<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 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.
Class Outstanding at November 12, 1998
- ---------------------------- --------------------------------
Common Stock, $.01 par value 22,757,168
<PAGE> 2
NORTH COAST ENERGY, INC.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets -
March 31, 1998 (Audited) and September 30, 1998 (Unaudited) 2
Unaudited Consolidated Statements of Operations -
For the Three and Six Months Ended September 30, 1997 and 1998 4
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended September 30, 1997 and 1998 6
Unaudited Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial Condition and Results of Operations 13
PART II - OTHER INFORMATION 20
</TABLE>
<PAGE> 3
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 and SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
------
March 31, September 30,
------------ -------------
1998 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 1,578,984 $ 3,330,079
Accounts receivable-
Trade, net 1,311,714 2,099,529
Affiliates 96,011 99,110
Inventories 189,223 159,008
Deferred income taxes 26,000 26,000
Refundable income taxes 38,000 38,000
Other, net 8,057 122,259
------------ ------------
Total current assets 3,247,989 5,873,985
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land 93,437 93,437
Oil and gas properties (successful efforts) 25,754,748 39,788,193
Pipelines 4,380,772 6,409,308
Vehicles 420,026 1,267,491
Furniture and fixtures 508,417 586,262
Buildings and improvements 786,689 796,037
------------ ------------
31,944,089 48,940,728
Less- Accumulated depreciation, depletion, amortization
and impairment (13,155,288) (14,153,492)
------------ ------------
18,788,801 34,787,236
OTHER ASSETS, net 274,726 1,727,771
------------ ------------
$ 22,311,516 $ 42,388,992
============ ============
</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 SEPTEMBER 30, 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, 1998 September 30,
1998 1998
-------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 88,300 $ 72,300
Accounts payable 1,824,740 1,940,213
Accrued expenses 250,073 374,352
Billings in excess of costs on uncompleted contracts 302,881 --
------------ ------------
Total current liabilities 2,465,994 2,386,865
------------ ------------
LONG-TERM DEBT, net of current portion 7,171,035 21,672,473
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 and 74,491 issued and outstanding
(aggregate liquidation value of $754,810 and $744,910, respectively) 755 745
Series B, Cumulative Convertible Preferred stock, par value $.01 per
share; 625,000 shares authorized, 268,264 and 233,864 issued and
outstanding (aggregate liquidation value $2,682,640 and $2,338,640,
respectively) 2,683 2,339
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 and 22,757,168 issued and outstanding 166,129 227,572
Additional paid-in capital 16,859,237 21,723,150
Retained deficit (4,689,517) (4,859,352)
------------ ------------
Total stockholders' equity 12,339,287 17,094,454
============ ============
$ 22,311,516 $ 42,388,992
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE> 5
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Periods Ended September 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Oil and gas production $ 671,074 $ 1,862,691 $ 1,415,124 $ 3,427,603
Drilling revenues 275,000 -- 738,554 326,958
Well operating, transportation and other 394,424 530,355 823,052 934,411
Administrative and agency fees 213,162 208,276 426,425 418,408
----------- ----------- ----------- -----------
1,553,660 2,601,322 3,403,155 5,107,380
COSTS AND EXPENSES:
Oil and gas production expenses 202,641 634,897 432,882 1,197,161
Drilling costs 255,938 176,611 629,803 571,788
Oil and gas operations 163,167 196,527 305,661 445,397
General and administrative expenses 569,220 567,013 1,047,880 1,011,139
Depreciation, depletion, amortization,
impairment and other 258,700 494,545 552,242 1,012,472
Abandonment of oil and gas properties -- -- 3,039 --
----------- ----------- ----------- -----------
1,449,666 2,069,593 2,971,507 4,237,957
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 103,994 531,729 431,648 869,423
----------- ----------- ----------- -----------
OTHER INCOME
Interest 13,377 28,607 26,293 45,676
Other -- 1,203 62 2,354
Gain (loss) on sale of property
and equipment -- (1,964) 1,897 (2,472)
----------- ----------- ----------- -----------
13,377 27,846 28,252 45,558
----------- ----------- ----------- -----------
OTHER EXPENSE
Interest 239,053 547,615 504,591 999,519
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (121,682) 11,960 (44,691) (84,538)
CREDIT FOR INCOME TAXES:
Current (1,000) -- -- --
Deferred -- -- -- --
----------- ----------- ----------- -----------
(1,000) -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (120,682) $ 11,960 $ (44,691) $ (84,538)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements
4
<PAGE> 6
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
For The Periods Ended September 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- ---------------------------
1997 1998 1997 1998
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
NET LOSS, applicable to common stock
(after preferred stock dividends paid or in
arrears of $67,066 and $58,466 for the
three months ended September 30, 1997
and 1998; and $134,132 and $125,532 for
the six months ended September 30, 1997
and 1998) $ (187,748) $ (46,506) $ (178,823) $ (210,070)
========== ========== ========== ============
NET LOSS PER SHARE
(basic and diluted) $ (.02) $ (.00) $ (.02) $ (.01)
========== ========== ========== ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 12,481,962 16,866,434 11,631,810 16,742,269
========== ========== ========== ============
</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
For The Six Months Ended September 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (44,691) $ (84,538)
Adjustments to reconcile net loss
to cash used by operating activities-
Depreciation, depletion, amortization, impairment and other 552,242 1,012,472
Abandonment of oil and gas properties 3,039 --
(Gain) loss on sale of property and equipment (1,897) 2,472
Change in:
Accounts receivable 82,888 (790,914)
Other current assets 96,918 (83,987)
Other assets (6,462) (1,309,922)
Accounts payable (326,084) 115,473
Other liabilities -- 900,000
Accrued expenses 21,447 124,279
Billings in excess of costs on uncompleted contracts (469,361) (302,881)
----------- ------------
Total adjustments (47,270) (333,008)
----------- ------------
Net cash used by operating activities (91,961) (417,546)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (461,472) (17,006,505)
Proceeds on sale of property and equipment 2,000 --
----------- ------------
Net cash used for investing activities (459,472) (17,006,505)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of accounts payable used to
finance property and equipment additions (87,161) --
Borrowings under revolving credit facility 200,000 17,962,370
Payments on long-term debt (1,508,776) (50,188)
Repayments of borrowings under revolving credit facility (2,840,000) (3,500,000)
Cash paid for deferred financing cost -- (150,000)
Proceeds from issuance of long-term debt -- 73,256
Net proceeds from the issuance of Common Stock 4,772,633 4,925,000
Distributions and dividends (67,066) (85,292)
----------- ------------
Net cash provided by financing activities 469,630 19,175,146
----------- ------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (81,803) 1,751,095
</TABLE>
The accompanying notes are an integral part of these Financial Statements
6
<PAGE> 8
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For The Six Months Ended September 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD $1,503,278 $1,578,984
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $1,421,475 $3,330,079
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the period for -
Interest $ 411,731 $ 885,569
Income taxes $ 11,049 $ 58,017
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Long-term debt incurred for the purchase
of property and equipment $ -- $ 73,256
Accounts payable incurred for the
purchase of property and equipment $ 13,347 $ --
Common Stock issued for Director fees $ 25,582 $ --
Accounts payable from interest on
long-term debt $ -- $ 155,799
</TABLE>
The accompanying notes are an integral part of these Financial Statements
7
<PAGE> 9
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>
<CAPTION>
<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 28.9%
North Coast Energy 1992-1 Appalachian Drilling Program Limited Partnership 25.0%
</TABLE>
8
<PAGE> 10
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
Note 1. Summary of Accounting Policies (Continued)
<S> <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 September 30, 1998
-------------- ------------------
<S> <C> <C>
Revolving credit notes payable - bank $6,565,265 $ 21,027,635
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 48,518
Mortgage note payable to a bank, secured by land and a
building, requiring monthly payments of approximately
$5,248 (including interest at 8.58%). 507,404 497,808
Various installment notes payable, in aggregate monthly
installments (including interest of $6,860 at March 31,
1998 and $9,031 at September 30, 1998). 134,095 170,812
---------- -----------
7,259,335 21,744,773
Less current portion 88,300 72,300
---------- ------------
$7,171,035 $ 21,672,473
========== ============
</TABLE>
9
<PAGE> 11
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 ($150,000 at September 30, 1998), as
defined. At September 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 September 30, 1998 were
$3,822,365 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. The Bank is currently performing its semi-annual
borrowing base review, and preliminary discussions indicate that the
Company's Credit Facility will be continued without payment of principal
until January 1, 2001. Therefore, the debt has been reflected in the
financial statements as long-term.
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 September 30, 1997 and September 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 September 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, September 30,
1998 1998
---- ----
<S> <C> <C>
Billings on uncompleted contracts $ 335,920 $ -
Costs incurred on uncompleted contracts 33,039 -
-------- ----------
$ 302,881 $ -
======= ==========
</TABLE>
At September 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 $150,000 in lieu of coverage
provided by insurance for road bond deposits against damage.
At September 30, 1998, the Company has committed to fund certain costs
of the North Coast Energy Appalachian Drilling Programs estimated to be
approximately $118,000 for tangible well equipment and pipeline
construction.
10
<PAGE> 12
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 5. Preferred Dividends
On September 30, 1998, the Company paid a dividend of $58,466 on the
cumulative convertible Series B preferred stock. For purposes of computing
earnings per share for the six months ended September 30, 1998, dividends
paid and in arrears on the cumulative convertible Series B preferred stock
were $125,532. Cumulative dividends in arrears on the cumulative
convertible Series B preferred stock are $375,570 at September 30, 1998.
Note 6. Sale of Common Stock
On September 29, 1998 the Company sold 5,747,127 shares of its Common
Stock for $5 million to NUON International bv, a limited liability company
organized under the laws of the Netherlands ("NUON"), pursuant to the terms
of a stock purchase agreement ("Agreement") by and between the Company and
NUON dated August 1, 1997. Pursuant to the terms of the Agreement and
subject to the satisfaction of certain conditions, including the
development of a plan of complementary business, NUON may purchase an
additional 5,747,127 shares of Common Stock by September 30, 1999. By
exercising their option to purchase additional shares by September 30,
1998, NUON's stock ownership increased to 51% of the Company's outstanding
Common Stock with the ability of NUON to appoint additional directors at
the Company's next Annual Meeting.
A portion of the proceeds from the sale of Common Stock was utilized to
reduce the amount outstanding under the Company's Credit Facility with the
remaining proceeds being used for working capital purposes.
Note 7. 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 both the Kelt Ohio Acquisition and the sale of Common Stock
to NUON had occurred at April 1, 1997.
<TABLE>
<CAPTION>
September 30, 1997
Pro Forma
(unaudited)
-----------
<S> <C>
TOTAL REVENUES $5,781,140
COSTS AND EXPENSES 4,529,154
INCOME FROM OPERATIONS 1,251,986
OTHER EXPENSES 1,308,967
NET LOSS $ (56,981)
===========
</TABLE>
11
<PAGE> 13
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 7. Acquisition of Kelt Ohio, Inc. (continued)
<TABLE>
<S> <C> <C>
NET LOSS, applicable to common stock (after preferred stock
dividends paid or in arrears of $134,132) $ (191,113)
===========
BASIC AND DILUTED EARNINGS, per common share $ (0.01)
===========
WEIGHTED AVERAGE SHARES, outstanding 16,499,595
===========
</TABLE>
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.
12
<PAGE> 14
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 six months ended September 30, 1997 and 1998. All items in the
table are calculated as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30, September 30,
1997 1998 1997 1998
---- --- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Oil and gas production 42% 71% 41% 67%
Drilling revenues 18 0 22 6
Well operating, transportation and other 25 20 24 18
Administrative and agency fees 14 8 12 8
Other 1 1 1 1
---- --- ---- ----
Total Revenues 100% 100% 100% 100%
---- --- ---- ----
Expenses:
Oil and gas production expenses 13% 24% 13% 23%
Drilling costs 16 7 18 11
Oil and gas operations 11 7 9 9
General and administrative expenses 36 22 30 20
Depreciation, depletion, amortization and other 17 19 16 20
Abandonment of oil and gas properties 0 0 0 0
Provision for taxes on income 0 0 0 0
Other 15 21 15 19
---- --- ---- ----
Total Expenses 108% 100% 101% 102%
---- --- ---- ----
Net Income (8)% 0% (1)% (2)%
==== === ==== ====
</TABLE>
The following discussion and analysis reviews the results of operations
and the financial condition for the Company for the three and six months ended
September 30, 1997 and 1998. The review should be read in conjunction with the
financial information presented elsewhere herein.
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 1998 TO SIX MONTHS ENDED SEPTEMBER
30, 1997.
REVENUES
Oil and gas production revenues increased $2,012,479 (142%) to
$3,427,603 for the six months ended September 30, 1998 compared to $1,415,124
for the prior corresponding period. This increase in oil and gas revenue is due
to the increase of production related to approximately 700 producing oil and gas
properties acquired from Kelt Ohio, Inc. ("Kelt Acquisition", "Kelt"). The sale
of gas production from the Kelt wells was contracted with a third party at a 4%
higher price than its previous contract on June 15, 1998, for a period of one
year.
13
<PAGE> 15
Management believes that the value of this contract will compose approximately
50% of the Company's oil and gas revenue during the contract period. The Company
received an average price of $11.32 and $17.53 per barrel of oil for the six
months ended September 30, 1998 and 1997, respectively, and $2.59 and $2.30 per
Mcf for natural gas for the six months ended September 30, 1998 and 1997,
respectively.
Drilling revenues for the period decreased by $411,596 to $326,958
for the six months ended September 30, 1998 from $738,554 for the six months
ended September 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
six months ended September 30, 1998 compared to 4 wells for the six months ended
September 30, 1997.
For the six months ended September 30, 1998, well operating,
transportation and other revenues increased $111,359 (14%) compared to the six
months ended September 30, 1997. A third party sale of $64,000 coupled with
increases in transportation and well operating revenues contributed to the
increase for the six months ended September 30, 1998 compared to the six months
ended September 30, 1997.
EXPENSES
Oil and gas production expenses increased to $1,197,161 for the six
months ended September 30, 1998 from $432,882 for the six months ended September
30, 1997 primarily due to the Kelt Acquisition.
Drilling costs for the six months ended September 30, 1998 compared to
the six months ended September 30, 1997 decreased $58,015 (9%). This decrease
between comparable periods was due to the fewer number of wells drilled during
the six months ended September 30, 1998 compared to the six months ended
September 30, 1997. However, the overall decrease was offset by a higher per
well overhead allocation the Company experienced during the six months ended
September 30, 1998 compared to the six months ended September 30, 1997.
Oil and gas operations expenses increased $139,736 (46%) for the six
months ended September 30, 1998 compared to the six months ended September 30,
1997. This increase was primarily due to increased costs arising from the Kelt
Acquisition as well as an increase in gas purchases related to unaffiliated
third party gas sales for the six months ended September 30, 1998 compared to
the six months ended September 30, 1997.
Interest expense increased to $999,519 for the six months ended
September 30, 1998 from $504,591 for the prior corresponding period. This
increase reflects the 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 six months ended September 30, 1998
increased to $869,423 from $431,648 for the six months ended September 30, 1997.
The increase in income from operations was primarily due to the Kelt
Acquisition. The Company's net loss increased from $44,691 for the six months
ended September 30, 1997 to $84,538 for the six months ended September 30, 1998.
The increase in the net loss was primarily a result of the increased interest
expense related to the Kelt Acquisition.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THREE MONTHS ENDED
SEPTEMBER 30, 1997.
REVENUE
Oil and gas production revenues for the three months ended September
30, 1998 increased $1,191,617 (178%) to $1,862,691 compared to $671,074 for the
prior corresponding period. The primary reason for the increase in oil and gas
production revenues was the acquisition of Kelt on April 8, 1998. The Company
received an average price of $11.01 and $18.10 per barrel of oil for the three
months ended September 30, 1998 and 1997, respectively, and $2.63 and $2.33 per
Mcf for natural gas for the three months ended September 30, 1998 and 1997,
respectively.
The Company did not complete nor did it recognize revenue on the
drilling of any wells for the three months ended September 30, 1998, compared to
two wells for the three months ended September 30, 1997. The
14
<PAGE> 16
Company did complete three wells that were drilled by Kelt and the Company
drilled and completed two wells that it owns a 100% working interest. The
Company capitalizes the entire cost of drilling wells it owns a 100% working
interest in to proved properties, and in turn does not recognize any of the
drilling income normally recognized on wells funded by the Drilling Programs.
Revenues generated from well operating, transportation and other
increased $135,931 (34%) for the three months ended September 30, 1998 as
compared to the three months ended September 30, 1997. This increase was due to
an increase in well operating, and transportation revenues as well as
unaffiliated third party gas sales of $64,000.
EXPENSES
Oil and gas production expenses increased to $634,897 for the three
months ended September 30, 1998 compared to September 30, 1997 primarily due to
the Kelt Acquisition.
Drilling costs for the three months ended September 30, 1998 compared
to the three months ended September 30, 1997 decreased $79,327. This decrease
between comparable periods was due to the fewer number of wells drilled during
the period. Drilling costs were incurred during the period even though there was
no income recognized on any of the wells drilled by the Company because of
overhead allocated towards drilling. Management anticipates that a Drilling
Program will be formed and that partnership wells as well as additional
corporate wells will be drilled during fiscal year 1999. Therefore, the Company
will continue to allocate overhead to drilling costs as prospects continue to be
evaluated for future wells.
Oil and gas operations expenses increased $33,630 (20%) for the three
months ended September 30, 1998 as compared to the three months ended September
30, 1997. This increase was due to the increase in gas purchases related to
unaffiliated third party gas sales for the three months ended September 30, 1998
compared to the three months ended September 30, 1997.
Interest expense increased $308,562 for the three months ended
September 30, 1998 compared to $239,053 for the three months ended September 30,
1997. This increase reflects the increase in the average outstanding borrowings
for the comparable periods due to the increase in debt associated with the Kelt
Acquisition.
For the three months ended September 30, 1998 income from operations
increased $427,735 to $531,729 compared to $103,994 for the three months ended
September 30, 1997. Net income for the three months ended September 30, 1998
increased $132,642 from a net loss of $120,682 for the three months ended
September 30, 1997 primarily due to an increase in oil and gas production
revenues for the quarter.
INFLATION AND CHANGES IN PRICES
The Company received an average price of $11.32 and $17.53 per barrel
for the six months ended September 30, 1998 and 1997, respectively, and $2.59
and $2.30 per Mcf for natural gas for the six months ended September 30, 1998
and 1997, respectively. On average, natural gas prices decreased $0.121/Mcf for
the six months ended September 30, 1998 compared to the six months ended
September 30, 1997 based on major price indices used in the Appalachian Basin
(TCO and CNG indices). However, the Company experienced a $0.29/Mcf increase for
its natural gas during this period. The increase can be attributed to the
Company continuing its marketing strategy of targeting small to medium sized
commercial end users and balancing the remainder of its gas between spot
Appalachian prices, Nymex based contracts and fixed price contracts. 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 which have recently been experienced
industry-wide due to a surplus in storage during the summer months. Storage
figures reached record levels by the end of the summer. 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,
15
<PAGE> 17
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 $3,487,000 at September 30, 1998
compared to $782,000 at March 31, 1998. The increase of $2,705,000 in working
capital from September 30, 1998 reflects the funds received from NUON when it
exercised its option to purchase $5 million of the Company's Common Stock on
September 29, 1998. The Company has also drilled several wells using its
drilling rig acquired in the Kelt Acquisition. The Company intends to invest in
both corporately owned wells and in Drilling Programs. As of September 30, 1998,
the Company had $21,027,635 outstanding under its Credit Facility. North Coast's
current ratio was 2.46 to 1.0 at September 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 September 30, 1998:
<TABLE>
<CAPTION>
(Amounts in Thousands) March 31, 1998 September 30, 1998
-------------- ------------------
Amount % Amount %
------- --- ------- ------
<S> <C> <C> <C> <C>
Working capital $ 782 4% $ 3,487 9%
Property and equipment (net) 18,789 95% 34,787 87%
Other 275 1% 1,728 4%
------- --- ------- ------
Total $19,846 100% $40,002 100%
======= === ======= ======
Long-term debt $ 7,171 36% $21,673 54%
Deferred income taxes and other liabilites 336 2% 1,235 3%
Stockholders' equity 12,339 62% 17,094 43%
------- --- ------- ------
Total $19,846 100% $40,002 100%
======= === ======= ======
</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 and equity financings.
The following table summarizes the Company's Statements of Cash Flows
for the six months ended September 30, 1998 and 1997:
16
<PAGE> 18
<TABLE>
<CAPTION>
Six Months Ended September 30,
-------------------------------
(Amounts in Thousands) 1997 1998
---- ----
Amount % Amount %
<S> <C> <C> <C> <C>
Net cash used by operating activities $ (92) (9)% $ (418) (2)%
Net cash used for investing activities (459) (43)% (17,006) (84)%
Net cash provided by financing activities 469 44% 19,175 95%
------- -- --------- --
Increase (decrease) in cash and equivalents $ (82) (8)% $ 1,751 9%
======= == ========= ==
</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 $326,000 for the six months ended September
30, 1998 compared to the period ended September 30, 1997. This increase reflects
the working capital changes in accounts receivable and other current assets. A
certain amount of working capital was utilized to fund the operations of the 700
producing wells for a 60 to 90 day period until the revenue on those wells are
collected. Also, the Company recorded other assets of approximately $1,000,000
in connection with the Kelt Acquisition, which represents the net present value
of approximately $4,000,000 of prepaid well royalties.
Net cash used for investing activities increased to approximately
$17,006,000 for the six months ended September 30, 1998 from approximately
$459,000 for the six months ended September 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 purchase of property and equipment also reflects the completion of three
corporately owned wells and the drilling of two corporately owned wells during
the six months September 30, 1998.
Net cash from financing activities increased approximately $18,706,000
for the six months ended September 30, 1998 compared to the six months ended
September 30, 1997. This increase reflects the Company's borrowings under its
credit facility to finance the Kelt Acquisition. Also reflected is the receipt
of $5 million from NUON on September 29, 1998 for the issuance of Common Stock
of the Company and the subsequent payment of a portion of the Company's Credit
Facility.
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") expanded the Company's $20 million revolving credit facility with
ING ("ING") to a $25 million revolving credit facility ("Credit Facility"). 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 ($150,000 at September
30, 1998), as defined. The Credit Agreement requires payment of an agent fee
(0.75% for Credit Agreement) on amounts available and 1/2% commitment fee on
amounts not borrowed up to the available line. At September 30, 1998, the
Company's borrowing base was $25 million subject to reduction for the
outstanding letters of credit. Available borrowings under the facility at
September 30, 1998 were $3,822,365 and may subsequently change based upon the
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 September 30, 1998, the Company had $21,027,635 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%
17
<PAGE> 19
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 September 30, 1998, the Company had approximately
$48,518 outstanding under a mortgage note payable for their facility in
Youngstown. 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 a mortgage note on
May 13, 1996 for $540,000 over a 15-year term with an interest rate of 8.58% to
be renegotiated every five years. The amount outstanding under the mortgage note
at September 30, 1998 was $497,808.
On September 29,1998 the Company sold an additional 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. By exercising their option to purchase additional
shares by September 30, 1998, NUON's stock ownership increased to 51% of the
Company's outstanding Common Stock with the ability of NUON to appoint
additional directors at the Company" next Annual Meeting. 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, NUON may purchase an additional 5,747,127
shares of Common Stock by September 30, 1999. The Company is also obligated to
issue 134,000 warrants when 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 an 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 will be sufficient to fund the Company's operations
and meet debt service requirements through fiscal 1999.
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 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 has been expended primarily in the first two quarters of 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.
18
<PAGE> 20
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 has not determined the impact, if any, 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 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.
19
<PAGE> 21
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
27.1 Financial Data Schedule*
b). Reports on Form 8-K:
The Company's current reports on Form 8-K/A dated July 14,
1998 amending Form 8-K dated June 12, 1998.
*Exhibit 27.1 furnished for Security and Exchange purposes only.
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH COAST ENERGY, INC.
November 13, 1998 /s/ Charles M. Lombardy, Jr.
-------------------------------------------
Charles M. Lombardy, Jr.
Chief Executive Officer and Director
November 13, 1998 /s/ Tim Wagers
-------------------------------------------
Tim Wagers
Principal Accounting and Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000839950
<NAME> NORTH COAST ENERGY, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,330,079
<SECURITIES> 0
<RECEIVABLES> 2,198,639
<ALLOWANCES> 0
<INVENTORY> 159,008
<CURRENT-ASSETS> 5,873,985
<PP&E> 48,940,728
<DEPRECIATION> 14,153,492
<TOTAL-ASSETS> 42,388,992
<CURRENT-LIABILITIES> 2,386,865
<BONDS> 0
0
3,084
<COMMON> 227,572
<OTHER-SE> 16,863,798
<TOTAL-LIABILITY-AND-EQUITY> 42,388,992
<SALES> 5,107,380
<TOTAL-REVENUES> 5,107,380
<CGS> 4,237,957
<TOTAL-COSTS> 4,237,957
<OTHER-EXPENSES> (45,558)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 999,519
<INCOME-PRETAX> (84,538)
<INCOME-TAX> 0
<INCOME-CONTINUING> (84,538)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (84,538)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
