<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date. Indicate the number of shares
outstanding of each of the issuer's classes of Common Stock as the latest
practical date.
Class Outstanding at August 11, 1997
---------------------------- ------------------------------
Common Stock, $.01 par value 10,795,455
<PAGE> 2
NORTH COAST ENERGY, INC.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets -
March 31, 1997 (Audited) and June 30, 1997 (Unaudited) 2
Unaudited Consolidated Statements of Operations -
For the Three Months Ended June 30, 1996 and 1997 4
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended June 30, 1996 and 1997 5
Unaudited Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION 18
</TABLE>
<PAGE> 3
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 and JUNE 30, 1997
(Unaudited)
ASSETS
------
<TABLE>
<CAPTION>
March 31, June 30,
------------ ------------
1997 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 1,503,278 $ 922,126
Accounts receivable-
Trade, net 1,306,577 1,144,013
Affiliates 81,456 66,616
Inventories 200,971 160,455
Deferred income taxes 26,000 26,000
Refundable income taxes 50,000 50,000
Other, net 8,488 991
------------ ------------
Total current assets 3,176,770 2,370,201
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land 93,437 93,437
Oil and gas properties (successful efforts) 24,290,505 24,433,264
Pipelines 4,158,204 4,186,648
Vehicles 348,825 354,995
Furniture and fixtures 501,049 502,921
Buildings and improvements 788,419 785,531
------------ ------------
30,180,439 30,356,796
Less- Accumulated depreciation, depletion, amortization
and impairment (12,279,402) (12,499,927)
------------ ------------
17,901,037 17,856,869
OTHER ASSETS, net 150,893 135,150
------------ ------------
$ 21,228,700 $ 20,362,220
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE> 4
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 and JUNE 30, 1997
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, June 30,
1997 1997
------------ ----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 108,900 $ 196,300
Accounts payable 1,952,863 1,334,006
Accrued expenses 320,255 294,714
Billings in excess of costs on uncompleted contracts 469,361 153,149
------------ ----------
Total current liabilities 2,851,379 1,978,169
------------ ----------
LONG-TERM DEBT, net of current portion 10,720,510 10,624,397
DEFERRED INCOME TAXES, net 347,200 348,200
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A, 6% Noncumulative Convertible Preferred stock, par value
$.01 per share; 563,270 shares authorized; 76,951 and 76,106
issued and outstanding (aggregate liquidation value of $769,510
and $761,060, respectively) 770 761
Series B, Cumulative Convertible Preferred stock, par value $.01 per
share; 625,000 shares authorized, 269,464 and 268,264 issued and
outstanding (aggregate liquidation value $2,694,640 and 2,682,640,
respectively) 2,695 2,683
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; 10,753,895 and 10,792,711 issued and outstanding 107,539 107,927
Additional paid-in capital 12,083,196 12,108,681
Retained deficit (4,884,589) (4,808,598)
------------ ----------
Total stockholders' equity 7,309,611 7,411,454
------------ ----------
$ 21,228,700 20,362,220
============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE> 5
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
REVENUE:
Oil and gas production $ 862,934 $ 744,050
Drilling revenues 1,169,196 463,554
Well operating, transportation and other 471,807 428,628
Administrative and agency fees 203,478 213,263
----------- -----------
2,707,415 1,849,495
COSTS AND EXPENSES:
Oil and gas production expenses 225,810 230,241
Drilling costs 921,583 373,865
Oil and gas operations 249,439 142,494
General and administrative expenses 561,099 478,660
Depreciation, depletion, amortization and other 300,690 293,542
Abandonment of oil and gas properties 48,535 3,039
----------- -----------
2,307,156 1,521,841
----------- -----------
INCOME FROM OPERATIONS 400,259 327,654
----------- -----------
OTHER INCOME:
Interest 13,961 12,916
Other 16,000 62
(Loss) gain on sale of property and equipment (1,780) 1,897
----------- -----------
28,181 14,875
----------- -----------
OTHER EXPENSE:
Interest 239,289 265,538
----------- -----------
INCOME BEFORE INCOME TAXES 189,151 76,991
PROVISION FOR INCOME TAXES:
Current -- 1,000
Deferred 37,000 --
----------- -----------
37,000 1,000
----------- -----------
NET INCOME $ 152,151 75,991
=========== ===========
NET (LOSS) INCOME PER SHARE (primary and fully diluted) $ (.01) $ .00
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 152,151 $ 75,991
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation, depletion, amortization and other 300,690 293,542
Abandonment of oil and gas properties 48,535 3,039
Loss (gain) on sale of property and equipment 1,780 (1,897)
Deferred income taxes 37,000 1,000
Change in-
Accounts receivable (102,210) 177,404
Inventories and other current assets 11,876 48,013
Other assets, net 15,575 --
Accounts payable (443,070) (519,191)
Accrued expenses (57,983) (25,541)
Billings in excess of costs on uncompleted contracts (516,184) (316,212)
----------- -----------
Total adjustments (703,991) (339,843)
----------- -----------
Net cash used by operating activities (551,840) (263,852)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (971,899) (223,425)
Proceeds on sale of property and equipment 104,262 2,000
----------- -----------
Net cash used for investing activities (867,637) (221,425)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of accounts payable used to finance property
and equipment additions (70,962) (87,161)
Borrowings under revolving credit facility 1,150,000 --
Borrowings under note payable to stockholder 20,262 21,863
Payments on long-term debt (41,520) (30,577)
Distributions and dividends (207,708) --
----------- -----------
Net cash provided (used) by financing activities $ 850,072 $ (95,875)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 7
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
DECREASE IN CASH AND EQUIVALENTS $ (569,405) $ (581,152)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,551,748 1,503,278
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 982,343 $ 922,126
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 131,449 $ 235,943
Income taxes -- 11,049
SUPPLEMENTAL DISCLOSURES ON NONCASH INVESTING AND FINANCING
ACTIVITIES:
Long-term debt incurred for the purchase of property and
equipment $ 579,510 --
Accounts payable incurred for the purchase of property
and equipment $ 97,515 $ 13,347
Common stock issued for director fees -- $ 25,852
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 8
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Accounting Policies
A. General
The consolidated financial statements included herein, have been
prepared by North Coast Energy, Inc. without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position have
been made.
Information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
financial statements be read in conjunction with the financial
statements and notes thereto which are incorporated in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
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>
7
<PAGE> 9
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
<TABLE>
<S> <C>
Note 1. Summary of Accounting Policies (Continued)
North Coast Energy 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%
North Coast Energy 1996-2 Appalachian Drilling Program Limited Partnership 20.0%
All significant intercompany accounts and transactions have been eliminated.
</TABLE>
Note 2. Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following:
March 31, 1997 June 30, 1997
-------------- -------------
<S> <C> <C>
Revolving credit notes payable - bank $8,640,000 $ 8,640,000
Notes payable to stockholder with interest at prime
plus 1% and 8%. 1,453,674 1,475,537
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. 60,216 58,357
Mortgage note payable to a bank, secured by land and a
building, requiring monthly payments of approximately
$5,248 (including interest at 8.58%). 524,033 519,621
Various installment notes payable, in aggregate monthly
installments (including interest of $9,042 at March 31,
1997 and $8,598 at June 30, 1997). 151,487 127,182
------------ ----------
10,829,410 10,820,697
Less current portion 108,900 196,300
------------ -----------
$ 10,720,510 $10,624,397
=========== ===========
</TABLE>
8
<PAGE> 10
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Long-Term Debt (Continued)
The Company has a $20,000,000 revolving credit agreement with its
lender. The Agreement provides for a borrowing base which is determined
semiannually by the lender based upon the Company's financial position,
oil and gas reserves, as well as outstanding letters of credit ($140,000
at June 30, 1997), as defined. At June 30, 1997, the Company's borrowing
base was $10,200,000 subject to monthly reductions of $110,000 beginning
in May 1997 and increasing to $200,000 beginning June 1, 1997. Available
borrowings under the facility at June 30, 1997 were $1,110,000 and may
subsequently change based upon the semiannual 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
1999.
Amounts outstanding under the reducing revolving line of credit which
were $8,640,000 at June 30, 1997, 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 stockholders' equity, restrictions on the
payment of dividends, as defined, 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 June 30, 1997.
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. The
Company also entered into an second note payable with the same
stockholder for $1,000,000. This note 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.
Note 3. Billings in Excess of Costs on Uncompleted Contracts
Billings in excess of costs on uncompleted contracts consist of:
<TABLE>
<CAPTION>
March 31, June 30,
1997 1997
---- ----
<S> <C> <C>
Billings on uncompleted contracts $ 738,554 $ 275,000
Costs incurred on uncompleted contracts 269,193 121,851
------- -------
$ 469,361 $ 153,149
======= =======
</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 for road bond deposits against damage.
9
<PAGE> 11
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 4. Commitment and Contingencies (Continued)
At June 30, 1997, the Company has committed to fund certain costs of
the North Coast Energy Appalachian Drilling Programs estimated to be
approximately $334,449 for tangible well equipment and pipeline
construction.
Note 5. Preferred Dividends
The agreement with the Company's Credit Facility provides that the
payment of dividends with respect to the capital stock of the Company
is prohibited. For purposes of computing earning per share for the
three months ending June 30, 1997, dividends in arrears on the
cumulative convertible Series B preferred stock were $67,066.
Cumulative dividends in arrears on the cumulative convertible Series B
preferred stock are $201,198.
Note 6. Pro Forma
In fiscal 1997, the Company commenced a conversion offer to its
preferred shareholders (Series A and B) to convert their shares into
common stock with additional shares offered as an incentive. Following
the termination of the conversion offer in fiscal 1997, 223,159 shares
of preferred Series A were tendered and exchanged for 1,115,795 shares
of common stock and 195,201 shares of preferred Series B were tendered
and exchanged for 1,561,608 shares of common stock.
The following table presents unaudited, pro forma operating results as
if the stock conversion had occurred at the beginning of each period
presented.
<TABLE>
<CAPTION>
June 30, 1996
Pro Forma June 30, 1997
------------------ ----------------
<S> <C> <C>
REVENUES $2,707,415 $ 1,849,495
NET INCOME 57,151 75,991
NET INCOME APPLICABLE TO
COMMON STOCK $60,987 $ 8,925
WEIGHTED AVERAGE SHARES
OUTSTANDING 10,730,782 10,949,781
EARNINGS PER SHARE $ 0.01 $ 0.00
</TABLE>
The pro forma operating results have been prepared for comparative
purposes only. They do not purport to present actual operating results
that would have been achieved had the conversions been made at the
beginning of each period presented or to necessarily be indicative of
future results of operations.
Note 7. Subsequent Events
On August 1, 1997 North Coast Energy, Inc., a Delaware corporation (the
"Company"), entered into a stock purchase agreement (the "Agreement")
with NUON International bv, a limited liability company organized under
the laws of the Netherlands ("NUON"), wherein NUON
10
<PAGE> 12
Note 7. Subsequent Events (Continued)
agreed to purchase an aggregate of 17,226,387 shares of stock of North
coast for $15 million, subject to the satisfaction of certain
conditions.
Pursuant to the terms of the Agreement NUON will purchase 5,747,127
shares of Common Stock, $0.01 par value per share (the "Common Stock"),
for $5 million at a closing currently scheduled for September 4, 1997.
The price per share is $0.87 per share. Subject to the satisfaction of
certain conditions, including the development of a plan of
complementary business, NUON may purchase an additional 5,747,127
shares of Common Stock by each of September 30, 1998 and September 30,
1999 at a price of $0.87 per share.
Upon the closing and the payment of the initial $5 million installment,
NUON will appoint three individuals to the Company's Board of
Directors.
A portion of the proceeds from the initial installment will be used to
pay existing subordinated indebtedness. At June 30, 1997 this amount
was $1,475,537.
The transaction is subject to customary conditions and governmental
approvals, including the approval of NUON's Supervisory Board.
11
<PAGE> 13
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. The Company's strategy
focuses primarily on the acquisition of proved undeveloped natural gas and oil
properties and on the 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 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 three months ended June 30, 1996 and 1997. All items in the
table are calculated as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months
Ended
June 30,
1996 1997
--------------
<S> <C> <C>
Revenues:
Oil and gas production 32% 40%
Drilling revenues 43 25
Well operating, transportation and other 17 23
Administrative and agency fees 7 11
Other 1 1
--- ---
Total Revenues 100% 100%
--- ---
Expenses:
Oil and gas production expenses 8% 12%
Drilling costs 34 20
Oil and gas operations 9 8
General and administrative expenses 20 26
Depreciation, depletion, amortization and other 11 16
Abandonment of oil and gas properties 2 0
Provision for taxes on income 1 0
Other 9 14
--- ---
Total Expenses 94% 96%
--- ---
Net Income 6% 4%
=== ===
</TABLE>
12
<PAGE> 14
The following discussion and analysis reviews the results of operations
and the financial condition for the Company for the three months ended June 30,
1996 and 1997. The review should be read in conjunction with the financial
information presented elsewhere herein.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1996 TO THREE MONTHS ENDED JUNE 30,
1997.
REVENUES
Oil and gas production revenues decreased $118,884 (14%) to $744,050
for the three months ended June 30, 1997 compared to $862,934 for the prior
corresponding period. The primary reason for the decrease in oil and gas
production revenues was due to a 8% decrease in gas production from the
Appalachian area between comparable periods. Oil and gas production revenues
were also effected by a decrease in oil production coupled with a decrease in
oil prices in the Appalachian area for the three months ended June 30, 1997
compared to the three months ended June 30, 1996. The Company received an
average price of $16.86 and $19.59 per barrel of oil for the three months ended
June 30, 1997 and 1996, respectively, and $2.28 and $2.39 per Mcf for natural
gas for the three months ended June 30, 1997 and 1996, respectively.
Drilling revenues for the period decreased by $705,642 to $463,554
for the three months ended June 30, 1997 from $1,169,196 for the three months
ended June 30, 1996 due to the decrease in the number of wells recognized in
revenue for the period. Drilling revenues were recognized on 3 wells for the
three months ended June 30, 1997 compared to 11 wells for the three months ended
June 30, 1996. The decrease 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, 1997. The reduction in the number of wells in
progress was a result of the decrease of $3,444,500 in the amount of funds
raised in the fiscal 1997 Drilling Programs of $3,015,500 as compared to
$6,460,000 for the fiscal 1996 Drilling Programs. Management of the Company
believes that this reduction was caused by the uncertainties arising from the
purchase of North Coast common stock by Lomak Petroleum, Inc. ("Lomak"), now a
principal stockholder of the Company. At June 30, 1997, the Company had 2 wells
in progress and not yet recognized in drilling revenues as compared to 3 wells
at June 30, 1996.
For the three months ended June 30, 1997, well operating,
transportation and other revenues decreased $43,179 (9%) compared to the three
months ended June 30, 1996. A decrease of $72,673 in third party gas sales
coupled with a decrease in transportation revenue was offset somewhat by an
increase in well operating revenue and compressor revenue.
EXPENSES
Oil and gas production expenses increased $4,431 for the three months
ended June 30, 1997 compared to June 30, 1996 due to $35,000 of costs incurred
with relocation of certain production facilities in the Gulf Coast area.
Drilling costs for the three months ended June 30, 1997 compared to the
three months ended June 30, 1996 decreased $547,718 primarily due to the
decreased number of wells completed between comparable periods. The profit
margin on drilling revenue decreased to 19% for the three months ended June 30,
1997 compared to 21% for the three months ended June 30, 1996. The decrease in
the drilling profit margin between comparable periods was due to the fewer
number of wells drilled with a higher per well overhead allocation for the three
months ended June 30, 1997 compared to the three months ended June 30, 1996.
General and administrative expenses decreased $82,439 (15%) for the
three months ended June 30, 1997 compared with the three months ended June 30,
1996. This decrease in general and administrative expenses was primarily due to
reductions in salary and employee benefits costs relating to a decrease in the
size of the Company's staff. Also, the staff reductions resulted in certain
changes in job responsibility resulting in additional general and administrative
costs being allocated to production expense and oil and gas operations.
Abandonment of oil and gas properties decreased $45,496 for the three
months ended June 30, 1997 compared to the three months ended June 30, 1996. The
Company incurred costs abandoning one well during the
13
<PAGE> 15
three months ended June 30, 1996 in its Gulf Coast area of interest while during
the three months ended June 30, 1997 the Company incurred abandonment costs on
two wells in the Appalachian area.
Interest expense increased to $265,538 for the three months ended June
30, 1997 from $239,289 for the three months ended June 30, 1996. This increase
was associated with an increase in the average outstanding borrowings for the
comparable periods.
Income from operations for the three months ended June 30, 1997
decreased $72,605 to $327,654 for the three months ended June 30, 1997 compared
to $400,259 for the three months ended June 30, 1996. The Company's net income
decreased $76,160 to $75,991 for the three months ended June 30, 1997 compared
to $152,151 for the three months ended June 30, 1996. The above mentioned
decrease in income was primarily a result of decreases in production revenues
and drilling income which was offset by reduced general and administrative
expenses.
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 $16.86 and $19.59 per
barrel of oil for the three months ended June 30, 1997 and 1996, respectively,
and $2.28 and $2.39 per Mcf for natural gas for the three months ended June 30,
1997 and 1996, respectively. Despite fluctuating gas prices due to weather and
other events beyond the Company's control, several Appalachian based gas market
indexes indicate that the general market for natural gas in the Appalachian
Basin has been, on average, $.60 per Mcf higher during the two year period ended
June 30, 1997 compared to the two year period ended June 30, 1995. Although it
is anticipated that there will be a decline in gas prices during the summer
months compared to the winter of 1996/1997 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 possible changes in federal and state
regulations. With continued unbundling of pipeline service, better educated
consumers and open access to a variety of geographical markets, management
cannot predict what long-term effects this 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 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 $392,000 at June 30, 1997 compared to
$325,000 at March 31, 1997. The increase of $67,000 in working capital from
March 31, 1997 reflects the Company's increase in cash flow from operating
activities and the reduced cash outflow for the purchase of tangible equipment.
The Company was able to utilize equipment on previously uneconomic wells by
abandoning those wells and installing the equipment on new productive wells to
meet its obligations to the partnerships formed in fiscal 1997. As of June 30,
1997, the Company had $8,640,000 outstanding under its Credit Facility. North
Coast's current ratio was 1.2 to 1.0 at June 30, 1997 and 1.1 to 1.0 at March
31, 1997.
14
<PAGE> 16
The following table summarizes the Company's financial position at
March 31, 1997 and June 30, 1997:
<TABLE>
<CAPTION>
(Amounts in Thousands) March 31, 1997 June 30, 1997
----------------- ------------------
Amount % Amount %
<S> <C> <C> <C>
Working capital $ 325 2% $ 392
2%
Property and equipment (net) 17,901 97% 17,857 97%
Other 151 1% 135 1%
------- ------- ------- -------
Total $18,377 100% $18,384 100%
======= ======= ======= =======
Long-term debt $10,720 58% $10,624 58%
Deferred income taxes 347 2% 348 2%
Stockholders' equity 7,310 40% 7,412 40%
------- ------- ------- -------
Total $18,377 100% $18,384 100%
======= ======= ======= =======
</TABLE>
CAPITAL RESOURCES AND REQUIREMENTS
The oil and gas exploration and development activities of North Coast
historically have been financed through the Drilling Programs, through
internally generated funds, and from bank financing.
The following table summarizes the Company's Statements of Cash Flows
for the three months ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
(Amounts in Thousands) 1996 1997
---- ----
Amount % Amount %
<S> <C> <C> <C> <C>
Net cash used by operating activities $(552) (28)% $(264) (28)%
Net cash used for investing activities (867) (44)% (221) (23)%
Net cash provided (used) by financing activities 850 43 % (96) (10)%
----- ----- ----- -----
Increase in cash and equivalents $(569) (29)% $(581) (61)%
===== === ===== ===
</TABLE>
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.
As the above table indicates, the Company's cash flow from operating
activities increased approximately $288,000 for the three months ended June 30,
1997 compared to the period ended June 30, 1996. This increase reflects the
reduction of general and administrative expenses for the three months ended June
30, 1997 compared to the three months ended June 30, 1996.
Net cash used for investing activities decreased to approximately
$221,000 for the three months ended June 30, 1997 from approximately $867,000
for the three months ended June 30, 1996. The decrease of $646,000 was due to
the amount of funds raised in Drilling Programs and the subsequent number of
wells drilled, coupled with the Company's ability to utilize equipment on
previously uneconomic wells by abandoning those wells and installing the
equipment on new productive wells to meet its obligations to the fiscal 1997
Drilling Programs.
Net cash from financing activities decreased approximately $946,000 for
the three months ended June 30, 1997 compared to the three months ended June 30,
1996. This decrease reflects the Company's reduced need for borrowing due to
reduced general and administrative expenses and the elimination of its Preferred
Stock dividends between the comparable periods.
15
<PAGE> 17
The Company has a $20,000,000 revolving credit agreement with its
lender. The Agreement provides for a borrowing base which is determined
semiannually by the lender based upon the Company's financial position, oil and
gas reserves, as well as outstanding letters of credit ($140,000 at June 30,
1997), as defined. At June 30, 1997, the Company's borrowing base was
$10,200,000 subject to monthly reductions of $110,000 beginning in May 1997 and
increasing to $200,000 beginning June 1, 1997. Available borrowings under the
facility at June 30, 1997 were $1,110,000 and may subsequently change based upon
the semiannual reserve study and borrowing base determination (see Note 4 to the
Company's March 31, 1997 financial statements). Also, the amendment of December
2, 1996 provides that the payment of dividends with respect to the capital stock
of the Company is prohibited. As of June 30, 1997, the Company had $8,640,000
outstanding under the Credit Facility. At June 30, 1997 the Company was in
violation of its debt coverage ratio, although this violation was waived by the
lender. Amounts borrowed under the Credit Facility bear interest at the lending
bank's prime rate plus 1 1/2%. 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 1999. Also, at June 30, 1997, the Company had approximately
$58,357 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 June 30, 1997 was $519,621.
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.
In addition to bank financing, the Company has two loans with Lomak.
The first loan of $335,000 ($304,791 outstanding on June 30, 1997) bears an
interest rate at the prime rate designated by the Chemical Bank, N.A., plus 1%
(9.25% at June 30, 1997). The amounts outstanding under the terms of the
Company's financing arrangement are subordinated to the prior payment and
amounts outstanding under the Company's Credit Facility. Repayment of the loan
is in cash, based upon a percentage of the net monthly revenues received from
certain previously acquired properties.
The second loan in the amount of $1,000,000 is unsecured and may be
repaid in cash plus accrued interest (with approval of the Company's senior
lender) with the proceeds of a sale of equity or may be converted into shares of
Common Stock at the rate of $1.00 per share. The loan is subordinate to the
Company's Credit Facility with its senior lender and bears interest at the rate
of 8% per annum. As of June 30, 1997, the balance of the loan and accrued
interest was $1,170,746. 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.
On or about September 4, 1996 Lomak, a publicly traded oil and gas
company, purchased approximately 47% of the voting stock of the Company (as of
June 30, 1997 Lomak owns approximately 37% of the voting stock of the Company)
from two of the Company's largest former stockholders, 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. Litigation among the Company,
Lomak and Mr. Brocker concerning such proxies then ensued until November 1996
when the parties 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 was adversely
affected. With the reduction of the Drilling Program activity and the need to
conserve cash, the Company's ability to utilize equipment it owns on
non-productive wells and increase profitably through the Drilling Programs was
adversely affected. Demands on the Company's capital resources
16
<PAGE> 18
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 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. Also, the Company suspended its dividends on its Series A
Non-cumulative and Series B Cumulative Preferred Stock and adopted a plan to pay
director fees in Common Stock in an effort to conserve cash resources. The
Company subsequently made an offer to all holders of the Company's Preferred
Stock offering additional shares of the Company's Common Stock as an enticement
for conversion of the Preferred Stock to Common Stock. At June 30, 1997, the
Company had cumulative dividends in arrears of $201,198.
Management of the Company believes that the funds anticipated to be
raised in the Drilling Programs together with anticipated general economic
conditions and various sources of available capital, including current available
borrowings under the Credit Facility, will be sufficient to fund the Company's
operations and meet debt service requirements through fiscal 1998.
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.
On August 1, 1997 the Company entered into a stock purchase agreement
(the "Agreement") with NUON International by, a limited liability company
organized under the laws of the Netherlands ("NUON"), wherein NUON agreed to
purchase an aggregate of 17,226,387 shares of stock of North Coast for $15
million, subject to the satisfaction of certain conditions. Pursuant to the
terms of the Agreement, NUON will purchase 5,747,127 shares of Common Stock,
$0.01 par value per share (the "Common Stock"), for $5 million at a closing
currently scheduled for September 4, 1997. Subject to the satisfaction of
certain conditions, including the development of a plan of complementary
business, NUON may purchase an additional 5,747,127 shares of Common Stock by
each of September 30, 1998 and September 30, 1999. A portion of the proceeds
from the initial installment will be used to pay existing subordinated
indebtedness ($1,475,537 outstanding at June 30, 1997) owed to Lomak, a
stockholder of the Company. The transaction is subject to customary conditions
and governmental approvals, including the approval of NUON's Supervisory Board.
ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share" which will revise the calculation methods and
disclosures regarding earnings per share. SFAS No. 128 is required to be adopted
for financial statements with fiscal years ending after December 31, 1997. The
Company has not determined the impact, if any, of this standard.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that may cause such a difference include, but are not limited to, the
competition within the oil and gas industry, the price of oil and gas in the
Appalachian Basin area, the weather in the Company's geographic region, the cost
of the locating and drilling oil and gas wells in the Appalachian Basin area,
the amount of funds raised in the fiscal 1998 Drilling Programs, and the ability
to locate productive oil and gas prospects for development by the Company.
17
<PAGE> 19
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a). Exhibits
11.1 Computation of Earnings per Common Share.
27.1 Financial Data Schedule*
b). No reports on Form 8-K have been filed during the quarter for which
this report was filed.
*Exhibit 27.1 furnished for Security and Exchange purposes only.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH COAST ENERGY, INC.
August 14, 1997 /s/ Charles M. Lombardy, Jr.
-------------------------------------
Charles M. Lombardy, Jr.
Chief Executive Officer and Director
August 14, 1997 /s/ Tim Wagers
-------------------------------------
Tim Wagers
Principal Accounting and Financial Officer
19
<PAGE> 1
Exhibit 11.1
Computation of Primary and Fully Diluted Earnings Per Common Share
<TABLE>
<CAPTION>
Three Months Ended
6/30/96 6/30/97
------- -------
<S> <C> <C>
EARNINGS
Net Income $ 152,151 $ 75,991
Series A Preferred Stock Dividends (91,542) 0
Series B Preferred Stock Dividends (116,166) 0
Series B Preferred Stock Dividends in Arrears 0 (67,066)
--------- ---------
Pro Forma (Loss) Income Applicable to Common
Stock $ (55,557) $ 8,925
========= =========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
<S> <C> <C>
Weighted Average Common Shares for the
period ended 8,040,268 10,772,315
Additional Shares Assuming Conversion of:
Preferred Stock Series A and Employee
Options Exercised 0 177,466
---------- ----------
Pro Forma Shares for Primary Earnings
Per Common Share 8,040,268 10,949,781
---------- ----------
Additional Shares Assuming Conversion of:
Employee Options Exercised 0 1,553
---------- ----------
Pro Forma Shares for Fully Diluted Earnings
Per Common Share 8,040,268 10,951,334
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Primary (Loss) Earnings Per Common Share $ (.01) $ .00
Fully Diluted (Loss) Earnings Per Share *$ (.01) **$ .00
</TABLE>
- -------------------------------------------------- -------------------
* Common Stock Equivalents have an anti-dilutive effect on Earnings Per Share
and are excluded from this Exhibit.
** Series B Preferred Stock have an anti-dilutive effect on Earnings Per Share
and are excluded from this Exhibit.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000839950
<NAME> NORTH COAST ENERGY
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 922,126
<SECURITIES> 0
<RECEIVABLES> 1,210,629
<ALLOWANCES> 0
<INVENTORY> 160,455
<CURRENT-ASSETS> 2,370,201
<PP&E> 30,356,796
<DEPRECIATION> 12,499,927
<TOTAL-ASSETS> 20,362,220
<CURRENT-LIABILITIES> 1,978,169
<BONDS> 0
<COMMON> 107,927
0
3,444
<OTHER-SE> 12,108,681
<TOTAL-LIABILITY-AND-EQUITY> 20,362,220
<SALES> 1,849,495
<TOTAL-REVENUES> 1,849,495
<CGS> 1,521,841
<TOTAL-COSTS> 1,521,841
<OTHER-EXPENSES> (14,875)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 265,538
<INCOME-PRETAX> 76,991
<INCOME-TAX> 1,000
<INCOME-CONTINUING> 75,991
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,991
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
