<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 September 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: (330) 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.
Class Outstanding at November 10, 1997
- -------------------------------- ---------------------------------
Common Stock, $.01 par value 16,580,680
<PAGE> 2
NORTH COAST ENERGY, INC.
<TABLE>
<CAPTION>
Page No.
--------
PART I - FINANCIAL INFORMATION
<S> <C>
Consolidated Balance Sheets -
March 31, 1997 (Audited) and September 30, 1997 (Unaudited) 2
Unaudited Consolidated Statements of Operations -
For the Three and Six Months Ended September 30, 1996 and 1997 4
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended September 30, 1996 and 1997 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 17
</TABLE>
<PAGE> 3
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 and SEPTEMBER 30, 1997
(Unaudited)
ASSETS
------
<TABLE>
<CAPTION>
March 31, September 30,
--------------- ----------------
1997 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 1,503,278 $ 1,421,475
Accounts receivable-
Trade, net 1,306,577 1,205,644
Affiliates 81,456 99,501
Inventories 200,971 111,161
Deferred income taxes 26,000 26,000
Refundable income taxes 50,000 50,000
Other, net 8,488 1,380
---------------- -----------------
Total current assets 3,176,770 2,915,161
---------------- -----------------
PROPERTY AND EQUIPMENT, at cost:
Land 93,437 93,437
Oil and gas properties (successful efforts) 24,290,505 24,584,799
Pipelines 4,158,204 4,284,492
Vehicles 348,825 354,995
Furniture and fixtures 501,049 505,003
Buildings and improvements 788,419 785,530
---------------- -----------------
30,180,439 30,608,256
Less- Accumulated depreciation, depletion, amortization
and impairment (12,279,402) (12,771,222)
---------------- -----------------
17,901,037 17,837,034
OTHER ASSETS, net 150,893 127,445
---------------- -----------------
$ 21,228,700 $ 20,879,640
================ =================
</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 SEPTEMBER 30, 1997
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, September 30,
1997 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 108,900 $ 99,800
Accounts payable 1,952,863 1,513,766
Accrued expenses 320,255 341,702
Billings in excess of costs on uncompleted contracts 469,361 -
----------- -----------
Total current liabilities 2,851,379 1,955,268
----------- -----------
LONG-TERM DEBT, net of current portion 10,720,510 6,580,835
DEFERRED INCOME TAXES, net 347,200 347,200
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A, 6% Noncumulative Convertible Preferred stock, par value $.01 per
share; 563,270 shares authorized; 76,951 and 75,541 issued and outstanding
(aggregate liquidation value of $769,510
and $755,410, respectively) 770 755
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 16,542,832 issued and outstanding 107,539 165,428
Additional paid-in capital 12,083,196 16,823,817
Retained deficit (4,884,589) (4,996,346)
----------- -----------
Total stockholders' equity 7,309,611 11,996,337
----------- -----------
$21,228,700 $20,879,640
=========== ===========
</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 Periods Ended September 30, 1996 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Oil and gas production $ 721,199 $ 671,074 $ 1,584,133 $ 1,415,124
Drilling revenues 273,504 275,000 1,442,700 738,554
Well operating, transportation and other 574,978 394,424 1,046,785 823,052
Administrative and agency fees 221,483 213,162 424,961 426,425
----------- ----------- ----------- -----------
1,791,164 1,553,660 4,498,579 3,403,155
COSTS AND EXPENSES:
Oil and gas production expenses 182,305 202,641 408,115 432,882
Drilling costs 275,055 255,938 1,196,638 629,803
Oil and gas operations 392,027 163,167 641,466 305,661
General and administrative expenses 695,822 569,220 1,256,921 1,047,880
Depreciation, depletion, amortization,
impairment and other 278,942 258,700 579,632 552,242
Abandonment of oil and gas properties (3,692) - 44,843 3,039
----------- ----------- ----------- -----------
1,820,459 1,449,666 4,127,615 2,971,507
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (29,295) 103,994 370,964 431,648
----------- ----------- ----------- -----------
OTHER INCOME
Interest 13,174 13,377 27,135 26,293
Other 8,824 - 24,824 62
Gain (loss) on sale of property
and equipment (8,994) - (10,774) 1,897
----------- ----------- ----------- -----------
13,004 13,377 41,185 28,252
----------- ----------- ----------- -----------
OTHER EXPENSE
Interest 272,815 239,053 512,104 504,591
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (289,106) (121,682) (99,955) (44,691)
CREDIT FOR INCOME TAXES:
Current - (1,000) - -
Deferred (61,000) - (24,000) -
----------- ----------- ----------- -----------
(61,000) (1,000) (24,000) -
----------- ----------- ----------- -----------
NET LOSS $ (228,106) $ (120,682) $ (75,955) $ (44,691)
=========== =========== =========== ===========
NET LOSS PER SHARE
(primary and fully diluted) $ (.04) $ (.02) $ (.05) $ (.02)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements
4
<PAGE> 6
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended September 30, 1996 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1996 1997
---- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (75,955) $ (44,691)
Adjustments to reconcile net loss
to cash provided by operating activities-
Depreciation, depletion, amortization, impairment and other 579,632 552,242
Abandonment of oil and gas properties 44,843 3,039
(Gain) loss on sale of property and equipment 10,774 (1,897)
Deferred income taxes (24,000) -
Change in:
Accounts receivable (282,165) 82,888
Other current assets (59,909) 96,918
Other assets 22,809 (6,462)
Accounts payable (727,619) (326,084)
Accrued expenses 56,745 21,447
Billings in excess of costs on uncompleted contracts (63,037) (469,361)
----------- -----------
Total adjustments (441,927) (47,270)
----------- -----------
Net cash used by operating activities (517,882) (91,961)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,581,674) (461,472)
Proceeds on sale of property and equipment 104,262 2,000
----------- -----------
Net cash used for investing activities (1,477,412) (459,472)
----------- -----------
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 1,660,000 200,000
Payments on long-term debt (33,366) (1,508,776)
Repayments of borrowings under revolving credit facility - (2,840,000)
Net proceeds from the issuance of Common Stock - 4,772,633
Distributions and dividends (323,875) (67,066)
----------- -----------
Net cash provided by financing activities 1,231,797 469,630
----------- -----------
DECREASE IN CASH AND EQUIVALENTS (763,497) (81,803)
</TABLE>
The accompanying notes are an integral part of these Financial Statements
5
<PAGE> 7
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For The Six Months Ended September 30, 1996 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD $1,551,748 $1,503,278
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 788,251 $1,421,475
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the period for -
Interest $ 395,823 $ 411,731
Income taxes $ - $ 11,049
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Long-term debt incurred for the purchase
of property and equipment $ 637,549 $ -
Accounts payable incurred for the
purchase of property and equipment $ 80,032 $ 13,347
Common Stock issued for Director fees $ - $ 25,582
</TABLE>
The accompanying notes are an integral part of these 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 26.9%
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%
</TABLE>
7
<PAGE> 9
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
<TABLE>
<S> <C>
Note 1. Summary of Accounting Policies (Continued)
North Coast Energy 1991-3 Appalachian Drilling Program Limited Partnership 25.3%
North Coast Energy 1992-1 Appalachian Drilling Program Limited Partnership 25.0%
North Coast Energy 1992-2 Appalachian Drilling Program Limited Partnership 25.0%
North Coast Energy 1992-3 Appalachian Drilling Program Limited Partnership 39.5%
North Coast Energy 1993-1 Appalachian Drilling Program Limited Partnership 30.3%
North Coast Energy 1993-2 Appalachian Drilling Program Limited Partnership 31.0%
North Coast Energy 1993-3 Appalachian Drilling Program Limited Partnership 30.0%
North Coast Energy 1994-1 Appalachian Drilling Program Limited Partnership 30.0%
North Coast Energy 1994-2 Appalachian Drilling Program Limited Partnership 25.0%
North Coast Energy 1994-3 Appalachian Drilling Program Limited Partnership 25.0%
North Coast Energy 1995-1 Appalachian Drilling Program Limited Partnership 20.0%
North Coast Energy 1995-2 Appalachian Drilling Program Limited Partnership 20.0%
North Coast Energy 1996-1 Appalachian Drilling Program Limited Partnership 20.0%
North Coast Energy 1996-2 Appalachian Drilling Program Limited Partnership 20.0%
</TABLE>
All significant intercompany accounts and transactions have been
eliminated.
Note 2. Long-Term Debt
<TABLE>
<CAPTION>
March 31, 1997 September 30, 1997
-------------- ------------------
Long-term debt consists of the following:
<S> <C> <C>
Revolving credit notes payable - bank $ 8,640,000 $6,000,000
Notes payable to stockholder with interest at prime
plus 1% and 8%. Repaid in fiscal 1998. 1,453,674 -
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 56,475
Mortgage note payable to a bank, secured by land and
a building, requiring monthly payments of approximately
$5,248 (including interest at 8.58%). 524,033 516,791
Various installment notes payable, in aggregate monthly
installments (including interest) of $9,042 at March 31,
1997, and $8,300 at September 30, 1997. 151,487 107,369
----------- ----------
10,829,410 6,680,635
Less current portion 108,900 99,800
----------- ----------
$10,720,510 $6,580,835
=========== ==========
</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 ("Credit
Facility") 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 September 30, 1997), as defined. At September 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
September 30, 1997 were $3,150,000 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 $6,000,000 at September 30, 1997, bear interest at the lending
bank's prime rate plus 1 1/2% (currently 10%). 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 respect to all covenants and restrictions at September 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 had two notes payable to a stockholder, which were repaid on
September 5, 1997, in the aggregate of $1,526,043. The loan payment
included interest of $50,506.
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,
1997 1997
---- ----
<S> <C> <C>
Billings on uncompleted contracts $ 738,554 $ -
Costs incurred on uncompleted contracts 269,193 -
------- -----------
$ 469,361 $ -
======= ===========
</TABLE>
At September 30, 1997 all contracts were completed.
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.
At September 30, 1997, the Company has committed to fund certain costs
of the North Coast Energy Appalachian Drilling Programs estimated to be
approximately $239,000 for tangible well equipment and pipeline
construction.
9
<PAGE> 11
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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. The Company paid a quarterly dividend of $67,066 on the
cumulative convertible Series B preferred stock on September 30, 1997
after receiving a waiver from its lender. For purposes of computing
earning per share for the three months ending September 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. Sale of Common Stock
September 4, 1997 the Company sold 5,747,127 shares of its Common Stock
for $5 million to NUON International bv, a limited liability company
organized under the laws of the Netherlands ("NUON"), pursuant to the
terms of a stock purchase agreement ("Agreement") by and between the
Company and NUON dated August 1, 1997. Pursuant to the terms of the
Agreement and 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 sale of Common Stock was utilized to
repay existing subordinated indebtedness and interest in the amount of
$1,526,043 owed to Lomak Petroleum, Inc., a principal stockholder of
the Company, with the remaining proceeds used for working capital and
to reduce the amount outstanding under the Company's Credit Facility.
Note 7. Pro Forma
During fiscal 1997, the Company conducted 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, 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 and the sale of Common Stock (see Note 6) had
occurred at the beginning of each period presented.
<TABLE>
<CAPTION>
September 30, 1996 September 30,
Pro Forma 1997
------------------ -----------------
<S> <C> <C>
REVENUE $ 4,498,579 $ 3,403,155
NET LOSS (75,955) (44,691)
NET LOSS APPLICABLE TO COMMON
STOCK $ (399,830) $ (178,823)
WEIGHTED AVERAGE SHARES
OUTSTANDING 16,478,301 16,533,744
EARNINGS PER SHARE $ (0.02) $ (0.01)
</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.
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
North Coast Energy, Inc., (the "Company") a Delaware corporation, is an
independent natural gas and oil company engaged in exploration, development and
production activities primarily in the Appalachian Basin. 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.
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 six to eight 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 and six months ended September 30, 1996 and 1997. 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,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Oil and gas production 40% 42% 35% 41%
Drilling revenues 15 18 32 22
Well operating, transportation and other 32 25 23 24
Administrative and agency fees 12 14 9 12
Other 1 1 1 1
---- ---- ---- ----
Total Revenues 100% 100% 100% 100%
---- ---- ---- ----
Expenses:
Oil and gas production expenses 10% 13% 9% 13%
Drilling costs 15 16 26 18
Oil and gas operations 22 11 14 9
General and administrative expenses 39 36 28 30
Depreciation, depletion, amortization, impairment and other 15 17 13 16
Abandonment of oil and gas properties 0 0 1 0
Provision for taxes on income (3) 0 0 0
Other 15 15 11 15
---- ---- ---- ----
Total Expenses 113% 108% 102% 101%
Net Loss (13)% (8)% (2)% (1)%
==== ==== ==== ====
</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 1997. The review should be read in conjunction with the
financial information presented elsewhere herein.
11
<PAGE> 13
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 1996 TO SIX MONTHS ENDED SEPTEMBER
30, 1997.
REVENUE
Oil and gas production revenues decreased $169,009 (11%) to $1,415,124
for the six months ended September 30, 1997 compared to $1,584,133 for the prior
corresponding period. The primary reason for the decrease in oil and gas
production revenues was due to a 6% decrease in gas production from the
Appalachian area between comparable periods. The gas production revenues were
also affected by a decrease in product price in the Company's Pennsylvania
market. Although the average price received by the Company decreased, oil
production revenue remained stable between comparable periods due to a 12%
increase in oil production. The Company received an average price of $17.53 and
$19.85 per barrel of oil for the six months ended September 30, 1997 and 1996,
respectively, and $2.21 and $2.51 per Mcf for natural gas for the six months
ended September 30, 1997 and 1996, respectively.
Drilling revenues for the period decreased by $704,146 (49%) to
$738,554 for the six months ended September 30, 1997 from $1,442,700 for the six
months ended September 30, 1996 due primarily to the decrease in the number of
wells recognized in revenue for the period. Drilling revenues were recognized on
4 wells for the six months ended September 30, 1997 compared to 14 wells for the
six months ended September 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 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.
For the six months ended September 30, 1997, well operating,
transportation and other revenues decreased $223,733 (21%) compared to the six
months ended September 30, 1996. A decrease of $291,620 in third party gas sales
coupled with a decrease in transportation revenue was offset somewhat by an
increase in well operating and compressor revenue.
EXPENSES
Oil and gas production expenses increased $24,767 (6%) for the six
months ended September 30, 1997 compared to September 30, 1996 due to $35,000 of
costs incurred with relocation of certain production facilities in the Gulf
Coast area.
Drilling costs for the six months ended September 30, 1997 as compared
to the six months ended September 30, 1996 decreased $566,835 (47%) primarily
due to the decreased number of wells completed between comparable periods. The
profit margin on drilling revenue decreased to 15% for the six months ended
September 30, 1997 compared to 17% for the six months ended September 30, 1996.
The decrease in the drilling profit margin between comparable periods was due to
additional completion costs over the estimated accruals from wells recognized in
drilling income in prior periods.
Oil and gas operations expenses decreased $335,805 (52%) for the six
months ended September 30, 1997 as compared to the six months ended September
30, 1996. The unaffiliated third party gas sales fluctuate from year to year
based upon the availability of these types of transactions.
General and administrative expenses decreased $209,041 (17%) for the
six months ended September 30, 1997 compared with the six months ended September
30, 1996. This decrease in general and administrative expenses was primarily due
to cost savings related to staff reductions and the litigation expenses related
to Lomak for the six months ended September 30, 1996.
Income from operations for the six months ended September 30,
1997 increased $60,684 (16%) to $431,648 for the six months ended September 30,
1997 compared to $370,964 for the six months ended September
12
<PAGE> 14
30, 1996. The Company's net loss decreased $31,264 (41%) to $44,691 for the six
months ended September 30, 1997 compared to a net loss of $75,955 for the six
months ended September 30, 1996. The above mentioned increase in income was
primarily a result of decreases in oil and gas operations expense and general
and administrative expenses which were offset by reduced drilling activity.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THREE MONTHS ENDED
SEPTEMBER 30, 1996.
REVENUE
Oil and gas production revenues for the three months ended September
30, 1997 decreased $50,125 (7%) to $671,074 compared to $721,199 for the prior
corresponding period. The primary reason for the decrease in oil and gas
production revenues was a 4% decrease in the average natural gas price the
Company received between comparable periods. The average price the Company
received for natural gas decreased to $2.33 per Mcf for the three months ended
September 30, 1997 from $2.43 per Mcf for the three months ended September 30,
1996.
The Company recognized revenue on the drilling of two wells for the
three months ended September 30, 1997, compared to three wells for the three
months ended September 30, 1996. The drilling revenues remained relatively
constant even with the reduction in the number of wells because certain of the
wells which were completed during the three months ended September 30, 1996 were
shallower than the wells completed during the three months ended September 30,
1997. Shallower wells are charged a lower turnkey contract price.
Revenues generated from well operating, transportation and other
decreased $180,554 (31%) for the three months ended September 30, 1997 as
compared to the three months ended September 30, 1996. This decrease was due to
a decrease in unaffiliated third party gas sales of $218,947. The decrease in
revenues in this category was slightly offset by an increase in well operating
revenue and compressor revenue.
EXPENSES
Oil and gas operations expenses decreased $228,860 (58%) for the three
months ended September 30, 1997 as compared to the three months ended September
30, 1996. This decrease was due to the decrease in gas purchases related to
unaffiliated third party gas sales as discussed above.
General and administrative expenses decreased $126,602 (18%) for the
three months ended September 30, 1997 compared to the three months ended
September 30, 1996. This decrease in general and administrative expenses was due
to cost savings related to staff reductions and the litigation expenses related
to Lomak for the three months ended September 30, 1996.
For the three months ended September 30, 1997 income from operations
increased $133,289 to $103,289 for the three months ended September 30, 1997
compared to a loss from operations of $29,295 for the three months ended
September 30, 1996.
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 of the
Company believes that other forces of the economy and world events, 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 $18.10 and $20.25 per barrel of oil for
the six months ended September 30, 1997 and 1996, respectively, and $2.33 and
$2.43 per Mcf for natural gas for the six months ended September 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
September 30, 1997 compared to the two year period ended September 30, 1995.
Although it is anticipated that there will be a decline in gas prices during
13
<PAGE> 15
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 include 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 contracts and
on the spot market. Approximately 10% of the company's production is sold on the
spot market, while 90% is under contract. The spot market price the Company
receives for gas production is related to several variables, including weather
and the effects of gas storage. The gas under contract is priced as follows; 60%
is based on the NYMEX price plus a premium, 10% is based on Appalachian indexes
plus a premium, while the price of the remaining production is fixed. The price
of the NYMEX based contracts can be predetermined by the Company at any NYMEX
level prior to the production month. The index price contracts are based on then
current market prices.
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 $960,000 at September 30, 1997
compared to $325,000 at March 31, 1997. The increase of $635,000 in working
capital from March 31, 1997 reflects the Company's improved cash position from
the sale of 5 million shares of Common Stock on September 4, 1997. Also, the
Company reduced cash outflow related to the purchase of well equipment by
utilizing equipment in inventory or on wells yet to be plugged and abandoned. As
of September 30, 1997, the Company had $6,000,000 outstanding under its Credit
Facility. North Coast's current ratio was 1.5 to 1.0 at September 30, 1997 and
1.1 to 1.0 at March 31, 1997.
The following table summarizes the Company's financial position at
March 31, 1997 and September 30, 1997:
<TABLE>
<CAPTION>
(Amounts in Thousands) March 31, 1997 September 30, 1997
-------------- ------------------
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Working capital $ 325 2% $ 960 5%
Property and equipment (net) 17,901 97% 17,837 94%
Other 151 1% 127 1%
------- --- ------- ---
Total $18,377 100% $18,924 100%
======= === ======= ===
Long-term debt $10,720 58% $ 6,581 35%
Deferred income taxes 347 2% 347 2%
Stockholders' equity 7,310 40% 11,996 63%
------- --- ------- ---
Total $18,377 100% $18,924 100%
======= === ======= ===
</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.
14
<PAGE> 16
The following table summarizes the Company's Statements of Cash Flows
for the six months ended September 30, 1996 and 1997:
<TABLE>
<CAPTION>
Six Months Ended September 30,
------------------------------
(Amounts in Thousands) 1996 1997
---- ----
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Net cash used by operating activities $ (518) (21)% $ (92) (9)%
Net cash used for investing activities (1,477) (58)% (459) (43)%
Net cash provided by financing activities 1,232 49% 469 44%
------- --- ----- ---
Decrease in cash and equivalents $ (763) (30)% $ (82) (8)%
======= === ===== ===
</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 $426,000 for the six months ended September
30, 1997 compared to the period ended September 30, 1996. This increase reflects
the reduction of general and administrative expenses for the six months ended
September 30, 1997 compared to the six months ended September 30, 1996.
Net cash used for investing activities decreased to approximately
$459,000 for the six months ended September 30, 1997 from approximately
$1,477,000 for the six months ended September 30, 1996. The decrease of
$1,018,000 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 well equipment in inventory or on wells yet to be plugged and abandoned.
Net cash from financing activities decreased approximately $763,000 for
the six months ended September 30, 1997 compared to the six months ended
September 30, 1996. This decrease reflects the Company's sale of $5,000,000 of
Common Stock, the repayment of two loans to Lomak, a reduction in dividends on
Preferred Stock and repayments of borrowings under the Credit Facility for the
six months ended September 30, 1997 compared to an increase in borrowings on the
Credit Facility for the six months ended September 30, 1996.
The Company has a $20,000,000 revolving credit agreement ("Credit
Facility") 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 September 30, 1997), as defined. At September 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 September 30, 1997 were
$3,150,000 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 December 2, 1996 amendment to the Credit
Facility provides that the payment of dividends with respect to the capital
stock of the Company is prohibited. The Company paid a quarterly dividend of
$67,066 on the cumulative convertible Series B preferred stock on September 30,
1997 after receiving a waiver from its lender. As of September 30, 1997, the
Company had $6,000,000 outstanding under the Credit Facility. At September 30,
1997 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%. 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 September 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 a 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, 1997 was $516,791.
15
<PAGE> 17
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.
On September 4, 1997 the Company sold 5,747,127 shares of its Common
Stock for $5 million to NUON International bv, a limited liability company
organized under the laws of the Netherlands ("NUON"), pursuant to the terms of a
stock purchase agreement ("Agreement") by and between the Company and NUON dated
August 1, 1997. Pursuant to the terms of the Agreement and 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 sale of Common Stock was utilized to
repay existing subordinated indebtedness in the amount of $1,475,537 plus
interest of $50,506 owed to Lomak with the remaining proceeds used for working
capital and to reduce the amount outstanding under the Company's Credit
Facility.
Management of the Company intends to utilize its Credit Facility to
purchase additional partnership interests in the Drilling Programs previously
sponsored by the Company. Management has not yet determined to what extent, if
any, it will be able to acquire additional interest in these partnerships,
however, management believes that available borrowing on the existing Credit
Facility will provide sufficient funds.
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 on or about September 4, 1996, the
Company's ability to market its Drilling Programs was adversely affected for
fiscal 1996. With the reduction of the Drilling Program activity for fiscal 1996
and the need to conserve cash, the Company's ability to increase profitably
through the Drilling Programs was adversely affected. Demands on the Company's
capital resources increased due to reduced cash flow associated with lower
levels of investor interest in its Drilling Programs and increased costs
associated with litigation with Lomak. This necessitated actions by the Company
to conserve cash by initiating layoffs of 21% of its staff in October, 1996,
suspending its dividends on its Series A Non-cumulative and Series B Cumulative
Preferred Stock and other cost cutting measures. Revenues derived from the
Company's Drilling Partnership activity for fiscal 1998 will be dependent upon
several factors including the potential partnership investors' reaction to the
NUON transaction, the Company's ability to re-staff necessary departments,
locate available drilling sites, results from prior drilling programs and
ultimately the total amount of drilling program funds raised.
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.
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
16
<PAGE> 18
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.
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*
99.1 Stock Purchase Agreement by and between North Coast Energy,
Inc. and NUON International bv, dated August 1, 1997.**
b). Form 8-K Filings.
On August 1, 1997, the Company filed a current report on Form
8-K relating to a Stock Purchase Agreement it entered into
with NUON International bv wherein NUON agreed to purchase an
aggregate of 17,226,387 shares of stock of North Coast Energy,
Inc. for $15 million, subject to the satisfaction of certain
conditions.
On September 4, 1997, the Company filed a current report on
Form 8-K relating to the sale of 5,747,127 shares of its
Common Stock to NUON pursuant to the terms of the Stock
Purchase Agreement dated August 1, 1997. Pursuant to the terms
of the Agreement and subject to the satisfaction of certain
conditions, 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.
17
<PAGE> 19
Also on September 4, 1997 Robert L. Bauman, Charles K. Ebinger
and W. Dale Wegrich resigned from the Board of Directors of
the Company. Pursuant to the terms of the Agreement and upon
the recommendation of NUON, the Board of Directors appointed
Dr. Leo J.M.J. Blomen, Drs. J.J.M. Smits and Saul Siegel to
the Board of Directors of the Company.
*Exhibit 27.1 furnished for Securities and Exchange Commission purposes only.
**Incorporated by reference to the appropriate exhibit to the Company's Form 8-K
filed on August 1, 1997.
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.
November 14, 1997 /s/ Charles M. Lombardy, Jr.
----------------------------------------------
Charles M. Lombardy, Jr.
Chief Executive Officer and Director
November 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
EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
9/30/96 9/30/97 9/30/96 9/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Loss $ (228,106) $ (120,682) $ (75,955) $ (44,691)
Series A Preferred Stock Dividends - - (91,542) -
Series B Preferred Stock Dividends (116,167) (67,066) (232,333) (134,132)
----------- ------------ ----------- ------------
Pro Forma Loss Applicable to Common Stock $ (344,273) $ (187,748) $ (399,830) $ (178,823)
- ---------------------------------------------------------------------------------------------------------------------------------
SHARES
Weighted Average Common Shares for the
period ended 8,041,213 12,481,962 8,040,743 11,631,810
Additional Shares Assuming Conversion of:
Employee Options Exercised
0 0 0 0
----------- ------------ ----------- ------------
Pro Forma Shares for Primary Earnings
Per Common Share 8,041,213 12,481,962 8,040,743 11,631,810
----------- ------------ ----------- ------------
Additional Shares Assuming Conversion of:
Preferred Stock
0 0 0 0
----------- ------------ ----------- ------------
Pro Forma Shares for Fully Diluted Earnings
Per Common Share 8,041,213 12,481,962 8,040,743 11,631,810
=========== ============ =========== ============
- ---------------------------------------------------------------------------------------------------------------------------------
Primary Earnings Per Common Share $ (.04) $ (.02) $ (.05) $ (.02)
Fully Diluted Earnings Per Share *$ (.04) *$ (.02) *$ (.05) *$ (.02)
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
* Common Stock Equivalents Have an Anti-Dilutive Effect on Earnings Per Share
and are Excluded From This Exhibit.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000839950
<NAME>NORTH COAST ENERGY
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,421,475
<SECURITIES> 0
<RECEIVABLES> 1,305,145
<ALLOWANCES> 0
<INVENTORY> 111,161
<CURRENT-ASSETS> 2,915,161
<PP&E> 30,608,256
<DEPRECIATION> 12,771,222
<TOTAL-ASSETS> 20,879,640
<CURRENT-LIABILITIES> 1,955,268
<BONDS> 0
0
3,438
<COMMON> 165,428
<OTHER-SE> 11,827,471
<TOTAL-LIABILITY-AND-EQUITY> 20,879,640
<SALES> 3,403,155
<TOTAL-REVENUES> 3,403,155
<CGS> 2,971,507
<TOTAL-COSTS> 2,971,507
<OTHER-EXPENSES> (28,252)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 504,591
<INCOME-PRETAX> (44,691)
<INCOME-TAX> 0
<INCOME-CONTINUING> (44,691)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,691)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
