<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1999
REGISTRATION NO. 333-71855
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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NORTH COAST ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
1311
(Primary Standard Industrial
Classification Code No.)
34-1594000
(I.R.S. Employer
Identification Number)
1993 CASE PARKWAY
TWINSBURG, OHIO 44087
(330) 425-2330
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
GARRY REGAN
PRESIDENT
1993 CASE PARKWAY
TWINSBURG, OHIO 44087
(330) 425-2330
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
MICHAEL D. PHILLIPS
CALFEE, HALTER & GRISWOLD LLP
MCDONALD INVESTMENT CENTER, SUITE 1400
CLEVELAND, OHIO 44114
(216) 622-8200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value $.01 per
share(1)................................ 3,106,547 $3.15(3) $9,785,623.05 $2,886.76
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Common stock underlying warrants and
options(2).............................. 1,323,026 $3.15(3) $4,167,529.38 $1,224.07
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Total..................................... 4,429,573 $3.15(3) $13,953,152.43 $4,110.83
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</TABLE>
(1) The 3,106,547 shares consist of common stock previously issued in private
placements, upon exercise of warrants issued in private placements, for
payment of director fees and payment of other fees in lieu of cash.
(2) Represents shares of common stock issuable upon exercise of the warrants and
options.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to paragraph (c) of Rule 457 under the Securities Act of 1933.
$4,023.26 of the registration fee was paid when the original registration
statement was filed. An additional $87.57 accompanies this registration
statement because an additional 100,000 shares of common stock are being
registered.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED IN THIS PROSPECTUS IS SUBJECT TO COMPLETION AND AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR WILL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH THAT OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF THAT STATE.
SUBJECT TO COMPLETION
PROSPECTUS DATED JULY 1, 1999
PROSPECTUS
4,429,573 SHARES
NORTH COAST ENERGY, INC.
COMMON STOCK
This prospectus relates to the offer and sale of 3,106,547 shares of common
stock of North Coast Energy, Inc. which are currently issued and outstanding and
1,323,026 shares of common stock issuable upon the exercise of outstanding stock
warrants and options to purchase shares of common stock. All of the common stock
being registered by this prospectus may be offered and sold from time to time by
the selling stockholders of North Coast. North Coast will receive approximately
$5,787,000 in proceeds if the warrants and options are exercised. North Coast
will receive no proceeds from the sale of the common stock.
Shares of North Coast's common stock are traded on the Nasdaq SmallCap Market
under the symbol "NCEB." On June 30, 1999, the last reported sales price for the
common stock was $3.50 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF SOME OF THE FACTORS
THAT YOU SHOULD CONSIDER BEFORE MAKING AN INVESTMENT DECISION ABOUT THE COMMON
STOCK OFFERED BY THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 1999
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and you should read it in
conjunction with, the more detailed information and consolidated financial
statements appearing elsewhere in this prospectus.
NORTH COAST
North Coast Energy, Inc. is an independent natural gas and oil company engaged
in exploration, development and production activities primarily in the
Appalachian Basin region of Ohio and Pennsylvania. North Coast's strategy
focuses primarily on its acquisition of proved undeveloped natural gas and oil
properties and on the turnkey, or fixed price, drilling and development of these
properties in conjunction with drilling partnerships that North Coast manages
and sponsors. Drilling programs are funded through the sale of partnership
interests to non-industry investors and by contributions from North Coast.
As of March 31, 1999, North Coast served as the managing general partner of 28
drilling programs and operated 1,574 wells, 385 of which are operated for
drilling programs. In connection with the drilling and development of the wells
it operates, North Coast currently transports gas from 1,251 company-operated
wells through its pipelines. At March 31, 1999, North Coast had estimated net
proved reserves of approximately 52.5 Bcf of natural gas and 425,200 barrels of
oil.
North Coast focuses its exploration and development activities in the
Appalachian Basin, where wellhead prices for natural gas have, in recent years,
generally averaged higher than in the Gulf Coast and mid-continent regions of
the country due to the area's proximity to major commercial and industrial
markets.
RECENT DEVELOPMENTS
North Coast acquired the assets of Kelt, Ohio pursuant to a purchase and sale
agreement dated April 8, 1998 and later amended on May 12, 1998. The Kelt
acquisition closed on May 29, 1998, with an effective date of April 8, 1998. The
purchase price for the acquired assets was $16.0 million. The acquired assets
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. North
Coast funded the acquisition using cash and an increase in its existing line of
credit. Approximately $15.0 million of the $16.0 million purchase price was
financed under a recently amended credit facility, which increased North Coast's
borrowing base to $25.0 million. See "Description of Certain Indebtedness" for a
more detailed description of this credit facility.
------------------------
North Coast was incorporated in Delaware on August 30, 1988 as a successor to
the business carried on by its predecessor since 1981. Its principal executive
offices are located at 1993 Case Parkway, Twinsburg, Ohio 44087 and its
telephone number is (330) 425-2330.
2
<PAGE> 4
THE OFFERING
COMMON STOCK.................... Common stock was issued to several parties
through private transactions and the
issuance of warrants and options. The
following is a summary of the shares to be
registered.
- Common stock was issued to NUON
International bv, a limited liability
company organized under the laws of the
Netherlands, through a private offering at
the then current price of $4.35 per share
of common stock. NUON purchased 2,298,851
shares of common stock in two separate
transactions on September 4, 1997 and
September 30, 1998. NUON also has an
option to purchase an additional 1,149,426
shares of common stock prior to September
30, 1999 for $4.35 per share.
- Range Resources Corporation, formerly
Lomak Petroleum, Inc., owns 791,975 shares
of common stock to be registered. Range
also holds a warrant to purchase 40,000
shares of common stock at $6.00 per share
to be registered.
- North Coast's directors received common
stock instead of cash compensation for
director's fees between the dates of
October 1996 and December 1997 in the
amounts to be registered listed below. In
addition, Mr. Bradley received an option
to purchase 20,000 shares of common stock,
of which one-third vested on April 16,
1998, one-third vested on April 16, 1999
and one-third will vest on April 16, 2000.
This option was also issued instead of
cash compensation for director's fees.
<TABLE>
<S> <C>
John Pinkerton 1,693 shares
Steve Grose 1,795 shares
C. Rand Michaels 1,619 shares
George Begley 3,343 shares
Dale Wegrich 2,481 shares
Charles Ebinger 2,395 shares
Robert Bauman 2,395 shares
Ralph Bradley 20,000 shares
under option
</TABLE>
- North Coast issued warrants to purchase
60,000 shares of common stock to Mr.
Charles Lombardy associated with the
buyout of a separation agreement.
3
<PAGE> 5
- North Coast issued warrants to purchase
26,800 shares of common stock each to
Messrs. Berns and Siegel associated with
the NUON investment transactions of
September 4, 1997 and September 30, 1998
for their work as consultants.
USE OF PROCEEDS................. North Coast will not receive any proceeds
from the sale of common stock offered by the
selling stockholders. The net proceeds from
the exercise of any warrant or option is
anticipated to be used to repay indebtedness
and for general corporate purposes.
NASDAQ SYMBOL FOR COMMON
STOCK......................... "NCEB"
COMMON STOCK OUTSTANDING PRIOR
TO OFFERING................... 4,556,814
COMMON STOCK OUTSTANDING AFTER
THE EXERCISE OF WARRANTS AND
OPTIONS....................... 5,879,840
The amounts of outstanding common stock shown above do not include 339,241
shares of common stock issuable upon conversion of the preferred stock or 14,920
shares issuable upon exercise of options and warrants outstanding as of March
31, 1999, but do include the shares of common stock issuable to NUON and Messrs.
Bradley, Siegel, Lombardy and Berns upon the exercise of their currently
exercisable options and warrants. See "Capitalization" for a more detailed
description of the amounts of North Coast's securities which are currently
issued and outstanding.
RISK FACTORS
You should carefully consider the risk factors set forth under the caption "Risk
Factors" and any other information included in the prospectus prior to making an
investment decision.
4
<PAGE> 6
SUMMARY OIL AND GAS PRODUCTION AND RESERVE INFORMATION
The following table summarizes information regarding North Coast's gas and oil
production and proved gas and oil reserves. See "Business -- Gas and Oil
Reserves" and North Coast's consolidated financial statements appearing
elsewhere in this prospectus for more information about North Coast's reserve
estimates.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
SUMMARY OIL AND GAS DATA:
Production:
Gas (Mcf)................................ 2,688,000 1,116,000 1,153,000
Oil (Bbls)............................... 28,100 13,900 16,200
Equivalent Mcf @ 6 Mcf/Bbl............... 2,856,600 1,199,400 1,250,200
Average Sales Price:
Gas, per Mcf............................. $ 2.57 $ 2.50 $ 2.43
Oil, per Bbl............................. $ 11.39 $ 16.18 $ 20.65
Average Lifting Cost per Mcf............... $ .91 $ .70 $ .62
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
PROVED RESERVE DATA:
Gas (Mcf).................................. 52,521,000 17,802,000 16,959,000
Oil (Bbls)................................. 425,200 135,700 120,200
Equivalent Mcf @ 6 Mcf/Bbl................. 55,072,200 18,616,200 17,680,200
Estimated Future Net Revenues (Before
Income Taxes)............................ $83,850,000 $31,174,000 $28,937,000
Discounted Present Value (Before Income
Taxes)................................... $35,856,000 $14,765,000 $14,164,000
</TABLE>
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table shows summary consolidated financial information of North
Coast as of the dates and periods indicated. You should read the summary
consolidated financial data in conjunction with the financial statements of
North Coast appearing elsewhere in this prospectus. Long-term debt does not
include that portion of indebtedness classified as current.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31,
---------------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
OPERATIONS DATA:
Revenues:
Oil and gas production............................ $ 7,234 $3,014 $3,137
Drilling revenues................................. 3,686 2,988 3,784
Well operating, transportation and other.......... 2,062 1,622 1,860
Administrative and agency fees.................... 960 966 884
------- ------ ------
Total..................................... 13,942 8,590 9,665
Costs and Expenses:
Oil and gas production expenses................... 2,602 840 777
Drilling costs.................................... 2,927 2,517 2,877
Oil and gas operations............................ 1,200 653 977
General and administrative expenses............... 2,109 2,216 2,308
Depreciation, depletion, amortization, impairment
and other...................................... 2,480 1,242 1,385
Abandonment of oil and gas properties............. -- 89 74
Interest expense.................................. 1,841 839 1,055
Other income, net................................. (87) (68) (80)
------- ------ ------
13,072 8,328 9,373
------- ------ ------
Income (Loss) Before Income Taxes................... 870 262 292
Provision (Credit) For Income Taxes................. -- -- --
------- ------ ------
Net Income (Loss)................................... $ 870 $ 262 $ 292
======= ====== ======
Net Income (Loss) Applicable to Common Stock........ $ 634 $ (6) $ (167)
======= ====== ======
Net Income (Loss) Per Share......................... $ .16 $ (.00) $ (.10)
======= ====== ======
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31,
----------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
CASH FLOW DATA:
Net cash provided by operating activities............. $ 2,385 $ 1,186 $ 1,162
Net cash used for investing activities................ (20,913) (2,122) (1,827)
Net cash provided by financing activities............. 18,905 1,012 616
-------- ------- -------
Increase (decrease) in cash........................... $ 377 $ 76 $ (49)
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-----------------
<S> <C>
BALANCE SHEET DATA:
Working Capital............................................. 2,399
Property and Equipment (net)................................ 36,418
Total Assets...................................... 43,573
Long-Term Debt.............................................. 21,494
Total Stockholders' Equity........................ 17,943
</TABLE>
7
<PAGE> 9
RISK FACTORS
You should carefully consider the following factors, in addition to the other
information contained in this prospectus, in evaluating an investment in the
common stock. This prospectus contains forward-looking statements that involve
risks and uncertainties. Actual results could differ materially from those
discussed in this prospectus. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as those discussed elsewhere in this prospectus.
IF NORTH COAST IS UNABLE TO DEVELOP AND ACQUIRE ADDITIONAL RESERVES, ITS
RESERVES WILL BE DEPLETED AS THEY ARE PRODUCED AND NORTH COAST MAY BE UNABLE TO
PROVIDE FOR INCREASED DEMAND FOR ITS OIL AND GAS.
North Coast's future growth depends on its ability to develop or acquire
additional natural gas and oil properties and reserves that can be operated or
developed on a basis which is profitable enough to provide attractive rates of
return. Unless North Coast is successful developing and acquiring additional
reserves, its reserves will be depleted as they are produced and North Coast may
be unable to provide for increased demand for its oil and gas. There can be no
assurance that North Coast will be able to economically find or acquire
additional gas and oil reserves or that it will be able to economically develop
its current or any future reserves.
WITHOUT ADEQUATE FINANCING, NORTH COAST WILL BE UNABLE TO IMPLEMENT ITS STRATEGY
OF FINDING, ACQUIRING AND DEVELOPING NATURAL GAS AND OIL PROPERTIES.
North Coast's strategy of finding, acquiring and developing natural gas and oil
properties depends upon its ability to obtain financing for these activities.
Although North Coast may be able to issue common stock or other securities for
these purposes, subject to market conditions and restrictions under North
Coast's existing reducing revolving credit facility on the issuance of debt and
preferred stock, it also intends to utilize the credit facility and internally
generated funds to finance these activities, including its investment in
drilling programs. Also, NUON has the option to acquire 1,149,426 shares of
common stock for $5,000,000. There is no assurance when or if NUON will exercise
this option.
The credit facility limits North Coast's outstanding borrowings to those
amounts, determined by the bank in its sole discretion, based upon several
factors including the discounted present value of North Coast's estimated future
net cash flow from oil and gas production.
Any future acquisition or development activities by North Coast requiring bank
financing in excess of the amount then available under the credit facility will
depend upon the bank's evaluation of the properties proposed to be acquired or
developed. If funds are not available under the credit facility and cannot be
obtained from alternative sources, the scope of North Coast's operations would
be limited. The credit facility will convert to a term loan on July 2, 2000, the
principal amount of which is scheduled to be amortized over five years. Although
there can be no assurance, North Coast believes the credit facility can be
renewed on substantially similar terms. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for more current information about North Coast's credit facility.
8
<PAGE> 10
IF THE MARKET PRICE OF NATURAL GAS DECLINES, NORTH COAST'S REVENUES AND
OPERATING INCOME WILL DECLINE.
During fiscal 1999, North Coast derived 96% of its gas and oil production
revenues, or 50% of its total revenues, from the sale of natural gas. In
addition, North Coast attributes approximately 95% of its March 31, 1999 proved
developed reserves, on an equivalent Mcf basis, to natural gas. Thus, North
Coast depends highly upon both the markets and prices paid for its natural gas
production. See "Business--Markets" for more information about the oil and gas
markets.
ANY SIGNIFICANT DECLINE IN THE PRICE OF NATURAL GAS OR OIL WOULD MATERIALLY
ADVERSELY AFFECT NORTH COAST'S OPERATING INCOME AND FINANCIAL CONDITION.
The revenues generated from the oil and natural gas production of North Coast
depend upon the prices at which gas can be sold. Various factors beyond the
control of North Coast affect prices of natural gas, including:
- domestic supplies,
- the level of consumer demand,
- weather,
- the price and availability of alternative fuels,
- the availability of pipeline capacity and
- changes in existing federal regulation and price controls.
Historically, prices have been subject to considerable fluctuation. Any
significant decline in the price of natural gas would materially adversely
affect North Coast's revenues and operating income and its financial condition.
This could result in a write down in the carrying value of North Coast's oil and
gas properties which would affect the availability of funds and North Coast's
ability to repay borrowed funds under the credit facility. See
"Business--Markets" for more information about price fluctuations in the oil and
gas markets.
IF NORTH COAST'S RESERVE ESTIMATES ARE INACCURATE, NORTH COAST MAY NOT BE ABLE
TO PRODUCE ENOUGH OIL AND GAS.
Estimated quantities of proved reserves and projected future rates of production
and the timing of development expenditures are uncertain. The reserve data in
this prospectus represents only estimates. In addition, the estimates of future
net revenues from proved reserves and their discounted present value are based
upon assumptions about future production levels, prices and costs that may not
be accurate. The estimates of the future net cash flows as of March 31, 1999
reflect average oil and gas prices, on that date, of $12.56 per Bbl and $2.61
per Mcf, respectively. There can be no assurance that these prices will be
realized or that the projected volumes will be produced. See "Business--Gas and
Oil Reserves" for information about North Coast's reserve estimates. At June 17,
1999, the prevailing field price for crude oil in the Appalachian Basin was
$15.00 per barrel. If the current estimate of proved reserves is materially
inaccurate, it could materially adversely affect production, cash flow and net
income. North Coast's reserves reflect the product price either received at
North Coast's year end or the contracted purchase price adjusted to market after
the term of the contract. Approximately 96% of North Coast's proved reserves are
derived from natural gas. The reduction of oil prices would not materially
affect the reserves
9
<PAGE> 11
as a whole. A decrease in natural gas prices would affect North Coast's reserves
to a greater extent.
IF NORTH COAST IS UNABLE TO CONTINUE TO SUCCESSFULLY SPONSOR DRILLING PROGRAMS,
THE SIZE, SCOPE AND DIVERSIFICATION OF NORTH COAST'S OPERATIONS COULD BE
LIMITED.
A substantial portion of North Coast's revenues historically were realized from
drilling, well operating, gas gathering and transportation, gas marketing and
other services performed under contract to drilling programs. Drilling programs
raised $3.5 million during fiscal 1999, $2.7 million during fiscal 1998 and $3.0
million during fiscal 1997. To date, North Coast has organized 49 drilling
programs, of which 28 are still active and operating. North Coast's ability to
continue to market drilling programs to investors, and the amount of capital
raised through these drilling programs, will depend upon a number of factors,
including:
- the performance of North Coast's gas and oil development activities,
- the continued availability of federal income tax benefits for investors,
including the availability of tax deductions for intangible drilling and
development costs and passive activity losses,
- the absence of adverse changes in federal and state securities regulations
which might preclude North Coast from offering partnership interests in
its drilling programs to investors in reliance on the exemption from
registration afforded by Regulation D under the Securities Act of 1933,
- factors affecting natural gas and oil prices and markets,
- North Coast's ability to maintain good working relationships with the
broker-dealer group which sells partnership interests in drilling programs
and
- general economic conditions.
See "Business--Drilling Programs" for a more detailed discussion of how drilling
programs relate to North Coast's business.
LOSSES AND LIABILITIES FROM UNINSURED OR UNDERINSURED DRILLING AND OPERATING
EVENTS COULD HAVE A MATERIALLY ADVERSE EFFECT ON THE FINANCIAL CONDITION AND
OPERATIONS OF NORTH COAST.
Commercial production of natural gas or oil may not be obtained from each of the
wells drilled by North Coast. The cost of drilling, completing and operating
wells is uncertain and drilling and/or production may be curtailed or delayed as
a result of many factors. The business is also subject to all of the operating
risks normally associated with the exploration for and production of gas and
oil, including, but not limited to, unexpected formations or pressures,
uncontrollable flows of gas, oil, brine or well fluids into the environment
including groundwater contamination, blowouts, cratering, fires, explosions,
pollution and other risks, any of which could result in personal injuries, loss
of life, damage to properties and substantial losses. North Coast carries
insurance but it is not fully insured against all risks. Losses and liabilities
from uninsured or under-insured events could have a materially adverse effect on
the financial condition and operations of North Coast. See "Business--Operating
Hazards and Uninsured Risks" for a description of the hazards that may accompany
oil and gas drilling and producing activity.
10
<PAGE> 12
NORTH COAST IS SUBJECT TO LIABILITY AS THE MANAGING GENERAL PARTNER OF THE
DRILLING PROGRAMS.
North Coast is subject to liability as the managing general partner of the
drilling programs. To maintain the marketability of its drilling programs, North
Coast also indemnifies the investors against liabilities in excess of their
capital contributions. The partnership interests in drilling programs constitute
securities and North Coast is subject to potential liability for failure to
comply with applicable federal and state securities laws and regulations. North
Coast offers partnership interests in its drilling programs to investors in
reliance on the exemption from registration afforded by Regulation D under the
Securities Act of 1933 and exemptions from securities registration requirements
under state securities laws. If North Coast were to fail to qualify for these
exemptions as a result of inadequate disclosure or changes in registration
requirements, North Coast may be precluded from offering partnership interests
in the future and from generating revenue through future drilling programs.
NORTH COAST IS SUBJECT TO THE RISKS OF COST OVERRUNS IN CONNECTION WITH ITS
DRILLING CONTRACTS.
For fiscal 1999, North Coast received approximately 26% of its revenues from its
drilling contracts with drilling programs. North Coast enters into these
drilling contracts on a turnkey, or fixed price, basis and in turn subcontracts
with drilling contractors to drill and complete the wells. North Coast must
conduct all operations necessary for the drilling and completion of drilling
program wells regardless of actual costs incurred. As a result, North Coast is
subject to the risks of cost overruns, increased prices for goods and services,
or other unanticipated costs. See "Business--Drilling Services" for a
description of some of North Coast's drilling operations.
THE CONCENTRATED OWNERSHIP OF NORTH COAST'S COMMON STOCK MAY PREVENT A CHANGE IN
CONTROL OF NORTH COAST.
The officers, directors including Mr. Lombardy and holders of 10% or more of the
outstanding common stock of North Coast beneficially own approximately 75% of
North Coast's voting capital stock. Furthermore, pursuant to an August 1, 1997
stock purchase agreement between North Coast and NUON, NUON is entitled to
designate a majority of the members of the board of directors until NUON's
ownership of North Coast's outstanding common stock falls below 33 1/3%.
Accordingly, these stockholders may remain in a position to control future
corporate actions requiring stockholder approval. This concentration of
ownership may delay or prevent a change in control of North Coast. See
"Principal and Selling Stockholders" for a list of the amounts of securities
held by the selling stockholders.
NORTH COAST CANNOT ASSURE THE HOLDERS OF ITS COMMON STOCK THAT THEY WILL RECEIVE
A DISTRIBUTION FROM NORTH COAST IF NORTH COAST IS LIQUIDATED.
As of March 31, 1999, 73,816 shares of 6% series A noncumulative convertible
preferred stock were outstanding and 232,864 shares of series B cumulative
convertible preferred stock were outstanding. In addition, the board of
directors is authorized to create and issue, in one or more series, 811,730
additional shares of preferred stock. The outstanding preferred stock is
entitled to receive liquidation preferences of $3,392,810, in the aggregate
including dividends in arrears, prior to any distribution on the common stock in
the event of liquidation or dissolution of North Coast. This amount includes
dividends in arrears at March 31, 1999 of $326,010 on the series B cumulative
preferred stock. See "Description of Securities."
11
<PAGE> 13
There can be no assurance that the assets of North Coast would be sufficient to
satisfy these liquidation preferences or, if these preferences are satisfied,
the extent of assets remaining for distribution to holders of common stock.
See "Price Range of Common Stock and Dividend Policy" for more information on
the payment of dividends on the series B preferred stock.
NORTH COAST'S CREDIT FACILITY PROHIBITS THE PAYMENT OF CASH DIVIDENDS.
The credit facility currently prohibits the payment of cash dividends on common
stock. In addition, holders of preferred stock are entitled to receive dividends
before any cash dividends are paid on common stock. See "Price Range of Common
Stock and Dividend Policy" for more information on the payment of dividends on
the series B preferred stock.
NORTH COAST'S CREDIT FACILITY IS COLLATERALIZED BY SUBSTANTIALLY ALL OF NORTH
COAST'S ASSETS.
If an event of default occurs under North Coast's credit facility, all
obligations under that facility will become immediately due and payable. North
Coast's credit facility is collateralized by substantially all of North Coast's
assets, including receivables, inventory, equipment and a first mortgage on some
of North Coast's interests in oil and gas wells and reserves. If an event of
default occurs, North Coast risks foreclosure on these assets. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for more current information about
North Coast's credit facility.
FUTURE SALES OF LARGE AMOUNTS OF NORTH COAST'S COMMON STOCK COULD ADVERSELY
AFFECT THE MARKET PRICE OF THE COMMON STOCK AND WARRANTS.
Future sales of substantial amounts of common stock in the public market could
adversely affect the market price of the common stock and warrants and could
impair North Coast's ability to raise additional capital through the public sale
of its equity securities. Of North Coast's stockholders, NUON owns approximately
50.5% of the common stock and Range owns approximately 17.4% of the common
stock. See "Principal and Selling Stockholders" for a list of the amounts of
securities held by the selling stockholders. If either NUON or Range decided to
sell large quantities of common stock, it could adversely affect the market
price of North Coast's common stock. In addition, several stockholders,
including Range, have rights requiring North Coast to register their shares of
common stock for resale. Range may request that North Coast register Range's
shares of common stock pursuant to a registration statement, and North Coast
agreed to use its best efforts to have that registration statement declared
effective as quickly as practicable and maintain the effectiveness until the
earlier of September 30, 2001 or until all of Range's shares of common stock are
sold. North Coast is registering 4,429,573 of a total of 5,894,760 shares of
common stock, options and warrants, of which 3,106,547 are freely transferable.
A LARGE AMOUNT OF OPTIONS AND WARRANTS ARE OUTSTANDING, AND THE EXERCISE OF
THOSE OPTIONS AND WARRANTS WOULD MOST LIKELY RAISE LESS CAPITAL THAN NORTH COAST
COULD RECEIVE IN A PUBLIC OFFERING.
At June 30, 1999, options and warrants to purchase an aggregate of 1,337,946
shares of common stock were outstanding. The preferred stock is currently
convertible into an
12
<PAGE> 14
aggregate of 339,241 shares of common stock. See "Description of Securities" for
a more detailed description of the terms of the common and preferred stock.
Although the exercise of options or warrants may raise capital for North Coast,
the amounts raised will most likely be less than North Coast could receive in a
public offering at the time of exercise.
PROVISIONS IN NORTH COAST'S CERTIFICATE OF INCORPORATION WHICH MAY INHIBIT A
CHANGE IN CONTROL OF NORTH COAST MAY ALSO DISCOURAGE A TENDER OFFER FOR CONTROL
OF NORTH COAST.
North Coast's certificate of incorporation and by-laws include several
provisions that may inhibit a change of control of North Coast. These include
super-majority voting requirements for certain transactions, a classified board
of directors serving staggered terms and the authorization of additional classes
of preferred stock. In addition, some of North Coast's officers have entered
into employment contracts providing for salary continuation payments to be made
if a change of control of North Coast occurs. These provisions may discourage a
tender offer for or an attempt to obtain control of North Coast. See
"Description of Securities--Certain Anti-Takeover Provisions" for a description
of these provisions which may inhibit a change in control.
THE DELISTING OF NORTH COAST'S COMMON STOCK COULD ADVERSELY AFFECT THE
PREVAILING MARKET PRICE FOR THE COMMON STOCK.
The common stock is currently listed on the Nasdaq SmallCap Market. Nasdaq has
established minimum criteria for the continued listing of the common stock on
the SmallCap Market, including a minimum price of $1.00 per share. Since
September 29, 1998, the common stock has traded at prices less than this minimum
criteria. As a result, on November 5, 1998, North Coast received a notice from
Nasdaq indicating that the common stock would be delisted if the common stock
could not meet the minimum criteria for ten consecutive days before a period of
ninety calendar days after the date of the notice had lapsed. After North
Coast's common stock was unable to maintain the minimum criteria, North Coast
requested a hearing before Nasdaq's Listing Qualifications Panel. The hearing
was held on April 15, 1999. On April 14, 1999, North Coast filed an information
statement with the Commission which describes North Coast's plans to effect a
one for five reverse stock split on June 7, 1999. At the hearing, North Coast
discussed this proposed stock split. As a result of this discussion, the Listing
Qualifications Panel indicated that North Coast's common would not be delisted
from the Nasdaq SmallCap Market so long as North Coast completed the one for
five reverse stock split. North Coast completed its one for five reverse stock
split on June 7, 1999. North Coast anticipates that its common stock will now
continue to be listed on the Nasdaq SmallCap Market. However, the delisting of
the common stock, or the perception that the delisting of the common stock could
occur, could adversely affect the prevailing market price for the common stock.
WHILE NORTH COAST HAS REALIZED NET INCOME IN THE PAST THREE FISCAL YEARS, IN
FISCAL 1996 IT REALIZED A SIGNIFICANT NET LOSS.
While North Coast had net income of $870,000 in fiscal 1999, $262,000 in fiscal
1998 and $292,000 in fiscal 1997, it has had significant net losses in the past.
In fiscal 1996, North Coast realized a net loss of $1,254,000. North Coast
cannot assure you that it will be profitable in the future or that it will not
realize significant losses.
13
<PAGE> 15
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
North Coast's annual report on Form 10-K for the fiscal year ended March 31,
1999, and North Coast's current report on Form 8-K, dated April 5, 1999, are
incorporated in this prospectus by reference. Information incorporated by
reference becomes a part of this prospectus. You should consider statements
contained in the foregoing documents incorporated by reference modified or
superseded if statements contained in this prospectus modify, supersede or
replace those statements. If a statement is modified by this prospectus, then
you should not consider the previous version of that statement to be
incorporated by reference into this prospectus.
If requested, North Coast will furnish, without charge to you a copy of any or
all of the documents described above, other than exhibits not incorporated by
reference into those documents. Please address your requests to: North Coast
Energy, Inc., 1993 Case Parkway, Twinsburg, Ohio 44087-2343, Attention: Garry
Regan, telephone: (330) 425-2330.
INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
Sections of this prospectus, including "Prospectus Summary," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," contain forward-looking statements that are based on management's
current beliefs, estimates and assumptions concerning the operations, future
results, and prospects of North Coast and the natural gas and oil industry in
general. All statements that address operating performance, events or
developments that management anticipates will occur in the future, including
statements related to future sales, profits, expenses, income and earnings per
share, or statements expressing a general optimism about future results, are
forward-looking statements. In addition, words like "expects," "anticipates,"
"intends," "plans," "believes," "estimates," variations of these words and other
similar expressions are intended to identify forward-looking statements.
The statements described in the preceding paragraph constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Because these statements are based on a number of beliefs,
estimates and assumptions that could cause actual results to materially differ
from those in the forward-looking statements, North Coast cannot assure you that
forward-looking statements will prove to be accurate.
Factors that may cause actual results to differ significantly from the results
discussed in the forward-looking statements 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 North Coast's geographic region;
- possible acquisitions by North Coast;
- the cost of locating and drilling oil and gas wells in the
Appalachian Basin area;
- the amount of funds raised in the fiscal 2000 drilling programs; and
- the ability to locate productive oil and gas prospects for
development by North Coast.
Forward-looking statements are subject to the safe harbors created in the
Exchange Act. North Coast undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
14
<PAGE> 16
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The common stock is traded on the Nasdaq SmallCap Market under the symbol
"NCEB." The following table shows, for the fiscal periods indicated, the high
and low bid and ask prices for the common stock.
COMMON STOCK
(amounts rounded to the nearest 32nd)
<TABLE>
<CAPTION>
HIGH LOW
-------------- --------------
BID ASK BID ASK
--- --- --- ---
<S> <C> <C> <C> <C>
FISCAL 1997
First Quarter.................................. $5 5/16 $5 15/16 $2 1/2 $3 3/4
Second Quarter................................. 7 3/16 8 1/8 3 1/8 3 3/4
Third Quarter.................................. 6 9/16 7 1/2 4 3/8 5 5/16
Fourth Quarter................................. 5 15/16 6 7/8 3 1/8 3 3/4
FISCAL 1998
First Quarter.................................. $5 $5 5/32 $3 7/16 $3 3/4
Second Quarter................................. 5 15/16 6 9/16 4 1/16 4 7/32
Third Quarter.................................. 4 27/32 5 5/32 2 21/32 3 7/16
Fourth Quarter................................. 5 5 5/32 2 21/32 3 1/8
FISCAL 1999
First Quarter.................................. $5 15/16 $6 1/4 $3 3/4 $4 7/32
Second Quarter................................. 5 5/16 5 5/8 2 3/16 2 13/16
Third Quarter.................................. 4 11/16 5 2 1/2 2 13/16
Fourth Quarter................................. 4 3/8 4 11/16 2 1/2 2 13/16
FISCAL 2000
First Quarter (through June 14, 1999).......... $5 5/16 $5 1/2 $3 $3 7/16
</TABLE>
As of June 10, 1999, there were approximately 4,556,814 shares of common stock
outstanding held by approximately 1,300 holders of record.
Holders of series A preferred stock are entitled to receive semi-annual
non-cumulative cash dividends at an annual rate of $.60 per share. Such
dividends are payable on June 1 and December 1 of each year. Holders of series B
preferred stock are entitled to receive quarterly cumulative cash dividends at
an annual rate of $1.00 per share. For fiscal 1999, North Coast paid $201,724 in
aggregate cash dividends on its series B preferred stock. North Coast has
dividends in arrears on its series B preferred stock of $326,010 at March 31,
1999.
North Coast has never paid any cash dividends on its common stock and is
currently restricted from paying cash dividends on any of its common stock under
the terms of its reducing revolving credit facility. North Coast currently
intends to retain future earnings in order to provide funds for use in the
operation of its business.
15
<PAGE> 17
CAPITALIZATION
The following table shows the capitalization of North Coast as of March 31,
1999. You should read this table in conjunction with the financial statements of
North Coast included elsewhere in this prospectus. See "Description of
Securities" for more information about the common and preferred stock.
<TABLE>
<CAPTION>
MARCH 31,
1999
-----------
<S> <C>
Short-term debt (current portion of long-term debt)......... $ 97,600
===========
Long-term debt.............................................. 21,493,922
Stockholders' equity:
Series A 6% non-cumulative convertible preferred stock,
par value $.01 per share; 563,270 shares authorized;
73,816 issued and outstanding (aggregate liquidation
value of $738,160) (1)................................. 738
Series B cumulative convertible preferred stock, par value
$.01 per share; 625,000 shares authorized, 232,864
issued and outstanding (aggregate liquidation value of
$2,328,640 plus dividends in arrears of
$326,010) (2).......................................... 2,329
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; 4,556,814 issued and outstanding,
5,706,239.............................................. 45,568
Additional paid-in capital................................ 21,914,939
Retained deficit.......................................... (4,021,027)
-----------
Total stockholders' equity........................ $17,942,547
-----------
Total capitalization.............................. $39,436,469
===========
</TABLE>
- ---------------
(1) Each share of series A preferred stock is currently convertible into .46
shares of common stock.
(2) Each share of series B preferred stock is currently convertible into 1.311
shares of common stock.
USE OF PROCEEDS
North Coast will not receive any proceeds from the sale of common stock offered
by the selling stockholders. North Coast intends to use the net proceeds, if
any, from the exercise of the warrants or options for general corporate
purposes.
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PRODUCTION DATA)
The following selected consolidated financial data for North Coast for the years
ended March 31, 1999, 1998, 1997, 1996 and 1995 are derived from North Coast's
audited consolidated financial statements. You should read the selected
consolidated financial data below in conjunction with the financial statements
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
REVENUES:
Oil and Gas Production................... $ 7,234 $3,014 $3,137 $ 2,849 $ 2,846
Drilling Revenues........................ 3,686 2,988 3,784 5,490 8,802
Well Operating, Transportation, and
Other................................. 2,062 1,622 1,860 1,610 2,814
Administrative and Agency Fees........... 960 966 884 911 813
------- ------ ------ ------- -------
Total Revenues........................... 13,942 8,590 9,665 10,860 15,275
------- ------ ------ ------- -------
EXPENSES:
Oil and Gas Production Expenses.......... 2,602 840 777 796 561
Drilling Costs........................... 2,927 2,517 2,877 4,161 7,178
Oil and Gas Operations................... 1,200 653 977 881 1,943
General and Administrative Expenses...... 2,109 2,216 2,308 2,879 2,949
Depreciation, Depletion, Amortization,
and Other............................. 2,480 1,242 1,385 3,298 1,711
Abandonment of Oil and Gas Properties.... -- 89 74 60 147
Interest................................. 1,841 839 1,055 773 529
Other income, net........................ (87) (68) (80) (96) (87)
------- ------ ------ ------- -------
Total Expenses........................... 13,072 8,328 9,373 12,752 14,931
------- ------ ------ ------- -------
Income (Loss) Before Income Taxes........ 870 262 292 (1,892) 344
Provision (Credit) for Income Taxes...... -- -- -- (638) 49
------- ------ ------ ------- -------
Net Income (Loss)........................ $ 870 $ 262 $ 292 $(1,254) $ 295
======= ====== ====== ======= =======
Net Income (Loss) Applicable to Common
Stock................................. $ 634 $ (6) $ (167) $(1,904) $ (359)
======= ====== ====== ======= =======
Net Income (Loss) Per Common Share
(primary and fully diluted) (1)....... $ .16 $(0.00) $(0.10) $ (1.19) $ (0.25)
======= ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital......................... $ 2,399 $ 782 $ 325 $ (360) $ (482)
Property and Equipment (net)............ 36,418 18,789 17,901 16,736 16,386
Total Assets............................ 43,573 22,311 21,229 20,243 21,135
Long-Term Debt (2)...................... 21,494 7,171 10,721 8,955 6,197
Total Stockholders' Equity.............. 17,942 12,339 7,310 7,319 9,223
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Net cash provided by operating
activities........................... $ 2,385 $ 1,186 $ 1,162 $ 1,049 $ 2,428
Net cash used for investing
activities........................... (20,913) (2,122) (1,827) (3,377) (5,065)
Net cash provided by financing
activities........................... 18,905 1,012 616 1,513 3,708
======= ======= ======= ======= =======
Increase (decrease) in cash............. $ 377 $ 76 $ (49) $ (815) $ 1,071
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
PRODUCTION DATA:
Production:
Gas (Mcf)................................... 2,688,000 1,116,000 1,153,000
Oil (Bbls).................................. 28,100 13,900 16,200
Equivalent Mcf @ 6 Mcf/Bbl.................. 2,856,600 1,199,400 1,250,200
Average Sales Prices:
Gas (Mcf)................................... $ 2.57 $ 2.50 $ 2.43
Oil (Bbls).................................. $ 11.39 $ 16.18 $ 20.65
Average Lifting Cost per Mcf................ $ .91 $ .70 $ .62
Producing Wells:
Gross (3)................................... 1,711 725 690
Net......................................... 1,277.87 348.13 344.14
Average Working Interest.................... 74.69% 48.02% 49.88%
Operated Wells.............................. 1,574 691 654
</TABLE>
- ---------------
(1) Dividends earned on cumulative preferred stock for the years ended March 31,
1999, 1998, 1997, 1996 and 1995 in the amounts of $236, $268, $459, $650,
and $654, respectively.
(2) Long-term debt does not include that portion of indebtedness classified as
current.
(3) Gross producing wells include 92, 92, 45, 45, and 32 wells at March 31,
1999, 1998, 1997, 1996 and 1995, respectively, in which North Coast owns a
royalty interest.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
North Coast is engaged in the exploration, development and production of natural
gas and oil, primarily in conjunction with drilling programs it sponsors and
manages. North Coast derives its revenues from its own oil and gas production
and turnkey drilling, well operations, gas gathering, transportation and gas
marketing services performed under contract with drilling programs.
Since inception, North Coast has raised over $87,000,000 from the sale of
partnership interests, which has resulted in the formation of 49 partnerships.
North Coast's growth depends on a number of factors, including its continued
ability to raise drilling program funds, drilling results for corporate wells,
contract drilling and service-related revenues and North Coast's ability to
maintain adequate liquidity to provide its contributions to new drilling
programs and to acquire additional proved undeveloped or proved producing
properties. North Coast's growth is also dependent on several external factors,
including the price at which gas, and to a lesser extent oil, can be found and
sold.
RECENT DEVELOPMENTS
North Coast acquired the assets of Kelt pursuant to a purchase and sale
agreement dated April 8, 1998 and amended on May 12, 1998. The Kelt acquisition
closed on May 29, 1998, with an effective date of April 8, 1998. The purchase
price for the acquired assets was $16.0 million. The acquired assets 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. North
Coast funded the acquisition using cash and an increase in its existing line of
credit. Approximately $15.0 million of the $16.0 million purchase price was
financed under a recently amended credit facility, which expands North Coast's
credit line to $25.0 million. See "Description of Certain Indebtedness."
RESULTS OF OPERATIONS
The following table is a review of the results of operations of North Coast for
the fiscal years ended March 31, 1999, 1998 and 1997. All items in the table are
calculated as a percentage of total revenues.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Oil and gas production.................................. 52% 35% 33%
Drilling revenues....................................... 26 35 39
Well operating, transportation and other................ 15 19 19
Administrative and agency fees.......................... 7 11 9
--- --- ---
Total Revenues.................................. 100% 100% 100%
--- --- ---
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expenses:
Oil and gas production expenses......................... 19% 10% 8%
Drilling costs.......................................... 21 29 30
Oil and gas operations.................................. 9 8 10
General and administrative expenses..................... 15 26 24
Depreciation, depletion, amortization, impairment and
other................................................ 18 15 14
Abandonment of oil and gas properties................... 0 0 1
Provision (credit) for income taxes..................... 0 0 0
Other................................................... 12 9 10
--- --- ---
Total Expenses.................................. 94% 97% 97%
--- --- ---
Net Income (Loss)......................................... 6% 3% 3%
=== === ===
Net income (loss) applicable to common stock.............. 5% (0)% (2)%
</TABLE>
The following discussion and analysis reviews the financial condition and
results of operations of North Coast for the years ended March 31, 1999, 1998
and 1997. You should read this review in conjunction with the financial
statements appearing elsewhere in this prospectus.
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues. Oil and gas production increased from 1.2 bcf equivalent in fiscal
1998 to 2.9 bcf equivalent in fiscal 1999. Oil and gas production revenues
increased $4,219,834 (140%) to $7,233,763 for fiscal 1999 compared to $3,013,929
for fiscal 1998 primarily due to the increased production, of which 96% is from
natural gas. This increase in oil and gas revenue and production is primarily
associated with approximately 760 producing oil and gas properties acquired from
Kelt. The Kelt wells comprised 1.56 bcf equivalent of the total production in
fiscal 1999. Gas revenues were also affected by the sale of natural gas from the
Kelt properties, which was contracted on June 15, 1998 for a period of one year
at a price of approximately $2.85 per Mcf. The increase in oil and gas
production revenues also reflects approximately $320,000 in production revenues
resulting from North Coast's third quarter purchase of interests in prior
drilling programs. North Coast received an average price of $11.39 and $16.18
per barrel of oil for fiscal 1999 and 1998, respectively, and $2.57 and $2.50
per Mcf for natural gas for fiscal 1999 and 1998, respectively.
Drilling revenues increased by $697,787 (23%) to $3,686,158 for fiscal 1999
compared to $2,988,371 for fiscal 1998 due to the increase in the number of
wells recognized in revenue for the comparable periods. Drilling revenues were
recognized on 23 wells for fiscal 1999 compared to 20 wells for fiscal 1998.
North Coast raised $3,515,000 for its fiscal 1999 drilling program compared to
$2,718,000 for its fiscal 1998 drilling programs.
For fiscal 1999, well operating, transportation and other revenues increased
$439,605 (27%) compared to fiscal 1998. This increase was primarily due to the
increase in revenue from gas transportation and oilfield services, which was a
result of the Kelt acquisition. North Coast has utilized the oilfield equipment
from the acquisition to provide services to its oilfield operations.
Expenses. Oil and gas production expense increased to $2,601,555 for fiscal 1999
from $840,346 for fiscal 1998 primarily due to the Kelt acquisition coupled with
an increase
20
<PAGE> 22
resulting from the fiscal third quarter purchase of interests in prior drilling
programs. The Kelt wells accounted for approximately $1.5 million of the total
oil and gas production expense for fiscal 1999. North Coast's average operating
cost per equivalent Mcf increased to $0.91 for the year ended March 31, 1999
compared to $0.70 for the year ended March 31, 1998 primarily due to the
integration of the assets and operating staff from the Kelt acquisition for the
year ended March 31, 1999.
Drilling costs for fiscal 1999 compared to fiscal 1998 increased $410,714 (16%).
This increase between comparable periods was due to the larger number of
drilling program wells drilled and completed during the fiscal year ended 1999
compared to the fiscal year ended 1998. North Coast's profit margin was 21% for
fiscal 1999 compared to 16% for fiscal 1998 primarily due to weather conditions
being more conducive for drilling activity in fiscal 1999 than in fiscal 1998.
In September, North Coast initiated an enhancement and development program
focused on completing wells acquired from Kelt and the development of selective
proved undeveloped reserves. At March 31, 1999, North Coast had expended
approximately $3.1 million on its enhancement program. North Coast does not
recognize drilling revenue or expense on these drilling development activities.
Oil and gas operations expenses increased $547,842 (84%) for fiscal 1999
compared to fiscal 1998. This increase was due to an increase in gas purchases
related to unaffiliated third party gas sales of approximately $60,000,
increased costs associated with the utilization of oilfield equipment acquired
in the Kelt acquisition of approximately $170,000, and the increase in costs
associated with the integration of Kelt operations.
General and administrative expense decreased $107,013 (5%) primarily as a result
of a reallocation of overhead expenses related to integration of the assets
acquired from Kelt as well as a reduction in consulting fees in fiscal 1999
compared to fiscal 1998. As a percentage of revenues, general and administrative
expense decreased from 26% in fiscal 1998 to 15% in fiscal 1999 also due to the
Kelt acquisition. Subsequent to fiscal 1999 North Coast made payments to a
former executive of North Coast which will be reflected in general and
administrative expense in fiscal 2000.
Depreciation, depletion, amortization, impairment, and other increased
$1,237,344 (100%) for fiscal 1999 compared to fiscal 1998. The increase is
primarily due to the increased depletion associated with the wells acquired from
Kelt and the increased depreciation associated with the oilfield equipment and
saleslines also acquired from Kelt.
Interest expense increased to $1,841,108 for fiscal 1999 from $839,342 for
fiscal 1998. 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, the investment in the enhancement and development
activities and North Coast's contributions to the drilling program wells.
Income from operations for fiscal 1999 increased to $2,624,437 from $1,033,918
for fiscal 1998. The increase in income from operations was primarily due to
higher production volumes, the increased price of natural gas and increased
drilling revenues. The aforementioned increases in volumes, price and drilling
revenue also increased North Coast's net income $608,076 (232%) to $870,214 for
fiscal 1999 from $262,138 for fiscal 1998.
21
<PAGE> 23
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues. Oil and gas production revenues decreased 3.9% to $3,014,000 for
fiscal 1998 compared to $3,137,000 for the prior corresponding period. On an
equivalent basis, production declined to 1.20 bcf equivalent in fiscal 1998 from
1.25 bcf equivalent in fiscal 1997. The decrease in oil and gas production
revenues was a result of a decrease in oil revenues of approximately $110,000
due to a decrease in the oil production and in the average price received for
oil by North Coast between comparable periods. For fiscal 1998 North Coast
received an average price of $16.18 per barrel of oil and $2.50 per Mcf of
natural gas compared to an average price of $20.65 per barrel of oil and $2.43
per Mcf of natural gas received for the prior corresponding period.
Drilling revenues for the period decreased 21.0% to $2,988,000 for fiscal 1998
compared to $3,784,000 for the prior corresponding period due to the decrease in
the number of wells recognized in revenue. This decline is a direct consequence
of the reduced capital raised through drilling programs for fiscal 1997 and
1998. Drilling programs raised $2.7 million in fiscal 1998 compared to $3.0
million in fiscal 1997. Management believes that these declines were a result of
investor and broker uncertainty as to the control and strategic direction of
North Coast occasioned by Range's acquisition of common stock in 1996 and NUON's
initial investment in 1997. North Coast recognized revenues for fiscal 1998 on
20 wells as compared to 29 wells for fiscal 1997. The decrease in the number of
wells recognized in drilling revenues was also due to the higher number of
carryover wells at the end of fiscal 1996. North Coast has 2 wells in
work-in-progress at the end of fiscal 1998 compared to 5 at the end of fiscal
1997.
Revenues generated from well operating, transportation and other decreased 12.8%
to $1,622,000 for fiscal 1998 compared to $1,860,000 for the prior corresponding
period. This decrease was primarily due to a decrease in unaffiliated third
party gas sales. Unaffiliated third party gas sales fluctuate from year to year
based upon the availability of these types of transactions.
Revenue from administrative, management and agency fees, which are based on a
percentage of the total investor capital raised in drilling programs, increased
9.3% to $966,000 for fiscal 1998 compared to $884,000 for the prior
corresponding period due to the formation of drilling programs in fiscal 1998.
The administrative fees derived from fiscal 1998 drilling programs were charged
a rate equal to 4.5% of total capital raised compared to the prior year's
programs, which are charged an annual fee equal to 2% of total capital raised.
Expenses. Oil and gas production expense increased 8.1% to $840,000 for fiscal
1998 compared to $777,000 for the prior corresponding period. This increase was
primarily due to additional costs incurred with relocation of certain production
facilities in the Gulf Coast area and costs associated with reworking wells in
Pennsylvania.
Drilling costs for fiscal 1998 decreased 12.5% to $2,517,000 compared to
$2,877,000 for the prior corresponding period due to the decreased number of
wells completed between comparable periods. The profit margin on drilling
revenue decreased to 16% for fiscal 1998 compared to 24% for fiscal 1997. The
decrease in the drilling profit margin was due to actual completion costs in
excess of the estimated costs for wells recognized in drilling income coupled
with increased general and administrative costs allocated to drilling
activities. Net drilling income decreased approximately $435,000 between fiscal
year ends due to the fewer number of wells drilled and completed.
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<PAGE> 24
Oil and gas operations expense decreased $324,000 (33%) for fiscal 1998 as
compared to fiscal 1997. This decrease was primarily due to reduced natural gas
purchases associated with unaffiliated third party gas sales.
Interest expense decreased 20.5% to $839,000 for fiscal 1998 compared to
$1,055,000 for the prior corresponding period. This decrease was primarily due
to the reduction of the borrowings under North Coast's credit facility and other
debt by utilizing funds received from the sale of common stock. At March 31,
1998, $6,565,265 was outstanding under North Coast's credit facility compared to
$8,640,000 at March 31, 1997.
Net income for fiscal 1998 decreased 10.1% to $262,000 compared to $292,000 for
the prior corresponding period. The decrease reflects the decreased drilling
activity and production revenues between comparable periods.
INFLATION AND CHANGES IN PRICES
While the costs of operations have been and will continue to be affected by
inflation, oil and gas prices have fluctuated during recent years and generally
have not followed the same pattern as inflation. With today's global economy,
especially in the area of oil and natural gas, management believes that other
forces of the economy and world events, such as OPEC, the weather, economic
factors, and the effects of supply of natural gas in the United States and
regionally have a more immediate effect on current pricing than inflation. North
Coast received an average price of $11.39 and $16.18 per barrel for fiscal 1999
and 1998, respectively, and $2.57 and $2.50 per Mcf for natural gas for fiscal
1999 and 1998, respectively. On average, Appalachian natural gas prices
decreased $0.41/Mcf from fiscal year 1998 to fiscal year 1999. However, North
Coast experienced a $0.07/Mcf increase for its natural gas during this period.
For the 24 month period ending March 31, 1999, the CNG and TCO Appalachian
natural gas index pricing decreased $0.71 Mcf on average from $2.85 to $2.14,
while North Coast's average price increased $0.14 Mcf, from $2.43 to $2.57. The
increase North Coast received can be attributed to a change in marketing
strategy including (1) aggressively targeting small to medium-sized commercial
end-users, (2) balancing the remainder of North Coast's gas prices between spot
Appalachian based prices and NYMEX based prices. This strategy allows North
Coast the greatest opportunity to exceed the average regional prices, while
minimizing the effects of a negative fluctuation. The industry-wide weakness of
natural gas prices can be attributed to the effects of a relatively mild winter,
which lessened demand for natural gas. Although it is anticipated that there
will be a decline in gas prices during the summer months, the demand for gas by
storage facilities, coupled with the anticipated nationwide hot summer, may keep
gas prices above last summer's. Other variables potentially effecting gas prices
are increased competition from Canadian gas, effects of gas storage and FERC
Order 636. FERC Order 636 may have contributed to the lower spot market prices
by mandating an unbundling of pipeline service and allowing open access to a
variety of geographical markets. Management cannot predict what long-term
effects FERC Order 636 will have on either spot market prices or longer term gas
contracts.
Currently, North Coast sells natural gas under both fixed price contracts and on
the spot market. The spot market price North Coast receives for gas production
is related to several variables, including the weather and the effects of gas
storage. North Coast anticipates that spot market prices will continue to
fluctuate in response to various factors primarily weather and market
conditions.
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<PAGE> 25
In an effort to position itself to take advantage of future increases in demand
for natural gas, North Coast 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 its wells.
LIQUIDITY AND CAPITAL RESOURCES
North Coast's working capital was $2,399,000 at March 31, 1999 compared to
$782,000 at March 31, 1998. The increase of $1,617,000 in working capital
reflects the funds received from the formation of the fiscal 1999 drilling
program and the general increase in working capital resulting from the
additional Kelt wells. As of March 31, 1999, North Coast had $20,827,635
outstanding under its credit facility.
The following table summarizes North Coast's financial position at March 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
AMOUNT % AMOUNT %
------- --- ------- ---
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Working capital.............................. $ 2,399 6 $ 782 4
Property and equipment....................... 36,418 89 18,789 95
Other........................................ 1,857 5 275 1
------- --- ------- ---
Total.............................. $40,674 100 $19,846 100
======= === ======= ===
Long-term debt............................... $21,494 53 $ 7,171 36
Deferred income taxes and other liability.... 1,238 3 336 2
Stockholders' equity......................... 17,942 44 12,339 62
------- --- ------- ---
Total.............................. $40,674 100 $19,846 100
======= === ======= ===
</TABLE>
CAPITAL RESOURCES AND REQUIREMENTS
The oil and gas exploration and development activities of North Coast
historically have been financed through the drilling programs, through
internally generated funds, and from bank financing.
The following table summarizes North Coast's Statements of Cash Flows for the
years ended March 31, 1999, 1998 and 1997. All items 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
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<PAGE> 26
activities and net cash provided by financing activities, plus any decrease in
cash and cash equivalents.
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
DOLLARS % DOLLARS % DOLLARS %
------- --- ------- --- ------- ---
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
operating activities....... $ 2,385 11% $1,186 46% $1,162 48%
Net cash used for investing
activities................. (20,913) (94) (2,122) (82) (1,827) (76)
Net cash provided by
financing activities....... 18,906 85 1,012 39 616 26
------- --- ------ --- ------ ---
Increase (decrease) in cash
and cash equivalent........ $ 378 2% $ 76 3% $ (49) (2)%
======= === ====== === ====== ===
</TABLE>
As the above table indicates, North Coast's cash provided by operating
activities increased to $2,385,000 for fiscal 1999 compared to $1,186,000 for
fiscal 1998 primarily due to the Kelt acquisition.
Net cash used for investing activities increased to $20,913,000 for fiscal 1999
from $2,122,000 for fiscal 1998. This increase was primarily due to the Kelt
acquisition. In the fiscal fourth quarter it was determined that the drilling
rig acquired in the Kelt acquisition was not being utilized as effectively as
initially planned and was sold to a third party. North Coast also invested
approximately $3.1 million in drilling and development activities associated
with completing wells acquired from Kelt and the development of proved
undeveloped reserves.
Net cash from financing activities increased by approximately $17,894,000 for
fiscal 1999 compared to fiscal 1998. This increase reflects North Coast's
borrowings under its credit facility to finance the Kelt acquisition and the
receipt of $5.0 million from NUON on September 29, 1998 for the issuance of
common stock and the subsequent payment of a portion of North Coast's credit
facility.
On February 9, 1998, North Coast entered into an agreement with ING (U.S.)
Capital Corporation to replace the $20.0 million revolving credit facility with
its previous lender. North Coast's amended credit facility, dated May 29, 1998,
expanded North Coast's $20.0 million revolving credit facility with ING to a
$25.0 million revolving credit facility. The credit agreement also provides for
a borrowing base which is determined semi-annually by the lender based upon
North Coast's financial position, oil and gas reserves, as well as outstanding
letters of credit ($150,000 at March 31, 1999). The credit agreement requires
payment of an agent fee of 0.75% on amounts available and a 0.50% commitment fee
on amounts not borrowed up to the available credit line. At March 31, 1999,
North Coast's borrowing base was $25.0 million subject to reduction for the
outstanding letters of credit. Available borrowings under the facility at March
31, 1999 were $4,022,365 and may change based upon the semi-annual reserve study
and borrowing base determination. See note 5 to North Coast's March 31, 1999
financial statements. The credit facility provides that the payment of dividends
with respect to the common stock is prohibited. As of March 31, 1999, North
Coast had $20,827,635 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 0.75% or LIBOR plus
2.50%. The revolving line of credit is
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<PAGE> 27
reviewed semi-annually and may be extended by an amendment to the current
facility or converted to a term loan on July 2, 2000.
The lender has performed its September 30, 1998 semi-annual borrowing base
review and has provided a third amendment to the credit facility which continues
the facility without payment of principal until September 30, 2000. The lender
has indicated that, in the future, it intends to discontinue lending in the oil
and gas business in the United States and has requested that North Coast find
another lender. North Coast is currently reviewing options with several lenders
that are interested in providing at least a $25 million credit facility.
The amounts borrowed under its reducing revolving line of credit are secured by
North Coast's receivables, inventory, equipment and a first mortgage on North
Coast's interests in oil and gas wells and reserves. The mortgage notes are
secured by land and buildings.
In addition, at March 31 1999, North Coast had approximately $44,290 outstanding
under a mortgage note payable for its facility in Youngstown. The mortgage note
bears interest at the rate of 8% and requires North Coast to make monthly
payments of approximately $1,019 through July 2003. North Coast entered into a
mortgage note for its headquarters on May 13, 1996 for $540,000 with a 15-year
term and an interest rate of 8.58%. The mortgage note may be renegotiated every
five years. The amount outstanding under the mortgage note at March 31, 1999 was
$487,673.
On September 29, 1998 North Coast sold an additional 1,149,425 shares of its
common stock for $5.0 million to NUON, pursuant to the terms of a stock purchase
agreement between North Coast and NUON dated August 1, 1997. By exercising its
option to purchase additional shares by September 30, 1998, NUON's stock
ownership increased to 51% of the outstanding common stock and NUON gained the
ability to appoint additional directors at North Coast's next annual meeting.
North Coast also issued 26,800 warrants representing the right of the holder to
purchase one share of common stock for $4.375 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
1,149,426 shares of common stock by September 30, 1999. North Coast is also
obligated to issue 26,800 warrants when and if NUON purchases an additional
1,149,426 shares with 13,400 of the potential warrants due to Mr. Siegel and
13,400 of the potential warrants due to Mr. Berns. The additional warrants
represent the right to purchase one share of common stock for $4.375 per share.
Effective on April 8, 1998, North Coast acquired Kelt, headquartered in
Cambridge, Ohio. The Kelt acquisition was made pursuant to a purchase and sale
agreement. The purchase price for the acquired assets was approximately $16.0
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. North Coast funded the acquisition using cash and an
increase in its existing line of credit. Approximately $15.0 million of the
total purchase price was financed under an expanded credit facility with the
remaining amount paid in cash.
On April 30, 1999, the chief executive officer resigned from North Coast. Under
a separation agreement, he is entitled to payments instead of his existing
employment contract and payments for non-compete and a warrant to purchase
common stock. In addition, North Coast could be obligated to purchase his common
stock for $4.375 per share. North Coast would not be obligated to purchase the
former executive's shares of common stock if NUON elects to purchase his shares
prior to September 30, 1999 in accordance with the separation
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<PAGE> 28
agreement. However, NUON would have the right to reduce its option under the
1997 purchase and sale agreement to the extent to which it purchases the former
executive's shares. NUON is not obligated to exercise its option to acquire
1,149,426 shares nor is it obligated to acquire the former chief executive
officer's shares.
Management believes that general economic conditions and various sources of
available capital, including current borrowings under the credit facility,
NUON's exercise of its option and funds raised in drilling programs will be
sufficient to fund North Coast's obligations, operations and debt service
requirements through fiscal 2000.
YEAR 2000 READINESS DISCLOSURE
North Coast has developed an action plan and identified the resources required
to convert its computer systems and software applications to achieve Year 2000
compliance with no anticipated effect on its customers or disruption of its
business operations. North Coast has already implemented the first three phases
of its four-phase action plan. In phase one, North Coast assessed its
information technology and non-IT systems. The term "computer equipment and
software" includes systems that are commonly thought of as IT systems, including
accounting, data processing, telephone, scanning equipment and other
miscellaneous systems. Those items not considered IT systems include alarms, fax
machines and monitors for field operations. Both IT and non-IT systems may
contain embedded technology which complicates Year 2000 identification and
assessment efforts.
In phase two, North Coast tested existing systems and determined whether those
systems suspect to Year 2000 compliance problems should be replaced. In phase
three, North Coast replaced systems and software because of the Year 2000 issue
and because the Kelt acquisition necessitated newer and more compatible systems.
North Coast estimates that the cost to complete phases one, two and three, which
primarily includes the purchase of software and hardware upgrades under normal
maintenance agreements with third party vendors, will be approximately $60,000.
To date, North Coast has incurred approximately 83.0% of these anticipated
costs.
Phase four of North Coast's action plan involves the implementation of North
Coast's Year 2000 compliant software and the reevaluation of all of North
Coast's material systems. North Coast may engage independent consultants to
assist in completing phase four. The additional cost of these independent
consultants has not been determined and has not yet been included in North
Coast's Year 2000 compliance cost estimates.
In addition, North Coast has discussed Year 2000 compliance issues with its
vendors and customers. Although North Coast has no reason to believe that its
vendors and customers will not be Year 2000 compliant, North Coast is unable to
determine the extent to which Year 2000 issues will effect its vendors and
customers. North Coast continues to discuss procedures necessary to address this
issue with its vendors and customers.
North Coast presently does not plan to incur significant operational problems
due to the Year 2000 issue. However, there can be no assurance that the Year
2000 issue will not materially impact North Coast's financial condition or
results of operations, or adversely effect its relationship with customers,
vendors and others. Additionally, there can be no assurance that the Year 2000
issues of other entities will not have a material impact on North Coast's
systems or results of operations. North Coast plans to establish a contingency
plan for dealing with the most reasonably likely worst-case scenario. To date,
this scenario has not
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<PAGE> 29
been clearly identified. North Coast plans to complete this analysis and
contingency planning by the second quarter of fiscal 2000.
ACCOUNTING STANDARDS
In June 1997, SFAS 130, "Reporting Comprehensive Income," was issued. SFAS 130
established new standards for reporting comprehensive income and its components
and is effective for fiscal years beginning after December 15, 1997. In June
1997, the Financial Accounting Standards Board issued SFAS 131, "Disclosure
About Segments of an Enterprise and Related Information." SFAS 131 changed the
standards for reporting financial results by operating segments, related
products and services geographical areas and major customers. In February 1998,
SFAS 132, "Employers' Disclosures About Pensions and Other Postretirement
Benefits," was issued. SFAS 132 standardizes the disclosure requirements for
pension and other postretirement benefit plans but does not change the
measurement or recognition of those plans. SFAS 132 is effective for fiscal
years beginning after December 15, 1997. In June 1998, SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS 133 is effective for fiscal years beginning after June 15,
1999. The effect of the adoption or anticipated adoption of the above standards
had no, or is expected to have no, material effect on North Coast's financial
statements.
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<PAGE> 30
BUSINESS
GENERAL
North Coast is an independent natural gas and oil company engaged in
exploration, development and production activities primarily in the Appalachian
Basin region of Ohio and Pennsylvania. North Coast's strategy focuses primarily
on the acquisition of proved undeveloped natural gas and oil properties and the
turnkey drilling and development of such properties by North Coast in
conjunction with drilling programs. Drilling programs are funded through the
sale of partnership interests to non-industry investors and by contributions
from North Coast. Typically, North Coast obtains leases or other drilling rights
to these properties and assigns specific drill sites to drilling programs for
drilling and development. North Coast also engages in well operating, gas
gathering and transportation and gas marketing, primarily for drilling program
wells.
STRATEGY
North Coast's strategy focuses on increasing its natural gas and oil reserves,
as well as production, drilling and oilfield service revenues, by acquiring
undeveloped oil and gas properties in the Appalachian Basin and financing and
conducting the drilling and developing of these properties in conjunction with
drilling programs.
Drilling programs have permitted North Coast to broaden its exploration,
development and production activities by participating in a greater number of
wells than would be possible for North Coast to do by drilling solely for its
own account. Additionally, drilling programs have allowed North Coast to
diversify its activities and sources of revenues into related oilfield services
by providing such services under contract to drilling programs. As of March 31,
1999, North Coast served as the managing general partner of 28 drilling programs
and operated 1,574 wells in Ohio and Pennsylvania, of which 385 wells are
operated for drilling programs.
While North Coast is pursuing its strategy of increasing reserves through
drilling and development in conjunction with drilling programs and more recently
acquisitions, it continues to review potential acquisitions, including other gas
and oil companies or partnerships and producing properties. Although potential
acquisitions outside the Appalachian Basin are also reviewed, North Coast
anticipates continuing its focus on the Appalachian Basin.
EXPLORATION AND DEVELOPMENT
Exploration and development activities conducted by North Coast have involved
the acquisition of proved undeveloped oil and gas properties and the drilling
and development of such properties in conjunction with drilling programs and
joint ventures. Management has chosen to sponsor limited partnerships and joint
ventures to increase the funds available to North Coast and enable it to engage
in a greater number of drilling opportunities. In addition, drilling programs
add to North Coast's reserves and produce additional sources of income for North
Coast, including revenues from serving as general contractor for drilling
operations, management services, oilfield service operations and gas-gathering,
and marketing services which are provided to drilling programs.
North Coast's strategy focuses on increasing its natural gas and oil reserves,
as well as production, drilling and oil field service revenues, by acquiring
undeveloped oil and gas
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<PAGE> 31
properties in the Appalachian Basin and financing and conducting the drilling
and development of these properties in conjunction with drilling programs. While
North Coast is pursuing its strategy of increasing reserves through drilling and
development in conjunction with drilling programs, it continues to review
potential acquisitions, including other gas and oil companies or partnerships
and producing properties.
AREAS OF OPERATION
The Appalachian Basin is located in close proximity to major natural gas markets
in the northeast United States. This proximity to a substantial number of large
commercial and industrial gas markets, coupled with the relatively stable nature
of Appalachian Basin production and the availability of transportation
facilities has resulted in generally higher wellhead prices for Appalachian
natural gas than those prices available in the Gulf Coast and Mid-continent
regions. The Appalachian Basin is the oldest gas and oil-producing region in the
United States and includes portions of Ohio, Pennsylvania, New York, West
Virginia, Kentucky and Tennessee. Historically, most production in the
Appalachian Basin has been from wells drilled to a number of relatively shallow
blanket formations at depths of 1,000 to 7,500 feet. These formations are
generally characterized as long-lived reserves that produce for more than 20
years.
To date, the Company's drilling operations in the Appalachian Basin have
principally involved drilling to the Clinton/Medina sandstone geologic
formation. This formation is an oil and gas bearing sandstone formation, which
underlies a large section of eastern Ohio and western Pennsylvania in varying
thicknesses and at depths ranging generally from 2,800 to 7,500 feet.
Substantially, all of the wells that the Company drills in this area have
estimated depths of between 3,500 and 6,700 feet. Although Clinton/Medina wells
generally produce for many years, a substantial portion of the total well
production can be expected within the first three years of production.
The Company also maintains leasehold acreage in portions of Ohio and
Pennsylvania with other potential producing formations. Although there are
variances in the nature and characteristics of these producing formations, they
are generally typical of the Appalachian area.
ACQUISITION OF PROPERTIES
North Coast continually evaluates undeveloped prospects originated by its staff
or other independent geologists as well as other gas and oil companies. If
review of a prospect indicates that it may be geologically and economically
attractive, North Coast will attempt to obtain a lease of the mineral rights on
the acreage.
Typically, North Coast will acquire the entire working interest in a lease in
consideration of paying a lease bonus and annual rentals subject to a
landowner's royalty and, where the property is acquired through a third party,
possibly an overriding royalty interest. After obtaining these drilling rights,
North Coast continues to evaluate the property for potential drilling.
Substantially all of North Coast's drilling operations are currently conducted
in conjunction with drilling programs. If a prospect is selected for drilling
through a drilling program, North Coast assigns the minimum required acreage for
a well to that entity. In that case, North Coast retains the balance of the
leasehold acreage for future drilling.
In 1994, North Coast acquired a number of oil and gas interests in Erie and
Crawford Counties in northwestern Pennsylvania previously owned by a private
company. These
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<PAGE> 32
properties include the entire working interest in 163 producing wells, 43 miles
of gas gathering lines and drilling locations.
In 1997, North Coast acquired additional interests in its drilling programs by
extending an offer to the partners in certain of these drilling programs. Recent
drilling programs give each investor the ability to present his interest to
North Coast to be purchased by North Coast at a predetermined calculated price.
In an effort to provide liquidity to investors in drilling programs which did
not include this provision in their partnership agreements, North Coast has
continued to extend offers to some of its investors in its older drilling
programs. Typically, North Coast will not extend an offer to those drilling
programs that have been in existence for less than three years. North Coast
acquired interests in several of its drilling programs in December 1997 for
approximately $136,000. North Coast purchased interests in its drilling programs
in fiscal 1999 for approximately $435,000.
In 1998, North Coast acquired Kelt, headquartered in Cambridge, Ohio. The Kelt
acquisition was made pursuant to a purchase and sale agreement. The purchase
price for the acquired assets was approximately $16.0 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.
North Coast continues to review potential acquisitions of oil and gas
properties, but has no commitment with respect to any material acquisition.
DRILLING PROGRAMS
Since North Coast's inception in 1981, North Coast has sponsored 49 drilling
programs to engage in oil and gas drilling and development operations. Public
drilling programs accounted for 7 of these programs, while 42 were sold through
private placements. As a result of an exchange offer, 21 of the 22 partnerships
were dissolved. North Coast currently manages 28 drilling programs.
Each drilling program has been conducted as a separate limited partnership with
North Coast serving as managing general partner of each. To maintain the
marketability of its drilling programs, North Coast continually reviews program
structure and performance and makes modifications from program to program, as it
deems appropriate. These modifications have included changes to the compensation
arrangements between North Coast and drilling programs, including charges for
its drilling and administrative services, and changes in North Coast's interest
in drilling programs.
North Coast acts as operator and general contractor for drilling and production
operations, undertaking to drill and complete drilling program wells and to
serve as operator for producing wells for producing well operations. In drilling
programs, typically the entire working interest in the leasehold is acquired by
the program, although only the minimum required acreage for a well is assigned
by North Coast to each drilling program.
As managing general partner, North Coast is subject to full liability for the
obligations of drilling programs although it is indemnified by each program to
the extent of the assets of drilling programs. The partnership interests in
drilling programs constitute securities and North Coast is subject to potential
liability for failure to comply with applicable federal and state securities
laws and regulations. North Coast offers partnership interests in its drilling
programs to investors in reliance on the exemption from registration afforded by
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<PAGE> 33
Regulation D under the Securities Act of 1933 and exemptions from registration
requirements under state securities laws. If North Coast were to fail to qualify
for these exemptions as a result of inadequate disclosure or changes in
registration requirements, North Coast may be precluded from offering
partnership interests in the future.
Typically, each drilling program is structured as a "functional allocation"
program whereby the non-industry investors contribute cash in an aggregate
amount equal to the intangible drilling and development costs to be incurred for
drilling program wells. North Coast contributes the drill sites to each drilling
program and agrees to contribute all tangible equipment necessary to drill,
complete and produce each well, as well as organizational and syndication costs
of each drilling program. The allocation of partnership revenues in each
drilling program may vary depending upon the structure chosen by North Coast,
with North Coast's percentage interest ranging from 20% to 40%.
Interests in drilling programs are sold to investors through securities dealers
registered with the NASD. In each program, NCE Securities, Inc. acts as
placement agent and enters into selling agreements with a number of
broker-dealers to assist it in selling the interests.
Drilling programs raised $3.5 million during fiscal 1999, $2.7 million during
fiscal 1998 and $3.0 million during fiscal 1997. North Coast intends to continue
its efforts to market its drilling programs and increase the number of wells
drilled and operated. If these efforts are unsuccessful, North Coast would seek
alternatives including joint ventures with industry partners and the financing
of drilling activity through internal cash flow and other financing
alternatives.
DRILLING SERVICES
North Coast enters into turnkey drilling contracts with drilling programs to
drill wells. From time to time, North Coast also performs a limited amount of
drilling and other services for unaffiliated third parties. Pursuant to these
drilling contracts, North Coast is responsible for the drilling and development
of wells. North Coast acquired a drilling rig in its acquisition of Kelt and has
drilled several corporately owned wells. However, North Coast intends to
subcontract with third parties for the performance of a substantial portion of
the operations required to drill, complete and equip these wells for production.
Although North Coast manages and supervises all necessary drilling and related
service and equipment operations on these wells, there are a number of third
party services to obtain, including contract drilling, fracturing, logging and
pipeline construction which are performed by subcontractors who specialize in
those operations.
Since North Coast contracts with drilling programs on a turnkey basis, North
Coast is responsible for drilling and completing the wells, regardless of the
actual cost. Thus, North Coast is subject to the risk that costs incurred in the
actual drilling and development operations could increase beyond the contract
price, thereby rendering its drilling contracts less profitable or unprofitable.
Moreover, difficulties encountered in drilling and completion operations can
substantially increase costs without recourse for North Coast. North Coast
continually monitors the cost incurred in drilling, completion and production
operations and reviews its turnkey contract prices for each drilling program in
order to reduce the risk of unprofitable drilling operations. These turnkey
drilling prices are subject to change based on competition, the return sought by
drilling program investors, North Coast's revenue and profit considerations and
other industry conditions.
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OIL FIELD SERVICE OPERATIONS
As of March 31, 1999, the Company operated 1,574 wells, all of which were
located in Ohio and Pennsylvania. As the operator of producing wells, North
Coast is responsible for the maintenance and verification of all production
records, contracting for oil and gas sales, distribution of production proceeds
and information, and compliance with various state and federal regulations.
Generally, North Coast provides the routine production operations for producing
wells and is paid for such services on a monthly per well basis. North Coast
also subcontracts some of its oil field operations.
North Coast receives a monthly operating fee for each producing well it operates
and is reimbursed for most third party costs associated with operations and
production of the wells. Drilling programs each pay North Coast their specified
operating fee based upon the investors' aggregate interest in drilling program
wells, exclusive of North Coast's ownership interest.
GAS GATHERING ACTIVITIES
In connection with the drilling and development of the wells which it operates,
North Coast has constructed and owns natural gas gathering pipelines in various
counties throughout eastern Ohio and western Pennsylvania. These pipelines carry
natural gas from the wellhead to the gas transmission systems of various
utilities for sale to such utilities, to natural gas brokers purchasing gas for
resale to others or to industrial purchasers pursuant to self-help gas purchase
arrangements. These systems gathered gas from 1,251 wells as of March 31, 1999.
Since early calendar 1992, North Coast has increased its construction of new
pipelines and the establishment of compressor facilities in order to expand the
number of purchasers available to North Coast.
For such gas gathering services, North Coast collects certain allowances from
public utilities, end-users or other natural gas purchasers, including natural
gas brokers. These gathering fees or transportation allowances averaged
approximately $.20 per Mcf of natural gas at March 31, 1999.
GAS AND OIL RESERVES
Proved Reserves. The following table summarizes estimates of North Coast's
proved reserves, as prepared by North Coast.
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
GAS OIL GAS OIL GAS OIL
(MCF) (BBLS) (MCF) (BBLS) (MCF) (BBLS)
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Proved developed
reserves............... 41,214,000 322,700 15,087,000 126,700 14,472,000 120,200
Proved undeveloped
reserves............... 11,307,000 102,500 2,715,000 9,000 2,487,000 --
---------- ------- ---------- ------- ---------- -------
Total reserves........... 52,521,000 425,200 17,802,000 135,700 16,959,000 120,200
========== ======= ========== ======= ========== =======
</TABLE>
Reservoir engineering is a subjective process of estimating underground
accumulations of gas and oil that cannot be measured in an exact way. The
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. As a result,
estimates made by different engineers often vary. In addition, results of
drilling, testing and production subsequent to the date of an estimate may
justify revision
33
<PAGE> 35
of such estimates, and such revisions may be material. Accordingly, reserve
estimates are generally different from the quantities of gas and oil that are
ultimately recovered.
Estimated Future Net Revenues. The following table summarizes, as of March 31,
1999, the estimated future net revenues attributable to the properties of North
Coast after deducting future capital costs, production and ad valorem taxes and
operating expenses, but before consideration of federal income taxes. The future
net revenues have been discounted at an annual rate of 10% to determine their
"present value." The present value is shown to indicate the effect of time on
the value of the revenue stream and should not be construed as being the fair
market value of the properties. Estimates have been made in accordance with
current Commission guidelines concerning the use of constant oil and gas prices
and operating costs in reserve evaluations.
<TABLE>
<CAPTION>
ESTIMATED FUTURE NET REVENUES (BEFORE INCOME TAXES)
(in thousands)
TOTAL
TOTAL PROVED
PROVED DEVELOPED
RESERVES RESERVES
YEAR ENDING MARCH 31, ------------ ------------
<S> <C> <C>
2000................................................. $ 120 $ 5,715
2001................................................. 2,322 5,112
2002................................................. 7,857 4,534
Thereafter........................................... 73,551 53,882
------- -------
Total........................................ $83,850 $69,243
======= =======
Discounted Present Value............................... $35,856 $32,441
======= =======
</TABLE>
DRILLING ACTIVITY
The following table shows the results of drilling activities on North Coast's
properties. You should not consider this information and the results of prior
drilling activities as necessarily indicative of future performance, nor should
you assume that there is necessarily any correlation between the number of
productive wells drilled and the oil and gas reserves generated by those wells.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Development Wells
Productive
Gross............................................... 37 16 20
Net................................................. 20.20 4.50 3.88
Dry
Gross............................................... 0 1 0
Net................................................. 0 .22 0
Exploratory Wells
Productive
Gross............................................... 0 0 0
Net................................................. 0 0 0
Dry
Gross............................................... 0 0 0
Net................................................. 0 0 0
</TABLE>
34
<PAGE> 36
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Total Wells
Productive
Gross............................................... 37 16 20
Net................................................. 20.20 4.50 3.88
Dry
Gross............................................... 0 1 0
Net................................................. 0 .22 0
</TABLE>
- ---------------
(1) For fiscal 1999, North Coast drilled 7 gross wells, or 4.6 net wells, which
are in various stages of completion and have been included in the above
drilling activity schedule as productive wells.
PRODUCING WELLS
The following table shows the number of gross and net productive oil and gas
wells in which North Coast owned an interest directly or through drilling
programs as of March 31, 1999. Wells are classified as gas or oil according to
their predominant product stream.
<TABLE>
<CAPTION>
TYPE OF GROSS AVERAGE WORKING
PRODUCTIVE WELL WELLS(1) NET WELLS INTEREST
--------------- -------- --------- ---------------
<S> <C> <C> <C>
Natural Gas...................... 1,685 1,268.11 75%
Oil.............................. 26 9.76 38%
</TABLE>
- ---------------
(1) Gross producing wells include 92 wells at March 31, 1999 in which North
Coast owned a royalty interest.
Substantially all of North Coast's oil and gas properties are working interests
under industry-standard natural gas and oil leases, rather than mineral
ownership or fee title.
LEASEHOLD ACREAGE
The following table shows the developed and undeveloped acreage of North Coast,
on both a gross and net basis, as of March 31, 1999:
<TABLE>
<CAPTION>
GROSS ACRES NET ACRES
----------- ---------
<S> <C> <C>
Developed Acreage.............................. 77,900 57,800
Undeveloped Acreage............................ 3,300 3,300
</TABLE>
35
<PAGE> 37
PRODUCTION SUMMARY
The annual net production of North Coast's interests in gas and oil wells for
the past three fiscal years was as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Natural Gas (Mcf)
Total Production.......................... 2,688,000 1,116,000 1,153,000
Average Daily Production.................. 7,364 3,058 3,159
Crude Oil (Bbls)
Total Production.......................... 28,100 13,900 16,200
Average Daily Production.................. 77 38 44
</TABLE>
The price of gas and oil may vary from region to region. The average weighted
prices and the lifting costs per equivalent Mcf for the past three years were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Natural Gas Average Weighted Price per Mcf.......... $ 2.57 $ 2.50 $ 2.43
Crude Oil Average Weighted Price per Bbl............ $11.39 $16.18 $20.65
Average Lifting Cost per Mcf........................ .91 .70 .62
</TABLE>
MARKETS
The ability of North Coast to market oil and gas often depends on factors beyond
its control. The potential effects of governmental regulation and market
factors, including alternative domestic and imported energy sources, available
pipeline capacity, and general market conditions are not entirely predictable.
Natural Gas. Natural gas is generally sold pursuant to individually negotiated
gas purchase contracts, which vary in length from spot market sales of a single
day to term agreements that may extend several years. North Coast customers who
purchase natural gas include marketing affiliates of the major pipeline
companies, natural gas marketing companies, and a variety of commercial and
public authorities, industrial, and institutional end-users who ultimately
consume the gas. Gas purchase contracts define the terms and conditions unique
to each of these sales. The price received for natural gas sold on the spot
market may vary daily, reflecting changing market conditions.
The deliverability and price of natural gas are subject to both governmental
regulation and supply and demand forces. During the past several years, regional
surpluses and shortages of natural gas have occurred resulting in wide
fluctuations in prices achieved.
The lengths of the contracts vary widely. Additionally, several of North Coast's
contracts provide for monthly pricing which are derived from published price
indexes. The Columbia Transmission and Consolidated Natural Gas Index prices,
which create a basis for spot sales prices in the Mid-Atlantic and northeastern
United States, ranged from $1.73 to $2.50 per Mcf during fiscal 1999. As of
March 31, 1999, approximately one-half of North Coast's natural gas contracts
are fixed price contracts with industrial end-users. The prices received from
these contracts range between $1.97 and $4.43 per Mcf. The remainder of North
Coast's natural gas contracts are with utilities and marketers. Approximately
60% of the wells operated by North Coast, which produce gas to fulfill the
contractual obligations to
36
<PAGE> 38
utilities and marketers during the summer months, contain fixed prices ranging
from $1.75 to $2.972 per Mcf. In addition, 40% of these wells contain market
sensitive provisions during the winter months. The range of Appalachian Basin
unit pricing during the winter of 1998/99 was from $1.73 to $2.25 per Mcf. For
the fiscal year ended March 31, 1999, North Coast received an average price of
$2.57 per Mcf. During fiscal 1999, Interstate Gas Supply, Inc. purchased 52% of
the gas produced by North Coast, which comprised 26% of North Coast's revenues
for the year.
Due to the seasonal supply and demand market pressures, prices paid by
purchasers will continue to fluctuate for the next several years. North Coast
has pursued a strategy of varying the length and pricing provisions of its gas
purchase contracts so as to maintain flexibility to react to those fluctuating
prices.
During the past several years, an overabundance of natural gas supplies and the
promulgation of state and federal regulations pertaining to the sale,
transportation, and marketing of natural gas resulted in increasing competition
and declining prices. It is likely that supply and demand factors will continue
to be the driving force in the changing marketplace.
Crude Oil. Oil produced from North Coast's properties is generally sold at the
prevailing field price to one or more of a number of unaffiliated purchasers in
the area. Generally, purchase contracts for the sale of oil are cancelable on 30
days notice. The price paid by these purchasers is generally an established, or
"posted," price that is offered to all producers. North Coast received an
average price of $11.39 per barrel for its oil during fiscal 1999. However,
during the last several years prices paid for crude oil have fluctuated
substantially. The price posted for purchase contracts for the sale of oil at
June 10, 1999 was $15.00. Future oil prices are difficult to predict due to the
impact of worldwide economic trends, coupled with supply and demand variables,
and such non-economic factors as the impact of political considerations on OPEC
pricing policies and the possibility of supply interruptions. Oil production
comprised approximately 6% of North Coast's total oil and gas production
calculated on an equivalent Mcf basis for fiscal 1999. Therefore, an increase or
decrease in oil prices has a minimal effect on revenues when compared to the
effect on the price of natural gas. To the extent that the prices which North
Coast receives for its crude oil, decline from current levels, revenues from oil
production will be reduced accordingly.
COMPETITION
The gas and oil industry is highly competitive in all phases. North Coast
encounters strong competition from other independent oil companies in acquiring
economically desirable properties as well as in marketing production therefrom
and obtaining external financing. Many of North Coast's competitors may have
financial resources, personnel and facilities substantially greater than those
of North Coast.
REGULATION
Exploration and Production. The exploration, production and sale of natural gas
and oil are subject to various types of local, state and federal laws and
regulations. These laws and regulations govern a wide range of matters,
including the drilling and spacing of wells, allowable rates of production,
restoration of surface areas, plugging and abandonment of wells and requirements
for the operation of wells. These regulations may adversely affect the rate at
which North Coast's wells produce gas and oil.
37
<PAGE> 39
In addition, legislation and new regulations concerning gas and oil exploration
and production operations are constantly being reviewed and proposed. Most of
the states in which North Coast owns and operates properties have laws and
regulations governing several of the matters mentioned above. Compliance with
the laws and regulations affecting the gas and oil industry generally increases
North Coast's cost of doing business and consequently affects North Coast's
profitability.
Environmental Matters. The discharge of oil, gas or other pollutants into the
air, soil or water may give rise to liabilities to the government and third
parties and may require North Coast to incur costs to remedy discharges. Natural
gas, oil or other pollutants, including salt water brine, may be discharged in
many ways, including from a well or drilling equipment at a drill site, leakage
from pipelines or other gathering and transportation facilities, leakage from
storage tanks and sudden discharges from damage or explosion at natural gas
facilities or gas and oil wells. Discharged hydrocarbons may migrate through
soil to water supplies or adjoining property, giving rise to additional
liabilities.
A variety of federal and state laws and regulations govern the environmental
aspects of natural gas and oil production, transportation and processing and
may, in addition to other laws, impose liability in the event of discharges,
whether or not accidental, failure to notify the proper authorities of a
discharge, and other noncompliance with those laws. Compliance with such laws
and regulations may increase the cost of gas and oil exploration, development
and production, although the Company does not currently anticipate that
compliance will have a material adverse effect on capital expenditures or
earnings of North Coast.
North Coast does not believe that its environmental risks are materially
different from those of comparable companies in the oil and gas industry. North
Coast believes its present activities substantially comply, in all material
respects, with existing environmental laws and regulations. Nevertheless, North
Coast cannot assure you that environmental laws will not result in a curtailment
of production or material increase in the cost of production, development or
exploration or otherwise adversely affect North Coast's financial condition and
results of operations. Although North Coast maintains liability insurance
coverage for certain liabilities from pollution, environmental risks generally
are not fully insurable. The amount of such coverage is currently $1,000,000 and
is provided on a "claims made" basis.
Marketing and Transportation. The interstate transportation and sale for resale
of natural gas is regulated by the Federal Energy Regulatory Commission under
the Natural Gas Act of 1938. The sale and transportation of natural gas also is
subject to regulation by various state agencies. The Natural Gas Wellhead
Decontrol Act of 1989 eliminated all gas price regulation effective January 1,
1993. In addition, FERC recently has proposed several rules and orders
concerning transportation and marketing of natural gas. The impact of these
rules and other regulatory developments on North Coast cannot be predicted.
In 1992, FERC finalized Order 636, and also has promulgated regulations
pertaining to the restructuring of the interstate transportation of natural gas.
Pipelines serving this function have since been required to "unbundle" the
various components of their service offerings, which include gathering,
transportation, storage, and balancing services. In their current capacity,
pipeline companies must provide their customers with only the specific service
desired, on a non-discriminatory basis. Although North Coast is not an
interstate pipeline, North Coast believes the changes brought about by Order 636
have increased competition in the marketplace, resulting in greater market
volatility.
38
<PAGE> 40
Various rules, regulations and orders, as well as statutory provisions may
affect the price of natural gas production and the transportation and marketing
of natural gas.
OPERATING HAZARDS AND UNINSURED RISKS
North Coast's gas and oil operations are subject to all operating hazards and
risks normally incident to drilling for and producing gas and oil, such as
encountering unusual formations and pressures, blow-outs, environmental
pollution, and personal injury. North Coast will maintain such insurance
coverage as it believes to be appropriate, taking into account the size of North
Coast and its proposed operations. North Coast currently does not maintain
insurance coverage for physical loss or damage to equipment located on the wells
or for selected properties, such as crude oil stored in tanks. North Coast's
insurance policies also have standard exclusions. Losses can occur from an
uninsurable risk or in amounts more than existing insurance coverage. The
occurrence of an event which is not insured or not fully insured could have an
adverse impact on North Coast's revenues and earnings.
EMPLOYEES
At March 31, 1999, North Coast had 81 employees, including 48 field employees.
None of these employees is represented by a union and North Coast believes that
it maintains good relations with its employees.
FACILITIES
North Coast owns a 12,000 square foot building, its corporate headquarters, in
Twinsburg, Ohio. The office facility is in a centralized location, which during
fiscal 1997 allowed North Coast to relocate operations and personnel from its
Cleveland and Youngstown offices. The North Coast's Youngstown facility is used
for field operations. As part of the Kelt acquisition, North Coast held a six
month lease on Kelt's facility in Cambridge, Ohio, with an option to purchase
the property for $27,187. North Coast recently exercised this option. The
facility is used in North Coast's field operations.
LEGAL PROCEEDINGS
North Coast is involved from time to time in various legal and administrative
proceedings and threatened legal and administrative proceedings incidental to
the ordinary course of its business. North Coast is not now involved in any
litigation, individually or in the aggregate, which could have a material
adverse effect on North Coast's business, financial condition, results of
operations, or cash flows.
39
<PAGE> 41
MANAGEMENT
The following table shows the names and ages of each of the current directors
and executive officers of North Coast and the principal offices and positions
with North Coast held by each such person. The officers of North Coast are
elected annually by the board of directors. Subject to rights, if any, under
employment contracts, each officer serves a term of one year and thereafter
until his successor is elected and qualified or until his death, resignation or
removal.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Garry Regan (1) 49 President and Director
Leo J. M. J. Blomen (1) 44 Director
Dominic A. Visconsi (1) 74 Director
Carel W. J. Kok (1) 32 Director
S. F. E. Bas Rosenbaum (2) 50 Director
C. Rand Michaels (2) 62 Director
John H. Pinkerton (2) 45 Director
Saul Siegel (3) 69 Chief Executive Officer and Director
Jos J. M. Smits (3) 50 Director
Ralph L. Bradley (3) 58 Director
Thomas A. Hill 41 Secretary and General Counsel
Timothy Wagers 39 Chief Financial Officer and Treasurer
Omer Yonel 35 Chief Operating Officer
</TABLE>
- ---------------
(1) Term as director expires in 2001.
(2) Term as director expires in 1999.
(3) Term as director expires in 2000.
Garry Regan is President and a director. Mr. Regan served as an executive
officer and a director of North Coast's predecessor since 1981 and has been
President and a director of North Coast since August 1988. He received his B.S.
from The Ohio State University and his Masters from Indiana University. Mr.
Regan is a member of the Independent Petroleum Association of America. Mr. Regan
also serves as Director and President of NCE, a wholly owned subsidiary of North
Coast and a registered broker-dealer.
Leo J.M.J. Blomen is a director. Mr. Blomen was appointed to the board of
directors in September 1997. He has been Director of the International Division
of NUON Energy Group since March 1997. Since July 1996, Mr. Blomen has been
Managing Director of NUON Projects. Mr. Blomen is also the founder and, from
January 1993 to July 1996, the Managing Director of Blomenco b.v. Mr. Blomen is
also on the Boards of DATTEL a.s, a cable company in Prague; Calortex, Ltd., a
gas company in the United Kingdom; and the Sino-foreign company Shantou Da Nan
Windpower Development Company, Ltd., a joint venture which is currently
constructing the largest windfarm in China. Mr. Blomen holds a degree in
Chemical Engineering and a Ph.D. in Medicine.
Dominic A. Visconsi is a director. Mr. Visconsi was appointed to the board of
directors in January 1999. Mr. Visconsi is the senior member of Cleveland-based,
and nationally recognized, Visconsi Companies, Ltd., which acquires and develops
commercial properties, and now manages more than two million square feet of
retail space. In 1956, he and Richard E. Jacobs formed a partnership, Jacobs,
Visconsi & Jacobs Company, that would eventually grow to become the nation's
fifth-largest developer of shopping malls, The Richard E. Jacobs
40
<PAGE> 42
Group. A recognized community leader, Mr. Visconsi is very involved in many
philanthropic, charitable and social organizations primarily in the greater
Cleveland area.
Carel W. J. Kok is a director. Mr. Kok has been Manager of Business Development
with the International Division of the NUON Energy Group since October 1996.
From 1990 to 1995 he was with the Royal Dutch Shell Group working in a variety
of downstream commercial, trading and new business development functions in East
Asia, the Middle East, and Western and Eastern Europe. Mr. Kok was co-founder of
Lone Star Europe Holding, a U.S.-Dutch joint venture with the American chain
Lone Star Steakhouse & Saloon. Mr. Kok is also on the Boards of Calortex Ltd., a
retail gas distribution company in the United Kingdom serving nearly 500,000
customers and is Chairman of the Board of the Sino-foreign joint venture company
Shantou Dan Nan Windpower Development Company, Ltd., a joint venture now
operating the largest windfarm in China. Mr. Kok holds a B.A. from Princeton
University and an M.B.A. from the Rotterdam School of Management at Erasmus
University.
S. F. E. Rosenbaum is a director. Mr. Rosenbaum has been BU-manager Olefins for
Tolson Holland BV. He is responsible for global coverage, turnover and results.
From 1990 until 1993 Mr. Rosenbaum was Managing Director Europe/Partner for JLM
Industries, where he founded branches in France and the Netherlands. He was
responsible for all trading activities in NEW on hydrocarbons and other
petrochemicals. Mr. Rosenbaum received his B.A. from HEAO-CE in Holland.
C. Rand Michaels is a director. Mr. Michaels was elected as a director of North
Coast in 1996. Mr. Michaels retired from the office of Vice Chairman of Range in
1998 and is a Director of Range. He served as President and Chief Executive
Officer of Lomak from 1976 through 1988 and Chairman of the Board from 1984
through 1988, when he became Vice Chairman of Lomak. Mr. Michaels is also a
director of American Business Computers Corporation of Akron, Ohio, a public
company serving the beverage dispensing and fast foods industries.
John H. Pinkerton is a director. Mr. Pinkerton was appointed to the board of
directors of North Coast in 1996. Mr. Pinkerton is President, Chief Executive
Officer and a Director of Range and joined Lomak in 1988. He was appointed
President of Lomak in 1990 and Chief Executive Officer of Lomak in 1992.
Previously, Mr. Pinkerton was Senior Vice President-Acquisitions of SOCO. Prior
to joining SOCO in 1980, Mr. Pinkerton was with Arthur Andersen & Co. Mr.
Pinkerton received his B.A. from Texas Christian University and his M.B.A. from
the University of Texas. Mr. Pinkerton will serve out the unexpired term of
Steven L. Grose, a Vice President of Range Resources Corporation, who resigned
his position as director in 1998.
Saul Siegel is Chief Executive Officer and a director. Mr. Siegel was appointed
as a director and Chief Operating Officer of North Coast in September 1997 and
in May 1999 was named Chief Executive Officer. Since July 1996, Mr. Siegel has
been President and owner of Clark Engineering Services, Inc., a Buchanan,
Michigan testing facility for off-road vehicles. In addition, for more than five
years Mr. Siegel has been President of Metalworking International Corporation, a
Cleveland, Ohio company that purchases manufacturing plants and new and used
metalworking equipment. Since May 1996, Mr. Siegel has also been Treasurer of
Precision Rebuilders, Inc., a New Orleans, Louisiana company which is engaged in
the remanufacturing of oil and gas valves. Mr. Siegel devotes substantially all
of his time to the operations of North Coast.
41
<PAGE> 43
Omer Yonel was appointed Executive Vice President-Corporate Development in
January 1999 and in May 1999 promoted to Chief Operating Officer. Mr. Yonel has
ten years' experience in project engineering management in the European oil and
gas industry. Prior to joining NUON in January 1998, he was a project manager
for the construction of co-generation plants at Schelde Engineering &
Contractors bv. Previous to his service with Schelde, Mr. Yonel held various
project engineering and management positions at ABB Lummus, an Asea Brown Boveri
subsidiary that provides engineering services to chemical, petrochemical,
petroleum refining, oil and gas and other industries.
Jos J. M. Smits is a director. Mr. Smits was appointed to the board of directors
in September 1997. Mr. Smits has been Manager-Purchasing and Trade for NUON
Energy Group since July 1994. From October 1992 until July 1994, Mr. Smits was
Managing Director of Fels B.V., a Dutch manufacturer of building materials. Mr.
Smits holds a degree in Economics from the University of Amsterdam.
Ralph L. Bradley is a director. Mr. Bradley was elected to the board of
directors on December 5, 1997. Mr. Bradley is currently President of Bradley
Energy International, which provides energy solutions for the world market, and
Bradley Energy USA, which provides individuals with the opportunity to own
various aspects of natural gas production. Prior to forming these entities, Mr.
Bradley was chief executive officer of The Eastern Group, Inc., and its
predecessor, Eastern States Exploration Company, Inc.
Thomas A. Hill is Secretary and General Counsel. Mr. Hill was elected Secretary
and General Counsel of North Coast in August 1987. Mr. Hill joined Capital Oil &
Gas, Inc. in 1984, prior to its acquisition by North Coast. He graduated from
Hiram College with a B.A. in History and Political Science and from George
Washington University National Law Center with a J.D. Mr. Hill is a member of
the Mahoning County Bar Association and Eastern Mineral Law Foundation.
Timothy Wagers is Treasurer and Chief Financial Officer. Mr. Wagers joined North
Coast in 1983 and currently is Treasurer and Chief Financial Officer. Mr. Wagers
is also responsible for overseeing the accounting for partnership distributions,
oil and gas production and tax reporting, and monitoring well costs. He received
a B.S. in Accounting from the University of Akron. From 1982 through 1983, Mr.
Wagers was employed by Hausser + Taylor, independent certified public
accountants, as a staff accountant auditing various entities including oil and
gas partnerships. Mr. Wagers is a certified public accountant, a member of the
Ohio Society of Certified Public Accountants, the Ohio Petroleum Accountants
Society, and the American Institute of Certified Public Accountants.
TERMS OF DIRECTORS
The board of directors currently consists of eleven directors with one vacancy.
The board of directors is divided into three classes. With the approval of an
amendment to the certificate of incorporation at its annual meeting of
stockholders on December 16, 1998, the first two classes now consist of four
directors each and the third class consists of three directors. One class of
directors is elected annually by North Coast's stockholders to serve a
three-year term.
42
<PAGE> 44
COMMITTEES OF THE BOARD OF DIRECTORS
The audit committee, of which Messrs. Blomen, Michaels, Pinkerton, Bradley, Kok
and Smits are currently members, oversees the accounting functions of North
Coast, including matters related to the appointment and activities of North
Coast's auditors.
The compensation and stock option committee, of which Messrs. Blomen, Visconsi
and Smits are members, reviews and makes recommendations concerning the salaries
of North Coast's executive officers, reviews and makes recommendations
concerning North Coast's stock option plan and stock bonus plan and administers
North Coast's profit sharing plan.
The executive committee, of which Messrs. Blomen, Siegel, Kok, Rosenbaum and
Regan are currently members, exercises the powers and authority of the full
board of directors during the periods between meetings of the board of
directors.
EXECUTIVE COMPENSATION
The following tables shows the annual and long-term compensation for North
Coast's former Chief Executive Officer and the two other executives earning in
excess of $100,000 for fiscal 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NUMBER OF
COMPENSATION
ANNUAL COMPENSATION ------------------------------
-------------------------------------- NUMBER OF
OTHER SECURITIES ALL OTHER
ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS (1)
--------------------------- ---- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Charles M. Lombardy, Jr. 1999 178,050 $0 N/A -- $11,654
Former Chief 1998 173,740 0 N/A -- 9,576
Executive Officer 1997 166,350 0 N/A -- 7,148
Garry Regan 1999 178,050 0 N/A -- 10,694
President and Director 1998 173,740 0 N/A -- 8,616
1997 166,350 0 N/A -- 6,188
Saul Siegel 1999 190,223 0 N/A -- 4,451
Chief Executive Officer 1998 102,733 0 N/A -- 0
and Director
</TABLE>
- ---------------
No named executive officer received personal benefits or perquisites during
fiscal year 1999 in excess of the lesser of $50,000 or 10% of his aggregate
salary and bonus.
(1) The amounts shown in the table include, for Messrs. Lombardy and Regan,
$2,810 and $1,850, respectively, for fiscal years 1999, 1998, and 1997 in
life insurance premiums paid by North Coast under the terms of employment
agreements between North Coast and such persons. See
"Management -- Employment Agreements." With respect to all of the named
executive officers, the amounts shown in the table reflect the following
contributions under North Coast's profit sharing plan and matching funds
through the 401(k) plan: Mr. Lombardy, $8,844, $6,766 and $4,338 and Mr.
Regan, $8,844, $6,766 and $4,338 for fiscal years 1999, 1998 and 1997,
respectively. Mr. Siegel was not eligible under the terms of the plan for
every year presented except 1999, $4,451.
43
<PAGE> 45
STOCK OPTION PLAN
North Coast has a stock option plan to provide incentives to stimulate interest
in the development and financial success of North Coast. The option plan
provides for stock option grants to purchase common stock at an option price
determined by the compensation committee. The compensation committee determines
the expiration date, but no option is exercisable for a period of more than 10
years. The aggregate fair market value of the common stock exercisable for the
first time during any calendar year shall not exceed $100,000. Options granted
under the option plan terminate if the employee leaves North Coast. Currently,
North Coast has issued options representing 11,420 shares of common stock with
the ability to issue options representing up to 75,910 shares of common stock.
The option plan expires on August 17, 1999. North Coast, from time to time, may
issue additional options outside the plan. North Coast has options outstanding
representing 23,500 shares of common stock that were not issued under the option
plan.
OPTION GRANTS IN FISCAL 1998
No options were granted to the named executive officers in fiscal 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END VALUES
The following table summarizes options exercised during fiscal 1999 and presents
the value of unexercised options held by the named executive officers at fiscal
year end:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT FISCAL YEAR END AT FISCAL YEAR END(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles M. Lombardy, Jr.... -- $0 0 0 $0 $0
Garry Regan................ -- 0 0 0 0 0
Saul Siegel................ -- 0 26,800 0 0 0
</TABLE>
- ---------------
(1) Based upon the closing bid price of a share of common stock as reported on
the Nasdaq system on March 31, 1999. None of the options were in-the-money
at March 31, 1999.
EMPLOYMENT CONTRACTS
Messrs. Lombardy and Regan each have an employment agreement running through May
3, 2001, unless terminated earlier under the terms of these agreements. These
agreements provide for current base annual compensation of $178,623 to each of
Messrs. Lombardy and Regan, with increases for cost of living based upon the
Consumer Price Index. Additional bonuses may be awarded from time to time by the
board of directors. Each agreement provides that for a period of two years from
the date of the termination of the executive's employment the executive will
not, directly or indirectly, engage in any business competitive with that of
North Coast or otherwise interfere with North Coast's business.
The board of directors approved the award of an employment contract with Mr.
Siegel at its meeting on March 16, 1998, with the terms and conditions to be
substantially the same as those contained in the employment agreements with
Messrs. Lombardy and Regan. The agreement was to commence May 3, 1998, for a
three-year period, but was referred to the
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<PAGE> 46
executive committee for review and final approval. Mr. Siegel is currently
receiving a base annual compensation of $182,230 which also includes payment
instead of health and life insurance benefits. The executive committee has yet
to approve the contract, but Mr. Siegel is receiving a salary commensurate with
that provided for in the contract.
Each of the employment agreements contains provisions addressing a possible
change in control of North Coast. The purchase of common stock by NUON was
exempted by a separate agreement. The change in control provisions provide
conditions which continue to exist. The change in control provisions require the
payment of benefits to these executive officers upon the termination of their
employment, other than for good cause, after the occurrence of a change in
control of North Coast. A "change in control of North Coast" includes a change
in the ownership of North Coast's securities which would be required to be
reported as a change in control in a proxy statement filed under the Exchange
Act, North Coast's ceasing to have a class of equity securities registered under
Section 12 of the Exchange Act, or the acquisition by any person or entity of
50% or more of the outstanding shares of common stock or its equivalent, through
the acquisition of a combination of preferred and common stock, in voting power
of North Coast's common stock.
Under the change in control provisions, any of these three executive officers
who remain in the employ of North Coast following the date of the occurrence of
a change in control of North Coast and whose employment is subsequently
terminated other than for good cause would be entitled to receive a lump sum
payment from North Coast, regardless of whether the executive officer continues
in the employ of North Coast. After the occurrence of a change in control of
North Coast, "termination" includes relocation of the principal place at which
the executive is to perform his duties to a location outside the Cleveland, Ohio
metropolitan area, a substantial reduction in the benefits provided to the
executive, a substantial reduction in the executive's responsibilities or
functions or a substantial adverse change in the executive's working conditions.
The change in control provisions provide for the payment of the change in
control payment in the event of a termination of the executive's employment
after any change in control of North Coast, regardless of whether such change in
control is approved by the board of directors and/or stockholders of North
Coast.
Under the change in control provisions, in the event of a termination of
employment after a change in control of North Coast, other than for good cause,
each of the three executive officers would be entitled to change in control
payments in the amount equal either to 2.99 times the average annual salary,
bonus, and incentive compensation amounts paid during the three-year period
immediately preceding the termination after a change in control of North Coast,
payable in 36 equal monthly installments, or a lump sum equal to the aggregate
of the monthly amounts payable discounted to present value at a discount rate of
7% per annum.
The change in control provisions will make more difficult or may discourage a
proxy contest, the assumption of control of North Coast by a substantial
shareholder or shareholder group, or the removal of incumbent management.
Additionally, the change in control provisions may have the effect of
discouraging a third party from making a tender offer or otherwise attempting to
obtain control of North Coast, even though such an attempt might be beneficial
to North Coast and its stockholders. Accordingly, stockholders of North Coast
may be deprived of certain opportunities to sell their shares of common stock at
temporarily higher market prices often associated with actual or rumored
takeover attempts.
On April 30, 1999, North Coast's chief executive officer resigned and under a
separation agreement is entitled to certain payments in lieu of his existing
employment contract and
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<PAGE> 47
payments for non-compete, a warrant to purchase common stock. In addition, under
certain conditions North Coast could be obligated to purchase the former
executive's stock for $4.375 a share. North Coast would not be obligated to
purchase the former executive's shares if NUON elects to purchase his shares
prior to September 30, 1999 in accordance with the separation agreement.
However, NUON would have the right to reduce its option under the 1997 purchase
and sale agreement to the extent to which it purchases the former executive's
shares. NUON is not obligated to exercise its option to acquire 1,149,426 shares
or to acquire the former chief executive officer's shares. Management believes
that general economic conditions and various sources of available capital,
including current available borrowings under the credit facility, NUON's
exercise of their option shares and funds raised in drilling programs will be
sufficient to fund North Coast's obligations, operations and meet debt service
requirements through fiscal 2000.
DIRECTORS COMPENSATION
During fiscal 1998, the board of directors voted to discontinue the payment of
any director's fees to any board member. However, the board granted of options
to purchase 20,000 shares of common stock at $4.375 per share to Ralph L.
Bradley during the year ending March 31, 1999. These options vest over a
three-year period.
CERTAIN TRANSACTIONS
North Coast believes that the terms of the following transactions were as
favorable to North Coast as could have been obtained from unaffiliated third
parties. All future transactions between North Coast and its affiliates will be
on terms no less favorable to North Coast than those that could be obtained from
unaffiliated parties and all loans to North Coast officers, affiliates and
stockholders will be approved by a majority of disinterested directors, if any.
North Coast currently manages 28 drilling programs, and each drilling program
has been conducted as a separate limited partnership with North Coast serving as
managing general partner of each. North Coast contributes the drill sites to
each drilling program and agrees to contribute all tangible equipment necessary
to drill, complete and produce each well, as well as organizational and
syndication costs of each drilling program. Drilling programs raised $3.5
million during fiscal 1999, $2.7 million during fiscal 1998 and $3.0 million
during fiscal 1997.
Accounts receivable from affiliates consist primarily of receivables from the
partnerships managed by North Coast and are for administrative fees charged to
the partnerships and to reimburse North Coast for amounts paid on behalf of the
partnerships. Significantly all of North Coast's revenues, other than oil and
gas production revenue, are generated from or a result of the organization and
management of oil and gas partnerships sponsored by North Coast. During the year
ended March 31, 1999, North Coast acquired limited partnership interests in oil
and gas drilling programs that it had sponsored at a cost of approximately
$450,000.
In connection with the sale of shares of common stock to NUON, Mr. Siegel
received cash payment of $112,500 and five-year warrants to purchase 26,800
shares of common stock at a price of $4.375 per share. Upon the exercise by NUON
of its right to purchase additional shares of common stock, Mr. Siegel will
receive an additional finder's fee of $37,500 and five year warrants to purchase
an additional 13,400 shares of common stock at a price of
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<PAGE> 48
$4.375 per share. In addition, a company owned by Mr. Siegel repaired two
compressors for North Coast for $51,000.
Effective April 30 Charles M. Lombardy, Jr., the chief executive officer of
North Coast, was paid $370,000 instead of continuing his employment contract by
signing a separation agreement with North Coast. North Coast, also subsequent to
year-end, escrowed approximately $800,000 for the payment of dividend arrearages
associated with the series B preferred stock and the purchase of the former
chief executive officer's common shares, if NUON does not exercise their option
to purchase the shares. If NUON does exercise their option to purchase these
shares, it will directly reduce the amount of common shares NUON would be
required to purchase under their warrant agreement, if exercised.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table shows information with respect to the common stock, series A
preferred stock and series B preferred stock owned on June 15, 1999 by: each
person known by North Coast to own beneficially more than 5% of North Coast's
outstanding common stock and preferred stock at that date; each director of
North Coast; each of the executive officers listed in the Summary Compensation
Table; and all directors and executive officers as a group, and the percentage
of the outstanding shares.
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------------------------------------
SHARES
AMOUNT AND BENEFICIALLY
NATURE OF PERCENT NUMBER OWNED PERCENT
NATURE AND ADDRESS (1) BENEFICIAL OF OF SHARES AFTER OF
OF BENEFICIAL OWNER OWNERSHIP CLASS OFFERED OFFERING CLASS
---------------------- ---------------- ------- --------- ------------ -------
<S> <C> <C> <C> <C> <C>
Charles M. Lombardy, Jr.
(former CEO)................ 181,038 Shares(2)(3) 3.92% 60,000 121,038 2.65%
Garry Regan................... 114,485 Shares 2.51% 0 114,485 2.51%
Saul Siegel................... 86,880 Shares(4) 1.90% 26,800 60,080 1.31%
Leo J. M. J. Blomen........... 0 Shares *% 0 0 *%
Jos J. M. Smits............... 0 Shares *% 0 0 *%
Dominic A. Visconsi........... 37,000 Shares *% 37,000 *%
Carel W. J. Kok............... 0 Shares *% 0 *%
S.F.E. Rosenbaum.............. 0 Shares *% 0 *%
NUON.......................... 3,448,277 Shares(5) 60.43% 3,448,277 0 *%
Ralph L. Bradley.............. 20,000 Shares(6) *% 20,000 0 *%
C. Rand Michaels.............. 1,619 Shares *% 1,619 0 *%
John H. Pinkerton............. 1,693 Shares *% 1,693 0 *%
Range Resources Corporation... 831,975 Shares(7) 18.01% 831,975 0 *%
--------- ---------- ----
All directors and executive
officers as a group
(13 persons) (including Mr.
Lombardy)................... 457,416 Shares(8) 9.90% 110,112 332,603 7.20%
</TABLE>
- ---------------
* Less than one percent
(1) The address of NUON is Utrechtsweg 68, 6812 AH Arnhem, The Netherlands. The
address of Range Resources Corporation is 125 State Route 43, Hartville,
Ohio 44632.
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<PAGE> 49
(2) Includes 60,000 shares of common stock which Mr. Lombardy could acquire upon
the exercise of immediately exercisable stock options or warrants which he
holds.
(3) The share ownership figures for Mr. Lombardy include 13,738 shares of common
stock owned by a trust for which Mr. Lombardy is the trustee and as to which
he disclaims any beneficial interest. Mr. Lombardy resigned from North Coast
on April 30, 1999.
(4) Includes 26,800 shares of common stock which Mr. Siegel could acquire upon
the exercise of immediately exercisable stock options or warrants which he
holds. Does not include 13,400 shares of common stock Mr. Siegel could
acquire through the exercise of a warrant which may be issued if NUON
purchases additional shares of common stock.
(5) Includes 1,149,426 shares of common stock that may be immediately acquired
by NUON upon exercise of an outstanding option for $4.35 per share.
(6) Includes 6,667 shares of common stock which Mr. Bradley could acquire upon
the exercise of stock options or warrants which he holds and will vest in
April, 2000.
(7) Includes 40,000 shares of common stock which may be acquired upon the
exercise of certain warrants to purchase common stock.
(8) Includes 115,505 shares of common stock, which may be acquired by all
directors and executive officers as a group (including Mr. Lombardy) upon
the exercise of immediately exercisable stock options or warrants.
DESCRIPTION OF SECURITIES
North Coast is authorized to issue 60,000,000 shares of common stock, $.01 par
value and 2,000,000 shares of preferred stock, $.01 par value.
COMMON STOCK
Holders of shares of common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders of North Coast. Except as
required by applicable law, holders of shares of common stock do not vote
separately as a class, but vote together with the holders of outstanding shares
of capital stock of all other classes and series. Certain actions require the
affirmative vote of holders of more than a majority of the voting capital stock.
See " -- Certain Anti-Takeover Provisions." There is no cumulative voting for
the election of directors.
Holders of shares of common stock are entitled to receive dividends, if, as, and
when declared by the board of directors out of funds legally available for that
purpose, after payment of dividends required to be paid on outstanding shares of
any series of preferred stock, if any. Upon liquidation of North Coast, holders
of shares of common stock are entitled to share ratably in all assets of North
Coast remaining after payment of liabilities, subject to the prior distribution
rights of any outstanding shares of preferred stock which have a liquidation
preference. Holders of shares of common stock have no conversion, redemption or
preemptive rights. The rights of the holders of common stock are subject to the
rights of the holders of preferred stock.
The common stock is traded on the Nasdaq SmallCap Market under the symbol
"NCEB."
PREFERRED STOCK
North Coast's certificate of incorporation authorizes the issuance of 2,000,000
shares of preferred stock, which may be divided into one or more series of
shares. The board of directors has the authority to issue preferred stock in one
or more series and to fix the rights,
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<PAGE> 50
preferences, privileges, designations and limitations, including the dividend
rights, dividend rate, conversion rights, voting rights, terms of redemption
including sinking fund provisions, redemption price or prices, liquidation
preferences, designations and the authorized number of shares constituting any
series, without any further vote or action by the stockholders. The rights of
any series of preferred stock may, if provided by the board of directors, be
senior to and have preference over the rights of the shares of common stock
and/or shares of other series of preferred stock. The series A preferred stock
and the series B preferred stock constitute series of preferred stock. See
" -- Series A Preferred Stock" and " -- Series B Preferred Stock." No other
shares of the remaining preferred stock, which equal 811,730 authorized shares,
are issued or outstanding.
North Coast has no current plans to issue any shares of other series of
preferred stock. The issuance of additional shares of preferred stock in the
future could adversely affect the rights of the holders of any class of North
Coast's capital stock, including common stock. Also, the issuance of additional
shares of preferred stock could hinder or deter an acquisition of North Coast or
potential tender offers. See " -- Certain Anti-Takeover Provisions."
SERIES A PREFERRED STOCK
The board of directors has created a series of the preferred stock consisting of
563,270 shares designated as series A 6% convertible non-cumulative preferred
stock, $.01 par value per share.
Voting Rights. Holders of shares of series A preferred stock are entitled to the
number of votes per share as they would have if they had exercised their
conversion rights and received shares of common stock as of the record date
applicable to that vote. Except as required by applicable law, holders of shares
of series A preferred stock do not vote separately as a class or series, but
vote together with the holders of outstanding shares of voting capital stock of
all other classes and series.
Dividends. Holders of shares of series A preferred stock are entitled to receive
cash dividends at an annual rate of $.60 per share. These cash dividends are
non-cumulative, and are payable semi-annually on June 1 and December 1 of each
year, if, when and as declared by the board of directors out of funds legally
available. Shares of series A preferred stock are senior to shares of common
stock with respect to such cash dividends. No cash dividends will be paid on
shares of common stock unless and until all declared, unpaid cash dividends on
the shares of series A preferred stock have been paid or set aside for payment.
Liquidation Rights. The series A preferred stock has a liquidation preference of
$10.00 per share. Thus, upon liquidation, dissolution or winding up of North
Coast, holders of shares of series A preferred stock are entitled to receive,
after payment of liabilities but prior to any distributions to holders of shares
of common stock or of shares of any other class or series of the serial
preferred stock ranking junior in liquidation rights to the series A preferred
stock, $10.00 per share. If the amounts available for distribution to holders of
shares of series A preferred stock are not sufficient to pay in full the
preferred liquidation payments in respect of all of the outstanding shares of
series A preferred stock, holders of outstanding shares of series A preferred
stock will share ratably in any distribution. After payment of the full
preferred liquidation payments, holders of outstanding shares of series A
preferred stock shall not participate with respect to those shares in any
further distribution of the assets of North Coast.
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<PAGE> 51
Conversion Rights. A holder of outstanding shares of series A preferred stock
may elect at any time to convert his shares of series A preferred stock into
shares of common stock. North Coast, at its option, when it makes a public
offering may convert all outstanding shares of series A preferred stock into
shares of common stock. In the event any shares of series A preferred stock are
called for redemption as described below, the holders shall have the right to
elect to convert those shares into shares of common stock in accordance with
these provisions at any time prior to the date specified for that redemption to
occur.
A holder of shares of series A preferred stock is entitled to receive the number
of whole shares of common stock for each share of series A preferred stock
converted determined by dividing $10.00 by the price at which conversion occurs.
The conversion price currently equals $21.75. Therefore, each share of series A
preferred stock is currently convertible into .46 shares of common stock.
Adjustments to the conversion price are provided from time to time in connection
with stock dividends payable in shares of common stock or split-ups,
combinations and other similar transactions affecting the outstanding shares of
common stock. Further, in the event North Coast issues any shares of common
stock, other than shares of common stock issued upon conversion of outstanding
shares of series A preferred stock or upon the exercise of employee stock
options, for a consideration per share less than the then current market price
of the common stock, the conversion price will be adjusted to provide economic
dilution protection for holders of shares of series A preferred stock.
North Coast must reserve and keep available the number of shares of common stock
sufficient to effect the conversion of all shares of Series A preferred stock
outstanding. Public offering, as used with respect to the conversion of shares
of series A preferred stock, means an offering by North Coast, pursuant to an
effective registration statement under the Act, of shares of its common stock
which yields net proceeds to North Coast of not less than $5,000,000 and which
is made at a public offering price of not less than a price per share equal to
1.5 multiplied by the conversion price. This price is subject to adjustment for
stock dividends payable in shares of common stock or split-ups, combinations and
other similar transactions affecting the outstanding shares of common stock.
Redemption. North Coast currently has the option to redeem, in whole or in part,
shares of series A preferred stock at a price of $10.00 per share plus declared,
unpaid dividends on such shares to the date fixed for redemption. North Coast
may exercise this option by providing not less than 30 days prior written notice
to each record holder of shares of series A preferred stock. There are no
sinking fund or mandatory redemption provisions for the shares of series A
preferred stock. Holders of shares of series A preferred stock have no
preemptive rights.
SERIES B PREFERRED STOCK
The board of directors has created a second series of preferred stock consisting
of 625,000 shares designated as series B cumulative convertible preferred stock.
Dividends. Holders of shares of series B preferred stock are entitled to
receive, when, as and if declared by the board of directors out of funds at the
time legally available, cash dividends at an annual rate of $1.00 per share,
payable quarterly. Dividends will accrue and be cumulative from the date of
first issuance of the series B preferred stock and are payable to holders of
record as they appear on the stock books of North Coast on the record dates
fixed by the board of directors.
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<PAGE> 52
The series B preferred stock has priority as to dividends over the common stock,
the series A preferred stock and any series or class of North Coast's stock
issued that ranks junior as to dividends to the series B preferred stock. No
dividend, other than dividends payable solely in common stock or any other
series or class of North Coast's stock hereafter issued that ranks junior as to
dividends to the series B preferred stock, may be declared, paid or set apart
for payment on, and no purchase, redemption or other acquisition may be made by
North Coast of, any common stock or junior dividend stock unless all accrued and
unpaid dividends on the series B preferred stock have been paid or declared and
set apart for payment.
Liquidation Rights. In the event of any liquidation, dissolution or winding up
of North Coast, holders of shares of series B preferred stock are entitled to
receive a liquidation preference of $10.00 per share, plus an amount equal to
any accrued and unpaid dividends to the payment date. Holders of series B
preferred stock will receive this payment before any payment or distribution is
made to the holders of common stock, the series A preferred stock, or any series
or class of North Coast's stock issued that ranks junior as to liquidation
rights to the series B preferred stock. However, the holders of the shares of
the series B preferred stock will not be entitled to receive the liquidation
preference of these shares until the liquidation preference of any other series
or class of North Coast's stock issued that ranks senior as to liquidation
rights to the series B preferred stock has been paid in full. The holders of
series B preferred stock and all series or classes of North Coast's stock issued
that rank on a parity as to liquidation rights with the series B preferred stock
are entitled to share ratably, in accordance with the respective preferential
amounts payable on that stock, in any distribution, after payment of the
liquidation preference of the senior liquidation stock, which is not sufficient
to pay in full the aggregate of the amounts payable on that stock. After payment
in full of the liquidation preference of the shares of the series B preferred
stock, the holders of those shares will not be entitled to any further
participation in any distribution of assets by North Coast.
Voting Rights. The holders of the series B preferred stock have no voting rights
except as described below or as required by law. In exercising any vote, each
outstanding share of series B preferred stock is entitled to one vote, excluding
shares held by North Coast or any entity controlled by North Coast. Shares held
by North Coast or by any entity controlled by North Coast have no voting rights.
Whenever dividends on the series B preferred stock or any outstanding shares of
any class or series of North Coast's capital stock having parity with the series
B preferred stock as to dividends have not been paid in an aggregate amount
equal to at least six quarterly dividends on the shares, whether or not
consecutive, the number of directors of North Coast will be increased by two. In
addition, the holders of the series B preferred stock, voting separately as a
class with the holders of parity dividend stock on which like voting rights have
been conferred and are exercisable, will be entitled to elect two additional
directors, and any successor to each of these directors, at any meeting of
stockholders of North Coast at which directors are to be elected held during the
period such dividends remain in arrears. This voting right will terminate when
all of the dividends accrued and in default have been paid in full or set apart
for payment. The term of office of all directors so elected will terminate
immediately upon payment or setting apart for payment. To date, the number of
directors has not been increased as a result of this provision of the series B
preferred stock.
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<PAGE> 53
If any series B preferred stock is outstanding, North Coast shall not, without
the affirmative vote of the holders of at least 66 2/3% of all outstanding
shares of series B preferred stock, voting separately as a class:
- amend, alter or repeal any provision of the certificate of incorporation
or the by-laws of North Coast to adversely affect the relative rights,
preferences, qualifications, limitations or restrictions of the series B
preferred stock,
- authorize or issue, or increase the authorized amount of, any additional
class or series of stock, or any security convertible into stock of such
class or series, ranking senior to the series B preferred stock as to
dividends or upon liquidation, dissolution or winding up of North Coast,
or
- effect any reclassification of the series B preferred stock.
If any series B preferred stock is outstanding, North Coast shall not, without
the affirmative vote of the holders of at least 50% of all outstanding shares of
series B preferred stock, voting separately as a class, authorize, issue, or
increase the authorized amount of, any additional class or series of stock, or
any security convertible into stock of a class or series, ranking on parity with
the series B preferred stock as to dividends or liquidation and having voting
rights superior to the series B preferred stock. Further, North Coast will not,
without the affirmative vote described above, incur indebtedness or authorize or
issue, or increase the authorized amount of, any additional class or series of
stock, or any security convertible into stock of a class or series, ranking on
parity with the series B preferred stock as to dividend or liquidation rights.
North Coast will not take these actions if, immediately following such event,
adjusted stockholders' equity is less than the aggregate liquidation preferences
of all series B preferred stock and stock ranking senior to or on parity with
the series B preferred stock as to liquidation. Adjusted stockholders' equity is
North Coast's stockholders' equity as shown on its most recent annual or
quarterly balance sheet, increased by:
- any amount of any liability or other reduction in stockholders' equity
attributable to the series B preferred stock and each series of stock
senior to or on parity with the series B preferred stock as to liquidation
and
- the net proceeds of any equity financing since the date of the balance
sheet, reduced by any reduction in stockholders' equity resulting from
certain dispositions of assets since the date of the balance sheet.
Redemption. The series B preferred stock is redeemable for cash, in whole or in
part, at any time, at the option of North Coast, at $10.00 per share plus any
accrued and unpaid dividends, whether or not declared.
If fewer than all of the outstanding shares of series B preferred stock are to
be redeemed, North Coast will select those shares to be redeemed pro rata or by
lot or in some other manner as the board of directors may determine. There is no
mandatory redemption or sinking fund obligation with respect to the series B
preferred stock. If North Coast has failed to pay accrued dividends on the
series B preferred stock, it may not redeem any of the then outstanding shares
of the series B preferred stock until all of these accrued and unpaid dividends
and, except with respect to shares to be redeemed, the then current quarterly
dividend have been paid in full.
Notice of redemption will be mailed at least 30 days but not more than 60 days
before the redemption date to each holder of record of shares of series B
preferred stock to be
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redeemed. After the redemption date, unless there shall have been a default in
payment of the redemption price, dividends will cease to accrue on the shares of
series B preferred stock called for redemption and all rights of the holders of
these shares will terminate, except the right to receive the redemption price
without interest.
Conversion Rights
Optional Conversion. At any time prior to the redemption thereof, the
holders of series B preferred stock shall have the right, exercisable at their
option, to convert any or all of those shares into common stock at a
conversion price of $8.70 per share or a conversion rate of 1.311 shares of
common stock per share of series B preferred stock which includes an
adjustment for the $1.40 per share of dividends in arrears, subject to
adjustment as described below.
Automatic Conversion. If at any time after the initial issuance of the
series B preferred stock the mean between the closing bid and asked price for
the series B preferred stock as reported on Nasdaq, or the closing sale price
as reported on any national securities exchange on which the series B
preferred stock is then listed, shall, for a period of 10 consecutive trading
days, exceed $14.00, then, effective as of the closing of business on that
tenth trading day, all shares of series B preferred stock then outstanding
shall immediately and automatically be converted into shares of common stock
at the conversion rate then in effect.
No fractional shares will be issued in connection with either the optional or
automatic conversion of series B preferred stock, but, instead, an appropriate
amount will be paid in cash by North Coast based upon the reported last sale
price of the common stock on the business day prior to the date of conversion.
The series B preferred stock is currently convertible into common stock at the
rate of 1.311 shares of common stock for each share of series B preferred stock.
The conversion rate is subject to adjustment in certain events, including: the
issuance of stock as a dividend on common stock; subdivisions or combinations of
common stock; the issuance to all holders of common stock of certain rights or
warrants expiring within 45 days after the record date for determining
stockholders entitled to receive them to subscribe for or purchase common stock
at a price less than the current market price of common stock; or the
distribution to all holders of common stock of evidences of indebtedness of
North Coast, cash, excluding ordinary cash dividends, other assets or rights or
warrants to subscribe for or purchase any securities, other than those referred
to above.
North Coast from time to time may decrease the conversion price by any amount
for any period of at least 20 days, by giving at least 15 days notice of such
decrease. North Coast may, at its option, make decreases in the conversion
price, in addition to those described above, as the board of directors of North
Coast deems advisable to avoid or diminish any income tax to holders of common
stock resulting from any dividend or distribution of stock or issuance of rights
or warrants to purchase or subscribe for common stock or from any event for
income tax purposes.
Upon conversion of shares of series B preferred stock, the rights of holders of
shares so converted will be limited to the right to receive shares of common
stock at the conversion rate then in effect.
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<PAGE> 55
Other Provisions. The shares of series B preferred stock are duly and validly
issued, fully paid and nonassessable. The holders of the shares of series B
preferred stock have no preemptive rights with respect to any securities of
North Coast.
ANTI-TAKEOVER PROVISIONS
Provisions of North Coast's certificate of incorporation and by-laws and rights
of common stock, described below, might have the effect of delaying, deferring
or preventing a change in control of North Coast and may make more difficult the
removal of incumbent management even if these transactions could be beneficial
to the interests of stockholders.
Staggered Board of Directors. Under North Coast's certificate of incorporation
and by-laws, the board of directors shall consists of not less than seven or
more than thirteen members with the number of directors to be fixed by the vote
of the majority of the entire board of directors from time to time. The number
of directors is currently fixed at eleven. The board of directors is also
divided into three classes, with four directors being elected to each of classes
I and II, and three directors being elected to class III. Directors of each
class serve a three-year term, with the term of office of one class expiring at
North Coast's annual meeting of stockholders in each year. The current board
configuration is a result of the approval of an amendment to North Coast's
certificate of incorporation that was approved at the annual meeting of
stockholders on December 16, 1998. The amendment was necessary to comply with
the majority designation clause contained in the stock purchase agreement dated
August 1, 1997, between North Coast and NUON. The number of directors has never
been increased as a result of the provisions of the series B preferred stock.
Supermajority Provisions. Under the certificate of incorporation, the
affirmative vote of the holders of at least 80% of the aggregate outstanding
voting capital stock of North Coast is required, in addition to any separate
vote of any other class or series of securities of North Coast which may be
required by the terms of such securities, to effect a merger or consolidation,
or a sale, lease, exchange or transfer of more than 10% of North Coast's assets,
or a sale, lease, exchange or transfer of more than 10% of another entity's
assets to North Coast, where the other party to the transaction, including its
affiliates and associated persons, is a holder or beneficial owner, directly or
indirectly, of 10% or more of the outstanding shares of capital stock of North
Coast entitled to vote at a meeting called to consider such a proposed
transaction. These people are referred to as related persons. In addition, any
proposed transaction must also be approved by the affirmative vote of the
holders of at least 55% of the aggregate voting power of North Coast that is not
held by the related person. The board of directors must make a conclusive
determination as to whether the proposed transaction involves a related person.
The requirements for supermajority approval are not applicable to proposed
transactions approved by a majority of the directors who are not the related
person, who were elected prior to the acquisition of the 10% share interest by
the related person and who have served continuously since such election,
provided that with respect to any proposed transaction as to which the
supermajority voting requirements would otherwise be applicable, any inducements
in connection with the proposed transaction offered to directors of North Coast
which are not extended to all stockholders have been disclosed to all
stockholders.
The division of the board of directors into classes and the above-described
voting requirements may have the overall effect of making it more difficult to:
54
<PAGE> 56
- attempt to take control of North Coast through a merger, tender offer,
proxy contest or other means;
- assume control of North Coast by a holder of a large block of North
Coast's voting securities; and/or
- remove incumbent management.
This may be the case even though certain stockholders of North Coast may
determine the action to be in their best interests. These provisions of North
Coast's certificate of incorporation and its by-laws can be changed or amended
only by the affirmative vote of the holders of at least 80% of the aggregate
outstanding voting capital stock of North Coast and, in the case of the
above-described voting requirements with respect to transactions involving a
related person, by the additional affirmative vote of the holders of at least
55% of such voting power held by persons who are not related persons.
Serial Preferred Stock. The board of director's ability to issue shares of
preferred stock and to determine the rights, preferences, privileges,
designations and limitations of the stock, including the dividend rights,
dividend rate, conversion rights, voting rights, terms of redemption and other
terms of conditions of such stock, could make it more difficult for a person to
engage in, or discourage a person from engaging in, a change in control
transaction without the cooperation of management.
Section 203. North Coast is a Delaware corporation and is subject to Section 203
of the Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder," defined generally as a person owning 15% or more of a
corporation's outstanding voting stock, from engaging in a "business
combination" with a Delaware corporation for three years following the date that
person became an interested stockholder unless:
- before that person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
- upon consummation of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding stock held by
directors who are also officers of the corporation and by employee stock
plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in
a tender or exchange offer; or
- following the transaction in which that person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of two-thirds of the outstanding
voting stock of the corporation not owned by the interested stockholder.
Under Section 203, the restrictions described above also do not apply to
business combinations proposed by an interested stockholder following the
announcement or notification of an extraordinary transaction involving the
corporation and a person who had not been an interested stockholder during the
previous three years or who became an interested stockholder with the approval
of a majority of the corporation's directors, if the
55
<PAGE> 57
extraordinary transaction is approved or not opposed by a majority of the
directors who were directors prior to any person becoming an interested
stockholder during the previous three years or who were recommended for election
or elected to succeed those directors by a majority of those directors.
DIRECTOR LIABILITY
As permitted by the Delaware General Corporation law, the certificate of
incorporation contains a provision which eliminates under certain circumstances
the personal liability of the directors of North Coast to North Coast or its
stockholders, in their capacity as directors of North Coast, for monetary
damages for the breach of fiduciary duty as a director. The provision in the
certificate of incorporation does not change a director's duty of care, but it
does eliminate the possibility of monetary liability for certain violations of
that duty, including violations based on grossly negligent business decisions.
The provision does not affect the availability of equitable remedies for a
breach of the duty of care, like an action to enjoin or rescind a transaction
involving a breach of fiduciary duty. However, as a practical matter, equitable
remedies may not be available. The provision in the certificate of incorporation
does not in any way affect a director's liability under the federal securities
laws. In addition, North Coast's by-laws indemnify its past and present
directors for and provide advancements in respect of any expense, liability or
loss incurred in connection with any threatened, pending or completed action,
suit or proceeding by an individual by reason of the fact that he is or was a
director or officer of North Coast or serving at the request of North Coast in
another capacity. North Coast has also entered into indemnity agreements
pursuant to which it has agreed, among other things, to indemnify its directors
for settlements in derivative actions.
TRANSFER AGENT AND REGISTRAR AND WARRANT AGENT
The American Stock Transfer & Trust Company, New York, New York, is the transfer
agent and registrar for the common stock, the series A preferred stock and the
series B preferred stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, of the 60,000,000 authorized shares of common
stock, 5,894,760 shares will be outstanding or reserved for issuance through the
exercise of exercisable stock options and warrants. Of these 5,894,760 shares of
common stock, the 4,429,573 shares purchased in this offering by persons who are
not "affiliates" of North Coast will be freely tradable, without restriction
under the Securities Act. North Coast believes that 3,106,547 shares of common
stock currently may be sold pursuant to Rule 144 under the Securities Act in
compliance with the resale volume limitations of Rule 144. These volume
limitations will apply only if and as long as the holders of these shares are
"affiliates" of North Coast for purposes of Rule 144.
The 1,337,946 shares of common stock reserved for issuance upon exercise of
outstanding options and warrants will become eligible for resale under Rule 144
two years subsequent to the date or dates that the holders of such options and
warrants exercise the same.
In general, under Rule 144 under the Securities Act as currently in effect, a
person, or persons whose shares must be aggregated, including a person who may
be deemed an "affiliate" of North Coast, who has beneficially owned "restricted
securities" for at least one
56
<PAGE> 58
year, may sell within any three month period that number of shares that does not
exceed the greater of 1% of the then outstanding shares of the common stock or
the reported average weekly trading volume of the then outstanding shares of
common stock for the four weeks preceding each sale. The sales under Rule 144
also are subject to certain manner of sale restrictions and notice requirements
and to the availability of current public information about North Coast. In
addition, a person, or persons whose shares must be aggregated, who owns
restricted securities, who is not deemed an "affiliate" of North Coast at any
time during the 90 days preceding a sale and who acquired such shares at least
two years prior to their resale, is entitled to sell these shares under Rule
144(k) without regard to the foregoing requirements. Sales of restricted
securities by affiliates of North Coast, even after the two-year holding period,
must continue to be made in broker's transactions subject to the volume
limitations described above. As defined in Rule 144, an "affiliate" of an issuer
is a person that directly, or indirectly through the use of one or more
intermediaries, controls, or is controlled by, or is under common control with,
the issuer.
No prediction can be made as to the effect, if any, that future sales of shares,
or the availability of shares for future sale, will have on the market price of
the common stock prevailing from time to time. Sales of substantial amounts of
common stock, including shares issued upon the exercise of the outstanding stock
options, or the perception that sales could occur, could adversely affect the
prevailing market prices for the common stock.
57
<PAGE> 59
DESCRIPTION OF CERTAIN INDEBTEDNESS
The summary of the amended credit facility contained in this prospectus does not
purport to be complete and is qualified in its entirety by reference to the
provisions of the amended credit facility, a copy of which will be filed as an
exhibit to the registration statement of which this prospectus is a part.
On February 9, 1998, North Coast entered into an agreement with ING to replace
the $20.0 million revolving credit facility with its previous lender. North
Coast's amended credit facility, dated May 29, 1998, expanded North Coast's
$20.0 million revolving credit facility with ING to a $25.0 million revolving
credit facility. The credit agreement also provides for a borrowing base which
is determined semi-annually by the lender based upon North Coast's financial
position, oil and gas reserves, as well as outstanding letters of credit of
$150,000 at March 31, 1999. At March 31, 1999, North Coast's borrowing base was
$25.0 million subject to reduction for the outstanding letters of credit.
Available borrowings under the facility at March 31, 1999 were $4,022,365 and
may change based upon the semi-annual reserve study and borrowing base
determination. As of March 31, 1999, North Coast had $20,827,635 outstanding
under the credit facility, and was in compliance with its loan covenants.
The amounts borrowed under its reducing revolving line of credit are secured by
North Coast's receivables, inventory, equipment and a first mortgage on certain
of North Coast's interests in oil and gas wells and reserves. The mortgage notes
are secured by certain land and buildings.
Interest Rate. Under the credit facility, loans bear interest at the prime rate
of the lending bank plus 0.75% or LIBOR plus 2.50%. North Coast also pays an
agent fee of 0.75% on amounts available and a 0.50% commitment fee on amounts
not borrowed up to the available credit line.
Covenants. The credit facility limits North Coast's ability to incur additional
indebtedness, except existing indebtedness, indebtedness under the credit
facility, obligations under operating leases entered into in the ordinary course
of North Coast's business, or indebtedness not to exceed $400,000. In addition,
North Coast is subject to other negative covenants under the credit facility,
including, subject to exceptions, covenants limiting:
- liens on North Coast's property and assets;
- participation in hedging contracts;
- mergers and issuances of securities;
- sales of North Coast's property;
- dividends and redemptions;
- investments and new businesses;
- credit extensions; and
- transactions with affiliates other than at arm's length.
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<PAGE> 60
Events of Default. In the event of an event of default, all obligations under
the credit facility will become immediately due and payable. The credit facility
includes standard events of default, including:
- defaults in the payment of principal and interest;
- defaults in the observance or performance of any covenants included in the
credit facility or in the related security and pledge documents;
- materially incorrect representations and warranties;
- the entry of a judgment or decree in a involuntary proceeding commenced
under a bankruptcy or similar law;
- the entry of a judgment for the payment of money in excess of $150,000,
not satisfactorily covered by insurance, that is not discharged within 30
days of the judgment date; and
- a change in control of North Coast or a material adverse change.
Borrowing Base Review. 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 2, 2000. The lender has performed its September 30, 1998
semi-annual borrowing base review and has provided a third amendment to the
credit facility which would continue the facility without payment of principal
until September 30, 2000. The lender has indicated that it intends to
discontinue lending in the oil and gas business in the United States and has
requested that North Coast find another lender. North Coast is currently
reviewing options with several lenders that are interested in providing at least
a $25 million credit facility.
59
<PAGE> 61
MANNER OF OFFERING
The price and the manner of sale of the shares of common stock offered by this
prospectus are in the sole discretion of the selling stockholders. Sales of
shares of common stock covered by this prospectus may be made by the selling
stockholder, or, subject to applicable law, by pledgees, donees, transferees or
other successors in interest, in over-the-counter market or otherwise at prices
and at terms then prevailing or at prices related to the then-current market
price or at prices and at terms determined in privately negotiated transactions.
The shares of common stock may be sold through any one of several methods,
including by any one or more of the following:
- a block trade in which the broker or dealers so engaged will attempt to
sell the shares of common stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction,
- purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this prospectus,
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers, and
- privately negotiated transactions.
In effecting sales, brokers or dealers engaged by the selling stockholders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from the selling stockholders in amounts to be
negotiated immediately prior to sale. Such brokers or dealers may be deemed to
be "underwriters" within the meaning of the Securities Act in connection with
these sales. In addition, any shares of common stock covered by this prospectus,
which qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather
than by this prospectus.
North Coast has advised the selling stockholders of their obligations under the
Exchange Act to avoid market manipulation of common stock, including without
limitation their obligation not to purchase or solicit purchases by others of
any common stock during the two business days preceding the commencement of any
offers or sales of common stock by the selling stockholders, until the offering
by this prospectus by the selling stockholders has been completed.
North Coast has also advised the selling stockholders of their obligations under
the Securities Act to deliver copies of this prospectus to any purchaser of
their common stock.
LEGAL MATTERS
Certain legal matters with respect to the validity of the common stock offered
by this prospectus will be passed upon for North Coast by Calfee, Halter &
Griswold LLP, Cleveland, Ohio.
EXPERTS
The consolidated financial statements and notes thereto and schedules included
or incorporated by reference in this prospectus and elsewhere in the
registration statement, to the extent and for the periods indicated in their
reports, have been audited by Hausser + Taylor LLP and Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
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<PAGE> 62
On March 17, 1999, North Coast's board of directors decided to retain Hausser +
Taylor LLP as its independent public accountants and dismissed North Coast's
former auditors. There were no disagreements with the former auditors on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure at the time of the change or with respect to North
Coast's consolidated financial statements for fiscal year 1998, which, if not
resolved to the former auditors' satisfaction, would have caused them to make
reference to the subject matter of the disagreement in connection with their
report. Prior to retaining Hausser + Taylor LLP, North Coast had not consulted
with Hausser + Taylor LLP regarding accounting principles.
WHERE YOU CAN FIND MORE INFORMATION
North Coast has filed with the Commission a registration statement on Form S-1
under the Securities Act with respect to the common stock offered by this
prospectus. This prospectus does not contain all the information set forth in
the registration statement, certain portions of which are omitted as permitted
by the rules and regulations of the Commission. For further information about
North Coast and the common stock offered by this prospectus, you should refer to
the registration statement. Statements made in this prospectus regarding the
contents of any contract or other document are not necessarily complete, and in
each instance you should refer to the copy of the contract or other document
filed as an exhibit to the registration statement or other document, each
statement being qualified in all respects by that reference.
North Coast is subject to the informational requirements of the Securities Act
and, in accordance with the Securities Act, files reports, proxy statements and
other information with the Commission. You may inspect these reports, proxy
statements, and other information, as well as the registration statement,
without charge, at the public reference facility maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C., 20549 and
at the Commission's regional offices located at Seven World Trade Center, Suite
1300, New York, NY 10048 and Northwestern Atrium Center, 500 West Madison
Street, Room 1400, Chicago, IL 60661-2511. Copies of such material may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. You may also inspect
these materials at the offices of the Nasdaq National Market System at 1735 K
Street, N.W., Washington, D.C. 20006 or on the Commission's website at
http://www.sec.gov.
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<PAGE> 63
NORTH COAST ENERGY, INC.
GENERAL INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Consolidated Financial Statements -
March 31, 1999 (Audited).................................. F-5
</TABLE>
F-1
<PAGE> 64
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Auditors' Reports on the Financial Statements............... F-3 - F-4
Financial Statements
Consolidated balance sheets............................... F-5 - F-6
Consolidated statements of operations..................... F-7
Consolidated statements of stockholders' equity........... F-8
Consolidated statements of cash flows..................... F-9 - F-10
Notes to consolidated financial statements................ F-11 - F-25
</TABLE>
F-2
<PAGE> 65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
NORTH COAST ENERGY, INC.
CLEVELAND, OHIO
We have audited the accompanying consolidated balance sheet of North Coast
Energy, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1999, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of North Coast
Energy, Inc. and subsidiaries as of March 31, 1999, and the consolidated results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
Hausser + Taylor LLP
Cleveland, Ohio
May 28, 1999
except for Note 5 dated
June 29, 1999
F-3
<PAGE> 66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
NORTH COAST ENERGY, INC.
CLEVELAND, OHIO
We have audited the accompanying consolidated balance sheet of North Coast
Energy, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the two fiscal years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of North Coast
Energy, Inc. and subsidiaries as of March 31, 1998, and the consolidated results
of their operations and their cash flows for each of the two fiscal years in the
period ended March 31, 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Cleveland, Ohio
June 4, 1998
F-4
<PAGE> 67
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents...................................... $ 1,956,617 $ 1,578,984
Accounts receivable:
Trade, net............................................. 2,740,394 1,311,714
Affiliates............................................. 115,278 96,011
Inventories............................................... 210,556 189,223
Deferred income taxes..................................... 57,000 26,000
Refundable income taxes................................... 38,000 38,000
Prepaid expenses.......................................... 180,000 8,057
------------ ------------
Total current assets.............................. 5,297,845 3,247,989
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Land...................................................... 97,822 93,437
Oil and gas properties (successful efforts)............... 42,964,679 25,754,748
Pipelines................................................. 6,543,928 4,380,772
Vehicles.................................................. 937,613 420,026
Furniture and fixtures.................................... 588,473 508,417
Building and improvements................................. 823,225 786,689
------------ ------------
51,955,740 31,944,089
Less accumulated depreciation, depletion, amortization and
impairment................................................ (15,537,255) (13,155,288)
------------ ------------
36,418,485 18,788,801
OTHER ASSETS
Advanced royalties........................................ 1,570,000 --
Other, net................................................ 287,137 274,726
------------ ------------
1,857,137 274,726
------------ ------------
$ 43,573,467 $ 22,311,516
============ ============
</TABLE>
The accompanying notes are an integral part of there consolidated financial
statements.
F-5
<PAGE> 68
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt......................... $ 97,600 $ 88,300
Accounts payable.......................................... 2,355,982 1,824,740
Accrued expenses.......................................... 444,808 250,073
Billings in excess of costs on uncompleted contracts...... -- 302,881
------------ ------------
Total current liabilities......................... 2,898,390 2,465,994
------------ ------------
LONG-TERM DEBT, net of current portion...................... 21,493,922 7,171,035
ACCRUED PLUGGING LIABILITY.................................. 872,408 --
DEFERRED INCOME TAXES, net.................................. 366,200 335,200
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A, 6% Noncumulative Convertible Preferred stock,
par value $.01 per share; 563,270 shares authorized;
73,816 and 75,481 issued and outstanding (aggregate
liquidation value of $738,160 and $754,810,
respectively).......................................... 738 755
Series B, Cumulative Convertible Preferred stock, par
value $.01 per share; 625,000 shares authorized;
232,864 and 268,264 issued and outstanding (aggregate
liquidation value of $2,328,640 and $2,682,640,
respectively plus dividends in arrears of $326,010 and
$335,330, respectively)................................ 2,329 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; 4,556,814 and 3,322,586 issued and
outstanding (see Note 6G).............................. 45,568 33,226
Additional paid-in capital................................ 21,914,939 16,992,140
Retained deficit.......................................... (4,021,027) (4,689,517)
------------ ------------
Total stockholders' equity........................ 17,942,547 12,339,287
------------ ------------
$ 43,573,467 $ 22,311,516
============ ============
</TABLE>
The accompanying notes are an integral part of there consolidated financial
statements.
F-6
<PAGE> 69
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE
Oil and gas production............................... $7,233,763 $3,013,929 $3,137,556
Drilling revenues.................................... 3,686,158 2,988,371 3,783,630
Well operating, transportation and other............. 2,062,213 1,622,608 1,859,806
Administrative and agency fees....................... 960,166 965,724 883,997
---------- ---------- ----------
13,942,300 8,590,632 9,664,989
---------- ---------- ----------
COSTS AND EXPENSES
Oil and gas production expenses...................... 2,601,555 840,346 777,163
Drilling costs....................................... 2,927,302 2,516,588 2,876,615
Oil and gas operations............................... 1,200,514 652,672 976,943
General and administrative expenses.................. 2,108,948 2,215,961 2,307,994
Depreciation, depletion, amortization, impairment and
other............................................. 2,479,544 1,242,200 1,385,570
Abandonment of oil and gas properties................ -- 88,947 73,528
---------- ---------- ----------
11,317,863 7,556,714 8,397,813
---------- ---------- ----------
2,624,437 1,033,918 1,267,176
---------- ---------- ----------
INCOME FROM OPERATIONS
OTHER INCOME (EXPENSE)
Interest income...................................... 82,505 62,263 47,491
Other................................................ 4,380 5,299 32,492
Interest expense..................................... (1,841,108) (839,342) (1,055,409)
---------- ---------- ----------
(1,754,223) (771,780) (975,426)
INCOME BEFORE PROVISION (CREDIT) FOR
INCOME TAXES......................................... 870,214 262,138 291,750
PROVISION (CREDIT) FOR INCOME TAXES
Current.............................................. -- 12,000 (5,100)
Deferred............................................. -- (12,000) 5,100
---------- ---------- ----------
....................................................... -- -- --
---------- ---------- ----------
NET INCOME............................................. $ 870,214 $ 262,138 $ 291,750
========== ========== ==========
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK (after
dividends on cumulative Preferred Stock of $236,654,
$268,264 and $458,606, respectively)................. $ 633,560 $ (6,126) $ (166,856)
========== ========== ==========
NET INCOME (LOSS) PER SHARE (basic and diluted)........ $ 0.16 $ -- $ (0.10)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 70
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL
SERIES A SERIES B -------------------------
PREFERRED STOCK PREFERRED STOCK COMMON STOCK TOTAL
----------------- ----------------- -------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
-------- ------ -------- ------ ---------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1996,
AS PREVIOUSLY
REPORTED............... 305,200 $3,052 464,665 $4,647 8,040,148 $80,402 $12,082,969 $(4,852,465) $ 7,318,605
1-for-5 reverse stock
split effective
June 7, 1999....... -- -- -- -- (6,432,118) (64,322) 64,322 -- --
-------- ------ -------- ------ ---------- ------- ----------- ----------- -----------
BALANCE, MARCH 31,
1996................. 305,200 3,052 464,665 4,647 1,608,030 16,080 12,147,291 (4,852,465) 7,318,605
Net income........... -- -- -- -- -- -- -- 291,750 291,750
Shares converted..... (228,249) (2,282) (195,201) (1,952) 537,811 5,378 (1,144) -- --
Dividends on Series A
Preferred stock
($.30 per share)... -- -- -- -- -- -- -- (91,542) (91,542)
Dividends on Series B
Preferred stock
($.50 per share)... -- -- -- -- -- -- -- (232,332) (232,332)
Issuance of stock bonus
common shares........ -- -- -- -- 4,938 50 23,080 -- 23,130
-------- ------ -------- ------ ---------- ------- ----------- ----------- -----------
BALANCE, MARCH 31,
1997................. 76,951 770 269,464 2,695 2,150,779 21,508 12,169,227 (4,884,589) 7,309,611
Net income........... -- -- -- -- -- -- -- 262,138 262,138
Shares converted..... (1,470) (15) (1,200) (12) 3,273 33 (6) -- --
Dividends on Series B
Preferred stock
($.25 per share)... -- -- -- -- -- -- -- (67,066) (67,066)
Issuance of common
stock.............. -- -- -- -- 1,165,144 11,651 4,812,322 -- 4,823,973
Issuance of stock
bonus common
shares............. -- -- -- -- 3,390 34 10,597 -- 10,631
-------- ------ -------- ------ ---------- ------- ----------- ----------- -----------
BALANCE, MARCH 31,
1998................. 75,481 755 268,264 2,683 3,322,586 33,226 16,992,140 (4,689,517) 12,339,287
Net income........... -- -- -- -- -- -- -- 870,214 870,214
Shares converted..... (1,665) (17) (35,400) (354) 81,333 813 (442) -- --
Dividends on Series B
Preferred stock
($.85 per share)... -- -- -- -- -- -- -- (201,724) (201,724)
Issuance of common
stock.............. -- -- -- -- 1,149,425 11,494 4,913,506 -- 4,925,000
Issuance of stock
bonus common
shares............. -- -- -- -- 3,470 35 9,735 -- 9,770
-------- ------ -------- ------ ---------- ------- ----------- ----------- -----------
BALANCE, MARCH 31,
1999................. 73,816 $ 738 232,864 $2,329 4,556,814 $45,568 $21,914,939 $(4,021,027) $17,942,547
======== ====== ======== ====== ========== ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 71
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................ $ 870,214 $ 262,138 $ 291,750
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, amortization,
impairment and other...................... 2,479,544 1,242,200 1,385,570
Abandonment of oil and gas properties........ -- 88,947 73,528
Loss (gain) on sale of property and
equipment................................. 2,008 (1,609) 20,400
Deferred income taxes........................ -- (12,000) 5,100
Stock bonus.................................. 9,770 10,631 --
Change in:
Accounts receivable....................... (1,447,947) (19,692) 49,561
Inventories and other current assets...... (193,276) 12,179 (102,127)
Refundable income taxes................... -- 12,000 65,000
Other assets, net......................... 241,701 (109,154) 23,109
Accounts payable.......................... 531,242 (62,667) (521,662)
Accrued expenses.......................... 194,735 (70,182) 39,690
Billings in excess of costs on uncompleted
contracts............................... (302,881) (166,480) (167,986)
------------ ----------- -----------
Total adjustments......................... 1,514,896 924,173 870,183
------------ ----------- -----------
Net cash provided by operating
activities.............................. 2,385,110 1,186,311 1,161,933
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............... (4,824,062) (2,124,052) (2,025,561)
Acquisition of net assets of Kelt Ohio, Inc....... (16,488,876) -- --
Proceeds on sale of property and equipment........ 400,000 2,000 198,669
------------ ----------- -----------
Net cash used by investing activities..... (20,912,938) (2,122,052) (1,826,892)
------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 72
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of accounts payable used to finance
property and equipment additions............... $ -- $ (87,161) $ (70,964)
Borrowings under revolving credit facility........ 20,062,370 6,765,265 2,080,000
(Repayments) borrowings under note payable to
stockholder.................................... -- (1,453,674) 84,883
Repayment of borrowings under revolving credit
facility....................................... (5,800,000) (8,840,000) (1,000,000)
Payments on long-term debt........................ (107,315) (106,698) (140,656)
Cash paid for deferred financing fees............. (150,000) (88,223) (12,900)
Proceeds from issuance of long-term debt.......... 177,130 65,031 --
Net proceeds from issuance of common stock........ 4,925,000 4,823,973 --
Distributions and dividends....................... (201,724) (67,066) (323,874)
----------- ----------- -----------
Net cash provided by financing activities.... 18,905,461 1,011,447 616,489
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS......... 377,633 75,706 (48,470)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR........... 1,578,984 1,503,278 1,551,748
----------- ----------- -----------
CASH AND EQUIVALENTS AT END OF YEAR................. $ 1,956,617 $ 1,578,984 $ 1,503,278
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest....................................... $ 1,763,000 $ 887,000 $ 1,032,000
Income taxes................................... 103,000 51,000 52,000
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Long-term debt incurred for the purchase of
property and equipment....................... $ -- $ -- $ 638,000
Accounts payable incurred for the purchase of
property and equipment....................... -- 22,000 87,000
Accounts payable incurred for deferred
financing.................................... -- 88,000 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 73
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION
North Coast Energy, Inc. ("North Coast"), a Delaware corporation, was
formed in August 1988 to engage in the exploration, development and production
of oil and gas, the acquisition of producing oil and gas properties, and the
organization and management of oil and gas partnerships.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of North Coast
Energy, Inc. and its wholly owned subsidiaries (collectively, "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 is as follows:
<TABLE>
<S> <C>
Capital Drilling Fund 1986-1 Limited Partnership............ 13.2%
North Coast Energy/Capital Appalachian Drilling Program
Limited Partnership:
1987-1................................................. 51.2%
1987-2................................................. 45.1%
1988-1................................................. 43.9%
1988-2................................................. 48.6%
1989................................................... 36.0%
North Coast Energy Appalachian Drilling Program Limited
Partnership:
1990-1................................................. 44.7%
1990-2................................................. 36.2%
1990-3................................................. 42.3%
1991-1................................................. 37.0%
1991-2................................................. 33.6%
1991-3................................................. 38.2%
1992-1................................................. 28.3%
1992-2................................................. 37.9%
1992-3................................................. 54.0%
1993-1................................................. 42.6%
1993-2................................................. 38.7%
1993-3................................................. 36.7%
1994-1................................................. 37.7%
1994-2................................................. 29.4%
1994-3................................................. 33.5%
1995-1................................................. 20.0%
1995-2................................................. 20.0%
1996-1................................................. 20.0%
1996-2................................................. 20.0%
1997-1................................................. 38.2%
1997-2................................................. 22.1%
1998-1................................................. 20.1%
</TABLE>
All significant intercompany accounts and transactions have been
eliminated.
F-11
<PAGE> 74
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. CASH EQUIVALENTS
Investments having an original maturity of 90 days or less that are readily
convertible into cash have been included in, and are a significant portion of,
the cash and equivalents balances.
D. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated or depleted
principally on methods and at rates designed to amortize their costs over their
estimated useful lives (proved oil and gas properties using the unit-of-
production method based upon estimated proved developed oil and gas reserves,
pipelines using the straight-line method over 10 to 25 years, vehicles,
furniture and fixtures using accelerated methods over 5 to 7 years, building and
improvements using accelerated methods over 31.5 years).
E. OIL AND GAS INVESTMENTS AND PROPERTIES
The Company uses the successful efforts method of accounting for oil and
gas producing activities. Under successful efforts, costs to acquire mineral
interests in oil and gas properties, to drill and equip exploratory wells that
find proved reserves, and to drill and equip developmental wells are
capitalized.
Costs to drill exploratory wells that do not find proved reserves, costs of
developmental wells on properties the Company has no further interest in,
geological and geophysical costs, and costs of carrying and retaining unproved
properties are expensed.
Unproved oil and gas properties that are significant are periodically
assessed for impairment of value and a loss is recognized at the time of
impairment by providing an impairment allowance. Other unproved properties are
expensed when surrendered or expired.
When a property is determined to contain proved reserves, the capitalized
costs of such properties are transferred from unproved properties to proved
properties and are amortized by the unit-of-production method based upon
estimated proved developed reserves. To the extent that capitalized costs of
groups of proved properties having similar characteristics exceed the estimated
future net cash flows, the excess capitalized costs are written down to the
present value of such amounts. Estimated future net cash flows are determined
based primarily upon the estimated future reserves related to the Company's
current proved properties and, to a lesser extent, certain future net cash flows
related to operating and administrative fees due the Company related to its
management of various partnerships. The Company follows SFAS No. 121 which
requires a review for impairment whenever circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment is recorded on a
drilling program or property specific basis, as applicable.
On sale or abandonment of an entire interest in an unproved property, gain
or loss is recognized, taking into consideration the amount of any recorded
impairment if the property had been assessed. If a partial interest in an
unproved property is sold, the amount received is treated as a reduction of the
cost of the interest retained.
F. REVENUE RECOGNITION
The Company recognizes revenue on drilling contracts using the completed
contract method of accounting for both financial reporting purposes and income
tax purposes. This method is used because the typical contract is completed in
three months or less and financial position and results of operations do not
vary significantly from those which would result from use of the
percentage-of-completion method.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Billings in excess of costs on
uncompleted contracts are classified as current liabilities.
Oil and gas production revenue is recognized as income as it is extracted
and sold from the properties. Other revenue is recognized at the time it is
earned and the Company has a contractual right to such revenue.
F-12
<PAGE> 75
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. PER SHARE AMOUNTS
The computation of basic and diluted earnings per share does not assume the
conversion of the unconverted Series A (1998 and 1997) and Series B (1999, 1998
and 1997) Preferred stock or the effect of warrants and stock options
outstanding (1999, 1998 and 1997) due to either, the average market price of the
common shares being lower than the prices of all of the options and warrants
currently outstanding, or the effect being anti-dilutive. For the year ended
March 31, 1999, the conversion of Series A stock had the effect of increasing
the denominator (average outstanding shares) by 17,116 shares.
The average number of outstanding shares used in computing basic (diluted)
net loss per share was 3,949,818 (3,966,934), 2,821,298 (2,821,298) and
1,648,155 (1,648,155) for the years ended March 31, 1999, 1998 and 1997,
respectively.
H. RISK FACTORS
The Company operates in an environment with many financial risks including,
but not limited to, the ability to acquire additional economically recoverable
oil and gas reserves, the continued ability to market drilling programs, the
inherent risks of the search for, development of and production of oil and gas,
the ability to sell oil and gas at prices which will provide attractive rates of
return, and the highly competitive nature of the industry and worldwide economic
conditions. The Company's ability to expand its reserve base, diversify its
operations and continue its marketing efforts for and investments in drilling
programs is also dependent upon the Company's ability to obtain the necessary
capital through operating cash flow, additional borrowings or additional equity
funds.
I. ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
J. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and equivalents, accounts
receivable, accounts payable and debt obligations. The book value of cash and
equivalents, accounts receivable and accounts payable are considered to be
representative of fair value because of the short maturity of these instruments.
The Company believes that the carrying value of its borrowings under its bank
credit facility and other debt obligations approximates their fair value as they
bear interest at adjustable interest rates which change periodically to reflect
market conditions. The Company's accounts receivable are concentrated in the oil
and gas industry. The Company does not view such a concentration as an unusual
credit risk.
K. RECLASSIFICATIONS
Certain reclassifications were made to prior period financial statement
presentations to conform with current period presentations.
NOTE 2. ACQUISITION OF KELT OHIO, INC.
Effective April 8, 1998, the Company acquired significantly all of the
assets and operations and assumed certain liabilities of Kelt Ohio, Inc.
("Kelt") pursuant to a Purchase and Sale Agreement dated April 8, 1998 (as
amended May 12, 1998). The assets acquired from Kelt, an oil and gas producer
headquartered in Cambridge, Ohio, include approximately 900 natural gas and oil
wells, undeveloped acreage, brine disposal facilities, drilling
F-13
<PAGE> 76
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and service rigs, and natural gas compressors and gas gathering systems. The
Company funded the acquisition primarily with borrowings under its revolving
credit facility.
The acquisition cost (which includes approximately $16,000,000 paid to Kelt
and direct acquisition costs of $488,876 incurred by the Company) was allocated
to the net assets acquired based on estimated fair values and no goodwill was
recorded. The estimated fair value of tangible assets and liabilities acquired
was $17,488,876 and $1,000,000, respectively. The acquisition has been accounted
for as a purchase and, accordingly, the operating results related to the
acquisition are included in the Company's consolidated statement of operations
for significantly all (April 8, 1998 -- March 31, 1999) of the Company's fiscal
1999 year.
The following summary presents fiscal 1998 pro forma consolidated results
of operations as if the acquisition had occurred on April 1, 1997 and includes
adjustments for estimated amounts of depreciation, depletion and amortization of
fixed assets acquired based on their estimated fair values and increased
interest expense. The pro forma amounts include Kelt's operation based on Kelt's
fiscal year ended December 31, 1997. The pro forma results are for illustrative
purposes only and do not purport to be indicative of the actual results which
would have occurred had the transaction been consummated as of an earlier date,
nor are they indicative of results of operations which may occur in the future.
These results do not reflect any synergies that may or may not be achieved.
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED
MARCH 31, 1998
--------------
<S> <C>
REVENUES.................................................... $13,211,603
COSTS AND EXPENSES.......................................... 10,860,061
-----------
INCOME FROM OPERATIONS...................................... 2,351,542
OTHER INCOME................................................ 67,562
OTHER EXPENSE -- Interest................................... 2,448,094
-----------
NET LOSS.................................................... $ (28,990)
===========
NET LOSS, applicable to common stock (after preferred stock
dividends of $268,264).................................... $ (297,254)
BASIC AND DILUTED EARNINGS, per common share................ $ (0.11)
Weighted average number of shares outstanding............... 2,821,298
</TABLE>
NOTE 3. BILLINGS IN EXCESS OF COSTS ON UNCOMPLETED CONTRACTS
Billings in excess of costs on uncompleted contracts consist of the
following at March 31:
<TABLE>
<CAPTION>
1999 1998
---- --------
<S> <C> <C>
Billings on uncompleted contracts....................... $-- $335,920
Costs incurred on uncompleted contracts................. -- 33,039
-- --------
$-- $302,881
== ========
</TABLE>
At March 31, 1999, all contracts were completed.
NOTE 4. LEASE COMMITMENTS
Prior to the year ended March 31, 1999, the Company leased real and
personal property under operating leases. Total rental expense under the
operating leases for the years ended March 31, 1998 and 1997 amounted to
approximately $6,000 and $43,000, respectively. In 1997 rent expense of
approximately $34,000 was incurred pursuant to the lease of the Company's
previous corporate headquarters from one of the Company's stockholders.
F-14
<PAGE> 77
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There was no rental expense incurred for any operating leases for the year ended
March 31, 1999 and the Company has no noncancelable operating leases which
require future minimum rental payments.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following at March 31:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Revolving credit notes payable -- bank................... $20,827,635 $6,565,265
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.... 44,290 52,571
Mortgage note payable to a bank, secured by land and a
building, requiring monthly payments of approximately
$5,248 (including interest at 8.58%) through May 2001.
Thereafter, the balance of the note will be amortized
over a ten-year period, at an interest rate to be
renegotiated every five years.......................... 487,673 507,404
Various installment notes payable in aggregate monthly
installments (including interest) of $6,984 at March
31, 1999, through 2004................................. 231,924 134,095
----------- ----------
21,591,522 7,259,335
Less current portion..................................... 97,600 88,300
----------- ----------
$21,493,922 $7,171,035
=========== ==========
</TABLE>
On February 9, 1998, the Company entered into an agreement with ING (U.S.)
Capital LLC (successor in interest to ING (U.S.) Capital Corporation) ("ING
Capital") 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 semi-annually by
the lender based upon the Company's financial position, oil and gas reserves, as
well as outstanding letters of credit ($150,000 at March 31, 1999), as defined.
At March 31, 1999, the Company's borrowing base was $25,000,000 subject to
reduction for the outstanding letters of credit. Available borrowings under the
facility at March 31, 1999 were $4,022,365 and may subsequently change based
upon the semi-annual reserve study and borrowing base determination.
In June 1999, the Company and ING Capital entered into an amended credit
agreement that extended the commitment period until and including July 2, 2000.
At the termination of the commitment period, borrowings on the note are due and
payable in 20 equal quarterly installments beginning in September 2000. ING
Capital has indicated to the Company that sometime in the future it will
discontinue lending to the oil and gas industry. The Company is currently in the
process of reviewing its options and financing needs with several prospective
lenders.
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 7.65% and 8.5% at March 31, 1999 and March 31, 1998, respectively.
The weighted average interest rate on these borrowings was 8.3%, 10.1% and 9.9%
for the years ended March 31, 1999, 1998 and 1997, respectively. The agreement
requires the Company to pay a commitment fee of .5% on the unused amount of
available borrowings. The agreement contains certain restrictive covenants,
including working capital, current ratio, tangible net worth, and EBITDA
calculations, as defined. Additionally, the Company is restricted from paying
cash dividends on any of its common stock under the terms of its credit
facility. The Company was in compliance with all covenants and restrictions at
March 31, 1999.
F-15
<PAGE> 78
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Future maturities of long-term debt for the years ended March 31 are as
follows:
<TABLE>
<S> <C>
Fiscal 2000............................................... $ 97,600
Fiscal 2001............................................... 3,226,261
Fiscal 2002............................................... 4,257,981
Fiscal 2003............................................... 4,245,190
Fiscal 2004............................................... 4,212,994
Thereafter................................................ 5,551,496
-----------
$21,591,522
===========
</TABLE>
The carrying amount of the Company's long-term debt approximates fair
value, as all of the Company's significant debt instruments carry adjustable
interest rates which change periodically to reflect market conditions.
NOTE 6. STOCKHOLDERS' EQUITY
A. SALE OF COMMON STOCK
In September 1997, the Company sold 1,149,426 shares of its common stock
for $5 million to NUON International bv ("NUON"), a limited liability company
organized under the laws of the Netherlands, pursuant to the terms of a stock
purchase agreement ("Agreement") by and between the Company and NUON dated
August 1, 1997. In September 1998, NUON exercised its option under the Agreement
to purchase an additional 1,149,425 shares of common stock for $5,000,000 which
increased NUON's ownership to 51% of the Company's outstanding common stock.
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 1,149,426 shares of common stock by
September 30, 1999 to bring its total ownership to 3,448,277 shares of the
Company's common stock.
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.
B. PREFERRED STOCK
The Board of Directors of North Coast has designated 563,270 shares of the
2,000,000 shares of preferred stock authorized as Series A, 6% Convertible
Noncumulative Preferred stock (Series A Preferred stock) and 625,000 shares of
Preferred stock as Series B, Cumulative Convertible Preferred stock (Series B
Preferred stock).
Stockholders of Series A Preferred stock are entitled to vote such shares
on any and all matters submitted to a vote of the stockholders of the Company
based upon the number of votes such stockholders would have if the Series A
Preferred stock had been converted into shares of common stock of the Company.
Holders of shares of Series A Preferred stock are entitled to receive, when and
if declared by the Board of Directors, noncumulative cash dividends at an annual
rate of $.60 per share. Shares of Series A Preferred stock are senior to shares
of common stock with respect to such cash dividends and junior to shares of
Series B Preferred stock.
Series A Preferred stock is convertible, at the stockholder's option, into
shares of common stock at the conversion rate of .46 shares of common stock for
each share of Series A Preferred stock converted.
All of, but not less than all, the outstanding shares of Series A Preferred
stock shall, at the option of North Coast, be converted into fully paid and
nonassessable shares of common stock at the conversion price, upon the
F-16
<PAGE> 79
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consummation of the sale of shares of common stock of North Coast pursuant to an
effective registration statement under the Securities Act of 1933, as amended;
provided that such sale yields gross proceeds to the Corporation of not less
than $5,000,000 and is made at a public offering price per share of not less
than 1.5 times the conversion price in effect on such date.
In the case where North Coast issues warrants or rights to purchase shares
of common stock of the Company, each record holder of outstanding shares of
Series A Preferred stock will receive the kind and amount of such warrants or
rights so issued which such holder would have been entitled to upon such
issuance had all of the holders of shares of Series A Preferred stock been
converted, as defined.
The Series A Preferred stock is redeemable at the option of North Coast at
a price of $10 per share. North Coast does not have any obligation to redeem the
Series A Preferred stock.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of North Coast, holders of the Series A Preferred stock are entitled
to be paid $10 per share out of the assets of North Coast but after payment of
other indebtedness of North Coast, after payment or distribution to the holders
of Series B Preferred stock, but prior to any distribution to holders of the
common stock.
Holders of shares of Series B Preferred stock are entitled to receive,
when, as and if declared by the Board of Directors, cash dividends at an annual
rate of $1.00 per share, payable quarterly.
In the event of any liquidation, dissolution or winding up of the Company,
holders of shares of Series B Preferred stock are entitled to receive the
liquidation preference of $10 per share, plus an amount equal to any accrued and
unpaid dividends to the payment date, before any payment or distribution is made
to the holders of common stock and Series A Preferred stock, as defined. After
payment of the liquidation preference, the holders of such shares will not be
entitled to any further participation in any distribution of assets by the
Company.
Generally, each outstanding share of Series B Preferred stock has no vote,
however in certain instances required by Delaware General Corporation Law or by
the certificate of designation, each share will be entitled to one-fifth vote,
excluding shares held by the Company or any entity controlled by the Company,
which shares shall have no voting rights. So long as any Series B Preferred
stock is outstanding, the Company cannot, without the affirmative vote of the
holders of at least 66 2/3 percent of all outstanding shares of Series B
Preferred stock, voting separately as a class, (i) amend, alter or repeal any
provision of the Company's Restated Certificate of Incorporation or Bylaws so as
to affect adversely the relative rights, preferences, qualifications,
limitations or restrictions of the Series B Preferred stock, (ii) authorize or
issue, or increase the authorized amount of, any additional class or series of
stock of the Corporation, or any security convertible into stock of such class
or series, having rights senior to the Series B Preferred stock as to dividends
or liquidation, or (iii) effect any reclassification of the Series B Preferred
stock. Additionally, the Series A Preferred stock's certificate of designation
restricts the ability to significantly modify the Company's capital structure
where such modification could be at a detriment to the Series B Preferred
stockholders.
Whenever distributions on the Series B Preferred stock have not been paid,
as defined, the number of directors of the Company may be increased, and the
holders of the Series B will be entitled to elect such additional directors to
the Board of Directors, as defined. Such voting right will terminate when all
such distributions accrued and in default have been paid in full or set apart
for payment, as defined. The amount of dividends in arrears attributable to
Series B Preferred is $326,010 ($1.40 per share) as of March 31, 1999.
Effective December 18, 1995, the Series B Preferred stock was redeemable at
the option of the Company, at $10 per share plus any accrued and unpaid
dividends, as defined.
There is no mandatory redemption or sinking fund obligation with respect to
the Series B Preferred stock. In the event that the Company has failed to pay
accrued dividends on the Series B Preferred stock, it may not redeem any of the
outstanding shares of the Series B Preferred stock until all such accrued and
unpaid distributions have been paid in full.
F-17
<PAGE> 80
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The holders of Series B Preferred stock have the right, exercisable at
their option, to convert any or all of such shares into 1.311 (1.15 per share of
Preferred stock plus .161 per share related to Preferred dividends in arrears at
March 31, 1999) shares of common stock.
In fiscal 1997, the Company commenced a conversion offer to its Preferred
shareholders (Series A and B) to convert their shares into common stock with
additional shares offered as an incentive. Pursuant to the conversion offer in
fiscal 1997, 228,249 shares of Preferred Series A were tendered and exchanged
for 228,249 shares of common stock and 195,201 shares of Preferred Series B were
tendered and exchanged for 309,562 shares of common stock.
C. COMMON STOCK WARRANTS
Warrants issued in connection with the Series B Preferred stock entitled
the holders thereof to purchase .23 shares of common stock with each warrant at
a price of $13.05 per share, as defined. The warrants issued in connection with
the Series B Preferred stock expired on December 18, 1997. There were 2,500,000
Series B warrants outstanding at March 31, 1997.
The Company has granted Range Resources, a shareholder of the Company,
certain warrants to purchase 40,000 shares of common stock at $6.00 per share
and 60,000 shares of common stock at $5.00 per share, as defined. These warrants
were exercisable on June 13, 1995 and expire on or have expired on June 13, 2000
and 1998, respectively. The warrants may be redeemed by the Company for $.50 per
share at its option upon 30 days written notice.
In fiscal 1999 and 1998, in conjunction with the NUON Agreement, the
Company issued (each year) warrants to purchase 26,800 shares of common stock
for $4.375 per share. The Company is obligated to issue additional warrants to
purchase 26,800 additional shares of common stock for $4.375 per share if NUON
purchases an additional 1,149,426 shares of common stock by September 30, 1999.
These warrants (half of which are issued or issuable to a director/officer)
expire five years from date of issuance.
D. SERIES B UNIT WARRANTS
In connection with the issuance of the Series B Preferred stock, the
underwriter of the issue received 50,000 warrants to purchase Series B Units at
$12.00 per unit. A Series B Unit consists of one share of Series B Preferred
stock and five warrants to purchase .23 shares of common stock at $13.05 per
share. These warrants expired, with none being exercised, on December 18, 1997.
E. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
North Coast has a stock option plan ("the Option Plan") to provide
incentives to stimulate interest in the development and financial success of the
Company. The Option Plan provides for the granting of stock options to purchase
common stock at an option price determined by North Coast's Compensation
Committee ("the Committee"). Options granted during 1999, 1998 and 1997 have
been at fair market value of the stock at the date of grant. The Committee shall
determine the expiration date but no option shall be exercisable for a period of
more than 10 years. The aggregate fair market value of the common stock
exercisable for the first time during any calendar year shall not exceed
$100,000. Options granted under the Option Plan terminate upon the employee
leaving the Company. The Company, from time to time, may issue additional
options outside the plan. The plan expires August 17, 1999.
F-18
<PAGE> 81
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option transactions during 1999, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING RANGE
----------- ------------
<S> <C> <C>
March 31, 1996.............................................. 99,966
Options exercised........................................... (20) $ 3.90
Options granted............................................. 3,620 $ 3.90
Options canceled............................................ (895) $ 3.90-$6.90
-------
March 31, 1997.............................................. 102,671
Options exercised........................................... (50) $ 3.90
Options canceled............................................ (41,273) $3.90-$24.55
-------
March 31, 1998.............................................. 61,348
Options granted............................................. 20,000 $ 4.38
Options canceled............................................ (46,428) $ 3.90-$8.10
-------
March 31, 1999.............................................. 34,920
=======
</TABLE>
In the year ended March 31, 1999, the Company granted 20,000 options to a
Company director at $4.375 per share with 6,667 shares vesting on that date and
6,667 vesting each year after.
A summary of stock options outstanding and exercisable at March 31, 1999
follows:
<TABLE>
<CAPTION>
OPTIONS OPTION
EXERCISABLE AT MARCH 31, 1999 THROUGH: OUTSTANDING PRICE
-------------------------------------- ----------- ------
<S> <C> <C>
January 18, 2000............................................ 3,500 $8.10
May 17, 2001................................................ 8,740 $4.90
March 19, 2003.............................................. 920 $6.90
September 4, 2006........................................... 1,760 $3.90
April 15, 2003.............................................. 6,667 $4.38
------ -----
21,587
Non vested options........................................ 13,333 $4.38
------ -----
Total............................................. 34,920
======
</TABLE>
Stock appreciation rights may be awarded by the Committee at the time or
subsequent to the time of the granting of options. Stock appreciation rights
awarded shall provide that the option holder shall have the right to receive an
amount equal to 100% of the excess, if any, of the fair market value of the
shares of common stock covered by the option over the option price payable, as
defined. No stock appreciation rights have been awarded under the plan.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Company's two stock option
plans been determined based on the fair value at the grant date for awards in
fiscal 1999, 1998 and 1997 consistent with the provisions of SFAS No. 123, the
Company's net income per share would not change.
F. STOCK BONUS PLAN
The Company has a Key Employees Stock Bonus Plan ("the Bonus Plan") to
provide key employees, as defined, with greater incentive to serve and promote
the interests of the Company and its shareholders. The aggregate number of
shares of common stock which may be issued as bonuses shall be 46,000 shares of
common
F-19
<PAGE> 82
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock, as defined. The expenses of administering the Bonus Plan shall be borne
by the Company. The Bonus Plan will terminate on February 1, 2001. The Company
issued 3,470 and 3,340 shares of common stock related to this plan during fiscal
1999 and 1998, respectively, and 25,120 shares of common stock since inception.
G. REVERSE STOCK SPLIT
On March 17, 1999, the Company's Board of Directors authorized a 1-for-5
reverse split of its common stock effective June 7, 1999 for stockholders of
record at the close of business on May 12, 1999. The par value of the common
stock was not changed. All share and per-share amounts in the accompanying
consolidated financial statements have been restated to give retroactive effect
to the reverse stock split.
NOTE 7. INCOME TAXES
The Company accounts for income taxes under the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109
is an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's consolidated financial statements or tax
returns.
Income taxes differed from the amount computed by applying the federal
statutory rates to pretax book income as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Provision based on the
statutory rate............ $296,000 34.0 $ 89,000 34.0 $ 99,000 34.0
Tax effect of:
Statutory depletion.... (306,000) (35.2) (132,000) (50.4) (143,000) (49.0)
Other -- net........... 10,000 1.2 43,000 16.4 44,000 15.0
-------- ----- --------- ----- --------- -----
Total.................. $ -- -- $ -- -- $ -- --
======== ===== ========= ===== ========= =====
</TABLE>
The components of the net deferred tax liability as of March 31, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Property and equipment.................................... $(1,322,000) $(389,000)
Other, net................................................ -- (30,200)
----------- ---------
Total deferred tax liabilities.................... (1,322,000) (419,200)
----------- ---------
DEFERRED TAX ASSETS
Alternative minimum tax credit carryforwards.............. 397,000 397,000
Net operating loss carryforwards.......................... 1,181,000 640,000
Other financial reserves.................................. 57,000 30,000
Less: valuation allowance................................. (622,200) (957,000)
----------- ---------
Total deferred tax assets......................... 1,012,800 110,000
----------- ---------
Net deferred tax liability............................. $ (309,200) $(309,200)
=========== =========
</TABLE>
As of March 31, 1999, the Company had operating loss, percentage depletion
and alternative minimum tax credit carryforwards of approximately $3,500,000,
$1,900,000 and $397,000, respectively. The 34% tax effect of the percentage
depletion carryover has been shown as a reduction of the deferred tax liability
related to property and equipment in the above presentation. The operating loss
carryforwards begin to expire in 2012. The percentage depletion and alternative
minimum tax carryforwards can be carried forward indefinitely. Realization
F-20
<PAGE> 83
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of these items is subject to certain limitations and is contingent upon future
earnings. Additionally, a significant portion of the carryforwards may be
subject to limitations imposed by Internal Revenue Code Section 382, which could
further restrict the Company's utilization and realization of such
carryforwards. Due to the uncertainty of the realization of certain tax
carryforwards, the Company has established a valuation allowance against these
carryforward benefits in the amount of $622,200.
NOTE 8. PROFIT SHARING PLAN
The Company has a profit sharing plan that provides retirement and death
benefits to participants and covers substantially all employees. Company
contributions are discretionary and are allocated to the participants' accounts
based upon their compensation and are subject to a graded vesting schedule which
allows 20% vesting after two years of vesting service with an additional 20%
vesting for each complete year of vesting service thereafter. Contributions of
approximately $50,000, $30,000 and $20,000 were accrued or paid for the years
ended March 31, 1999, 1998 and 1997, respectively.
North Coast provides no significant post-retirement and/or post-employment
benefits other than the profit sharing plan discussed above.
NOTE 9. OTHER COMMITMENTS AND CONTINGENCIES
North Coast Energy, Inc., as general partner of several limited
partnerships, has committed to fund certain costs (primarily tangible well costs
and saleslines additions) of the partnerships as they are incurred. At March 31,
1999, management estimates the commitment to fund such costs to be approximately
$438,000. The commitment is expected to be funded by September 30, 1999.
The Company shares in unlimited liability to third parties with respect to
the operations of the partnerships it has sponsored and may be liable to limited
partners for losses attributable to breach of fiduciary obligations. In certain
partnerships, certain investors have participated as co-general partners in such
partnerships. To make such investments more acceptable to potential investors
(from a standpoint of risks to such investors), North Coast has agreed to
indemnify these investor-general partners from any partnership liability which
they may incur in excess of their contributions.
The Company has entered into employment contracts with certain of its
officers that provide for a minimum annual salary and incentives based on the
Company's sales and profitability. The commitment, including minimum incentives,
amounts to $330,000, $330,000 and $430,000, respectively, for the years ending
March 31, 1999, 1998 and 1997 plus CPI adjustments. In addition, each employment
contract provides for: reimbursement of certain business expenses; life
insurance of $1,000,000; disability benefits for a stated period of time as
defined; and termination benefits of between one and three years' salary.
Subsequent to March 31, 1999, Charles M. Lombardy, Jr., the Chief Executive
Officer of the Company, was paid $370,000 in lieu of continuing his employment
contract by signing a separation agreement with the Company. Additionally,
Lombardy received a ten year warrant to purchase, at $5.00 per share, 60,000
shares of the Company's common stock. The Company, also subsequent to year-end,
escrowed approximately $800,000 for the payment of dividend arrearages
associated with the Series B Preferred stock and the purchase of the former
Chief Executive Officer's common shares. The Company is obligated to purchase
the 107,301 common shares for $470,000 if NUON does not exercise its option to
purchase such shares. If NUON does exercise their option to purchase these
shares, it will directly reduce the amount of common shares NUON would be
required to purchase under the NUON Agreement (see Note 6A).
NOTE 10. INDUSTRY SEGMENTS AND MAJOR CUSTOMERS
North Coast and its subsidiaries operate in a single industry segment, the
acquisition, exploration and development of oil and gas properties. North Coast
and its subsidiaries both originate and acquire prospects and
F-21
<PAGE> 84
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
drill, or cause to be drilled, such prospects through joint drilling
arrangements with other independent oil companies or through limited
partnerships sponsored by the Company.
The Company's revenue is derived from oil and gas production and oil and
gas related activities. Gas production revenues represented 96%, 93% and 89% of
total oil and gas production revenues for the years ended March 31, 1999, 1998
and 1997, respectively. In 1999 (1998), the Company sold gas to major purchasers
that accounted for 52% (32%) and 13% (21%) of its gas production revenues. In
1997, the Company sold gas to major purchasers that accounted for 18%, 18% and
12%, respectively, of its gas production revenues. A significant portion of
trade accounts receivable at March 31, 1999 and 1998 was attributable to these
purchasers.
NOTE 11. RELATED PARTY TRANSACTIONS
The Company believes that the terms of related party transactions are as
favorable to the Company as could have been obtained from unaffiliated third
parties.
Accounts receivable from affiliates consist primarily of receivables from
the partnerships managed by the Company and are for administrative fees charged
to the partnerships and to reimburse the Company for amounts paid on behalf of
the partnerships. Significantly all of the Company's revenues, other than oil
and gas production revenue, are generated from or a result of the organization
and management of oil and gas partnerships sponsored by the Company. During the
year ended March 31, 1999, the Company acquired limited partnership interests in
oil and gas drilling programs that it had sponsored at a cost of approximately
$450,000.
During fiscal 1999, a company owned by an employee of the Company repaired
two compressors for $51,000 and the Company paid a $37,500 finder's fee to an
employee. During fiscal 1998, the Company purchased wells and a pipeline from a
shareholder for $62,000, purchased 28 wells from an employee for $339,000 and
paid a $75,000 finder's fee to an employee.
NOTE 12. ACCOUNTING STANDARDS
In June 1997, SFAS 130, "Reporting Comprehensive Income," was issued. SFAS
130 established new standards for reporting comprehensive income and its
components and is effective for fiscal years beginning after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure About Segments of an Enterprise and Related Information." SFAS 131
changed the standards for reporting financial results by operating segments,
related products and services, geographical areas and major customers. In
February 1998, SFAS 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits," was issued. SFAS 132 standardizes the disclosure
requirements for pension and other postretirement benefit plans but does not
change the measurement or recognition of those plans. SFAS 132 is effective for
fiscal years beginning after December 15, 1997. In June 1998, SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS
133 establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS 133 is effective for fiscal years beginning after
June 15, 1999. The effect of the adoption or anticipated adoption of the above
standards had no, or is expected to have no, material effect on the Company's
financial statements.
NOTE 13. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The following supplemental unaudited oil and gas information is required by
Statement of Financial Accounting Standards (SFAS) No. 69, "Disclosures About
Oil and Gas Producing Activities."
The tables on the following pages set forth pertinent data with respect to
the Company's oil and gas properties, all of which are located within the United
States.
F-22
<PAGE> 85
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Proved oil and gas properties....................... $42,964,679 $25,754,748 $24,290,505
Accumulated depreciation, depletion, amortization
and impairment.................................... (12,742,541) (10,892,238) (10,488,719)
----------- ----------- -----------
Net capitalized costs............................... $30,222,138 $14,862,510 $13,801,786
=========== =========== ===========
</TABLE>
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Property acquisition costs............................ $13,687,040 $ 277,742 $ 124,384
Exploration costs..................................... 110,295 194,503 121,809
Development costs..................................... 4,125,422 2,149,440 1,477,312
</TABLE>
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Oil and gas production................................. $7,233,763 $3,013,929 $3,137,556
(Loss) gain on sale of oil and gas properties.......... (2,008) 1,700 (26,031)
Production costs....................................... (2,601,555) (840,346) (777,163)
Exploration expenses................................... (110,295) (194,503) (121,809)
Depreciation, depletion, amortization, impairment and
other................................................ (1,863,012) (627,636) (695,877)
Abandonment of oil and gas properties.................. -- (88,947) (73,528)
---------- ---------- ----------
2,656,893 1,264,197 1,443,148
Provision for income taxes............................. 561,056 278,123 347,460
---------- ---------- ----------
Results of operations for oil and gas producing
activities (excluding corporate overhead and
financing costs).................................. $2,095,837 $ 986,074 $1,095,688
========== ========== ==========
</TABLE>
Provision for income taxes was computed using the statutory tax rates for
the years ended March 31, 1999, 1998 and 1997 and reflects permanent
differences, including the Partnership's results of operations for oil and gas
producing activities that are reflected in the Company's consolidated income tax
provision (credit) for the periods.
F-23
<PAGE> 86
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
OIL GAS
(BBLS) (MCF)
------- ----------
<S> <C> <C>
Balance, March 31, 1996..................................... 195,200 20,048,000
Extensions, discoveries and other additions............... -- 2,267,000
Production................................................ (16,200) (1,153,000)
Revision of previous estimates............................ (58,800) (3,121,000)
Sales of minerals in place................................ -- (1,082,000)
------- ----------
Balance, March 31, 1997..................................... 120,200 16,959,000
Extensions, discoveries and other additions............... 3,000 1,333,000
Production................................................ (13,900) (1,116,000)
Revision of previous estimates............................ 26,400 1,153,000
Sales of minerals in place................................ -- (527,000)
------- ----------
Balance, March 31, 1998..................................... 135,700 17,802,000
Extensions, discoveries and other additions............... 264,100 34,976,000
Production................................................ (28,100) (2,688,000)
Revision of previous estimates............................ 53,500 2,682,000
Sales of minerals in place................................ -- (251,000)
------- ----------
Balance, March 31, 1999..................................... 425,200 52,521,000
======= ==========
PROVED DEVELOPED RESERVES
March 31, 1996............................................ 151,800 16,303,000
March 31, 1997............................................ 120,200 14,472,000
March 31, 1998............................................ 126,700 15,087,000
March 31, 1999............................................ 322,700 41,214,000
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Future cash inflows from sales of oil and gas...... $142,552,000 $46,349,000 $44,379,000
Future production and development costs............ (58,702,000) (15,175,000) (15,442,000)
Future income tax expense.......................... (24,774,000) (8,959,000) (8,145,000)
------------ ----------- -----------
Future net cash flows.............................. 59,076,000 22,215,000 20,792,000
Effect of discounting future net cash flows at 10%
per annum........................................ (33,650,000) (11,557,000) (10,447,000)
------------ ----------- -----------
Standardized measure of discounted future net cash
flows............................................ $ 25,426,000 $10,658,000 $10,345,000
============ =========== ===========
</TABLE>
F-24
<PAGE> 87
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHANGES IN THE STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year.......................... $10,658,000 $10,345,000 $13,262,000
Extensions, discoveries and other additions......... 24,948,000 728,000 1,301,000
Sales of oil and gas, net of production costs....... (4,632,000) (2,173,000) (2,355,000)
Net changes in prices and production costs.......... (3,058,000) 26,000 (3,567,000)
Revisions of previous quantity estimates............ 2,272,000 1,122,000 (1,477,000)
Sales of minerals in place.......................... (107,000) (259,000) (859,000)
Net change in income taxes.......................... (6,367,000) (246,000) 2,257,000
Accretion of discount............................... 1,066,000 1,035,000 1,326,000
Other............................................... 646,000 80,000 457,000
----------- ----------- -----------
Balance, end of year................................ $25,426,000 $10,658,000 $10,345,000
=========== =========== ===========
</TABLE>
Under the guidelines of SFAS No. 69, estimated future cash flows are
determined based on year-end prices for crude oil, current allowable prices
applicable to expected natural gas production, estimated production of proved
crude oil and natural gas reserves, estimated future production and development
costs of reserves based on current economic conditions, and the estimated future
income tax expenses, based on year-end statutory tax rates (with consideration
of true tax rates already legislated) to be incurred on pretax net cash flows
less the tax basis of the properties involved. Such cash flows are then
discounted using a 10% rate.
The estimated quantities of proved oil and gas reserves and standardized
measure of discounted future net cash flows include reserves from proved
undeveloped acreage. The proved undeveloped acreage includes only the acreage
directly offsetting locations to wells that have indicated commercial production
in the objective formation and which North Coast expects to drill in the near
future using prices, operating costs and development costs expected in the area
of interest. The quantities for fiscal 1999, 1998 and 1997 were reviewed by an
independent petroleum engineering firm.
The methodology and assumptions used in calculating the standardized
measure are those required by SFAS No. 69. It is not intended to be
representative of the fair market value of the Company's proved reserves. The
valuation of revenues and costs does not necessarily reflect the amounts to be
received or expended by the Company. In addition to the valuations used,
numerous other factors are considered in evaluating known and prospective oil
and gas reserves.
F-25
<PAGE> 88
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY NORTH
COAST. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF NORTH COAST SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 2
Risk Factors.......................... 8
Incorporation of Certain Documents by
Reference........................... 14
Information About Forward-Looking
Statements.......................... 14
Price Range of common stock and
Dividend Policy..................... 15
Capitalization........................ 16
Use of Proceeds....................... 16
Selected Consolidated Financial
Data................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 29
Management............................ 40
Summary Compensation Table............ 43
Aggregated Option Exercises in Last
Fiscal Year and Fiscal Year-End
Values.............................. 44
Certain Transactions.................. 46
Principal and Selling Stockholders.... 47
Description of Securities............. 48
Shares Eligible for Future Sale....... 56
Description of Certain Indebtedness... 58
Manner of Offering.................... 60
Legal Matters......................... 60
Experts............................... 60
Where You Can Find More Information... 61
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
4,429,573 SHARES OF
COMMON STOCK
NORTH COAST ENERGY, INC.
--------------------
PROSPECTUS
--------------------
, 1999
------------------------------------------------------
------------------------------------------------------
<PAGE> 89
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a list of the estimated expenses to be incurred by North
Coast in connection with the distribution of the shares of common stock being
registered hereby. Except for the Securities and Exchange Commission
Registration Fee, all amounts are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... 4,110.83
Blue Sky Fees and Expenses.................................. 1,000.00
Printing and Engraving Costs................................ 1,000.00
Legal Fees and Expenses..................................... 15,000.00
Accountants Fee and Expenses................................ 5,000.00
Miscellaneous............................................... 1,000.00
----------
Total............................................. $27,110.83
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits indemnification
of directors, officers, employees or agents of the Registrant against expenses,
including attorney's fees, actually and reasonably incurred by such persons in
connection with the defense of any action, suit or proceeding in which such a
person is a party by reason of his being or having been a director, officer,
employee or agent of the Registrant, or of any corporation, partnership, joint
venture, trust or other enterprise in which he served as such at the request of
the Registrant, provided that he acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation, and
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful, and provided further (if the threatened,
pending or completed action or suit is by or in the right of the corporation)
that he shall not have been adjudged to be liable for negligence or misconduct
in the performance of his duty to the corporation (unless the court determines
that indemnity would nevertheless be proper under the circumstances). The
Registrant's by-laws provide that the Registrant shall indemnify such
individuals to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law. These provisions may be sufficiently broad to indemnify
such persons for liabilities arising under the Securities Act of 1933.
In addition, as permitted by Section 102(b)(7) of the Delaware General
Corporation Law, the Registrant's certificate of incorporation provides that a
director of the corporation shall not be personally liable to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a director
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) for
paying a dividend or approving a stock repurchase in violation of Section 174 of
the Delaware General Corporation Law; or (iv) for any transaction from which the
director derived an improper personal benefit. The effect of these provisions
will be to eliminate the rights of North Coast and its stockholders (through
stockholders' derivative suits on behalf of North Coast) to recover monetary
damages against a director for breach of fiduciary duty as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i)-(iv) of the preceding sentence. These
provisions will not affect the availability of injunctive relief nor will it
limit directors' liability for violations of the federal securities laws.
In addition to the indemnification provisions contained in North Coast's
certificate of incorporation and by-laws, North Coast has entered into
Indemnification Agreements with each of its directors and executive officers.
Generally, these Indemnification Agreements require North Coast to reimburse
such officers and directors for the costs of defending litigation by or in the
right of North Coast or otherwise, by reason of the fact such officer or
director was acting in good faith in his capacity as such on behalf of North
Coast. These Indemnification Agreements also require North Coast to reimburse
the costs of a good-faith settlement of any such litigation by such officers and
directors. Finally, the Indemnification Agreements may not restrict the
officers' and directors' indemnity rights subsequently without the approval of
the affected officer or director.
E-1
<PAGE> 90
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
No securities of North Coast which were not registered under the Act have
been issued or sold by North Coast within the past three years except as
follows:
common stock was issued to NUON pursuant to a private offering at the then
current price of $0.87 per share. NUON purchased 11,494,254 shares of common
stock in two separate transactions on September 4, 1997 and September 30, 1998.
NUON also has an option to purchase an additional 5,747,127 shares of common
stock prior to September 30, 1999 for $0.87 per share.
North Coast issued warrants to each of Messrs. Berns and Siegel to purchase
134,000 shares of common stock at a price of $0.875 per share associated with
the NUON investment transactions of September 4, 1997 and September 30, 1998
described above. Messrs. Berns and Siegel are each entitled to additional
warrants to purchase 67,000 shares of common stock upon the exercise of NUON's
option.
Certain directors of North Coast received common stock in lieu of cash
compensation for director's fees between October 1996 and December 1997 in the
following amounts: Mr. Pinkerton (8,464 shares); Mr. Grose (8,971 shares); Mr.
Michaels (8,094 shares); Mr. Begley (16,715 shares); Mr. Wegrich (12,403
shares); Mr. Ebinger (11,973 shares); and Mr. Bauman (11,973 shares).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See the Exhibit Index at page E-1 of this Registration Statement.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(a) The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective date thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
E-2
<PAGE> 91
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities bring registered which remain unsold at the
termination of the offering.
E-3
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment no. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Cleveland, State of Ohio on July 1, 1999.
NORTH COAST ENERGY, INC.
By: /s/ GARRY REGAN
------------------------------------
Garry Regan
President
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 1 to the registration statement has been signed by the following persons in
the capacities indicated on this 1st day of July, 1999.
<TABLE>
<S> <C>
/s/ GARRY REGAN President and Director
- --------------------------------------------
Garry Regan
Director
- --------------------------------------------
Leo J. M. J. Blomen
Director
- --------------------------------------------
Dominic A. Visconsi
CAREL W. J. KOK* Director
- --------------------------------------------
Carel W. J. Kok
Director
- --------------------------------------------
S. F. E. Bas Rosenbaum
C. RAND MICHAELS* Director
- --------------------------------------------
C. Rand Michaels
JOHN H. PINKERTON* Director
- --------------------------------------------
John H. Pinkerton
SAUL SIEGEL* Chief Executive Officer and Director
- -------------------------------------------- (principal executive officer)
Saul Siegel
JOS J. M. SMITS* Director
- --------------------------------------------
Jos J. M. Smits
RALPH L. BRADLEY* Director
- --------------------------------------------
Ralph L. Bradley
TIMOTHY WAGERS* Treasurer and Chief Financial Officer
- -------------------------------------------- (principal financial and accounting officer)
Timothy Wagers
</TABLE>
- ---------------
* The undersigned, by signing his name hereto, does sign this amendment no. 1 to
this registration statement on behalf of the above directors and officers of
North Coast Energy, Inc., pursuant to a power of attorney executed on behalf
of each such director and officer and which has been filed with the Securities
and Exchange Commission.
By: /s/ GARRY REGAN
-----------------------------------
Garry Regan
As Attorney-In-Fact
E-4
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENTS PAGE
- ------- ------------------------ ----------
<C> <S> <C>
3.1 Certificate of Incorporation of the Registrant dated August (B)
30, 1988.
3.2 Certificate of Stock Designation of the Registrant filed (B)
September 12, 1988.
3.3 Certificate of Stock Designation of the Registrant filed (B)
September 14, 1989.
3.4 Certificate of Correction filed March 22, 1991. (C)
3.5 Certificate of Amendment to Certificate of Incorporation (A)
filed November 4, 1992.
3.6 Certificate of Stock Designation filed December 29, 1992. (D)
3.7 Certificate of Amendment to Certificate of Incorporation (G)
filed August 29, 1994.
3.8 Certificate of Amendment to Certificate of Incorporation (K)
filed December 16, 1998.
3.9 Certificate of Amendment to Certificate of Incorporation --
filed June 7, 1999.
5.1 Opinion of Calfee, Halter & Griswold LLP as to the validity
of the shares of common stock.
10.1 1988 Stock Option Plan. (B)
10.2 Form of Profit Sharing Plan. (B)
10.3 Form of Indemnity Agreement between the Registrant and each (B)
of its Directors and executive officers.
10.4 North Coast Energy, Inc. Key Employees Stock Bonus Plan. (B)
10.5 Stock Option Agreement dated as of May 17, 1991 between (C)
Registrant and Timothy Wagers.
10.6 Stock Option Agreement dated as of May 17, 1991 between the (C)
Registrant and Thomas A. Hill.
10.7 Option Agreement dated February 22, 1994 by and between (E)
Registrant and Charles M. Lombardy, Jr.
10.8 Option Agreement dated February 22, 1994 by and between (E)
Registrant and Garry Regan.
10.9 Warrant to purchase 200,000 shares of common stock of North (G)
Coast.
10.10 Warrant to purchase 300,000 shares of common stock of North (G)
Coast.
10.11 Restated Employment Agreement dated May 3, 1995 by and (H)
between Registrant and Charles M. Lombardy, Jr.
10.12 Restated Employment Agreement dated May 3, 1995 by and (H)
between Registrant and Garry Regan.
10.13 Credit Agreement by and between ING Capital and North Coast (L)
dated February 9, 1998.
10.14 Purchase and Sale Agreement dated April 8, 1998 between Kelt (J)
Ohio, Inc., and North Coast Energy, Inc.
10.15 Ratification and Amendment to Purchase and Sale Agreement (J)
dated May 12, 1998 between Kelt Ohio, Inc., and North Coast
Energy, Inc.
10.16 First Amendment to Credit Agreement and Promissory Note (J)
dated May 29, 1998 between ING (U.S.) Capital Corporation
and North Coast Energy, Inc.
10.17 Second Amendment to Credit Agreement and Promissory Note (L)
dated September 2, 1998 between ING (U.S.) Capital
Corporation and North Coast Energy, Inc.
10.18 Warrants to purchase 300,000 shares (pre-split) of Common (L)
Stock of the Company.
10.19 Separation Agreement dated April 30, 1999 by and among North (L)
Coast Energy, Inc., NUON International, bv, Charles M.
Lombardy, Jr., and Betty M. Lombardy.
10.20 Third Amendment to Credit Agreement and Promissory Note (L)
dated June 23, 1999 between ING (U.S.) Capital Corporation
and North Coast Energy, Inc.
21.1 List of Subsidiaries. (E)
</TABLE>
E-5
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENTS PAGE
- ------- ------------------------ ----------
<C> <S> <C>
23.1 Consent of Arthur Andersen LLP. --
23.2 Consent of Hausser + Taylor LLP. --
23.3 Consent of Calfee, Halter & Griswold LLP (included in
Exhibit 5.1 of this Registration Statement)
27.1 Financial Data Schedule for the period April 1, 1998 to *
March 31, 1999
</TABLE>
- ---------------
<TABLE>
<S> <C>
(A) Incorporated herein by reference to the appropriate exhibit
to the Registrant's Registration Statement on Form S-2 (Reg.
No. 33-54288).
(B) Incorporated herein by reference to the appropriate exhibit
to North Coast's Registration Statement on Form S-1 (File
No. 33-24656).
(C) Incorporated herein by reference to the appropriate exhibit
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1991.
(D) Incorporated herein by reference to the appropriate exhibit
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1993.
(E) Incorporated herein by reference to the appropriate exhibit
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994.
(F) Incorporated herein by reference to the appropriate exhibit
to the Registrant's Quarterly Report on form 10-Q for the
fiscal quarter ended September 30, 1994.
(G) Incorporated herein by reference to the appropriate exhibit
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1995.
(H) Incorporated herein by reference to the appropriate exhibit
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996.
(I) Incorporated herein by reference to the appropriate exhibit
to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1996.
(J) Incorporated herein by reference to the appropriate exhibit
to the Registrant's Report on Form 8-K dated June 12, 1998.
(K) Incorporated herein by reference to the appropriate exhibit
to the Registrant's Form S-1 dated February 5, 1999 (File
No. 33-71855).
(L) Incorporated herein by reference to the appropriate exhibit
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1999.
* Exhibit 27.1 furnished for Securities and Exchange
Commission purposes only.
</TABLE>
E-6
<PAGE> 1
EXHIBIT 3.9
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
NORTH COAST ENERGY, INC.
--------------------------------
Pursuant to Section 242 of the
Delaware General Corporation Law
--------------------------------
The undersigned, Garry Regan, being the President, and Vicki L.
Zanella, being the Assistant Secretary, of North Coast Energy, Inc., a Delaware
corporation (the "Corporation"), hereby certify as follows:
1. The name of the Corporation is North Coast Energy, Inc.
2. The Board of Directors of the Corporation, by action taken at a
meeting on March 17, 1999, adopted a resolution proposing and declaring
advisable the amendment to Article IV of the Certificate of Incorporation of the
Corporation described below.
3. This Certificate of Amendment of the Certificate of
Incorporation was duly adopted by the requisite vote of the Board of Directors
of the Corporation.
4. By written action of more than a majority of the stockholders of
the Corporation entitled to vote effective on June 7, 1999, taken in accordance
with Sections 228 and 242 of the Delaware General Corporation Law, the necessary
number of shares as required by statute were voted in favor of the adoption of
the amendment.
5. The amendment of the Certificate of Incorporation as hereinafter
set forth has been duly adopted in accordance with Section 242 of the Delaware
General Corporation Law.
<PAGE> 2
6. The Certificate of Incorporation of the Corporation is hereby
amended by deleting in its entirety the current first full, introductory
paragraph of Article IV and replacing it with the following:
"The total authorized capital stock of the Corporation shall be
Sixty-Two Million (62,000,000) shares of which number Sixty Million
(60,000,000) shall be shares of Common Stock, $.01 par value (the "Common
Stock"), and Two Million (2,000,000) shall be shares of Preferred Stock, $.01
par value. The total authorized capital stock of the Corporation shall not be
changed by the transaction described below.
At the time this Certificate of Amendment becomes effective, and
without any further action on the part of the Corporation or its stockholders,
each five shares of common stock, par value $.01 per share, then issued and
outstanding, shall be changed and reclassified into one fully paid and
nonassessable share of common stock, par value $.01. The capital account of the
Corporation shall not be increased or decreased by such change and
reclassification. To reflect the said change and reclassification, each
certificate representing shares of common stock, par value $.01 per share,
theretofore issued and outstanding, shall represent one-fifth the number of
shares of common stock, par value $.01 per share, issued and outstanding after
such change and reclassification; and the holder of record of each such
certificate shall be entitled to receive a new certificate representing a number
of shares of common stock, par value $.01, of the kind authorized by this
amendment, equal to one-fifth the number of shares represented by said
certificate for theretofore issued and outstanding shares, so that upon this
amendment becoming effective each holder of record of five shares of the common
stock with a par value of $.01 will have, or be entitled to, a certificate
representing one share of common stock with par value $.01 of the kind
authorized by this amendment."
<PAGE> 3
IN WITNESS WHEREOF, the undersigned, being the duly elected and acting
President and Assistant Secretary, respectively, have hereunto subscribed their
names to this Certificate of Amendment and affirm that the facts stated herein
are true under penalties of perjury, this 7th day of June, 1999.
/s/ Garry Regan
--------------------------------
Garry Regan,
President
/s/ Vicki L. Zanella
- ----------------------------
Vicki L. Zanella
Assistant Secretary
<PAGE> 1
Exhibit 5.1
June 30, 1999
North Coast Energy, Inc.
1993 Case Parkway
Twinsburg, Ohio 44087
In connection with the registration under the Securities Act
of 1933, as amended (the "Act"), and sale of 4,429,573 shares of North Coast
Energy, Inc.'s (the "Company's") Common Stock, $.01 par value (the "Common
Stock"), we, as your counsel, have examined such corporate records, certificates
and other documents, and such questions of law as we have considered necessary
or appropriate for this opinion.
Based upon such examination and on the assumptions set forth
below, we are of the opinion that (a) 3,106,547 shares of Common Stock to be
registered under the Act are currently validly issued, fully paid and
nonassessable and (b) the remaining 1,323,026 shares of Common Stock to be
registered under the Act and issuable upon the exercise of outstanding stock
warrants and options, when duly issued upon the exercise of outstanding stock
warrants and options, will be validly issued, fully paid and nonassessable.
In rendering the foregoing opinion, we have relied as to
certain matters on information obtained from public officials, officers of the
Company and other sources believed by us to be responsible, and we have not
independently checked or verified the accuracy of the statements contained
therein. In addition, we are admitted to the practice of law only in the State
of Ohio and the opinions expressed herein are limited to the federal law of the
United States of America, Delaware corporate law and the laws of the State of
Ohio, in each case as in effect on the date hereof.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement on Form S-1 (the "Registration Statement") filed
by the Company to effect registration of the Common Stock under the Act, and to
the reference to us under the heading "Legal Matters" in the prospectus
constituting part of the Registration Statement. In giving such consent, we do
not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Act.
Very truly yours,
CALFEE, HALTER & GRISWOLD LLP
<PAGE> 1
Exhibit 23.1
Consent of Arthur Andersen LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports (i) dated June 4, 1998,
on Form 10-K for the fiscal year ended March 31, 1998 and (ii) dated May 7,
1998, on Form 8-K, dated July 14, 1998, and to all references to our Firm
included in this registration statement.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Cleveland, Ohio
June 30, 1999.
<PAGE> 1
Exhibit 23.2
Consent of Hausser + Taylor LLP
CONSENT AND REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement of our report
which has a primary date of May 28, 1999, relating to the consolidated financial
statements of North Coast Energy, Inc. and subsidiaries, and to the reference
to our Firm under the caption "Experts."
HAUSSER + TAYLOR LLP
/s/ Hausser + Taylor LLP
Cleveland, Ohio
July 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000839950
<NAME> NORTH COAST ENERGY
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,956,617
<SECURITIES> 0
<RECEIVABLES> 2,855,672
<ALLOWANCES> 0
<INVENTORY> 210,556
<CURRENT-ASSETS> 5,297,845
<PP&E> 51,955,740
<DEPRECIATION> 15,537,255
<TOTAL-ASSETS> 43,576,467
<CURRENT-LIABILITIES> 2,898,390
<BONDS> 0
0
3,067
<COMMON> 45,568
<OTHER-SE> 17,893,912
<TOTAL-LIABILITY-AND-EQUITY> 43,573,467
<SALES> 13,942,300
<TOTAL-REVENUES> 13,942,300
<CGS> 11,317,863
<TOTAL-COSTS> 11,317,863
<OTHER-EXPENSES> (86,885)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,841,108
<INCOME-PRETAX> 870,214
<INCOME-TAX> 0
<INCOME-CONTINUING> 870,214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 870,214
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.16
</TABLE>
