<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
COMMISSION FILE NUMBER 0-18691
NORTH COAST ENERGY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1594000
(State of incorporation) (I.R.S. Employer
Identification No.)
1993 CASE PARKWAY
TWINSBURG, OHIO 44087-2343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 425-2330
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
SERIES A 6% CONVERTIBLE NON-CUMULATIVE PREFERRED STOCK, $0.01 PAR VALUE
(Title of class)
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK, $0.01 PAR VALUE
(Title of class)
WARRANTS TO PURCHASE COMMON STOCK, $0.01 PAR VALUE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all Reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
As of September 30, 1999, the Registrant had outstanding 5,599,575 shares of
Common Stock, 70,061 shares of Series A Preferred Stock, and 232,864 shares of
Series B Preferred Stock. All shares have been restated to reflect the 1 for 5
reverse Common Stock split effective June 7, 1999.
The aggregate market value of Common Stock held by non-affiliates of the
Registrant at June 10, 1999 was $4,400,148 which value has been computed on the
basis of $3.88 per share of Common Stock, the mean between the closing bid and
ask price as reported for that day on Nasdaq.
The undersigned registrant hereby amends and restates in their entirety the
following items, financial statements, exhibits or other portions of its Annual
Report on Form 10-K for the fiscal year ended as set forth in the pages attached
hereto:
PART II, Items 6, 7, 8
PART III, Items 10, 11, 12 and 13
<PAGE> 2
PART II
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data for the Company
for each of the five fiscal years in the period ended March 31, 1999, 1998,
1997, 1996 and 1995.
<TABLE>
<CAPTION>
Years Ended March 31
(In thousands, except per share amounts)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $13,942 $8,591 $9,665 $10,860 $15,275
Net Income (Loss) 870 262 292 (1,254) 295
Net Income (Loss) per Share(1) .16 (.00) (.75) (1.19) (.25)
Total Assets 43,573 22,312 21,229 20,243 21,136
Long-term Debt (less current portion) 21,494 7,171 10,721 8,955 6,197
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
North Coast is engaged in the acquisition and enhancement of developed
properties and the exploration, development and production of undeveloped
natural gas and oil properties, primarily in conjunction with the 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 the
Drilling Programs.
North Coast's proved developed natural gas reserves increased to 41.2
Bcf for fiscal 1999 from 15.1 Bcf for the fiscal year ended March 31, 1998 and
proved developed oil reserves increased to 322,700 barrels from 126,700 barrels.
The increase in proved developed reserves resulted primarily from the Kelt
acquisition coupled with the purchase of the working interest in 35 wells and
the purchase of partnership interests from certain of the Company's Drilling
Program investors. The proved gas reserves (developed and undeveloped) increased
to 52.5 Bcf for fiscal 1999 from 17.8 Bcf for fiscal 1998. The increase in
proved gas reserves was due to the increases mentioned previously for the proved
developed reserves coupled with the upward revision to the proved undeveloped
reserves for drilling locations that were proved through the Company's recent
Drilling Programs. Proved oil reserves (developed and undeveloped) increased to
425,200 barrels for fiscal 1999 from 135,700 barrels for fiscal 1998. North
Coast recognizes as proved undeveloped reserves only the potential oil and gas
which can reasonably be expected to be recovered from drillable locations which
it owned (or had rights to) at fiscal year end which are directly offsetting
locations to wells that have indicated commercial production in the objective
formation and which North Coast fully expects to drill in the very near future.
Changes in the Standardized Measure of Discounted Future Net Cash Flows are set
forth in Note 13 of the Company's financial statements. The above mentioned
additions and sales of natural gas, coupled with the development costs
associated with undeveloped acreage, create timing differences which are
reflected in the other category of the Standardized Measure. Of the Company's
total proved reserves, approximately 78% are proved developed and approximately
22% are proved undeveloped based upon equivalent unit Mcfs. Proved undeveloped
acreage requires considerable capital expenditures to develop. Management
believes that a significant percentage of the proved undeveloped reserves should
be recovered in future years, although no assurance of such recovery can be
given.
The following table is a review of the results of operations of the
Company 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>
Revenues: 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Oil and gas production 52% 35% 33%
Drilling revenues 26 35 39
Well operating, transportation and other 15 19 19
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Administrative and agency fees 7 11 9
----- ---- ----
Total Revenues 100% 100% 100%
----- ---- ----
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 6% 3% 3%
===== === ==
Net Income (Loss) Applicable to Common Stock(1) 5% 0% (13)%
===== === ====
</TABLE>
(1) Dividends were paid or accrued on the Series B cumulative preferred
stock in the amount of $236,654, $268,264 and $458,606 for fiscal
1999, 1998, and 1997.
The following discussion and analysis reviews the results of operations
and financial condition for the Company for the years ended March 31, 1997, 1998
and 1999. This review should be read in conjunction with the Financial
Statements and other financial data presented elsewhere herein.
COMPARISON OF FISCAL 1999 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 acquisition 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 the Company's third quarter purchase of
interests in prior Drilling Programs. The Company 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. The Company 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.
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<PAGE> 4
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 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, the Company 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, the Company had
expended approximately $3.1 million on its enhancement program. The Company 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 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 due
to the integration of the 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
certain payments to a former executive of the Company 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 the Company's net income $608,076 (232%) to
$870,214 for fiscal 1999 from $262,138 for fiscal 1998.
COMPARISON OF FISCAL 1998 TO FISCAL 1997
REVENUES
Oil and gas production revenues decreased $123,627 (4%) to $3,013,929
for fiscal 1998 compared to $3,137,556 for fiscal 1997. On an equivalent basis,
production declined to 1.20 bcf equivalent in fiscal 1998 from 1.25 bcf
equivalent in fiscal 1997. Oil revenues decreased approximately $110,000 due to
a decrease in the oil production and a decrease in the average price received
for oil by the Company. For fiscal 1998 the Company 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
during fiscal 1997.
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Drilling revenues decreased $795,259 (21%) for fiscal 1998 compared to
fiscal 1997 due to the decrease in the number of wells recognized in revenue.
The Company recognized revenues for fiscal 1998 on 20 wells as compared to 29
wells for fiscal 1997.
Revenues generated from well operating, transportation and other
decreased $237,198 (13%) for fiscal 1998 compared to fiscal 1997. This decrease
was primarily due to a decrease in unaffiliated third party gas sales. The
unaffiliated third party gas sales fluctuate from year to year based upon the
availability of these types of transactions.
Revenue from administrative and agency fees, which are based on a
percentage of the total investor capital raised in all of the Drilling Programs,
increased by $81,727 (9%) for fiscal 1998 compared to fiscal 1997 due to the
formation of the Drilling Programs in fiscal 1998. The administrative fees
derived from the fiscal 1998 Drilling Programs were charged a one-time fee equal
to 4.5% of total capital raised compared to the prior years programs which are
charged an annual fee equal to 2% of total capital raised.
EXPENSES
Oil and gas production expense increased $63,183 (8%) for fiscal 1998
as compared to fiscal 1997. 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 compared to fiscal 1997 decreased
$360,027 (13%) 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
between comparable periods was due to actual completion costs over the estimated
accruals from 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.
Oil and gas operations expense decreased $324,271 (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 to $839,342 for fiscal 1998 from $1,055,409
for fiscal 1997. This decrease was primarily due to the reduction of the
borrowings under the Company's Credit Facility and other debt by utilizing funds
received from the sale of common stock. At March 31, 1998, $6,565,265 was
outstanding under the Company's Credit Facility, as compared to $8,640,000 at
March 31, 1997.
Net income was $262,138 for fiscal 1998 compared to $291,750 for fiscal
1997. 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 the Company'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
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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 possibly FERC Order 636. The 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. The Company anticipates that spot market prices will
continue to fluctuate in response to various factors primarily weather and
market conditions.
In an effort to position itself to take advantage of future increases
in demand for natural gas, 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 Company 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, the Company had $20,827,635
outstanding under its Credit Facility.
The following table summarizes the Company's financial position at
March 31, 1999 and 1998:
<TABLE>
<CAPTION>
(Amounts in Thousands) 1999 1998
---- ----
Amount % Amount %
------ - ------ -
<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:
<TABLE>
<CAPTION>
(Amounts in Thousands) 1999 1998 1997
---- ---- ----
Dollars % Dollars % Dollars %
------- - ------- - ------- -
<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>
(1) All items in the previous table are calculated as a percentage of total
cash sources. Total cash sources include the
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following items, if positive: cash flow from operations before working
capital changes, changes in working capital, net cash provided by
investing activities and net cash provided by financing activities, plus
any decrease in cash and cash equivalents.
As the above table indicates, 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 approximately $17,894,000
for fiscal 1999 compared to fiscal 1998. This increase reflects the Company's
borrowings under its credit facility to finance the Kelt acquisition. Also
reflected is the receipt of $5 million from NUON on September 29, 1998 for the
issuance of Common Stock of the Company and the subsequent payment of a portion
of the Company's Credit Facility.
On February 9, 1998, the Company entered into an agreement with ING
(US) Capital Corporation to replace the $20 million revolving credit facility
with its previous lender. An amended credit facility dated May 29, 1998 ("Credit
Agreement") expanded the Company's $20 million revolving credit facility with
ING ("ING") to a $25 million revolving credit facility ("Credit Facility"). The
Credit Agreement also provides for a borrowing base which is determined
semiannually by the lender based upon the Company's financial position, oil and
gas reserves, as well as outstanding letters of credit ($150,000 at March 31,
1999), as defined. The Credit Agreement requires payment of an agent fee (0.75%
for Credit Agreement) on amounts available and 1/2% commitment fee on amounts
not borrowed up to the available line. At March 31, 1999, the Company's
borrowing base was $25 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 subsequently be adjusted upon the semiannual reserve study
and borrowing base determination (see Note 5 to the Company's March 31, 1999
financial statements). The Credit Facility provides that the payment of cash
dividends with respect to the Common Stock of the Company is prohibited. As of
March 31, 1999, the Company 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
.75% or Libor plus 2.50%. The line of credit is reviewed semi-annually and
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
the Company 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 revolving line of credit are secured by
the Company's receivables, inventory, equipment and a first mortgage on certain
of the Company's interests in oil and gas wells and reserves. The mortgage notes
are secured by certain land and buildings.
In addition, at March 31, 1999, the Company 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 the Company to make
monthly payments of approximately $1,019 through July 2003. The Company
purchased a building for its headquarters and entered a mortgage note on May 13,
1996 for $540,000 over a 15-year term with an interest rate of 8.58% to be
renegotiated every five years. The amount outstanding under the mortgage note at
March 31, 1999 was $487,673.
On September 29, 1998, the Company sold an additional 1,149,425 shares
of its Common Stock for $5 million to NUON International bv, a limited liability
company organized under the laws of the Netherlands ("NUON"), pursuant to the
terms of a stock purchase agreement ("Agreement") by and between the Company and
NUON dated August 1, 1997. By exercising its option to purchase additional
shares by September 30, 1998, NUON's stock ownership increased to 51%
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<PAGE> 8
of the Company's outstanding Common Stock. NUON also exercised the right to
appoint two directors at the Company's December 1998 Annual Meeting. The Company
issued 126,800 warrants representing the right of the holders 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. The Company is also obligated to
issue 26,800 warrants if NUON purchases the additional 1,149,426 shares, with
13,400 of the potential warrants due to an officer of the Company. The
additional warrants represent the right to purchase one share of Common Stock
for $4.375 per share.
The Company acquired certain assets and assumed certain obligations of
Kelt, headquartered in Cambridge, Ohio. The Kelt acquisition was made pursuant
to a Purchase and Sale Agreement dated April 8, 1998 and amended May 12, 1998.
The purchase price for the acquired assets was approximately $16 million. The
Company funded the acquisition using cash and an increase in its credit
facility.
On April 30, 1999, the Company's chief executive officer resigned and
under a separation agreement is entitled to certain payments in lieu of his
existing employment contract and payments for non-compete, a warrant to purchase
common stock. In addition, under certain conditions the Company 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 of North Coast 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 the Company's
obligations, operations and meet debt service requirements through fiscal 2000.
YEAR 2000 READINESS DISCLOSURE
The Company 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. The Company has already implemented the first three
phases of its four-phase action plan. In Phase One, the Company assessed its
information technology ("IT") 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. Phase Two included the upgrade of North Coast's personal
computer equipment and software.
In Phase Three, the Company tested existing systems and determined
whether those systems suspect to Year 2000 compliance problems should be
replaced. In Phase Three, the Company replaced systems and software because of
the Year 2000 issue and because the Kelt acquisition necessitated newer and more
compatible systems. The Company 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, the Company has incurred approximately 83.0% of
these anticipated costs.
Phase Four of the Company's action plan involves the implementation of
the Company's Year 2000 compliant software and the reevaluation of all of the
Company's material systems. North Coast intends to complete this phase of its
action plan by the end of the second quarter of fiscal year 2000. The Company
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 the Company's Year 2000 compliance cost estimates.
In addition, the Company has discussed Year 2000 compliance issues with
its vendors and customers. Although the Company has no reason to believe that
its vendors and customers will not be Year 2000 compliant, the Company is unable
to determine the extent to which Year 2000 issues will effect its vendors and
customers. The Company continues to discuss procedures necessary to address this
issue with its vendors and customers.
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<PAGE> 9
The Company 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 the Company'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 the Company's
systems or results of operations. The Company plans to establish a contingency
plan for dealing with the most reasonably likely worse case scenario. To date
such a scenario has not been clearly identified. North Coast plans to complete
such analysis and contingency planning by the second quarter of fiscal year
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 the Company's
financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY.
PLEASE SEE PAGES F-1 THROUGH F-31 FOR THE FINANCIAL STATEMENTS REQUIRED BY ITEM
8 OF PART II OF THE FORM 10-K.
8
<PAGE> 10
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
1999 CONSOLIDATED FINANCIAL REPORT
F-1
<PAGE> 11
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-31
</TABLE>
F-2
<PAGE> 12
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> 13
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 (earnings per share
for the year ended March 31, 1997 has been restated - See Note 6), 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 (except with respect to earnings per share for the year ended March
31, 1997 discussed in Note 6, as to which the date is August 26, 1999)
F-4
<PAGE> 14
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 intergral part of these consolidated financial
statements.
F-5
<PAGE> 15
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
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 intergral part of these consolidated financial
statements.
F-6
<PAGE> 16
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
------------ ------------ ------------
INCOME FROM OPERATIONS 2,624,437 1,033,918 1,267,176
------------ ------------ ------------
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
============ ============ ============
DIVIDENDS ON CUMULATIVE PREFERRED STOCK (236,654) (268,264) (458,606)
ENHANCED CONVERSION FEATURES IN EXCESS OF THE
IMBEDDED CONVERSION FEATURE AT-FAIR MARKET
VALUE ON FEBRUARY 28, 1997 -- -- (1,070,003)
------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 633,560 $ (6,126) $ (1,236,859)
============ ============ ============
NET INCOME (LOSS) PER SHARE (basic and diluted)
(restated for 1997) $ 0.16 $ -- $ (0.75)
============ ============ ============
</TABLE>
The accompanying notes are an intergral part of these consolidated financial
statements.
F-7
<PAGE> 17
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock
---------------------------- ---------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <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
1-for-5 reverse stock split
effective June 7, 1999 -- -- -- -- (6,432,118) (64,322)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1996 305,200 3,052 464,665 4,647 1,608,030 16,080
Net income -- -- -- -- -- --
Shares converted (228,249) (2,282) (195,201) (1,952) 537,811 5,378
Dividends on Series A Preferred
stock ($.30 per share) -- -- -- -- -- --
Dividends on Series B Preferred
stock ($.50 per share) -- -- -- -- -- --
Issuance of stock bonus common
shares -- -- -- -- 4,938 50
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1997 76,951 770 269,464 2,695 2,150,779 21,508
Net income -- -- -- -- -- --
Shares converted (1,470) (15) (1,200) (12) 3,273 33
Dividends on Series B Preferred
stock ($.25 per share) -- -- -- -- -- --
Issuance of common stock -- -- -- -- 1,165,144 11,651
Issuance of stock bonus common
shares -- -- -- -- 3,390 34
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1998 75,481 755 268,264 2,683 3,322,586 33,226
Net income -- -- -- -- -- --
Shares converted (1,665) (17) (35,400) (354) 81,333 813
Dividends on Series B Preferred
stock ($.85 per share) -- -- -- -- -- --
Issuance of common stock -- -- -- -- 1,149,425 11,494
Issuance of stock bonus common
shares -- -- -- -- 3,470 35
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1999 73,816 $ 738 232,864 $ 2,329 4,556,814 $ 45,568
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Additional Total
Paid-in Retained Stockholders'
Capital Deficit Equity
------- ------- ------
<S> <C> <C> <C>
BALANCE, MARCH 31, 1996,
AS PREVIOUSLY REPORTED $ 12,082,969 $ (4,852,465) $ 7,318,605
1-for-5 reverse stock split
effective June 7, 1999 64,322 -- --
------------ ------------ ------------
BALANCE, MARCH 31, 1996 12,147,291 (4,852,465) 7,318,605
Net income -- 291,750 291,750
Shares converted (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 23,080 -- 23,130
------------ ------------ ------------
BALANCE, MARCH 31, 1997 12,169,227 (4,884,589) 7,309,611
Net income -- 262,138 262,138
Shares converted (6) -- --
Dividends on Series B Preferred
stock ($.25 per share) -- (67,066) (67,066)
Issuance of common stock 4,812,322 -- 4,823,973
Issuance of stock bonus common
shares 10,597 -- 10,631
------------ ------------ ------------
BALANCE, MARCH 31, 1998 16,992,140 (4,689,517) 12,339,287
Net income -- 870,214 870,214
Shares converted (442) -- --
Dividends on Series B Preferred
stock ($.85 per share) -- (201,724) (201,724)
Issuance of common stock 4,913,506 -- 4,925,000
Issuance of stock bonus common
shares 9,735 -- 9,770
------------ ------------ ------------
BALANCE, MARCH 31, 1999 $ 21,914,939 $ (4,021,027) $ 17,942,547
============ ============ ============
</TABLE>
The accompanying notes are an intergral part of these consolidated financial
statements.
F-8
<PAGE> 18
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 intergral part of these consolidated financial
statements.
F-9
<PAGE> 19
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 intergral part of these consolidated financial
statements.
F-10
<PAGE> 20
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> 21
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(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-12
<PAGE> 22
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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.
F-13
<PAGE> 23
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 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.
F-14
<PAGE> 24
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. ACQUISITION OF KELT OHIO, INC. (CONTINUED)
<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. 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.
F-15
<PAGE> 25
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-16
<PAGE> 26
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. LONG-TERM DEBT (CONTINUED)
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.
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:
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
=============
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.
F-17
<PAGE> 27
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. STOCKHOLDERS' EQUITY (CONTINUED)
A. Sale of Common Stock (Continued)
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 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.
F-18
<PAGE> 28
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. STOCKHOLDERS' EQUITY (CONTINUED)
B. Preferred Stock (Continued)
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.
F-19
<PAGE> 29
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. STOCKHOLDERS' EQUITY (CONTINUED)
B. Preferred Stock (Continued)
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.
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. The earnings per share for
fiscal 1997 was restated from $(0.10) to $(0.75) which gives
effect to the fair market value of the enhanced conversion in
excess of the embedded conversion feature in the Preferred
Series A and B.
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.
F-20
<PAGE> 30
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. STOCKHOLDERS' EQUITY (CONTINUED)
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.
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>
F-21
<PAGE> 31
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. STOCKHOLDERS' EQUITY (CONTINUED)
E. Stock Options and Stock Appreciation Rights (Continued)
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 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.
F-22
<PAGE> 32
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. STOCKHOLDERS' EQUITY (CONTINUED)
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>
F-23
<PAGE> 33
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED)
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 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.
F-24
<PAGE> 34
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 its 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 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.
F-25
<PAGE> 35
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-26
<PAGE> 36
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-27
<PAGE> 37
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) (CONTINUED)
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-28
<PAGE> 38
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) (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>
F-29
<PAGE> 39
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) (CONTINUED)
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>
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>
F-30
<PAGE> 40
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) (CONTINUED)
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-31
<PAGE> 41
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's 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. At the Company's next annual meeting, stockholders will be
asked to elect three Directors whose term will expire at the 2002 annual
meeting.
GARRY REGAN, age 49, is President, Chairman of the Board, and a Director. Mr.
Regan served as an executive officer and director of the Company's predecessor
since 1981 and has been President and Director of the Company since August 1988.
He received his B.S. Degree from Ohio State University and a Masters Degree from
Indiana University. Mr. Regan is a member of the Independent Petroleum
Association of America. Mr. Regan also serves as president of NCE Securities, a
wholly owned subsidiary of the Company and a registered broker-dealer.
SAUL SIEGEL, age 69, 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 for oil and gas wells.
Precision Rebuilders, Inc. ceased operations in July, 1999. Mr. Siegel devotes
substantially all of his time to the operations of North Coast. Mr. Siegel
manages Clark Engineering Services and Metalworking International Corporation
and has managed Precision Rebuilders, Inc. through various third-party
management which consists of family members and a management team. Mr. Siegel
devotes some of his six weeks of vacation time to his outside business activity.
Mr. Siegel estimates he spends six hours in an average week with the third-party
management team.
JOS J.M. SMITS, age 50, 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.
LEO J.M.J. BLOMEN, age 44, is a Director. Mr. Blomen was appointed to the Board
of Directors in September 1997. Mr. Blomen 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
bv. Mr. Blomen is also on the boards of DATTEL a.s., a cable company in Prague
(Czech Republic); Calortex, Ltd., a gas company in the U.K.; and the
Sino-foreign company Shantou Dan Nan Windpower Development Company, Ltd., a
joint venture now operating the largest windfarm in China. Mr. Blomen holds a
degree in Chemical Engineering and a Ph.D. in Medicine.
RALPH L. BRADLEY, age 58, 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.
DOMINIC A. VISCONSI, age 74, 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,
9
<PAGE> 42
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 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, age 32, 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, an 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 a M.B.A. from the Rotterdam School of Management at
Erasmus University.
S. F. E. ROSENBAUM, age 50, 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, age 62, 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 Resources Corporation in 1998 and is a Director of Range. He served as
President and Chief Executive Officer of Lomak Petroleum, Inc. 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, age 45, is a Director. Mr. Pinkerton was appointed to the
Board of Directors in 1996. Mr. Pinkerton is President, Chief Executive Officer
and a Director of Range Resources Corporation and joined Lomak Petroleum, Inc.
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 a Director in 1998.
Executive Officers of the Registrant*
OMER YONEL, age 35, was appointed Executive Vice President-Corporate Development
in January 1999 and in May 1999 was 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, project management sales positions at ABB
Lummus, an Asea Brown Boveri subsidiary that provides engineering services to
chemical, petrochemical, petroleum refining, oil and gas and other industries.
TIMOTHY WAGERS, age 39, joined North Coast in 1983 and has served as Treasurer
and Chief Financial Officer since August 1991. From August 1988 until August
1990, he served as Vice President and Treasurer of the Company. From August 1990
to August 1991, he was the Company's Vice President, 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 for
monitoring well costs. He received a Bachelor of Science in
10
<PAGE> 43
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.
THOMAS A. HILL, age 41, was elected Secretary and General Counsel of North Coast
Energy 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 Bachelor
of Arts degree in History and Political Science and from George Washington
University National Law Center with a Juris Doctor degree. Mr. Hill is a member
of the bars of Ohio, Pennsylvania, Oklahoma, Texas, the District of Columbia and
the U.S. Supreme Court and is a member of the Eastern Mineral Law Foundation.
*The description of the Company's executive officers called for in this item is
included herein pursuant to instruction 3 to Section (b) of Item 401 of
Regulation S-K.
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 the Company'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.
UNTIMELY BENEFICIAL OWNERSHIP REPORTS
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and Directors, and persons who beneficially own
more than 10% of any class of equity security to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Executive
officers, Directors and greater than 10% beneficial owners are required by SEC
regulation to furnish the company with copies of all Section 16(a) forms they
file.
Based solely on a review of the copies of such forms furnished to the
Company, the Company believes that for the fiscal year ended March 31, 1999, all
Section 16(a) filing requirements applicable to its executive officers,
Directors and greater than 10% beneficial owners were complied with, with the
exception of: (a) reports which were filed late on behalf of Messrs. Kok and
Visconsi each pertaining to one transaction.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation
for the Company's Chief Executive Officer and the three highest paid executives
(the "Named Executive Officers") earning in excess of $100,000 for fiscal 1999.
11
<PAGE> 44
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Number of
Annual Compensation Compensation
------------------- ------------
Other Number of
Annual Securities All Other
Compen- Underlying Compen-
Name and Principal Position Year Salary Bonus sation Options Sation (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; 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 1998 102,733 0 N/A -- 0
Officer;
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 set forth in the table include, with respect to Messrs.
Lombardy and Regan $2,810 and $1,850, respectively, for fiscal years
1999, 1998, and 1997 in life insurance premiums paid by the Company
pursuant to the terms of employment agreements between the Company
and of such persons. See "Compensation of Directors and Executive
Officers -- Employment Agreements." With respect to all of the Named
Executive Officers, the amounts set forth in the table reflect the
following contributions under the Company'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.
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 Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Options 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 0 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. No 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
12
<PAGE> 45
for 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 conditionally 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 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 provides
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 the executive officers
under contract 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 executive officers who are currently under contract 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.
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<PAGE> 46
Directors Fees. 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 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.
ITEM 12. SECURITY OWNERSHIP
The following table sets forth information with respect to the Common
Stock, Series A Preferred Stock and Series B Cumulative Convertible Preferred
Stock (the "Series B Preferred Stock" and, collectively with the Series A
Preferred Stock, the "Preferred Stock") owned on July 31, 1999 by: (1) each
person known by the Company to own beneficially more than 5% of the Common Stock
and Preferred Stock at such date; (ii) each Director of the Company; (iii) each
of the executive officers listed in the Summary Compensation Table included
elsewhere herein; and (iv) all Directors and executive officers as a group, and
the percentage of the outstanding shares represented thereby.
<TABLE>
<CAPTION>
Common Stock
----------------------------------------
Nature and Address (1) Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
------------------- -------------------- --------
<S> <C> <C>
Charles M. Lombardy, Jr.
(former CEO) 170,049 Shares (2) (3) 3.68%
Garry Regan 114,485 Shares 2.52%
Saul Siegel 86,880 Shares (4) 1.90%
Leo J. M. J. Blomen 0 Shares *%
Jos J. M. Smits 0 Shares *%
Dominic A. Visconsi 37,000 Shares *%
Carel W. J. Kok 0 Shares *%
S.F.E. Rosenbaum 0 Shares *%
NUON (1) 3,448,277 Shares (5) 60.43%
Ralph L. Bradley 20,000 Shares (6) *%
C. Rand Michaels 1,619 Shares *%
John H. Pinkerton 1,693 Shares *%
Range Resources Corporation(1) 831,975 Shares (7) 18.01%
All Directors and executive
officers as a group (14
persons) (including Mr. 446,607 Shares (8) 9.74%
Lombardy)
Less than one percent*
</TABLE>
(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.
(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 2,748 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
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<PAGE> 47
officers as a group (including Mr. Lombardy) upon the exercise of
immediately exercisable stock options or warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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
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 as 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.
On September 4, 1997 North Coast Energy sold 1,149,426 shares of its
Common Stock for $5,000,000 to NUON, pursuant to the terms of a stock purchase
agreement by and between North Coast and NUON dated August 1, 1997. A portion of
the proceeds from the sale of Common Stock was utilized to repay existing
subordinated indebtedness in the amount of $1,475,537 plus interest of $54,506
owed to Lomak, the predecessor of Range and a stockholder of North Coast, with
the remaining proceeds used for working capital and to reduce the amount
outstanding under North Coast's Credit Facility.
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. Mr. Siegel acted
as a consultant to assist North Coast in finding a partner in the energy
industry. 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 $4.375 per share. In addition, a company owned by Mr. Siegel
repaired two compressors for North Coast for $51,000.
Effective April 30, 1999 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 Stock, if NUON does not
exercise its option to purchase the shares. If NUON does exercise its option to
purchase the Lombardy Common Stock, it will directly reduce the amount of Common
Stock NUON would be required to purchase under its stock purchase agreement, if
exercised.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH COAST ENERGY, INC.
October 14, 1999 /s/ Saul Siegel
-------------------------------------
Saul Siegel
Chief Executive Officer and Director
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