granted or,
                  if the employee dies intestate, by the applicable laws of
                  descent and distribution, or (ii) subject to the prior
                  approval of the Committee, for transfers to "family members"
                  (as defined below) or charitable institutions (subject to such
                  limitations as the Committee in its discretion may impose, if
                  necessary, to comply with applicable securities laws), in each
                  case subject to the condition that the Committee be satisfied
                  that such transfer is being made by the participant for estate
                  planning, tax planning or donative purposes and no
                  consideration (other than nominal consideration or interests
                  in a family partnership, family corporation or other
                  family-related entity) is received by the participant
                  therefor. Except as provided above, during the lifetime of a
                  participant, awards hereunder are exercisable only by, and
                  payable only to, the participant.

                  For purposes hereof, a "family member" shall mean any child,
                  stepchild, grandchild, parent, stepparent, grandparent,
                  spouse, former spouse, sibling, niece, nephew, mother-in-law,
                  father-in-law, son-in-law, daughter-in-law, brother-in-law, or
                  sister-in-law, including adoptive relationships, any person
                  sharing the participant's household (other than a tenant or
                  employee) a trust in which these persons have more than fifty
                  percent of the beneficial interest, a foundation in which
                  these persons (or the participant) control the management of
                  assets, and any other entity in which these persons (or the
                  participant) own more than fifty percent of the voting
                  interests. No option granted hereunder may be pledged or
                  hypothecated, nor shall any such option be subject to
                  execution, attachment or similar process.

         (d)      Employment required before exercise of option. The Committee
                  may, in its absolute discretion, require that prior to the
                  exercise of all or any part of any option granted hereunder,
                  the optionee shall have remained in the employ of the Company
                  or any subsidiary corporation for a specified period after the
                  date of such option, but always subject to the right of the
                  Company or any such subsidiary corporation to terminate his
                  employment during such period, or the Committee may determine
                  to make any option granted hereunder immediately exercisable.
                  Each option shall be subject to such additional restrictions
                  as to the time and method of exercise as shall be prescribed
                  by the Committee. Upon completion of the required period or
                  periods of employment, if any, the option or the appropriate
                  portion thereof may be exercised in whole or in part from time




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                  to time during the option period, but this right of exercise
                  shall be limited to whole shares. Options shall be exercised
                  by the optionee giving written notice to the Company of
                  intention to exercise the same accompanied by full payment of
                  the purchase price in cash or, with the consent of the
                  Committee, in whole or in part through the delivery of shares
                  of Common Stock having a fair market value on the date the
                  option is exercised equal to that portion of the purchase
                  price for which payment in cash is not made.

         (e)      Termination of employment. If the optionee ceases to be an
                  employee of the Company or one of its subsidiary corporations,
                  his option shall, unless extended by the Committee on or
                  before his date of termination of employment, terminate on the
                  effective date of termination of his employment and neither he
                  nor any other person shall have any right after such date to
                  exercise all or any part of his option. If, however, the
                  cessation of employment is because of such optionee's death,
                  then the option may be exercised within twelve (12) months
                  after the optionee's death by the optionee's estate or the
                  person designated in the optionee's Last Will and Testament or
                  to whom transferred by the applicable laws of descent and
                  distribution. Notwithstanding the foregoing, in no event shall
                  any option be exercisable after the expiration of the option
                  period and not to any greater extent than the optionee would
                  have been entitled to exercise the option at the time of his
                  death.

                  In the event an employee of the Company or one of its
                  subsidiaries is granted a leave of absence by the Company or
                  such subsidiary to enter military service or because of
                  sickness, his employment with the Company or such subsidiary
                  shall not be considered as terminated and he shall be deemed
                  an employee of the Company or such subsidiary during such
                  leave of absence or any extension thereof granted by the
                  Company or such subsidiary.

         (f)      Limitations on grant of incentive stock options. The aggregate
                  fair market value, determined as of the date an incentive
                  stock option is granted, of the shares of Common Stock for
                  which any employee may be granted incentive stock options
                  which are exercisable for the first time in any calendar year
                  shall not exceed One Hundred Thousand Dollars ($100,000).

7.  Amendments to Plan. The Committee is authorized to interpret the Plan and
from time to time adopt any rules and regulations for carrying out the Plan that
it may deem advisable. Subject to the approval of the Board of Directors of the
Company, the Committee may at any time amend, modify, suspend or terminate the
Plan. In no event, however, without the approval of shareholders, shall any
action of the Committee or the Board of Directors result in:

         (a)      Amending, modifying or altering the eligibility requirements
                  provided in Section 4 hereof;

         (b)      Increasing or decreasing, except as provided in Section 5
                  hereof, the maximum number of shares as to which options may
                  be granted;

         (c)      Decreasing the minimum option price per share at which options
                  may be granted under the Plan as provided in Section 6(a)
                  hereof;

         (d)      Extending either the maximum period during which an option is
                  exercisable as provided in Section 6(b) hereof or the date on
                  which the Plan shall terminate as provided in Section 11
                  hereof;

         (e)      Changing the requirements relating to the Committee; or

         (f)      Making any other change which would cause any options granted
                  under the Plan as incentive stock options not to qualify as
                  such options within the meaning of Section 422



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                  of the Code; except to conform the Plan and the option
                  agreements to changes in the Code or governing law.

8.  Stock Appreciation Rights. A key employee may be awarded, either at the time
of grant or subsequently, the right to elect alternative payment in lieu of
exercising all or a portion of the options granted to him. Stock appreciation
rights must be specifically granted upon such terms and conditions as specified
by the Committee, if the Company is the employer of the key employee, or by the
Board of Directors of a subsidiary corporation subject to the Committee's
approval, if such subsidiary corporation is the employer of the key employee. No
optionee shall be entitled to such rights solely as a result of the grant of an
option to him. Such right if granted, may be exercised by said option holder
either with respect to all or a portion of the option to which it applies. Stock
appreciation rights are exercisable only during the periods beginning on the
third business day following the release of a summary statement of the Company's
quarterly or annual sales and earnings and ending on the twelfth business day
following said date. The stock appreciation right shall provide that an option
holder shall have the right to receive an amount equal to one hundred percent
(100%) of the excess, if any, of the fair market value of the shares of Common
Stock covered by the option, determined as of the date of exercise of the stock
appreciation right by the Committee in the same manner as such value is
determined for purposes of the granting of options, over the option price. Such
amount shall be payable by either the Company or the subsidiary corporation,
whichever such corporation is the employer of the key employee, in one or more
of the following manners, as shall be determined by the Committee, if the
Company is the employer of the key employee, or by the Board of Directors of the
subsidiary corporation subject to the Committee's approval, if such subsidiary
corporation is the employer of the key employee:

         (a)      cash;

         (b)      fully-paid shares of Common Stock having a fair market value
                  equal to such amount; or

         (c)      a combination of cash and shares of Common Stock.

In no event may any person exercise any stock appreciation rights granted
hereunder unless (i) such person is then permitted to exercise the option or the
portion thereof with respect to which such stock appreciation rights relate, and
(ii) the fair market value of the shares of Common Stock covered by the option,
determined as provided above, exceeds the option price of such shares of Common
Stock. Upon the exercise of any stock appreciation rights, the option, or that
portion thereof to which such stock appreciation rights relate, shall be
cancelled and such person shall surrender such option for cancellation and
reissuance, if appropriate. Stock appreciation rights granted hereunder shall be
made a part of the option agreements in such form as the Committee shall approve
from time to time and which shall not be inconsistent with this Plan. The
granting of an option or stock appreciation right shall impose no obligation
upon the optionee to exercise such option or right. The Company's or a
subsidiary corporation's obligation to satisfy stock appreciation rights shall
not be funded or secured in any manner.

9.  Investment Representation, Approvals and Listing. The Committee may, if it
deems appropriate, condition its grant of any option hereunder upon receipt of
the following investment representation from the optionee:

                  "I further agree that any shares of Common Stock of North
         Coast Energy, Inc. which I may acquire by virtue of this option shall
         be acquired for investment purposes only and not with a view to
         distribution or resale; provided, however, that this restriction shall
         become inoperative in the event the said shares of Common Stock subject
         to this option shall be registered under the Securities Act of 1933, as
         amended, or in the event there is presented to North Coast Energy, Inc.
         an opinion of counsel satisfactory to North Coast Energy, Inc. to the
         effect that the offer or sale of the shares of Common Stock subject to
         this option may lawfully be made without registration of the said
         shares of stock under the Securities Act of 1933, as amended."



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The Company shall not be required to issue any certificate or certificates for
shares of Common Stock upon the exercise of an option or a stock appreciation
right granted under the Plan prior to (i) the obtaining of any approval from any
governmental agency which the Company shall, in its sole discretion, determine
to be necessary or advisable, (ii) the admission of such shares to listing on
any national securities exchange on which the shares of Common Stock may be
listed, (iii) the completion of any registration or other qualification of the
shares of Common Stock under any state or federal law or ruling or regulations
of any governmental body which the Company shall, in its sole discretion,
determine to be necessary or advisable or the determination by the Company, in
its sole discretion, that any registration or other qualification of the shares
of Common Stock is not necessary or advisable and (iv) the obtaining of an
investment representation from the optionee in the form stated above or in such
other form as the Company, in its sole discretion, shall determine to be
adequate.

10.  General Provisions. The form and substance of option agreements and grants
of stock appreciation rights, whether granted at the same or different times,
need not be identical.

Nothing in the Plan or in any option agreement shall confer upon any employee
any right to continue in the employ of the Company or any of its subsidiary
corporations, to be entitled to any remuneration or benefits not set forth in
the Plan or such option, or to interfere with or limit the right of the Company
or any subsidiary corporation to terminate his employment at any time, with or
without cause. No employee of the Company or other person shall have any right
to be granted an award under the Plan except in the discretion of the Committee.

Nothing contained in the Plan or in any option agreement shall be construed as
entitling any optionee to any rights of a shareholder as a result of the grant
of an option until such time as shares of Common Stock are actually issued to
such optionee pursuant to the exercise of an option or stock appreciation
rights.

The Plan may be assumed by the successors and assigns of the Company.

The liability of the Company under the Plan and any distribution of Common Stock
made hereunder is limited to the obligations set forth herein with respect to
such distribution and no term or provision of the Plan shall be construed to
impose any liability on the Company in favor of any person with respect to any
loss, cost or expense which the person may incur in connection with or arising
out of any transaction in connection with the Plan, including, but not limited
to, any liability to any federal, state, or local tax authority and/or any
securities regulatory authority.

The cash proceeds received by the Company from the issuance of shares of Common
Stock pursuant to the Plan will be used for general corporate purposes or in
such other manner as the Board of Directors deems appropriate.

The expense of administering the Plan shall be borne by the Company.

The captions and section numbers appearing in the Plan are inserted only as a
matter of convenience. They do not define, limit, construe or describe the scope
or intent of the provisions of the Plan.

11.  Termination of the Plan. The Plan shall terminate on the tenth (10th)
anniversary of the adoption hereof by the Board of Directors, and thereafter no
options shall be granted hereunder. All options outstanding at the time of
termination of the Plan shall continue in full force and effect according to
their terms and the terms and conditions of the Plan. The Board may at any time
terminate or from time to time amend the Plan in whole or in part, but no such
action shall adversely affect any rights or obligations with respect to any
awards theretofore made under the Plan.

12.  Taxes. Appropriate provisions shall be made for all taxes required to be
withheld and/or paid in connection with the options or the exercise thereof and
the transfer of Common Stock pursuant thereto, under the applicable laws or
other regulations of any governmental authority, whether federal, state, or
local and whether domestic or foreign. In its discretion, the Company may permit
the optionee to satisfy such




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withholding requirements by (a) the Company withholding from issuance to the
optionee such number of Common Stock otherwise issuable upon exercise of the
option as the Company and the optionee may agree, provided, however, that the
optionee must have had on file with the Company, for at least six (6) months
prior thereto, an effective standing election to satisfy said optionee's tax
withholding obligations in such a fashion, which election form by its terms
shall not be revocable or amendable for at least six (6) months, or (b) with the
consent of the Board, in whole or in part, in Common Stock having a fair market
value on the date the option is exercised equal to that portion of the
withholding obligation for which payment in cash is not made.

13.  Changes in Governing Rules and Regulations. All references herein to the
Internal Revenue Code of 1986, as amended, or sections thereof, or to rules and
regulations of the Department of Treasury or of the Securities and Exchange
Commission, shall mean and include the Code sections thereof and such rules and
regulations as are now in effect or as they may be subsequently amended,
modified, substituted or superseded.



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