<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 December 31, 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 February 10, 1998
- ---------------------------- ---------------------------------
Common Stock, $.01 par value 16,612,931
<PAGE> 2
NORTH COAST ENERGY, INC.
<TABLE>
<CAPTION>
Page No.
--------
PART I - FINANCIAL INFORMATION
<S> <C>
Consolidated Balance Sheets -
March 31, 1997(Audited) and December 31, 1997 (Unaudited) 2
Unaudited Consolidated Statements of Operations -
For the Three and Nine Months Ended December 31, 1996 and 1997 4
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended December 31, 1996 and 1997 5
Unaudited Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION 18
</TABLE>
<PAGE> 3
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1997
(Unaudited)
ASSETS
------
<TABLE>
<CAPTION>
March 31, December 31,
--------------- ----------------
1997 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 1,503,278 $ 3,275,582
Accounts receivable-
Trade, net 1,306,577 1,564,162
Affiliates 81,456 110,986
Inventories 200,971 192,639
Deferred income taxes 26,000 26,000
Refundable income taxes 50,000 50,000
Other, net 8,488 16,818
---------------- -----------------
Total current assets 3,176,770 5,236,187
---------------- -----------------
PROPERTY AND EQUIPMENT, at cost:
Land 93,437 93,437
Oil and gas properties (successful efforts) 24,290,505 25,228,293
Pipelines 4,158,204 4,289,663
Vehicles 348,825 354,995
Furniture and fixtures 501,049 503,877
Buildings and improvements 788,419 786,689
---------------- -----------------
30,180,439 31,256,954
Less- Accumulated depreciation, depletion, amortization
and impairment (12,279,402) (13,040,539)
---------------- -----------------
17,901,037 18,216,415
OTHER ASSETS, net 150,893 22,835
---------------- -----------------
$ 21,228,700 $ 23,475,437
================ =================
</TABLE>
The accompanying notes are an integral part of these Balance Sheets
2
<PAGE> 4
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1997
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, 1997 December 31,
1997 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 108,900 $ 88,200
Accounts payable 1,952,863 2,137,794
Accrued expenses 320,255 205,631
Billings in excess of costs on uncompleted contracts 469,361 2,074,616
------------- -------------
Total current liabilities 2,851,379 4,506,241
------------- -------------
LONG-TERM DEBT, net of current portion 10,720,510 6,564,825
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 75,481
issued and outstanding (aggregate liquidation value of $769,510
and $754,810, 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; 60,000,000 shares
authorized; 10,753,895 and 16,611,533 issued and outstanding 107,539 166,115
Additional paid-in capital 12,083,196 16,820,644
Retained deficit (4,884,589) (4,933,026)
------------- -------------
Total stockholders' equity 7,309,611 12,057,171
------------- -------------
$ 21,228,700 $ 23,475,437
============= =============
</TABLE>
The accompanying notes are an integral part of these Balance Sheets
3
<PAGE> 5
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Periods Ended December 31, 1996 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
1996 1997 1996 1997
---- ---- ---- ----
REVENUE:
<S> <C> <C> <C> <C>
Oil and gas production $ 767,086 $ 731,789 $ 2,351,219 $ 2,146,913
Drilling revenues - 518,997 1,442,700 1,257,551
Well operating, transportation and other 409,914 383,772 1,456,699 1,206,824
Administrative and agency fees 245,772 332,979 670,733 759,404
----------- ----------- ----------- -----------
1,422,772 1,967,537 5,921,351 5,370,692
COSTS AND EXPENSES:
Oil and gas production expenses 193,481 192,563 601,596 625,445
Drilling costs 91,900 518,417 1,288,538 1,148,220
Oil and gas operations 114,468 59,171 755,934 364,832
General and administrative expenses 698,157 638,628 1,955,078 1,686,508
Depreciation, depletion, amortization, and
other 466,390 319,406 1,046,022 871,648
Abandonment of oil and gas properties 14,017 30,851 58,860 33,890
----------- ----------- ----------- -----------
1,578,413 1,759,036 5,706,028 4,730,543
----------- ----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS (155,641) 208,501 215,323 640,149
----------- ----------- ----------- -----------
OTHER INCOME
Interest 11,155 17,067 38,290 43,360
Other 24,049 3,029 48,873 3,091
Gain (loss) on sale of property and equipment 1,806 671 (8,968) 2,568
----------- ----------- ----------- -----------
37,010 20,767 78,195 49,019
----------- ----------- ----------- -----------
OTHER EXPENSE
Interest 283,219 165,948 795,323 670,539
----------- ----------- ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (401,850) 63,320 (501,805) 18,629
CREDIT FOR TAXES ON INCOME
Current - - - -
Deferred (131,000) - (155,000) -
----------- ----------- ----------- -----------
(131,000) - (155,000) -
----------- ----------- ----------- -----------
NET (LOSS) INCOME $ (270,850) $ 63,320 $ (346,805) $ 18,629
=========== =========== =========== ===========
NET LOSS PER SHARE (basic and diluted) $ (.05) $ (.00) $ (.10) $ (.01)
=========== =========== =========== ===========
</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 Nine Months Ended December 31, 1996 and 1997
(Unaudited)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (346,805) $ 18,629
Adjustments to reconcile net (loss) income to cash
provided by operating activities-
Depreciation, depletion, amortization and other 1,046,022 871,648
Abandonment of oil and gas properties 58,860 33,890
(Gain) loss on sale of property and equipment 8,968 (2,568)
Deferred income taxes (155,000) -
Change in:
Accounts receivable (13,200) (287,115)
Other current assets (87,729) -
Other assets 35,209 86,932
Accounts payable (655,954) 342,081
Accrued expenses 46,411 (114,624)
Billings in excess of costs on uncompleted contracts 1,227,407 1,605,255
----------- -----------
Total adjustments 1,510,994 2,535,499
Net cash provided by operating activities 1,164,189 2,554,128
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,905,286) (1,179,221)
Proceeds on sale of property and equipment 171,569 2,000
----------- -----------
Net cash used for investing activities (1,733,717) (1,177,221)
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 2,080,000 200,000
Borrowings under note payable to stockholder 63,579 -
Repayments of borrowings under revolving credit facility - (2,840,000)
Net proceeds from the issuance of Common Stock - 4,726,008
Payments on long-term debt (109,553) (1,536,386)
Cash paid for deferred financing cost (12,900) -
Distributions and dividends (323,875) (67,066)
----------- -----------
Net cash provided by financing activities 1,626,289 395,395
INCREASE IN CASH AND EQUIVALENTS $ 1,056,761 $ 1,772,302
</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 Nine Months Ended December 31, 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 $2,608,509 $3,275,580
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 721,489 $ 583,137
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 $ 44,797 -
Accounts payable from interest incurred on long term debt -
Stock bonus given to employees $ 23,132 $ 10,270
Common Stock issued for Director fees - $ 59,719
</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 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 28.3%
North Coast Energy 1992-1 Appalachian Drilling Program Limited Partnership 25.0%
North Coast Energy 1992-2 Appalachian Drilling Program Limited Partnership 27.8%
North Coast Energy 1992-3 Appalachian Drilling Program Limited Partnership 39.5%
</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>
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 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%
North Coast Energy 1997-1 Appalachian Drilling Program Limited Partnership 38.2%
North Coast Energy 1997-2 Appalachian Drilling Program Limited Partnership 20.0%
All significant intercompany accounts and transactions have been eliminated.
</TABLE>
Note 2. Long-Term Debt
<TABLE>
<CAPTION>
March 31, 1997 December 31, 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 55,194
Mortgage note payable to a bank, secured by land and
a building, requiring monthly payments of approximately
$5,248 (including interest at 8.58%). 524,033 512,223
Various installment notes payable, in aggregate monthly
installments (including interest) of $9,042 at March 31,
1997, and $7,050 at December 31, 1997. 151,487 85,608
----------- -----------
10,829,410 6,653,025
Less current portion 108,900 88,200
----------- -----------
$10,720,510 $ 6,564,825
=========== ===========
</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 December 31, 1997), as defined. At December 31,
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
December 31, 1997 were $2,550,000 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 December 31, 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 December 31, 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, December 31,
1997 1997
---- ----
<S> <C> <C>
Billings on uncompleted contracts $ 738,554 $ 2,183,480
Costs incurred on uncompleted contracts 269,193 108,864
------- ----------
$ 469,361 $ 2,074,616
======= =========
</TABLE>
Note 4. Commitment and Contingencies
The Company and a commercial bank have issued standby letters of credit
which provide a guaranteed total amount of $140,000 in lieu of coverage
provided by insurance for road bond deposits against damage.
At December 31, 1997, the Company has committed to fund certain costs
of the North Coast Energy Appalachian Drilling Programs estimated to be
approximately $913,000 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
earnings per share for the nine months ending December 31, 1997,
dividends in arrears on the cumulative convertible Series B preferred
stock were $134,132. Cumulative dividends in arrears on the cumulative
convertible Series B preferred stock are $268,264.
Note 6. Sale of Common Stock
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 at $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..
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>
December 31, 1996 December 31,
Pro Forma 1997
--------------------- -----------------
<S> <C> <C>
REVENUE $ 5,921,351 $ 5,483,757
NET (LOSS) PROFIT (441,805) 18,629
NET LOSS APPLICABLE TO COMMON
STOCK $ (538,846) $ (182,569)
WEIGHTED AVERAGE SHARES
OUTSTANDING 16,482,608 16,546,422
EARNINGS PER SHARE $ ( 0.03) $ (0.01)
</TABLE>
10
<PAGE> 12
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The pro forma operating results have been prepared for comparative
purposes only. They do not purport to present actual operating results
that would have been achieved had the conversions been made at the
beginning of each period presented or to necessarily be indicative of
future results of operations.
Note 8. Per Share Amounts
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share" which revised the calculation methods and
disclosures regarding earnings per share. SFAS No. 128 was adopted for
the financial statements ending December 31, 1997 and 1996. The
standard did not impact the earnings per share amounts as presented for
the periods ended December 31, 1997 and 1996.
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
North Coast Energy, Inc., (the "Company") a Delaware corporation, is an
independent natural gas and oil company engaged in exploration, development and
production activities primarily in the Appalachian Basin. The Company's strategy
focuses primarily on the acquisition of proved undeveloped natural gas and oil
properties and on the development of such properties by the Company 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.
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 Company typically forms the Drilling Programs between August and
December of each year and conducts its drilling operations between September and
March.
The following table is a review of the results of operations of the
Company for the three and nine months ended December 31, 1996 and 1997. All
items in the table are calculated as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, December 31,
1996 1997 1996 1997
-------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas production 52% 37% 39% 40%
Drilling revenues 0 26 24 23
Well operating, transportation and other 28 19 24 22
Administrative and agency fees 17 17 11 14
Other 3 1 2 1
--- --- --- ---
Total Revenues 100 100 100 100
Expenses:
Oil and gas production expenses 13% 10% 10% 12%
Drilling costs 6 26 21 21
Oil and gas operations 8 3 13 7
General and administrative expenses 48 32 33 31
Depreciation, depletion, amortization, impairment and other 32 16 17 16
Abandonment of oil and gas properties 1 2 1 1
Provision for taxes on income (9) 0 (2) 0
Other 19 8 13 12
--- --- --- ---
Total Expenses 118% 97% 106% 100%
--- --- --- ---
Net Loss (18)% 3% (6)% 0%
=== === === ===
</TABLE>
The following discussion and analysis reviews the results of operations
and the financial condition for the Company for the three and nine months ended
December 31, 1996 and 1997. The review should be read in conjunction with the
financial information presented elsewhere herein.
12
<PAGE> 14
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1996 TO NINE MONTHS ENDED DECEMBER
31, 1997.
REVENUE
Oil and gas production revenues decreased $204,306 (9%) to $2,146,913
for the nine months ended December 31, 1997 compared to $2,351,219 for the prior
corresponding period. This decrease was primarily due to a 9% decrease in gas
production coupled with an 10% decrease in oil production and a 16% decrease in
the average oil price received by the Company. The Company received an average
price of $17.03 and $20.18 per barrel of oil for the nine months ended December
31, 1997 and 1996, respectively, and $2.45 and $2.39 per Mcf for natural gas for
the nine months ended December 31, 1997 and 1996, respectively.
Drilling revenues for the period decreased by $185,149 (13%) to
$1,257,551 for the nine months ended December 31, 1997 from $1,442,700 for the
nine months ended December 31, 1996 due primarily to the decrease in the number
of wells recognized in revenue for the period. Drilling revenues were recognized
on 13 wells for the nine months ended December 31, 1997 compared to 14 wells for
the nine months ended December 31, 1996.
For the nine months ended December 31, 1997, well operating,
transportation and other revenues decreased $249,875 (17%) compared to the nine
months ended December 31, 1996. This decrease was primarily due to a decrease of
$291,620 in unaffiliated third party gas sales which was offset by an increase
in well operating revenues. Unaffiliated third party gas sales fluctuate from
year to year based upon the availability of these types of transactions.
Revenue from administrative and agency fees, which are based on a
percentage of the total investor capital raised in all of the Drilling Programs,
increased by $88,671 (13%) for nine months ended December 31, 1997 compared to
December 31, 1996, due to the formation of the Drilling Programs in fiscal 1998.
The administrative fees derived from the fiscal 1998 Drilling Programs were
charged a rate equal to 4.5% of total capital raised compared to the prior years
programs which are charged an annual fee equal to 2% of total capital raised.
EXPENSES
Oil and gas production expenses increased $23,849 (4%) for the nine
months ended December 31, 1997 compared to December 31, 1996 due to $35,000 of
costs incurred with relocation of certain production facilities associated with
certain wells in the Gulf Coast area.
Drilling costs for the nine months ended December 31, 1997 as compared
to the nine months ended December 31, 1996 decreased $140,318 (11%) primarily
due to the decreased number of wells completed between comparable periods. The
profit margin on drilling revenue decreased to 9% for the nine months ended
December 31, 1997 compared to 11% for the nine months ended December 31, 1996.
The decrease in the drilling profit margin between comparable periods was due to
actual completion costs over the estimated accruals from wells recognized in
drilling income in prior periods.
Oil and gas operations expenses decreased $391,102 (52%) for the nine
months ended December 31, 1997 as compared to the nine months ended December 31,
1996 primarily due to reduced natural gas purchases associated with unaffiliated
third party gas sales.
General and administrative expenses decreased $268,570 (14%) for the
nine months ended December 31, 1997 compared with the nine months ended December
31, 1996. This decrease in general and administrative expenses was primarily due
to cost savings related to staff reductions, office rent and expenses associated
with litigation that was settled in December 1996.
Interest expenses decreased $124,784 (16%) for the nine months ended
December 31, 1997 compared with the nine months ended December 31, 1996. This
decrease was primarily due to the reduction of the borrowings under the
Company's Credit Facility and other debt by utilizing funds received from the
sale of common stock.
13
<PAGE> 15
Income from operations for the nine months ended December 31, 1997
increased $424,826 to $640,149 for the nine months ended December 31, 1997
compared to $215,323 for the nine months ended December 31, 1996. The Company's
net income increased $365,434 from a net loss of $346,805 for the nine months
ended December 31, 1996 to net income of $18,629 for the nine months ended
December 31, 1997.
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1997 TO THREE MONTHS ENDED
DECEMBER 31, 1996.
REVENUE
Oil and gas production revenues for the three months ended December 31,
1997 decreased $35,297 (5%) to $731,789 compared to $767,086 for the prior
corresponding period. The decrease in oil and gas production revenues was a
result of the decrease in oil revenue of $58,729 due to a decrease in the oil
production coupled with a decrease in the average oil price received by the
Company between comparable periods. A 21% increase in the average natural gas
price the Company received was offset in revenues by a decrease in production of
17% between the comparable periods. The Company derived 92% of its oil and gas
production revenue from natural gas. The Company received an average price of
$16.02 and $20.56 per barrel of oil for the three months ended December 31, 1997
and 1996, respectively, and $2.81 and $2.34 per Mcf for natural gas for the
three months ended December 31, 1997 and 1996, respectively.
The Company recognized revenue on the drilling of 4 wells for the three
months ended December 31, 1997 compared to no wells completed and recognized in
revenue for the three months ended December 31, 1996. The wells are recognized
in revenues when the wells have been completed.
Revenue from administrative and agency fees increased $88,671 (35%) for
the three months ended December 31, 1997 as compared to the three months ended
December 31, 1996. The administrative fees derived from the fiscal 1998 Drilling
Programs were charged a rate equal to 4.5% of total capital raised compared to
the prior years programs which are charged an annual fee equal to 2% of total
capital raised.
EXPENSES
Drilling costs for the three months ended December 31, 1997 as compared
to the three months ended December 31, 1996 increased $426,517 due to the
increased number of wells completed between comparable periods. The profit
margin was affected by the allocation of overhead which was increased between
the comparable quarters as the Company hired additional personnel.
General and administrative expenses decreased $59,529 (9%) for the
three months ended December 31, 1997 compared to the three months ended December
31, 1996. This decrease in general and administrative expenses was primarily due
to expenses associated to litigation that was settled in December 1996.
Interest expenses decreased $117,271 (41%) for the three months ended
December 31, 1997 compared with the three months ended December 31, 1996. This
decrease was primarily due to the reduction of borrowings under the Company's
Credit Facility and other debt by utilizing funds received from the sale of
Common Stock to NUON.
For the three months ended December 31, 1997 income from operations
increased $364,142 from a loss from operations of $155,641 for the three months
ended December 31, 1996 to operating income of $208,501 for the three months
ended December 31, 1997. Net income increased $334,170 from a net loss of
$270,850 for the three months ended December 31, 1996 to net income of $63,320
for the three months ended December 31, 1997.
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
14
<PAGE> 16
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 $17.03 and $20.18 per barrel of oil for the nine months ended
December 31, 1997 and 1996, respectively, and $2.45 and $2.39 per Mcf for
natural gas for the nine months ended December 31, 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, $.49 per Mcf higher during the two year period ended December 31, 1997
compared to the two year period ended December 31, 1995. Although it is
anticipated that there will be a decline in gas prices during the summer months
compared to the winter of 1997/1998 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; 56%
is based on the NYMEX price plus a premium, 10% is based on Appalachian indices
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 $730,000 at December 31, 1997
compared to $325,000 at March 31, 1997. The increase of $405,000 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. As of
December 31, 1997, the Company had $6,000,000 outstanding under its Credit
Facility. North Coast's current ratio was 1.16 to 1.0 at December 31, 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 December 31, 1997:
<TABLE>
<CAPTION>
(Amounts in Thousands) March 31, 1997 December 31, 1997
-------------- -----------------
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Working capital $ 325 2% $ 730 4%
Property and equipment (net) 17,901 97% 18,216 96%
Other 151 1% 23 0%
------- ------- ------- -------
Total $18,377 100% $18,969 100%
======= ======= ======= =======
Long-term debt $10,720 58% $ 6,565 35%
Deferred income taxes 347 2% 347 2%
Stockholders' equity 7,310 40% 12,057 63%
------- ------- ------- -------
Total $18,377 100% $18,969 100%
======= ======= ======= =======
</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.
15
<PAGE> 17
The following table summarizes the Company's Statements of Cash Flows
for the nine months ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Nine Months Ended December 31,
------------------------------
(Amounts in Thousands) 1996 1997
---- ----
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 1,164 42% $ 2,554 86%
Net cash used for investing activities (1,733) (62)% (1,177) (40)%
Net cash provided by financing activities 1,626 58% 395 13%
------- ------- ------- -------
Increase in cash and equivalents $ 1,057 38% $ 1,772 59%
======= ======= ======= =======
</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 $1,390,000 for the nine months ended December
31, 1997 compared to the period ended December 31, 1996. This increase reflects
the reduction of interest and general and administrative expenses coupled with
the cash flow from the formation of the fiscal 1998 Drilling Programs for the
nine months ended December 31, 1997 compared to the nine months ended December
31, 1996.
Net cash used for investing activities decreased to approximately
$1,177,000 for the nine months ended December 31, 1997 from approximately
$1,733,000 for the nine months ended December 31, 1996. This decrease was
primarily due to the purchase of the Company's corporate office building during
the period ended December 31, 1996. The Company also has reduced the amount
incurred on the construction of pipelines between comparable periods due to
infield drilling which utilize existing lines. During the nine months ended the
Company invested approximately $240,000 in its fiscal 1998 Drilling Programs,
purchased additional partnership interests in the Drilling Programs previously
sponsored by the Company for approximately $120,000 and purchased an interest in
two wells for approximately $150,000. Management intends to continue to actively
pursue additional purchases of these types of oil and gas related assets.
Net cash from financing activities decreased approximately $1,231,000
for the nine months ended December 31, 1997 compared to the nine months ended
December 31, 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
nine months ended December 31, 1997 compared to an increase in borrowings on the
Credit Facility for the nine months ended December 31, 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 December 31, 1997), as defined. At December 31, 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 December 31, 1997 were $2,550,000 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 December 31, 1997, the Company had
$6,000,000 outstanding under the
16
<PAGE> 18
Credit Facility. At December 31, 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 December 31, 1997, the Company had
approximately $55,194 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
December 31, 1997 was $512,223.
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. 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.
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.
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. The Company raised $2,718,000
for fiscal 1998 Drilling Programs compared to $3,015,500 for fiscal 1997
Drilling Programs. Management has reduced the cost of sales for its Drilling
Programs and plans to increase its efforts on acquisitions of oil and gas
related assets.
Management of the Company believes that 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.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that may cause such a difference include, but are not limited to, the
competition within the oil and gas industry, the price of oil and gas in the
Appalachian Basin area, the weather in the Company's geographic region, the cost
of the locating and drilling oil and gas wells in the Appalachian Basin area,
the amount of funds raised in the fiscal 1998 Drilling Programs, and the ability
to locate productive oil and gas prospects for development by the Company.
17
<PAGE> 19
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a). Exhibits
11.1 Computation of Earnings per Common Share.
27.1 Financial Data Schedule*
b). No reports on Form 8-K have been filed during the quarter for
which this report was filed.
*Exhibit 27.1 furnished for 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.
February 13, 1998 /s/ Charles M. Lombardy, Jr.
----------------------------------------------------
Charles M. Lombardy, Jr.
Chief Executive Officer and Director
February 13, 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
EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
12/31/96 12/31/97 12/31/96 12/31/97
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net (Loss) Income $(270,850) $ 63,320 $(346,805) $ 18,629
Series A Preferred Stock Dividends - - (91,542) -
Series B Preferred Stock Dividends - - (232,333) (67,066)
Series B Preferred Stock Dividends in arrears (116,166) (67,066) (116,166) (134,132)
--------- --------- --------- ---------
Pro Forma Loss Applicable to Common Stock $(387,016) $ (3,746) $(786,846) $(182,569)
</TABLE>
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
<S> <C> <C> <C> <C>
Weighted Average Common Shares for the
period ended 8,053,369 16,577,098 8,044,967 13,286,233
Additional Shares Assuming Conversion of:
Employee Options Exercised
0 0 0 0
--------- ---------- --------- ----------
Pro Forma Shares for Basic Earnings
Per Common Share 8,053,369 16,577,098 8,044,967 13,286,233
--------- ---------- --------- ----------
Additional Shares Assuming Conversion of:
Preferred Stock
0 0 0 0
--------- ---------- --------- ----------
Pro Forma Shares for Diluted Earnings
Per Common Share 8,053,369 16,577,098 8,044,967 13,286,233
========= ========== ========= ==========
</TABLE>
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Common Share $( .05) $( .00) $( .10) $( .01)
Diluted Earnings Per Share *$( .05) *$( .00) *$( .10) *$( .01)
</TABLE>
- -------------------------------------------------------------------------------
* 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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,275,582
<SECURITIES> 0
<RECEIVABLES> 1,675,148
<ALLOWANCES> 0
<INVENTORY> 192,639
<CURRENT-ASSETS> 5,236,187
<PP&E> 31,256,954
<DEPRECIATION> 13,040,539
<TOTAL-ASSETS> 23,475,437
<CURRENT-LIABILITIES> 4,506,241
<BONDS> 0
0
3,438
<COMMON> 166,115
<OTHER-SE> 11,887,618
<TOTAL-LIABILITY-AND-EQUITY> 23,475,437
<SALES> 5,370,692
<TOTAL-REVENUES> 5,370,692
<CGS> 4,730,543
<TOTAL-COSTS> 4,730,543
<OTHER-EXPENSES> (49,019)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 670,539
<INCOME-PRETAX> 18,629
<INCOME-TAX> 0
<INCOME-CONTINUING> 18,629
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,629
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
