<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 0-18691
NORTH COAST ENERGY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1594000
(State of Incorporation) I.R.S. (Employer
Identification No.)
5311 NORTHFIELD ROAD, SUITE 320
CLEVELAND, OHIO 44146-1135
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (216) 663-1668
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ---------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--------- ---------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date. Indicate the number of shares
outstanding of each of the issuer's classes of Common Stock as the latest
practical date.
Class Outstanding at August 5, 1996
---------------------------- -----------------------------
Common Stock, $.01 par value 8,040,699
<PAGE> 2
NORTH COAST ENERGY, INC.
<TABLE>
<CAPTION>
Page No.
--------
PART I - FINANCIAL INFORMATION
<S> <C>
Consolidated Balance Sheets -
March 31, 1996 (Audited) and June 30, 1996 (Unaudited) 2
Unaudited Consolidated Statements of Operations -
For the Three Months Ended June 30, 1995 and 1996 4
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended June 30, 1995 and 1996 5
Unaudited Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION 18
</TABLE>
<PAGE> 3
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 and JUNE 30, 1996
(Unaudited)
ASSETS
------
<TABLE>
<CAPTION>
March 31, June 30,
----------- -----------
1996 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 1,551,748 $ 982,343
Accounts receivable-
Trade, net 1,339,601 1,431,770
Affiliates 97,993 108,034
Inventories 85,235 78,608
Deferred income taxes 41,000 41,000
Refundable income taxes 115,000 115,000
Other, net 22,097 16,848
----------- -----------
Total current assets 3,252,674 2,773,603
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Land 122,699 93,437
Oil and gas properties (successful efforts) 23,769,853 24,244,302
Pipelines 3,696,277 3,976,754
Vehicles 427,920 483,881
Furniture and fixtures 453,718 462,017
Buildings and improvements 145,539 682,830
----------- -----------
28,616,006 29,943,221
Less- Accumulated depreciation, depletion, amortization
and impairment (11,879,077) (11,984,012)
----------- -----------
16,736,929 17,959,209
OTHER ASSETS, net 253,206 209,008
----------- -----------
$20,242,809 $20,941,820
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE> 4
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 and JUNE 30, 1996
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, June 30,
1996 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 213,060 $ 241,200
Accounts payable 2,481,558 2,065,041
Accrued expenses 280,565 222,582
Billings in excess of costs on uncompleted contracts 637,347 121,163
------------ ------------
Total current liabilities 3,612,530 2,649,986
------------ ------------
LONG-TERM DEBT, net of current portion 8,954,574 10,634,686
DEFERRED INCOME TAXES, net 357,100 394,100
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A, 6% Noncumulative Convertible Preferred stock, par value $.01 per
share; 563,270 shares authorized; 305,200 and 305,140 issued and
outstanding (aggregate liquidation value of $3,050,200 and $3,051,040,
respectively) 3,052 3,051
Series B, Cumulative Convertible Preferred stock, par value $.01 per share;
625,000 shares authorized, 464,665 issued and outstanding (aggregate
liquidation value $4,646,650) 4,647 4,647
Undesignated Serial Preferred stock, par value $.01 per share; 811,730 shares
authorized; none issued and outstanding -- --
Common stock, par value $.01 per share; 40,000,000 shares
authorized; 8,040,148 and 8,040,285 issued and outstanding 80,402 80,403
Additional paid-in capital 12,082,969 12,082,967
Retained deficit (4,852,465) (4,908,020)
------------ ------------
Total stockholders' equity 7,318,605 7,263,048
------------ ------------
$ 20,242,809 $ 20,941,820
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE> 5
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
REVENUE:
Oil and gas production $ 744,372 $ 862,934
Drilling revenues 168,750 1,169,196
Well operating, transportation and other 459,610 471,807
Administrative, management and agency fees 192,741 203,478
----------- -----------
1,565,473 2,707,415
----------- -----------
COSTS AND EXPENSES:
Oil and gas production expenses 201,744 225,810
Drilling costs 148,242 921,583
Oil and gas operations 232,319 249,439
General and administrative expenses 656,895 561,099
Depreciation, depletion, amortization, impairment and other 495,235 300,690
Abandonment of oil and gas properties -- 48,535
----------- -----------
1,734,435 2,307,156
----------- -----------
(LOSS) INCOME FROM OPERATIONS (168,962) 400,259
----------- -----------
OTHER INCOME:
Interest 20,774 13,961
Other 4,653 16,000
Gain (loss) on sale of property and equipment 8,943 (1,780)
----------- -----------
34,370 28,181
----------- -----------
OTHER EXPENSE:
Interest 170,099 239,289
----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (304,691) 189,151
(CREDIT) PROVISION FOR INCOME TAXES:
Current (61,000) --
Deferred (70,000) 37,000
----------- -----------
(131,000) 37,000
----------- -----------
NET (LOSS) INCOME $ (173,691) $ 152,151
=========== ===========
NET LOSS PER SHARE (primary and fully diluted) $ (.05) $ (.01)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (173,691) $ 152,151
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation, depletion, amortization, impairment
and other 495,235 300,690
Abandonment of oil and gas properties -- 48,535
(Gain) loss on sale of property and equipment (8,943) 1,780
Deferred income taxes (70,000) 37,000
Change in-
Accounts receivable 327,163 (102,210)
Inventories and other current assets 84,423 11,876
Other assets, net 9,497 15,575
Accounts payable (1,065,256) (443,070)
Accrued expenses (60,312) (57,983)
Billings in excess of costs on uncompleted
contracts (67,106) (516,184)
----------- -----------
Total adjustments (355,299) (703,991)
----------- -----------
Net cash used by operating activities (528,990) (551,840)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (579,259) (971,899)
Proceeds on sale of property and equipment -- 104,262
----------- -----------
Net cash used for investing activities (579,259) (867,637)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of accounts payable used to finance property
and equipment additions (236,422) (70,962)
Borrowings under revolving credit facility -- 1,150,000
Borrowings under note payable to stockholder 1,000,000 20,262
Repayment of borrowings under revolving credit facility (155,003) --
Payments on long-term debt (27,679) (41,520)
Cash paid for deferred financing (2,159) --
Distributions and dividends (209,004) (207,708)
----------- -----------
Net cash provided by financing activities $ 369,733 $ 850,072
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 7
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
DECREASE IN CASH AND EQUIVALENTS
$ (738,516) $ (569,405)
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD 2,366,660 1,551,748
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 1,628,144 $ 982,343
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 166,238 $ 131,449
Income taxes 24,818 --
SUPPLEMENTAL DISCLOSURES ON NONCASH INVESTING AND FINANCING
ACTIVITIES:
Long-term debt incurred for the purchase of property and
equipment $ -- $ 579,510
Accounts payable incurred for the purchase of property
and equipment 78,266 97,515
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 8
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Accounting Policies
A. General
The consolidated financial statements included herein, have been
prepared by North Coast Energy, Inc. without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position have
been made.
Information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
financial statements be read in conjunction with the financial
statements and notes thereto which are incorporated in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1996.
The results of the operations for the interim periods may not
necessarily be indicative of the results to be expected for the full
year. In addition, the preparation of these financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B. Principles of Consolidation
The consolidated financial statements include the accounts of North
Coast Energy, Inc. and its wholly owned subsidiaries (the Company),
North Coast Operating Company (NCOC), and NCE Securities, Inc. (NCE
Securities). In addition, the Company's investments in oil and gas
drilling partnerships, which are accounted for under the proportional
consolidation method, are reflected in the accompanying financial
statements. The Company's ownership of revenues in these drilling
partnerships are as follows:
<TABLE>
<S> <C>
Capital Drilling Fund 1986-1 Limited Partnership 13.2%
North Coast Energy/Capital 1987-1 Appalachian Drilling Program Limited Partnership 33.7%
North Coast Energy/Capital 1987-2 Appalachian Drilling Program Limited Partnership 27.0%
North Coast Energy/Capital 1988-1 Appalachian Drilling Program Limited Partnership 25.5%
North Coast Energy/Capital 1988-2 Appalachian Drilling Program Limited Partnership 34.8%
North Coast Energy 1989 Appalachian Drilling Program Limited Partnership 30.0%
North Coast Energy 1990-1 Appalachian Drilling Program Limited Partnership 26.0%
North Coast Energy 1990-2 Appalachian Drilling Program Limited Partnership 25.7%
North Coast Energy 1990-3 Appalachian Drilling Program Limited Partnership 25.0%
North Coast Energy 1991-1 Appalachian Drilling Program Limited Partnership 26.5%
</TABLE>
7
<PAGE> 9
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
<TABLE>
<S> <C>
Note 1. Summary of Accounting Policies (Continued)
North Coast Energy 1991-2 Appalachian Drilling Program Limited Partnership 25.0%
North Coast Energy 1991-3 Appalachian Drilling Program Limited Partnership 25.3%
North Coast Energy 1992-1 Appalachian Drilling Program Limited Partnership 25.0%
North Coast Energy 1992-2 Appalachian Drilling Program Limited Partnership 25.0%
North Coast Energy 1992-3 Appalachian Drilling Program Limited Partnership 39.5%
North Coast Energy 1993-1 Appalachian Drilling Program Limited Partnership 30.3%
North Coast Energy 1993-2 Appalachian Drilling Program Limited Partnership 31.0%
North Coast Energy 1993-3 Appalachian Drilling Program Limited Partnership 30.0%
North Coast Energy 1994-1 Appalachian Drilling Program Limited Partnership 30.0%
North Coast Energy 1994-2 Appalachian Drilling Program Limited Partnership 25.0%
North Coast Energy 1994-3 Appalachian Drilling Program Limited Partnership 25.0%
North Coast Energy 1995-1 Appalachian Drilling Program Limited Partnership 20.0%
North Coast Energy 1995-2 Appalachian Drilling Program Limited Partnership 20.0%
</TABLE>
All significant intercompany accounts and transactions have been
eliminated.
Note 2. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, 1996 June 30, 1996
-------------- -------------
<S> <C> <C>
Revolving credit notes payable - bank $ 7,560,000 $ 8,710,000
Notes payable to stockholder with interest at prime
plus 1% and 8% 1,386,842 1,393,631
Mortgage note payable to a bank, secured by land and a
building, requiring monthly payments of approximately
$1,019 (including interest at 8%) through July 2003 67,842 65,567
Mortgage note payable to a bank, secured by land and a
building, requiring monthly payments of approximately
$5,248 (including interest at 8.58%) -- 536,569
Various installment notes payable, in aggregate monthly
installments (including interest of $11,012 at March 31,
1996 and $13,970 at June 30, 1996) 152,950 170,119
----------- -----------
9,167,634 10,875,886
Less current portion 213,060 241,200
----------- -----------
$ 8,954,574 $10,634,686
=========== ===========
</TABLE>
8
<PAGE> 10
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Long-Term Debt (Continued)
The Company has an agreement with its lender to provide a reducing
revolving line of credit of up to $10,000,000. Available borrowings
under this agreement are computed based on a borrowing base determined
semi-annually by the lender, based upon the Company's financial
position, and level of oil and gas and pipeline based reserves and are
further based upon the amount of outstanding letters of credit used to
support certain bonding requirements ($140,000 at June 30, 1996). The
borrowing base is reduced monthly by an amount determined by the lender
at the semi-annual borrowing base determination. An amendment to the
credit agreement effective March 31, 1996 increased the borrowing base
to $9,500,000, with required monthly reductions of $110,000 beginning
on May 1, 1996. Available borrowings under the revolving line of credit
were $430,000 at June 30, 1996, and may subsequently change based on
the semi-annual reserve study and borrowing base determination. The
revolving line of credit can be renewed annually or converted to a term
loan at the Company's option prior to its expiration in fiscal 1998.
Amounts outstanding under the reducing revolving line of credit, which
were $8,710,000 at June 30, 1996, bear interest at the lending bank's
prime rate plus 1-1/2%. The agreement requires the Company to pay a
commitment fee of 1/2% on the unused amount of the available borrowings
and closing costs of 1% on any increase in borrowing availability. The
agreement contains certain restrictive covenants, including minimum
working capital, minimum shareholders' equity and a minimum debt
coverage ratio, all as defined. The Company was in compliance with or
had received waivers with respect to all covenants as of June 30, 1996.
The revolving credit facility and the notes are collateralized by
substantially all of the Company's assets including receivables,
inventory, equipment and a first mortgage on certain of the Company's
interest in oil and gas wells and reserves.
The Company has two notes payable to a stockholder. One note is payable
out of future operating revenues, as defined. The note is subordinate
to the borrowings under the revolving credit notes payable - bank.
During fiscal 1996, the Company entered into an additional note payable
with the same stockholder for $1,000,000. This note can be repaid in
either shares of common stock or the proceeds of a public offering, as
defined. This note is also subordinated to the borrowings under the
revolving credit notes payable bank. In connection with entering into
the Loan Agreement, the Company granted the stockholder certain
warrants to purchase 200,000 shares of common stock at $1.20 per share
and 300,000 shares of common stock at $1.00 per share, as defined. The
warrants may be redeemed by the Company for $.10 per share at its
option upon 30 days written notice.
On May 13, 1996, the company purchased a building for its headquarters
and entered into a mortgage note for $540,000 over a 15 year term with
an interest rate of 8.58% to be renegotiated every five years.
9
<PAGE> 11
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 3. Billings in Excess of Costs on Uncompleted Contracts
Billings in excess of costs on uncompleted contracts consist of:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1996
---- ----
<S> <C> <C>
Billings on uncompleted contracts $ 1,518,486 $ 347,610
Costs incurred on uncompleted contracts 881,139 226,447
--------- -------
$ 637,347 $ 121,163
========= =======
</TABLE>
Note 4. Commitment and Contingencies
The Company and a commercial bank have issued standby letters of credit
which provide a guaranteed total amount of $140,000 in lieu of coverage
provided by insurance or road bond deposits against damage.
At June 30, 1996, the Company has committed to fund certain costs of
the North Coast Energy Appalachian Drilling Programs estimated to be
approximately $563,987 for tangible well equipment and pipeline
construction. This commitment is expected to be realized by September
1996.
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
North Coast Energy, Inc., (the "Company") a Delaware corporation, is an
independent natural gas and oil company engaged in exploration, development and
production activities primarily in the Appalachian Basin region of Ohio and
Pennsylvania. The Company's strategy focuses primarily on the acquisition of
proved undeveloped natural gas and oil properties and on the turnkey drilling
and development of such properties by the Company in conjunction with drilling
partnerships which the Company sponsors and manages (the "Drilling Programs").
The Drilling Programs are funded through the sale of partnership interests to
non-industry investors and by contributions from the Company.
Several factors may affect the amount and timing of the Company's
revenues with respect to the activities of the Drilling Programs. The amount of
funds raised for each Drilling Program determines the number of wells for which
the Company receives drilling revenues and the date at which the wells reach a
certain point in the completion process determines the timing of revenue
recognition. The Company continually monitors the cost incurred in drilling,
completion and production operations and reviews its turnkey drilling contract
prices for each Drilling Program in order to reduce the risk of unprofitable
drilling operations. The turnkey drilling contract price between the Drilling
Programs and the Company may vary from Drilling Program to Drilling Program
depending on competition, type of well drilled and other cost factors and the
returns sought by investors in the Drilling Programs. A change in the turnkey
price and the Company's percentage interest in future Drilling Programs may
affect the Company's capital availability, as well as revenues and profits.
The Company typically forms the Drilling Programs between August and
December in each year and conducts its drilling operations between September and
March. It generally requires nine months between the drilling of a well and the
generation of production revenue from that well. Drilling revenues are
predominantly recognized during the second half of the Company's fiscal year.
The following table is a review of the results of operations of the
Company for the three months ended June 30, 1995 and 1996. All items in the
table are calculated as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months
Ended
June 30,
--------
1995 1996
-------------
<S> <C> <C>
Revenues:
Oil and gas production 46% 32%
Drilling revenues 11 43
Well operating, transportation and other 29 17
Administrative and agency fees 12 7
Other 2 1
--- ---
Total Revenues 100% 100%
--- ---
</TABLE>
11
<PAGE> 13
<TABLE>
<S> <C> <C>
Expenses:
Oil and gas production expenses 12% 8%
Drilling costs 9 34
Oil and gas operations 15 9
General and administrative expenses 41 20
Depreciation, depletion, amortization and other 31 11
Abandonment of oil and gas properties 0 2
Provision (credit) for taxes on income (8) 1
Other 11 9
--- ---
Total Expenses 111% 94%
--- ---
Net (Loss) Income ( 11)% 6%
====== ====
</TABLE>
The following discussion and analysis reviews the results of operations
and the financial condition for the Company for the three months ended June 30,
1995 and 1996. The review should be read in conjunction with the financial
information presented elsewhere herein.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1995 TO THREE MONTHS ENDED JUNE 30,
1996.
REVENUES
Oil and gas production revenues increased $118,562 (16%) to $862,934
for the three months ended June 30, 1996 compared to $744,372 for the prior
corresponding period. The primary reason for the increase in oil and gas
production revenues was a 14% increase between comparable periods in the average
natural gas price the Company received. Oil and gas production revenues were
also effected by an increase in oil production coupled with an increase in oil
prices of 15% for the three months ended June 30, 1996 compared to the three
months ended June 30, 1995. The average price the Company received for natural
gas increased from $2.09 per Mcf for the three months ended June 30, 1995 to
$2.39 per Mcf for the three months ended June 30, 1996.
Drilling revenues for the period increased by $1,000,446 to
$1,169,196 for the three months ended June 30, 1996 from $168,750 for the three
months ended June 30, 1995 due to the increase in the number of wells
recognized in revenue for the period. Drilling revenues were recognized on 11
wells for the three months ended June 30, 1996 compared to 3 wells for the
three months ended June 30, 1995. The increase in wells recognized in drilling
revenues was due to a larger number of wells in progress at the Company's
fiscal year end of March 31, 1996 compared to March 31, 1995. At June 30, 1996,
the Company had 3 wells in progress and not yet recognized in drilling revenues
as compared to 4 wells at June 30, 1995.
For the three months ended June 30, 1996, well operating,
transportation and other revenues increased $12,197 (3%) compared to the three
months ended June 30, 1995. An increase of $49,000 in third party gas sales
helped offset a $16,000 reduction in well operating income which was the result
of the Company purchasing an additional portion of the working interest in 23
wells. In addition, the replacement cost of compressors during fiscal 1996
caused compressor income to decrease by $17,000 during the three months ended
June 30, 1996.
Revenues from administrative and agency fees, which are based on a
percentage of the total investor capital raised in all of the Drilling Programs,
increased by $10,737 (6%) for the three months ended June 30, 1996 compared to
the three months ended June 30, 1995 due to the formation of the Drilling
Programs of fiscal 1996. This increase has been offset somewhat as the Company
continues its policy of reviewing administrative fees on its Drilling Programs
and reducing these fees when necessary.
EXPENSES
Drilling costs for the three months ended June 30, 1996 compared to the
three months ended June 30, 1995 increased $773,341 primarily due to the
increased number of wells completed between comparable periods. The
12
<PAGE> 14
profit margin on drilling revenue increased to 21% for the three months ended
June 30, 1996 compared to 12% for the three months ended June 30, 1995. The
increase in the drilling profit margin between comparable periods is due to a
higher turnkey, improved cost controls and lower drilling costs associated with
a lower average depth of a well.
General and administrative expenses decreased $95,796 (15%) for the
three months ended June 30, 1996 compared with the three months ended June 30,
1995. This decrease resulted from the reduction in certain one time consulting
expenses between comparable periods coupled with a decrease in certain ongoing
professional fees.
Depreciation, depletion, amortization, impairment and other decreased
$194,545 (39%) for the three months ended June 30, 1996 compared to the three
months ended June 30, 1995. This decrease was primarily due to the
implementation of the Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" during fiscal 1996, offset somewhat by increased
depreciation and amortization resulting from additions to investments in
pipelines and equipment during recent periods.
Abandonment of oil and gas properties increased $48,535 for the three
months ended June 30, 1996 compared to the three months ended June 30, 1995. The
Company abandoned a well during the three months ended June 30, 1996 in its Gulf
Coast area of interest which the Company and its industry partners were
reworking during the last fiscal year.
Interest expense increased to $239,289 for the three months ended June
30, 1996 from $170,099 for the three months ended June 30, 1995. This increase
was associated with the Company's additional borrowings on its reducing
revolving credit facility. At June 30, 1996, $8,710,000 was outstanding under
the Company's Credit Facility, as compared to $5,895,000 at June 30, 1995.
Income from operations for the three months ended June 30, 1996
increased $569,221 compared to the three months ended June 30, 1995 due
primarily to the increase in drilling income, coupled with lower depreciation,
depletion, amortization, impairment and other and general and administrative
expenses. The Company's net income increased $325,842 to $152,151 for the
three months ended June 30, 1996 compared to a net loss of $173,691 for the
three months ended June 30, 1995.
INFLATION AND CHANGES IN PRICES
While the costs of operations have been and will continue to be
effected by inflation, oil and gas prices have fluctuated during recent years
and generally have not followed the same pattern as inflation. With today's
global economy, especially in the area of oil and natural gas, Management
believes that other forces of the economy and world events, such as OPEC, the
weather, economic factors, and the effects of supply of natural gas in the
United States and regionally have a more immediate effect on current pricing
than inflation. The Company received an average price of $19.59 and $16.99 per
barrel for three months ended June 30, 1996 and 1995, respectively, and $2.39
and $2.09 per Mcf for natural gas for three months ended June 30, 1996 and 1995,
respectively. The general market for natural gas in the Appalachian Basin has
rebounded somewhat reflecting the colder Appalachian area weather during the
recent winter. The reasons for the previously weak natural gas prices and recent
increases in the gas prices can be attributed to supply and demand fluctuations
caused by the weather sensitive nature of the industry. Although it is
anticipated that there will be a decline in gas prices during the summer months
compared to the winter of 1995/1996 the demand for gas by storage facilities may
continue to keep gas prices above last year's low prices. Other variables
potentially effecting gas prices are increased competition from Canadian gas,
effects of gas storage and possibly Federal Energy Regulatory Commission
("FERC") Order 636. The FERC Order may have contributed to the lower spot market
prices by mandating an unbundling of pipeline service and allowing open access
to a variety of geographical markets. Management cannot predict what long-term
effects FERC Order 636 will have on either spot market prices or longer term gas
contracts.
Currently, the Company sells natural gas under both fixed price
contracts and on the spot market. The spot market price the Company receives for
gas production is related to several variables, including the weather and
13
<PAGE> 15
the effects of gas storage. The Company anticipates that spot market prices will
continue to fluctuate in response to various factors, primarily weather and
market conditions.
In an effort to position itself to take advantage of future increases
in demand for natural gas, the Company continues to construct new pipeline
systems in the Appalachian Basin and to contract with other pipeline systems in
the region to transport natural gas production from Company wells.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $124,000 at June 30, 1996 compared to
negative $360,000 at March 31, 1996. The increase of $484,000 in working capital
at June 30, 1996 reflects the Company's use of cash through the utilization of
it's Credit Facility to purchase property and equipment to meet its obligations
to fund its investments in the Drilling Programs. An amendment to the Credit
Facility increased the Company's borrowing base to $9,500,000 at March 31, 1996.
As of June 30, 1996, the Company had $8,710,000 outstanding under its Credit
Facility. North Coast's current ratio was 1.04 to 1.0 at June 30, 1996 and .90
to 1.0 at March 31, 1996.
The following table summarizes the Company's financial position at
March 31, 1996 and June 30, 1996:
(Amounts in Thousands)
<TABLE>
<CAPTION>
March 31,1996 June 30, 1996
------------- -------------
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Working capital $ (360) (2)% $ 124 1%
Property and equipment 16,737 100 17,959 98
Other 253 2 209 1
------- --- ------ ---
Total $ 16,630 100% $ 18,292 100%
====== === ====== ===
Long-term debt $ 8,954 54% $ 10,635 58%
Deferred income taxes 357 2 394 2
Stockholders' equity 7,319 44 7,263 40
----- --- ------- ---
Total $ 16,630 100% $ 18,292 100%
====== === ====== ===
</TABLE>
CAPITAL RESOURCES AND REQUIREMENTS
The oil and gas exploration and development activities of North Coast
historically have been financed through the Drilling Programs, through
internally generated funds, and from bank financing.
The following table summarizes the Company's Statements of Cash Flows
for the three months ended June 30, 1995 and 1996:
<TABLE>
<CAPTION>
(Amounts in Thousands) 1995 1996
---- ----
Dollars % Dollars %
------- - ------- -
<S> <C> <C> <C> <C>
Net cash used by operating activities $ (529) (39)% $ (552) (28)%
Net cash used for investing activities (579) (43) (867) (44)
Net cash provided by financing activities 369 27 850 43
--- -- --- --
Decrease in cash and cash equivalents $ (739) (55)% $ (569) (29)%
=== == === ==
</TABLE>
(1) All items in the previous table are calculated as a percentage of total
cash sources. Total cash sources include the following items, if positive:
cash flow from operations before working capital changes, changes in
working
14
<PAGE> 16
capital, net cash provided by investing activities and net cash
provided by financing activities, plus any decrease in cash and cash
equivalents.
As the above table indicates, the Company's cash flow used by operating
activities remained relatively constant between comparable periods.
Net cash used for investing activities increased from $579,000 (43% of
cash sources) for the three months ended June 30, 1995 to $867,000 (44% of cash
sources) for the three months ended June 30, 1996. The increase of $288,000 is
primarily due to the timing of the Company's cash expenditures related to its
obligation to fund the tangible equipment for the drilling programs.
Net cash provided by financing activities increased by $481,000 for the
three months ended June 30, 1995 compared to the three months ended June 30,
1996. This increase reflects the repayment of borrowings under the revolving
credit facility for the three months ended June 30, 1995 without a
corresponding repayment for the current period. In addition, the Company
increased borrowings by $150,000 for the period ended June 30, 1996.
On September 20, 1993 the Company entered into an agreement with an
affiliate of its lender to provide a reducing revolving line of credit of up to
$10,000,000 (the "Credit Facility"). The Credit Facility (as amended for
borrowing base adjustments) provided the Company with available (future)
borrowings of $9,500,000 at March 31, 1996 based upon the Company's financial
position and level of oil and natural gas and pipeline-based reserves, with
available borrowings reducing $110,000 at the first of each month. Available
borrowings are also subject to a reduction based upon the amount of outstanding
letters of credit used to support certain bonding requirements ($140,000 as of
June 30, 1996). The Credit Facility provides that availability is subject to
adjustment based upon the Company's semi-annual reserve study and is subject to
certain covenants (see Note 4 to the Company's March 31, 1996 financial
statements). As of June 30, 1996, the Company had $8,710,000 outstanding under
the Credit Facility. At June 30, 1996 the Company was in violation of its
stockholders' equity loan covenant, although this violation has been waived by
the lender. Amounts borrowed under the Credit Facility bear interest at the
lending bank's prime rate plus 1 1/2%. Also, at June 30, 1996, the Company had
approximately $65,600 outstanding under a mortgage note payable. The mortgage
note bears interest at the rate of 8% and requires the Company to make monthly
payments of approximately $1,019 through July 2003. Also, the Company purchased
a building for its headquarters and entered into a mortgage note on May 13, 1996
for $540,000 over 15 year term with an interest rate of 8.58% to be renegotiated
every five years.
The amounts borrowed under its reducing revolving line of credit are
secured by the Company's receivable, inventory, equipment and a first mortgage
on certain of the Company's interests in oil and gas wells and reserves. The
mortgage notes are secured by certain land and buildings.
In addition to bank financing, the Company secured $335,000 in
financing from NAGIT, a principal stockholder of the Company, relating to the
purchase of certain producing wells, gas gathering lines and drilling locations.
The amounts outstanding under the terms of the Company's financing arrangements
with NAGIT are subordinated to the prior payment and amounts outstanding under
the Company's Credit Facility, and bear an interest rate at the prime rate
designated by the Chemical Bank, N.A., plus 1% (9.25% at June 30, 1996). This
agreement grants NAGIT an overriding royalty interest in the acquired
properties. Repayment of the loan is in cash based upon a percentage of the net
monthly revenues from the acquired properties.
Also, effective June 13, 1995, the Company entered into a Loan
Agreement with NAGIT with respect to a loan of $1,000,000. The unsecured loan
may be repaid in cash plus accrued interest (with approval of the Company's
senior lender) with the proceeds of a sale of equity or may be converted into
shares of Common Stock at the rate of $1.00 per share. The loan is subordinate
to the Company's Credit Facility with its senior lender and bears interest at
the rate of 8% per annum. As of June 30, 1996, the balance of the loan and
accrued interest was $1,084,260. In connection with entering into the Loan
Agreement, the Company issued a warrant to purchase 200,000 shares of Common
Stock at $1.20 per share and a warrant to purchase 300,000 shares of Common
Stock at $1.00 per share. The warrants may be redeemed by the Company for $.10
per share at its option upon 30 days written notice.
15
<PAGE> 17
The oil and gas industry is intensely capital driven and demands on the
Company's capital resources may increase further during fiscal 1997. The
potential increases may result from additional drilling and completion
obligations of the Company relating to its sponsorship of Drilling Programs,
further development of the Company's drilling prospects, the possibility of
future joint ventures or other arrangements intended to assist in increasing the
Company's reserve base and production revenues and the dividend obligations
associated with the Company's Preferred stock.
Management of the Company believes that internally generated funds and
available borrowings under its Credit Facility will be sufficient to fund the
Company's anticipated capital expenditures as well as its working capital needs
through the end of the current fiscal year. During fiscal year 1996, the Company
adhered to its plan of increasing drilling margins by adjusting both its
percentage of ownership of the wells drilled by the Drilling Programs and the
depths of these wells. The improvement in drilling margins was a result of
reduced drilling and completion costs and increasing per well drilling revenues.
Although Management has taken the steps outlined above, due to the amount of
funds committed to current Drilling Programs and future projects, the
uncertainties associated with the amount of funds which may be raised from
investors in future Drilling Programs, and uncertainties associated with turnkey
drilling costs and future production revenues, it may be necessary for the
Company to secure additional sources of capital or financing for its future
projects and to fund its current obligations. In the event that available
borrowings under the Credit Facility are not sufficient or if additional
financing is needed and cannot be obtained, the Company believes that it would
be required to change its growth oriented business strategy to conserve cash. In
order to accomplish this objective, the Company believes that it would be
necessary to take various actions, including reducing the amount of capital
raised in future Drilling Programs, the introduction of certain cost cutting
measures and the possible sale of certain assets. Management of the Company
believes that measures of this type would have a material adverse effect on the
Company.
ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation" which permits either
recording the estimated value of Stock-Based compensation over the applicable
vesting period or disclosing the unrecorded cost and the related effect on
earnings per share in the notes to Consolidated Financial Statements. SFAS No.
123 is required to be adopted for Financial Statements with fiscal years
beginning after December 15, 1995. The Company is currently reviewing the
Accounting Standard and has not yet determined the effect, if any, on its
Financial Statements.
16
<PAGE> 18
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a). Exhibits
11.1 Computation of Earnings per Common Share.
27.1 Financial Data Schedule.*
b). No reports on Form 8-K have been filed during the quarter for
which this report was filed.
*Exhibit 27.1 furnished for Securities and Exchange Commission purposes only.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH COAST ENERGY, INC.
August __, 1996 /s/ Charles M. Lombardy, Jr.
---------------------------------------------
Charles M. Lombardy, Jr.
Chief Executive Officer and Director
August __, 1996 /s/ Tim Wagers
---------------------------------------------
Tim Wagers
Principal Accounting and Financial Officer
18
<PAGE> 1
Exhibit 11.1
Computation of Primary and Fully Diluted Earnings Per Common Share
<TABLE>
<CAPTION>
Three Months Ended
6/30/95 6/30/96
------- -------
EARNINGS
<S> <C> <C>
Net (Loss) Income $ (173,691) $ 152,151
Series A Preferred Stock Dividends (92,838) (91,542)
Series B Preferred Stock Dividends (116,166) (116,166)
----------- -----------
Pro Forma Loss Applicable to Common Stock $ (382,695) $ (55,557)
=========== ===========
- -----------------------------------------------------------------------------------------------------
SHARES
Weighted Average Common Shares for the
period ended 8,030,779 8,040,268
Additional Shares Assuming Conversion of:
Employee Options Exercised 0 0
----------- -----------
Pro Forma Shares for Primary Earnings
Per Common Share 8,030,779 8,040,268
----------- -----------
Additional Shares Assuming Conversion of:
Preferred Stock 0 0
----------- -----------
Pro Forma Shares for Fully Diluted Earnings
Per Common Share 8,030,779 8,040,268
=========== ===========
- -----------------------------------------------------------------------------------------------------
Primary Earnings Per Common Share $ (.05) $ (.01)
Fully Diluted Earnings Per Share *$ (.05) *$ (.01)
- -----------------------------------------------------------------------------------------------------
<FN>
* Common Stock Equivalents Have an Anti-Dilutive Effect on Earnings Per
Share and are Excluded From This Exhibit.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000839950
<NAME> NORTH COAST ENERGY, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 982,343
<SECURITIES> 0
<RECEIVABLES> 1,539,804
<ALLOWANCES> 0
<INVENTORY> 78,608
<CURRENT-ASSETS> 2,773,603
<PP&E> 29,943,221
<DEPRECIATION> 11,984,012
<TOTAL-ASSETS> 20,941,820
<CURRENT-LIABILITIES> 2,649,986
<BONDS> 0
<COMMON> 80,403
0
7,698
<OTHER-SE> 12,082,967
<TOTAL-LIABILITY-AND-EQUITY> 20,941,820
<SALES> 2,707,415
<TOTAL-REVENUES> 2,707,415
<CGS> 2,307,156
<TOTAL-COSTS> 2,307,156
<OTHER-EXPENSES> (28,181)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 239,289
<INCOME-PRETAX> 189,151
<INCOME-TAX> 37,000
<INCOME-CONTINUING> 152,151
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 152,151
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
