<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
NORTH COAST ENERGY, INC.
(Name of the Issuer)
North Coast Energy, Inc.
(Name of Person Filing Statement)
Series A 6% Convertible Preferred Stock
Series B Cumulative Convertible Preferred Stock
(Title of Classes of Securities)
658649207 (Series A Preferred)
658649405 (Series B Preferred)
(CUSIP Number of Classes of Securities)
Garry Regan
1993 Case Parkway
Twinsburg, Ohio 44087-2343
(216) 425-2330
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of Person Filing Statement)
Copy to:
Michael D. Phillips, Esq.
Calfee, Halter & Griswold
1400 McDonald Investment Center
800 Superior Avenue
Cleveland, Ohio 44114
(216) 622-8200
December 20, 1996
(Date Tender Offer First Published, Sent or Given to Security Holders)
CALCULATION OF FILING FEE
- --------------------------------------------------------------------------------
Transaction Valuation * Amount of Filing Fee
$6,718,220 $1,344.00
- --------------------------------------------------------------------------------
Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form
or Schedule and the date of its filing.
Amount Previously Paid: ________ Not Applicable
Form or Registration No.: ________ Not Applicable
Filing Party: ________ Not Applicable
Date Filed: __________ Not Applicable
- --------------------------------------------------------------------------------
* For purposes of calculation of fee only. This amount assumes the conversion of
all 300,090 shares of Series A Preferred outstanding and all 464,665 shares of
Series B Preferred outstanding. The book value of the Series A Preferred is
$10.00 per share. The market value of the Series B Preferred is $8.00 per share
and is based on the average of the high and low prices of the Series B Preferred
as of December 18, 1996.
<PAGE> 2
Preliminary Note: References in this Schedule to the "Offering Circular" and the
"Letter of Transmittal" are to the Offering Circular dated December 20, 1996
(the "Offering Circular") and the Conversion Notice and Letter of Transmittal
dated December 20, 1996 (the "Letter of Transmittal"), filed herewith as
Exhibits (a)(1) and (a)(2), respectively.
Item 1. Security and Issuer.
- -----------------------------
(a) The issuer of the securities to which this statement
relates is North Coast Energy, Inc., a Delaware corporation (the "Company"). The
Company's principal executive offices are located at 1993 Case Parkway,
Twinsburg, Ohio 44087-2343.
(b) The information required by this sub-item may be found on
the Outside Front Cover Page of the Offering Circular and under the following
headings in the Offering Circular: "The Conversion Offer" and "The Conversion
Offer -- Conditions of the Conversion Offer." Such information is incorporated
herein by reference.
(c) See "Comparative Market Prices" in the Offering Circular
and the Issuer's Annual Report on Form 10-K for the year ended March 31, 1996,
included as Appendix A to the Offering Circular, incorporated herein by
reference.
(d) Not applicable.
Item 2. Source and Amount of Funds or Other Consideration.
- -----------------------------------------------------------
(a) See "The Conversion Offer" and "North Coast Capital Stock"
in the Offering Circular, incorporated herein by reference.
(b) (1) Not applicable.
(b) (2) Not applicable.
Item 3. Purpose of the Tender Offer and Plans or Proposals of the Issuer or
- ---------------------------------------------------------------------------
Affiliate.
- ----------
See "Background of the Conversion Offer -- Reasons for the
Conversion Offer" in the Offering Circular, incorporated herein by reference.
The shares of Series A Preferred and Series B Preferred surrendered to the
Issuer on the conversion thereof into shares of Common Stock shall upon
appropriate filing and recording to the extent required by law, have the status
of authorized and unissued shares of Series A Preferred and Series B Preferred,
respectively.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) See "Background of the Conversion Offer," "North Coast
Capital Stock" and "Selected Historical and Pro Forma Financial Data" in the
Offering Circular, incorporated herein by reference.
(f) Not applicable.
(g) Not applicable.
(h) See "Certain Considerations -- Considerations Applicable
to Holders of Series A and B Preferred Who Do Not Convert in Connection with
this Conversion Offer" in the Offering Circular, incorporated herein by
reference.
(i) See "Background of the Conversion Offer -- Reasons for
Converting in Connection with this Conversion Offer" in the Offering Circular,
incorporated by reference.
(j) Not applicable.
2
<PAGE> 3
Item 4. Interest in Securities of the Issuer.
- ----------------------------------------------
Neither the Issuer nor to the best of its knowledge, any of
the other persons covered by Item 4 of this Schedule has effected any
transaction in the Series A Preferred or Series B Preferred during the 40
business days preceding the date of the Offering Circular.
Item 5. Contracts, Arrangements, Understandings or Relationships with Respect to
- --------------------------------------------------------------------------------
the Issuer's Securities.
- ------------------------
See "The Conversion Offer -- Conditions of the Conversion
Offer" in the Offering Circular, which describes the intentions of all Directors
and executive officers of the Issuer to convert the shares of Series A and
Series B Preferred held by them in connection with the Conversion Offer and
"Conversion Offer Procedures -- Payment of Expenses," of the Offering Circular,
which are incorporated by reference herein.
Item 6. Persons Retained, Employed or to be Compensated.
- --------------------------------------------------------
The Conversion Offer is being made by the Issuer in reliance
on the exemption from the Securities Act registration requirements afforded by
Section 3(a)(9) thereof. Therefore, the Issuer has not employed or retained and
will not compensate any persons to make solicitations or recommendations in
connection with the Conversion Offer. See "The Conversion Offer" and "Conversion
Offer Procedures -- Payment of Expenses" in the Offering Circular, incorporated
herein by reference.
Item 7. Financial Information.
- ------------------------------
(a) (1) See the Issuer's Annual Report on form 10-K for the
year ended March 31, 1996, included as Appendix A to the Offering Circular and
incorporated herein by reference.
(2) See the Issuer's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, included as Appendix B to the Offering
Circular and incorporated herein by reference.
(3) See "Selected Historical and Pro Forma Financial
Data" in the Offering Circular, incorporated herein by reference.
(4) See "Selected Historical and Pro Forma Financial
Data" in the Offering Circular, incorporated herein by reference.
(b) See "Selected Historical and Pro Forma Financial Data" in
the Offering Circular, incorporated herein by reference.
Item 8. Additional Information.
- -------------------------------
(a) Not applicable.
(b) See "The Conversion Offer--Conditions of the Conversion
Offer" in the Offering Circular, incorporated herein by reference.
(c) The Series B Preferred are "margin securities" under the
regulations of the Board of Governors of the Federal Reserve Board. See "Certain
Considerations -- Illiquidity of Series B Preferred; Possible NASDAQ Delisting;
Margin Regulations."
(d) Not applicable.
(e) The Offering Circular, including the Appendices thereto,
and the Letter of Transmittal should be read in their entirety and are
incorporated herein by reference.
Item 9. Material to Be Filed as Exhibits.
- ------------------------------------------
Description
-----------
(a)(1) - Offering Circular dated December 20, 1996.
(a)(2) - Form of Conversion Notice and Letter of Transmittal
dated December 20, 1996.
3
<PAGE> 4
(a)(3) - Form of Notice of Guaranteed Delivery.
(a)(4) - Form of Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9.
(a)(5) - Form of Letters from the Chairman of the Board of
the Issuer to holders of Series A Preferred and
Series B Preferred, dated December 20, 1996.
(a)(6) - Form of Press Release issued by the Company on
December 20, 1996.*
(b) - Not applicable.
(c) - Not applicable.
(d) - Not applicable.
(e) - Not applicable.
(f) - Not applicable.
- ------------------------
* Not mailed to holders.
4
<PAGE> 5
SIGNATURE
After due inquiry and to the best of my knowledge and belief,
I certify that the information set forth in this statement is true, complete and
correct.
Date: December 20, 1996 North Coast Energy, Inc.
By /s/ Garry Regan
----------------------------
Garry Regan,
President
5
<PAGE> 6
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
(a)(1) - Offering Circular dated December 20, 1996.
(a)(2) - Form of Conversion Notice and Letter of Transmittal dated December 20, 1996.
(a)(3) - Form of Notice of Guaranteed Delivery.
(a)(4) - Form of Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.
(a)(5) - Form of Letters from the Chairman of the Board of the Issuer to holders of Series A Preferred and
Series B Preferred, dated December 20, 1996.
(a)(6) - Form of Press Release issued by the Company on December 20, 1996.*
(b) - Not applicable.
(c) - Not applicable.
(d) - Not applicable.
(e) - Not applicable.
(f) - Not applicable.
- ---------------
<FN>
* Not mailed to holders.
</TABLE>
6
<PAGE> 1
Exhibit (a)(1)
NORTH COAST ENERGY, INC.
CONVERSION OFFER
----------------
5.0 SHARES OF COMMON STOCK
UPON CONVERSION OF
EACH SHARE OF SERIES A 6% CONVERTIBLE PREFERRED STOCK*
------------------------------------------------------
8.0 SHARES OF COMMON STOCK
UPON CONVERSION OF
EACH SHARE OF SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK**
---------------------------------------------------------------
North Coast Energy, Inc. ("North Coast" or the "Company") is offering to issue
additional shares of its Common Stock, $.01 par value per share ("Common
Stock"), to convert the outstanding shares of its Series A 6% Convertible
Preferred Stock ("Series A Preferred") and its Series B Cumulative Convertible
Preferred Stock ("Series B Preferred") (together, the "Series A and B
Preferred"). The offer (the "Conversion Offer") is as follows:
*Series A Preferred -- A total of 5.0 shares of Common Stock will be
issued to the holder of each share of Series A Preferred converted in
connection with this Conversion Offer: each Series A Preferred share is
convertible into 2.3 shares of Common Stock in accordance with its
stated terms, and an additional 2.7 shares of Common Stock will be
issued as to each Series A Preferred share converted. See "The
Conversion Offer" for a further description.
**Series B Preferred -- A total of 8.0 shares of Common Stock will be
issued to the holder of each share of Series B Preferred converted in
connection with this Conversion Offer: each Series B Preferred share is
convertible into 5.75 shares of Common Stock in accordance with its
stated terms, and an additional 2.25 shares of Common Stock will be
issued as to each Series B Preferred share converted. See "The
Conversion Offer" for a further description.
Holders of Series A Preferred are entitled to receive semi-annual,
non-cumulative cash dividends at an annual rate of $.60 per share, and holders
of Series B Preferred are entitled to receive quarterly cumulative cash
dividends at an annual rate of $1.00 per share. However, pursuant to a recent
amendment to its Credit Facility, the Company is prohibited from paying any
dividends with respect to the Series A and B Preferred capital stock. The Bank
has verbally agreed to review the prohibition against the payment of dividends
in March 1997, but is not required to agree to lift the existing prohibition on
dividends. There can be no assurance as to when or if the prohibition will be
lifted or, if it is, as to what additional conditions the Bank may impose
limiting the Company's ability to pay dividends. See "Recent Developments." The
semi-annual dividend payment on the Series A Preferred, which was to be made on
December 1, 1996, was not made. As a result of the increased demands on the
Company's cash flow resulting from the lower level of investor interest in its
Drilling Programs (as defined on page one) and due to the prohibition against
paying dividends contained in the amendment to its Credit Facility, the Company
will not be able to pay the December 31, 1996 dividend on the Series B Preferred
when due. The Company will not be able to pay any dividends on either the Series
A Preferred or the Series B Preferred through at least the end of the current
fiscal year and cannot predict when the Company will be in a position to resume
the payment of dividends with respect to the Series A and B Preferred. On the
scheduled Expiration Date (as defined below) of this Conversion Offer, it is
anticipated that each of the shares of Series B Preferred will have an aggregate
dividend arrearage of $.25 per share.
Each tendering holder will be deemed to have waived such holder's right to
receive (1) all unpaid dividends in arrears on shares of Series B Preferred and
(2) any dividend which may become payable in respect of the tendered Series A
and Series B Preferred subsequent to the date that such shares are tendered,
even if such dividend becomes payable prior to acceptance of such shares by the
Company. See "North Coast Capital Stock -- Series A Preferred"; "-- Series B
Preferred."
The Common Stock and Series B Preferred are traded on the NASDAQ Small Cap
Market ("NASDAQ") under the symbols "NCEB" and "NCEBP," respectively. There is
no established market for the Series A Preferred. On December 19, 1996, the last
trading day before the Company publicly announced this Conversion Offer, the
closing price of the Common Stock on NASDAQ was $1.25 per share, and the closing
price of the Series B Preferred on NASDAQ was $7.00 per share. The closing
prices of the Common Stock and the Series B Preferred on NASDAQ on December 19,
1996, the last trading day before the date of this Offering Circular, were $1.25
and $7.00 per share, respectively.
THIS CONVERSION OFFER WILL EXPIRE AT 5:00 P.M.
CLEVELAND, OHIO TIME ON JANUARY 31, 1997 UNLESS EXTENDED
BY THE COMPANY (THE "EXPIRATION DATE").
THE DATE OF THIS OFFERING CIRCULAR IS DECEMBER 20, 1996.
<PAGE> 2
Shares of Series A and Series B Preferred are, in some cases, represented by
certificates for Units. Each Series A Preferred Unit consists of five shares of
Series A Preferred and ten shares of Common Stock (the "Series A Units"). The
Series A Units were issued in connection with the Company's exchange offer in
1990. See "Background of the Conversion Offer." Each Series B Preferred Unit
consists of one share of Series B Preferred and five warrants (the "Series B
Units"). See "North Coast Capital Stock -- Warrants." The Series B Units were
issued in connection with the Company's public offering in 1992. See "Background
of the Conversion Offer." Each holder of Series A Units who elects to convert
such holder's Series A Preferred shares will deliver the Series A Unit
certificate(s) and will be issued certificates for the number of shares of
Common Stock represented by each Unit, together with the number of shares of
Common Stock into which the Series A Preferred tendered by the holder pursuant
to the Conversion Offer have been converted. Each holder of Series B Units who
elects to convert such holder's Series B Preferred shares will deliver the
Series B Unit certificate(s) and will be issued certificates for the number of
shares of Common Stock into which the Series B Preferred tendered by the holder
pursuant to the Conversion Offer have been converted and a certificate
representing their warrants. See "Conversion Offer Procedures." References to
holders of Series A and B Preferred herein are meant to include holders of
Series A Units and Series B Units. References to Series A and B Preferred or
Series A and B Preferred shares are meant to include those held as part of
Series A Units or Series B Units.
This Conversion Offer is made upon the terms, and is subject to the conditions,
set forth in this Offering Circular and in the accompanying Conversion Notice
and Letter of Transmittal (the "Letter of Transmittal").
Series A and B Preferred shares delivered for conversion in connection with this
Conversion Offer may be withdrawn at any time prior to 5:00 p.m., Cleveland,
Ohio time, on the Expiration Date. See "Conversion Offer Procedures --
Withdrawal of Deliveries."
Based solely upon the $1.25 per share closing price of the Common Stock on
December 19, 1996, the dollar value of the Common Stock issuable to holders of
Series A and B Preferred accepting this Conversion Offer is as follows:
Series A Preferred: A total of $6.25 in Common Stock, or $2.88 for the
2.3 shares of Common Stock currently issuable upon conversion in
accordance with its stated terms, plus $3.37 in additional shares to
induce conversion.
Series B Preferred: A total of $10.00 in Common Stock, or $7.19 for the
5.75 shares of Common Stock currently issuable upon conversion in
accordance with its stated terms, plus $2.81 in additional shares to
induce conversion.
No assurance can be given as to future market price fluctuations and changes in
the relative values of the shares of Common Stock and Series A and B Preferred.
Holders should obtain current market price quotations before making a final
decision regarding this Conversion Offer. The number of additional shares of
Common Stock being offered will NOT be adjusted by the Company for fluctuations
in the market prices of Common Stock and Series A and B Preferred.
The Company has been advised that all of the 7,085 shares of Series A Preferred
and all of the 1,500 shares of Series B Preferred held directly by executive
officers and Directors of the Company and by Lomak Petroleum, Inc., a
significant stockholder of the Company, will be converted by them in this
Conversion Offer. See "The Conversion Offer."
THE COMPANY WILL NOT SEEK OR OBTAIN AN INDEPENDENT "FAIRNESS OPINION" OR
INDEPENDENT VALUATION REGARDING THIS CONVERSION OFFER AND IS NOT MAKING ANY
RECOMMENDATION TO HOLDERS OF SERIES A PREFERRED OR SERIES B PREFERRED WHETHER TO
ACCEPT OR REJECT THIS CONVERSION OFFER. EACH HOLDER OF SERIES A PREFERRED OR
SERIES B PREFERRED SHOULD CAREFULLY REVIEW THIS CONVERSION OFFER AND THE
APPLICABLE TAX CONSEQUENCES BEFORE DECIDING WHETHER TO CONVERT SUCH SHARES IN
CONNECTION WITH THIS CONVERSION OFFER. SEE "BACKGROUND OF THE CONVERSION OFFER"
AND "CERTAIN CONSIDERATIONS" FOR AN EXPLANATION OF FACTORS THAT LED THE COMPANY
AND ITS BOARD OF DIRECTORS TO MAKE THIS CONVERSION OFFER AND FOR A DESCRIPTION
OF CERTAIN CONSIDERATIONS WHICH THE COMPANY BELIEVES HOLDERS MAY WANT TO
EVALUATE IN MAKING A DECISION TO CONVERT IN CONNECTION WITH THIS CONVERSION
OFFER.
Appendix A to this Offering Circular is a copy, without exhibits, of the
Company's Annual Report on Form 10-K for the year ended March 31, 1996 (the
"Annual Report"), describing the Company and its various businesses, and
including the Company's audited consolidated financial statements (and notes
thereto). Appendix B to this Offering Circular is a copy, without exhibits, of
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, which includes the Company's unaudited financial statements (and notes
thereto) for the six month periods then ended (the "Quarterly Report"). The
information contained in these materials should be reviewed carefully by each
holder of Series A Preferred or Series B Preferred in considering this
Conversion Offer.
SEE "CERTAIN CONSIDERATIONS" AND "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" FOR A
DISCUSSION OF VARIOUS FACTORS THAT ALSO SHOULD BE CONSIDERED BY HOLDERS OF
SERIES A AND B PREFERRED IN EVALUATING THIS CONVERSION OFFER.
No person has been authorized to give any information pertaining to this
Conversion Offer or the Company, except as contained in this Offering Circular
and its Appendices. Any information not so contained must not be relied upon as
having been authorized by
ii
<PAGE> 3
the Company. Neither the delivery of this Offering Circular nor the consummation
of this Conversion Offer will be deemed to create any implication that there has
been no change in the information set forth herein or in the Annual Report and
the Quarterly Report since their respective dates.
All questions and requests for assistance or for additional copies of this
Offering Circular and the Letter of Transmittal may be directed to the
Conversion Agent at 40 Wall Street, New York, New York 10005; telephone:
800-937-5449.
NEITHER THIS CONVERSION OFFER NOR THE COMMON STOCK ISSUABLE IN ACCORDANCE
HEREWITH HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR REGISTERED OR QUALIFIED UNDER THE SECURITIES OR BLUE SKY
LAWS OF ANY STATE OR OTHER JURISDICTION. THIS CONVERSION OFFER IS BEING MADE BY
THE COMPANY IN RELIANCE ON THE EXEMPTION FROM THE SECURITIES ACT REGISTRATION
REQUIREMENTS AFFORDED BY SECTION 3(A)(9) THEREOF. IN ACCORDANCE WITH THE
REQUIREMENTS FOR SUCH EXEMPTION, THE COMPANY WILL NOT PAY ANY COMMISSION OR
OTHER REMUNERATION TO ANY BROKER, DEALER, SALESMAN OR OTHER PERSON FOR
SOLICITING DELIVERIES OF THE SERIES A AND B PREFERRED FOR CONVERSION. REGULAR
EMPLOYEES OF THE COMPANY, WHO WILL NOT RECEIVE ADDITIONAL COMPENSATION THEREFOR,
MAY PROVIDE INFORMATION TO HOLDERS OF THE SERIES A AND B PREFERRED CONCERNING
THIS CONVERSION OFFER.
This Conversion Offer is not being made to, nor will the Company accept
deliveries for conversion from, holders of Series A and B Preferred in any
jurisdiction in which the acceptance thereof or this Conversion Offer would not
be in compliance with the securities or Blue Sky laws of such jurisdiction.
North Coast is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Such reports, proxy
statements and other information may be inspected and copied (at prescribed
rates) at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and at the SEC's regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New
York 10048. The SEC maintains a website, located at http://www.sec.gov., that
contains reports, proxy and other information regarding registrants, including
North Coast, that file electronically with the SEC. In addition, such reports,
proxy and other information concerning the Company may be inspected at the
office of NASDAQ at 1735 K Street, N.W., Washington, D.C. 20006. For certain
further information with respect to the Company and the Conversion Offer,
reference is made to the Issuer Tender Offer Statement on Schedule 13E-4 (the
"Schedule 13E-4"), including the exhibits filed as part thereof or incorporated
by reference therein. Copies of the Schedule 13E-4 and its exhibits may be
inspected and copied (at prescribed rates) at the offices of the SEC at the
locations set forth above.
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995: Certain of the statements in this Offering Circular under "Background of
the Conversion Offer" and "Certain Considerations" and elsewhere herein
(including certain statements in the Annual Report reproduced as Appendix A and
in the Quarterly Report reproduced as Appendix B which contain Management's
Discussion and Analysis of Financial Conditions and Results of Operations
("Management's Discussion and Analysis")) and other Company materials referred
to herein, are not historical facts and are "forward looking statements" that
involve risks and uncertainties, including, but not limited to, stock market
conditions and fluctuations, future economic conditions, performance of oil and
gas drilling activities, factors affecting oil and natural gas prices and
markets, operating hazards, the impact of competition, government regulation,
the availability and cost of financing, environmental matters, the effect of the
Company's accounting policies and other risks described in the Company's filings
with the SEC.
AMERICAN STOCK TRANSFER AND TRUST COMPANY IS SERVING AS THE CONVERSION AGENT
("CONVERSION AGENT") FOR THIS CONVERSION OFFER. ITS TELEPHONE NUMBER AND ADDRESS
IS SET FORTH ON THE BACK COVER OF THIS OFFERING CIRCULAR. ALL DOCUMENTS TO BE
SUBMITTED IN CONNECTION WITH THIS CONVERSION OFFER SHOULD BE DELIVERED TO THE
CONVERSION AGENT AT ITS ADDRESS SET FORTH ON THE BACK COVER OF THIS OFFERING
CIRCULAR.
iii
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
OFFERING CIRCULAR SUMMARY.............................................................1
BACKGROUND OF THE CONVERSION OFFER....................................................4
RECENT DEVELOPMENTS...................................................................6
REASONS FOR THE CONVERSION OFFER......................................................6
REASONS FOR CONVERTING IN CONNECTION WITH THIS CONVERSION OFFER.......................7
THE CONVERSION OFFER..................................................................8
CERTAIN CONSIDERATIONS...............................................................10
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..............................................14
NORTH COAST CAPITAL STOCK............................................................14
COMPARATIVE MARKET PRICES............................................................21
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA.....................................22
CAPITALIZATION.......................................................................25
PRINCIPAL STOCKHOLDERS...............................................................26
MANAGEMENT...........................................................................27
CONVERSION OFFER PROCEDURES..........................................................32
SHARES ELIGIBLE FOR FUTURE RESALE....................................................36
APPENDIX A - FORM 10-K FOR THE YEAR ENDED MARCH 31, 1996.
APPENDIX B - FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE
COMPANY AS TO WHETHER SHAREHOLDERS SHOULD TENDER OR REFRAIN FROM TENDERING
SHARES PURSUANT TO THE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER OTHER
THAN THOSE CONTAINED HEREIN OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE,
SUCH RECOMMENDATION AND SUCH INFORMATION AND REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
NEITHER THIS TRANSACTION NOR THE SECURITIES OFFERED HEREBY HAS BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING
CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
iv
<PAGE> 5
OFFERING CIRCULAR SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Offering Circular, the Company's Annual
Report reproduced as Appendix A to this Offering Circular and the Company's
Quarterly Report reproduced as Appendix B to this Offering Circular.
THE COMPANY
North Coast is an independent natural gas and oil company and is engaged in the
exploration, development and production activities primarily in the Appalachian
Basin region of Ohio and Pennsylvania. The Company mainly focuses on the
acquisition of proved undeveloped natural gas and oil properties and on the
turnkey drilling and development of such properties. The Company develops these
properties in conjunction with drilling programs ("Drilling Programs"), which
the Company sponsors and manages. Through sponsoring Drilling Programs, the
Company is able to leverage its resources to engage in development activities
with respect to many more properties than could be developed exclusively through
the use of its own financial resources.
The Company's headquarters are located at 1993 Case Parkway, Twinsburg, Ohio
44087, and its telephone number is (216) 425-2330 or 1-800-645-6427.
THE CONVERSION OFFER
<TABLE>
<S> <C>
BASIC TERMS.................................The Company is offering to issue additional shares
of its Common Stock to convert the outstanding
shares of its Series A and B Preferred, as follows:
Series A Preferred .........................A total of 5.0 shares of Common Stock will be
issued to the holder of each share of Series A
Preferred converted in connection with this
Conversion Offer: each Series A Preferred share is
convertible into 2.3 shares of Common Stock in
accordance with its stated terms, and an additional
2.7 shares of Common Stock will be issued as to
each Series A Preferred share converted. See "The
Conversion Offer" for a further description.
Series B Preferred..........................A total of 8.0 shares of Common Stock will be
issued to the holder of each share of Series B
Preferred converted in connection with this
Conversion Offer: each Series B Preferred share is
convertible into 5.75 shares of Common Stock in
accordance with its stated terms, and an additional
2.25 shares of Common Stock will be issued as to
each Series B Preferred share converted. See "The
Conversion Offer" for a further description.
Common Stock................................The Common Stock is described in this Offering
Circular under "North Coast Capital Stock -- Common
Stock."
Units ......................................Shares of Series A and Series B Preferred are, in
some cases, represented by certificates for Units.
Each Series A Preferred Unit consists of five
shares of Series A Preferred and ten shares of
Common Stock (the "Series A Units"). The Series A
Units were issued in connection with the Company's
exchange offer in 1990. See "Background of the
Conversion Offer." Each Series B Preferred Unit
consists of one share of Series B Preferred and
five warrants (the "Series B Units"). See "North
Coast Capital Stock -- Warrants." The Series B
Units were issued in connection with the Company's
public offering in 1992. See "Background of the
</TABLE>
1
<PAGE> 6
<TABLE>
<S> <C>
Conversion Offer." Each holder of Series A Units
who elects to convert such holder's Series A
Preferred will deliver the Series A Unit
certificate(s) and will be issued certificates for
the number of shares of Common Stock represented by
each Unit, together with the number of shares of
Common Stock into which the Series A Preferred
tendered by the holder pursuant to the Conversion
Offer have been converted. Each holder of Series B
Units who elects to convert such holder's Series B
Preferred will deliver their Series B Unit
certificate(s) and will be issued certificates for
the number of shares of Common Stock into which the
Series B Preferred tendered by the holder pursuant
to the Conversion Offer have been converted and a
certificate representing their warrants. See
"Conversion Offer Procedures." References to
holders of Series A and B Preferred are meant to
include holders of Series A Units and Series B
Units. References to Series A and B Preferred or
Series A and B Preferred shares are meant to
include those held as part of Series A Units or
Series B Units.
Dividend Arrearage..........................The Company did not pay the scheduled semi-annual
dividend on the Series A Preferred on December 1,
1996. Additionally, pursuant to a recent amendment
to its Credit Facility, the Company is prohibited
from paying any dividends with respect to the
Series A and B Preferred. See "Recent
Developments." The Company will not be able to pay
the scheduled quarterly dividend on the Series B
Preferred on December 31. 1996. On the Expiration
Date, each of the 464,665 shares of outstanding
Series B Preferred will have an aggregate dividend
arrearage of $0.25. Holders of Series A Preferred
shares are entitled to receive noncumulative cash
dividends at an annual rate of $.60 per share,
payable semi-annually, and holders of Series B
Preferred shares are entitled to receive cumulative
cash dividends at an annual rate of $1.00 per
share, payable quarterly. BY TENDERING SHARES
PURSUANT TO THE OFFER AND NOT WITHDRAWING THE SAME,
EACH TENDERING HOLDER WILL BE DEEMED TO HAVE WAIVED
SUCH HOLDER'S RIGHT TO RECEIVE (1) ANY UNPAID
DIVIDENDS WITH RESPECT TO THE SERIES B PREFERRED
AND (2) ANY DIVIDEND WHICH MAY BECOME PAYABLE IN
RESPECT OF THE TENDERED SERIES A AND B PREFERRED
SUBSEQUENT TO THE DATE THAT SUCH SHARES ARE
TENDERED, EVEN IF SUCH DIVIDEND BECOMES PAYABLE
PRIOR TO ACCEPTANCE OF SUCH SHARES BY THE COMPANY.
See "North Coast Capital Stock -- Series A
Preferred"; "-- Series B Preferred."
</TABLE>
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<TABLE>
<S> <C>
No Adjustment for Market
Price Fluctuations..........................The number of additional shares of Common Stock
being offered to convert will NOT be adjusted by
the Company for fluctuations in the market prices
of Common Stock and Series A and B Preferred.
No Adjustment of Conversion
Ratio.......................................The conversion ratios for Series A and B Preferred
that remains outstanding and unconverted after the
Expiration Date of this Conversion Offer will NOT
be adjusted on account of additional shares of
Common Stock offered or issued in connection with
this Conversion Offer.
All or None Conversion......................HOLDERS WHO DESIRE TO CONVERT SERIES A PREFERRED
AND/OR SERIES B PREFERRED IN CONNECTION WITH THIS
CONVERSION OFFER MUST CONVERT ALL, AND NOT LESS
THAN ALL, OF THEIR SERIES A PREFERRED AND/OR SERIES
B PREFERRED.
Expenses....................................Converting holders of Series A and B Preferred will
not be required to pay brokerage commissions or
fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes for conversion of
Series A and B Preferred or receipt of additional
shares of Common Stock upon such conversion. The
Company will pay all reasonable out-of-pocket
expenses incurred by brokers, custodians, nominees
and fiduciaries in forwarding copies of this
Offering Circular and related documents to the
beneficial owners of Series A and B Preferred, and
in handling or forwarding deliveries of Series A
and B Preferred shares for conversion. See
"Conversion Offer Procedures -- Payment of
Expenses. "
CONDITIONS OF THE
CONVERSION OFFER............................The Company will have no obligation to accept any
Series A Preferred or Series B Preferred delivered
pursuant to this Conversion Offer unless the
conditions set forth herein are satisfied. See
"The Conversion Offer -- Conditions of the
Conversion Offer."
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES................................For a summary discussion of certain federal income
tax consequences relating to this Conversion Offer,
see "Certain Federal Income Tax Consequences."
NO APPRAISAL OR
SIMILAR RIGHTS..............................No appraisal or similar rights under the Delaware
General Corporation Law or other applicable law
will be available to holders of Series A and B
Preferred electing not to convert in connection
with this Conversion Offer.
</TABLE>
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<TABLE>
<S> <C>
CONVERSION OFFER PROCEDURES
Expiration Date ............................This Conversion Offer will expire at 5:00 p.m.
Cleveland, Ohio time, on January 31, 1997, unless
extended as provided in this Offering Circular. See
"Conversion Offer Procedures -- Expiration Date;
Extension; Amendment; Termination."
Procedures for Delivery.....................To be delivered properly under this Conversion
Offer, certificates evidencing Series A Units,
Series B Units, Series A Preferred and/or Series B
Preferred, together with a properly completed and
duly executed Letter of Transmittal (or facsimile
thereof), and any other documents required by the
Letter of Transmittal, must be received by the
Conversion Agent at the address set forth on the
back cover of this Offering Circular prior to 5:00
p.m., Cleveland, Ohio time, on the Expiration Date,
or holders of Series A Units, Series B Units,
Series A Preferred and/or Series B Preferred must
comply with the specific procedures for guaranteed
delivery described herein. See "Conversion Offer
Procedures -- Procedures for Conversion"; "--
Guaranteed Delivery Procedures."
Withdrawal Rights...........................Series A and B Preferred delivered for conversion
in connection with this Conversion Offer may be
withdrawn at any time prior to 5:00 p.m.,
Cleveland, Ohio time on the Expiration Date.
Conversion Agent............................American Stock Transfer and Trust Company is
serving as Conversion Agent for this Conversion
Offer. All documents to be submitted in connection
with this Conversion Offer should be delivered to
the Conversion Agent at its address set forth on
the back cover of this Offering Circular.
</TABLE>
BACKGROUND OF THE CONVERSION OFFER
North Coast 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. For a description of the business and
properties of the Company, see "Business" in Appendix A. For information
regarding the financial condition and operating results of the Company, see the
Company's audited consolidated financial statements (and related notes) and
"Management's Discussion and Analysis" also included in Appendix A and the
Company's unaudited consolidated financial statements (and related notes) and
"Management's Discussion and Analysis" included in Appendix B.
The Company began operations in 1981 with the formation of its first Drilling
Program. In August 1987, the Company completed the acquisition of Capital Oil &
Gas, Inc. ("Capital"), which was engaged in drilling and oil field operations,
as part of its plan to expand its operations. Subsequently, the Company began
the process of acquiring the assets and properties of 21 Drilling Programs which
it had sponsored as well as the assets and properties of a predecessor entity.
This acquisition was completed in January 1990 through an exchange offer (the
"Exchange Offer") which resulted in the Company becoming a public company
subject to the Securities Exchange Act of 1934 (the "Exchange Act"). In
connection with the Exchange Offer, the Company issued 1,732,107 shares of its
Common Stock, 371, 525 Series A Preferred and warrants to purchase 170,902
shares of Common Stock (the "Series A Warrants"), in the form of Series A Units,
which were each comprised of five shares of Series A Preferred, ten shares of
Common Stock and a Series A Warrant, to investors in the Drilling Programs which
were the subject of the Exchange Offer. The Series A Warrants expired on
December 31, 1994 in accordance with their terms. The Company also issued
4,138,452 shares of Common Stock to the shareholders of the Company's
predecessor in exchange for their transfer of all of the issued common shares of
the
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<PAGE> 9
predecessor entity. Since the consummation of the Exchange Offer, the Company
has continued the business and operations of its predecessor and now serves as
the managing and general partner of 24 Drilling Programs whose operations are
continuing. In 1992, the Company offered 500,000 Series B Units to the public
and used the proceeds from that offering to finance exploration and development
in the Appalachian Basin and to repay the Company's revolving credit facility.
Each Series B Unit consists of one share of Series B Preferred and five
warrants, each entitling the holder to purchase 1.15 shares of Common Stock at a
price of $2.61 per share (the "Series B Warrants"). See "North Coast Capital
Stock -- Warrants."
As the Quarterly Report attached as Appendix B indicates, despite improvement in
the Company's financial performance during the first half of fiscal 1997, recent
developments have caused concern about the Company's ability to meet its current
obligations. The Company has focused on its core business of forming Drilling
Programs which enables the Company to generate drilling revenues, well operating
fees, administrative fees and transportation fees. Revenues derived from the
Company's Drilling Programs provide an important source of the Company's cash
flow. Management anticipated a profitable year based upon improved drilling
margins, higher product prices, the results of the first six months of fiscal
1997 and a generally positive reception from its broker/dealer network for
Drilling Program sales.
On or about September 4, 1996, Lomak Petroleum, Inc. ("Lomak"), a publicly
traded oil and gas company, purchased (i) approximately 47% of the voting power
of the Company from two of the Company's largest stockholders, NAGIT, USA
("NAGIT") and Bruce E. Brocker and (ii) 5,655 Series A Preferred from Mr.
Brocker. At the Company's annual meeting of stockholders, Lomak presented
proxies representing the shares acquired from these stockholders and indicated
its intention to nominate and elect two Directors in the class whose terms were
scheduled to expire at that meeting. Due to concerns about the validity of
meeting, the Company recognized the validity of the proxy executed by NAGIT, but
reserved its rights with respect to such proxies, and the annual meeting was
adjourned to a later date. On September 11, 1996, the meeting was reconvened. At
the reconvened meeting, the Company recognized the NAGIT proxy, but reserved its
rights with respect to the proxy executed by Mr. Brocker. As described under the
caption "Legal Proceedings" of the Quarterly Report attached as Appendix B,
litigation among the Company, Lomak and Mr. Brocker then ensued. Also as
described under the caption "Legal Proceedings" of the Quarterly Report attached
as Appendix B, the parties entered into a Settlement Agreement effective
November 12, 1996. Under the terms of the Settlement Agreement, the Company
acknowledged the election of Messrs. Michaels and Grose as Directors of the
Company and, the Company and its Board of Directors agreed to increase the size
of the Board from six to nine directors. The Board filled these vacancies by
electing Charles M. Lombardy, Jr., and Dr. Charles Ebinger (the Board's original
nominees for the September 1996 Annual Meeting), and John H. Pinkerton of Lomak
to fill these vacancies.
Due to uncertainties among potential Drilling Program investors arising out of
Lomak's acquisition of a substantial ownership interest in the Company and the
other matters described above, the Company's ability to market its Drilling
Programs has been adversely affected. Consequently, demands on the Company's
capital resources have increased due to reduced cash flow associated with lower
levels of investor interest in its Drilling Programs and increased costs
associated with litigation and evaluating the Company's strategic alternatives.
This has necessitated actions by the Company to alter its growth oriented
business plan in order to conserve cash. On October 21, 1996, the Company
initiated layoffs of 21% of its staff coupled with a temporary reduction or
deferment in wages to many of its remaining employees. Additional cost cutting
measures may become necessary in the future if investor interest in the
Company's Drilling Programs does not increase.
With the reduction of the Drilling Program activity and the need to conserve
cash, the Company's ability to monetize equipment it owns on non-productive
wells and increase profitability through the Drilling Programs will be adversely
affected. It may be necessary for the Company to secure additional sources of
capital or change its scope of operations in order to fund future projects and
meet its obligations. In the event that available borrowings under the Credit
Facility are not sufficient or additional financing cannot be obtained, the
Company would be required to continue its current efforts to conserve cash
resources. 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 additional 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.
Holders of Series A Preferred are entitled to receive semi-annual cash dividends
at an annual rate of $.60 per share and holders of Series B Preferred are
entitled to receive quarterly cash dividends at an annual rate of $1.00 per
share. The semi-annual dividend payment on the Series A Preferred, which was to
be made on December 1, 1996, was not paid. Additionally, pursuant to a recent
amendment to its Credit Facility, the Company is prohibited from paying any
dividends with respect to the Series A and B Preferred. See "Recent
Developments." As a result of the increased demands on the Company's cash flow
resulting from the lower level of investor interest in its Drilling Programs as
discussed above, and due to the prohibition against paying dividends contained
in the amendment to its Credit Facility, the Company will not be able to pay the
December 31, 1996 dividend on the Series B Preferred when due. The Company will
not be able to pay any dividends on its Series A Preferred or Series B Preferred
through at least the end
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<PAGE> 10
of its current fiscal year and cannot predict when the Company will be in a
position to resume the payment of dividends with respect to the Series A and B
Preferred..
RECENT DEVELOPMENTS
On September 20, 1993 the Company entered into an agreement with Bank One,
Texas, National Association (the "Bank") to provide the Company with a reducing
revolving line of credit of up to $10,000,000 (the "Credit Facility"). Effective
August 30, 1996, the Credit Facility was amended to increase the maximum
availability to $20,000,000. The Credit Facility (as amended for borrowing base
adjustments) provided the Company with available borrowings of $10,000,000 at
September 30, 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. On December 2, 1996, the Company and the
Bank amended the Credit Facility to provide the Company with available
borrowings of $10,200,000, with available borrowings reducing $110,000 at the
first of each month, commencing May 1, 1997 (the "Amendment"). Currently, the
Company has approximately $9,640,000 outstanding under the Credit Facility. The
Amendment provides that payment of dividends with respect to the capital stock
of the Company, including Series A and B Preferred is prohibited. The Bank has
verbally agreed to review the prohibition against the payment of dividends in
March 1997, but is not required to agree to lift the existing prohibition on
dividends. There can be no assurance as to when or if the prohibition will be
lifted or, if it is, as to what additional conditions the Bank may impose
limiting the Company's ability to pay dividends. Prior to the Amendment, the
Credit Facility did not prohibit the payment of dividends with respect to the
Series A and B Preferred, provided that the Company was in compliance with the
various financial and other covenants contained therein.
Additionally, whenever dividends on the Series B Preferred have not been paid in
an aggregate amount equal to at least six quarterly dividends on such shares
(whether or not consecutive), the number of Directors of the Company will be
increased by two, and the holders of the Series B Preferred, voting separately
as a class, will be entitled to elect such two additional Directors (and any
successor to each such Director) to the Board of Directors at any meeting of
stockholders of the Company at which Directors are to be elected held during the
period such dividends remain in arrears. See "North Coast Capital Stock --
Series B Preferred Stock."
On June 18, 1996, the Company initiated an action in the Court of Common Pleas
of Mahoning County, Ohio styled NORTH COAST ENERGY, INC. VS. LOMAK PETROLEUM,
INC., ET AL., Case No. 96 CV 01555, against both Lomak and its wholly-owned
subsidiary, Border Resources, Inc. The complaint sought damages in excess of
$517,000 for, among other things, the value of natural gas sold by the Company
to the defendants between December 1995 and March 1996, but for which payment
was never made by the defendants. Border Resources counterclaimed for damages in
excess of $950,000 based upon the allegation that the Company had breached an
existing contract by stopping further deliveries of gas which allegedly
necessitated the purchase of replacement gas by Border at a higher price. On
December 18, 1996 a definitive settlement agreement was entered into by the
parties.
On December 19, 1996 the Stock Option Committee awarded a total of 24,591 shares
of Common Stock to certain key employees under the Company's Stock Bonus Plan.
See "Management -- Stock Bonus Plan." Included in the group of key employees
awarded such bonuses were the following executive officers: Timothy Wagers
(4,000 shares); Robert M. Hoisek (250 shares); Thomas A. Hill (2,500 shares);
and Anthony R. Kovacevich (2,000 shares).
REASONS FOR THE CONVERSION OFFER
The Company's inability to pay dividends on the Series A and Series B Preferred
has prompted the Company to seek to reduce or eliminate the number of
outstanding shares of Series A and Series B Preferred. Through the Conversion
Offer, holders of Series A and Series B Preferred will be offered the right to
convert such shares into a greater number of shares of Common Stock than they
would otherwise be entitled to receive upon conversion. Each tendering holder
will be deemed to have waived such holder's right to receive (1) any unpaid
dividends with respect to the Series B Preferred and (2) any dividend which may
become payable in respect of the tendered Series A and B Preferred subsequent to
the date such shares are tendered, even if such dividend becomes payable prior
to acceptance of such shares by the Company. Consequently, conversion of Series
A and B Preferred has the effect, among other things, of eliminating without
payment both unpaid dividend arrearages with respect to Series B Preferred and
future dividends on the converted Series A and B Preferred shares. Among the
factors leading the Board to authorize the Conversion are the following:
- The dollar amount of the payments required to cure the anticipated
dividend arrearages on the outstanding Series B Preferred could
adversely affect the Company's liquidity and its efforts to grow its
business.
- The perceived "overhang" attributable to an escalating level of
Series B Preferred dividend arrearages would likely hamper the
Company's efforts to increase the value of its Common Stock. Among
other things, it is not permissible under the terms
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<PAGE> 11
of the Series A and B Preferred to declare or pay any dividends on
Common Stock unless and until all Series B Preferred dividend
arrearages are cured.
- The existence of dividend arrearages results in a number of
additional expenses and administrative difficulties for a publicly held
company such as North Coast.
The Board determined to make this Conversion Offer to the holders of Series A
and B Preferred in light of the following: (i) the conversion and other rights
and preferences of the Series A and B Preferred and the unpaid dividends on the
Series A Preferred and anticipated to be unpaid dividend arrearages on the
Series B Preferred; (ii) the historical and recent market prices, liquidity and
trading activity in the Common Stock and Series B Preferred, and the estimated
value and relative illiquidity of Series A Preferred; and (iii) the investment
risks associated with an investment in North Coast capital stock and general
market conditions.
REASONS FOR CONVERTING IN CONNECTION WITH THIS CONVERSION OFFER
The Company believes that this Conversion Offer is in the best interests of the
Company and the holders of its Common Stock. HOWEVER, NEITHER THE COMPANY NOR
ITS BOARD OF DIRECTORS OR EXECUTIVE OFFICERS MAKES ANY RECOMMENDATION TO ANY
STOCKHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ANY OR ALL OF SUCH
STOCKHOLDER'S SERIES A OR B PREFERRED SHARES AND HAS NOT AUTHORIZED ANY PERSON
TO MAKE ANY SUCH RECOMMENDATION. HOLDERS ARE URGED TO EVALUATE CAREFULLY ALL
INFORMATION IN THE OFFER, CONSULT THEIR OWN INVESTMENT AND TAX ADVISORS AND MAKE
THEIR OWN DECISIONS WHETHER TO TENDER SHARES.
Outlined below are some of the reasons the Company believes that holders of
Series A and B Preferred may choose to accept this Conversion Offer. Along with
these reasons, holders of Series A and B Preferred should weigh and take into
account all of the factors listed under the caption "Certain Considerations" in
making their determination whether to accept or reject this Conversion Offer.
- The number of additional shares offered in this Conversion Offer
represents a premium above the current stated conversion ratios of the
Series A and B Preferred. The stated conversion ratios of Series A and
B Preferred are not being increased. Following the Expiration Date,
holders of Series A and B Preferred who choose not to accept this
Conversion Offer will not be entitled upon conversion to any additional
shares of Common Stock being offered or issued in connection with this
Conversion Offer.
- Dividend arrearages on Series B Preferred do not earn interest. The
priorities the Company has set for the use of available cash and the
prohibition on paying, any dividends contained in the Amendment to the
Company's Credit Facility make it unlikely that any arrearage will be
cured or that arrearages will be prevented.
- The Series A Preferred is not traded on any established market and,
to the Company's knowledge, no broker or dealer "makes a market" in
shares of Series A Preferred. Accordingly, the Series A Preferred is,
and is likely to remain, highly illiquid. Because the Series A
Preferred is illiquid, the offered conversion enables holders of Series
A Preferred to obtain liquidity in their stock.
- Although the Series B Preferred is currently traded on NASDAQ, its
trading volume and liquidity are lower than that of the Common Stock
(an average trading volume during 1995 of 1,297 shares per trading day
for the Series B Preferred compared with 2,090 shares per trading day
for the Common Stock). This liquidity differential will likely increase
to the extent that this Conversion Offer results in fewer outstanding
shares of Series B Preferred.
- The Company believes that some investors acquire and hold convertible
preferred stock rather than common stock because of a desire to forego
a portion of the appreciation potential of common stock in exchange for
a higher level of current dividend income and the lower perceived risk
and volatility which often accompany the liquidation and dividend
preferences of preferred stock. In the case of the Series A and B
Preferred, however, those factors may be less compelling, because it is
unclear when or if the Company will be able to resume regular dividend
payments with respect to the Series A and B Preferred. Nevertheless,
Series A and B Preferred do have certain preferences (as compared with
Common Stock) that holders will surrender upon accepting this
Conversion Offer. See "North Coast Capital Stock -- Common Stock"; " --
Series A Preferred Stock;" and " -- Series B Preferred Stock."
- Because the holders of Series A and B Preferred have no rights of
optional redemption (only the Company can elect to redeem Series A and
B Preferred), holders generally have no right to compel the payment of
dividends or redemption of their shares.
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- If the Series B Preferred does not meet the requirements of NASDAQ,
by reason of decreases in the outstanding shares of Series B Preferred
resulting from this Conversion Offer or fluctuations in price, the
liquidity of the Series B Preferred could be further impaired by a
delisting from NASDAQ. In the event of such a delisting of Series B
Preferred, the Company is under no obligation to arrange for a "market
maker" to maintain an active trading market for the Series B Preferred
in that event.
- The Series B Preferred is currently registered under the Exchange
Act, but that registration may be terminated if the Series B Preferred
is neither listed on NASDAQ or another national securities exchange nor
held of record by 300 or more persons.
- Neither the Delaware General Corporation Law nor the Company's
organizational documents provide for dissenters rights of appraisal (or
other comparable rights) for holders of Series A Preferred or Series B
Preferred not accepting this Conversion Offer.
- As described under "Certain Federal Income Tax Consequences," a
portion of the additional Common Stock received by holders of Series B
Preferred accepting this Conversion Offer will be currently taxable to
the recipient as ordinary income.
THE CONVERSION OFFER
The Company is making this Conversion Offer to induce conversion of the
outstanding shares of its Series A and B Preferred, as follows:
Series A Preferred -- A total of 5.0 shares of Common Stock will be
issued to the holder of each share of Series A Preferred converted in
connection with this Conversion Offer: each Series A Preferred share is
convertible into 2.3 shares of Common Stock, and an additional 2.7
shares of Common Stock will be issued in respect of the conversion of
each Series A Preferred share converted in accordance with this
Conversion Offer.
Series B Preferred -- A total of 8.0 shares of Common Stock will be
issued to the holder of each share of Series B Preferred converted in
connection with this Conversion Offer: each Series B Preferred share is
convertible into 5.75 shares of Common Stock, and an additional 2.25
shares of Common Stock will be issued in respect of the conversion of
each Series B Preferred share converted in accordance with this
Conversion Offer.
This Conversion Offer is made upon the terms and subject to the conditions set
forth in this Offering Circular and in the accompanying Letter of Transmittal.
The Company did not pay the dividend on the Series A Preferred on December 1,
1996. The Company will not be able to pay the scheduled quarterly dividend on
the Series B Preferred on December 31, 1996 and is prohibited from paying future
dividends on its outstanding shares of Series A and Series B Preferred under the
terms of its amended Credit Facility. On the Expiration Date, each share of
Series B Preferred will have an aggregate dividend arrearage of $0.25, BY
TENDERING SHARES PURSUANT TO THE OFFER AND NOT WITHDRAWING THE SAME, EACH
TENDERING HOLDER WILL BE DEEMED TO HAVE WAIVED SUCH HOLDER'S RIGHT TO (1) ANY
UNPAID DIVIDENDS WITH RESPECT TO THE SERIES B PREFERRED AND (2) RECEIVE ANY
DIVIDEND WHICH MAY BECOME PAYABLE IN RESPECT OF THE TENDERED SERIES A AND B
PREFERRED SHARES SUBSEQUENT TO THE DATE THAT SUCH SHARES ARE TENDERED, EVEN IF
SUCH DIVIDEND BECOMES PAYABLE PRIOR TO ACCEPTANCE OF SUCH SHARES BY THE COMPANY.
The conversion ratios for Series A and B Preferred remaining outstanding after
the Expiration Date will NOT be adjusted on account of additional shares offered
or issued in connection with this Conversion Offer. See "North Coast Capital
Stock" for a description of the Company's Common Stock and Series A and B
Preferred and certain related matters.
The number of additional shares of Common Stock being offered to convert will
NOT be adjusted by the Company for any fluctuations in the relative market
values of Common Stock and Series A and B Preferred.
Holders of Series A Preferred and/or Series B Preferred who desire to convert
their shares in connection with this Conversion Offer must convert all, and not
less than all, of the Series A Preferred and/or Series B Preferred owned by
them. By delivering or by causing the Registered Holder (as defined below) to
effect delivery for conversion, each beneficial owner of such Series A and B
Preferred represents and warrants that delivery has been effected with respect
to all Series A and B Preferred beneficially owned by them.
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Series A and B Preferred shares delivered for conversion in connection with this
Conversion Offer may be withdrawn at any time prior to 5:00 p.m., Cleveland,
Ohio time, on the Expiration Date. See "Conversion Offer Procedures --
Withdrawal of Deliveries."
CONDITIONS OF THE CONVERSION OFFER
The Company will have no obligation to accept any Series A and B Preferred
delivered for conversion pursuant to this Conversion Offer if any of the
following conditions exist, and may terminate or amend this Conversion Offer as
provided herein before the acceptance of any such shares for conversion:
(a) If any action or proceeding is instituted or is threatened in any
court or by or before any governmental agency or instrumentality with
respect to (i) this Conversion Offer or (ii) the Company or its capital
stock which, in the judgment of the Company, has or may have a material
adverse effect on the business, financial condition, operations or
prospects of the Company or impairs or may impair the benefits of this
Conversion Offer to the Company or the ability of the Company to
proceed with this Conversion Offer; or
(b) If there has been proposed, adopted or enacted any law, statute,
rule or regulation that, in the judgment of the Company, has or may
have a material adverse effect on the business, financial condition,
operations or prospects of the Company or impairs or may impair the
material benefits of this Conversion Offer to the Company or the
ability of the Company to proceed with this Conversion Offer; or
(c) If any change or changes have occurred or are threatened in the
business, assets, liabilities, condition (financial or otherwise),
operations, results of operations or prospects of the Company that, in
the judgment of the Company, has or may have a material adverse effect
on the Company; or
(d) There shall have occurred:
(i) the declaration of any banking moratorium or
suspension of payments in respect of banks in the
United States;
(ii) any general suspension of trading in, or limitation
on prices for, securities on any United States
national securities exchange or in the
over-the-counter market;
(iii) the commencement or escalation of a war, armed
hostilities or any other national or international
crisis directly or indirectly involving the United
States;
(iv) any limitation (whether or not mandatory) by any
governmental, regulatory or administrative agency or
authority on, or any event which, in the Company's
sole judgment, might affect, the extension of credit
by banks or other lending institutions in the United
States; or
(v) in the case of any of the foregoing existing at the
time of the commencement of the Conversion Offer, in
the Company's sole judgment, a material acceleration
or worsening thereof; or
(e) (i) any entity, "group" (as that term is used in Section 13(d)(3)
of the Exchange Act) or person (other than entities, groups or persons,
if any, who have filed with the SEC on or before December 1, 1996 a
Schedule 13G or a Schedule 13D with respect to any of the shares of
Common Stock) shall have acquired or proposed to acquire beneficial
ownership of more than 5% of the outstanding shares of Common Stock, or
(ii) such entity, group, or person that has publicly disclosed any such
beneficial ownership of more than 5% of the shares of Common Stock
prior to such date shall have acquired, or proposed to acquire,
beneficial ownership of additional shares of Common Stock constituting
more than 2% of the outstanding shares of Common Stock or shall have
been granted any option or right to acquire beneficial ownership of
more than 2% of the outstanding shares of Common Stock or (iii) any
person or group shall have filed a Notification and Report Form under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 or made a
public announcement reflecting an intent to acquire the Company or any
of its subsidiaries or any of their respective assets or securities; or
(f) If after the date of the commencement of the Conversion Offer, any
tender or exchange offer for 15% or more of the outstanding shares of
Common Stock, Series A Preferred or Series B Preferred (other than the
Conversion Offer), or any merger, acquisition, business combination or
other similar transaction with or involving the Company, shall have
been proposed, announced or made by any person or entity other than the
Company or any subsidiary.
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The Company reserves the right, in its judgment, (i) to terminate this
Conversion Offer if any of the events set forth above has occurred and the
condition is not waived by the Company, by giving oral or written notice of such
termination to the Conversion Agent and (ii) to extend or otherwise amend the
terms of this Conversion Offer in any manner. The amendment, extension or
termination of this Conversion Offer as to Series A Preferred or Series B
Preferred, or the waiver of a condition as to either series, need not be
accompanied by the same action as to the other series. Any such amendment,
extension or termination will be followed as promptly as practicable by public
announcement thereof. If this Conversion Offer is amended in a manner determined
by the Company to constitute a material change, the Company will promptly
disclose each amendment in a manner reasonably calculated to inform the holders
of such amendment and, if such amended Conversion Offer would otherwise expire
during such period, the Company will extend each such amended Conversion Offer
for a period which the Company in its judgment deems appropriate, depending upon
the significance of the amendment and the manner of disclosure to holders of the
Series A and B Preferred. Any such extension will be in compliance with the
applicable rules and regulations of the SEC. See "Conversion Offer Procedures --
Expiration Date; Extension; Amendment; Termination."
The Company has been advised that all of the 7,085 shares of Series A Preferred
and the 1,500 shares of Series B Preferred held by executive officers and
Directors of the Company and by Lomak, a significant stockholder of the Company,
will be converted by them in connection with this Conversion Offer.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
conditions and may be waived by the Company in whole or in part at any time and
from time to time in the judgment of the Company. Any determination by the
Company concerning the events described above will be final and binding upon all
parties.
INTERESTS OF CERTAIN PERSONS IN THE CONVERSION OFFER
No officer, Director, stockholder, equity holder or affiliate of the Company has
any material interest, direct or indirect, in this Conversion Offer other than
interests, if any, of such individuals as stockholders or equity holders of the
Company that are shared by all other stockholders and equity holders of the
Company. See "The Conversion Offer" above, which indicates that all Directors
and executive officers of North Coast holding Series A and B Preferred shares,
and Lomak, a significant stockholder of the Company, have informed the Company
of their present intentions to convert the shares of Series A and B Preferred
held by them in connection with this Conversion Offer.
ANTICIPATED ACCOUNTING TREATMENT OF CONVERSION OFFER
See "Selected Historical and Pro Forma Financial Data" for a description of the
Company's financial and accounting treatment of this Conversion Offer.
FEES AND EXPENSES
Holders of Series A and B Preferred delivered for conversion will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the conversion of
Series A and B Preferred or the issuance of additional shares of Common Stock in
connection with this Conversion Offer. The Company will pay all reasonable
out-of-pocket expenses incurred by brokers, custodians, nominees and fiduciaries
in forwarding copies of this Offering Circular and related documents to the
beneficial owners of the Series A and B Preferred, and in handling or forwarding
deliveries of Series A and B Preferred for conversion. Holders of Series A and B
Preferred will be responsible for all other costs incurred in converting shares
pursuant to this Conversion Offer. See "Conversion Offer Procedures --Payment of
Expenses."
CONVERSION AGENT
American Stock Transfer and Trust Company is serving as Conversion Agent for
this Conversion Offer. All documents to be submitted in connection with this
Conversion Offer should be delivered to the Conversion Agent at its address set
forth on the back cover of this Offering Circular.
CERTAIN CONSIDERATIONS
Holders of Series A and B Preferred should consider, among other things, the
specific considerations set forth below as well as the other information set
forth elsewhere in this Offering Circular (including the Appendices) and in the
Company materials referenced in this Offering Circular before determining
whether to convert shares in connection with this Conversion Offer.
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CONSIDERATIONS APPLICABLE TO HOLDERS OF SERIES A AND B PREFERRED WHO DO NOT
CONVERT IN CONNECTION WITH THIS CONVERSION OFFER
The conversion of Series A and B Preferred in connection with this Conversion
Offer may have certain adverse consequences to holders of Series A and B
Preferred who do not convert, including the following:
Illiquidity of Series B Preferred; Possible NASDAQ Delisting; Margin
Regulations. The trading volume and liquidity of the Series B Preferred are
lower than that of the Common Stock. If a significant portion of the outstanding
shares of the Series B Preferred are converted pursuant to this Conversion
Offer, this reduction in the outstanding Series B Preferred likely would
adversely affect the liquidity of the Series B Preferred that remains
outstanding. If the Series B Preferred does not meet the requirements of NASDAQ,
by reason of decreases in the outstanding Series B Preferred resulting from this
Conversion Offer or otherwise, the liquidity of the Series B Preferred could be
further impaired by a delisting from NASDAQ. In the event of such a delisting of
Series B Preferred, the Company is under no obligation to arrange for a "market
maker" to maintain an active trading market for the Series B Preferred in that
event. The Series B Preferred are currently "margin securities" under the
regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), which have the effect, among other things, of allowing
brokers to extend credit on the collateral of such Series B Preferred for the
purpose of buying, carrying or trading in securities ("Purpose Loans").
Depending upon factors such as the number of record holders of Series B
Preferred and the number and market value of publicly held Series B Preferred,
following the conversion of Series B Preferred pursuant to the Conversion Offer,
the Series B Preferred might no longer constitute "margin securities" for
purposes of the Federal Reserve Board's margin regulations and, therefore, could
no longer be used as collateral for Purpose Loans made by brokers. In addition,
if registration of the Series B Preferred under the Exchange Act were
terminated, the Series B Preferred would no longer constitute "margin
securities."
Illiquidity of Series A Preferred. The Series A Preferred is not traded on any
established market and, to the Company's knowledge, no broker or dealer "makes a
market" in shares of Series A Preferred. Accordingly, the Series A Preferred is,
and is likely to remain, highly illiquid, and to the extent that shares of
Series A Preferred are converted, the Company anticipates that any market for
shares of Series A Preferred will become even more limited.
No Interest on Dividend Arrearage; Inability to Pay Dividends. Unpaid dividends
on Series B Preferred will accumulate, but will not earn interest. Due to the
priorities the Company has set for the use of available cash and the prohibition
against paying dividends contained in the amendment to its Credit Facility, the
Company will not be able to pay any dividends on either the Series A Preferred
or Series B Preferred through at least the end of its current fiscal year and
cannot predict when the Company will be in a position to resume the payment of
dividends with respect to the Series A and B Preferred.
No Adjustment in Conversion Ratio. No adjustment will be made in the conversion
ratios for Series A and B Preferred on account of dividend arrearages on the
Series B Preferred or on account of the additional shares of Common Stock
offered or issued in connection with this Conversion Offer.
No Redemption Right. Except in certain limited circumstances, neither Series A
Preferred nor Series B Preferred is redeemable at the option of the holder; only
the Company has the right to elect to redeem shares of Series A and B Preferred.
No Appraisal or Similar Rights. No appraisal or similar rights under Delaware
General Corporation Law or other applicable law will be available to holders of
Series A and B Preferred electing not to convert in connection with this
Conversion Offer.
CONSIDERATIONS APPLICABLE TO HOLDERS OF SERIES A AND B PREFERRED WHO DO CONVERT
IN CONNECTION WITH THIS CONVERSION OFFER
Elimination of Dividend Rights, Liquidation Preferences and Protective
Covenants. Holders of Series A and B Preferred who convert their shares of
Series A and B Preferred into Common Stock will no longer be entitled to the
liquidation preferences, protective covenants and dividend rights of the Series
A and B Preferred. See "North Coast Capital Stock --Series A Preferred;" "--
Series B Preferred." Such holders will become subject to all of the risks
associated with common equity, including the preferential claims of holders of
the Company's debt and holders of then-outstanding preferred stock, in the event
of a liquidation, dissolution or winding up of the Company. Further, the special
voting rights now exercisable by the Series A and B Preferred will be
surrendered by holders accepting this Conversion Offer, although such holders
will thereafter hold voting rights as holders of Common Stock. See "North Coast
Capital Stock -- Common Stock;" "-- Series A Preferred;" "-- Series B
Preferred."
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<PAGE> 16
The Board of Directors is authorized under the Certificate of Incorporation, as
amended (the "Certificate"), without a further vote of the stockholders of the
Company, to issue up to 2,000,000 shares of preferred stock (less any shares of
preferred stock then outstanding) in one or more series and to fix the
designations, preferences, powers and relative, participating, optional or other
rights and restrictions thereof. The Company may issue one or more series of
preferred stock in the future that will have preferences over the Common Stock
with respect to the payment of dividends and upon liquidation, dissolution or
winding-up of the Company or otherwise. See "North Coast Capital Stock -- Serial
Preferred Stock."
No Adjustment for Market Price Fluctuations. Pursuant to the terms and
conditions of this Conversion Offer, the number of shares of Common Stock
issuable in connection with this Conversion Offer will not be adjusted on
account of fluctuations in the relative market values of Common Stock and Series
A and B Preferred.
Certain Tax Consequences. A portion of the additional shares of Common Stock
received by holders of Series B Preferred who accept this Conversion Offer will
be currently taxable to the recipient as ordinary income. See "Certain Federal
Income Tax Consequences."
Restrictions on Conversion Offer. Issuance of Common Stock in connection with
this Conversion Offer will be made as of the Expiration Date only after a timely
receipt by the Conversion Agent of a properly completed and duly executed Letter
of Transmittal, including all other documents required by such Letter of
Transmittal. Therefore, holders of Series A and B Preferred desiring to convert
such Series A and B Preferred should allow sufficient time to ensure timely
delivery. The Conversion Agent and the Company are under no duty to give
notification of defects or irregularities with respect to the deliveries of
Series A and B Preferred for conversion.
Recent Developments; Reduced Cash Flow. Recent developments have caused concern
for the Company's ability to meet its current obligations while maintaining its
current level of operations. Revenues derived from the Company's Drilling
Programs provide an important source of the Company's cash flow. Due to
uncertainties among potential Drilling Program investors arising out of Lomak's
acquisition of a substantial ownership interest in the Company, the Company's
ability to market its Drilling Programs has been adversely affected.
Consequently, demands on the Company's capital resources have increased due to
reduced cash flow associated with lower levels of investor interest in its
Drilling Programs and increased costs associated with litigation and evaluating
the Company's strategic alternatives. This has necessitated actions by the
Company to alter its growth oriented business plan in order to conserve cash. On
October 21, 1996, the Company initiated layoffs of 21% of its staff coupled with
a temporary reduction or deferment in wages to many of its remaining employees.
Additional cost cutting measures may become necessary in the future if investor
interest in the Company's Drilling Programs does not increase.
With the reduction of the Drilling Program activity and the need to conserve
cash, the Company's ability to monetize equipment it owns on non-productive
wells and increase profitably through the Drilling Programs will be adversely
affected. It will 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 its bank agreements
are not sufficient or additional financing cannot be obtained, the Company would
be required to continue its current efforts to conserve cash resources. 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 additional 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.
Additionally, the Company did not pay the dividend on the Series A Preferred on
December 1, 1996, and will not be able to pay the next quarterly dividend
payment on the Series B Preferred on December 31, 1996.
There can be no assurance that the Company's operations will be profitable or
that the Company's cashflow will be sufficient without changing its scope of
operations to meet its current obligations.
Dependence on Drilling Programs. A substantial portion of the Company's revenues
historically have been realized through fees or other payments attributable to
Drilling Programs which it has sponsored or managed. North Coast's ability to
market its Drilling Programs depends on a number of factors, including the
performance of its oil and gas drilling activities, the availability of certain
federal income tax benefits for investors, the absence of adverse changes in
federal and state securities regulations, factors affecting oil and natural gas
prices and markets, the Company's ability to maintain good working relationships
with its broker-dealer group and general economic conditions. The expiration of
certain federal tax credits, volatility in oil and natural gas prices and
uncertainty as to future developments in oil and natural gas markets may reduce
investor interest in Drilling Programs. To the extent that the Company is unable
to continue successfully sponsoring such Drilling Programs, the size and scope
of the Company's operations could be limited.
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Debt Agreement Restrictions; Dividend Policy. The Company's debt agreements
contain various restrictions on the Company's activities and require the Company
to achieve and maintain certain financial ratios. Certain terms used in this
section are defined in the applicable debt agreement. The restrictions include,
among other things, (i) a prohibition of paying dividends with respect to the
Company's capital stock, including the Series A and B Preferred, (ii) a
requirement that the Company maintain a minimum working capital not less than
$350,000, (iii) a requirement that the Company maintain a minimum stockholders'
equity of not less than $7,000,000, plus a cumulative 80% of positive net income
for all the fiscal years of the Company subsequent to March 31, 1996, less the
amount of Series A and B Preferred dividends paid for such period, plus a
cumulative 100% of all net proceeds from equity offerings since August 31, 1996,
(iv) a requirement that the Company maintain a minimum debt coverage ratio of
not less than 1.25 to 1 and (v) a requirement that the Company's indebtedness,
together with outstanding contingent obligations not exceed $500,000.
Other Transactions to Reduce Series A and B Preferred. Following the Conversion
Offer, and depending on the number of shares of Series A and B Preferred
converted, the Company would not be prohibited from taking additional actions to
reduce further or eliminate any remaining Series A and B Preferred. Such
transactions could be undertaken on terms which are more favorable or less
favorable than the Conversion Offer.
Market Value of the Company's Securities. The market value of the Common Stock
to be issued in connection with this Conversion Offer, as well as the value of
Series A and B Preferred not converted, will depend on the future performance of
the Company and market factors generally, which are influenced by a number of
conditions beyond the Company's control.
Risks of the Oil and Gas Industry. Oil and gas exploration and development are
speculative, involve a high degree of risk and are subject to all the hazards
typically associated with the search for, development of and production of oil
and gas. The success of the Company's future operations will be dependent on its
ability to discover, produce and sell oil and gas at prices which will provide
attractive rates of return. Although the Company emphasizes development drilling
in the Clinton/Medina formation in the Appalachian Basin where drilling
operations are less risky than in other areas, the process of drilling for oil
and gas can be hazardous. Oil and gas operations are subject to oil field
hazards such as fire, explosion, blow-outs, cratering and environmental damage,
any of which can cause personal injury and loss of life and severely damage or
destroy equipment, suspend drilling operations and cause substantial damage to
surrounding areas or properties of others.
Competition. The oil and gas industry is highly competitive in many respects,
including identification of attractive oil and gas properties for acquisition,
drilling and development, securing financing for such activities and obtaining
the necessary equipment and personnel to conduct such operations and activities.
Many other oil and gas companies in the industry have financial resources,
personnel and facilities substantially greater than those of the Company and
there can be no assurance that the Company will continue to be able to compete
effectively with these larger entities.
Uncertain Markets for Gas and Oil. The revenues generated from the oil and gas
operations of the Company are highly dependent upon the prices at which oil and
gas can be sold. Various factors beyond the control of the Company affect prices
of oil and natural gas, including worldwide and domestic supplies of oil and
natural gas, the ability of the members of the Organization of Petroleum
Exporting Countries ("OPEC") to agree to and maintain oil price and production
controls, political instability or armed conflict in oil-producing regions, the
price of foreign imports, the level of consumer demand, the price and
availability of alternative fuels, the availability of pipeline capacity and
changes in existing federal regulation and price controls. Any significant
decline in the price of oil or natural gas would adversely affect the Company's
revenues and operating income and could require a writedown in the carrying
value of the Company's oil and gas properties.
Writedowns and Limitations on Accuracy of Reserve Estimates. Oil and gas reserve
estimates are necessarily inexact and involve matters of subjective engineering
judgment. In addition, any estimates of future net revenues and the present
value thereof are based on price and cost assumptions made by the Company which
only represent its best estimate. If these estimates of quantities, prices and
costs prove inaccurate, the Company is unsuccessful in expanding its oil and gas
reserves base with its capital expenditure program, and/or declines in and
instability of oil and gas prices occur, then writedowns in the capitalized
costs associated with the Company's oil and gas assets may be required.
Development of Additional Reserves. The Company's future success depends upon
its ability to find or acquire additional oil and gas reserves that are
economically recoverable. Except to the extent that the Company conducts
successful exploration or development activities or acquires properties
containing proved reserves, the proved reserves of the Company generally will
decline as reserves are produced. There can be no assurance that the Company
will be able to discover additional commercial quantities of oil and gas, or
that the Company will be able to acquire oil and gas reserves.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
This discussion is based on the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), final, temporary and proposed United States Treasury
Regulations promulgated thereunder, and the administrative and judicial
interpretations thereof, all as in effect as of the date of this Offering
Circular. Such laws or interpretations are subject to change (possibly with
retroactive effect) or different interpretations. The effectiveness of this
Conversion Offer is not conditioned upon the receipt of any ruling from the
Internal Revenue Service, and no ruling has been or will be requested on any tax
matters relating to this Conversion Offer.
TAX CONSEQUENCES TO HOLDERS OF SERIES A AND B PREFERRED
Conversion of Series A and B Preferred in connection with this Conversion Offer
will be treated as a recapitalization under Section 368(a)(1)(E) of the Code.
Therefore, a holder of Series A Preferred or Series B Preferred accepting this
Conversion Offer will not recognize gain or loss on the conversion of such
holder's Series A Preferred or Series B Preferred. However, holders of Series B
Preferred will be deemed to have received a distribution to which Section 301 of
the Code applies (the "Deemed Distribution") equal to the lesser of: (i) the
amount by which the fair market value of the Common Stock received on the
distribution date exceeds the issue price of the Series B Preferred, and (ii)
the amount of the unpaid dividend arrearage with respect to the Series B
Preferred on such date.
The Deemed Distribution will constitute a dividend for tax purposes taxable as
ordinary income, to the extent of the Company's current or accumulated earnings
and profits. Based upon current information, the Company does not expect to have
sufficient earnings and profits for tax purposes such that there will be no
Deemed Distribution basis.
A holder's basis in the Common Stock received will equal such holder's basis in
the Series A Preferred or Series B Preferred converted in connection with this
Conversion Offer. The holding period for each share of Common Stock will include
the period for which the Series A Preferred or Series B Preferred, as the case
may be, was held by the holder.
TAX CONSEQUENCES TO THE COMPANY
The Company will not recognize gain or loss in connection with the transactions
contemplated by this Conversion Offer.
THE ABOVE DISCUSSION IS OF A GENERAL NATURE AND DOES NOT FULLY ADDRESS ANY
STATE, LOCAL OR FOREIGN TAX CONSEQUENCES OR THE FEDERAL INCOME TAX CONSEQUENCES
FOR STOCKHOLDERS WHO DO NOT HOLD SERIES A PREFERRED OR SERIES B PREFERRED AS A
CAPITAL ASSET OR FOR FOREIGN STOCKHOLDERS. THIS DISCUSSION IS FOR GENERAL
INFORMATION ONLY, AND EACH STOCKHOLDER SHOULD CONSULT WITH HIS, HER OR ITS OWN
TAX ADVISOR AS TO THE CONSEQUENCES OF THIS CONVERSION OFFER.
NORTH COAST CAPITAL STOCK
At the present time North Coast's Certificate authorizes the issuance of
40,000,000 shares of $.01 par value Common Stock and 2,000,000 shares of $.01
par value preferred stock ("North Coast Preferred Stock"). On December 18, 1996,
there were issued and outstanding 8,051,898 shares of Common Stock, and
3,362,031 shares in the aggregate were reserved for issuance upon conversion of
the Series A and B Preferred, at their current stated conversion ratios,
exercise of employee stock options and issuance in connection with outstanding
warrants and notes. The notes include a note payable to Lomak for $1,000,000.
This note can be repaid in either shares of Common Stock or the proceeds of a
public offering, as defined. Lomak also owns 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. If all
holders of Series A and B Preferred were to convert their Series A and B
Preferred in connection with this Conversion Offer, 1,855,739 additional shares
of Common would be issued and outstanding (over and above the shares into which
the Series A and B Preferred are convertible by their stated terms).
Shares of Common Stock and North Coast Preferred Stock authorized by the
Certificate, but not outstanding or reserved for issuance, may be issued in the
judgment of North Coast's Board of Directors from time to time for such
consideration as the Board of Directors may determine and for any corporate
purpose, without further action by the stockholders, except as may be required
by law or by the rules of NASDAQ. As permitted by the General Corporation Law of
Delaware, such authorized and unissued shares of North Coast
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<PAGE> 19
Preferred Stock may be issued in such series, and with such designations,
relative rights and preferences (including voting rights), as the Board may
determine.
Certain of the rights of the holders of Series A Preferred, Series B Preferred
and Common Stock are summarized below.
No holders of any shares of capital stock of North Coast have any preemptive or
comparable rights. All of the shares of North Coast Preferred Stock and Common
Stock now outstanding or to be issued upon acceptance of this Conversion Offer,
are, or upon issuance will be, fully paid and nonassessable.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on
all matters submitted to a vote of the stockholders of the Company. Except as
required by applicable law, holders of shares of Common Stock do not vote
separately as a class, but vote together with the holders of outstanding shares
of capital stock of all other classes and series. Certain actions require the
affirmative vote of holders of more than a majority of the voting capital stock.
See "-- Certain Anti-Takeover Provisions." There is no cumulative voting for the
election of Directors.
Holders of shares of Common Stock are entitled to receive dividends,
if, as, and when declared by the Board of Directors out of funds legally
available therefore, after payment of dividends required to be paid on
outstanding shares of any series of Serial Preferred Stock (if any). Upon
liquidation of the Company, holders of shares of Common Stock are entitled to
share ratably in all assets of the Company remaining after payment of
liabilities, subject to the prior distribution rights of any outstanding shares
of Serial Preferred Stock which have a liquidation preference, including the
Series A Preferred Stock and the Series B Preferred Stock. Holders of shares of
Common Stock have no conversion, redemption or preemptive rights. The rights of
the holders of Common Stock are subject to, and may be adversely affected by,
the rights of the holders of Serial Preferred Stock.
NORTH COAST PREFERRED STOCK
The Certificate authorizes the issuance of 2,000,000 shares of Serial
Preferred Stock, which may be divided into one or more series of shares. The
Board of Directors has the authority to issue the Serial Preferred Stock in one
or more series and to fix the rights, preferences, privileges, designations and
limitations, including the dividend rights, dividend rate, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences, designations and the
authorized number of shares constituting any series, without any further vote or
action by the stockholders. The rights of any series of the Serial Preferred
Stock may, if provided by the Board of Directors, be senior to and have
preference over the rights of the shares of Common Stock and/or shares of other
series of Serial Preferred Stock. The Series A Preferred Stock (see "--Series A
Preferred Stock") constitutes one series of Serial Preferred Stock and the
Series B Preferred Stock constitutes another series of Serial Preferred Stock.
No other shares of the remaining Serial Preferred Stock are issued or
outstanding.
The Company has no current plans to issue any shares of other series of
Serial Preferred Stock. The issuance of additional shares of Serial Preferred
Stock in the future could adversely affect the rights of the holders of any
class of the Company's capital stock, including the Common Stock. Also, the
issuance of additional shares of Serial Preferred Stock could have the effect of
hindering or deterring an acquisition of the Company or potential tender offers.
See "--Certain Anti-Takeover Provisions."
SERIES A PREFERRED STOCK
Voting Rights. Holders of Series A Preferred are entitled to such
number of votes per share as they would have if they had exercised their
conversion rights and received shares of Common Stock as of the record date
applicable to such vote. Except as required by applicable law, holders of shares
of Series A Preferred do not vote separately as a class or series, but vote
together with the holders of outstanding shares of voting capital stock of all
other classes and series.
Dividends. Holders of Series A Preferred are entitled to receive cash
dividends at an annual rate of $.60 per share. Such cash dividends are
non-cumulative, and are payable semi-annually on June 1 and December 1 of each
year, if, when and as declared by the Board of Directors out of funds legally
available therefor. Series A Preferred are senior to shares of Common Stock with
respect to such cash dividends. No cash dividends will be paid on shares of
Common Stock unless and until all declared, unpaid cash dividends on the shares
of Series A Preferred have been paid or set aside for payment.
Liquidation Rights. The Series A Preferred has a liquidation preference
of $10.00 per share. Consequently, upon liquidation, dissolution or winding up
of the Company, holders of shares of Series A Preferred are entitled to receive,
after payment of liabilities but prior to any distributions to holders of shares
of Common Stock or of shares of any other class or series of the Serial
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Preferred Stock ranking junior in liquidation rights to the Series A Preferred,
the sum of $10.00 per share. If the amounts available for distribution to
holders of Series A Preferred upon liquidation, dissolution or winding up of the
Company are not sufficient to pay in full the preferred liquidation payments in
respect of all of the outstanding Series A Preferred, holders of outstanding
Series A Preferred will share ratably in any such distribution. After payment of
the full preferred liquidation payments in respect of all of the outstanding
Series A Preferred, holders of outstanding Series A Preferred shall not
participate with respect to such shares in any further distribution of the
assets of the Company upon its liquidation, dissolution or winding up.
Conversion Rights. A holder of outstanding Series A Preferred Stock may
elect at any time to convert his Series A Preferred into shares of Common Stock.
The Company, at its option, at such time as it makes a Public Offering (as
defined below) may convert all outstanding Series A Preferred into shares of
Common Stock. In the event any shares of Series A Preferred Stock are called for
redemption as described below, the holders thereof shall have the right to elect
to convert such shares into shares of Common Stock in accordance with these
provisions at any time prior to the date specified for such redemption to occur.
A holder of shares of Series A Preferred is entitled to receive the
number of whole shares of Common Stock for each share of Series A Preferred
converted as is determined by dividing $10.00 by the price at which conversion
occurs (the "Conversion Price"), which Conversion Price currently equals $4.35.
Therefore, each share of Series A Preferred is currently convertible into 2.3
shares of Common Stock. Certain adjustments to the Conversion Price are provided
from time to time in connection with stock dividends payable in shares of Common
Stock or split-ups, combinations and other similar transactions affecting the
outstanding shares of Common Stock. Further, in the event the Company issues any
shares of Common Stock, other than shares of Common Stock issued upon conversion
of outstanding Series A Preferred or upon the exercise of employee stock
options, for a consideration per share less than the then current market price
of the Common Stock, the Conversion Price will be adjusted to provide economic
dilution protection for holders of Series A Preferred. The Company must reserve
and keep available, out of its authorized but unissued shares of Common Stock,
solely for the purposes of conversion of the outstanding shares of Series A
Preferred, the number of shares of Common Stock sufficient to effect the
conversion of all Series A Preferred from time to time outstanding. "Public
Offering," as used with respect to the conversion of Series A Preferred, means
an offering by the Company, pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "Act"), of shares of its
Common Stock which yields net proceeds to the Company of not less than
$5,000,000 and which is made at a public offering price of not less than a price
per share equal to 1.5 multiplied by the Conversion Price (currently
approximately $6.52), subject to adjustment for stock dividends payable in
shares of Common Stock or split-ups, combinations and other similar transactions
affecting the outstanding shares of Common Stock.
Redemption. The Company currently has the option to redeem, in whole or
in part, shares of Series A Preferred Stock at a price of $10.00 per share plus
declared, unpaid dividends on such shares to the date fixed for redemption. The
Company may exercise such option by providing not less than 30 days prior
written notice to each record holder of shares of Series A Preferred Stock.
There are no sinking fund or mandatory redemption provisions for the shares of
Series A Preferred Stock. Holders of shares of Series A Preferred Stock have no
preemptive rights.
SERIES B PREFERRED STOCK
Dividends. Holders of shares of Series B Preferred Stock are entitled
to receive, when, as and if declared by the Board of Directors out of funds at
the time legally available therefor, cash dividends at an annual rate of $1.00
per share, and no more, payable quarterly on June 30, September 30, December 31
and March 31 of each year. Dividends will accrue and be cumulative from the date
of first issuance of the Series B Preferred and are payable to holders of record
as they appear on the stock books of the Company on such record dates as are
fixed by the Board of Directors.
The Series B Preferred has priority as to dividends over the Common
Stock, the Series A Preferred and any series or class of the Company's stock
hereafter issued that ranks junior as to dividends to the Series B Preferred
(the "Junior Dividend Stock"), and no dividend (other than dividends payable
solely in Common Stock or any other series or class of the Company's stock
hereafter issued that ranks junior as to dividends to the Series B Preferred)
may be declared, paid or set apart for payment on, and no purchase, redemption
or other acquisition may be made by the Company of, any Common Stock or Junior
Dividend unless all accrued and unpaid dividends on the Series B Preferred Stock
have been paid or declared and set apart for payment.
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Company, holders of Series B Preferred are entitled to receive
a liquidation preference of $10.00 per share, plus an amount equal to any
accrued and unpaid dividends to the payment date, and no more, before any
payment or distribution is made to the holders of Common Stock, the Series A
Preferred, or any series or class of the Company's stock hereafter issued that
ranks junior as to liquidation rights to the Series B Preferred. However, the
holders of the Series B Preferred will not be entitled to receive the
liquidation preference of such shares until the liquidation preference of any
other series or class of the Company's stock hereafter issued that ranks senior
as to liquidation rights to the Series B Preferred (the "Senior Liquidation
Stock") has been paid in full. The holders of Series B Preferred
16
<PAGE> 21
and all series or classes of the Company's stock hereafter issued that rank on a
parity as to liquidation rights with the Series B Preferred are entitled to
share ratably, in accordance with the respective preferential amounts payable on
such stock, in any distribution (after payment of the liquidation preference of
the Senior Liquidation Stock) which is not sufficient to pay in full the
aggregate of the amounts payable thereon. After payment in full of the
liquidation preference of the Series B Preferred, the holders of such shares
will not be entitled to any further participation in any distribution of assets
by the Company.
Voting Rights. The holders of Series B Preferred have no voting rights
except as described below or as required by law. In exercising any such vote,
each outstanding share of Series B Preferred is entitled to one vote, excluding
shares held by the Company or any entity controlled by the Company, which shares
have no voting rights.
Whenever dividends on the Series B Preferred or any outstanding shares
of any class or series of the Company's capital stock having parity with the
Series B Preferred as to dividends (the "Parity Dividend Stock") have not been
paid in an aggregate amount equal to at least six quarterly dividends on such
shares (whether or not consecutive), the number of Directors of the Company will
be increased by two, and the holders of the Series B Preferred, voting
separately as a class with the holders of Parity Dividend Stock on which like
voting rights have been conferred and are exercisable, will be entitled to elect
such two additional Directors (and any successor to each such Director) to the
Board of Directors at any meeting of stockholders of the Company at which
Directors are to be elected held during the period such dividends remain in
arrears. Such voting right will terminate when all such dividends accrued and in
default have been paid in full or set apart for payment. The term of office of
all directors so elected will terminate immediately upon such payment or setting
apart for payment.
So long as any Series B Preferred is outstanding, the Company shall
not, without the affirmative vote of the holders of at least 66-2/3% of all
outstanding shares of Series B Preferred, voting separately as a class, (i)
amend, alter or repeal any provision of the Certificate or the By-laws of the
Company so as to adversely affect the relative rights, preferences,
qualifications, limitations or restrictions of the Series B Preferred, (ii)
authorize or issue, or increase the authorized amount of, any additional class
or series of stock, or any security convertible into stock of such class or
series, ranking senior to the Series B Preferred as to dividends or upon
liquidation, dissolution or winding up of the Company or (iii) effect any
reclassification of the Series B Preferred.
So long as any Series B Preferred is outstanding, the Company shall
not, without the affirmative vote of the holders of at least 50% of all
outstanding shares of Series B Preferred, voting separately as a class, (i)
authorize, issue, or increase the authorized amount of, any additional class or
series of stock, or any security convertible into stock of such class or series,
ranking on parity with the Series B Preferred as to dividends or liquidation and
having voting rights superior to the Series B Preferred, or (ii) incur
indebtedness or authorize or issue, or increase the authorized amount of, any
additional class or series of stock, or any security convertible into stock of
such class or series, ranking on parity with the Series B Preferred as to
dividend or liquidation rights if, immediately following such event, Adjusted
Stockholders' Equity is less than the aggregate liquidation preferences of all
Series B Preferred and stock ranking senior to or on parity with the Series B
Preferred as to liquidation. Adjusted Stockholders' Equity is the Company's
stockholders' equity as shown on its most recent annual or quarterly balance
sheet, increased by (a) any amount of any liability or other reduction in
stockholders' equity attributable to the Series B Preferred and each series of
stock senior to or on parity with the Series B Preferred as to liquidation and
(b) the net proceeds of any equity financing since the date of the balance
sheet, reduced by any reduction in stockholders' equity resulting from certain
dispositions of assets since the date of the balance sheet.
Redemption. The Series B Preferred Stock is redeemable for cash, in
whole or in part, at any time, at the option of the Company, at $10.00 per share
plus any accrued and unpaid dividends, whether or not declared.
If fewer than all of the outstanding Series B Preferred are to be
redeemed, the Company will select those shares to be redeemed pro rata or by lot
or in such other manner as the Board of Directors may determine. There is no
mandatory redemption or sinking fund obligation with respect to the Series B
Preferred. In the event that the Company has failed to pay accrued dividends on
the Series B Preferred, it may not redeem any of the then outstanding shares of
the Series B Preferred until all such accrued and unpaid dividends and (except
with respect to shares to be redeemed) the then current quarterly dividend have
been paid in full.
Notice of redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of record of Series B
Preferred to be redeemed. After the redemption date, unless there shall have
been a default in payment of the redemption price, dividends will cease to
accrue on the Series B Preferred called for redemption and all rights of the
holders of such shares will terminate, except the right to receive the
redemption price without interest.
17
<PAGE> 22
Conversion Rights. At any time prior to the redemption thereof, the
holders of Series B Preferred shall have the right, exercisable at their option,
to convert any or all of such shares into Common Stock at a conversion price of
$1.74 per share (equivalent to a conversion rate of 5.75 shares of Common Stock
per share of Series B Preferred Stock), subject to adjustment in certain events
as described below.
If at any time after the initial issuance thereof the mean between the
closing bid and asked price for the Series B Preferred as reported on NASDAQ (or
the closing sale price as reported on any national securities exchange on which
the Series B Preferred is then listed), shall, for a period of 10 consecutive
trading days, exceed $14.00, then, effective as of the closing of business on
the tenth such trading day, all shares of Series B Preferred then outstanding
shall immediately and automatically be converted into shares of Common Stock at
the conversion rate then in effect.
No fractional shares will be issued in connection with either the
optional or automatic conversion of Series B Preferred, but, in lieu thereof, an
appropriate amount will be paid in cash by the Company based upon the reported
last sale price of the Common Stock on the business day prior to the date of
conversion.
The Series B Preferred is currently convertible into Common Stock at
the rate of 5.75 shares of Common Stock for each share of Series B Preferred
converted. The conversion rate is subject to adjustment in certain events,
including: the issuance of stock as a dividend on the Common Stock; subdivisions
or combinations of the Common Stock; the issuance to all holders of Common Stock
of certain rights or warrants (expiring within 45 days after the record date for
determining stockholders entitled to receive them) to subscribe for or purchase
Common Stock at a price less than the current market price of the Common Stock;
or the distribution to all holders of Common Stock of evidences of indebtedness
of the Company, cash (excluding ordinary cash dividends), other assets or rights
or warrants to subscribe for or purchase any securities (other than those
referred to above).
The Company from time to time may decrease the conversion price by any
amount for any period of at least 20 days, by giving at least 15 days notice of
such decrease. The Company may, at its option, make such decreases in the
conversion price, in addition to those set forth above, as the Board of
Directors of the Company deems advisable to avoid or diminish any income tax to
holders of Common Stock resulting from any dividend or distribution of stock or
issuance of rights or warrants to purchase or subscribe for Common Stock or from
any event treated as such for income tax purposes.
Upon conversion of shares of Series B Preferred, the rights of holders
of shares so converted will be limited to the right to receive shares of Common
Stock at the conversion rate then in effect.
The Series B Preferred are duly and validly issued, fully paid and
nonassessable. The holders of the Series B Preferred Stock have no preemptive
rights with respect to any securities of the Company.
WARRANTS
In connection with an offering of Series B Preferred in 1992, the
Company issued 2,550,000 warrants to purchase shares of Common Stock (the
"Series B Warrants"). Each Series B Warrant represents the right to purchase
1.15 shares of Common Stock on or before 5:00 p.m. Eastern Time on December 18,
1997 at the current exercise price of $2.61 per share. The exercise price and
the number of shares subject to the Series B Warrants are subject to adjustment
in certain events, including the issuance of Common Stock as a dividend on
shares of Common Stock; subdivisions, combinations and reclassifications of the
shares of the Common Stock; the distribution to all holders of Common Stock of
evidences of indebtedness of the Company or assets (other than cash dividends);
and certain mergers, consolidations or sales of substantially all of the assets
of the Company. Except as stated in the preceding sentence, the Series B
Warrants do not contain provisions protecting against dilution resulting from
the sale of additional shares of Common Stock for less than the exercise price
of the Series B Warrants or the current market price.
The Series B Warrants are currently redeemable, in whole or in part, at
the option of the Company, upon not fewer than 30 days notice, at a redemption
price equal to $.10 per Series B Warrant.
Holders of Series B Warrants are entitled to notice if (a) the Company
grants holders of its Common Stock rights to purchase any shares of capital
stock or any other rights, or (b) the Company authorizes a reclassification,
consolidation, merger or sale of substantially all of its assets.
The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Common Stock for issuance upon exercise of the
Series B Warrants. Exercise of each Series B Warrant may be effected by delivery
of the Series B Warrant, duly endorsed for exercise and accompanied by payment
of the exercise price, to the warrant agent for the Series B
18
<PAGE> 23
Warrants. The shares of Common Stock issuable on exercise of the Series B
Warrants will be, when issued and paid for in the manner contemplated by the
Series B Warrants, fully paid and non-assessable.
Except as described above, the holders of the Series B Warrants have no
rights as stockholders until they exercise their Series B Warrants. Except as
described above, the holders of the Warrants have no rights as stockholders
until they exercise their Warrants.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate and By-laws and rights
of the Common Stock, set forth below, might have the effect of delaying,
deferring or preventing a change in control of the Company and may make more
difficult the removal of incumbent management even if such transactions could be
beneficial to the interests of stockholders.
Staggered Board of Directors. Under the Company's Certificate and
By-laws, the Board of Directors will consist of not less than five members nor
more than nine members, with the number of Directors to be fixed by the vote of
a majority of the entire Board of Directors from time to time. The number of
Directors is currently fixed at nine. The Board of Directors also is divided
into three classes, as nearly equal in number as possible. Directors of each
class serve a three year term, with the term of office of one class expiring at
the Company's Annual Meeting of Stockholders in each year.
Supermajority Provisions. Under the Certificate, the affirmative vote
of the holders of at least 80% of the aggregate outstanding voting capital stock
of the Company is required (in addition to any separate vote of any other class
or series of securities of the Company which may be required by the terms of
such securities) to effect a merger or consolidation, or a sale, lease, exchange
or transfer of more than 10% of the Company's assets, or a sale, lease, exchange
or transfer of more than 10% of another entity's assets to the Company, where
the other party to the transaction, including its affiliates and associated
persons, is a holder or beneficial owner, directly or indirectly, of 10% or more
of the outstanding shares of capital stock of the Company entitled to vote at a
meeting called to consider such a proposed transaction (such party(ies) being
hereinafter referred to as a "Related Person"). In addition, any such proposed
transaction must also be approved by the affirmative vote of the holders of at
least 55% of the aggregate voting power of the Company that is not held by the
Related Person. The Board of Directors must make a conclusive determination as
to whether the proposed transaction involves a Related Person. The requirements
for supermajority approval are not applicable to proposed transactions approved
by a majority of the Directors who are not the Related Person and who were
elected prior to the acquisition of the 10% share interest by the Related Person
and who have served continuously since such election, provided that with respect
to any proposed transaction as to which the supermajority voting requirements
would otherwise be applicable, there has also been disclosure to all
stockholders of any inducements in connection with the proposed transaction
offered to Directors of the Company which are not extended to all stockholders.
The provisions regarding division of the Board of Directors into
classes and the above-described voting requirements may have the overall effect
of making it more difficult to (i) attempt to take control of the Company
through a merger, tender offer, proxy contest or other means; (ii) assume
control of the Company by a holder of a large block of the Company's voting
securities; and/or (iii) remove incumbent management (each, a "Change in Control
Transaction"). This may be the case even though certain stockholders of the
Company may determine such action to be in their best interests. Such provisions
of the Company's Certificate and its By-laws can be changed or amended only by
the affirmative vote of the holders of at least 80% of the aggregate outstanding
voting capital stock of the Company and, in the case of the above-described
voting requirements with respect to certain transactions involving a Related
Person, by the additional affirmative vote of the holders of at least 55% of
such voting power held by persons who are not Related Persons.
Serial Preferred Stock. The Board of Director's ability to issue shares
of Serial Preferred Stock and to determine the rights, preferences, privileges,
designations and limitations of such stock, including the dividend rights,
dividend rate, conversion rights, voting rights, terms of redemption and other
terms of conditions of such stock, could make it more difficult for a person to
engage in, or discourage a person from engaging in, a Change in Control
Transaction without the cooperation of management.
Section 203. The Company is a Delaware corporation and is subject to
Section 203 of the Delaware General Corporation Law. In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined in Section 203) with a Delaware corporation
for three years following the date such person became an interested stockholder
unless (i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the
19
<PAGE> 24
corporation and by employee stock plans that do not provide employees with the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or (iii) following the transaction
in which such person became an interested stockholder, the business combination
is approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of two-thirds of
the outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203, the restrictions described above also do not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of one of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or who were recommended
for election or elected to succeed such directors by a majority of such
directors.
DEBT COVENANTS
The Company's debt agreements contain various restrictions on the Company's
activities and require the Company to achieve and maintain certain financial
ratios. Certain terms used in this section are defined in the applicable debt
agreement. Such restrictions include, among other things, (i) a prohibition of
paying dividends with respect to the Company's capital stock, including the
Series A and B Preferred, (ii) a requirement that the Company maintain a minimum
working capital not less than $350,000, (iii) a requirement that the Company
maintain a minimum stockholders' equity of not less than $7,000,000, plus a
cumulative 80% of positive net income for all the fiscal years of the Company
subsequent to March 31, 1996, less the amount of Series A and B Preferred
dividends paid for such period, plus a cumulative 100% of all net proceeds from
equity offerings since August 31, 1996, (iv) a requirement that the Company
maintain a minimum debt coverage ratio of not less than 1.25 to 1 and (v) the
requirement that the Company's indebtedness, together with outstanding
contingent obligations not exceed $500,000.
20
<PAGE> 25
COMPARATIVE MARKET PRICES
The Common Stock and Series B Preferred are listed under the symbols NCEB and
NCEBP, respectively, on NASDAQ. There is no active market for the Series A
Preferred. The closing prices per share of the Company's Common Stock and Series
B Preferred on NASDAQ on (i) December 18, 1996, the last trading day before
public announcement of this Conversion Offer, and (ii) December 19, 1996, the
last trading day before the date of this Offering Circular, was $1.25 and $7.00,
respectively,
The following table sets forth the high and low bid and ask prices per share of
the Company's Common Stock and Series B Preferred on NASDAQ for the calendar
quarters indicated.
<TABLE>
<CAPTION>
COMMON SERIES B
STOCK PREFERRED
----- ---------
High Low High Low
---- --- ---- ---
Bid Ask Bid Ask Bid Ask Bid Ask
--- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FISCAL 1995
First Quarter ........ $1 7/8 $2 1/8 $1 5/8 $1 7/8 $10 3/4 $11 1/4 $ 9 1/4 $ 9 3/4
Second Quarter ....... 1 3/4 2 1 1/8 1 5/16 11 11 1/4 10 10 1/2
Third Quarter ........ 1 9/16 1 3/4 1 1/4 1 1/2 10 3/4 11 1/2 10 10 3/8
Fourth Quarter........ 1 1/2 1 5/8 1 1 1/8 10 1/2 11 8 1/4 8 7/8
FISCAL 1996
First Quarter ........ $1 1/4 $1 7/16 $ 1/2 $ 7/8 $ 9 1/2 $10 1/4 $ 8 $ 8 3/4
Second Quarter ....... 1 3/8 1 1/2 9/16 7/8 9 1/2 10 1/4 6 3/4 7 1/2
Third Quarter ........ 1 3/8 1 1/2 7/8 1 1/16 9 1/4 10 8 8 3/8
Fourth Quarter........ 1 1 3/8 1/2 3/4 9 1/4 10 8 1/2 9 1/4
FISCAL 1997
First Quarter ........ $1 1/16 $1 3/16 $ 1/2 $ 3/4 $ 8 1/2 $ 9 1/4 $ 7 3/4 $ 8 1/2
Second Quarter ....... 1 7/16 1 5/8 5/8 3/4 9 1/2 10 1/2 7 3/4 8 1/4
Third Quarter (through
December 18, 1996)... 1 5/16 1 1/2 7/8 1 1/16 9 9 1/2 7 1/4 8
</TABLE>
HOLDERS OF SERIES A AND B PREFERRED ARE ADVISED TO OBTAIN CURRENT NASDAQ
MARKET QUOTATIONS FOR THE COMMON STOCK AND SERIES B PREFERRED BEFORE MAKING A
FINAL DECISION ON THIS CONVERSION OFFER. No assurance can be given as to the
market price of Common Stock or Series B Preferred at any time. No adjustment in
the number of shares of Common Stock issuable in connection with this Conversion
Offer will be made for fluctuations in the market price of Common Stock, Series
A Preferred or Series B Preferred.
As of December 12, 1996, there were 1,134 record holders of Common Stock, 1,047
record holders of Series A Preferred and 67 record holders of Series B
Preferred.
21
<PAGE> 26
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
Included in Appendix A and Appendix B are the Company's Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis. Holders
of Series A and B Preferred should refer to Appendix A and Appendix B for
detailed financial information about the Company.
The following historical and pro forma unaudited financial information for the
year ended March 31, 1996 and for the six months ended September 30, 1996 are
based on the consolidated financial statements of the Company and has been
prepared to give effect to this Conversion Offer as if each had been consummated
on April 1, 1995 and April 1, 1996. The pro forma adjustments assume acceptance
of this Conversion Offer, in the alternative, by holders of 51% and 100% of the
outstanding shares of Series A and B Preferred. The pro forma financial
information does not purport to be indicative of the results which would
actually have been obtained had such transactions been completed as of the
assumed date and for the period presented or which may be obtained in the
future, and should be read in conjunction with the consolidated financial
statements of the Company and the related notes appearing in Appendix A and
Appendix B to this Offering Circular. The assumptions on which the following pro
forma financial information are based are further described in the accompanying
footnotes.
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL DATA
ASSUMING ASSUMING
CONVERSION OF CONVERSION OF
51% OF SERIES A 51% OF SERIES A
AND 51% OF AND 51% OF
SERIES B SERIES B
PREFERRED PREFERRED
SHARES ON SHARES ON
APRIL 1, 1995(a) APRIL 1, 1996(b)
----------------------------------------------- -------------------------------------------------
SIX MONTHS ENDED (UNAUDITED)
YEAR ENDED MARCH 31, 1996 SEPTEMBER 30, 1996
----------------------------------------------- -------------------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE................ $10,860,496 $0 $10,860,496 $4,498,579 $0 $4,498,579
NET LOSS (d)........... $(1,254,418) $(95,000) $(1,349,418) $(75,955) $(95,000) $(170,955)
NET LOSS APPLICABLE TO
COMMON STOCK........... $(1,904,282) $236,430 $(1,667,852) $(399,830) $70,176 $(329,654)
WEIGHTED AVERAGE
SHARES OUTSTANDING (c). 8,033,640 2,684,956 10,718,596 8,040,743 2,672,449 10,713,192
NET LOSS PER COMMON
SHARE.................. $(0.24) $.08 $(0.16) $(0.05) $0.02 $(0.03)
WORKING CAPITAL (g).... $(359,856) $236,430 $(123,426) $(99,478) $70,176 $(29,302)
TOTAL ASSETS (g)....... $20,242,809 $236,430 $20,479,239 $21,363,322 $70,176 $21,433,498
STOCKHOLDERS EQUITY.... $7,318,605 $236,430 $7,555,035 $6,918,775 $70,176 $6,988,951
</TABLE>
22
<PAGE> 27
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL DATA
ASSUMING ASSUMING
CONVERSION OF CONVERSION OF
100% OF SERIES 100% OF SERIES
A AND 100% OF A AND 100% OF
SERIES B SERIES B
PREFERRED PREFERRED
SHARES ON SHARES ON
APRIL 1, 1995 (e) APRIL 1, 1996 (f)
----------------------------------------------- -----------------------------------------------
SIX MONTHS ENDED (UNAUDITED)
YEAR ENDED MARCH 31, 1996 SEPTEMBER 30, 1996
----------------------------------------------- -----------------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE................ $10,860,496 $0 $10,860,496 $4,498,579 $0 $4,498,579
NET LOSS (d)........... $(1,254,418) $(95,000) $(1,349,418) $(75,955) $(95,000) $(170,955)
NET LOSS APPLICABLE TO
COMMON STOCK........... $(1,904,282) $554,864 $(1,349,418) $(399,830) $228,875 $(170,955)
WEIGHTED AVERAGE
SHARES OUTSTANDING (c). 8,033,640 5,261,332 13,294,972 8,040,743 5,240,097 13,280,840
NET LOSS PER COMMON
SHARE.................. $(0.24) $.14 $(0.10) $(0.05) $0.04 $(0.01)
WORKING CAPITAL (g).... $(359,856) $554,864 $195,008 $(99,478) $228,875 $129,397
TOTAL ASSETS (g)....... $20,242,809 $554,864 $20,797,673 $21,363,322 $228,875 $21,592,197
STOCKHOLDERS EQUITY.... $7,318,605 $554,864 $7,873,469 $6,918,775 $228,875 $7,147,650
- ------------------
<FN>
(a) Assumes that 51% of the outstanding shares of Series A Preferred
were converted in connection with this Conversion Offer and an
aggregate of approximately 789,000 shares of Common Stock were issued -
approximately 426,000 representing the inducement to convert and that
51% of the outstanding shares of Series B Preferred were converted
pursuant to this Conversion Offer and an aggregate of 1,896,000 shares
of Common Stock were issued - approximately 533,000 representing the
inducement to convert. The annual dividend requirement, adjusted for
such assumed conversions for Series A Preferred and for the conversion
of Series B Preferred, would have been reduced by approximately $94,000
and $237,000, respectively.
(b) Assumes that 51% of the outstanding shares of Series A Preferred
were converted in connection with this Conversion Offer and an
aggregate of approximately 777,000 shares of Common Stock were issued -
approximately 420,000 representing the inducement to convert and that
51% of the outstanding shares of Series B Preferred were converted
pursuant to this Conversion Offer and an aggregate of 1,896,000 shares
of Common Stock were issued - approximately 533,000 representing the
inducement to convert. The annual dividend requirement, adjusted for
such assumed conversions for Series A Preferred and for the conversion
of Series B Preferred, would have been reduced by approximately $47,000
and $118,000, respectively.
(c) Weighted average shares outstanding includes Common Stock no Common
Stock equivalents because of their anti dilutive nature.
(d) Adjustments give effect to fees and expenses the Company will be
required to pay in cash in connection with this Conversion Offer,
estimated to be $95,000 which will be accounted for as Expenses.
</TABLE>
23
<PAGE> 28
(e) Assumes that 100% of the outstanding shares of Series A Preferred
were converted in connection with this Conversion Offer and an
aggregate of approximately 1,545,000 shares of Common Stock were issued
- approximately 836,000 representing the inducement to convert, and
that 100% of the outstanding shares of Series B Preferred were
converted pursuant to this Conversion Offer and an aggregate of
3,717,000 shares of Common Stock were issued - approximately 1,045,000
representing the inducement to convert. The dividend requirement,
assuming the conversions noted for the Series A Preferred, Series B
Preferred, would have been reduced by approximately 185,000 and
465,000, respectively.
(f) Assumes that 100% of the outstanding shares of Series A Preferred
were converted in connection with this Conversion Offer and an
aggregate of approximately 1,524,000 shares of Common Stock were issued
- approximately 824,000 representing the inducement to convert, and
that 100% of the outstanding shares of Series B Preferred were
converted pursuant to this Conversion Offer and an aggregate of
3,717,000 shares of Common Stock were issued - approximately 1,045,000
representing the inducement to convert. The dividend requirement,
assuming the conversions noted for the Series A Preferred, Series B
Preferred, would have been reduced by approximately $92,000 and
$232,000, respectively.
(g) All Pro Forma statements consider that cash saved on dividends was
retained as cash.
24
<PAGE> 29
CAPITALIZATION
The following table sets forth the capitalization of the Company as of September
30, 1996 and the pro forma amounts give effect to this Conversion Offer as if it
had been consummated on September 30, 1996. The pro forma amounts assume
acceptance of this Conversion Offer by holders of 100% of the outstanding shares
of A and B Preferred. This table should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included in Appendix
A and Appendix B.
September 30, 1996
Unaudited
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
<S> <C> <C>
SHORT-TERM DEBT (CURRENT PORTION OF LONG-TERM DEBT) $ 251,100 $ 251,100
=========== ===========
LONG-TERM DEBT, net of current portion $11,180,718 $11,180,718
STOCKHOLDERS' EQUITY
Series A, 6% Non-Cumulative Convertible Preferred stock, par value
$.01 per share; 563,270 shares authorized; 305,200 and 303,265 issued
and outstanding (aggregate
liquidation value of $3,032,650 and $0 respectively) 3,033 0
Series B, Cumulative Convertible Preferred stock, par value $.01 per
share; 625,000 shares authorized; 464,665 issued and outstanding
(aggregate liquidation value of $4,646,650
and $0, respectively) 4,647 0
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, 8,044,597 and 13,280,840 issued and outstanding 80,446 132,808
Additional paid-in capital 12,082,944 12,038,262
Retained deficit (5,252,295) (5,252,295)
---------- ----------
Total stockholders' equity 6,918,775 6,918,775
---------- ----------
$18,099,493 $18,099,493
=========== ===========
</TABLE>
25
<PAGE> 30
PRINCIPAL STOCKHOLDERS
The table set forth below shows the number of voting shares of North Coast owned
by each person who owns more than 5% of its voting shares and by the officers
and Directors of North Coast (as a group) as of December 18, 1996.
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK(1) PREFERRED STOCK(2)
-------------------------------- --------------------------------- -------------------------------
Name and Address(3) of Amount and Nature of Percent Amount and Nature of Percent Amount and Nature Percent
Beneficial Owner Beneficial Ownership of Class Beneficial Ownership of Class of Beneficial of Class
Ownership
- ---------------------------- ---------------------- --------- ----------------------- --------- --------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles M. Lombardy, Jr. 720,158 Shares(4)(5) 8.75% 1,430 Shares(5) .48% 0 Shares 0%
Garry Regan(12) 723,771 Shares(4) 8.80% 0 Shares 0% 0 Shares 0%
Charles K. Ebinger 10,000 Shares(6)(7) .12% 0 Shares 0% 500 Shares .11%
W. Dale Wegrich 20,750 Shares(7) .26% 0 Shares 0% 1,000 Shares .22%
George R. Begley 23,000 Shares(7)(8) .29% 0 Shares 0% 0 Shares 0%
Robert L. Bauman(12) 0 Shares 0% 0 Shares 0% 0 Shares 0%
Robert M. Hoisek 37,989 Shares(4)(9) .47% 0 Shares 0% 0 Shares 0%
Anthony Kovacevich 22,500 Shares(4) .28% 0 Shares 0% 6 Shares 0%
Eugene Hershman 437,213 Shares 5.43% 9,960 Shares 3.32% 0 Shares 0%
Steven L. Grose 0 Shares 0% 0 Shares 0% 0 Shares 0%
C. Rand Michaels 0 Shares 0% 0 Shares 0% 0 Shares 0%
John H. Pinkerton 0 Shares 0% 0 Shares 0% 0 Shares 0%
Lomak Petroleum, Inc. 4,051,599 Shares(10) 50.32% 5,655 Shares 1.88% 0 Shares 0%
All Directors and
Executive Officers as a
Group (13 persons) 1,616,170 Shares(11) 19.11% 1,430 Shares .48% 1,500 Shares .33%
<FN>
(1) Each share of Series A Preferred is currently convertible into 2.3
shares of Common Stock.
(2) Each share of Series B Preferred is currently convertible into 5.75
shares of Common Stock.
(3) The address of Messrs. Lombardy and Regan is 1993 Case Parkway,
Twinsburg, Ohio 44087. The address of Mr. Hershman is 13340 Verdon
Drive, Palm Beach Gardens, Florida 33410. The address of Lomak
Petroleum, Inc. is 125 State Route 43, Hartville, Ohio 44632.
(4) Includes 404,582 shares of Common Stock, in the aggregate, which could
be acquired by Messrs. Regan (177,066 shares), Lombardy (177,066
shares), Kovacevich (22,500) and Hoisek (27,950 shares) upon the
exercise of immediately exercisable stock options which they hold.
(5) The share ownership figures for Mr. Lombardy includes 6,588 shares of
Common Stock and 1,430 shares of Series A Preferred owned by a trust
for which Mr. Lombardy is the trustee and as to which he disclaims any
beneficial interest.
(6) Does not include 2,875 shares of Common Stock issuable upon exercise of
500 Series B held by Mr. Ebinger.
(7) Includes 10,000 shares of Common Stock which may be acquired upon the
exercise of immediately exercisable options.
(8) Does not include 8,050 shares of Common Stock issuable upon exercise of
7,000 Series B Warrants held by Mr. Begley's spouse. Mr. Begley
disclaims beneficial ownership of such shares.
(9) Includes 10,039 shares of Common Stock held by Mr. Hoisek's spouse.
(10) Does not include 500,000 shares of Common Stock which may be acquired
upon the exercise of certain Warrants to purchase Common Stock nor does
it include convertible debt of $1,105,802 at September 30, 1996 at
$1.00 per share.
(11) Includes 478,107 shares of Common Stock which may be acquired by all
Directors and executive officers as a group upon the exercise of
immediately exercisable options.
(12) Messrs. Regan and Bauman are brothers-in-law.
</TABLE>
26
<PAGE> 31
MANAGEMENT
Directors and Executive Officers
- --------------------------------
The Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Charles M. Lombardy (1)(3)(6) 46 Chief Executive Officer and Director
Garry Regan (5) 47 President and Chairman of the Board
Timothy Wagers 36 Treasurer and Chief Financial Officer
Anthony R. Kovacevich 42 Senior Vice President of Exploration and Production
Thomas A. Hill 38 Secretary and General Counsel
Robert M. Hoisek 44 Executive Vice President, Sales and Marketing
Robert L. Bauman (4) 55 Director
W. Dale Wegrich (1)(2)(5) 67 Director
Charles K. Ebinger (1)(2)(3)(4) 48 Director
George R. Begley (2)(4) 53 Director
Steven L. Grose (6) 47 Director
C. Rand Michaels (6) 58 Director
John H. Pinkerton (5) 42 Director
<FN>
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Stock Option Committee
(4) Term as Director expires in 1997
(5) Term as Director expires in 1998
(6) Term as Director expires in 1999
</TABLE>
CHARLES M. LOMBARDY has served as an executive officer and as
a Director of the Company's predecessor since 1981 and has been Chief Executive
Officer and a Director of the Company since August, 1988. Mr. Lombardy holds a
B.B.A. from Kent State University and is a member of the Ohio Oil & Gas
Association and the Independent Petroleum Association of America. Mr. Lombardy
also serves as Secretary/Treasurer of NCE Securities, Inc., a wholly-owned
subsidiary of the Company and a registered broker-dealer.
GARRY REGAN served as an executive officer and Director of the
Company's predecessor since 1981 and has been President and Director of the
Company since August 1988. Mr. Regan holds a B.S. Degree from Ohio State
University and a Masters Degree from Indiana University. Mr. Regan is a member
of the Independent Petroleum Association of America. Mr. Regan also serves as
President of NCE Securities, a wholly-owned subsidiary of the Company and a
registered broker-dealer.
TIMOTHY WAGERS joined North Coast in 1983 and currently is
Treasurer and Chief Financial Officer. Mr. Wagers is also responsible for
overseeing the accounting for partnership distributions, oil and gas production
and tax reporting, and for monitoring well costs. He received a Bachelor of
Science in Accounting from the University of Akron. From 1982 through 1983, Mr.
Wagers was employed by Hausser & Taylor, independent certified public
accountants, as a staff accountant auditing various
27
<PAGE> 32
entities including oil and gas partnerships. Mr. Wagers is a certified public
accountant, a member of the Ohio Society of Certified Public Accountants, the
Ohio Petroleum Accountants Society, and the American Institute of Certified
Public Accountants.
ANTHONY R. KOVACEVICH joined North Coast in October 1994 as
Senior Vice President of Exploration and Production. Mr. Kovacevich graduated
from Marietta College with a B.S. degree in Petroleum Engineering and has over
19 years of oil and gas experience, with over 14 years in the Appalachian Basin.
Prior to joining North Coast, from November 1984 to October 1994, Mr. Kovacevich
was Vice President of Exploration and Production with Resource America, Inc., a
publicly held oil and gas company conducting operations in the Appalachian
Basin, and had overall responsibility for drilling, production, exploration,
land department and gas marketing activities. Mr. Kovacevich is a member of the
Ohio Oil and Gas Association and the Society of Petroleum Engineers.
THOMAS A. HILL was elected Secretary and General Counsel of
North Coast in August, 1987. Mr. Hill joined Capital Oil & Gas, Inc. in 1984,
prior to its acquisition by North Coast. He graduated from Hiram College with a
Bachelor of Arts degree in History and Political Science and from George
Washington University National Law Center with a Juris Doctor degree. Mr. Hill
is a member of the Mahoning County Bar Association and Eastern Mineral Law
Foundation.
ROBERT M. HOISEK is Executive Vice President, Sales and
Marketing for North Coast. From 1984 through 1986, Mr. Hoisek served as Director
of Marketing and, prior to rejoining North Coast in 1990, he served as a
director and officer of various oil and gas companies. Mr. Hoisek has been
associated with the oil and gas industry for fifteen years and is a member of
the Independent Petroleum Association of America and the American Gas
Association.
ROBERT L. BAUMAN was appointed a Director of North Coast in
June 1996. Mr. Bauman is Chairman, President and Chief Executive Officer of
Hickok Incorporated, a publicly traded leader in automotive electronic
diagnostic technology. Mr. Bauman is a graduate engineer from Case Institute of
Technology and received his MBA from Case Western Reserve University.
W. DALE WEGRICH has served as a Director of the Company since
August, 1988. From 1955 until his retirement in 1985, Mr. Wegrich was employed
by Diamond Shamrock Corporation (now Maxus Energy) in a variety of executive
positions, including service as Chairman, President or Board Member of a number
of Diamond Shamrock subsidiaries. From January, 1986 until his retirement in
1991 he served as the Director of Public Utilities of the City of Cleveland. Mr.
Wegrich received a B.A. Degree from Baylor University and has completed the
advanced management program at The Harvard School of Business.
CHARLES K. EBINGER has served as a Director of the Company
since August, 1988. Dr. Ebinger has over 14 years experience in conventional
energy policy planning, energy pricing analysis, economic and political risk
analysis, market forecasting and energy project feasibility assessment, design,
and implementation for international corporations, banks and governments. From
1979 through 1987, Dr. Ebinger was the Director of the Energy and Strategic
Resources Program at the Georgetown University for Strategic and International
Studies. From 1987 to 1988, he was senior consultant to Putnam Hayes and
Bartlett, Inc. Since January, 1988 he has served as Director of the Energy
Analysis & Planning Group of Energy/Development International. Since 1984, Dr.
Ebinger has been a Director of the Kokomo Gas and Fuel Company. He holds a B.A.
from Williams College and Masters and Doctorate Degrees from the Fletcher School
of Law and Diplomacy, Tufts University.
GEORGE R. BEGLEY was elected as a Director of North Coast in
September 1994. Mr. Begley holds a B.A. from New York University. Mr. Begley
joined the investment banking firm of Prescott, Ball and Turben in 1971 and
worked in both its Cleveland and London, England offices. In 1974, in
conjunction with two partners he established McKinley Allsopp Inc. ("McKinley"),
an investment banking firm with offices in London, Paris and New York. Mr.
Begley remained with McKinley until 1990. In 1990, he became Vice Chairman of
the Forthill Group, based in New York, which specializes in both raising capital
for companies and acquiring companies for its own account. In 1995, Mr. Begley
formed his own private investment banking office to assist select companies in
financing projects. Mr. Begley serves on the Board pursuant to a designation by
NAGIT under the terms of the Stockholders Agreement.
STEVEN L. GROSE was elected as a Director of North Coast in
1996, and the Company acknowledged this election pursuant to the Settlement
Agreement entered into with Lomak. Mr. Grose is Vice President-Appalachia Region
of Lomak and joined Lomak in 1980. Previously, Mr. Grose was employed by
Halliburton Services, Inc. as a Field Engineer from 1971 until 1974. In 1974, he
was promoted to District Engineer and in 1978, was named Assistant District
Superintendent based in Pennsylvania. Mr. Grose is a member of the Society of
Petroleum Engineers and a trustee of The Ohio Oil and Gas Association. Mr. Grose
received his B.S. in Petroleum Engineering from Marietta College.
C. RAND MICHAELS was elected as a Director of North Coast in
1996, and the Company acknowledged this election pursuant to the Settlement
Agreement entered into with Lomak. Mr. Michaels who holds the office of Vice
Chairman of Lomak and
28
<PAGE> 33
is a Director of Lomak, served as President and Chief Executive Officer of Lomak
from 1976 through 1988 and Chairman of the Board from 1984 through 1988, when he
became Vice Chairman of Lomack. Mr. Michaels received his B.S. from Auburn
University and his M.B.A. from the University of Denver. Mr. Michaels is also a
director of American Business Computers Corporation of Akron, Ohio, a public
company serving the beverage dispensing and fast food industries.
JOHN H. PINKERTON was appointed by the Board of Directors as a
Director of North Coast in 1996 to fill a vacancy, which was due to the increase
in the size of the Board from six to nine Directors specified by the Settlement
Agreement with Lomak. Mr. Pinkerton is President, Chief Executive Officer and a
Director of Lomak and joined Lomak in 1988. He was appointed President of Lomack
in 1990 and Chief Executive Officer of Lomak in 1992. Previously, Mr. Pinkerton
was Senior Vice President-Acquisitions of SOCO. Prior to joining SOCO in 1980,
Mr. Pinkerton was with Arthur Andersen & Co. Mr. Pinkerton received his B.A. in
Business Administration from Texas Christian University and his Master of Arts
Degree in Business Administration from the University of Texas.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following tables sets for the annual and long-term compensation for the
Company's Chief Executive Officer and the three highest paid executives (the
"Named Executive Officers") earning in excess of $100,000 for fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Other Number of
Annual Securities All Other
Compen- Underlying Compen-
Name & Principal Position Year Salary Bonus sation Options sation (1)
------------------------- ---- ------ ----- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles M. Lombardy, Jr. 1996 $165,000 $0 N/A -- $6,308
Chief Executive Officer; 1995 165,635 0 N/A -- 4,974
Director 1994 165,635 0 N/A 115,000 9,671
Garry Regan 1996 165,000 0 N/A -- 5,348
President; Director 1995 165,635 0 N/A -- 4,014
1994 165,635 0 N/A 115,000 8,711
Robert M. Hoisek 1996 134,600 500 N/A -- 3,221
Executive Vice President 1995 154,983 500 N/A -- 1,970
1994 154,595 500 N/A -- 5,562
Anthony Kovacevich 1996 100,000 1,000 N/A -- 625
Vice President - Exploration 1995 45,327 0 N/A 20,000 625
and Production
</TABLE>
No Named Executive Officer received personal benefits or perquisites during
fiscal year 1996 in excess of the lesser of $50,000 or 10% of his aggregate
salary and bonus.
(1) The amounts set forth in the table include, with respect to Messrs.
Lombardy and Regan $2,810 and $1,850, respectively, for fiscal years
1996, 1995, and 1994 in life insurance premiums paid by the Company
pursuant to the terms of employment agreements between the Company and
of such persons. With respect to all of the Named Executive Officers,
the amounts set forth in the table reflect the following contributions
under the Company's Profit Sharing Plan and matching funds through the
401(K) Plan: Mr. Lombardy, $3,498, $2,164 and $6,861; Mr. Regan,
$3,498, $2,164 and $6,861 and Mr. Hoisek, $3,221, $1,970, and $5,562
for fiscal years 1996, 1995 and 1994, respectively. Mr. Kovacevich was
not eligible for the Company's Profit Sharing Plan. Under the terms of
the Profit Sharing Plan, all employees of the Company who have
completed a 12 month period with at least 1,000 hours of service for
the Company or its affiliates are eligible to participate in the plan.
The amount of the Company's contributions to the Profit Sharing Plan is
determined by the Board of
29
<PAGE> 34
Directors. Allocations of Company contributions under the plan are made
on the basis of a participant's total compensation and are subject to a
graded vesting schedule which allows 20% vesting after two years of
service with an additional 20% vesting for each complete year of
service thereafter.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END VALUES
The following table summarizes options exercised during fiscal 1996 and presents
the value of unexercised options held by the Named Executive Officers at fiscal
year end:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Options at Fiscal Year-End at Fiscal Year-End(1)
on Value -------------------------- ---------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles M. Lombardy, Jr. -- $ 0 177,066 0 $ 0 $ 0
Garry Regan -- 0 177,066 0 0 0
Robert M. Hoisek -- 0 26,450 0 0 0
Anthony Kovacevich -- 0 20,000 0 0 0
- ------------
<FN>
(1) Based upon the closing bid price of a share of Common Stock as reported
on the NASDAQ system on March 31, 1996. None of the options were
in-the-money at March 31, 1996.
</TABLE>
Stock Option Plan. The Company's 1988 Stock Option Plan (the "Option Plan") was
adopted by the Board of Directors of the Company in September 1988. The Option
Plan is intended as an employment incentive, to retain in the employ of the
Company persons of training, experience and ability, to attract new employees
whose services are considered unusually valuable, to encourage the sense of
proprietorship of such persons and to stimulate their active interest in the
development and financial success of the Company. Eligibility is limited to key
employees of the Company. It is intended that certain options issued pursuant to
the Option Plan may constitute incentive stock options within the meaning of
Section 422A of the Internal Revenue Code (the "Code"), while certain other
options granted under the Plan will be nonqualified options within the meaning
of Section 83 of the Code. The Option Plan provides for the granting of options
to purchase not more than 460,000 shares of Common Stock. Assuming 100%
conversion of the Series A Preferred, the Series B Preferred the Series A Units,
and the Series B Units, the shares of Common Stock issuable pursuant to the
Option Plan would represent 3% of the total Common Stock outstanding upon
consummation of the Conversion Offer.
The Option Plan provides that it shall be administered by the Stock Option
Committee. The Stock Option Committee, subject to the provisions of the Option
Plan, is charged with designating participants, determining the terms and
provisions of the respective option agreements, interpreting the provisions and
supervising the administration of the Option Plan. The purchase price of each
share acquired upon exercise of an incentive stock option shall be 100% of the
fair market value of such share on the date the option is granted; however, if
the employee owns more than ten percent (10%) of the total combined voting power
of the classes of stock of the Company the option price shall not be less than
one hundred ten percent (110%) of the fair market value of such share on the
date the option is granted. The exercise price of each nonqualified option will
be determined by the Stock Option Committee, in its discretion, at the time of
grant, provided that such exercise price shall not be lower than fifty percent
(50%) of the fair market value of such share at the time of the grant. The
aggregate fair market value (determined as of the time the option is granted) of
the Common Stock with respect to which incentive stock options are exercisable
for the first time by any optionee during any calendar year shall not exceed
$100,000. Optionees may also be granted stock appreciation rights under which
they may, in lieu of exercising an option, elect to receive cash or Common
Stock, or a combination thereof, equal to the excess of the market price of the
Common Stock over the option price.
On September 4, 1996, the Stock Option Committee granted options to purchase an
aggregate of 19,600 shares of Common Stock pursuant to the Plan. All executive
officers of the Company as a group received options to purchase 9,000 shares of
Common Stock. Of this amount, options to purchase 4,000 shares of Common Stock
were awarded to each of Messrs. Hoisek and Kovacevich.
Profit Sharing Plan. The Company's Profit Sharing Plan (the "Profit Sharing
Plan") covers employees who (a) have completed a 12-month period with 1,000
hours of service for the Company or any affiliate and (b) have attained the age
of 21 years. The Company may make annual contributions to the Profit Sharing
Plan in amounts determined by the Company's Board of Directors. These
30
<PAGE> 35
contributions are allocated among the accounts of eligible participants based on
such participants' total compensation and are subject to a graded vesting
schedule which allows 20% vesting after two years of vesting service with an
additional 20% vesting for each complete year of vesting service thereafter.
In addition, the Profit Sharing Plan contains provisions under which a
participant may elect, subject to certain limitations, to have a portion of his
compensation contributed to the Profit Sharing Plan rather than paid to him.
Such contributions are considered to be Company contributions for purposes of
the Profit Sharing Plan and are 100% vested at all times. Benefits under the
Plan ordinarily become payable upon a participant's attaining age 65 or upon his
disability, death or other termination of employment.
Stock Bonus Plan. On February 1, 1991, the Company put into effect a Key
Employees Stock Bonus Plan (the "Plan") to provide Key Employees with greater
incentive to serve and promote the interests of the Company and its
shareholders. The premise of the Plan is that if key employees acquire a
proprietary interest in the business of the Company then the incentive of such
key employees to work toward the continued success of the Company will be
increased. Accordingly, the Company will, from time to time during the effective
period of the Plan, issue to such Key Employees shares of Common Stock in
consideration of their prior service to the Company or its subsidiaries on the
terms and subject to the conditions of the Plan. Key Employees shall mean any
person who is a high level executive officer or other valuable managerial,
marketing or technical employee of either the Company or any subsidiary and who
does not own beneficially 5% or more of the Common Stock. A Key Employee who
renounces in writing any right he may have to receive bonuses under the Plan
shall not be eligible to receive any bonus under the Plan. No bonus shall be
granted to any Key Employee during any period of time when he is on leave of
absence.
The Plan is administered by the Stock Option Committee. The Stock Option
Committee has authority under the Plan to select the Key Employees who will
receive stock bonuses, determine the number of shares to be issued, determine
the time when bonuses will be paid, and to construe, amend, and interpret the
Plan, the rules and regulations and the instruments evidencing bonuses granted
under the Plan. Any decisions made or action taken by the Committee in
connection with the administration, interpretation, and implementation of the
Plan and of its rules and regulations, shall to the extent permitted by law, be
conclusive and binding upon all participants under the Plan.
The aggregate number of shares of Common Stock which may be issued as bonuses
shall be 230,000 shares of Common Stock subject to further increases or
decreases caused by stock splits, stock dividends, exchange of shares,
reorganization, reclassification, recapitalization, merger or other such change.
The expenses of administering the Plan are borne by the Company. The Plan will
terminate on February 1, 2001.
On December 19, 1996 the Stock Option Committee awarded a total of 24,591 shares
of Common Stock to certain key employees under the Company's Stock Bonus Plan.
Included in the group of key employees awarded such bonuses were the following
executive officers: Timothy Wagers (4,000 shares); Robert M. Hoisek (250
shares); Thomas A. Hill (2,500 shares); and Anthony R. Kovacevich (2,000
shares).
Employment Agreements. On May 3, 1995, after being recommended and approved by
the Compensation Committee, the Company entered into employment contracts with
Messrs. Lombardy and Regan providing for the employment of these officers
through January 31, 1998, with an option to extend for a three year period,
unless earlier terminated pursuant to the terms of these agreements. These
agreements provide for base annual compensation of $165,000 to each of Messrs.
Lombardy and Regan, with increases for cost of living based upon the Consumer
Price Index. The base annual salary of $165,000 is the same amount each
executive was receiving under previous employment contracts with the Company.
Additional bonuses may be awarded from time to time by the Board of Directors.
In addition, the Board of Directors has the authority to increase, but not
decrease without the executive's consent, the base salary of automobile
expenses, disability coverage, death benefits, and severance payments. Each
agreement provides that for a period of two years from the date of the
termination of the executive's employment the executive will not, directly or
indirectly, engage in any business competitive with that of the Company or
otherwise interfere with the Company's business.
Each of the employment agreements contains provisions addressing a possible
change in control of the Company (the "Change in Control Provisions"). The
Change in Control Provisions require the payment of certain benefits to these
executive officers upon the termination of the employment, other than for good
cause, after the occurrence of a change in control of the Company. A "change in
control of the Company" is defined to include a change in the securities
ownership of the Company's securities which would be required to be reported as
a change in control in a proxy statement filed under the Exchange Act, the
Company's ceasing to have a class of equity securities registered under Section
12 of the Exchange Act, or the acquisition by any person or entity of 50% or
more of the outstanding shares of Common Stock of the Company (or its equivalent
in voting power of any class or classes of the Company's securities).
31
<PAGE> 36
Under the Change in Control Provisions, either of these two executive officers
who remains in the employ of the Company following the date of the occurrence of
a change in control of the Company and whose employment is subsequently
terminated other than for good cause would be entitled to receive a lump sum
payment from the Company, regardless of whether such executive officer continues
in the employ of the Company (the "Change in Control Payment"). After the
occurrence of a change in control, "termination" is defined to include
relocation of the principal place at which the executive is to perform his
duties to a location outside the Cleveland, Ohio metropolitan area, a
substantial reduction in the benefits provided to the executive, a substantial
reduction in the executive's responsibilities or functions or a substantial
adverse change in the executive's working conditions. It should be noted that
the Change in control Provisions provide for the payment of the Change in
Control Payment in the event of a termination of the executive's employment
after any change in control of the Company, regardless of whether such change in
control is approved by the Board of Directors and/or stockholders of the
Company.
Under such Change in Control Provisions, in the event of a termination of
employment after a Change in Control, other than for good cause, each of Messrs.
Lombardy and Regan would be entitled to Change in Control Payments in the amount
equal to six times the average annual salary, bonus, and incentive compensation
amounts paid during the three year period immediately proceeding the termination
after a Change in Control. Also, at the executive's election, he could elect to
receive seventy-two equal payments for a period of seventy-two months or a lump
sum equal to the aggregate of the monthly amounts payable discounted to present
value at a discount rate of 7% per annum.
The Change in Control Provisions will make more difficult or may discourage a
proxy contest, the assumption of control of the Company by a substantial
shareholder or shareholder group, or the removal of incumbent management.
Additionally, the Change in Control Provisions may have the effect of
discouraging a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. Accordingly, stockholders of the Company
may be deprived of certain opportunities to sell their shares of Common Stock at
temporarily higher market prices often associated with actual or rumored
takeover attempts.
On October 11, 1994, Mr. Kovacevich entered into a three year employment
agreement with the Company providing for base compensation of $100,000 per year.
The agreement also provides for life insurance.
Directors' Fees. The Company historically has paid its Directors who are not
employees of the Company an annual retainer of $3,500 and a fee of $500 for
attendance in person, or by telephone if substantive matters are discussed, at
each meeting of the Board of Directors, plus reimbursement of expenses. On
November 19, 1996, the Board of Directors approved the payment of Directors'
fees in the form of North Coast Common Stock. The Company is in the process of
drafting a plan, which will contain the specifics concerning such fees.
CONVERSION OFFER PROCEDURES
EXPIRATION DATE; EXTENSION; AMENDMENT; TERMINATION
This Conversion Offer will expire at 5:00 p.m., Cleveland, Ohio time, on January
31, 1997, unless extended by the Company.
The Company reserves the right, in its judgment, (i) to terminate this
Conversion Offer if any of the events set forth under the caption "The
Conversion Offer -- Conditions of the Conversion Offer" have occurred and have
not been waived by the Company, by giving oral or written notice of such
termination to the Conversion Agent and (ii) to extend or otherwise amend the
terms of this Conversion Offer in any manner. The amendment, extension or
termination of this Conversion Offer as to Series A Preferred or Series B
Preferred, or the waiver of a condition as to either series, need not be
accompanied by the same action as to the other series. Any such extension,
termination or amendment will be followed as promptly as practicable by public
announcement thereof. If this Conversion Offer is amended in a manner determined
by the Company to constitute a material change, the Company will promptly
disclose each amendment in a manner reasonably calculated to inform the holders
of such amendment and, if such amended Conversion Offer would otherwise expire
during such period, the Company will extend each such amended Conversion Offer
for a period which the Company in its judgment deems appropriate, depending upon
the significance of the amendment and the manner of disclosure to holders of the
Series A and B Preferred. Any such extension will be in compliance with the
applicable rules and regulations of the Commission.
Subject to applicable law (including Rule 13e-4(e)(2) under the Exchange Act, to
the extent it may be applicable or relevant, which requires that material
changes be promptly disseminated to holders in a manner reasonably calculated to
inform them of such changes) and without limiting the manner in which the
Company may choose to make a public announcement, if any, of any
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<PAGE> 37
extension, amendment, waiver or termination of this Conversion Offer, the
Company will have no obligation to publish, advertise, or otherwise communicate
any such public announcement, other than by making a timely release to the Dow
Jones News Service.
If, prior to the Expiration Date, the Company should decide to increase or
decrease the number of shares of Series A and B Preferred that it desires to be
converted or to increase or decrease the additional shares of Common Stock being
offered in this Conversion Offer and, at the time notice of any such increase or
decrease is first published, sent or given to holders of such shares, this
Conversion Offer is scheduled to expire at any time earlier than the period
ending on the tenth business day from and including the date that such notice is
first so published, sent or given, this Conversion Offer will be extended at
least until the expiration of such ten business day period. For purposes of this
Conversion Offer, a "business day" means any day other than a Saturday, Sunday
or federal holiday, and consists of the time period from 12:01 a.m. through
12:00 midnight, Cleveland, Ohio time.
PROCEDURES FOR CONVERSION
Some holders of Series A and Series B Preferred hold such shares pursuant to
Units. Each Series A Preferred Unit consists of five shares of Series A
Preferred and ten shares of Common Stock (the "Series A Units"). The Series A
Units were issued in connection with the Company's exchange offer in 1990. See
"Background of the Conversion Offer." Each Series B Preferred Unit consists of
one share of Series B Preferred and five warrants (the "Series B Units"). See
"North Coast Capital Stock -- Warrants." The Series B Units were issued in
connection with the Company's public offering in 1992. See "Background of the
Conversion Offer." Each holder of Series A Units who elects to convert such
holder's Series A Preferred shares will deliver the Series A Unit certificate(s)
and will be issued certificates for the number of shares of Common Stock
represented by each Unit, together with the number of shares of Common Stock
into which the Series A Preferred tendered by the holder pursuant to the
Conversion Offer have been converted. Each holder of Series B Units who elects
to convert such holder's Series B Preferred shares will deliver the Series B
Unit certificate(s) and will be issued certificates for the number of shares of
Common Stock into which the Series B Preferred tendered by the holder pursuant
to the Conversion Offer have been converted and a certificate representing their
warrants. References to holders of Series A and B Preferred herein are meant to
include holders of Series A Units and Series B Units. References to Series A and
B Preferred or Series A and B Preferred shares are meant to include those held
as part of Series A Units or Series B Units.
The delivery of certificates for Series A Units, Series B Units or for shares of
Series A and B Preferred for conversion in this Conversion Offer by a holder
pursuant to one of the procedures set forth below will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth in this Offering Circular, in the Letter of
Transmittal, and in the Certificate.
The holder of a share or shares of Series A Preferred or Series B Preferred may
exercise the conversion rights as to such shares under the certificate(s) and
receive the additional Common Stock offered in connection with this Conversion
Offer by delivering to the Conversion Agent the certificate(s) for all of the
Series A Units, Series B Units or Series A and B Preferred held by such holder,
together with the properly completed Letter of Transmittal (or manually signed
facsimile thereof), executed by the Registered Holder (defined below) thereof,
and any other documents required by the Letter of Transmittal (such as
appropriate stock powers, if the certificates for such Series A Units, Series B
Units or Series A and B Preferred have not been endorsed, and evidence of
authority to act, if the Letter of Transmittal or any certificates for Series A
Units, Series B Units or Series A and B Preferred or related stock powers are
signed by someone acting in a fiduciary or representative capacity), all of
which must be received by the Conversion Agent at its address set forth on the
back cover of this Offering Circular prior to 5:00 p.m., Cleveland, Ohio time,
on the Expiration Date. The term "Registered Holder" will mean the person in
whose name the Series A Units, Series B Units, Series A Preferred or Series B
Preferred is registered on the books of the Company's transfer agent. LETTERS OF
TRANSMITTAL AND CERTIFICATES FOR SERIES A UNITS, SERIES B UNITS OR SERIES A AND
B PREFERRED SHOULD BE DELIVERED TO THE CONVERSION AGENT AND NOT TO THE COMPANY.
The Conversion Agent will make a request promptly after the date of this
Offering Circular to establish accounts with respect to the Series A Units,
Series B Units and the Series A and B Preferred at the Depository Trust Company
("DTC"), for the purpose of facilitating this Conversion Offer. Any financial
institution that is a participant in any of the Book Entry Transfer Facilities
systems may make book entry transfer of the Series A Units, Series B Units or
Series A and B Preferred to the Conversion Agent by causing DTC to transfer such
Series A Units, Series B Units or the Series A and B Preferred into the
Conversion Agent's account in accordance with DTC's procedure for such transfer.
Such transfer shall not affect the beneficial ownership of the transferred
shares. Although transfer of Series A and B Preferred may be effected through
book entry transfer into the Conversion Agent's account at DTC, the Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
or confirmed by the Conversion Agent at its address as set forth on the back
cover of this Offering Circular prior to 5:00 p.m., Cleveland, Ohio time, on the
Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES
DOES NOT CONSTITUTE DELIVERY TO THE CONVERSION AGENT.
33
<PAGE> 38
Signatures on the Letter of Transmittal must be guaranteed by a firm that is a
financial institution (including most commercial banks, savings and loan
associations and brokerage houses) that is a participant in one of the signature
guarantee programs described in the Letter of Transmittal (each, an "Eligible
Institution") unless the certificate or certificates for the Series A Units,
Series B Units or for the shares of Series A and B Preferred to be converted
pursuant thereto are delivered (i) by a Registered Holder of such units or
shares who has not completed either of the boxes entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution.
THE METHOD OF DELIVERY TO THE CONVERSION AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER, BUT IF SUCH DELIVERY IS BY MAIL IT IS RECOMMENDED THAT HOLDERS USE
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE CONVERSION AGENT
BEFORE THE EXPIRATION DATE.
Only a Registered Holder of Series A Units, Series B Units, Series A Preferred
or Series B Preferred may deliver certificates for Series A Units, Series B
Units or for shares of Series A and B Preferred with respect to this Conversion
Offer. If the Letter of Transmittal is signed by a person other than the
Registered Holder of the Series A and B Preferred, the certificates representing
such Series A Units, Series B Units or Series A and B Preferred must be endorsed
or accompanied by appropriate stock powers, in either case signed exactly as the
name or names of the Registered Holder (or Registered Holders) appear on such
certificates, together with a letter (or other evidence) describing the
transaction pursuant to which the Series A Units, Series B Units or Series A and
B Preferred was transferred. If the Letter of Transmittal or any certificates
for Series A Units, Series B Units or shares of Series A and B Preferred or
related stock powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing and, unless waived by the Company, provide evidence satisfactory to the
Company of their authority to so act.
Any beneficial owner whose Series A Units, Series B Units or Series A and B
Preferred is registered in the name of its broker, dealer, commercial bank,
trust company or other nominee and who wishes to convert Series A Preferred
and/or Series B Preferred in connection with this Conversion Offer should
contact such Registered Holder promptly and instruct such Registered Holder to
effect delivery on its behalf. If such beneficial owner wishes to effect
delivery on its own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering the certificate or
certificates for its Series A Units, Series B Units or shares of Series A and B
Preferred or effecting delivery through DTC described above, either make
appropriate arrangements to register ownership of the Series A Units, Series B
Units or Series A and B Preferred in such holder's name or obtain a properly
completed stock power from the Registered Holder. Beneficial owners should be
aware that the transfer of record ownership may take considerable time.
By delivering certificates for Series A Units, Series B Units or shares of
Series A and B Preferred for conversion in connection with this Conversion
Offer, each Registered Holder represents and warrants to the Company that such
Registered Holder has full power and authority to convert the Series A and B
Preferred and that such shares are free and clear of all liens, restrictions,
charges and encumbrances and are not subject to any adverse claim. Each
Registered Holder will, upon request, execute and deliver any additional
documents deemed by the Conversion Agent or the Company to be necessary or
desirable to complete the conversion of the Series A and B Preferred.
GUARANTEED DELIVERY PROCEDURES
If a Registered Holder of the Series A Units, Series B Units, Series A Preferred
or Series B Preferred desires to deliver the certificate or certificates and
such certificates are not immediately available (or the procedures for
book-entry transfer cannot be completed on a timely basis), or time will not
permit such holder's certificates or other required documents to reach the
Conversion Agent before the Expiration Date, a delivery for conversion may be
effected if (i) the delivery is made by or through an Eligible Institution, (ii)
prior to the Expiration Date, the Conversion Agent receives from such Eligible
Institution a properly completed and duly executed Notice of Guaranteed Delivery
(by telegram, telex, facsimile transmission, mail or hand delivery) setting
forth the name and address of the holder of the Series A Units, Series B Units
or Series A and B Preferred and the number of shares of Series A and B Preferred
to be converted, stating that the delivery for conversion is being made thereby
and guaranteeing that, within three NASDAQ trading days after execution of the
Notice of Guaranteed Delivery, the certificates for the Series A Units, Series B
Units or Series A and B Preferred, in proper form for conversion, or book-entry
confirmation, along with a duly executed Letter of Transmittal, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Conversion Agent, and (iii) the certificates for
the Series A Units, Series B Units or Series A and B Preferred, in proper form
for conversion, or book-entry confirmation, along with a duly executed Letter of
Transmittal, and all other documents required by the Letter of Transmittal are
received by the Conversion Agent within three NASDAQ trading days after
execution of Notice of Guaranteed Delivery.
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<PAGE> 39
EFFECTIVE DELIVERIES; COMPLIANCE WITH CONDITIONS OF THIS CONVERSION OFFER;
DELIVERY OF COMMON STOCK
Upon the terms and subject to the conditions of the certificate and this
Conversion Offer (including the terms and conditions of any extension or
amendment), the certificates for all Series A Units, Series B Units and shares
of Series A and B Preferred with respect to the conversion that are validly
delivered pursuant to this Conversion Offer and not properly withdrawn prior to
5:00 p.m., Cleveland, Ohio time, on the Expiration Date will be accepted and
deemed delivered to the Company for conversion and the Series A and B Preferred
will be converted as of the Expiration Date and entitled to the additional
benefits of this Conversion Offer. Each Letter of Transmittal for validly
delivered certificate(s) that is not withdrawn will constitute written notice of
conversion pursuant to the respective terms of the Series A Preferred and Series
B Preferred; provided, that such notice of conversion will not be deemed
delivered or effective until the Company has notified the Conversion Agent of
acceptance as set forth below. The Company, through the Conversion Agent, will
deliver certificates for Common Stock issued in respect of converted shares
within five NASDAQ trading days following the later to occur of (i) the
Expiration Date or (ii) receipt of the certificate or certificates for Series A
Units, Series B Units or shares of Series A and B Preferred with respect to the
conversion and all other documents required by the Letter of Transmittal
pursuant to the guaranteed delivery procedures set forth herein. See "Conversion
Offer Procedures -- Guaranteed Delivery Procedures."
With respect to holders of Series A Units and/or Series B Units, each holder of
Series A Units who elects to convert such holder's Series A Preferred shares
will deliver the Series A Unit certificate(s) and will be issued certificates
for the number of shares of Common Stock represented by each Unit, together with
the number of shares of Common Stock into which the Series A Preferred tendered
by the holder pursuant to the Conversion Offer have been converted.
Additionally, each holder of Series B Units who elects to convert such holder's
Series B Preferred shares will deliver the Series B Unit certificate(s) and will
be issued certificates for the number of shares of Common Stock into which the
Series B Preferred tendered by the holder pursuant to the Conversion Offer have
been converted and a certificate representing their warrants.
All questions as to the validity, form, eligibility (including time of receipt),
delivery and withdrawal of certificate(s) for shares of Series A Units, Series B
Units or Series A and B Preferred will be resolved by the Company, whose
determination will be final and binding on all parties, The Company reserves the
absolute right to reject any or all deliveries for conversion that are not in
proper form or which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right, in its judgment, to waive any
irregularities or conditions of delivery as to particular Series A Units, Series
B Units or Series A and B Preferred shares. The Company's interpretation of the
terms and conditions of this Conversion Offer (including the instructions in the
Letter of Transmittal) and the certificate(s) will be final and binding. Unless
waived, any irregularities or defects in connection with deliveries must be
cured within such time as the Company determines. Neither the Company, the
Conversion Agent nor any other person will be under any duty to give
notification of irregularities or defects in such deliveries or shall incur any
liability for failure to give such notification. Deliveries will not be deemed
to have been made until such irregularities have been cured or waived.
If any shares of Series A and B Preferred are not converted in connection with
this Conversion Offer because of an invalid delivery, the occurrence or
nonoccurrence of certain other events set forth herein or otherwise, such
unaccepted certificates for Series A Units, Series B Units or shares of Series A
and B Preferred will be returned, at the Company's expense, to the Registered
Holder thereof as promptly as practicable after the Expiration Date or the
termination of this Conversion Offer, as applicable.
WITHDRAWAL OF DELIVERIES
Any holder of Series A Units, Series B Units, Series A Preferred or Series B
Preferred who has delivered a certificate or certificates for, or effected
delivery with respect to, shares of Series A and B Preferred for conversion may
withdraw such delivery at any time prior to 5:00 p.m., Cleveland, Ohio time, on
the Expiration Date.
To be effective, a written telegraphic, telex or facsimile transmission notice
of withdrawal must (i) be received by the Conversion Agent at the address set
forth on the back cover of this Offering Circular prior to 5:00 p.m., Cleveland,
Ohio time, on the Expiration Date, (ii) specify the name of the person having
made or effected the delivery to be withdrawn, (iii) identify the Series A
Units, Series B Units or Series A and B Preferred with respect to which delivery
is to be withdrawn and (iv) be (a) signed by the Registered Holder in the same
manner as the original signature on the Letter of Transmittal by which the
certificates representing such Series A Units, Series B Units or Series A and B
Preferred were delivered (including any required signature guarantees) or (b)
accompanied by evidence satisfactory to the Company that the Registered Holder
withdrawing such delivery has succeeded to beneficial ownership of such Series A
Units, Series B Units or Series A and B Preferred. If certificates representing
Series A Units, Series B Units or Series A and B Preferred have been delivered
or otherwise identified to the Conversion Agent, the name of the Registered
Holder and the serial numbers of the particular certificate(s) to be withdrawn
must also be so furnished to the Conversion Agent as aforesaid prior to the
physical release of the withdrawn certificate(s). A properly withdrawn delivery
will thereafter be deemed not validly delivered for
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<PAGE> 40
purposes of this Conversion Offer; provided, however, that delivery may be again
made following one of the procedures described herein at any time prior to 5:00
p.m., Cleveland, Ohio time, on the Expiration Date.
All questions as to the validity, form and eligibility (including time of
receipt) of notices of withdrawal will be determined by the Company, whose
determination will be final and binding on all parties. Neither the Company, the
Conversion Agent, nor any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal or
incur any liability for failure to give any such notification.
PAYMENT OF EXPENSES
This Conversion Offer is being made by the Company in reliance on the exemption
from the Securities Act registration requirements afforded by Section 3(a)(9)
thereof. Therefore, the Company has not retained any dealer-manager in
connection with this Conversion Offer and will not make any payments to brokers,
dealers, salespersons or others for soliciting conversion in connection with
this Conversion Offer. The Company, however, will pay the Conversion Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith. The Company will also
pay the reasonable out-of-pocket expenses incurred by brokers, custodians,
nominees and fiduciaries in forwarding copies of this Offering Circular and
related documents to the owners of Series A Units, Series B Units or Series A
and B Preferred, and in handling or forwarding deliveries of Series A Units,
Series B Units or Series A and B Preferred shares for conversion. Holders of
Series A Units, Series B Units or Series A and B Preferred will be responsible
for all other costs incurred in evaluating or converting in connection with this
Conversion Offer.
The estimated expenses to be incurred in connection with this Conversion Offer
will be paid by the Company and are estimated in the aggregate to be $95,000.00
The Company will pay all transfer taxes, if any, applicable to the conversion of
Series A and B Preferred in connection with this Conversion Offer and issuance
of additional shares of Common Stock. If, however, Common Stock is to be
delivered to, or is to be registered or issued in the name of, any person other
than the Registered Holder of the Series A Units, Series B Units or Series A and
B Preferred, or if Series A Units, Series B Units or Series A and B Preferred
with respect to the conversion is registered in the name of any person other
than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the issuance of Common Stock pursuant to this
Conversion Offer, the amount of any such transfer taxes (whether imposed on the
Registered Holder or any other person) will be payable by the delivering holder.
Such holder hereby acknowledges and agrees that the Company and the Conversion
Agent may defer effecting such transfer and may retain such shares of Common
Stock until satisfactory evidence of the payment of such taxes, or exemption
therefrom, is submitted to them.
SHARES ELIGIBLE FOR FUTURE RESALE
Upon consummation of this Conversion Offer, assuming 100% conversion of Series A
and B Preferred in connection with this Conversion Offer, there will be
13,269,668 shares of Common Stock outstanding. Assuming 51% conversion of Series
A and B Preferred in connection with this Conversion Offer, there will be
10,712,961 shares of Common Stock outstanding. All of the shares of Common Stock
to be issued in connection with this Conversion Offer to holders of Series A and
B Preferred who are not otherwise affiliates of the Company will be freely
transferable without restriction or registration under the Securities Act.
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APPENDIX A
----------
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 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)
Registrant's telephone number, including area code:(216) 663-1668
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
SERIES A 6% CONVERTIBLE NON-CUMULATIVE PREFERRED STOCK, $0.01 PAR VALUE
(Title of class)
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK, $0.01 PAR VALUE
(Title of class)
WARRANTS TO PURCHASE COMMON STOCK, $0.01 PAR VALUE
(Title of class)
A-1
<PAGE> 42
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 the filing
requirements for the past 90 days.
Yes X. NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of June 12, 1996, the Registrant had outstanding 8,040,285 shares of Common
Stock, 305,140 shares of Series A Preferred Stock, 464,665 shares of Series B
Preferred Stock, Warrants to purchase 3,375,000 shares of Common Stock and
Representative Warrants to purchase 50,000 units, each consisting of one share
of Series B Preferred Stock and five warrants to purchase 1.15 shares of Common
Stock.
The aggregate market value of Common Stock held by non-affiliates of the
Registrant at June 12, 1996 was $4,377,819 which value has been computed on the
basis of $.875 per share of Common Stock, the mean between the closing bid and
ask price as reported on the NASDAQ system.
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE
Part of Form 10-K
-----------------
Part III (Items 10, 11, 12, and 13)
Document Incorporated by Reference
----------------------------------
Portions of the Registrant's definitive Proxy Statement to be used in connection
with its Annual Meeting of Stockholders to be held on September 4, 1996.
Except as otherwise indicated, the information contained in this Report is as of
March 31, 1996.
A-2
<PAGE> 43
PART I
ITEM 1. BUSINESS.
GENERAL
North Coast Energy, Inc., a Delaware corporation ("North Coast" or the
"Company") 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 its
acquisition of proved undeveloped natural gas and oil properties and on the
turnkey drilling and development of such properties. The Company develops these
properties in conjunction with drilling programs ("Drilling Programs") which the
Company sponsors and manages. The Drilling Programs are funded through the sale
of partnership interests to non-industry investors and by contributions from the
Company. The Company currently obtains an interest of approximately 20% in each
Drilling Program for which it contributes (either in cash or in kind)
organizational and tangible equipment costs and drill sites. As used in this
Annual Report on Form 10-K, the terms "Company" and "North Coast" mean North
Coast Energy, Inc., its subsidiaries and predecessors, unless the context
otherwise requires.
As of March 31, 1996, the Company is serving as the managing general
partner of 23 Drilling Programs and has contracted to operate 657 wells, 365 of
which are operated for the Drilling Programs, 106 of which are operated for the
Company and various working interest owners and 186 of which are operated for
the Company's account. In connection with the drilling and development of the
wells it operates, North Coast currently owns approximately 185 miles of natural
gas gathering pipelines in various counties throughout eastern Ohio and western
Pennsylvania. These gas gathering systems currently transport gas from 576 wells
operated by the Company. At March 31, 1996, the Company had estimated net proved
reserves of approximately 20,048,000 Mcf of natural gas and 195,200 Bbls of oil.
The Company focuses its exploration and development activities in the
Appalachian Basin where wellhead prices for natural gas have, in recent years,
generally averaged higher than in the Gulf Coast and mid-continent regions of
the country due to the area's proximity to major commercial and industrial
markets.
The Company began operations in 1981 with the formation of its first
Drilling Program. In August 1987, the Company completed the acquisition of
Capital Oil & Gas, Inc. which was engaged in drilling and oilfield operations in
the Appalachian Basin, as part of its plan to expand and diversify its
operations. By January 30, 1990, the Company had acquired the assets and
properties of 21 Drilling Programs which it had sponsored, as well as the assets
and properties of its predecessor entity, through an exchange offer (the
"Exchange Offer") which resulted in the Company becoming a public company
subject to the Exchange Act. Since the consummation of the Exchange Offer, the
Company has continued the business and operations of its predecessor and now
serves as the managing general partner of 23 Drilling Programs whose operations
are continuing.
Since its formation, the Company has participated in drilling
operations in a number of areas, including Ohio, Pennsylvania, Louisiana, Texas,
Oklahoma and Colorado. During the last five years, however, North Coast has
concentrated its drilling activities in the Appalachian Basin of Ohio and
Pennsylvania and, for the foreseeable future, the Company anticipates continuing
to focus its activities in the Appalachian Basin. Since the Exchange Offer, the
Company has drilled 425 wells in the Appalachian Basin, all but 7 of which were
drilled in conjunction with the Drilling Programs.
Subsidiaries. On March 31, 1993, the Company reorganized three of its
four principal subsidiaries, consolidating the business activities of Capital
Oil & Gas, Inc., Trinity Oil & Gas, Inc., and North Coast Energy Programs into
North Coast Energy, Inc. The reorganization of its subsidiaries enabled the
Company to reduce certain duplications between its affiliates and increase the
overall efficiency of the Company's operations. As of the date of this report,
the Company's sole active subsidiary is NCE Securities, Inc., ("NCE Securities")
a member of the NASD and a broker dealer registered with the SEC and licensed in
three states. NCE Securities' only business
A-3
<PAGE> 44
activity is the performance of its responsibilities as placement agent and, to a
limited degree, the sale of partnership interests in North Coast sponsored
Drilling Programs.
EXPLORATION AND DEVELOPMENT
Exploration and development activities conducted by the Company have
involved the acquisition of proved undeveloped oil and gas properties and the
drilling and development of such properties in conjunction with Drilling
Programs and joint ventures. Management has chosen to sponsor limited
partnerships and joint ventures to increase the funds available to the Company
and enable it to engage in a greater number of drilling opportunities, thereby
reducing its risk through diversification. In addition, the Drilling Programs
add to the Company's reserves and produce additional sources of income for the
Company, including revenues from serving as general contractor for drilling
operations, management services, oilfield service operations, gas-gathering, and
gas marketing and transportation services which are provided to the Drilling
Programs.
The Company's strategy focuses on increasing its natural gas and oil
reserves, as well as production, drilling and oil field service revenues, by
acquiring undeveloped oil and gas properties in the Appalachian Basin and
financing and conducting the drilling and development of these properties in
conjunction with the Drilling Programs.
While the Company is pursuing its strategy of increasing reserves
through drilling and development in conjunction with the Drilling Programs, it
continues to review potential acquisitions, including other gas and oil
companies or partnerships and producing properties.
Consistent with its efforts to increase reserve levels, from time to
time the Company also may participate in drilling and development activities in
other geographic regions of the US. The budget for these activities typically
has not exceeded $100,000 to $200,000 annually for any such non-Appalachian
project and the Company has no current plans to materially increase this budget.
AREAS OF OPERATION
Appalachian Basin. The Appalachian Basin is located in close proximity
to major natural gas markets in the northeast United States. This proximity to a
substantial number of large commercial and industrial gas markets, coupled with
the relatively stable nature of Appalachian Basin production and the
availability of transportation facilities has resulted in generally higher
wellhead prices for Appalachian natural gas than those prices available in the
Gulf Coast and Mid-continent regions. The Appalachian Basin is the oldest gas
and oil producing region in the United States and includes portions of Ohio,
Pennsylvania, New York, West Virginia, Kentucky and Tennessee. Historically,
most production in the Appalachian Basin has been from wells drilled to a number
of relatively shallow blanket formations at depths of 1,000 to 7,500 feet. These
formations are generally characterized by a relatively low recovery of reserves
in place, lower rates of production and wells which generally produce for more
than 20 years.
To date, the Company's drilling operations in the Appalachian Basin
have principally involved drilling to the Clinton/Medina sandstone geologic
formation. This formation is an oil and gas bearing sandstone formation which
underlies a large section of eastern Ohio and western Pennsylvania in varying
thickness' and at depths ranging generally from 2,800 to 7,500 feet.
Substantially all of the wells which the Company drills in this area have
estimated depths of between 3,500 and 6,700 feet. The Clinton/Medina formation
is generally characterized by low permeability (the ability of gas and oil
bearing rock to flow gas and oil) and low porosity (capacity of rock to hold oil
and gas). Generally, in a productive well, both oil and gas initially are
produced at rates which rapidly decline after the first one or two years.
Although Clinton/Medina wells generally produce for many years, a substantial
portion of the total well production can be expected within the first several
years of full production.
The Company also maintains leasehold acreage in other portions of
Pennsylvania with other potential producing formations. Although there are
variances in the nature and characteristics of these producing formations, they
are generally typical of the Appalachian area.
A-4
<PAGE> 45
Certain of the Company's leaseholds are in the Upper Devonian age
sandstone geological formations of Washington, Warren, McKean, Potter and
Clearfield counties in Pennsylvania, which are a series of oil and gas bearing
sands underlying eastern Ohio, western Pennsylvania and northern West Virginia.
The Balltown, Cooper, and Bradford Sandstone's, among others, are sandstone
formations of Upper Devonian age. Common productive depths range between
approximately 1,000 feet and 5,000 feet. The Company's target zones typically
range from 1,600 feet to 4,500 feet in depth. Historically, Upper Devonian wells
generally have long production lives, and many wells drilled in these formations
near the turn of the century are still in production.
ACQUISITION OF PROPERTIES
North Coast continually evaluates undeveloped prospects originated by
its staff or other independent geologists as well as other gas and oil
companies. If review of a prospect indicates that it may be geologically and
economically attractive, the Company will attempt to obtain a lease of the
mineral rights on the acreage.
Typically, the Company will acquire the entire working interest in a
lease in consideration of paying a lease bonus and annual rentals subject to a
landowner's royalty and, where the property is acquired through a third party,
possibly an overriding royalty interest. After obtaining these drilling rights,
the Company continues to evaluate the properties for potential drilling.
Substantially all of the Company's drilling operations are currently conducted
in conjunction with the Drilling Programs. If a prospect is selected for
drilling through a Drilling Program the Company assigns the minimum required
acreage for a well to such entity. In such a case, the Company retains the
balance of the leasehold acreage for future drilling.
On December 1, 1994, the Company acquired certain oil and gas interests
in Erie and Crawford Counties in northwestern Pennsylvania previously owned by a
private company. These properties include the entire working interest in 163
Clinton/Medina producing wells, 43 miles of gas gathering lines and drilling
locations.
The Company secured financing from its lender and from NAGIT (USA),
Inc. ("NAGIT"), a principal stockholder of the Company to purchase these oil and
gas interests. The Company has agreed to repay amounts owed to NAGIT from the
net proceeds of the purchased interests and to grant NAGIT an overriding royalty
interest in the acquired properties. Management of the Company believes that the
loan from NAGIT is on terms no less favorable than the Company could receive
from unrelated third parties.
The Company intends to continue to review potential acquisitions of oil
and gas properties, but has no commitment with respect to any material
acquisition.
DRILLING PROGRAMS
From the Company's inception in 1981 through March 31, 1996, North
Coast has sponsored 44 Drilling Programs to engage in oil and gas drilling and
development operations. Public Drilling Programs registered with the Commission
accounted for 7 of these programs, while 37 were sold through private
placements. The Company dissolved 21 of the 22 partnerships which were included
in the Exchange Offer and acquired the properties of such partnerships. The
Company currently is the managing general partner of 23 Drilling Programs whose
operations are continuing.
To date, each Drilling Program has been conducted as a separate limited
partnership with the Company serving as managing general partner of each. To
maintain the marketability of its Drilling Programs, the Company continually
reviews program structure and performance and makes modifications from program
to program as it deems appropriate. These modifications have included changes to
the compensation arrangements between the Company and the Drilling Programs,
including charges for its drilling and administrative services, and changes in
the Company's interest in the Drilling Programs.
The Company acts as operator and general contractor for drilling and
production operations, undertaking to drill and complete Drilling Program wells
and to be responsible for producing well operations. In the Drilling
A-5
<PAGE> 46
Programs, typically the entire working interest in the leasehold is acquired by
the program, although only the minimum required acreage for a well is assigned
by the Company to the Drilling Program.
As managing general partner, North Coast is subject to full liability
for the obligations of the Drilling Programs although it is entitled to
indemnification by each program to the extent of the assets of the Drilling
Programs under certain circumstances. Since the partnership interests in the
Drilling Programs constitute securities, the Company is also subject to
potential liability for failure to comply with applicable federal and state
securities laws and regulations.
Typically each Drilling Program is structured as a "functional
allocation" program whereby the non-industry investors contribute cash in an
aggregate amount equal to the total intangible drilling and development costs to
be incurred for all of the Drilling Program's wells. The Company contributes the
drill sites to the Drilling Program and agrees to contribute all tangible
equipment necessary to drill, complete and produce each well, as well as
organizational and syndication costs of the Drilling Program. The allocation of
partnership revenues in each Drilling Program may vary depending upon the
structure chosen by the Company, with the Company's percentage interest ranging
from 20% to 40%. The Company may elect to acquire a smaller or larger percentage
in future Drilling Programs.
Interests in North Coast's Drilling Programs are sold to investors
through securities dealers registered with the NASD. In each program, NCE
Securities, Inc., a wholly-owned subsidiary of the Company, acts as placement
agent and enters into selling agreements with a number of broker-dealers to
assist it in selling the interests. In the last four calendar years NCE
Securities has entered into selling agreements with more than 35 such
broker-dealers who have sold substantially all of the interests in the Drilling
Programs formed during this period.
The Company has generally sponsored three Drilling Programs each fiscal
year. Typically, the first program is organized in August or September, the
second in November, and the third in late December. The schedule for marketing
and organizing the Drilling Programs is largely a function of selling
broker-dealer and potential investor interest. The Company monitors Drilling
Program subscriptions and generally establishes the closing date for a
particular program based upon the amount of subscriptions received, the proposed
drilling schedule and the Company's determination as to the desired timing for a
subsequent Drilling Program. Although the Company, previously has elected to
form three Drilling Programs each year, the actual number of Drilling Programs,
and consequently the amount of available drilling capital and wells, will vary
depending upon investor interest and other factors. During fiscal 1996, the
Company formed two drilling programs and anticipates forming at least two
drilling programs this fiscal year.
The Drilling Programs raised $8,366,000 during fiscal 1994 and
$8,406,000 during fiscal 1995 and $6,460,000 during fiscal 1996 from
non-industry investors. The Company believes that the decrease from fiscal 1995
to fiscal 1996 results primarily from the uncertainties related to natural gas
prices and the potential returns from drilling program investments by
prospective investors. North Coast intends to continue its effort to market its
Drilling Programs and increase the number of wells drilled. If it is
unsuccessful in obtaining capital through future Drilling Programs, the Company
would anticipate seeking access to other sources of capital and, if unavailable,
altering its business plan.
DRILLING SERVICES
The Company enters into turnkey drilling contracts with the Drilling
Programs to drill wells. From time to time the Company also performs a limited
amount of drilling and other services for unaffiliated third parties. Pursuant
to these drilling contracts, the Company is responsible for the drilling and
development of the wells. Since the Company does not own any drilling rigs or
other drilling equipment, the Company subcontracts with third parties for the
performance of a substantial portion of the operations required to drill,
complete and equip these wells for production. Although the Company manages and
supervises all necessary drilling and related service and equipment operations
on these wells, there are a number of third party services to obtain, including
contract drilling, fracturing, logging and pipeline construction which are
performed by subcontractors who specialize in those operations. Since the
Company contracts with the Drilling Programs on a turnkey (fixed price) basis,
the Company
A-6
<PAGE> 47
is responsible for drilling and completing the wells, regardless of the actual
cost. Consequently, the Company is subject to the risk that prices incurred in
the actual drilling and development operations could increase beyond its
contract price thereby rendering its drilling contracts less profitable or
unprofitable. Moreover, difficulties encountered in drilling and completion
operations can substantially increase costs sometimes without recourse for the
Company. The Company continually monitors the cost incurred in drilling,
completion and production operations and reviews its turnkey contract prices for
each Drilling Program in order to reduce the risk of unprofitable drilling
operations. These turnkey drilling prices are subject to change based on
competition, the return sought by Drilling Programs investors, the Company's
revenue and profit considerations and other industry conditions.
OIL FIELD SERVICE OPERATIONS
As of March 31, 1996, the Company operated 657 wells, all of which were
located in Ohio and Pennsylvania. As operator of producing wells, the Company is
responsible for the maintenance and verification of all production records,
contracting for oil and gas sales, distribution of production proceeds and
information, and compliance with various state and federal regulations.
Generally, the Company provides the routine day-to-day production operations for
producing wells and is paid for such services on a per well, monthly fee basis.
The Company also subcontracts certain oil field operations.
The Company receives a monthly operating fee for each producing well it
operates and is reimbursed for most third party costs associated with operations
and production of the wells. The Drilling Programs each pay the Company their
specified operating fee based upon the investors' aggregate interest in the
Drilling Program wells, exclusive of the Company's ownership interest.
GAS-GATHERING ACTIVITIES
In connection with the drilling and development of the wells which it
operates, the Company has constructed and owns approximately 185 miles of
natural gas-gathering pipelines in various counties throughout eastern Ohio and
western Pennsylvania. These pipelines carry natural gas from the wellhead to the
gas transmission systems of various utilities for sale to such utilities, to
natural gas brokers purchasing gas for resale to others or to industrial
purchasers pursuant to self-help gas purchase arrangements. These systems
gathered gas from 576 wells as of March 31, 1996. Since early calendar 1992, the
Company has increased its construction of new pipelines and the establishment of
compressor facilities in order to expand the number of purchasers available to
the Company.
For such gas-gathering services, the Company collects certain
allowances from public utilities, end-users or other natural gas purchasers
(including natural gas brokers). These gathering fees or transportation
allowances averaged approximately $.20 per Mcf of natural gas at March 31, 1996.
MARKETS
The ability of the Company to market oil and gas depends to an extent,
on factors beyond its control. The potential effects of governmental regulation
and market factors including alternate domestic and imported energy sources,
available pipeline capacity, and general market conditions are not entirely
predictable.
Natural Gas. Natural gas is generally sold pursuant to individually
negotiated gas purchase contracts which vary in length from spot market sales of
a single day to term agreements which may extend several years. Customers of the
Company purchasing natural gas include marketing affiliates of the major
pipeline companies, natural gas marketing companies, and a variety of
commercial/public authority, industrial, and institutional end users who
ultimately consume the gas. Gas purchase contracts define the terms and
conditions unique to each of these sales. The price received for natural gas
sold on the spot market may vary daily reflecting changing market conditions.
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<PAGE> 48
As discussed, the deliverability and price of natural gas are subject
to both governmental regulation and supply/demand forces. During the past
several years regional surplus and shortage of natural gas situations have
occurred, resulting in wide fluctuations in the prices achieved.
The length of the contracts as defined in the "Term" provision in the
Company's gas purchase agreements vary widely. Additionally, several of the
Company's contracts provide for monthly pricing which are derived from published
NYMEX or Appalachian price indexes. The Columbia Transmission (TCO) and
Consolidated Natural Gas (CNG) Index prices, which create a basis for spot sales
prices in the Mid Atlantic and northeastern United States, ranged from $1.46 to
$4.95 during fiscal 1996. As of March 31, 1996, approximately 75% of the wells
operated by the Company which produce gas to fulfill contractual obligations
were either committed for less than one year and/or contained market sensitive
pricing provisions. The variance of unit pricing during March 31, 1996, was from
$1.31 to $5.05 per Mcf. On an overall basis, the Company received an average
price of $2.24 per Mcf for natural gas sold during fiscal 1996.
Due to the seasonal supply and demand market pressures, prices paid by
purchasers will continue to fluctuate for the next several years. The Company
has pursued a strategy of varying the length and pricing provisions of its gas
purchase contracts so as to maintain flexibility to react to those fluctuating
prices. Due to rising market conditions, the duration of recently renegotiated
fixed price contracts has been limited to a year or less. Should market trends
change (weaken) the Company will endeavor to commit a larger portion of its
natural gas under longer term arrangements to optimize revenues derived from
these sales.
During the past several years an over abundance of natural gas supplies
and promulgation of State and Federal regulations pertaining to the sale,
transportation, and marketing of natural gas resulted in increasing competition
and declining prices. More recently, regional natural gas shortages occurred,
fueling the uncertainty of future pricing. In the near term, natural gas prices
will likely continue to escalate until supply and demand market factors reach
equilibrium. It is likely that these market forces will continue to be the
driving force in the evolving marketplace.
Crude Oil. Oil produced from the Company's properties is generally sold
at the prevailing field price to one or more of a number of unaffiliated
purchasers in the area. Generally, purchase contracts for the sale of oil are
cancelable on 30 days notice. The price paid by these purchasers is generally an
established, or "posted," price which is offered to all producers. The Company
received an average price of $17.01 per barrel for its oil during fiscal 1996;
however, during the last several years prices paid for crude oil have fluctuated
substantially. Future oil prices are difficult to predict due to the impact of
worldwide economic trends, coupled with supply and demand variables, and such
non-economic factors as the impact of political considerations on OPEC pricing
policies and the possibility of supply interruptions. To the extent that the
prices which the Company receives for its crude oil decline from current levels,
revenues from oil production will be reduced accordingly.
COMPETITION
The gas and oil industry is highly competitive in all phases. The
Company encounters strong competition from other independent oil companies in
acquiring economically desirable properties as well as in marketing production
therefrom and obtaining external financing. Many of the Company's competitors
may have financial resources, personnel and facilities substantially greater
than those of the Company.
REGULATION
Exploration and Production. The exploration, production and sale of
natural gas and oil are subject to various types of local, state and federal
laws and regulations. Such laws and regulations govern a wide range of matters,
including the drilling and spacing of wells, allowable rates of production,
restoration of surface areas, plugging and abandonment of wells and requirements
for the operation of wells. Such regulations may adversely affect the rate at
which the Company's wells produce gas and oil. In addition, legislation and new
regulations concerning gas and oil exploration and production operations are
constantly being reviewed and proposed. Most of the states in which the Company
owns and operates properties have laws and regulations governing a number of the
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<PAGE> 49
matters enumerated above. Compliance with the laws and regulations affecting the
gas and oil industry generally increases the Company's cost of doing business
and consequently affects its profitability.
Environmental Matters. The discharge of oil, gas or other pollutants
into the air, soil or water may give rise to liabilities to the government and
third parties and may require the Company to incur costs to remedy the
discharge. Natural gas, oil or other pollutants (including salt water brine) may
be discharged in many ways, including from a well or drilling equipment at a
drill site, leakage from pipelines or other gathering and transportation
facilities, leakage from storage tanks and sudden discharges from damage or
explosion at natural gas facilities or gas and oil wells. Discharged
hydrocarbons may migrate through soil to water supplies or adjoining property,
giving rise to additional liabilities. A variety of federal and state laws and
regulations govern the environmental aspects of natural gas and oil production,
transportation and processing and may, in addition to other laws, impose
liability in the event of discharges (whether or not accidental), failure to
notify the proper authorities of a discharge, and other noncompliance with those
laws. Compliance with such laws and regulations may increase the cost of gas and
oil exploration, development and production although the Company does not
currently anticipate that compliance will have a material adverse effect on
capital expenditures or earnings of the Company.
The Company does not believe that its environmental risks are
materially different from those of comparable companies in the oil and gas
industry. The Company believes its present activities substantially comply, in
all material respects, with existing environmental laws and regulations.
Nevertheless, no assurance can be given that environmental laws will not, in the
future, result in a curtailment of production or material increase in the cost
of production, development or exploration or otherwise adversely affect the
Company's operations and financial condition. Although the Company maintains
liability insurance coverage for certain liabilities from pollution, such
environmental risks generally are not fully insurable; the amount of such
coverage is currently $500,000 and is provided on a "claims made" basis.
Marketing and Transportation. The interstate transportation and sale
for resale of natural gas is regulated by the Federal Energy Regulatory
Commission (the "FERC") under the Natural Gas Act of 1938 ("NGA"). The wellhead
price of natural gas is also regulated by FERC under the authority of the
Natural Gas Policy Act of 1978 ("NGPA"). The Natural Gas Wellhead Decontrol Act
of 1989 (the "Decontrol Act"), which was enacted on July 26, 1989, eliminated
all gas price regulation effective January 1, 1993. In addition, FERC recently
has proposed several rules or orders concerning transportation and marketing of
natural gas. The impact of these rules and other regulatory developments on the
Company cannot be predicted.
In 1992, the Federal Energy Regulatory Commission (FERC) finalized
Order 636, regulations pertaining to the restructuring of the interstate
transportation of natural gas. Pipelines serving this function have since been
required to "unbundle" the various components of their service offerings which
include gathering, transportation, storage, and balancing services. In their
current capacity, pipeline companies must provide their customers with only the
specific service desired, on a non-discriminatory basis. Although, North Coast
Energy, Inc. is not an interstate pipeline, the Company believes the changes
brought about by Order 636 have increased competition in the marketplace,
resulting in greater market volatility.
Various rules, regulations and orders, as well as statutory provisions,
may affect the price of natural gas production and the transportation and
marketing of natural gas.
OPERATING HAZARDS AND UNINSURED RISKS
The Company's gas and oil operations are subject to all operating
hazards and risks normally incident to drilling for and producing gas and oil,
such as encountering unusual formations and pressures, blow-outs, environmental
pollution, and personal injury. The Company will maintain such insurance
coverage as it believes to be appropriate, taking into account the size of the
Company and its proposed operations. The Company currently does not maintain
insurance coverage for physical loss or damage to equipment located on the wells
or for selected properties (such as crude oil stored in tanks). The Company's
insurance policies also have standard exclusions. Losses can occur from an
uninsurable risk or in amounts in excess of existing insurance coverage. The
occurrence
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<PAGE> 50
of an event which is not insured or not fully insured could have an adverse
impact on the Company's revenues and earnings.
EMPLOYEES
At March 31, 1996, the Company had 59 employees, including 23 field
employees, 2 petroleum engineers, 3 geologists and 3 employees engaged in
land/lease acquisition. No employees are represented by a union and the Company
believes that it maintains good relations with its employees.
ITEM 2. PROPERTIES.
Oil and Gas Properties
- ----------------------
In the following tables, "gross" refers to the total acres or wells in
which the Company has a working interest and "net" refers to gross acres or
wells multiplied by the Company's percentage working interests therein. Royalty
interests held by the Company will not affect the Company's working interests
(net wells) in its properties and will not be reflected in net wells.
PROVED RESERVES. The following table reflects the estimates of the
Company's Proved Reserves as of March 31, 1996.
<TABLE>
<CAPTION>
RESERVES
<S> <C>
Oil Reserves (Bbls):
Proved Developed 151,800
Proved Undeveloped 43,400
-------
Total 195,200
Gas Reserves (Mcf):
Proved Developed 16,303,000
Proved Undeveloped 3,745,000
----------
Total 20,048,000
</TABLE>
PRODUCTION. The following table summarizes the net oil and gas
production (on a rounded basis), average sales prices, and average production
(lifting) costs per equivalent unit of production for the periods indicated.
<TABLE>
<CAPTION>
PRODUCTION
Production Sales Price Average Lifting
Years Ended Oil Gas Cost per Equiv.
March 31: (Bbls) (Mcf) Per Bbl Per Mcf Bbl (1)
- --------- ------ ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1994 16,900 1,162,000 $15.35 $2.46 $2.60
1995 14,400 1,161,000 $15.92 $2.25 $2.70
1996 14,100 1,166,000 $17.01 $2.24 $3.82 (2)
<FN>
(1) For calculation of average lifting cost per equivalent barrel the
standard ratio of 6:1 for gas to oil was used.
(2) Includes costs of the Company's enhancement program and rework of
two wells in the Gulf Coast area of interest.
</TABLE>
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<PAGE> 51
PRODUCTIVE WELLS. The following table sets forth the number of gross
and net productive oil and gas wells of the Company as of March 31, 1996. Wells
are classified as gas or oil according to their predominant product stream.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
Gross Wells (1) Net Wells
Oil Gas Total Oil Gas Total
--- --- ----- --- --- -----
<S> <C> <C> <C> <C> <C>
16 615 631 7.10 291.73 298.83
<FN>
(1) Gross wells include 18 wells in which the Company owns only a
royalty interest.
</TABLE>
ACREAGE. The following table sets forth the Developed and Undeveloped
Acreage of the Company, on both a gross and net basis, as of March 31, 1996.
<TABLE>
<CAPTION>
LEASEHOLD ACREAGE
<S> <C>
Total Leasehold Acreage:
Gross Acres ........................... 68,700
Net Acres ............................. 34,900
Developed Acreage:
Gross Acres ........................... 37,400
Net Acres ............................. 19,200
Proved Undeveloped Acreage:
Gross Acres ........................... 2,300
Net Acres ............................. 1,200
</TABLE>
DRILLING ACTIVITY. The following table sets forth the results of
drilling activities on the Company's properties. Such information and the
results of prior drilling activities should not be considered as necessarily
indicative of future performance, nor should it be assumed that there is
necessarily any correlation between the number of productive wells drilled and
the oil and gas reserves generated thereby.
All wells were drilled by March 31st of their respective years and are
reflected in the Drilling Activities table. Wells in which the Company owns only
a royalty interest are not reflected in the table below.
DRILLING ACTIVITIES
<TABLE>
<CAPTION>
Fiscal year ended March 31,
- ---------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Exploratory Wells (1)
Productive
Gross 0 0 0
Net 0 0 0
Dry
Gross 1 1 0
Net .250 .250 .000
</TABLE>
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<PAGE> 52
<TABLE>
<S> <C> <C> <C>
Development Wells (2)
Productive (4) (5)
Gross 72 71 52
Net 25.372 18.900 9.800
Dry
Gross 0 0 0
Net 0 0 0
Total Wells (3)
Productive
Gross 72 71 52
Net 25.372 18.900 9.800
Dry
Gross 1 1 0
Net .250 .250 .000
<FN>
(1) Exploratory Wells are those wells drilled outside the confines of a
known productive reservoir area.
(2) Development Wells are those wells drilled within the confines of a
known productive reservoir.
(3) Total Wells is the sum of the Exploratory and Development Wells
(4) The number of productive wells for fiscal 1995 includes 6 gross wells
(1.65 net wells) as productive development wells which are awaiting
pipeline connection or well completion operations at March 31, 1996.
(5) The number of productive wells for fiscal 1996 includes 21 gross wells
(3.97 net wells) as productive development wells which are awaiting
pipeline connection or well completion operations at March 31, 1996.
</TABLE>
FACILITIES
The Company's headquarters in Cleveland, Ohio, are leased from a
stockholder and consist of approximately 4,650 square feet for which the Company
pays rental of $4,845 per month. The lease is currently month to month. The
Company owns the building from which it conducts its field operations in
Youngstown, Ohio, and also leases additional office space in Youngstown, Ohio,
from an unaffiliated third party. North Coast also maintains an office located
in Colorado Springs, Colorado which is leased from an unaffiliated third party.
The Company anticipates moving its corporate headquarters to a 12,000 square
foot building it acquired on May 8, 1996 in Twinsburg, Ohio. The office facility
is in a centralized location which will allow the Company to relocate certain
operations and its personnel from its Cleveland and Youngstown offices. The
Youngstown facility owned by the Company will be converted to use for field
operations and the office space that was leased in Youngstown will not be
renewed. The Company initially anticipated constructing an office facility on
land the Company owned in Streetsboro, Ohio, however, the Company sold the land
when the Twinsburg property was purchased.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company is
a party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year ended March 31, 1996,
there were no matters submitted to a vote of security holders through the
solicitation of proxies or otherwise.
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<PAGE> 53
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock is traded on the NASDAQ Small Cap Market under the
symbol "NCEB". The following table sets forth, for the fiscal periods indicated,
the high and low bid and ask prices for the Common Stock.
Common Stock
(Amounts rounded to the nearest 32nd)
<TABLE>
<CAPTION>
High Low
---- ---
Bid Ask Bid Ask
--- --- --- ---
<S> <C> <C> <C> <C>
FISCAL 1995
First Quarter.............................................. $1 7/8 $2 1/8 $1 5/8 $1 7/8
Second Quarter............................................. 1 3/4 2 1 1/8 1 5/16
Third Quarter.............................................. 1 9/16 1 3/4 1 1/4 1 1/2
Fourth Quarter............................................. 1 1/2 1 5/8 1 1 1/8
FISCAL 1996
First Quarter............................................. $1 1/4 $1 7/16 $1/2 $7/8
Second Quarter............................................ 1 3/8 1 1/2 9/16 7/8
Third Quarter............................................. 1 3/8 1 1/2 7/8 1 1/16
Fourth Quarter............................................ 1 1 3/8 1/2 3/4
</TABLE>
As of June 12, 1996, there were 8,040,285 shares of Common Stock
outstanding which were held by approximately 1,300 holders of record.
Holders of Series A Preferred Stock (convertible to 2.3 shares of
Common Stock) are entitled to receive semi-annual non-cumulative cash dividends
at an annual rate of $.60 per share. Such dividends are payable on June 1 and
December 1 of each year. The holders of Series B Preferred Stock (convertible to
5.75 shares of Common Stock) are entitled to receive quarterly cumulative cash
dividends at an annual rate of $1.00 per share. For the year ended March 31,
1996, the Company paid $649,864 in aggregate cash dividends, $185,199 on its
Series A Preferred Stock and $464,665 on its Series B Preferred Stock.
The Company has not paid any cash dividends on its Common Stock and is
restricted from paying such dividends under the terms of its reducing revolving
credit facility. The Company currently intends to retain future earnings in
order to provide funds for use in the operation and expansion of its business,
other than funds required for the payment of dividends on the Preferred Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data for the Company
for each of the five fiscal years ended March 31, 1992, 1993, 1994, 1995 and
1996.
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<PAGE> 54
<TABLE>
<CAPTION>
Years Ended March 31
(In thousands, except per share amounts)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $10,426 $10,007 $12,834 $15,275 $10,860
Net Income (Loss) 171 241 652 295 (1,254)
Net Income (Loss) per Share(1) (.03) .00 .00 (.05) (.24)
Total Assets 10,105 12,732 15,796 21,136 20,243
Long-term Debt (less current portion) 2,932 1,696 3,626 6,197 8,955
<FN>
(1) Net Income (Loss) per share has been restated to reflect stock dividends.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is engaged in the exploration, development and production
of natural gas and oil, primarily in conjunction with the Drilling Programs it
sponsors and manages. The Company derives a substantial portion of its revenues
from turnkey drilling, well operations, gas gathering, transportation and gas
marketing services performed under contract with the Drilling Programs.
During the last three fiscal years the Drilling Programs received
$23,232,000 from the sale of partnership interests to non-industry investors.
This funding, together with the Company's contributions to the Drilling
Programs, has resulted in the addition of 226 Drilling Program wells from fiscal
year 1992 through fiscal year 1996.
Several factors may affect the amount of the Company's revenues with
respect to the activities of the Drilling Programs. The amount of funds raised
by each Drilling Program determines the number of wells for which the Company
receives drilling revenues. The Company continually monitors the cost incurred
in drilling, completion and production operations and reviews its turnkey
contract prices for each Drilling Program in order to reduce the risk of
unprofitable drilling operations to the Company and the economic considerations
of the investors in the Drilling Programs. The turnkey drilling contract price
between the Drilling Programs and the Company may vary among Drilling Programs
depending on competition and other cost factors and the returns sought by
investors in the Drilling Programs. The Company's capital availability, as well
as revenue and profit considerations, may result in the Company changing its
interest percentage in future Drilling Programs.
The Company's continued growth depends on a number of factors,
including its continued ability to raise Drilling Program funds from
non-industry investors to increase the number of wells from which the Company
will receive production, contract drilling and service-related revenues and the
Company's ability to maintain adequate liquidity to provide its contributions to
new Drilling Programs and to acquire additional proved undeveloped or proved
producing properties. The Company's growth is also dependent on several external
factors, including the price at which gas, and to a lesser extent oil, can be
found and sold.
The drilling activity and acquisition of oil and gas properties
resulted in an increase in the Company's proved developed natural gas reserves
to 16,303,000 Mcf for fiscal 1996 from 15,788,000 Mcf for fiscal 1995 while
proved developed oil reserves decreased to 151,800 barrels from 178,600 barrels,
respectively. The increase in future net revenues (undiscounted) from
$27,997,000 for fiscal 1995 to $33,772,000 for fiscal 1996 for the net proved
developed reserves was due to increased natural gas prices received at March 31,
1996 as compared to the natural gas price received at March 31, 1995. The
Company produced 1,166,000 Mcf of gas from proved developed reserves while
adding 2,076,000 Mcf through the drilling of new wells. During fiscal 1996, the
Company adopted a methodology of only recognizing as proved undeveloped reserves
the potential oil and gas which can reasonably be expected to be recovered from
drillable locations which the Company owned (or had rights to) at fiscal year
end which are offsetting locations to wells that have indicated commercial
production in the objective formation and which the Company fully expects to
drill in the very near future. This methodology,
A-14
<PAGE> 55
coupled with the determination that certain proved undeveloped leasehold acreage
no longer fit the Company's long-term development plans at the current price or
development cost, and was either released or re-categorized to possible or
probable reserves, resulted in a downward revision of proved reserves by
3,299,000 Mcf. Although the Mcfs were revised downward, the reduction in
development costs for undeveloped acreage more than offset the reduction in
reserve value. Proved oil reserves decrease from 419,700 barrels at March 31,
1995 to 195,200 barrels at March 31, 1996 as extensions and discoveries
(including purchases) of 12,600 barrels were offset by production of 14,100
barrels, sales of 17,100 barrels as contributions of undeveloped acreage to
Drilling Programs and downward revisions of proved undeveloped leasehold acreage
amounting to 205,900 barrels. The decrease in proved oil reserves was primarily
due to the determination that certain proved undeveloped leasehold acreage no
longer fit the Company's development plans at the current price or development
cost and was either re-categorized or released. Changes in the Standardized
Measure of future net cash flows are set forth in Note 11 of the Company's
financial statements. The above mentioned additions and sales of natural gas
coupled with the development costs associated with undeveloped acreage create
timing differences which are reflected in the Other Category of the Standardized
Measure. Of the Company's total proved reserves, approximately 81% are proved
developed and approximately 19% are proved undeveloped based upon equivalent
unit Mcfs. Proved undeveloped acreage requires considerable capital expenditures
to develop. Management of the Company believes that a significant percentage of
the proved undeveloped reserves should be recovered in future years, although no
assurance of such recovery can be given.
The following table is a review of the results of operations of the
Company for the fiscal years ended March 31, 1994, 1995 and 1996. All items in
the table are calculated as a percentage of total revenues.
<TABLE>
<CAPTION>
Revenues: 1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Oil and gas production 24% 19% 26%
Drilling revenues 57 57 50
Well operating, transportation and other 13 18 15
Administrative, management and agency fees 5 5 8
Other 1 1 1
--- --- ----
Total Revenues 100% 100% 100%
---- ---- ----
Expenses:
Oil and gas production expenses 4% 4% 7%
Drilling costs 46 47 38
Oil and gas operations 6 13 8
General and administrative expenses 24 19 26
Depreciation, depletion, amortization, impairment and other 12 11 30
Abandonment of oil and gas properties 1 1 1
Provision (credit) for income taxes 1 0 (6)
Other 1 3 7
---- ---- ----
Total Expenses 95% 98% 111%
---- ---- ----
Net Income (Loss) 5% 2% (11)%
==== ==== =====
</TABLE>
The following discussion and analysis reviews the results of operations
and financial condition for the Company for the years ended March 31, 1994, 1995
and 1996. This review should be read in conjunction with the Financial
Statements and other financial data presented elsewhere herein.
A-15
<PAGE> 56
COMPARISON OF FISCAL 1996 TO FISCAL 1995
REVENUES
Oil and gas production revenues remained relatively constant between
fiscal 1996 and fiscal 1995. Production revenues were effected by relatively low
gas prices during the Company's first three quarters, although, gas prices
increased substantially during the Company's fourth quarter due to the generally
colder weather conditions, resulting in increased demand. Production also has
been adversely affected by the continued rework on the Company's Gulf Coast
properties, but increased oil production and gas production from the Company's
acquisition and drilling of Appalachian wells offset the Gulf Coast production
decline. For fiscal 1996, the Company received an average price of $17.01 per
barrel of oil and $2.24 per Mcf of natural gas compared to an average price of
$15.92 per barrel of oil and $2.25 per Mcf of natural gas received during fiscal
1995.
Drilling revenues decreased by $3,311,242 (38%) for fiscal 1996
compared to fiscal 1995 primarily due to the decrease in the amount of funds
raised from Drilling Programs as well as the timing of the formation of the
1995-1 Drilling Program, the commencement and completion of drilling activities
and the number of wells recognized in revenue and the type of wells drilled.
Drilling revenues were recognized on 45 wells for fiscal 1996 compared to 74
wells for fiscal 1995. At March 31, 1996, the Company had 14 additional wells as
yet not recognized in revenues as compared to 7 wells at March 31, 1995. The
Company's shallow wells range in depth from 1,400 feet to 2,300 feet, for which
the Company generally charges a lower turnkey drilling contract price compared
to deeper gas wells ranging from 3700 feet to 6400 feet. During fiscal 1996 the
Company formed two Drilling Programs and raised investor funds of $6,460,000 as
compared to three Drilling Programs with investor funds of $8,406,000 during
fiscal 1995. The first Drilling Program of fiscal 1996 was formed forty-five
days later than the first Drilling Program of fiscal 1995, thereby delaying the
number of wells completed and the recognition of revenue for the fiscal year.
Well operating, transportation and other revenues for fiscal 1996
decreased $1,204,079 (43%) compared to fiscal 1995 primarily due to a $1,175,898
decline in unaffiliated third party gas sales. The Company reduced the number of
low margin third party gas transactions in favor of focusing its gas marketing
department on its proprietary gas sales during the period of low natural gas
prices. Although the Company actively pursues these sales, the amount of third
party gas sales may vary materially from year to year.
Revenue from administrative, management and agency fees, which are
based on a percentage of the total investor capital raised in all of the
Drilling Programs, increased by $98,041 (12%) for fiscal 1996, as compared to
fiscal 1995, due to the formation of the Drilling Programs in fiscal 1996
coupled with the ongoing administrative fees accrued from the fiscal 1995
Drilling Programs.
EXPENSES
Oil and gas production expenses increased $235,775 (42%) for fiscal
1996 compared to fiscal 1995. This increase was primarily due to costs
associated with reworking two wells in the Gulf Coast area and costs associated
with the production enhancement program on the 163 wells the Company acquired in
December 1994. The Company was successful in reworking one Gulf Coast area well
while the results of the second well will not be known until the first or second
quarter of fiscal 1997.
Drilling costs for fiscal 1996 compared to fiscal 1995 decreased
$3,017,661 (42%) due to the decrease in the number of wells completed between
comparable periods. However, the profit margin on drilling revenues increased
from 18% for fiscal 1995 to 24% for fiscal 1996. The increase in the drilling
profit margin is due to lower drilling costs associated with the average depth
of the Company's Upper Devonian and Clinton/Medina wells and improved cost
controls for wells currently recognized in revenue compared to the prior period.
The Company's Upper Devonian and Clinton/Medina wells averaged 4,200 feet in
depth for fiscal 1996 compared to an average of 5,400 feet in depth for fiscal
1995. The Company also reduced its interest in the fiscal 1996 Drilling programs
to 20%, as compared to 25% in the fiscal 1995 Drilling Programs, and increased
the turnkey drilling price the Company receives thereby effecting the Company's
profit margin.
A-16
<PAGE> 57
Oil and gas operations expense decreased $1,061,522 (55%) in fiscal
1996 compared to fiscal 1995. This decrease was primarily due to the decrease in
unaffiliated third party gas purchases related to third party gas sales as
discussed above.
Depreciation, depletion, amortization, impairment and other increased
$1,587,721 (93%) in fiscal 1996 compared to fiscal 1995. This increase was
primarily due to the Company's 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". The Company
routinely reviews its long-lived assets for impairment, although SFAS No. 121
required a different grouping of assets which caused an impairment for the
period. At March 31, 1996 the Company's impairment of oil and gas properties and
leases due to the accounting change was $1,561,776. The Statement of Financial
Accounting Standards (SFAS) No. 121 requires the cumulative effect of the
accounting change to be reported in net income in the year of adoption.
Abandonment of oil and gas properties decreased $86,871 (59%) in fiscal
1996 compared to fiscal 1995. During fiscal 1996, the Company abandoned a deep
zone in two wells associated with its drilling on acreage acquired in the
purchase of 163 wells in western Pennsylvania. The Company, in conjunction with
its Drilling Programs, at March 31, 1996 has completed one of the wells in a
shallower formation and anticipates the completion of the second well in the
first fiscal quarter of 1997.
Interest expense increased to $772,731 in fiscal 1996 from $529,161 in
fiscal 1995. This increase was associated with the Company's additional
borrowings on its reducing revolving credit facility, the placement of a private
debt financing with NAGIT (USA), a principal shareholder of the Company, and an
increase in the prime interest rate. At March 31, 1996, $7,560,000 was
outstanding under the Company's Credit Facility, as compared to $6,050,003 at
March 31, 1995.
Net operating loss of $1,215,474 for fiscal 1996 compares to net
operating income of $785,671 for fiscal 1995. The increase in the operating loss
was due primarily to the increase in depreciation, depletion, amortization,
impairment and other which resulted from the accounting change promulgated by
the Financial Accounting Standard Board causing an impairment of oil and gas
properties and leases of $1,561,776. Without the affect of the impairment of oil
and gas properties the Company's fiscal 1996 net operating loss would have been
a net operating income of $346,302. Net income of $294,708 for fiscal 1995
decreased during fiscal 1996 to a net loss of $1,254,418 due primarily to the
impairment of the Company's oil and gas properties and leases coupled with the
lower net drilling income recognized and high interest expense.
COMPARISON OF FISCAL 1995 TO FISCAL 1994
REVENUES
Oil and gas production revenues decreased $270,062 (9%) to $2,845,573
for fiscal 1995 as compared to $3,115,635 for the prior corresponding period.
Natural gas production was relatively constant between years with a slight
decrease in oil production. The decrease in revenue is primarily attributable to
an average decrease in gas prices of 9% and a decline in oil production from the
Company's Louisiana properties resulting from reworking of wells throughout
fiscal 1995. For fiscal 1995 the Company received an average price of $15.92 per
barrel of oil and $2.25 per Mcf of natural gas compared to an average price of
$15.35 per barrel of oil and $2.46 per Mcf of natural gas received during fiscal
1994.
Drilling revenues increased by $1,394,541 (19%) as a result of the
increased drilling activity. The Company utilizes the completed contract method
to recognize revenue on drilling contracts. Under this method, drilling revenues
are recognized on wells when they are deemed to be substantially complete. For
fiscal 1995 the Company recognized revenue on 74 wells as compared to 61 wells
in fiscal 1994. This increase in the number of wells completed along with an
increase in the Company's turnkey price resulted in increased drilling revenues.
A-17
<PAGE> 58
Well operating, transportation and other revenues for fiscal 1995
increased $1,153,201 (69%) as compared to fiscal 1994. The increase was
primarily due to increased gas sales made to third parties of $1,310,998 in
fiscal 1995 as compared to sales of $262,511 in fiscal 1994.
Revenue from administrative, management and agency fees, which are
based on a percentage of the total investor capital raised in all of the
Drilling Programs, increased by $163,382 (25%) for fiscal 1995, as compared to
fiscal 1994, due to the additional Drilling Programs.
EXPENSES
Drilling costs in fiscal 1995 as compared to fiscal 1994 increased
$1,286,375 (22%) primarily due to the increased number of wells completed in the
recent period. The profit margin on drilling revenue decreased to 18% for fiscal
1995 from 20% for fiscal 1994.
General and administrative expenses decreased $70,966 (2%) for fiscal
1995 as compared to fiscal 1994. A larger decrease was offset somewhat by
Management's decision to withdraw its Registration Statement on Form S-2
resulting in additional expense of approximately $117,000 in associated costs in
fiscal 1995. The Company retained certain capitalized costs incurred with the
Registration Statement at March 31, 1995.
Depreciation, depletion, amortization, impairment and other increased
$181,256 (12%) for fiscal 1995 as compared to fiscal 1994. This increase was due
to increased depreciation resulting from the Company's capital investment for
gas gathering lines for new wells, depreciation of Company vehicles and
amortization of costs associated with the Credit Facility. The Company continues
to capitalize certain costs associated with its Drilling Programs resulting in
an increased depreciable basis of its investment. Consequently, depreciation,
depletion, amortization, impairment and other has increased in conjunction with
increased Drilling Program activity in fiscal 1995.
Abandonment of oil and gas properties increased $74,125 (101%), due
primarily to a larger amount of the Company's Jurmonville acreage abandoned
during fiscal 1995 as compared to fiscal 1994.
Interest expense increased from $184,687 for fiscal 1994 to $529,161
for fiscal 1995. This increase is primarily associated with higher borrowings
under the Credit Facility in order to fund a portion of the Company's additional
investments in fiscal year 1995 Drilling Programs. At March 31, 1995, $6,050,003
was outstanding under the Company's Credit Facility, as compared to $3,465,774
at March 31, 1994.
Net income for fiscal 1995 of $294,708 compares to $652,132 for fiscal
1994. The decrease in net income for fiscal 1995 resulted primarily from a
decrease in oil and gas production revenues attributable to the decrease in the
average price received for its gas. In addition, net income was decreased by the
increase in interest expense due to the Company's additional borrowings in
fiscal 1995 as compared to the prior year.
INFLATION AND CHANGES IN PRICES
While the costs of operations have been and will continue to be
affected 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 $17.01 and $15.92 per
barrel for fiscal 1996 and 1995, respectively, and $2.24 and $2.25 per Mcf for
natural gas for fiscal 1996 and 1995, respectively. The general market for
natural gas in the Appalachian Basin has remained weak for a longer period than
the Company previously anticipated, however, gas prices have increased
approximately 30% in the Company's last quarter of fiscal 1996 due to the colder
Appalachian area weather. The reasons for the continued 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
A-18
<PAGE> 59
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 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 negative $ 360,000 at March 31, 1996
compared to negative $482,000 at March 31, 1995. The increase of $ 122,000 in
working capital from March 31, 1995 reflects the Company's use of cash to
purchase property and equipment to meet its obligations to fund its investments
in the Drilling Programs. Also, the Company's current accounts receivable
related to Federal Income Taxes increased during the year ended March 31, 1996.
An amendment to the Credit Facility increased the Company's borrowing base to
$9,360,000 (after adjustment for outstanding letters of credit) at March 31,
1996. As of March 31, 1996, the Company had $7,560,000 outstanding under its
Credit Facility. North Coast's current ratio was .90 to 1.0 at March 31, 1996
and .90 to 1.0 at March 31, 1995.
The following table summarizes the Company's financial position at
March 31, 1995 and 1996:
<TABLE>
<CAPTION>
(Amounts in Thousands) 1995 1996
---- ----
Amount % Amount %
------ --- ------ ---
<S> <C> <C> <C> <C>
Working capital $ (482) (3%) $ (360) (2%)
Property and equipment 16,387 100 16,737 100
Other 445 3 253 2
---- --- -------- ----
Total $16,350 100% $16,630 100%
======= ==== ======= ====
Long-term debt $ 6,197 38% $ 8,954 54%
Deferred income taxes 930 6 357 2
Stockholders' equity 9,223 56 7,319 44
----- ---- ------- ----
Total $16,350 100% $16,630 100%
======= ==== ======= ====
</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.
A-19
<PAGE> 60
The following table summarizes the Company's Statements of Cash Flows
for the years ended March 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
(Amounts in Thousands) 1994 1995 1996
---- ---- ----
Dollars % Dollars % Dollars %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by operating activities $3,318 73% $2,428 40% $1,049 27%
Net cash used for investing activities (4,543) (100) (5,065) (83) (3,377) (87)
Net cash provided by financing activities 516 11 3,708 60 1,513 39
------ --- ------ --- ------ ----
Increase (decrease) in cash and cash equivalents $ (709) (16)% $1,071 17% $ (815) (21)%
====== ==== ====== === ====== ====
<FN>
(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 capital, net cash provided by investing activities and net cash
provided by financing activities, plus any decrease in cash and cash
equivalents.
</TABLE>
As the above table indicates, the Company's cash flow provided by
operating activities decreased approximately $ 1,379,000 for fiscal 1996 as
compared to fiscal 1995. This decrease is due to the reduced amount of funds
raised in Drilling Programs, resulting in reduced drilling activity and lower
profits.
Net cash used for investing activities decreased from $5,065,000 (83%
of cash sources) for fiscal 1995 to $3,377,000 (87% of cash sources) for fiscal
1996. The decrease of $1,688,000 was due to the Company's purchase of certain
oil and gas interests in fiscal 1995 in western Pennsylvania compared to small
individual purchases of working interests in fiscal 1996. In addition, the
Company's investment in tangible equipment and gas gathering lines for Drilling
Programs were reduced in fiscal 1996, compared to fiscal 1995, due to the
reduced number of wells drilled, the timing and amount of funds raised in
Drilling Programs and the reduced investment in tangibles resulting from
drilling shallower wells.
Net cash provided by financing activities decreased by $2,195,000 from
fiscal 1995 to fiscal 1996. This decrease reflects the sale of stock in fiscal
1995 without a corresponding sale of stock in fiscal 1996 coupled with a
decrease in overall borrowings between the comparable periods.
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 $9,360,000 (after adjustment for outstanding letters of credit) 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 also are subject to
reduction based upon the amount of outstanding letters of credit used to support
certain bonding requirements ($140,000 as of March 31, 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 March 31,
1996, the Company had $7,560,000 outstanding under the Credit Facility. At March
31, 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 March 31, 1996, the Company had approximately $67,000 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, subsequent to year end 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 receivables, 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.
A-20
<PAGE> 61
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 March 31, 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 March 31, 1996, the balance of the loan and
accrued interest was $1,064,000. 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.
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 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 estimation 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.
A-21
<PAGE> 62
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
The following pages contain the Financial Statements and supplementary data
required by Item 8 of Part II of Form 10-K.
A-22
<PAGE> 63
NORTH COAST ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
F-1
<PAGE> 64
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
-----------------------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-3
FINANCIAL STATEMENTS:
Consolidated balance sheets F-4 - F-5
Consolidated statements of operations F-6
Consolidated statements of stockholders' equity F-7 - F-8
Consolidated statements of cash flows F-9 - F-10
Notes to consolidated financial statements F-11 - F-24
All other financial statement schedules have been
appropriately omitted if the information is
not required or is furnished in the financial
statements or in the notes thereto
</TABLE>
F-2
<PAGE> 65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
North Coast Energy, Inc.:
We have audited the accompanying consolidated balance sheets of North Coast
Energy, Inc. (a Delaware corporation) and Subsidiaries as of March 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three fiscal years in the period ended
March 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of North Coast Energy, Inc. and
Subsidiaries as of March 31, 1995 and 1996, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
March 31, 1996, in conformity with generally accepted accounting principles.
As explained in Note 12 to the consolidated financial statements, in fiscal
1996, the Company changed its method of assessing the impairment of the
capitalized costs of oil and gas properties and other long-lived assets.
Cleveland, Ohio,
May 31, 1996.
F-3
<PAGE> 66
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
MARCH 31, 1995 AND 1996
-----------------------
ASSETS
------
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 2,366,660 $ 1,551,748
Accounts receivable-
Trade, net 1,592,321 1,339,601
Affiliates 59,243 97,993
Inventories 218,628 85,235
Deferred income taxes 59,000 41,000
Refundable income taxes -- 115,000
Other, net 7,682 22,097
------------ ------------
Total current assets 4,303,534 3,252,674
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land 122,699 122,699
Oil and gas properties (successful efforts) 21,051,552 23,769,853
Pipelines 3,187,714 3,696,277
Vehicles 384,241 427,920
Furniture and fixtures 362,288 453,718
Building and improvements 145,539 145,539
------------ ------------
25,254,033 28,616,006
Less- Accumulated depreciation, depletion, amortization
and impairment (8,867,435) (11,879,077)
------------ ------------
16,386,598 16,736,929
OTHER ASSETS, net 445,534 253,206
------------ ------------
$ 21,135,666 $ 20,242,809
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
F-4
<PAGE> 67
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
MARCH 31, 1995 AND 1996
-----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 432,100 $ 213,060
Accounts payable 3,644,368 2,481,558
Accrued expenses 423,981 280,565
Billings in excess of costs on uncompleted contracts 284,880 637,347
------------ ------------
Total current liabilities 4,785,329 3,612,530
------------ ------------
LONG-TERM DEBT, net of current portion 6,197,450 8,954,574
DEFERRED INCOME TAXES, net 930,000 357,100
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A, 6% Noncumulative Convertible Preferred stock, par value $.01 per
share; 563,270 shares authorized; 309,460 and 305,200 issued and
outstanding (aggregate liquidation value of $3,094,600 and $3,050,200,
respectively) 3,095 3,052
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; 8,030,352 and 8,040,148 issued and outstanding 80,304 80,402
Additional paid-in capital 12,083,024 12,082,969
Retained deficit (2,948,183) (4,852,465)
------------ ------------
Total stockholders' equity 9,222,887 7,318,605
------------ ------------
$ 21,135,666 $ 20,242,809
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-5
<PAGE> 68
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
-------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE:
Oil and gas production $ 3,115,635 $ 2,845,573 $ 2,848,610
Drilling revenues 7,407,065 8,801,606 5,490,364
Well operating, transportation and other 1,661,347 2,814,548 1,610,469
Administrative, management and agency fees 649,630 813,012 911,053
------------ ------------ ------------
12,833,677 15,274,739 10,860,496
------------ ------------ ------------
COSTS AND EXPENSES:
Oil and gas production expenses 547,926 560,755 796,530
Drilling costs 5,892,074 7,178,449 4,160,788
Oil and gas operations 828,804 1,942,547 881,025
General and administrative expenses 3,020,268 2,949,302 2,878,762
Depreciation, depletion, amortization, impairment and
other 1,529,382 1,710,638 3,298,359
Abandonment of oil and gas properties 73,252 147,377 60,506
------------ ------------ ------------
11,891,706 14,489,068 12,075,970
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 941,971 785,671 (1,215,474)
------------ ------------ ------------
OTHER INCOME:
Interest 35,678 90,720 63,063
Other 9,545 -- 14,429
Gain on sale of property and equipment 20,125 -- 18,295
------------ ------------ ------------
65,348 90,720 95,787
------------ ------------ ------------
OTHER EXPENSE:
Interest 184,687 529,161 772,731
Loss on sale of property and equipment -- 3,522 --
------------ ------------ ------------
184,687 532,683 772,731
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 822,632 343,708 (1,892,418)
PROVISION (CREDIT) FOR INCOME TAXES:
Current 274,000 82,000 (83,100)
Deferred (103,500) (33,000) (554,900)
------------ ------------ ------------
170,500 49,000 (638,000)
------------ ------------ ------------
NET INCOME (LOSS) $ 652,132 $ 294,708 $ (1,254,418)
============ ============ ============
NETLOSS APPLICABLE TO COMMON STOCK
(after Preferred stock dividends of
$680,165, $654,111 and $649,864 in 1994,
1995 and 1996, respectively)
$ (28,033) $ (359,403) $ (1,904,282)
============ ============ ============
NET LOSS PER SHARE (primary and fully diluted)
$ 0.00 $ (0.05) $ (0.24)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE> 69
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
-------------------------------------------------
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock
------------------- -------------------
Shares Amount Shares Amount
-------- ------- -------- -------
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1993 343,380 $ 3,434 479,200 $ 4,792
Net income -- -- -- --
Issuance of Common stock -- -- -- --
Shares converted (25,715) (257) (3,800) (38)
Stock distribution -- -- -- --
Dividends on Series A Preferred stock ($.60 per
share) -- -- -- --
Dividends on Series B Preferred stock ($1.00 per
share) -- -- -- --
-------- ------- -------- -------
BALANCE, MARCH 31, 1994 317,665 3,177 475,400 4,754
Net income -- -- -- --
Exercise of stock options -- -- -- --
Issuance of Common stock -- -- -- --
Shares converted (8,205) (82) (10,735) (107)
Dividends on Series A Preferred stock ($.60 per
share) -- -- -- --
Dividends on Series B Preferred stock ($1.00 per share) -- -- -- --
-------- ------- -------- -------
BALANCE, MARCH 31, 1995 309,460 3,095 464,665 4,647
Net loss -- -- -- --
Shares converted (4,260) (43) -- --
Dividends on Series A Preferred stock ($0.60 per
share) -- -- -- --
Dividends on Series B Preferred stock ($1.00 per
share) -- -- -- --
-------- ------- -------- -------
BALANCE, MARCH 31, 1996 305,200 $ 3,052 464,665 $ 4,647
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE> 70
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
-------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Total
- ------------------- Paid-In Retained Stockholders'
Shares Amount Capital Deficit Equity
- --------- ------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
5,330,375 $53,304 $ 8,537,919 $(1,012,088) $ 7,587,361
-- -- -- 652,132 652,132
100,000 1,000 127,962 -- 128,962
70,430 704 (409) -- --
825,951 8,260 1,540,399 (1,548,659) --
-- -- -- (203,365) (203,365)
-- -- -- (476,800) (476,800)
- --------- ------- ------------ ----------- -----------
6,326,756 63,268 10,205,871 (2,588,780) 7,688,290
-- -- -- 294,708 294,708
23,000 230 22,270 -- 22,500
1,600,000 16,000 1,855,500 -- 1,871,500
80,596 806 (617) -- --
-- -- -- (188,571) (188,571)
-- -- -- (465,540) (465,540)
- --------- ------- ------------ ----------- -----------
8,030,352 80,304 12,083,024 (2,948,183) 9,222,887
-- -- -- (1,254,418) (1,254,418)
9,796 98 (55) -- --
-- -- -- (185,199) (185,199)
-- -- -- (464,665) (464,665)
- --------- ------- ------------ ----------- -----------
8,040,148 $80,402 $ 12,082,969 $(4,852,465) $ 7,318,605
========= ======= ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
<PAGE> 71
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
-------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 652,132 $ 294,708 $(1,254,418)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation, depletion, amortization,
impairment and other 1,529,382 1,710,638 3,298,359
Abandonment of oil and gas properties 73,252 147,377 60,506
Loss (gain) on sale of property and
equipment (20,125) 3,522 (18,295)
Deferred income taxes (103,500) (33,000) (554,900)
Change in-
Accounts receivable (268,469) (404,481) 213,970
Inventories and other current assets 25,529 (187,258) 118,979
Refundable income taxes -- -- (115,000)
Other assets, net (18,924) (48,156) 88,129
Accounts payable 843,324 1,340,497 (997,350)
Accrued expenses 129,290 9,886 (143,417)
Billings in excess of costs on
uncompleted contracts 475,628 (405,892) 352,467
----------- ----------- -----------
Total adjustments 2,665,387 2,133,133 2,303,448
----------- ----------- -----------
Net cash provided by operating
activities 3,317,519 2,427,841 1,049,030
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,557,595) (5,075,715) (3,389,274)
Proceeds on sale of property and equipment 15,000 10,620 12,253
----------- ----------- -----------
Net cash used for investing
activities (4,542,595) (5,065,095) (3,377,021)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
<PAGE> 72
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
-------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of accounts payable used to finance
property and equipment additions
$ (74,878) $ (335,552) $ (236,422)
Borrowings under revolving credit facility 5,515,774 3,020,000 3,800,000
Borrowings under note payable to stockholder
-- 335,000 1,064,000
Repayment of borrowings under revolving credit
facility (2,750,000) (435,771) (2,290,003)
Payments on long-term debt (1,499,339) (89,321) (127,278)
Cash paid for deferred financing (124,178) (25,973) (47,354)
Exercise of stock options -- 22,500 --
Proceeds from issuance of Common stock 128,962 1,871,500 --
Distributions and dividends (680,165) (654,111) (649,864)
----------- ----------- -----------
Net cash provided by financing
activities 516,176 3,708,272 1,513,079
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
(708,900) 1,071,018 (814,912)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR
2,004,542 1,295,642 2,366,660
----------- ----------- -----------
CASH AND EQUIVALENTS AT END OF YEAR
$ 1,295,642 $ 2,366,660 $ 1,551,748
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 184,000 $ 521,000 $ 716,000
Income taxes 120,000 155,000 30,000
SUPPLEMENTAL DISCLOSURES ON NONCASH INVESTING AND
FINANCING ACTIVITIES:
Long-term debt incurred for the purchase of
property and equipment $ 84,000 $ 111,000 $ 91,000
Accounts payable incurred for the purchase of
property and equipment 336,000 236,000 71,000
Accounts payable from interest on long-term debt -- -- 64,000
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
<PAGE> 73
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
-----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
MARCH 31, 1994, 1995 AND 1996
-----------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------------------------
A. Organization
------------
North Coast Energy, Inc. (North Coast), a Delaware corporation, was formed in
August 1988 to engage in the exploration, development and production of oil and
gas, the acquisition of producing oil and gas properties, and the organization
and management of oil and gas partnerships.
B. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of North Coast
Energy, Inc. and its wholly owned subsidiaries (collectively, 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 is 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/Capital 1989 Appalachian
Drilling Program Limited Partnership 30.0%
North Coast Energy 1990-1 Appalachian Drilling
Program Limited Partnership 25.0%
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 collectively,
26.5%
</TABLE>
F-11
<PAGE> 74
<TABLE>
<S> <C>
North Coast Energy 1991-2 Appalachian Drilling
Program Limited Partnership 25.0%
North Coast Energy 1991-3 Appalachian Drilling
Program Limited Partnership 25.0%
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.
C. Cash Equivalents
----------------
Investments having an original maturity of 90 days or less that are readily
convertible into cash have been included in, and are a significant portion of,
the cash and equivalents balances.
D. Property and Equipment
----------------------
Property and equipment are stated at cost and are depreciated or depleted
principally on methods and at rates designed to amortize their costs over their
estimated useful lives (proved oil and gas properties using the
unit-of-production method based upon estimated proved developed oil and gas
reserves, pipelines using the straight-line method over 10 to 14 years,
vehicles, furniture and fixtures using accelerated methods over 3 to 7 years,
building and improvements using accelerated methods over 31 years).
F-12
<PAGE> 75
E. Oil and Gas Investments and Properties
--------------------------------------
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Under successful efforts, costs to acquire mineral
interests in oil and gas properties, to drill and equip exploratory wells that
find proved reserves, and to drill and equip development wells are capitalized.
Costs to drill exploratory wells that do not find proved reserves, costs of
development wells on properties the Company has no further interest in,
geological and geophysical costs, and costs of carrying and retaining unproved
properties are expensed.
Unproved oil and gas properties that are significant are periodically assessed
for impairment of value and a loss is recognized at the time of impairment by
providing an impairment allowance. Other unproved properties are expensed when
surrendered or expired.
When a property is determined to contain proved reserves, the capitalized costs
of such properties are transferred from unproved properties to proved properties
and are amortized by the unit-of-production method based upon estimated proved
developed reserves. To the extent that capitalized costs of groups of proved
properties having similar characteristics exceed the estimated future net cash
flows, the excess capitalized costs are written down to such amounts. Impairment
is recorded on a drilling program or property specific basis, as applicable.
On sale or abandonment of an entire interest in an unproved property, gain or
loss is recognized, taking into consideration the amount of any recorded
impairment if the property had been assessed. If a partial interest in an
unproved property is sold, the amount received is treated as a reduction of the
cost of the interest retained.
F. Revenue Recognition
-------------------
The Company recognizes revenue on drilling contracts using the completed
contract method of accounting for both financial reporting purposes and income
tax purposes. This method is used because the typical contract is completed in
three months or less and financial position and results of operations do not
vary significantly from those which would result from use of the
percentage-of-completion method.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Billings in excess of costs on uncompleted
contracts are classified as current liabilities.
Oil and gas production revenue is recognized as income as it is extracted and
sold from the properties. Other revenue is recognized at the time it is earned
and the Company has a contractual right to such revenue.
G. Per Share Amounts
-----------------
The computation of primary and fully diluted earnings per share for 1994, 1995
and 1996 does not assume the conversion of the Series A and B Preferred stock or
the effect of warrants and stock options outstanding due to a calculated loss
(after dividends) being incurred in each period and the effect, therefore, being
anti-dilutive. The average number of outstanding shares used in computing both
primary and fully diluted loss per share was 6,195,091, 7,210,268 and 8,033,642
for the years ended March 31, 1994, 1995 and 1996, respectively.
H. Risk Factors
------------
The Company operates in an environment with many financial risks, including, but
not limited to, its limited history of profitable operations, the ability to
acquire additional economically recoverable oil and gas reserves, the continued
ability to market drilling programs, the inherent risks of the search for
development of and production of oil and gas, the ability to sell oil and gas at
prices which will provide attractive rates of return, and the highly competitive
nature of the industry and worldwide economic conditions. The Company's ability
to expand its reserve base, diversify its operations and continue its marketing
efforts for and investments in drilling programs is
F-13
<PAGE> 76
also dependent upon the Company's ability to obtain the necessary capital
through operating cash flow, additional borrowings or additional equity funds.
I. Accounting Estimates
--------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
J. Financial Instruments
---------------------
The Company's financial instruments include cash and equivalents, accounts
receivable, accounts payable and debt obligations. The book value of cash and
equivalents, accounts receivable and payable are considered to be representative
of fair value because of the short maturity of these instruments. The Company
believes that the carrying value of its borrowings under its bank credit
facility and other debt obligations approximates their fair value as they bear
interest at adjustable interest rates which change periodically to reflect
market conditions. The Company's accounts receivable are concentrated in the oil
and gas industry. The Company does not view such a concentration as an unusual
credit risk.
2. BILLINGS IN EXCESS OF COSTS ON UNCOMPLETED CONTRACTS:
-----------------------------------------------------
Billings in excess of costs on uncompleted contracts consist of the following at
March 31:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Billings on uncompleted contracts $687,850 $1,518,486
Costs incurred on uncompleted contracts
402,970 881,139
-------- ----------
$284,880 $ 637,347
======== ==========
</TABLE>
3. LEASE COMMITMENTS:
------------------
The Company leases real and personal property under operating leases. The most
significant obligations under these lease agreements are for annual building
rentals, which include standard maintenance and insurance. Total rental expense
under the operating leases for the years ended March 31, 1994, 1995 and 1996,
amounted to approximately $73,000, $80,000 and $82,000, respectively. In 1994,
1995 and 1996, rent expense of approximately $65,000 was incurred pursuant to
the lease of the Company's corporate headquarters from one of the Company's
principal stockholders.
The Company currently has no noncancelable operating leases which require future
minimum rental payments.
F-14
<PAGE> 77
4. LONG-TERM DEBT:
---------------
Long-term debt consists of the following at March 31:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Revolving credit notes payable--bank $6,050,003 $7,560,000
Notes payable to stockholder with interest at prime
plus 1% and 8% 335,000 1,386,842
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
73,790 67,842
Various installment notes payable in aggregate monthly installments (including
interest) of $8,585 and $11,012 at March 31, 1995 and 1996, respectively,
through 1999
170,757 152,950
---------- ----------
6,629,550 9,167,634
Less- Current portion 432,100 213,060
---------- ----------
$6,197,450 $8,954,574
========== ==========
</TABLE>
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 reduced based upon the amount of
outstanding letters of credit used to support certain bonding requirements
($140,000 at March 31, 1996). The borrowing base is reduced monthly by an amount
determined by the lender at the semi-annual borrowing base determination. At
March 31, 1996, the borrowing base was $9,360,000, and required monthly
reductions of $110,000 beginning in May 1996. Available borrowings under the
revolving line of credit were $1,800,000 at March 31, 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 bear interest at
the lending bank's prime rate plus 1.5% or approximately 10.5% and 9.75% at
March 31, 1995 and 1996, respectively. The weighted average interest rate on
these borrowings was 9.6% and 10.4% for fiscal 1995 and 1996, respectively. The
agreement requires the Company to pay a commitment fee of .5% 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 stockholders' equity and a minimum
debt coverage ratio, as defined. The Company was in compliance with or had
received waivers with respect to all covenants and restrictions at March 31,
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 interests 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 subordinated 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
F-15
<PAGE> 78
can be repaid in either shares of common stock or proceeds of a public offering,
as defined. This note is also subordinated to the borrowings under the revolving
credit notes payable - bank.
Future maturities of long-term debt for the years ended March 31, are as
follows:
<TABLE>
<S> <C>
Fiscal 1997 $ 213,060
Fiscal 1998 8,895,174
Fiscal 1999 14,115
Fiscal 2000 9,268
Fiscal 2001 10,127
Thereafter 25,890
----------
$9,167,634
==========
</TABLE>
The carrying amount of the Company's long-term debt approximates fair value, as
primarily all of the Company's debt instruments carry adjustable interest rates
which change periodically to reflect market conditions.
5. STOCKHOLDERS' EQUITY:
---------------------
A. Preferred Stock
---------------
The Board of Directors of North Coast has designated 563,270 shares of the
2,000,000 shares of preferred stock authorized as Series A, 6% Convertible
Noncumulative Preferred stock (Series A Preferred stock) and 625,000 shares of
preferred stock as Series B, Cumulative Convertible Preferred stock (Series B
Preferred stock).
Stockholders of Series A Preferred stock are entitled to vote such shares on any
and all matters submitted to a vote of the stockholders of the Company based
upon the number of votes such stockholders would have if the Series A Preferred
stock been converted into shares of common stock of the Company. Holders of
shares of Series A Preferred stock are entitled to receive noncumulative cash
dividends at an annual rate of $.60 per share. Shares of Series A Preferred
stock are senior to shares of common stock with respect to such cash dividends
and junior to shares of Series B Preferred stock.
Series A Preferred stock is convertible, at the stockholder's option, into
shares of common stock at the conversion rate of 2.3 shares of common stock for
each share of Series A Preferred stock converted.
All of the outstanding shares of Series A Preferred stock shall, at the option
of North Coast, be converted into shares of common stock pursuant to an
effective registration statement, as defined.
In the case where North Coast issues warrants or rights to purchase shares of
common stock of the Company, each record holder of outstanding shares of Series
A Preferred stock will receive the kind and amount of such warrants or rights so
issued which such holder would have been entitled to upon such issuance had all
of the holders of shares of Series A Preferred stock been converted, as defined.
The Series A Preferred stock is redeemable at the option of North Coast at a
price of $10 per share. North Coast does not have any obligation to redeem the
Series A Preferred stock.
In the event of a voluntary or involuntary liquidation, dissolution or winding
up of North Coast, holders of the Series A Preferred stock are entitled to be
paid $10 per share out of the assets of North Coast but after payment of other
indebtedness of North Coast, after payment or distribution to the holders of
Series B Preferred stock, but prior to any distribution to holders of the common
stock.
Holders of shares of Series B Preferred stock are entitled to receive, when, as
and if declared by the Board of Directors cash dividends at an annual rate of
$1.00 per share, payable quarterly.
F-16
<PAGE> 79
In the event of any liquidation, dissolution or winding up of the Company,
holders of shares of Series B Preferred stock are entitled to receive the
liquidation preference of $10 per share, plus an amount equal to any accrued and
unpaid dividends to the payment date, before any payment or distribution is made
to the holders of common stock and Series A Preferred stock, as defined. After
payment of the liquidation preference, the holders of such shares will not be
entitled to any further participation in any distribution of assets by the
Company.
Each outstanding share of Series B Preferred stock will be entitled to one vote,
excluding shares held by the Company or any entity controlled by the Company,
which shares shall have no voting rights.
Whenever distributions on the Series B Preferred stock have not been paid, as
defined, the number of directors of the Company will be increased by two, and
the holders of the Series B will be entitled to elect such two additional
directors to the Board of Directors. Such voting right will terminate when all
such distributions accrued and in default have been paid in full or set apart
for payment, as defined.
Effective December 18, 1995, the Series B Preferred stock was redeemable at the
option of the Company, at $10 per share plus any accrued and unpaid dividends,
as defined.
There is no mandatory redemption or sinking fund obligation with respect to the
Series B Preferred stock. In the event that the Company has failed to pay
accrued dividends on the Series B Preferred stock, it may not redeem any of the
outstanding shares of the Series B Preferred stock until all such accrued and
unpaid distributions have been paid in full.
The holders of Series B Preferred stock shall have the right, exercisable at
their option, to convert any or all of such shares into 5.75 shares of common
stock.
B. Common Stock Warrants
---------------------
Warrants issued in connection with the Series B Preferred stock entitle the
holders thereof to purchase 1.15 shares of common stock with each warrant at a
price of $2.61 per share, as defined. The warrants issued in connection with the
Series B Preferred stock expire on December 18, 1997. There are 2,500,000 Series
B warrants outstanding at March 31, 1995 and 1996, respectively.
The Company has entered into a loan agreement with an existing stockholder (Note
4). In conjunction therewith, 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. These warrants
are exercisable on June 13, 1995 and expire on June 13, 2000 and 1998,
respectively. The warrants may be redeemed by the Company for $.10 per share at
its option upon 30 days written notice.
C. Series B Unit Warrants
----------------------
In connection with the issuance of the Series B Preferred stock, the underwriter
of the issue received 50,000 warrants to purchase Series B Units at $12.00 per
unit. A Series B Unit consists of one share of Series B Preferred stock, and
five warrants to purchase 1.15 shares of common stock at $2.61 per share. None
of these warrants were exercised as of March 31, 1996.
D. Stock Options and Stock Appreciation Rights
-------------------------------------------
North Coast has a stock option plan (the Option Plan) to provide incentives to
stimulate interest in the development and financial success of the Company. The
Option Plan provides for the granting of stock options to purchase common stock
at an option price determined by North Coast's Compensation Committee (the
Committee). The Committee shall determine the expiration date but no option
shall be exercisable for a period of more than 10 years. The aggregate fair
market value of the common stock exercisable for the first time during any
calendar year shall not exceed $100,000. Options granted under the Option Plan
terminate upon the employee leaving the Company. The Company, from time to time,
may issue additional options outside the plan.
F-17
<PAGE> 80
Stock option transactions during 1994, 1995 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Options Price Range
Outstanding -----------
-----------
<S> <C> <C>
March 31, 1993 357,581
Options granted 345,000 $1.52
Options canceled (57,787) $1.38-$2.17
---------
March 31, 1994 644,794
Options exercised (23,000) $.99
Options granted 57,500 $1.50-$1.88
Options canceled (125,925) $.98-$1.52
---------
March 31, 1995 553,369
Options granted 10,000 $.94
Options canceled (63,538) $.98-$2.17
---------
March 31, 1996 499,831
=========
Exercisable at March 31, 1996 499,831
=========
</TABLE>
A summary of stock options outstanding at March 31, 1996 follows:
<TABLE>
<CAPTION>
Options Option
Exercisable at March 31, 1996 through: Outstanding Price
-------------------------------------- ----------- -----
<S> <C> <C>
August 31, 1997 124,131 $4.91
February 20, 1999 230,000 $1.52
May 31, 1999 20,000 $1.88
October 10, 1999 20,000 $1.50
January 18, 2000 17,500 $1.62
March 12, 2001 10,000 $.94
May 17, 2001 69,000 $.98
March 19, 2003 5,750 $1.38
March 31, 2003 3,450 $1.55
-------
499,831
=======
</TABLE>
Stock appreciation rights may be awarded by the Committee at the time or
subsequent to the time of the granting of options. Stock appreciation rights
awarded shall provide that the option holder shall have the right to receive an
amount equal to 100% of the excess, if any, of the fair market value of the
shares of common stock covered by the option over the option price payable, as
defined.
E. Stock Bonus Plan
----------------
The Company has a Key Employees Stock Bonus Plan (the Bonus Plan) to provide key
employees, as defined, with greater incentive to serve and promote the interests
of the Company and its shareholders. The aggregate number of shares of common
stock which may be issued as bonuses shall be 230,000 shares of common stock, as
defined. The
F-18
<PAGE> 81
expenses of administering the Bonus Plan shall be borne by the Company. The
Bonus Plan will terminate on February 1, 2001. The Company has issued 66,958
shares of common stock related to this plan since inception.
F. Stock Distribution
------------------
In fiscal 1994, the Board of Directors of the Company declared a 15% common
stock distribution. In March 1994, 825,951 shares of common stock were issued as
a result of this distribution.
6. INCOME TAXES:
-------------
The Company has adopted the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 is an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's consolidated financial statements or tax returns.
Income taxes differed from the amount computed by applying the federal statutory
rates to pretax book income as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Provision based on the statutory rate $ 280,000 $ 125,000 $(643,000)
Tax effect of:
Adjustment from prior years 12,500 18,000 39,000
Statutory depletion (119,000) (108,000) (109,000)
Other - net (3,000) 14,000 75,000
--------- --------- ---------
Total $ 170,500 $ 49,000 $(638,000)
========= ========= =========
</TABLE>
The components of the net deferred tax liability as of March 31, 1995 and 1996
were as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Property and equipment $(551,000) $(364,000)
Partnership income difference (212,000) --
Other (167,000) (106,100)
--------- ---------
Total deferred tax liabilities (930,000) (470,100)
--------- ---------
DEFERRED TAX ASSETS:
Alternative minimum tax credit carryforwards 204,000 367,000
Other financial reserves 59,000 81,000
Partnership income difference -- 73,000
Less- Valuation allowance (204,000) (367,000)
--------- ---------
Total deferred tax assets 59,000 154,000
--------- ---------
Net deferred tax liability $(871,000) $(316,100)
========= =========
</TABLE>
F-19
<PAGE> 82
7. PROFIT SHARING PLAN:
--------------------
The Company has a profit sharing plan that provides retirement and death
benefits to participants and covers substantially all employees. Company
contributions are discretionary and are allocated to the participants' accounts
based upon their compensation and are subject to a graded vesting schedule which
allows 20% vesting after two years of vesting service with an additional 20%
vesting for each complete year of vesting service thereafter. Contributions of
approximately $44,000 and $15,000 were accrued for the years ended March 31,
1994 and 1996, respectively. No contribution was accrued for the year ended
March 31, 1995.
North Coast provides no significant postretirement and/or postemployment
benefits other than the profit sharing plan discussed above.
8. OTHER COMMITMENTS AND CONTINGENCIES:
------------------------------------
North Coast Energy, Inc., as general partner of several limited partnerships,
has committed to fund certain costs (primarily tangible well costs and
saleslines additions) of the partnerships as they are incurred. At March 31,
1996, management estimates the commitment to fund such costs to be approximately
$916,000. The commitment is expected to be funded by September 30, 1996.
The Company shares in unlimited liability to third parties with respect to the
operations of the partnerships it has sponsored and may be liable to limited
partners for losses attributable to breach of fiduciary obligations. In certain
partnerships, certain investors have participated as co-general partners in such
partnerships. To make such investments more acceptable to potential investors
(from a standpoint of risks to such investors) North Coast has agreed to
indemnify these investor-general partners from any partnership liability which
they may incur in excess of their contributions.
Effective December 31, 1994, the Chairman of the Board of the Company resigned.
In connection therewith, an existing employment contract was terminated and a
consulting and noncompete agreement was entered into. The consulting and
noncompete agreement provides for the payment of fees of $165,000 per year, and
certain benefits and expenses, as defined, for a three-year period.
The Company has entered into employment contracts with three of its officers
that provide for a minimum annual salary and incentives based on the Company's
sales and profitability. The commitment, including minimum incentives, amounts
to $430,000 for the years ending March 31, 1996, 1997 and 1998 plus CPI
adjustments. In addition, each employment contract provides for: reimbursement
of certain business expenses; life insurance ranging from $500,000 to
$1,000,000; disability benefits for a stated period of time as defined, and
termination benefits of between one and three years' salary.
9. INDUSTRY SEGMENTS AND MAJOR CUSTOMERS:
--------------------------------------
North Coast and its subsidiaries operate in a single industry segment, the
acquisition, exploration and development of oil and gas properties. North Coast
and its subsidiaries both originate and acquire prospects and drill or cause to
be drilled, such prospects through joint drilling arrangements with other
independent oil companies or through limited partnerships sponsored by the
Company.
The Company's revenue, other than revenue from oil and gas production, is
derived primarily from public and private program partnerships sponsored by the
Company. During 1994, 1995, and 1996 between 17% and 39% of the Company's oil
and gas production revenues were derived from two and/or three significant
purchasers. A significant portion of trade accounts receivable at March 31, 1995
and 1996 was attributable to these purchasers.
F-20
<PAGE> 83
10. RECEIVABLES FROM AFFILIATES:
----------------------------
Accounts receivable from affiliates consists primarily of receivables from the
partnerships managed by the Company and are for administrative fees charged to
the partnerships, and to reimburse the Company for amounts paid on behalf of the
partnerships.
11. SUPPLEMENTAL INFORMATION RELATING TO OIL
AND GAS PRODUCING ACTIVITIES (UNAUDITED):
-----------------------------------------
The following supplemental unaudited oil and gas information is required by
Statement of Financial Accounting Standards (SFAS) No. 69, "Disclosures about
Oil and Gas Producing Activities."
The tables on the following pages set forth pertinent data with respect to the
Company's oil and gas properties, all of which are located within the United
States.
CAPITALIZED COSTS RELATING TO OIL AND GAS
PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
March 31,
--------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Proved oil and gas properties $ 17,124,567 $ 21,051,552 $ 23,769,853
Accumulated depreciation, depletion, amortization
and impairment (6,819,740) (7,749,013) (10,392,335)
------------ ------------ ------------
Net capitalized costs $ 10,304,827 $ 13,302,539 $ 13,377,518
============ ============ ============
</TABLE>
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Property acquisition costs $ 67,000 $ 71,000 $ 334,934
Exploration costs 224,639 370,106 216,595
Development costs 3,809,332 4,066,637 2,584,430
</TABLE>
F-21
<PAGE> 84
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Oil and gas production $ 3,115,635 $ 2,845,573 $ 2,848,610
Gain on sale of oil and gas properties 20,125 1,175 9,766
Production costs (547,926) (560,755) (796,530)
Exploration expenses (167,347) (222,729) (156,089)
Depreciation, depletion, amortization, impairment and other (1,240,916) (1,253,875) (2,550,431)
Abandonment of oil and gas properties (73,252) (147,377) (60,506)
----------- ----------- -----------
1,106,319 662,012 (705,180)
Provision (credit) for income taxes 250,000 117,000 (349,000)
----------- ----------- -----------
Results of operations for oil and gas producing activities (excluding
corporate overhead and financing costs) $ 856,319 $ 545,012 $ (356,180)
=========== =========== ===========
</TABLE>
Provision (credit) for income taxes was computed using the statutory tax rates
for the years ended March 31, 1994, 1995 and 1996 and reflects permanent
differences, including the Partnership's results of operations for oil and gas
producing activities that are reflected in the Company's consolidated income tax
provision (credit) for the periods.
F-22
<PAGE> 85
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
Oil Gas
(BBLS) (MCF)
-------- -----------
<S> <C> <C>
Balance, March 31, 1993 58,000 39,024,000
Extensions, discoveries and other additions 554,100 25,758,000
Production (16,900) (1,162,000)
Revision of previous estimates 15,500 (15,322,000)
Sales of minerals in place (800) (2,092,000)
-------- -----------
Balance, March 31, 1994 609,900 46,206,000
Extensions, discoveries and other additions 157,900 3,548,000
Production (14,400) (1,161,000)
Revision of previous estimates (291,600) (26,619,000)
Sales of minerals in place (42,100) (1,740,000)
-------- -----------
Balance, March 31, 1995 419,700 20,234,000
Extensions, discoveries and other additions 12,600 4,899,000
Production (14,100) (1,166,000)
Revision of previous estimates (205,900) (3,299,000)
Sales of minerals in place (17,100) (620,000)
-------- -----------
Balance, March 31, 1996 195,200 20,048,000
======== ===========
PROVED DEVELOPED RESERVES:
March 31, 1993 33,100 11,182,000
March 31, 1994 122,300 13,589,000
March 31, 1995 178,600 15,788,000
March 31, 1996 151,800 16,303,000
</TABLE>
F-23
<PAGE> 86
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
March 31,
---------------------------------------------
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Future cash inflows from sales of oil and
gas $ 124,748,000 $ 54,022,000 $ 59,810,000
Future production and development costs
(62,331,000) (20,135,000) (19,992,000)
Future income tax expense (20,204,000) (10,571,000) (12,836,000)
------------ ------------ -------------
Future net cash flows 42,213,000 23,316,000 26,982,000
Effect of discounting future net cash flows
at 10% per annum (26,775,000) (11,681,000) (13,720,000)
------------ ------------ -------------
Standardized measure of discounted future
net cash flows $ 15,438,000 $ 11,635,000 $ 13,262,000
============ ============ =============
</TABLE>
CHANGES IN THE STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 12,944,000 $ 15,438,000 $ 11,635,000
Extensions, discoveries and other additions
9,247,000 2,499,000 3,925,000
Sales of oil and gas, net of production
costs (2,568,000) (2,198,000) (2,052,000)
Net changes in prices and production costs
1,990,000 (1,819,000) 3,019,000
Revisions of previous quantity estimates
(4,854,000) (5,731,000) (2,893,000)
Sales of minerals in place (657,000) (464,000) (158,000)
Net change in income taxes (1,612,000) 2,114,000 (1,034,000)
Accretion of discount 1,294,000 1,544,000 1,163,000
Other (346,000) 252,000 (343,000)
------------ ------------ ------------
Balance, end of year $ 15,438,000 $ 11,635,000 $ 13,262,000
============ ============ ============
</TABLE>
Under the guidelines of SFAS No. 69, estimated future cash flows are determined
based on year-end prices for crude oil, current allowable prices applicable to
expected natural gas production, estimated production of proved crude oil and
natural gas reserves, estimated future production and development costs of
reserves based on current economic conditions, and the estimated future income
tax expenses, based on year-end statutory tax rates (with consideration of true
tax rates already legislated) to be incurred on pretax net cash flows less the
tax basis of the properties involved. Such cash flows are then discounted using
a 10% rate.
The estimated quantities of proved oil and gas reserves and standardized measure
of discounted future net cash flows include reserves from proved undeveloped
acreage. The proved undeveloped acreage is included at the working interest
which the Company estimates to retain in the properties, and the standardized
measure was calculated using prices and operating costs and development costs
expected in the area of interest.
F-24
<PAGE> 87
The methodology and assumptions used in calculating the standardized measure are
those required by SFAS No. 69. It is not intended to be representative of the
fair market value of the Company's proved reserves. The valuation of revenues
and costs do not necessarily reflect the amounts to be received or expended by
the Company. In addition to the valuations used, numerous other factors are
considered in evaluating known and prospective oil and gas reserves.
12. ACCOUNTING STANDARDS:
---------------------
During fiscal 1996, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets." Although the Company in
the past has routinely reviewed its oil and gas properties for impairment, the
Company changed its method of assessing the impairment of the capitalized costs
of oil and gas properties, to a drilling program or property specific basis as
applicable, to comply with the new standard. As a result of adoption, the
Company incurred impairment expense of approximately $1,562,000, on a pretax
basis, for the year ended March 31, 1996. The impairment expense is included in
the depreciation, depletion, amortization, impairment and other caption in the
accompanying consolidated financial statements.
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.
F-25
<PAGE> 88
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
North Coast Energy, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement on File No. 33-40341.
Cleveland, Ohio,
June 26, 1996.
F-26
<PAGE> 89
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 as to the Directors of the Company
is incorporated herein by reference to the information set forth under the
caption "Information Concerning Nominees for Directors" in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
September 4, 1996, since such Proxy Statement will be filed with the Securities
and Exchange Commission not later than 120 days after the end of the Company's
fiscal year pursuant to Regulation 14A. Information required by this Item 10 as
to the Executive Officers of the Company is included in Part I of this Annual
Report on Form 10-K.
Executive Officers of the Registrant*
Timothy Wagers, age 36, joined North Coast in 1983 and currently is
Treasurer and Chief Financial Officer. Mr. Wagers is also responsible for
overseeing the accounting for partnership distributions, oil and gas production
and tax reporting, and for monitoring well costs. He received a Bachelor of
Science in Accounting from the University of Akron. From 1982 through 1983, Mr.
Wagers was employed by Hausser + Taylor, independent certified public
accountants, as a staff accountant auditing various entities including oil and
gas partnerships. Mr. Wagers is a certified public accountant, a member of the
Ohio Society of Certified Public Accountants, the Ohio Petroleum Accountants
Society, and the American Institute of Certified Public Accountants.
Anthony R. Kovacevich, age 42, joined North Coast in October 1994 as Senior
Vice President of Exploration and Production. Mr. Kovacevich graduated from
Marietta College with a BS degree in Petroleum Engineering and has over 19 years
of oil and gas experience, with over 14 years in the Appalachian Basin. Prior to
joining North Coast, from November 1984 to October 1994, Mr. Kovacevich was Vice
President of Exploration and Production with Resource America, Inc., a publicly
held oil and gas company conducting operations in the Appalachian Basin, and had
overall responsibility for drilling, production, exploration, land department
and gas marketing activities. Mr. Kovacevich is a member of the Ohio Oil and Gas
Association and the Society of Petroleum Engineers.
Thomas A. Hill, age 38, was elected Secretary and General Counsel of North
Coast Energy in August, 1987. Mr. Hill joined Capital Oil & Gas, Inc. in 1984,
prior to its acquisition by North Coast. He graduated from Hiram College with a
Bachelor of Arts degree in History and Political Science and from George
Washington University National Law Center with a Juris Doctor degree. Mr. Hill
is a member of the Mahoning County Bar Association and Eastern Mineral Law
Foundation.
Robert M. Hoisek, age 44, is Executive Vice President, Sales and Marketing
for North Coast. From 1984 through 1986, Mr. Hoisek served as Director of
Marketing and, prior to rejoining North Coast in 1990, he served as a director
and officer of various oil and gas companies. Mr. Hoisek has been associated
with the oil and gas industry for fifteen years and is a member of the
Independent Petroleum Association of America and the American Gas Association.
*The description of the Company's executive officers called for in this item is
included herein pursuant to instruction 3 to Section (b) of Item 401 of
Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 is incorporated by reference to
the information set forth under the caption "Executive Compensation" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
by held on September 4, 1996, since such Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
Company's fiscal year pursuant to Regulation 14A.
A-23
<PAGE> 90
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 12 is incorporated by reference to
the information set forth under the captions "Principal Shareholders" and "Share
Ownership of Directors and Officers" in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on September 4, 1996, since
such Proxy Statement will be filed with the Securities and Exchange Commission
not later than 120 days after the end of the Company's fiscal year pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 13 is incorporated by reference to
the information set forth under the caption "Transactions with Management" in
the Company's definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on September 4, 1996, since such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the Company's fiscal year pursuant to Regulation 14A.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
The following Consolidated Financial Statements of the Registrant and its
subsidiaries are included in Part II, Item 8:
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Report of Independent Public Accountants F-3
Consolidated balance sheets F-4 - F-5
Consolidated statements of income F-6
Consolidated statements of stockholders' equity F-7 - F-8
Consolidated statements of cash flows F-9 - F-10
Notes to consolidated financial statements F-11 - F-24
</TABLE>
(a) (2) Financial Statements Schedules
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(a) (3) Exhibits
Reference is made to the Exhibit Index.
(b) Reports on Form 8-K: None.
A-24
<PAGE> 91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly cased this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTH COAST ENERGY, INC.
By /s/ Charles M. Lombardy Chief Executive Officer June 26, 1996
- --------------------------
Charles M. Lombardy, Jr.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Charles M. Lombardy Chief Executive Officer and Director June 26, 1996
- ------------------------- (principal executive officer)
Charles M. Lombardy, Jr.
/s/ Garry Regan President and Director June 26, 1996
- -------------------------
Garry Regan
/s/ Timothy Wagers Treasurer and Chief Financial Officer June 26, 1996
- ------------------------- (principal accounting and financial officer)
Timothy Wagers
/s/ Charles K. Ebinger Director June 26, 1996
- -------------------------
Charles K. Ebinger
/s/ W. Dale Wegrich Director June 26, 1996
- -------------------------
W. Dale Wegrich
/s/ George R. Begley Director June 26, 1996
- -------------------------
George Begley
/s/ Robert L. Bauman Director June 26, 1996
- -------------------------
Robert L. Bauman
</TABLE>
A-25
<PAGE> 92
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description of Documents Page
- ------ ------------------------ ----
<S> <C> <C>
4.1 Certificate of Incorporation of the Registrant dated August 30, 1988. (B)
4.2 Certificate of Stock Designation of the Registrant filed September 12, 1988. (B)
4.3 Certificate of Stock Designation of the Registrant filed September 14, 1989. (B)
4.4 Certificate of Correction filed March 22, 1991. (C)
4.5 Certificate of Amendment to Certificate of Incorporation filed November 4, 1992. (A)
4.6 Certificate of Stock Designation filed December 29, 1992. (D)
4.7 Certificate of Amendment to Certificate of Incorporation filed August 29, 1994. (J)
10.1 Employment Agreement dated May 3, 1995 by and between Registrant and Charles
M. Lombardy, Jr. (J)
10.2 Employment Agreement dated May 3, 1995 by and between Registrant and Garry Regan. (J)
10.3 1988 Stock Option Plan. (B)
10.4 Form of Profit Sharing Plan. (B)
10.5 Amendment (dated as of July 15, 1988 but effective for all purposes as of October 4, (B)
1989) to Option Agreement originally dated August 31, 1987 by and between Registrant
and Charles M. Lombardy, Jr.
10.6 Amendment (dated as of July 15, 1988 but effective for all (B)
purposes as of October 4, 1989) to Option Agreement originally
dated August 31, 1987 by and between Registrant and Garry Regan.
10.7 Form of Indemnity Agreement between the Registrant and each of its Directors and (B)
executive officers.
10.8 North Coast Energy, Inc. Key Employees Stock Bonus Plan. (B)
10.9 Stock Option Agreement dated as of May 17, 1991 between Registrant and Timothy (C)
Wagers.
10.10 Stock Option Agreement dated as of May 17, 1991 between the Registrant and (C)
Thomas A. Hill.
10.11 Option Agreement dated February 22, 1994 by and between Registrant and (E)
Charles M. Lombardy, Jr.
</TABLE>
A-26
<PAGE> 93
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description of Documents Page
- ------ ------------------------ ----
<S> <C> <C>
10.12 Option Agreement dated February 22, 1994 by and between Registrant and Garry Regan. (E)
10.13 Reducing Revolving Credit Agreement dated September 20, 1993 between Bank One (E)
Texas, N.A. and North Coast Energy, Inc.
10.14 First Amendment to Credit Agreement dated March 16, 1994 between Bank One Texas, (E)
N.A. and North Coast Energy, Inc.
.
10.15 Agreement dated January 6, 1995 between Bruce E. Brocker, Garry Regan, (F)
Charles M. Lombardy, Jr. and the Registrant.
10.16 Option Agreement dated June 2, 1994 by and between Registrant and Charles Ebinger. (G)
10.17 Option Agreement dated June 2, 1994 by and between Registrant and W. Dale Wegrich. (G)
10.18 Option Agreement dated October 11, 1994 by and between Registrant and (G)
Tony Kovacevich.
10.19 Employment Agreement dated October 11, 1994 by and between Registrant (G)
and Tony Kovacevich.
10.20 Share Purchase Agreement between NAGIT (USA) INC. and the Registrant dated (H)
September 29, 1994.
10.21 Stockholder's Agreement between Charles M. Lombardy, Jr., Garry Regan and (H)
NAGIT (USA) INC. dated as of September 29, 1994.
10.22 Loan and Participation Agreement by and between NAGIT (USA) INC. and the Company (I)
dated as of January 13, 1995.
10.23 Second Amendment to Credit Agreement by and between Bank One, Texas, N.A. (I)
and the Company dated January 13, 1995.
10.24 Loan Agreement by and between NAGIT (USA) INC. and the Company dated (J)
June 13, 1995.
10.25 8% Convertible Subordinated Note for $1,000,000 by and between NAGIT(USA) INC. (J)
and the Company dated June 13, 1995.
10.26 Warrant to purchase 200,000 shares of Common Stock of the Company. (J)
10.27 Warrant to purchase 300,000 shares of Common Stock of the Company. (J)
10.28 Third Amendment to Credit Agreement by and between Bank One, Texas, N.A. and (K)
the Company dated August 8, 1995.
10.29 Fourth Amendment to Credit Agreement by and between Bank One, Texas, N.A. and _
the Company dated March 31, 1996.
</TABLE>
A-27
<PAGE> 94
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description of Documents Page
- ------ ------------------------ ----
<S> <C> <C>
10.30 Restated Employment Agreement dated May 3, 1995 by and between Registrant and _
Charles M. Lombardy, Jr.
10.31 Restated Employment Agreement dated May 3, 1995 by and between Registrant and _
Garry Regan.
11.1 Statement regarding computation of per share earnings. _
21.1 List of Subsidiaries. (E)
23.1 Consent of Arthur Andersen LLP. _
27.1 Financial Data Schedule *
- -------------------------
<FN>
(A) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Registration Statement on Form S-2 (Reg. No.
33-54288).
(B) Incorporated herein by reference to the appropriate exhibits to
the Company's Registration Statement on Form S-1 (File No.
33-24656).
(C) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1991.
(D) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1993.
(E) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994.
(F) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Current Report on Form 8-K dated January 6,
1995.
(G) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Quarterly Report on form 10-Q for the fiscal
quarter ended September 30, 1994.
(H) Incorporated herein by reference to the appropriate exhibit to
the Schedule 13D dated September 29, 1994.
(I) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 1994.
(J) Incorporated herein be references to the appropriate exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995.
(K) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1995.
*Exhibit 27.1 furnished for Securities and Exchange Commission purposes only.
</TABLE>
A-28
<PAGE> 95
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 September 30, 1996
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
COMMISSION FILE NUMBER 0-18691
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.)
1993 CASE PARKWAY
TWINSBURG, OHIO 44087-2343
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (216) 425-2330
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.
<TABLE>
<CAPTION>
Class Outstanding at November 11, 1996
---------------------------- --------------------------------
<S> <C>
Common Stock, $.01 par value 8,047,195
</TABLE>
B-1
<PAGE> 96
NORTH COAST ENERGY, INC.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets -
March 31, 1996 (Audited) and September 30, 1996 (Unaudited) 2
Unaudited Consolidated Statements of Operations -
For the Three and Six Months Ended September 30, 1995 and 1996 4
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended September 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>
B-2
<PAGE> 97
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
1996 1996
---- ----
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and equivalents $ 1,551,748 $ 788,251
Accounts receivable:
Trade 1,339,601 1,635,635
Affiliates 97,993 84,124
Inventory 85,235 107,241
Deferred income taxes 41,000 41,000
Refundable income taxes 115,000 115,000
Other, net 22,097 60,000
------------ ------------
Total current assets 3,252,674 2,831,251
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Land 122,699 93,437
Oil and gas properties (successful
efforts) 23,769,853 24,579,678
Pipelines 3,696,277 4,101,187
Vehicles 427,920 487,503
Furniture and fixtures 453,718 498,326
Building and improvements 145,539 785,217
------------ ------------
28,616,006 30,545,348
Less-Accumulated depreciation, depletion,
amortization and impairment (11,879,077) (12,192,941)
------------ ------------
16,736,929 18,352,407
OTHER ASSETS, net 253,206 179,664
------------ ------------
$ 20,242,809 $ 21,363,322
============ ============
</TABLE>
The accompanying notes are an integral part of these Balance Sheets
B-3
<PAGE> 98
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
1996 1996
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 213,060 $ 251,100
Accounts payable 2,481,558 1,768,009
Accrued expenses 280,565 337,310
Billings in excess of costs on
uncompleted contracts 637,347 574,310
------------ ------------
Total current liabilities 3,612,530 2,930,729
------------ ------------
LONG-TERM DEBT, net of current portion 8,954,574 11,180,718
DEFERRED INCOME TAXES, net 357,100 333,100
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A, 6% Non-Cumulative Convertible Preferred stock, par value $.01 per
share; 563,270 shares authorized; 305,200 and 303,265 issued and
outstanding (aggregate liquidation value of
$3,050,200 and $3,032,650, respectively) 3,052 3,033
Series B, Cumulative Convertible Preferred stock, par value $.01 per share;
625,000 shares authorized; 464,665 issued and outstanding
(aggregate liquidation value of $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 8,044,597 issued and outstanding 80,402 80,446
Additional paid-in capital 12,082,969 12,082,944
Retained deficit (4,852,465) (5,252,295)
------------ ------------
Total stockholders' equity 7,318,605 6,918,775
------------ ------------
$ 20,242,809 $ 21,363,322
============ ============
</TABLE>
The accompanying notes are an integral part of these Balance Sheets
B-4
<PAGE> 99
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Periods Ended September 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Oil and gas production $ 576,508 $ 721,199 $ 1,320,880 $ 1,584,133
Drilling revenues 134,250 273,504 303,000 1,442,700
Well operating, transportation and other 408,809 574,978 868,419 1,046,785
Administrative and agency fees 238,782 221,483 431,523 424,961
----------- ----------- ----------- -----------
1,358,349 1,791,164 2,923,822 4,498,579
COSTS AND EXPENSES:
Oil and gas production expenses 209,795 182,305 411,539 408,115
Drilling costs 209,204 275,055 357,446 1,196,638
Oil and gas operations 171,116 392,027 403,435 641,466
General and administrative expenses 670,536 695,822 1,327,431 1,256,921
Depreciation, depletion, amortization,
impairment and other 468,225 278,942 963,460 579,632
Abandonment of oil and gas properties -- (3,692) -- 44,843
----------- ----------- ----------- -----------
1,728,876 1,820,459 3,463,311 4,127,615
----------- ----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS (370,527) (29,295) (539,489) 370,964
----------- ----------- ----------- -----------
OTHER INCOME
Interest 16,188 13,174 36,961
27,135
Other 3,004 8,824 7,658 24,824
Gain (loss) on sale of property
and equipment -- (8,994) 8,943 (10,774)
----------- ----------- ----------- -----------
19,192 13,004 53,562 41,185
----------- ----------- ----------- -----------
OTHER EXPENSE
Interest 202,765 272,815 372,864 512,104
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (554,100) (289,106) (858,791) (99,955)
CREDIT FOR INCOME TAXES:
Current -- -- (61,000) --
Deferred (211,000) (61,000) (281,000) (24,000)
----------- ----------- ----------- -----------
(211,000) (61,000) (342,000) (24,000)
----------- ----------- ----------- -----------
NET LOSS $ (343,100) $ (228,106) $ (516,791) $ (75,955)
=========== =========== =========== ===========
NET LOSS PER SHARE
(primary and fully diluted) $ (.06) $ (.04) $ (.10) $ (.05)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements
B-5
<PAGE> 100
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended September 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (516,791) $ (75,955)
Adjustments to reconcile net loss
to cash provided by operating activities-
Depreciation, depletion, amortization, impairment and other 963,460 579,632
Abandonment of oil and gas properties -- 44,843
(Gain) loss on sale of property and equipment (8,943) 10,774
Deferred income taxes (281,000) (24,000)
Change in:
Accounts receivable (1,276,549) (282,165)
Other current assets 33,665 (59,909)
Other assets 14,964 22,809
Accounts payable (1,558,151) (727,619)
Current income taxes payable -- --
Accrued expenses (149,388) 56,745
Billings in excess of costs on uncompleted contracts 1,334,632 (63,037)
----------- -----------
Total adjustments (927,310) (441,927)
----------- -----------
Net cash used by operating activities (1,444,101) (517,882)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,217,218) (1,581,674)
Proceeds on sale of property and equipment -- 104,262
----------- -----------
Net cash used for investing activities (1,217,218) (1,477,412)
----------- -----------
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 1,000,000 1,660,000
Borrowings under note payable to stockholder 1,000,000 41,801
Repayments of borrowings under revolving credit facility (240,003) --
Payments on long-term debt (52,824) (75,167)
Cash paid for deferred financing cost (46,142) --
Distributions and dividends (325,171) (323,875)
----------- -----------
Net cash provided by financing activities 1,099,438 1,231,797
----------- -----------
DECREASE IN CASH AND EQUIVALENTS (1,561,881) (763,497)
</TABLE>
The accompanying notes are an integral part of these Financial Statements
B-6
<PAGE> 101
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For The Six Months Ended September 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD $2,366,660 $1,551,748
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 804,779 $ 788,251
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the period for -
Interest $ 343,116 $ 395,823
Income taxes $ 71,135 $ --
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Long-term debt incurred for the purchase
of property and equipment $ 42,860 $ 637,549
Accounts payable incurred for the
purchase of property and equipment $ 233,552 $ 80,032
</TABLE>
The accompanying notes are an integral part of these Financial Statements
B-7
<PAGE> 102
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%
North Coast Energy 1991-2 Appalachian Drilling Program Limited Partnership 25.0%
North Coast Energy 1991-3 Appalachian Drilling Program Limited Partnership 25.3%
</TABLE>
B-8
<PAGE> 103
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 1. Summary of Accounting Policies (Continued)
<TABLE>
<S> <C>
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%
North Coast Energy 1996-1 Appalachian Drilling Program Limited Partnership 20.0%
All significant intercompany accounts and transactions have been eliminated.
</TABLE>
Note 2. Long-Term Debt
<TABLE>
<CAPTION>
March 31, 1996 September 30, 1996
-------------- ------------------
<S> <C> <C>
Long-term debt consists of the following:
Revolving credit notes payable - bank $ 7,560,000 $ 9,220,000
Notes payable to stockholder with interest at prime
plus 1% and 8% 1,386,842 1,410,593
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 63,827
Mortgage note payable to a bank, secured by land and a building,
requiring monthly payments of approximately $5,248 (including
interest at 8.58%) through May 2001 over a five year period,
at an interest rate to be renegotiated -- 532,561
Various installment notes payable, in aggregate monthly
installments (including interest) of $11,012 at March 31,
1996, and $10,122 at September 30, 1996 152,950 204,837
----------- -----------
9,167,634 11,431,818
Less current portion 213,060 251,100
----------- -----------
$ 8,954,574 $11,180,718
=========== ===========
</TABLE>
B-9
<PAGE> 104
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Long-Term Debt (Continued)
The Company's credit agreement with its lender was amended August 30,
1996 increasing its reducing revolving line of credit to $20,000,000.
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 September 30, 1996). The borrowing base is reduced monthly
by an amount determined by the lender at the semi-annual borrowing base
determination. The amendment also increased the Company's borrowing
base to $10,000,000, with required monthly reductions of $110,000
beginning on October 1, 1996. Available borrowings under the revolving
line of credit were $640,000 at September 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 $9,220,000 at September 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 all covenants as of September 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.
B-10
<PAGE> 105
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, September 30,
1996 1996
---- ----
<S> <C> <C>
Billings on uncompleted contracts $ 1,518,486 $ 700,826
Costs incurred on uncompleted contracts 881,139 126,516
----------- -----------
$ 637,347 $ 574,310
=========== ===========
</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 September 30, 1996, the Company has committed to fund certain costs
of the North Coast Energy Appalachian Drilling Programs estimated to be
approximately $580,000 for tangible well equipment and pipeline
construction. This commitment is expected to be realized by March 1997.
B-11
<PAGE> 106
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 of 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 six months ended September 30, 1995 and 1996. All items in the
table are calculated as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30, September 30,
------------- -------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Oil and gas production 42% 40% 44% 35%
Drilling revenues 10 15 10 32
Well operating, transportation and other 30 32 29 23
Administrative and agency fees 17 12 15 9
Other 1 1 2 1
--- --- --- ---
Total Revenues 100% 100% 100% 100%
--- --- --- ---
</TABLE>
B-12
<PAGE> 107
<TABLE>
<S> <C> <C> <C> <C>
Expenses:
Oil and gas production expenses 15% 10% 14% 9%
Drilling costs 15 15 12 26
Oil and gas operations 12 22 13 14
General and administrative expenses 49 39 45 28
Depreciation, depletion, amortization
impairment and other 34 15 32 13
Abandonment of oil and gas properties 0 0 0 1
Provision for taxes on income (15) (3) (11) 0
Other 15 15 12 11
--- --- --- ---
Total Expenses 125% 113% 117% 102%
--- --- --- ---
Net Loss (25%) (13%) (17%) (2%)
=== === === ===
</TABLE>
The following discussion and analysis reviews the results of operations
and the financial condition for the Company for the three and six months ended
September 30, 1996 and 1995. The review should be read in conjunction with the
financial information presented elsewhere herein.
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 1996 TO SIX MONTHS ENDED
SEPTEMBER 30, 1995.
REVENUES
Oil and gas production revenues increased $263,253 (20%) to $1,584,133
for the six months ended September 30, 1996 compared to $1,320,880 for the prior
corresponding period. Revenues were enhanced by increases in both oil and gas
production from wells in the Appalachian area. In addition, the average gas
price the Company received for oil and natural gas increased approximately 16%.
The average gas price the Company received increased to $2.41 per Mcf for the
six months ended September 30, 1996 compared to $2.07 per Mcf for the six months
ended September 30, 1995. The average oil price the Company received increased
to $19.85 per Barrel for the six months ended September 30, 1996 compared to
$16.99 per Barrel for the six months ended September 30, 1995.
Drilling Revenues for the period increased by $1,139,700 (376%) for the
six months ended September 30, 1996 compared to the six months ended September
30, 1995 due to the increase in the number of wells recognized in revenue for
the period. The Company recognized revenues for the six months ended September
30, 1996 on fourteen wells as compared to four wells for the six months ended
September 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.
Revenues generated from well operating, transportation and other
increased $178,366 (21%) for the six months ended September 30, 1996 compared to
the six months ended September 30, 1995. This increase was due to an increase in
unaffiliated third party gas sales. The unaffiliated third party gas sales
fluctuate from year to year based upon the availability of these types of
transactions and Company resources available. The increase in revenues in this
category was somewhat offset by a decrease in compression fees due to expenses
incurred with the placement of several new compression facilities into
operation.
EXPENSES
Drilling costs for the six months ended September 30, 1996 compared to
the six months ended September 30, 1995 increased $839,192 (235%) due to the
increased number of wells completed between comparable periods.
B-13
<PAGE> 108
Oil and gas operations expense increased $238,031 (59%) for the six
months ended September 30, 1996 as compared to the six months ended September
30, 1995. This increase was due to the increase in unaffiliated third party gas
purchases related to unaffiliated third party gas sales as discussed above.
General and administrative expenses decreased $70,510 (5%) for the six
months ended September 30, 1996 compared with the six months ended September 30,
1995. This decrease resulted from a change in the Company's allocation of
general and administrative costs to production and operation expenses. Without
this change in the allocation of costs, the Company's general and administrative
expenses would have remained relatively constant even with $89,000 in legal fees
pertaining to litigation with Lomak Petroleum, Inc. and other related issues.
Depreciation, depletion, amortization, impairment and other decreased
$383,828 (40%) for the six months ended September 30, 1996 compared to the six
months ended September 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 which decreased the basis of the
properties being depleted for future periods.
Interest expense increased to $512,104 for the six months ended
September 30, 1996 from $372,864 for the six months ended September 30, 1995.
This increase was primarily due to the Company's additional borrowings on its
reducing revolving credit facility. At September 30, 1996, $9,220,000 was
outstanding under the Company's Credit Facility, as compared to $6,810,000 at
September 30, 1995.
Operating income for the six months ended September 30, 1996 increased
to $370,964 compared to an operating loss of $539,489 for the six months ended
September 30, 1995 primarily due to the decrease in depreciation, depletion,
amortization, impairment and other and increases in oil and gas production and
net drilling income. The Company's net loss was $75,955 for the six months ended
September 30, 1996 compared to a net loss of $516,791 for the six months ended
September 30, 1995.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1996 TO THREE MONTHS ENDED
SEPTEMBER 30, 1995.
REVENUES
Oil and gas production revenues for the three months ended September
30, 1996 increased $144,691 (25%) to $721,199 compared to $576,508 for the prior
corresponding period. The primary reason for the increase in oil and gas
production revenues was a 19% increase between comparable periods in the average
natural gas price the Company received coupled with an increase of 7% in natural
gas production. The average price the Company received for natural gas increased
to $2.43 per Mcf for the three months ended September 30, 1996 from $2.04 per
Mcf for the three months ended September 30, 1995.
The Company recognized revenue on the drilling of three wells for the
three months ended September 30, 1996 compared to one well for the three months
ended September 30, 1995 resulting in an increase in drilling revenue of
$139,254 (104%).
Revenues generated from well operating, transportation and other
increased $166,169 (41%) for the three months ended September 30, 1996 as
compared to the three months ended September 30, 1995. This increase was due to
an increase in unaffiliated third party gas sales. The unaffiliated third party
gas sales fluctuate from year to year based upon the availability of these types
of transactions and resources available. The increase in revenues in this
category was somewhat offset by a decrease in compression fees due to expenses
incurred with the placement of several new compression facilities into
operation.
Revenue from administrative and agency fees decreased by 7% for the
three months ended September 30, 1996 compared to the three months ended
September 30, 1995. This decrease was due to the reduction of administrative
fees charged to certain of the Company's Drilling Programs. This reduction
followed the Company's policy of reviewing administrative fees and reducing
these fees when necessary.
B-14
<PAGE> 109
EXPENSES
Oil and gas operations expense increased $220,911 (129%) for the three
months ended September 30, 1996 as compared to the three months ended September
30, 1995. This increase was due to the increase in unaffiliated third party gas
purchases related to unaffiliated third party gas sales as discussed above.
General and administrative expenses increased $25,286 (4%) for the
three months ended September 30, 1996 compared to the three months ended
September 30, 1995. This increase was due to $89,000 in legal fees pertaining to
litigation with Lomak Petroleum, Inc. and other related issues.
Depreciation, depletion, amortization, impairment and other decreased
$189,283 (40%) for the three months ended September 30, 1996 compared to the
three months ended September 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 which decreased the basis of the
properties being depleted for future periods.
Interest expense increased to $272,815 for the three months ended
September 30, 1996 from $202,765 for the three months ended September 30, 1995.
This increase was associated with the Company's additional borrowings on its
reducing revolving credit facility.
For the three months ended September 30, 1996 loss from operations
decreased $341,232 compared to the three months ended September 30, 1995 due
primarily to the increase in oil and gas production revenues coupled with lower
depreciation, depletion, amortization and other.
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 the 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 $19.85 and $16.99 per
barrel in the six months ended September 30, 1996 and 1995, respectively, and
$2.41 and $2.07 per Mcf for natural gas in the six months ended September 30,
1996 and 1995, respectively. The general market for natural gas in the
Appalachian Basin has rebounded somewhat reflecting the colder Appalachian area
weather which caused a draw-down in storage supplies of natural gas during the
1995/1996 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
there has been a decline in gas prices during the summer months compared to the
winter of 1995/1996, the demand for gas by storage facilities has continued to
keep gas prices above last year. 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 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 gas gathering
systems in the Appalachian Basin and to contract with other pipeline systems in
the region to transport natural gas production from Company wells.
B-15
<PAGE> 110
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was approximately negative $99,000 at
September 30, 1996 compared to approximately negative $360,000 at March 31,
1996. The increase of $261,000 in working capital from March 31, 1996 reflects
additional borrowings during the six months ended September 30, 1996. An
amendment to the Credit Facility increased the Company's borrowing base from
$9,500,000 at March 31, 1996 to $10,000,000 at August 30, 1996. As of September
30, 1996, the Company had $9,220,000 outstanding under its Credit Facility.
North Coast's current ratio was .97 to 1.0 at September 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 September 30, 1996:
<TABLE>
<CAPTION>
(Amounts in Thousands) March 31, 1996 September 30, 1996
-------------- ------------------
Amount % Amount %
------ --- ------ ---
<S> <C> <C> <C> <C>
Working capital $( 360) ( 2%) $( 99) ( 1%)
Property and equipment (net) 16,737 100% 18,352 100%
Other 253 2% 180 1%
-------- ---- -------- ----
Total $ 16,630 100% $ 18,433 100%
======== ==== ======== ====
Long-term debt $ 8,954 54% $ 11,181 61%
Deferred income taxes 357 2% 333 2%
Stockholders' equity 7,319 44% 6,919 37%
-------- ---- -------- ----
Total $ 16,630 100% $ 18,433 100%
======== ==== ======== ====
</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 six months ended September 30, 1995 and 1996:
<TABLE>
<CAPTION>
Six Months Ended September 30,
------------------------------
(Amounts in Thousands) 1995 1996
---- ----
Amount % Amount %
------ --- ------ ---
<S> <C> <C> <C> <C>
Net cash used by operating activities $ (1,444) (51%) $ (518) (21%)
Net cash used for investing activities (1,217) (43%) (1,477) (58%)
Net cash provided by financing activities 1,099 39% 1,232 49%
-------- --- -------- ----
Decrease in cash and equivalents $ (1,562) (55%) $ (763) (30%)
========= === ======== ===
<FN>
Note: 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 capital, net cash provided by investing activities and
net cash provided by financing activities, plus any decrease in cash and
cash equivalents.
</TABLE>
As the above table indicates, the Company's cash flow used by operating
activities decreased approximately $926,000 for the six months ended September
30, 1996 compared to the period ended September 30, 1995. This decrease reflects
the increased number of wells recognized in drilling revenues and the increase
cash flow from operations.
B-16
<PAGE> 111
Net cash used for investing activities increased to approximately
$1,477,000 (58% of cash sources) for the six months ended September 30, 1996
from approximately $1,217,000 (43% of cash sources) for the six months ended
September 30, 1995. This increase is primarily due to the Company's acquisition
of a new building to house its corporate headquarters coupled with 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 approximately
$133,000 for the six months ended September 30, 1996 compared to the prior
period. This increase reflects the increase in borrowings on the Company's
credit facilities for the six months ended September 30, 1996 compared to
September 30, 1995.
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, effective August 30, 1996 this amount was increased to
$20,000,000(the "Credit Facility"). The Credit Facility (as amended for
borrowing base adjustments) provided the Company with available borrowings of
$10,000,000 at September 30, 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 September
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 September 30, 1996, the Company had $9,220,000 outstanding
under the Credit Facility. At September 30, 1996 the Company was in compliance
with its loan covenants. Amounts borrowed under the Credit Facility bear
interest at the lending bank's prime rate plus 1 1/2%. Also, at September 30,
1996, the Company had approximately $63,827 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. 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 amount outstanding under the
mortgage note at September 30, 1996 was $532,561.
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, in 1994 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 September 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 September 30, 1996, the balance of the loan and
accrued interest was $1,105,812. 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. All of the Company's
indebtedness to NAGIT, as well as the related Warrants, were acquired by Lomak
in connection with the stock purchase described below.
As the financial results for the six months ended September 30, 1996
indicate North Coast Energy, Inc. made significant strides to regain
profitability. Recent developments, however, have caused concern for the
Company's ability to meet its current obligations. The Company has focused on
its core business of forming
B-17
<PAGE> 112
Drilling Programs which enables the Company to generate drilling revenues, well
operating fees, administrative fees and transportation fees. Management
anticipated a profitable year based upon improved drilling margins, higher
product prices, the results of the first six months of fiscal 1997 and a
generally positive reception from its broker/dealer network for Drilling Program
sales. On or about September 4, 1996 Lomak Petroleum, Inc.(Lomak), a publicly
traded oil and gas company, purchased approximately 47% of the outstanding
common stock of the Company from two of the Company's largest shareholders,
NAGIT, USA (NAGIT) and Bruce E. Brocker.
At the Company's annual meeting of stockholders, Lomak presented
proxies representing the shares acquired from these shareholders and indicated
its intention to nominate and elect two directors in the class whose terms were
scheduled to expire at that meeting. Due to concerns about the validity of such
proxies, the annual meeting was adjourned to a later date. On September 11,
1996, the meeting was reconvened. At the reconvened meeting, the Company
recognized the validity of the proxy executed by NAGIT (PLC), but reserved its
rights with respect to the proxy executed by Mr. Brocker. As described under the
caption "Legal Proceedings," litigation among the Company, Lomak and Mr. Brocker
then ensued. Also as described under "Legal Proceedings," the parties have
recently reached a settlement with respect to that litigation.
Revenues derived from the Company's Drilling Programs provide an
important source of the Company's cash flow. Due to uncertainties among
potential Drilling Program investors arising out of Lomak's acquisition of a
substantial ownership interest in the Company and the other matters described
above, the Company's ability to market its Drilling Programs has been adversely
affected. Consequently, demands on the Company's capital resources have
increased due to reduced cash flow associated with lower levels of investor
interest in its Drilling Programs and increased costs associated with litigation
and evaluating the Company's strategic alternatives. This has necessitated
actions by the Company to alter its growth oriented business plan in order to
conserve cash. On October 21, 1996, the Company initiated layoffs of 21% of its
staff coupled with a temporary reduction or deferment in wages to many of its
remaining employees. Additional cost cutting measures may become necessary in
the future if investor interest in the Company's Drilling Programs does not
increase.
With the reduction of the Drilling Program activity and the need to
conserve cash, the Company's ability to monetize equipment it owns on productive
wells and increase profitably through the Drilling Programs will be adversely
affected. It will 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 additional financing cannot be obtained, the Company would
be required to continue its current efforts to conserve cash resources. 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 additional 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.
The Company currently has 303,265 shares of Series A, 6% Non-Cumulative
Convertible Preferred Stock ("Stock A Stock") and 625,000 shares of Series B,
Cumulative Convertible Preferred Stock ("Series B Stock") outstanding. Holders
of Series A Stock are entitled to receive Semi-annual cash dividends at an
annual rate of $.60 per share and holders of Series B Stock are entitled to
receive quarterly cash dividends at an annual rate of $1.00 per share. The next
Semi-annual dividend payment on the Series A Stock is scheduled to be made on
December 1, 1996, and the next quarterly dividend payment on the Series B Stock
is scheduled to be made on December 31, 1996. As a result of the increased
demands on the Company's cash flow resulting from the lower level of investor
interest in its Drilling Programs, the Company anticipates that it may be unable
to make these dividend payments when due.
B-18
<PAGE> 113
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On June 18, 1996, the Company initiated an action in the Court of
Common Pleas of Mahoning County, Ohio styled NORTH COAST ENERGY, INC. VS. LOMAK
PETROLEUM, INC., ET AL., Case No. 96 CV 01555, against both Lomak and its
wholly-owned subsidiary, Border Resources, Inc. The complaint seeks damages in
excess of $517,000 for, among other things, the value of natural gas sold by the
Company to the defendants between December 1995 and March 1996, but for which
payment was never made by the defendants. Border Resources counterclaimed for
damages in excess of $950,000 based upon the allegation that the Company had
breached an existing contract by stopping further deliveries of gas which
allegedly necessitated the purchase of replacement gas by Border at a higher
price. Lomak's motion to dismiss was denied by the Court on September 3, 1996.
On September 4, 1996 representatives of Lomak attended the Company's
Annual Meeting of Stockholders at the Company's headquarters in Twinsburg, Ohio,
and presented proxies which purported to represent approximately 46.49% of the
shares of the Company's common stock which had been purchased by Lomak from
NAGIT (USA), North American Gas Investment Trust, PLC, and Bruce E. Brocker,
formerly the Company's Chairman of the Board. The meeting was adjourned until
the following Wednesday, September 11, 1996, to allow the inspectors of election
and legal counsel to verify the validity of the proxies and also to review the
Separation Agreement of January 6, 1995 between the Company and Brocker to
determine if the purported sale represented a breach of that agreement.
At the reconvened meeting of September 11, the Company recognized the
NAGIT (PLC) proxy, but reserved its rights with respect to the proxy executed by
Mr. Brocker based upon a review of Mr. Brocker's Agreement pursuant tot which he
sold his stock to Lomak. When the Chairman, Garry Regan, attempted to adjourn
the meeting once again based upon this issue, representatives of Lomak acted to
continue the meeting and elect their representatives as Directors, being C. Rand
Michaels and Steven L. Gorse, in opposition to the Company's nominees. Lomak
then filed an action in the Court of Chancery for the State of Delaware in a
case styled Lomak Petroleum, Inc., C. Rand Michaels and Steven L. Grose vs.
North Coast Energy, Inc., Charles M. Lombardy, Jr., and Charles K. Ebinger,
Civil Action No. 15211. The Company raised as an affirmative defense the
invalidity of the alleged proxy from Bruce E. Brocker and the fact that the
Shareholders' Meeting of the 11th had been adjourned without any valid action
having been taken.
The Company also amended its complaint in the Mahoning County, Ohio
action relating to the natural gas sales dispute to add a claim for tortious
interference against Lomak and a breach of contract claim against Mr. Brocker
with respect to his separation agreement with the Company.
Following discussions and negotiations between representatives of the
Company and Lomak, effective November 12, 1996, the Company entered in a
Settlement Agreement with Lomak in which all parties stipulated to the dismissal
of the Delaware litigation and to the litigation relating to Lomak's acquisition
of Mr. Brocker's shares in Ohio. The Settlement Agreement provides that the
Company will acknowledge the election of Messrs. Michaels and Grose as Directors
of the Company and, in addition, the Company and its Board of Directors have
agreed to increase the size of the Board from six to nine directors. The Board
will fill these vacancies by electing Charles M. Lombardy, Jr., Dr. Charles
Ebinger, the Board's original nominees for the September 1996 Annual Meeting,
and John H. Pinkerton of Lomak to fill these vacancies.
The Company also agreed to withdraw its motion for leave to amend its
complaint in the Mahoning County, Ohio action and entered into a separate
settlement agreement and mutual release with Bruce E. Brocker whereby both
parties acknowledged the continuing validity of the Separation Agreement of
January 6, 1995.
B-19
<PAGE> 114
Accordingly, the only remaining legal proceeding is to the existing gas contract
dispute with Lomak and its subsidiary, Border Resources.
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
10.32 Fifth Amendment to Credit Agreement by and between Bank One,
Texas, N.A. and the Company dated August 30, 1996.
10.33 Open End Mortgage and Promissory Note by and between Bank One,
Akron, N.A. and the Company dated April 30, 1996.
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 Security and Exchange purposes only.
B-20
<PAGE> 115
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.
November 13, 1996 /s/ Charles M. Lombardy, Jr.
-------------------------------------------
Charles M. Lombardy, Jr.
Chief Executive Officer and Director
November 13, 1996 /s/ Tim Wagers
-------------------------------------------
Tim Wagers
Principal Accounting and Financial Officer
B-21
<PAGE> 116
The Conversion Agent for the Conversion Offer is:
AMERICAN STOCK TRANSFER AND TRUST COMPANY
40 WALL STREET
NEW YORK, NEW YORK 10005
800-937-5449
<PAGE> 1
Exhibit(a)(2)
CONVERSION NOTICE AND LETTER OF TRANSMITTAL
NORTH COAST ENERGY, INC
IN RESPECT OF ITS CONVERSION OFFER TO ISSUE
5.0 SHARES OF COMMON STOCK UPON CONVERSION OF
EACH SHARE OF SERIES A 6% CONVERTIBLE PREFERRED STOCK
("SERIES A PREFERRED")
AND
8.0 SHARES OF COMMON STOCK UPON CONVERSION OF
EACH SHARE OF SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK ("SERIES B
PREFERRED")
AS DESCRIBED IN THE OFFERING CIRCULAR, DATED DECEMBER 20, 1996
THIS CONVERSION OFFER, AND WITHDRAWAL RIGHTS FOR PREFERRED SHARES DELIVERED
FOR CONVERSION IN CONNECTION WITH THE CONVERSION OFFER, WILL EXPIRE AT 5:00
P.M., CLEVELAND, OHIO TIME, ON
JANUARY 31, 1997 (THE "EXPIRATION DATE"), UNLESS EXTENDED.
The Conversion Agent for the Conversion Offer is:
AMERICAN STOCK TRANSFER AND TRUST COMPANY
<TABLE>
<S> <C> <C>
By Mail: By Facsimile Transmission By Hand or Overnight Courier:
40 Wall Street (For Eligible Institutions Only) 40 Wall Street
New York, New York 10005 (718) 234-5001 New York, New York 10005
</TABLE>
DELIVERY OF THIS NOTICE OF CONVERSION AND LETTER OF TRANSMITTAL (THE "LETTER OF
TRANSMITTAL") TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
This Letter of Transmittal is to be used by holders of Series A Units,
Series B Units, Series A Preferred or Series B Preferred if certificates for
Series A Units, Series B Units, Series A Preferred and/or Series B Preferred are
to be forwarded herewith or if delivery is to be made by book-entry transfer to
the Conversion Agent's account at The Depository Trust Company ("DTC").
Holders who cannot deliver the certificates for Series A Units, Series B
Units, Series A Preferred and/or Series B Preferred and all other documents
required hereby to the Conversion Agent on or prior to the Expiration Date or
who cannot complete the procedures for book-entry transfer on a timely basis, or
who cannot deliver a Letter of Transmittal and all other required documents to
the Conversion Agent on or prior to the Expiration Date, must tender their
Series A Units, Series B Units, Series A Preferred and/or Series B Preferred
pursuant to the guaranteed delivery procedure set forth under "Conversion Offer
Procedures -- Guaranteed Delivery Procedures" in the Offering Circular. DELIVERY
OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE CONVERSION AGENT.
<PAGE> 2
[ ] CHECK HERE IF UNITS OR SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO AN ACCOUNT MAINTAINED BY THE CONVERSION AGENT WITH DTC AND COMPLETE
THE FOLLOWING:
Name of Delivery Institution:___________________________________________________
Account Number__________________________________________________________________
Transaction Code Number_________________________________________________________
[ ] CHECK HERE IF SHARES ARE BEING DELIVERED PURSUANT TO NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE CONVERSION AGENT AND COMPLETE THE FOLLOWING.
PLEASE ENCLOSE A PHOTOCOPY OF SUCH NOTICE OF GUARANTEED DELIVERY.
Name(s) of Registered Holders(s)________________________________________________
________________________________________________________________________________
Window Ticket Number (if any)___________________________________________________
Date of Execution of Notice of Guaranteed Delivery______________________________
Name of Eligible Institution that Guaranteed Delivery___________________________
If delivery is by book entry transfer:
Account No._____________________________________________________________
Transaction Code No.____________________________________________________
LIST BELOW UNITS AND/OR THE PREFERRED SHARES TO WHICH THIS
LETTER OF TRANSMITTAL RELATES:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF UNITS OR PREFERRED SHARES DELIVERED
- ------------------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF UNITS OR SHARES ENCLOSED
REGISTERED HOLDER(S)(A) (ATTACH ADDITIONAL LIST, IF NECESSARY)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CERTIFICATE NUMBER OF SHARES
NUMBER(S)(B) TO BE CONVERTED(C)
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
TOTAL SHARES
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) "Registered Holder" means the person in whose name the Series A Units,
Series B Units, Series A Preferred or Series B Preferred is registered on
the books of the Company's transfer agent. If not already printed hereon,
please print the name and address of the Registered Holder exactly as they
appear on the certificate(s) representing the Units or Preferred Shares
delivered hereby. (b) Need not be completed by Book Entry Holders. If space
is inadequate, please attach a separate signed schedule. (c) Holders who
desire to convert Series A and/or Series B Preferred Shares in connection
with this Conversion Offer must deliver all, and not less than all, of their
Series A and/or Series B Preferred Shares for conversion. No payment is
being made in respect of accrued and unpaid dividends on Series B Preferred
Shares delivered and accepted for conversion.
NOTE: Each holder of Series A Units who elects to convert such holder's Series A
Preferred shares will deliver the Series A Unit certificate(s) and will be
issued certificates for the number of shares of Common Stock represented by each
Unit, together with the number of shares of Common Stock into which the Series A
Preferred tendered by the holder pursuant to the Conversion Offer have been
converted. Holders of Series B Units who elect to convert their Series B
Preferred shares will deliver the Series B Unit certificate(s) and will be
issued certificates for the number of shares of Common Stock into which the
Series B Preferred tendered by the holder pursuant to the Conversion Offer have
been converted and a certificate representing their warrants.
<PAGE> 3
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS.
Ladies and Gentlemen:
The undersigned hereby delivers the above-described Series A Preferred
and/or Series B Preferred shares of the Company, in accordance with the
Company's offer to issue 5.0 shares of its Common Stock, par value $.01 per
share (the "Common Stock"), upon conversion of each share of Series A 6%
Convertible Preferred Stock (the "Series A Preferred") and 8.0 shares of its
Common Stock upon conversion of each share of Series B Cumulative Convertible
Preferred Stock (the "Series B Preferred" and together with the Series A
Preferred, the "Preferred Shares") in accordance with the Company's Certificate
of Incorporation, as amended (the "Certificate"), and upon the terms and subject
to the conditions set forth in the Offering Circular dated December 20, 1996
(the "Offering Circular"), and in this Letter of Transmittal (together with the
Offering Circular, the "Conversion Offer"). Receipt of the Offering Circular and
Letter of Transmittal are hereby acknowledged. THE UNDERSIGNED UNDERSTANDS THAT
SERIES A PREFERRED AND/OR SERIES B PREFERRED SHARES ACCEPTED FOR CONVERSION WILL
NOT RECEIVE ANY DIVIDEND PAYMENTS IN RESPECT OF SUCH PREFERRED SHARES.
On the terms and subject to the conditions of the Conversion Offer, and
subject to, and effective upon, acceptance for conversion by the Company of the
Series A Units, Series B Units, Series A Preferred and/or Series B Preferred
delivered herewith and the issuance of shares of Common Stock in respect thereof
in accordance with the terms of the Certificate and the Conversion Offer, the
undersigned hereby relinquishes all right, title and interest in and to all such
Series A Units, Series B Units, Series A Preferred and/or Series B Preferred as
are being delivered hereby and that are accepted for conversion pursuant to the
Conversion Offer. The undersigned hereby irrevocably constitutes and appoints
the Conversion Agent as the true and lawful agent and attorney-in-fact of the
undersigned (with full knowledge that the Conversion Agent also acts as the
agent of the Company) with respect to the Series A Units, Series B Units, Series
A Preferred and/or Series B Preferred delivered hereby and accepted for
conversion pursuant to the Conversion Offer, with full power of substitution
(such power of attorney being deemed to be an irrevocable power coupled with an
interest), to (a) deliver the Series A Units, Series B Units, Series A Preferred
and/or Series B Preferred to the Company for conversion and (b) receive the
Common Stock to be issued in connection with conversion of the Preferred Shares
and the Conversion Offer, all in accordance with the terms and subject to the
conditions of the Conversion Offer; provided, however, that the undersigned
shall retain the voting rights with respect to such Preferred Shares until the
Company has accepted the same for conversion in connection with the Conversion
Offer.
By delivering certificates for Series A Units, Series B Units, Series A
Preferred and/or Series B Preferred for conversion in connection with this
Conversion Offer, the undersigned represents and warrants to the Company that
the undersigned has full power and authority to convert the Preferred Shares and
that the Preferred Shares are free and clear of all liens, restrictions, charges
and encumbrances and are not subject to any adverse claim. The undersigned will,
upon request, execute and deliver any additional documents deemed by the
Conversion Agent or the Company to be necessary or desirable to complete the
conversion of the Preferred Shares delivered hereby.
The undersigned understands that the delivery of Preferred Shares for
conversion in connection with this Conversion Offer by a holder pursuant to one
of the procedures set forth in the Offering Circular and this Letter of
Transmittal will constitute an agreement between the undersigned and the Company
in accordance with the terms and subject to the conditions of the Conversion
Offer.
All authority conferred, or agreed to be conferred, in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, legal representatives, successors, and assigns of the
undersigned.
Unless otherwise indicated herein under "Special Issuance Instructions,"
please issue the shares of Common Stock due in respect of the Series A Units,
Series B Units, Series A Preferred and/or Series B Preferred accepted for
conversion in the name(s) of the Registered Holder(s) appearing above under
"Description of Units or Preferred Shares Delivered." In addition, unless
otherwise indicated under "Special Delivery Instructions," please mail the
shares of Common Stock due in respect of the Preferred Shares accepted for
conversion, and return any Series A Units, Series B Units, Series A Preferred
and/or Series B Preferred not accepted and accompanying documents, as
appropriate, to the Registered Holder(s) at the address(es) appearing above
under "Description of Units or Preferred Shares Delivered." If both the "Special
Issuance Instructions" and "Special Delivery Instructions" are completed, please
issue the shares of Common Stock due in respect of the Preferred Shares accepted
for conversion in the name(s) of, and mail the shares of Common Stock due in
respect of the Preferred Shares accepted for conversion to, the person(s) so
indicated. The undersigned recognizes that the Company has no obligation
pursuant to the "Special Issuance Instructions" to transfer any Series A Units,
Series B Units, Series A Preferred and/or Series B Preferred from the name(s) of
the Registered Holder(s) thereof if the Company does not accept for conversion
any of the Preferred Shares so delivered. The undersigned acknowledges and
agrees that the Company and the Conversion Agent may in appropriate
circumstances defer effecting such transfer and may retain such shares of Common
Stock until satisfactory evidence of the payment of transfer taxes payable on
account of such transfer by the undersigned, or exemption therefrom, is
submitted to them.
<PAGE> 4
THE UNDERSIGNED HEREBY DELIVERS TO THE CONVERSION AGENT FOR CONVERSION THE UNITS
AND/OR PREFERRED SHARES SET FORTH ABOVE UNDER "DESCRIPTION OF UNITS OR PREFERRED
SHARES DELIVERED."
- --------------------------------------------------------------------------------
SIGN AND DATE HERE
(PLEASE COMPLETE SUBSTITUTE W-9 BELOW)
(Must be signed by Registered Holder(s) exactly as name(s) appear(s) on the
certificates representing the Units and/or Preferred Shares or on a security
position listing or by person(s) authorized to become Registered Holder(s) by
certificates and documents transmitted herewith. If signature is by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, please
set forth the following information and see Instruction 1.)
________________________________________________________________________________
________________________________________________________________________________
(SIGNATURE(S) OF HOLDER(S))
Dated: _________________________________________________________________, 199__
Name(s) of
Registered Holder(s) __________________________________________________________
________________________________________________________________________________
(PLEASE TYPE OR PRINT)
Address ________________________________________________________________________
________________________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone No. ____________________________________________________
Tax Identification
or Social Security No. _________________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 2, 7 AND 8)
To be completed ONLY if the shares of Common Stock to be issued upon
conversion of the Preferred Shares accepted for conversion are to be sent to
someone other than the Registered Holder appearing above under "Description of
Units or Preferred Shares Delivered."
Deliver Common Stock to:
Name __________________________________________________________________________
(PLEASE TYPE OR PRINT)
Address _______________________________________________________________________
________________________________________________________________________________
(INCLUDE ZIP CODE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 2, 7 AND 8)
To be completed ONLY if the shares of Common Stock to be issued upon
conversion of the Preferred Shares accepted for conversion are to be issued in
the name of someone other than the Registered Holder appearing above under
"Description of Units or Preferred Shares Delivered."
Issue Common Stock to:
Name __________________________________________________________________________
(PLEASE TYPE OR PRINT)
Address _______________________________________________________________________
________________________________________________________________________________
(INCLUDE ZIP CODE)
________________________________________________________________________________
TAXPAYER IDENTIFICATION NO. OR SOCIAL SECURITY NO.
COMPLETE SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1 AND 2)
Authorized Signature ___________________________________________________________
Name(s) ________________________________________________________________________
(PLEASE PRINT)
Capacity _______________________________________________________________________
(PLEASE PRINT)
Name of Firm ___________________________________________________________________
Address ________________________________________________________________________
________________________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone No. ____________________________________________________
Dated: ___________________________________________________________________, 199_
- --------------------------------------------------------------------------------
HOLDERS WHO DO NOT WISH TO CONVERT THEIR PREFERRED SHARES
NEED NOT TAKE ANY ACTION WITH RESPECT TO THIS CONVERSION OFFER.
<PAGE> 5
INSTRUCTIONS
1. SIGNATURES ON LETTERS OF TRANSMITTAL.
Only a Registered Holder of Series A Units, Series B Units, Series A
Preferred and/or Series B Preferred may deliver certificates for Series A Units,
Series B Units, Series A Preferred and/or Series B Preferred for conversion of
Preferred Shares in this Conversion Offer. Any beneficial owner whose Series A
Units, Series B Units, Series A Preferred and/or Series B Preferred are
registered in the name of its broker, dealer, commercial bank, trust company or
other nominee and who wishes to convert his or her Preferred Shares in
connection with this Conversion Offer should contact such Registered Holder
promptly and instruct such Registered Holder to effect delivery on its behalf.
If this Letter of Transmittal is signed by the Registered Holder(s) of the
Series A Units, Series B Units, Series A Preferred and/or Series B Preferred
delivered hereby, the signatures must correspond exactly with the name(s) as
written on the face of the certificates without any change whatsoever. If any of
the Series A Units, Series B Units, Series A Preferred and/or Series B Preferred
delivered hereby are owned of record by two or more joint owners, all such
owners must sign this Letter of Transmittal.
If the Letter of Transmittal is signed by a person other than the Registered
Holder of the Series A Units, Series B Units, Series A Preferred and/or Series B
Preferred, the certificates representing such Series A Units, Series B Units,
Series A Preferred and/or Series B Preferred must be endorsed or accompanied by
appropriate stock powers, in either case signed exactly as the name or names of
the Registered Holder (or Registered Holders) appear on such certificates,
together with a letter (or other evidence) describing the transaction pursuant
to which the Series A Units, Series B Units, Series A Preferred and/or Series B
Preferred were transferred. Signatures on any stock powers or other transfer
documents submitted in connection with this Letter of Transmittal must be
guaranteed by an Eligible Institution. See Instruction 2.
If the Letter of Transmittal or any certificates for Series A Units, Series
B Units, Series A Preferred and/or Series B Preferred or related stock powers
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and provide evidence
satisfactory to the Company of their authority to so act.
2. GUARANTEE OF SIGNATURES.
Except as provided below, all signatures on this Letter of Transmittal must
be guaranteed by a financial institution (including most commercial banks,
savings and loan associations and brokerage houses) that is a participant in the
Security Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Guarantee Program or the Stock Exchange Medallion Program
("Eligible Institutions"). Signatures on this Letter of Transmittal need not be
guaranteed if (i) the Letter of Transmittal is signed by a Registered Holder of
such Series A Units, Series B Units, Series A Preferred and/or Series B
Preferred whose name appears on a security position listing as the owner of
Series A Units, Series B Units, Series A Preferred and/or Series B Preferred
delivered herewith and such Registered Holder(s) have not completed either of
the boxes entitled "Special Issuance Instructions" or "Special Delivery
Instructions" herein or (ii) such Series A Units, Series B Units, Series A
Preferred and/or Series B Preferred are for the account of an Eligible
Institution.
3. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES; BOOK ENTRY TRANSFER.
Unless guaranteed delivery procedures are utilized, this Letter of
Transmittal (or a manually signed facsimile thereof), properly completed and
duly executed, along with any required signature guarantees and any other
documents required by this Letter of Transmittal, must be received by the
Conversion Agent at its address set forth herein on or prior to 5:00 p.m.,
Cleveland, Ohio time, on the Expiration Date.
In addition, unless guaranteed delivery procedures are utilized (or book
entry transfer is effected as provided below), certificates for all Series A
Units, Series B Units, Series A Preferred and/or Series B Preferred with respect
to the conversion must be received by the Conversion Agent at its address set
forth herein prior to 5:00 p.m., Cleveland, Ohio time, on the Expiration Date.
If a Registered Holder of Series A Units, Series B Units, Series A Preferred
and/or Series B Preferred desires to deliver the certificate or certificates for
such Preferred Shares to be converted and such certificates are not immediately
available (or the procedures for book-entry transfer discussed below cannot be
completed on a timely basis), or time will not permit such holder's certificates
or other required documents to reach the Conversion Agent before the Expiration
Date, a delivery for conversion may be effected by following the guaranteed
delivery procedures set forth in the Offering Circular under "Conversion Offer
Procedures -- Guaranteed Delivery Procedures."
Any financial institution that is a participant in any of the Book Entry
Transfer Facilities systems may make book entry transfer of the Series A Units,
Series B Units, Series A Preferred and/or Series B Preferred to the Conversion
Agent by causing the Depository Trust Company ("DTC") to transfer such Series A
Units, Series B Units, Series A Preferred and/or Series B Preferred into the
Conversion Agent's account in accordance with such Book Entry Transfer
Facility's procedure for such transfer. (Such transfer shall not affect the
beneficial ownership of the transferred shares.) Although transfer of Series A
Units, Series B Units, Series A Preferred and/or Series B Preferred may be
effected through book entry transfer into the Conversion
<PAGE> 6
Agent's account at DTC, the Letter of Transmittal (or facsimile thereof), with
any required signature guarantees and any other required documents, must, in any
case, be transmitted to and received or confirmed by the Conversion Agent at its
address as set forth herein prior to 5:00 p.m Cleveland, Ohio time, on the
Expiration Date (unless guaranteed delivery procedures are utilized). DELIVERY
OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE
DELIVERY TO THE CONVERSION AGENT.
THE METHOD OF DELIVERY OF SERIES A UNITS, SERIES B UNITS, SERIES A PREFERRED
AND/OR SERIES B PREFERRED AND ALL OTHER REQUIRED DOCUMENTS TO THE CONVERSION
AGENT IS AT THE ELECTION AND RISK OF THE HOLDER DELIVERING SUCH SERIES A UNITS,
SERIES B UNITS, SERIES A PREFERRED AND/OR SERIES B PREFERRED. IF SENT BY MAIL IT
IS RECOMMENDED THAT THE HOLDER USE REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE DELIVERY TO THE CONVERSION AGENT BEFORE THE EXPIRATION DATE.
No alternative, conditional or contingent deliveries will be accepted. All
holders delivering Series A Units, Series B Units, Series A Preferred and/or
Series B Preferred for conversion of Preferred Shares, by execution of this
Letter of Transmittal (or facsimile thereof), waive any right to receive any
notice of the acceptance of their Preferred Shares for conversion.
All questions as to the validity, form and eligibility (including time of
receipt) of deliveries for conversion of Preferred Shares will be resolved by
the Company, whose determination will be final and binding on all parties. The
Company reserves the absolute right to reject any or all deliveries for
conversion that are not in proper form or which would, in the opinion of counsel
for the Company, be unlawful. Neither the Company, the Conversion Agent nor any
other person will be under any duty to give notification of any defects or
irregularities in any deliveries or incur any liability for failure to give any
such notification. Deliveries will not be deemed to have been made until such
irregularities have been cured or waived. The Company also reserves the right,
in its judgment, to waive any irregularities or conditions of delivery as to
particular Series A Units, Series B Units, Series A Preferred and/or Series B
Preferred. The Company's interpretation of the terms and conditions of this
Conversion Offer (including the instructions in the Letter of Transmittal) will
be final and binding. Unless waived, any irregularities or defects in connection
with deliveries must be cured within such time as the Company determines.
4. WITHDRAWAL OF DELIVERIES.
Any holder of Series A Units, Series B Units, Series A Preferred and/or
Series B Preferred who has delivered a certificate or certificates for, or
effected delivery with respect to, Preferred Shares for conversion may withdraw
such delivery at any time prior to 5:00 p.m., Cleveland, Ohio time, on the
Expiration Date.
All questions as to the validity, form and eligibility (including time of
receipt) of notices of withdrawal will be determined by the Company, whose
determination will be final and binding on all parties. Neither the Company, the
Conversion Agent, nor any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal or
incur any liability for failure to give any such notification.
5. NO PARTIAL CONVERSIONS.
Holders of Series A Units, Series B Units, Series A Preferred and/or Series
B Preferred who desire to convert their Series A Preferred and/or Series B
Preferred shares in connection with this Conversion Offer must convert all, and
not less than all, of the Series A Preferred and/or Series B Preferred owned by
them.
6. RETURN OF CERTIFICATES NOT ACCEPTED FOR CONVERSION.
If any Preferred Shares delivered for conversion are not converted in
connection with this Conversion Offer because of an invalid delivery, the
occurrence or nonoccurrence of certain other events set forth in the Offering
Circular or otherwise, such unaccepted certificates for Series A Units, Series B
Units, Series A Preferred and/or Series B Preferred will be returned, at the
Company's expense, to the Registered Holder thereof as promptly as practicable
after the Expiration Date or the termination of this Conversion Offer, as
applicable.
7. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the
conversion of Preferred Shares in connection with this Conversion Offer and
issuance of additional shares of Common Stock. If, however, Common Stock is to
be delivered to, or is to be registered or issued in the name of, any person
other than the Registered Holder of the Series A Units, Series B Units, Series A
Preferred and/or Series B Preferred, or if the Preferred Shares to be converted
are registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other than
the issuance of Common Stock pursuant to this Conversion Offer, the amount of
any such transfer taxes (whether imposed on the Registered Holder or any other
person) will be payable by the delivering holder. Such holder hereby
acknowledges and agrees that the Company and the Conversion Agent may defer
effecting such transfer and may retain such shares of Common Stock until
satisfactory evidence of the payment of such taxes, or exemption therefrom, is
submitted to them.
<PAGE> 7
8. SPECIAL ISSUANCE INSTRUCTIONS AND SPECIAL DELIVERY INSTRUCTIONS.
If certificates representing shares of Common Stock are to be issued to a
person other than the person signing this Letter of Transmittal or if such
certificates are to be sent or returned to someone other than the person signing
this Letter of Transmittal or to an address other than that shown above, the
appropriate information set forth in "Special Issuance Instructions" and
"Special Delivery Instructions" should be completed.
9. BACKUP WITHHOLDING.
Federal income tax law requires that, unless an exception applies, a
recipient (a "Payee") of the shares of Common Stock issued in respect of
converted Preferred Shares must provide the Conversion Agent (as payor) with
such Payee's taxpayer identification number ("TIN") and certify that such number
is correct. In the case of a Payee who is an individual, the Payee's TIN is his
or her social security number. In addition, a Payee must certify that such Payee
is not subject to backup withholding. If the foregoing requirements are not
satisfied, the Payee may be subject to a $50 penalty imposed by the Internal
Revenue Service (the "IRS") and to backup withholding. The Payee with respect to
any converted Preferred Shares will be either (i) the delivering holder of such
Series A Units, Series B Units, Series A Preferred and/or Series B Preferred or
(ii) if the shares of Common Stock are issued to one or more other persons
pursuant to the Special Issuance Instructions, as indicated in the applicable
box, such other person or persons. Certain Payees (including among others, all
corporations and certain foreign Payees) are not subject to these backup
withholding and reporting requirements. In order to satisfy the Conversion Agent
that a foreign individual qualifies as an exempt recipient, such Payee must
submit a statement, signed under penalties of perjury, attesting to that
individual's exempt status. Such statement can be obtained from the Conversion
Agent. Foreign Payees should consult their own tax advisers with respect to the
tax consequences (including backup withholding requirements) of the Conversion
Offer.
If backup withholding applies, the Conversion Agent is required to withhold
31% of any "Deemed Distribution" (as defined in the Offering Circular) made to
the Payee. Backup withholding is not an additional tax. Rather, the tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
be obtained provided that the required information is furnished to the IRS.
To prevent backup withholding, each nonexempt Payee must provide his or her
correct TIN by completing the Substitute Form W-9 set forth herein, certifying
that the TIN provided is correct (or that such Payee is awaiting a TIN). See the
enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 for additional instructions. In addition, the Payee must
also certify that he or she is not subject to backup withholding either because
(i) such Payee has not been notified by the IRS that he or she is subject to
backup withholding as a result of failure to report all interest or dividends or
(ii) the IRS has notified such Payee that he or she is no longer subject to
backup withholding. Failure to complete the Substitute Form W-9 will not, by
itself, cause Preferred Shares to be deemed invalidly delivered, but may subject
the payee to backup withholding.
10. WAIVER OF CONDITIONS.
Subject to the terms of the Conversion Offer, the conditions of the
Conversion Offer may be waived by the Company, in whole or in part, at any time
and from time to time, in the Company's judgment, in the case of any Series A
Units, Series B Units, Series A Preferred and/or Series B Preferred delivered.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Requests for assistance may be directed to, and additional copies of the
Offering Circular, this Letter of Transmittal and the Notice of Guaranteed
Delivery may be obtained from the Conversion Agent.
12. LOST, DESTROYED OR STOLEN CERTIFICATES.
[ ] Please check the box if any certificate(s) representing Series A Units,
Series B Units, Series A Preferred and/or Series B Preferred has been lost,
destroyed or stolen. Instructions will be given to you as to what steps must be
taken to obtain a replacement certificate(s). The Letter of Transmittal and
related documents cannot be processed until the procedures for replacing such
missing certificate(s) have been followed.
<PAGE> 8
TO BE COMPLETED BY ALL CONVERTING HOLDERS
(SEE INSTRUCTION 9)
PAYOR'S NAME _________________________________________________________
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
SUBSTITUTE _________________________________
FORM W-9 PART 1 -- PLEASE PROVIDE YOUR TIN IN SOCIAL SECURITY NUMBER
PAYOR'S REQUEST FOR THE BOX AT RIGHT AND CERTIFY BY SIGNING
TAXPAYER IDENTIFICATION AND DATING BELOW. OR_______________________________
NUMBER (TIN) EMPLOYER IDENTIFICATION NUMBER
--------------------------------------------------------------------------
PART 2 -- Awaiting TIN [ ]
- ---------------------------------------------------------------------------------------------------------
CERTIFICATION -- UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM IS
TRUE, CORRECT AND COMPLETE.
I am not subject to backup withholding either because (a) I am exempt from backup withholding, or
(b) I have not been notified by the Internal Revenue Service ("IRS") that I am subject to backup
withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me
that I am no longer subject to backup withholding.
- ---------------------------------------------------------------------------------------------------------
Name___________________________________________________________________________________________________
(PLEASE PRINT)
Address________________________________________________________________________________________________
(INCLUDING ZIP CODE)
Signature__________________________________________________________ Date___________________________
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 9
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER
IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office, or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a Taxpayer Identification Number within sixty (60) days, 31% of any
"Deemed Distribution" (as defined in the Offering Circular) made to me
thereafter will be withheld until I provide a number.
Signature _______________________________ Date ____________________________
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN A BACKUP
WITHHOLDING OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE OFFER.
PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS
Facsimile copies of the Letter of Transmittal, properly completed and duly
executed, will be accepted. The Letter of Transmittal, certificates of Series A
Units, Series B Units, Series A Preferred and/or Series B Preferred and any
other required documents should be sent or delivered by each holder or his or
her broker, dealer, commercial bank, trust company or other nominee to the
Conversion Agent at one of its addresses set forth below:
Conversion Agent for the Conversion Offer is:
AMERICAN STOCK TRANSFER AND TRUST COMPANY
<TABLE>
<S> <C> <C>
By Mail: By Facsimile Transmission By Hand or Overnight Courier:
40 Wall Street (For Eligible Institutions Only) 40 Wall Street
New York, New York 10005 (718) 234-5001 New York, New York 10005
</TABLE>
Questions and requests for assistance may be directed to the Conversion
Agent at its address and telephone number listed above. Additional copies of the
Offering Circular, this Letter of Transmittal and other conversion offer
materials may be obtained from the Conversion Agent as set forth above, and will
be furnished promptly at the Company's expense. You may also contact your
broker, dealer, commercial bank, trust company or other nominee for assistance
concerning this Conversion Offer.
<PAGE> 1
Exhibit(a)(3)
NOTICE OF GUARANTEED DELIVERY
FOR
CONVERSION OF SERIES A PREFERRED AND/OR SERIES B PREFERRED
OF
NORTH COAST ENERGY, INC.
As set forth in "Conversion Offer Procedures" of the Offering Circular (as
defined below), this form or one substantially equivalent hereto must be used to
convert shares of Series A Preferred and/or Series B Preferred pursuant to the
Conversion Offer (as defined below) if certificates for shares of Series A 6%
Convertible Preferred Stock (the "Series A Preferred"), shares of Series B
Cumulative Convertible Preferred Stock (the "Series B Preferred," and together
with the Series A Preferred, the "Series A and B Preferred" or the "Shares"),
Series A Units or Series B Units (the Series A Units and Series B Units are
collectively referred to herein as the "Units"), of North Coast Energy, Inc., a
Delaware corporation, are not immediately available or time will not permit all
documents required by the Letter of Transmittal to reach the Conversion Agent by
the Expiration Date (as defined in the Offering Circular). Such form may be
delivered by hand or transmitted by telegram, facsimile transmission, mail or
hand delivery to the Conversion Agent. See "Conversion Offer Procedures" of the
Offering Circular.
TO: AMERICAN STOCK TRANSFER AND TRUST COMPANY, CONVERSION AGENT
<TABLE>
<S> <C> <C>
By Mail: By Facsimile Transmission: By Hand or Overnight Courier:
40 Wall Street, (718) 234-5001 40 Wall Street,
New York, New York 10005 (For Eligible Institutions Only) New York, New York 10005
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION OF INSTRUCTIONS VIA A
FACSIMILE TRANSMISSION
OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
The undersigned hereby delivers to North Coast Energy, Inc., a Delaware
corporation, for conversion and upon the terms and subject to the conditions set
forth in the Offering Circular dated December 20, 1996 (the "Offering Circular")
and the related Letter of Transmittal (which together constitute the "Conversion
Offer"), receipt of which is hereby acknowledged, the number of Series A
Preferred and/or Series B Preferred shares indicated below pursuant to the
guaranteed delivery procedure set forth in the Conversion Offer.
Number of Series A Preferred and/or Series B
Preferred shares:
- ------------------------------------------------------
Certificate Nos. of Series A Units, Series B Units
(if available):
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
Name(s) of Record Holder(s):
--------------------------
- ------------------------------------------------------
(PLEASE TYPE OR PRINT)
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
Address:
----------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
ZIP CODE
Area Code and
Telephone No.:
----------------------------------------
SIGN HERE
Signature(s):
-----------------------------------------
- ------------------------------------------------------
Dated:
------------------------------------------------
<PAGE> 2
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of a registered national securities exchange or
of the National Association of Securities Dealers, Inc. or a commercial bank or
trust company having an office or correspondent in the United States, guarantees
(a) that the above-named person(s) "own(s)" the Series A Units, Series B Units,
Series A Preferred and/or Series B Preferred delivered for conversion of Series
A Preferred and/or Series B Preferred hereby within the meaning of Rule 10b-4
promulgated under the Securities Exchange Act of 1934, as amended, (b) that such
tender of Series A Preferred and/or Series B Preferred complies with Rule 10b-4
and (c) that it will deliver to the Conversion Agent, at one of its addresses
set forth above, the Share and/or Unit certificate(s) representing the Series A
Preferred and/or Series B Preferred to be converted hereby, in proper form for
transfer, or deliver to the Conversion Agent such Shares and/or Units pursuant
to the procedures for book-entry transfer, in either case with delivery of a
properly completed and duly executed Letter of Transmittal (or manually signed
facsimile thereof) and any other required documents, all within three NASDAQ (as
defined in the Offering Circular) trading days after the date hereof.
- ------------------------------------------------------
NAME OF FIRM
- ------------------------------------------------------
ADDRESS
- ------------------------------------------------------
ZIP CODE
Area Code and Tel. No.
--------------------------------
- ------------------------------------------------------
AUTHORIZED SIGNATURE
- ------------------------------------------------------
TITLE
Name
--------------------------------------------------
(PLEASE TYPE OR PRINT)
Dated
-------------------------------------------------
DO NOT SEND SERIES A UNITS, SERIES B UNITS, SERIES A PREFERRED AND/OR SERIES B
PREFERRED CERTIFICATES WITH THIS FORM
The Institution which completes this form must communicate the guarantee to
the Conversion Agent and must deliver the Letter of Transmittal and certificates
for Series A Units, Series B Units, Series A Preferred and/or Series B Preferred
to the Conversion Agent within the time period shown herein. Failure to do so
could result in a financial loss to such Institution.
<PAGE> 1
Exhibit (a)(4)
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYOR--Social Security numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payor.
<TABLE>
<S> <C>
- -----------------------------------------------------------
GIVE THE
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF--
- -----------------------------------------------------------
1. An individual's account The individual
2. Two or more individuals The actual owner
(joint account) of the account or,
if combined funds,
any one of the
individuals(1)
3. Husband and wife The actual owner
(joint account) of the account or,
if joint funds,
either person(1)
4. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
5. Adult and minor The adult or,
(joint account) if the minor is the
only contributor,
the minor(1)
6. Account in the name of The ward, minor,
guardian or committee for or incompetent
a designated ward, minor, person(3)
or incompetent person
7. a. The usual revocable savings The grantor-
trust account (grantor is trustee(1)
also trustee)
b. So-called trust account that The actual owner(1)
is not a legal or valid trust
under State law
8. Sole proprietorship account The owner(4)
<CAPTION>
- -----------------------------------------------------------
- -----------------------------------------------------------
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF--
- -----------------------------------------------------------
<S> <C>
9. A valid trust, estate, The legal entity (Do
or pension trust not furnish the
identifying number
of the personal
representative or
trustee unless the
legal entity itself
is not designated in
the account
title.)(5)
10. Corporate account The corporation
11. Religious, charitable, or The organization
educational organization account
12. Partnership account held in the The partnership
name of the business
13. Association, club or other The organization
tax-exempt organization
14. A broker or registered nominee The broker or
nominee
15. Account with the Department The public entity
of Agriculture in the name of a
public entity (such as a State or
local government, school district,
or prison) that receives
agricultural program payments
- -----------------------------------------------------------
<FN>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate or pension trust.
</TABLE>
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
<PAGE> 2
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service (the "IRS") and
apply for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include the
following:
- A corporation.
- A financial institution.
- An organization exempt from tax under section 501(a), or an individual
retirement plan.
- The United States or any agency or instrumentality thereof.
- A State, the District of Columbia, a possession of the United States, or any
political subdivision or instrumentality thereof.
- A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
- An international organization or any agency, or instrumentality thereof.
- A registered dealer in securities or commodities registered in the U.S. or a
possession of the U.S.
- A real estate investment trust.
- A common trust fund operated by a bank under section 584(a).
- An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1).
- An entity registered at all times under the Investment Company Act of 1940.
- A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- Payments to nonresident aliens subject to withholding under section 1441.
- Payment to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
- Payments of interest on obligations issued by individuals.
NOTE: You may be subject to backup withholding if this interest is $600 or
more and is paid in the course of the payor's trade or business and you have
not provided your correct taxpayer identification number to the payor.
- Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
- Payments described in section 6049(b)(5) to nonresident aliens.
- Payments on tax-free covenant bonds under section 1451.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYOR, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYOR. IF THE PAYMENTS ARE INTEREST OR DIVIDENDS, ALSO SIGN AND DATE THE
FORM.
Certain payments other than interest and dividends that are not subject to
information reporting are also not subject to backup withholding. For details,
see the regulations under sections 6041, 6041A(a), 6045, and 6050A.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payors
who must report the payments to IRS. IRS uses the numbers whether or not
recipients are required to file tax returns. Payors must generally withhold 20%
of taxable interest, dividends, and certain other payments to a payee who does
not furnish a taxpayer identification number to a payor. Certain penalties may
also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER -- If you fail
to furnish your taxpayer identification number to a payor, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.
(2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS. -- If you fail to
include any portion of an includible payment for interest or dividends in gross
income, such failure will be treated as being due to negligence and will be
subject to a penalty equal to the sum of 5% on any portion of an underpayment
attributable to that failure, unless there is clear and convincing evidence to
the contrary.
(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE.
<PAGE> 1
Exhibit (a)(5)
Logo
NORTH COAST ENERGY, INC.
Your Partner in Energy Development
IMPORTANT: THIS OFFER EXPIRES ON JANUARY 31,1997
December 20,1996
TO: HOLDERS OF THE SERIES A 6% CONVERTIBLE PREFERRED STOCK
("SERIES A PREFERRED STOCK") OF NORTH COAST ENERGY, INC. ("NORTH COAST")
Our communications of the past several months have described changes at North
Coast Energy and our plans for improving and enhancing the Company. The
improvements that the Board envisions will require significant and often
difficult changes and decisions. Perhaps one of the Company's most needed
areas of change and improvement is its capital structure which includes two
classes of Preferred stock and impacts the Company's cash flow by over
$644,000.
As briefly described in our letter of December 2, 1996, the Board has decided
to offer holders of Series A Preferred Stock an improved offer to exchange
their Series A Preferred Stock into Common Stock of the Company. The
Conversion Offer detailed in the enclosed material provides holders of Series
A Preferred Stock the opportunity to exchange each of their shares of Series A
Preferred Stock for five (5) shares of North Coast Common Stock compared to
the conversion rate of two point three (2.3) shares of Common Stock.
We have attempted to make the offer and conversion process as clear and
simplified as possible. The Company has not engaged a broker to contact you
and no broker will be paid on any conversion of shares of Series A Preferred
Stock. However, the Conversion Agent, American Stock Transfer and Trust
Company (800) 937-5449, the Company, its officers and staff are available to
assist you with the conversion process. Our phone number is (216) 425-2330 or
(800) 645-6427. As described in the Offering Circular, the Conversion Offer
includes those shares of Series A Preferred Stock held in Series A Units as
well as shares of Series A Preferred Stock held independently by you or in a
brokerage account. If you hold your Series A Preferred Stock or Series A Units
directly, you need to complete, sign and date the Conversion Notice and Letter
of Transmittal and return it with your certificate(s). Please note that if you
intend to change any of the current information on the certificate(s)
including name(s) or address, you must also complete the special instructions
section of the Conversion Notice and Letter of Transmittal and obtain a
signature guarantee before you forward your certificate(s). If your shares of
Series A Preferred or Series A Units are held in street name (brokerage or
similar account) you must notify the broker of your acceptance of the
Conversion Offer. If you have lost your certificate(s), please indicate this
in the space provided in the Conversion Notice and Letter of Transmittal and
immediately return to the Conversion Agent.
As a reminder, should you decide to participate in this Conversion Offer, you
must convert all of the shares of Series A Preferred Stock you hold.
While the Board believes the Conversion Offer to be an important step in
improving the finances and capital structure of the Company, we recognize that
this is a personal decision of each holder of Series A Preferred Stock. THE
COMPANY WILL NOT SEEK OR OBTAIN AN INDEPENDENT "FAIRNESS OPINION" OR
INDEPENDENT VALUATION REGARDING THIS CONVERSION OFFER AND IS NOT MAKING ANY
RECOMMENDATION TO HOLDERS OF SERIES A PREFERRED STOCK WHETHER TO ACCEPT OR
REJECT THIS CONVERSION OFFER. EACH HOLDER OF SHARES OF SERIES A PREFERRED
STOCK SHOULD CAREFULLY REVIEW THE CONVERSION OFFER AND THE APPLICABLE TAX
CONSEQUENCES BEFORE DECIDING WHETHER TO CONVERT SUCH SHARES IN CONNECTION WITH
THIS CONVERSION OFFER.
The Conversion Offer is described in the enclosed Offering Circular dated
December 20, 1996 and in the accompanying Conversion Notice and Letter of
Transmittal. As you will see, a similar offer is also being made to the
holders of North Coast's other series of outstanding preferred stock (Series
B). The Offering Circular includes North Coast's Annual Report on Form 10-K
for the year ended March 31, 1996 and its Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, and other important information
concerning the Conversion Offer and the Company. Please read this material
carefully for a full description of the terms and conditions of the Conversion
Offer. We encourage you to call and discuss this matter with us (216-425-2330
or 800-645-6427) or the Conversion Agent (800-937-5449) and to review the
material carefully.
1993 Case Parkway - Twinsburg, Ohio 44087-2343
(800) 645-6427 - (216) 425-2330 - Fax: (216) 405-3298
<PAGE> 2
BY TENDERING SHARES PURSUANT TO THE OFFER AND NOT WITHDRAWING THE SAME, EACH
TENDERING HOLDER WILL BE DEEMED TO HAVE WAIVED SUCH HOLDER'S RIGHT TO RECEIVE
ANY DIVIDEND WHICH MAY BECOME PAYABLE IN RESPECT OF THE TENDERED SHARES OF
SERIES A PREFERRED STOCK SUBSEQUENT TO THE DATE THAT SUCH SHARES ARE TENDERED,
EVEN IF SUCH DIVIDEND BECOMES PAYABLE PRIOR TO ACCEPTANCE OF SUCH SHARES BY THE
COMPANY.
Sincerely,
NORTH COAST ENERGY, INC.
Garry Regan
Chairman of the Board
<PAGE> 3
Logo
NORTH COAST ENERGY, INC.
Your Partner in Energy Development
IMPORTANT: THIS OFFER EXPIRES ON JANUARY 31,1997
December 20,1996
TO: HOLDERS OF THE SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
("SERIES B PREFERRED STOCK") OF NORTH COAST ENERGY, INC. ("NORTH COAST")
Our communications of the past several months have described changes at North
Coast Energy and our plans for improving and enhancing the Company. The
improvements that the Board envisions will require significant and often
difficult changes and decisions. Perhaps one of the Company's most needed
areas of change and improvement is its capital structure which includes two
classes of Preferred stock and impacts the Company's cash flow by over
$644,000.
The Board has decided to offer holders of Series B Preferred Stock an
improved offer to exchange their Series B Preferred Stock into Common Stock of
the Company. The Conversion Offer detailed in the enclosed material provides
holders of Series B Preferred Stock the opportunity to exchange each of their
shares of Series B Preferred Stock for eight (8) shares of North Coast Common
Stock compared to the conversion rate of five point seven five (5.75) shares
of Common Stock.
We have attempted to make the offer and conversion process as clear and
simplified as possible. The Company has not engaged a broker to contact you
and no broker will be paid upon any conversion of shares of Series B Preferred
Stock. However, the Conversion Agent, American Stock Transfer and Trust
Company (800) 937-5449, the Company, its officers and staff are available to
assist you with the conversion process. Our phone number is (216) 425-2330 or
(800) 645-6427. As described in the Offering Circular, the Conversion Offer
includes those shares of Series B Preferred Stock held in Series B Units as
well as shares of Series B Preferred Stock held independently by you or in a
brokerage account. The Conversion Agent will issue to Unit holders a new
certificate representing Series B warrants. If you hold your Series B
Preferred Stock or Series B Units directly, and wish to convert, you need to
complete, sign and date the Conversion Notice and Letter of Transmittal and
return it with your certificate(s). Please note that if you intend to change
any of the current information on the certificate(s) including name(s) or
address, you must also complete the special instructions section of the
Conversion Notice and Letter of Transmittal and obtain a signature guarantee
before you forward your certificate(s). If your shares of Series B Preferred
Stock or Series B Units are held in street name (brokerage or similar account)
you must notify the broker of your acceptance of the Conversion Offer. If you
have lost your certificate(s), please indicate this in the space provided in
the Conversion Notice and Letter of Transmittal and immediately return it to
the Conversion Agent.
As a reminder, should you decide to participate in this Conversion Offer, you
must convert all of the shares of Series B Preferred Stock you hold.
While the Board believes the Conversion Offer to be an important step in
improving the finances and capital structure of the Company, we recognize that
this is a personal decision of each holder of Series B Preferred Stock. THE
COMPANY WILL NOT SEEK OR OBTAIN AN INDEPENDENT "FAIRNESS OPINION" OR
INDEPENDENT VALUATION REGARDING THIS CONVERSION OFFER AND IS NOT MAKING ANY
RECOMMENDATION TO HOLDERS OF SERIES B PREFERRED STOCK WHETHER TO ACCEPT OR
REJECT THIS CONVERSION OFFER. EACH HOLDER OF SHARES OF SERIES B PREFERRED
STOCK SHOULD CAREFULLY REVIEW THE CONVERSION OFFER AND THE APPLICABLE TAX
CONSEQUENCES BEFORE DECIDING WHETHER TO CONVERT SUCH SHARES IN CONNECTION WITH
THIS CONVERSION OFFER.
The Conversion Offer is described in the enclosed Offering Circular dated
December 20, 1996 and in the accompanying Conversion Notice and Letter of
Transmittal. As you will see, a similar offer is also being made to the
holders of North Coast's other series of outstanding preferred stock (Series
A). The Offering Circular includes North Coast's Annual Report on Form 10-K
for the year ended March 31, 1996 and its Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, and other important information
concerning the Conversion Offer and the Company. Please read this material
carefully for a full description of the terms and conditions of the Conversion
Offer. We encourage you to call and discuss this matter with us (216-425-2330
or 800-645-6427) or the Conversion Agent (800-937-5449) and to review the
material carefully.
1993 Case Parkway - Twinsburg, Ohio 44087-2343
(800) 645-6427 -(216) 425-2330 - Fax: (216) 405-3298
<PAGE> 4
BY TENDERING SHARES PURSUANT TO THE OFFER AND NOT WITHDRAWING THE SAME, EACH
TENDERING HOLDER WILL BE DEEMED TO HAVE WAIVED SUCH HOLDER'S RIGHT TO (1) ANY
UNPAID DIVIDENDS AND (2) RECEIVE ANY DIVIDEND WHICH MAY BECOME PAYABLE IN
RESPECT OF THE TENDERED SHARES OF SERIES B PREFERRED STOCK SUBSEQUENT TO THE
DATE THAT SUCH SHARES ARE TENDERED, EVEN IF SUCH DIVIDEND BECOMES PAYABLE PRIOR
TO ACCEPTANCE OF SUCH SHARES BY THE COMPANY.
Sincerely,
NORTH COAST ENERGY, INC.
Garry Regan
Chairman of the Board
<PAGE> 1
EXHIBIT a(6)
PRESS RELEASE
FOR IMMEDIATE RELEASE
Contact:
-----------------------
-----------------------
-----------------------
-----------------------
NORTH COAST ENERGY ANNOUNCES EXCHANGE OFFER
Cleveland, Ohio (December 20, 1996) - North Coast Energy, Inc. (NASDAQ: NCEB
and NCEBP) today announced that it has made an exchange offer for all 300,090
issued and outstanding shares of its Series A 6% Convertible Preferred Stock
and for all 464,665 issued and outstanding shares of its Series B Convertible
Preferred Stock. Pursuant to the offer, each share of Series A Stock tendered
and accepted by the Company will entitle the holder to receive five shares of
the Company's Common Stock. Each share of Series B Stock tendered and accepted
by the Company will entitle the holder to receive eight shares of the
Company's Common Stock. If all outstanding shares of Series A Stock and Series
B Stock are exchanged, approximately 5,217,770 shares of Common Stock will be
issued in the exchange offer. There are currently approximately 8,051,898
shares of Common Stock outstanding.
The exchange offer, which is subject to certain conditions, is open until 5:00
p.m., Cleveland time, January 31, 1997, unless extended by the Company.
Details concerning the offer are being mailed to all record holders of either
Series A Stock or Series B Stock.
A spokesman for the Company said that the exchange offer provides the Company
with an opportunity to reduce and potentially eliminate its preferred stock
dividend obligations. The Series A Stock bears a non-cumulative dividend of
$0.60 per annum, which the Company recently did not pay. The Series B Stock
bears a cumulative dividend of $1.00 per annum, which the Company will not be
able to pay.
North Coast Energy, Inc. 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.
