<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, 1998
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 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 of the latest
practical date.
Class Outstanding at August 12, 1998
---------------------------- ------------------------------
Common Stock, $.01 par value 16,617,881
<PAGE> 2
NORTH COAST ENERGY, INC.
<TABLE>
<CAPTION>
Page No.
--------
PART I - FINANCIAL INFORMATION
<S> <C>
Consolidated Balance Sheets -
March 31, 1998 (Audited) and June 30, 1998 (Unaudited) 2
Unaudited Consolidated Statements of Operations -
For the Three Months Ended June 30, 1997 and 1998 4
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended June 30, 1997 and 1998 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, 1998 and JUNE 30, 1998
(Unaudited)
ASSETS
------
<TABLE>
<CAPTION>
March 31, June 30,
1998 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 1,578,984 $ 1,302,895
Accounts receivable-
Trade, net 1,311,714 2,121,868
Affiliates 96,011 104,931
Inventories 189,223 177,638
Deferred income taxes 26,000 26,000
Refundable income taxes 38,000 38,000
Other, net 8,057 94,928
------------ ------------
Total current assets 3,247,989 3,866,260
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land 93,437 93,437
Oil and gas properties (successful efforts) 25,754,748 39,366,148
Pipelines 4,380,772 6,271,143
Vehicles 420,026 1,203,885
Furniture and fixtures 508,417 516,546
Buildings and improvements 786,689 794,689
------------ ------------
31,944,089 48,245,848
Less- Accumulated depreciation, depletion, amortization
and impairment (13,155,288) (13,640,460)
------------ ------------
18,788,801 34,605,388
OTHER ASSETS, net 274,726 1,704,034
------------ ------------
$ 22,311,516 $ 40,175,682
============ ============
</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, 1998 and JUNE 30, 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, June 30,
1998 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 88,300 $ 83,100
Accounts payable 1,824,740 1,786,171
Accrued expenses 250,073 214,489
Billings in excess of costs on uncompleted contracts 302,881 -
------------ ------------
Total current liabilities 2,465,994 2,083,760
------------ ------------
LONG-TERM DEBT, net of current portion 7,171,035 24,640,761
DEFERRED INCOME TAXES AND OTHER LIABILITIES 335,200 1,235,200
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A, 6% Noncumulative Convertible Preferred stock, par value $.01 per
share; 563,270 shares authorized; 75,481 issued and outstanding (aggregate
liquidation value of $754,810) 755 755
Series B, Cumulative Convertible Preferred stock, par value $.01 per
share; 625,000 shares authorized, 268,264 issued and outstanding
(aggregate liquidation value $ 2,682,640) 2,683 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; 16,612,931 issued and outstanding 166,129 166,129
Additional paid-in capital 16,859,237 16,859,237
Retained deficit (4,689,517) (4,812,843)
------------ ------------
Total stockholders' equity 12,339,287 12,215,961
============ ============
$ 22,311,516 $ 40,175,682
============ ============
</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, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
REVENUE:
Oil and gas production $ 744,050 $ 1,564,912
Drilling revenues 463,554 326,958
Well operating, transportation and other 428,628 404,056
Administrative and agency fees 213,263 210,132
------------ ------------
1,849,495 2,506,058
------------ ------------
COSTS AND EXPENSES:
Oil and gas production expenses 230,241 562,264
Drilling costs 373,865 395,177
Oil and gas operations 142,494 248,870
General and administrative expenses 478,660 444,126
Depreciation, depletion, amortization and other 293,542 517,927
Abandonment of oil and gas properties 3,039 -
------------ ------------
1,521,841 2,168,364
------------ ------------
INCOME FROM OPERATIONS 327,654 337,694
------------ ------------
OTHER INCOME:
Interest 12,916 17,069
Other 62 1,151
Gain (loss) on sale of property and equipment 1,897 (508)
------------ ------------
14,875 17,712
------------ ------------
OTHER EXPENSE:
Interest 265,538 451,904
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 76,991 (96,498)
PROVISION FOR INCOME TAXES:
Current 1,000 -
Deferred - -
------------ ------------
1,000 -
------------ ------------
NET INCOME (LOSS) 75,991 (96,498)
============ ============
NET INCOME (LOSS) PER SHARE (basic and diluted) $ .00 $ (.01)
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE> 6
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 75,991 $ (96,498)
Adjustments to reconcile net income (loss) to net cash used by
operating activities-
Depreciation, depletion, amortization and other 293,542 517,927
Abandonment of oil and gas properties 3,039 -
(Gain) loss on sale of property and equipment (1,897) 508
Deferred income taxes 1,000 -
Change in-
Accounts receivable 177,404 (819,074)
Inventories and other current assets 48,013 (75,286)
Other assets, net - (1,288,634)
Accounts payable (519,191) (38,569)
Accrued expenses (25,541) (35,584)
Other liabilities - 900,000
Billings in excess of costs on uncompleted contracts (316,212) (302,881)
------------ ------------
Total adjustments (339,843) (1,141,593)
------------ ------------
Net cash used by operating activities (263,852) (1,238,091)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (223,425) (16,325,698)
Proceeds on sale of property and equipment 2,000 -
------------ ------------
Net cash used for investing activities (221,425) (16,325,698)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of accounts payable used to finance property
and equipment additions (87,161) -
Borrowings under revolving credit facility - 17,962,370
Borrowings under note payable to stockholder 21,863 -
Repayments of borrowings under revolving credit facility - (500,000)
Payments on long-term debt (30,577) (29,210)
Proceeds from issuance of long-term debt - 31,366
Distributions and dividends - (26,826)
Cash paid for deferred financing costs - (150,000)
------------ ------------
Net cash provided (used) by financing activities $ (95,875) $ 17,287,700
------------ ------------
</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, 1997 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
DECREASE IN CASH AND EQUIVALENTS $ (581,152) $ (276,089)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,503,278 1,578,984
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 922,126 $ 1,302,895
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 235,943 $ 353,889
Income taxes 11,049 21,086
SUPPLEMENTAL DISCLOSURES ON NONCASH INVESTING AND FINANCING ACTIVITIES:
Long-term debt incurred for the purchase of property
and equipment $ - $ 31,366
Accounts payable incurred for the purchase of property
and equipment 13,347 -
Common stock issued for director fees 25,852 -
Accounts payable from interest on long-term debt - 139,267
</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, 1998.
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> <C>
Capital Drilling Fund 1986-1 Limited Partnership 13.2%
North Coast Energy/Capital 1987-1 Appalachian Drilling Program Limited Partnership 40.4%
North Coast Energy/Capital 1987-2 Appalachian Drilling Program Limited Partnership 38.9%
North Coast Energy/Capital 1988-1 Appalachian Drilling Program Limited Partnership 35.1%
North Coast Energy/Capital 1988-2 Appalachian Drilling Program Limited Partnership 41.7%
North Coast Energy 1989 Appalachian Drilling Program Limited Partnership 31.6%
North Coast Energy 1990-1 Appalachian Drilling Program Limited Partnership 29.4%
North Coast Energy 1990-2 Appalachian Drilling Program Limited Partnership 28.9%
North Coast Energy 1990-3 Appalachian Drilling Program Limited Partnership 25.0%
North Coast Energy 1991-1 Appalachian Drilling Program Limited Partnership 28.4%
North Coast Energy 1991-2 Appalachian Drilling Program Limited Partnership 25.6%
North Coast Energy 1991-3 Appalachian Drilling Program Limited Partnership 28.9%
North Coast Energy 1992-1 Appalachian Drilling Program Limited Partnership 25.0%
</TABLE>
7
<PAGE> 9
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 1. Summary of Accounting Policies (Continued)
<TABLE>
<S> <C> <C>
North Coast Energy 1992-2 Appalachian Drilling Program Limited Partnership 27.8%
North Coast Energy 1992-3 Appalachian Drilling Program Limited Partnership 39.5%
North Coast Energy 1993-1 Appalachian Drilling Program Limited Partnership 32.6%
North Coast Energy 1993-2 Appalachian Drilling Program Limited Partnership 31.7%
North Coast Energy 1993-3 Appalachian Drilling Program Limited Partnership 30.0%
North Coast Energy 1994-1 Appalachian Drilling Program Limited Partnership 31.4%
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%
North Coast Energy 1997-1 Appalachian Drilling Program Limited Partnership 38.2%
North Coast Energy 1997-2 Appalachian Drilling Program Limited Partnership 22.1%
</TABLE>
All significant intercompany accounts and transactions have been
eliminated.
Note 2. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1998
------------ ------------
<S> <C> <C> <C>
Revolving credit notes payable - bank $ 6,565,265 $ 24,027,635
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. 52,571 50,589
Mortgage note payable to a bank, secured by land and a
building, requiring monthly payments of approximately
$5,248 (including interest at 8.58%). 507,404 502,599
Various installment notes payable, in aggregate monthly
installments (including interest of $6,860 at March 31,
1998 and $7,517 at June 30, 1998). 134,095 143,038
------------ ------------
7,259,335 24,723,861
Less current portion 88,300 83,100
------------ ------------
$ 7,171,035 $ 24,640,761
============ ============
</TABLE>
8
<PAGE> 10
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Long-Term Debt (Continued)
On February 9, 1998, the Company entered into an agreement with ING (US)
Capital Corporation to replace the $20,000,000 revolving credit facility
with its previous lender. On May 29, 1998, the Company entered into an
amended Credit Agreement with its lender increasing the Credit Facility
from $20,000,000 to $25,000,000. 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 ($245,000 at June 30, 1998), as defined.
At June 30, 1998, the Company's borrowing base was $25,000,000 subject
to reduction for the outstanding letters of credit. Available borrowings
under the facility at June 30, 1998 were $727,365 and may subsequently
change based upon the semiannual reserve study and borrowing base
determination.
The revolving line of credit is reviewed semi-annually and may be
extended by an amendment to the current facility or converted to a term
loan on July 1, 1999.
Amounts outstanding under the reducing revolving line of credit bear
interest at the lending bank's prime rate plus .75% or LIBOR plus 2.50%,
or approximately 10% and 8.25% at June 30, 1997 and June 30, 1998,
respectively. The agreement requires the company to pay a commitment fee
of .5% on the unused amount of the available borrowings. The agreement
contains certain restrictive covenants, including working capital,
current ratio, tangible net worth, and EBITDA calculations, as defined.
The Company was in compliance with all covenants and restrictions at
June 30, 1998.
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.
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,
1998 1998
---- ----
<S> <C> <C>
Billings on uncompleted contracts $ 335,920 $ -
Costs incurred on uncompleted contracts 33,039 -
---------- ----------
$ 302,881 $ -
========== ==========
</TABLE>
At June 30, 1998, 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 $245,000 in lieu of coverage
provided by insurance for road bond deposits against damage.
At June 30, 1998, the Company has committed to fund certain costs of
the North Coast Energy Appalachian Drilling Programs estimated to be
approximately $328,900 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
On June 30, 1998, the Company paid a dividend of $26,826 ($0.10 per
share) on the cumulative convertible Series B preferred stock. For
purposes of computing earnings per share for the three months ended
June 30, 1998, dividends paid and 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
$375,570 at June 30, 1998.
Note 6. Acquisition of Kelt Ohio, Inc.
In May 1998, the Company acquired oil and gas properties from Kelt Ohio
(the "Kelt Ohio Acquisition") for a purchase price of approximately $16
million. The acquisition was accounted for as a purchase. The acquired
assets include approximately 900 natural gas and oil wells, brine
disposal facilities, drilling and service rigs, and natural gas
compressors and gas gathering systems.
The Company funded the acquisition primarily with borrowings under its
revolving credit facility which was amended in May 1998 to increase the
borrowing base to $25 million, as defined.
The accompanying unaudited pro forma financial information gives effect
to the Kelt Ohio Acquisition and the related financing in May 1998 for
approximately $16 million. The unaudited pro forma operating results
were prepared as if the Kelt Ohio Acquisition had occurred at April 1,
1997.
<TABLE>
<CAPTION>
June 30, 1997
Pro Forma
(unaudited)
-----------
<S> <C>
TOTAL REVENUES $ 3,027,453
COSTS AND EXPENSES 2,300,321
INCOME FROM OPERATIONS 727,132
OTHER EXPENSES 899,737
NET LOSS (172,605)
============
NET LOSS, applicable to common stock (after preferred stock
dividends in arrears of $67,066) (239,671)
============
BASIC AND DILUTED EARNINGS, per common share $ (0.02)
============
WEIGHTED AVERAGE SHARES, outstanding 10,951,334
============
</TABLE>
10
<PAGE> 12
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 6. Acquisition of Kelt Ohio, Inc. (continued)
The pro forma operating results do not purport to present actual operating
results that would have been achieved had the acquisition and financing been
made at the beginning of the period presented or to necessarily be indicative of
future results of operations.
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 developed and proved undeveloped
natural gas and oil properties and on the development of such properties by the
Company or 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 following table is a review of the results of operations of the
Company for the three months ended June 30, 1997 and 1998. All items in the
table are calculated as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months
Ended
June 30,
--------
1997 1998
-------------
<S> <C> <C>
Revenues:
Oil and gas production 40% 62%
Drilling revenues 25 13
Well operating, transportation and other 23 16
Administrative and agency fees 11 8
Other 1 1
---- ----
Total Revenues 100% 100%
---- ----
Expenses:
Oil and gas production expenses 12% 22%
Drilling costs 20 16
Oil and gas operations 8 10
General and administrative expenses 26 18
Depreciation, depletion, amortization and other 16 20
Abandonment of oil and gas properties 0 0
Provision for taxes on income 0 0
Other 14 18
---- ----
Total Expenses 96% 104%
---- ----
Net Income 4% (4)%
==== ====
</TABLE>
The following discussion and analysis reviews the results of operations
and the financial condition for the Company for the three months ended June 30,
1997 and 1998. The review should be read in conjunction with the financial
information presented elsewhere herein.
12
<PAGE> 14
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 TO THREE MONTHS ENDED JUNE 30,
1997.
REVENUES
Oil and gas production revenues increased $820,862, or 110%, to
$1,564,912 for the three months ended June 30, 1998 compared to $744,050 for the
prior corresponding period. This increase in oil and gas revenue is due to the
increase of production related to certain oil and gas properties acquired from
Kelt Ohio, Inc. ("Kelt Acquisition", "Kelt"). Although the purchase was
effective on April 8, 1998, the Company did not begin managing the assets until
after the closing date of May 29, 1998. The sale of gas production from the Kelt
wells for the period ended June 30, 1998 was predominantly sold under a fixed
contract to an end user. This contract expired on June 15, 1998 and the gas from
these wells has been contracted at a 4% higher price for a period of one year.
The Company received an average price of $12.58 and $16.86 per barrel of oil for
the three months ended June 30, 1998 and 1997, respectively, and $2.55 and $2.28
per Mcf for natural gas for the three months ended June 30, 1998 and 1997,
respectively.
Drilling revenues for the period decreased by $136,596 to $326,958
for the three months ended June 30, 1998 from $463,554 for the three months
ended June 30, 1997 due to the decrease in the number of wells recognized in
revenue for the period. Drilling revenues were recognized on 2 wells for the
three months ended June 30, 1998 compared to 3 wells for the three months ended
June 30, 1997.
For the three months ended June 30, 1998, well operating,
transportation and other revenues decreased $24,572 (6%) compared to the three
months ended June 30, 1997. An increase in well operating revenue was offset by
decreases in revenue from transportation, gas marketing, compression and third
party gas sales. With the Kelt acquisition the Company obtained 16 compressors
with several units not currently being utilized. The Company intends to utilize
these units by replacing compressors which are being rented from third parties.
EXPENSES
Oil and gas production expenses increased $332,023 for the three months
ended June 30, 1998 compared to June 30, 1997 due primarily to the Kelt
Acquisition. The Company is in the process of integrating various functions of
their field operations between their existing operations and Kelt's operations.
Also, the Company acquired service rigs, water trucks, and other oilfield
equipment which it intends to use in its operations to increase production and
reduce operating expenses.
Drilling costs for the three months ended June 30, 1998 compared to the
three months ended June 30, 1997 increased $21,312. This increase between
comparable periods was due to a higher overhead allocation for the three months
ended June 30, 1998 compared to the three months ended June 30, 1997.
Interest expense increased $186,366 for the three months ended June 30,
1998 compared to the three months ended June 30, 1997. This increase was
associated with an increase in the average outstanding borrowings for the
comparable periods due to the increase in debt associated with the Kelt
Acquisition.
Income from operations for the three months ended June 30, 1998
remained relatively constant between the periods presented. The Company's net
income decreased from $75,991 for the three months ended June 30, 1997 to a net
loss of $96,498 for the three months ended June 30, 1998. The above mentioned
decrease in net income was primarily a result of the increased interest expense
related to the Kelt Acquisition.
INFLATION AND CHANGES IN PRICES
The Company received an average price of $12.58 and $16.86 per barrel
for the three months ended June 30, 1998 and 1997, respectively, and $2.55 and
$2.28 per Mcf for natural gas for the three months ended June 30, 1998 and 1997,
respectively. On average, natural gas prices increased $0.09/Mcf for the three
months ended June 30, 1998 compared to the three months ended June 30, 1997
based on major price indices used in the Appalachian Basin (TCO and CNG
indices). However, the Company experienced a $0.27/Mcf increase for its natural
gas
13
<PAGE> 15
during this period. The increase the Company received can be attributed to a
change in marketing strategy as follows: (1) aggressively target small to
medium-sized commercial end-users, (2) balancing the remainder of the Company's
gas prices between spot Appalachian based prices and Nymex based prices. This
strategy allows the Company the greatest opportunity to exceed the average
regional prices, while minimizing the effects of a negative fluctuation. In
addition, the Company committed just over 50% of its natural gas production for
one year for the price of $2.855. This further minimizes the Company's exposure
to negative fluctuations in the spot market. While the costs of operations have
been and may 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.
Currently, the Company sells natural gas under both fixed price
contracts and on the spot market. The spot market price the Company receives for
gas production is related to several variables, including the weather and the
effects of gas storage. The Company anticipates that spot market prices will
continue to fluctuate in response to various factors, primarily weather and
market conditions.
In an effort to position itself to take advantage of future increases
in demand for natural gas, the Company continues to construct new pipeline
systems in the Appalachian Basin and to contract with other pipeline systems in
the region to transport natural gas production from Company wells.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $1,783,000 at June 30, 1998 compared
to $782,000 at March 31, 1998. The increase of $1,001,000 in working capital
from June 30, 1998 reflects the Company's increase in certain current assets
including prepaid royalties and the increase in the Company's trade receivables
associated with the Kelt Acquisition. As of June 30, 1998, the Company had
$24,027,635 outstanding under its Credit Facility. North Coast's current ratio
was 1.86 to 1.0 at June 30, 1998 and 1.32 to 1.0 at March 31, 1998.
The following table summarizes the Company's financial position at
March 31, 1998 and June 30, 1998:
<TABLE>
<CAPTION>
(Amounts in Thousands) March 31, 1998 June 30, 1998
-------------- -------------
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Working capital $ 782 4% $ 1,783 5%
Property and equipment (net) 18,789 95% 34,605 91%
Other 275 1% 1,704 4%
--------- --------- --------- ---------
Total $ 19,846 100% $ 38,092 100%
========= ========= ========= =========
Long-term debt $ 7,171 36% $ 24,641 65%
Deferred income taxes and other liabilities 336 2% 1,235 3%
Stockholders' equity 12,339 62% 12,216 32%
--------- --------- --------- ---------
Total $ 19,846 100% $ 38,092 100%
========= ========= ========= =========
</TABLE>
14
<PAGE> 16
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 and equity financings.
The following table summarizes the Company's Statements of Cash Flows
for the three months ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
(Amounts in Thousands) 1997 1998
- ---------------------- ---- ----
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Net cash used by operating activities $ (264) (28)% $ (1,238) (7)%
Net cash used for investing activities (221) (23)% (16,326) (91)%
Net cash provided (used) by financing activities (96) (10)% 17,288 96%
-------- -------- -------- --------
Increase in cash and equivalents $ (581) (61)% $ (276) (2)%
======== ======== ======== ========
</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 used by operating
activities increased approximately $974,000 for the three months ended June 30,
1998 compared to the period ended June 30, 1997. This increase for the current
period reflects the cost of the recent acquisition coupled with the typical
delay in cash flow from production related to the Kelt Acquisition.
Net cash used for investing activities increased to approximately
$16,236,000 for the three months ended June 30, 1998 from approximately $221,000
for the three months ended June 30, 1997. The increase was primarily due to the
Kelt Acquisition. The Kelt Acquisition included approximately 900 natural gas
and oil wells and Kelt's brine disposal facilities, drilling and service rigs,
natural gas compressors and gas gathering systems, and a large inventory of
oilfield service equipment and supplies. The addition of the service rigs and
equipment will allow the Company to generate additional revenues by servicing
the Company's wholly owned wells at a reduced cost and by servicing Drilling
Program wells which would generate revenue for the Company. The Company,
however, is in the process of reviewing the equipment purchased to determine if
all the equipment will be utilized by the Company or whether certain equipment
will be sold.
Net cash from financing activities increased approximately $17,384,000
for the three months ended June 30, 1998 compared to the three months ended June
30, 1997. This increase reflects the Company's borrowings under its credit
facility to finance the Kelt Acquisition.
On February 9, 1998, the Company entered into an agreement with ING
(US) Capital Corporation to replace the $20 million revolving credit facility
with its previous lender. An amended credit facility dated May 29, 1998 ("Credit
Agreement") expands the Company's $20 million revolving credit facility with ING
("ING") to a $25 million revolving credit facility ("Credit Facility"). The
Credit Agreement calls for payments to reduce the Credit Facility to $20 million
by July 1, 1999 if NUON International bv, the Company's largest stockholder,
does not exercise its option to purchase an additional $5 million in common
stock by September 4, 1998. The Credit Agreement also 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 ($245,000 at June 30, 1998), as defined. The expansion of the Credit
Agreement required a payment of an agency fee which equaled 1.5% of the
additional amount available along with a corresponding 0.25% decrease in the
interest rate on the amount outstanding and 1/2% commitment fee on amounts not
borrowed up to the available line. At June 30, 1998, the Company's borrowing
base was $25,000,000 subject to reduction for the outstanding letters of credit.
Available borrowings under the facility at June 30, 1998 were $727,365 and may
subsequently change based upon the
15
<PAGE> 17
semiannual reserve study and borrowing base determination (see Note 4 to the
Company's March 31, 1998 financial statements). The Credit Facility provides
that the payment of dividends with respect to the Common Stock of the Company is
prohibited. As of June 30, 1998, the Company had $24,027,635 outstanding under
the Credit Facility, and was in compliance with its loan covenants. Amounts
borrowed under the Credit Facility bear interest at the prime rate of the
lending bank plus .75% or LIBOR plus 2.50%. The revolving line of credit is
reviewed semi-annually and extended by an amendment to the current facility or
converted to a term loan on July 1, 1999.
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, at June 30, 1998, the Company had approximately $50,589
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 June 30, 1998
was $502,599.
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. The Company also issued 134,000 warrants representing the right
of the holder to purchase one share of Common Stock for $0.875 per share in
connection with the sale of Common Stock to NUON. 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. The Company is also obligated to issue 134,000 warrants on each occasion
NUON purchases an additional 5,747,127 shares. The additional warrants represent
the right to purchase one share of Common Stock for $0.875 per share.
The Company acquired certain assets and assumed certain obligations of
Kelt Ohio, Inc.,("Kelt") headquartered in Cambridge, Ohio. The Kelt Acquisition
was made pursuant to a Purchase and Sale Agreement dated April 8, 1998 as
amended May 12, 1998. The purchase price for the acquired assets was
approximately $16 million. The acquired assets include approximately 900 natural
gas and oil wells and Kelt's brine disposal facilities, drilling and service
rigs, natural gas compressors and gas gathering systems, and a large inventory
of oilfield service equipment and supplies. The Company funded the acquisition
using cash and an increase in its existing line of credit. Approximately $15
million of the total purchase price was financed under a recently expanded
credit facility with the remaining amount paid in cash.
Management of the Company believes that general economic conditions and
various sources of available capital, including current available borrowings
under the Credit Facility and the expected funds to be received from NUON, will
be sufficient to fund the Company's operations and meet debt service
requirements through fiscal 1999.
In the event that available borrowings under the Credit Facility are
not sufficient, NUON does not exercise its option to purchase additional Common
Stock or additional financing cannot be obtained, the Company would need 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 may have a
material adverse effect on the Company.
YEAR 2000
The Company has developed an action plan and identified the resources
needed to convert the majority of its computer systems and software applications
to achieve a year 2000 date conversion with no effect on customers or disruption
to business operations. Implementation of the plan has begun and the Company
anticipates completion
16
<PAGE> 18
of testing or replacement of systems by the end of fiscal 1999. The Company
estimates that the cost to complete these efforts, which primarily includes the
purchase of software and hardware upgrades under normal maintenance agreements
with third party vendors will be approximately $60,000 and will be expended
primarily in fiscal 1999. In addition, the Company has discussed with its
vendors and customers the need to be 2000 compliant. Although the Company has no
reason to believe that its vendors and customers will not be compliant by the
year 2000, the Company is unable to determine the extent to which year 2000
issues will effect its vendors and customers, and the Company continues to
discuss with its vendors and customers the need for implementing procedures to
address this issue.
ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
which may require the Company to report certain information about operating
segments including product, services and geographical areas. SFAS No. 131 is
required to be adopted for financial statements with fiscal years beginning
after December 15, 1997. The Company believes that there is no material impact
from the adoption of this standard.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-Q contains forward-looking statements
that 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, possible
acquisitions by the Company, the cost of the locating and drilling oil and gas
wells in the Appalachian Basin area, the ability of the Company to integrate
their existing field operations with that of their recently acquired operations,
the ability to utilize the new service and production equipment purchased, the
amount of funds raised in the fiscal 1999 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). Reports on Form 8-K:
The Company's current report on Form 8-K dated June 12, 1998
as amended by Form 8-K/A dated July 14, 1998.
*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, 1998 /s/ Charles M. Lombardy, Jr.
--------------------------------------------
Charles M. Lombardy, Jr.
Chief Executive Officer and Director
August 14, 1998 /s/ Tim Wagers
--------------------------------------------
Tim Wagers
Principal Accounting and Financial Officer
19
<PAGE> 1
Exhibit 11.1
Computation of Basic and Diluted Earnings Per Common Share
<TABLE>
<CAPTION>
Three Months Ended
6/30/97 6/30/98
--------- ---------
<S> <C> <C>
EARNINGS
Net Income (Loss) $ 75,991 $ (96,498)
Series B Preferred Stock Dividends 0 (26,826)
Series B Preferred Stock Dividends in Arrears (67,066) (40,240)
--------- ---------
Pro Forma Income (Loss) Income Applicable
to Common Stock $ 8,925 $(163,564)
========= =========
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
<S> <C> <C>
Weighted Average Common Shares for the
period ended 10,772,315 16,612,931
Additional Shares Assuming Conversion of:
Preferred Stock Series A and Employee
Options Exercised 177,466 0
---------- ----------
Pro Forma Shares for Basic Earnings
Per Common Share 10,949,781 16,612,931
---------- ----------
Additional Shares Assuming Conversion of:
Employee Options Exercised 1,553 0
---------- ----------
Pro Forma Shares for Diluted Earnings
Per Common Share 10,951,334 16,612,931
========== ==========
</TABLE>
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Basic Earnings Per Common Share $ .00 $ (.01)
Diluted Earnings Per Share *$ .00 **$ (.01)
</TABLE>
- --------------------------------------------------------------------------------
* Series B Preferred Stock have an anti-dilutive effect on Earnings Per Share
and are excluded from this Exhibit.
** Common Stock Equivalents 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-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,302,895
<SECURITIES> 0
<RECEIVABLES> 2,226,799
<ALLOWANCES> 0
<INVENTORY> 177,638
<CURRENT-ASSETS> 3,866,260
<PP&E> 48,245,848
<DEPRECIATION> 13,640,460
<TOTAL-ASSETS> 40,175,682
<CURRENT-LIABILITIES> 2,083,760
<BONDS> 0
0
3,438
<COMMON> 166,129
<OTHER-SE> 12,046,394
<TOTAL-LIABILITY-AND-EQUITY> 40,175,682
<SALES> 2,506,058
<TOTAL-REVENUES> 2,506,058
<CGS> 2,168,364
<TOTAL-COSTS> 2,168,364
<OTHER-EXPENSES> (17,712)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 451,904
<INCOME-PRETAX> (96,498)
<INCOME-TAX> 0
<INCOME-CONTINUING> (96,498)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (96,498)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
