<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
COMMISSION FILE NUMBER 0-18691
NORTH COAST ENERGY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1594000
(State of Incorporation) I.R.S. (Employer
Identification No.)
1993 CASE PARKWAY
TWINSBURG, OHIO 44087-2343
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (330) 425-2330
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 10, 1999
- ---------------------------- ------------------------------
Common Stock, $.01 par value 4,557,366
<PAGE> 2
NORTH COAST ENERGY, INC.
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets -
June 30, 1999 (Unaudited) and March 31, 1999 (Audited) 2
Unaudited Consolidated Statements of Operations -
For the Three Months Ended June 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended June 30, 1999 and 1998 5
Unaudited Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II - OTHER INFORMATION 17
<PAGE> 3
\
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and March 31, 1999
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents (including restricted
cash of $800,000 at June 30, 1999) $ 2,759,554 $ 1,956,617
Accounts receivable:
Trade, net 2,728,547 2,740,394
Affiliates 124,909 115,278
Inventories 209,787 210,556
Deferred income taxes 57,000 57,000
Refundable income taxes 38,000 38,000
Prepaid expenses 220,000 180,000
------------ ------------
Total current assets 6,137,797 5,297,845
PROPERTY AND EQUIPMENT, at cost:
Land 97,822 97,822
Oil and gas properties (successful efforts) 43,414,305 42,964,679
Pipelines 6,648,529 6,543,928
Vehicles 1,034,947 937,613
Furniture and fixtures 595,051 588,473
Buildings and improvements 828,925 823,225
------------ ------------
52,619,579 51,955,740
Less accumulated depreciation, depletion, amortization
and impairment (16,005,214) (15,537,255)
------------ ------------
36,614,365 36,418,485
OTHER ASSETS
Advanced royalties 1,530,000 1,570,000
Other, net 267,402 287,137
------------ ------------
1,797,402 1,857,137
------------ ------------
$ 44,549,564 $ 43,573,467
============ ============
</TABLE>
The accompanying notes are an integral part of these Balance Sheets
2
<PAGE> 4
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and March 31, 1999
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 118,700 $ 97,600
Accounts payable 1,958,223 2,355,982
Accrued expenses 367,934 444,808
Billings in excess of costs on uncompleted contracts -- --
------------ ------------
Total current liabilities 2,444,857 2,898,390
------------ ------------
LONG-TERM DEBT, net of current portion 23,542,628 21,493,922
ACCRUED PLUGGING LIABILITY 872,408 872,408
DEFERRED INCOME TAXES, NET 366,200 366,200
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A, 6% Noncumulative Convertible Preferred stock, par value $.01 per
share; 563,270 shares authorized; 73,816 issued and
outstanding (aggregate liquidation value of $738,160) 738 738
Series B, Cumulative Convertible Preferred stock, par value $.01 per
share; 625,000 shares authorized, 232,864 issued and outstanding
(aggregate liquidation value $2,328,640, plus dividends in arrears
of $326,010) 2,329 2,329
Undesignated Serial Preferred stock, par value $.01 per share;
811,730 shares authorized; none issued and outstanding -- --
Common stock, par value $.01 per share; 60,000,000 shares
authorized; 4,557,217 and 4,556,814 issued and outstanding 45,572 45,568
Additional paid-in capital 21,914,935 21,914,939
Retained deficit (4,640,103) (4,021,027)
------------ ------------
Total stockholders' equity 17,323,471 17,942,547
------------ ------------
$ 44,549,564 $ 43,573,467
============ ============
</TABLE>
The accompanying notes are an integral part of these Balance Sheets
3
<PAGE> 5
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Periods Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
1999 1998
----------- -----------
<S> <C> <C>
REVENUE:
Oil and gas production $ 1,511,866 $ 1,564,912
Drilling revenues -- 326,958
Well operating, transportation and other 745,568 404,056
Administrative and agency fees 157,035 210,132
----------- -----------
2,414,469 2,506,058
COSTS AND EXPENSES:
Oil and gas production expenses 606,534 562,264
Drilling costs 104,385 395,177
Oil and gas operations 561,395 248,870
General and administrative expenses 803,975 444,126
Depreciation, depletion, amortization,
impairment and other 480,331 517,927
----------- -----------
2,556,620 2,168,364
----------- -----------
INCOME (LOSS) FROM OPERATIONS (142,151) 337,694
OTHER INCOME (EXPENSES)
Interest income 17,189 17,069
Other 561 1,151
Gain (loss) on sale of property and equipment (177) (508)
Interest expense (436,281) (451,904)
----------- -----------
(418,708) (434,192)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (560,859) (96,498)
PROVISION FOR TAXES ON INCOME
Current -- --
Deferred -- --
----------- -----------
-- --
----------- -----------
NET INCOME (LOSS) $ (560,859) $ (96,498)
=========== ===========
NET INCOME (LOSS), applicable to common stock
(after preferred stock dividends paid or in
arrears of $58,216 and $67,066 for the three
months ended June 30, 1999 and 1998) $ (619,075) $ (163,564)
=========== ===========
NET INCOME (LOSS) PER SHARE
(basic and diluted) $ (.14) $ (.05)
=========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,556,920 3,322,586
=========== ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
4
<PAGE> 6
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (560,859) $ (96,498)
Adjustments to reconcile net loss to cash provided (used) by
operating activities-
Depreciation, depletion, amortization and other 480,331 517,927
(Gain) loss on sale of property and equipment 177 508
Change in:
Accounts receivable 2,216 (819,074)
Inventories and other current assets, net (39,231) (75,286)
Other assets 48,660 (388,634)
Accounts payable (397,759) (38,569)
Accrued expenses (76,874) (35,584)
Billings in excess of costs on uncompleted contracts -- (302,881)
------------ ------------
Total adjustments 17,520 (1,141,593)
------------ ------------
Net cash provided (used) by operating activities (543,339) (1,238,091)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (665,314) (16,325,698)
------------ ------------
Net cash used for investing activities (665,314) (16,325,698)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility 2,000,000 17,962 370
Repayments of borrowings under revolving credit facility -- (500,000)
Payments on long-term debt (25,885) (29,210)
Cash paid for deferred financing cost -- (150,000)
Proceeds from issuance of long-term debt 95,691 31,366
Distributions and dividends (58,216) (26,826)
------------ ------------
Net cash provided by financing activities $ 2,011,590 $ 17,287,700
------------ ------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS $ 802,937 $ (276,089)
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
5
<PAGE> 7
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For The Three Months Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD $1,956,617 $1,578,984
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $2,759,554 $1,302,895
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 411,887 $ 353,889
Income taxes $ 15,234 $ 21,086
</TABLE>
The accompanying notes are an integral part of these Financial Statements
6
<PAGE> 8
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Accounting Policies
A. General
The consolidated financial statements included herein, have been
prepared by North Coast Energy, Inc. without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position have
been made.
Information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
financial statements be read in conjunction with the financial
statements and notes thereto which are incorporated in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1999.
The results of the operations for the interim periods may not
necessarily be indicative of the results to be expected for the full
year. In addition, the preparation of these financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B. Principles of Consolidation
The consolidated financial statements include the accounts of North
Coast Energy, Inc. and its wholly owned subsidiaries (the Company),
North Coast Operating Company (NCOC), and NCE Securities, Inc. (NCE
Securities). In addition, the Company's investments in oil and gas
drilling partnerships, which are accounted for under the proportional
consolidation method, are reflected in the accompanying financial
statements. The Company's ownership of revenues in these drilling
partnerships are as follows:
<TABLE>
<S> <C>
Capital Drilling Fund 1986-1 Limited Partnership 13.2%
North Coast Energy/Capital 1987-1 Appalachian Drilling Program Limited Partnership 51.2%
North Coast Energy/Capital 1987-2 Appalachian Drilling Program Limited Partnership 45.1%
North Coast Energy/Capital 1988-1 Appalachian Drilling Program Limited Partnership 43.9%
North Coast Energy/Capital 1988-2 Appalachian Drilling Program Limited Partnership 48.6%
North Coast Energy 1989 Appalachian Drilling Program Limited Partnership 36.0%
North Coast Energy 1990-1 Appalachian Drilling Program Limited Partnership 44.7%
North Coast Energy 1990-2 Appalachian Drilling Program Limited Partnership 36.2%
North Coast Energy 1990-3 Appalachian Drilling Program Limited Partnership 42.3%
North Coast Energy 1991-1 Appalachian Drilling Program Limited Partnership 37.0%
North Coast Energy 1991-2 Appalachian Drilling Program Limited Partnership 33.6%
North Coast Energy 1991-3 Appalachian Drilling Program Limited Partnership 38.2%
North Coast Energy 1992-1 Appalachian Drilling Program Limited Partnership 28.3%
North Coast Energy 1992-2 Appalachian Drilling Program Limited Partnership 37.9%
North Coast Energy 1992-3 Appalachian Drilling Program Limited Partnership 54.0%
</TABLE>
7
<PAGE> 9
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 1. Summary of Accounting Policies (Continued)
<TABLE>
<S> <C>
North Coast Energy 1993-1 Appalachian Drilling Program Limited Partnership 42.6%
North Coast Energy 1993-2 Appalachian Drilling Program Limited Partnership 38.7%
North Coast Energy 1993-3 Appalachian Drilling Program Limited Partnership 36.7%
North Coast Energy 1994-1 Appalachian Drilling Program Limited Partnership 37.7%
North Coast Energy 1994-2 Appalachian Drilling Program Limited Partnership 29.4%
North Coast Energy 1994-3 Appalachian Drilling Program Limited Partnership 33.5%
North Coast Energy 1995-1 Appalachian Drilling Program Limited Partnership 20.0%
North Coast Energy 1995-2 Appalachian Drilling Program Limited Partnership 20.0%
North Coast Energy 1996-1 Appalachian Drilling Program Limited Partnership 20.0%
North Coast Energy 1996-2 Appalachian Drilling Program Limited Partnership 20.0%
North Coast Energy 1997-1 Appalachian Drilling Program Limited Partnership 38.2%
North Coast Energy 1997-2 Appalachian Drilling Program Limited Partnership 22.1%
North Coast Energy 1998-1 Appalachian Drilling Program Limited Partnership 20.1%
</TABLE>
All significant intercompany accounts and transactions have been
eliminated.
Note 2. Long-Term Debt
<TABLE>
<CAPTION>
JUNE 30, 1999 MARCH 31, 1999
------------- --------------
Long-term debt consists of the following:
<S> <C> <C>
Revolving credit notes payable - bank $22,827,635 $ 20,827,635
Mortgage note payable to a bank, secured by land and
a building, requiring monthly payments of approximately
$1,019 (including interest at 8%) through July 2003. 42,620 44,290
Mortgage note payable to a bank, secured by land and
a building, requiring monthly payments of approximately
$5,248 (including interest at 8.58% renegotiated every 5 years) . 480,977 487,673
Various installment notes payable, in aggregate monthly
installments (including interest) of $12,500 at June 30, 1999,
and $7,500 at March 31, 1999. 310,096 231,924
------------ -----------
23,661,328 21,591,522
Less current portion 118,700 97,600
------------ -----------
$ 23,542,628 $21,493,922
============ ===========
</TABLE>
8
<PAGE> 10
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Long-Term Debt (Continued)
On February 9, 1998, the Company entered into an agreement with ING (US)
Capital LLC (successor in interest to ING (US) 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 June 30, 1999), as defined. At June 30, 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 June 30, 1999 were $2,022,365 and may subsequently change based upon
the semiannual 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 on
September 30, 2000. ING Capital has indicated to the company that
sometime in the future it will discontinue lending to the oil and gas
industry. The Company is currently in the process of reviewing its
options and financing needs with several prospective lenders.
Amounts outstanding under the reducing revolving line of credit bear
interest at the lending bank's prime rate plus .75% or LIBOR plus 2.50%,
or approximately 7.65% and 8.25% at June 30, 1999 and June 30, 1998,
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.
The Company was in compliance with all covenants and restrictions at
June 30, 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.
Note 3. Billings in Excess of Costs on Uncompleted Contracts
At June 30 and March 31, 1999, all drilling contracts were completed.
Note 4. Commitment and Contingencies
The Company and a bank have issued standby letters of credit
which provide a guaranteed total amount of $150,000 in lieu of coverage
provided by insurance for road bond deposits against damage.
At June 30, 1999, the Company has committed to fund certain costs of the
North Coast Energy Appalachian Drilling Programs estimated to be
approximately $84,000 for tangible well equipment and pipeline
construction.
On April 30, 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
escrowed approximately $800,000 for the purchase of the former Chief
Executive Officer's common shares. The escrowed funds have been
reflected as a cash and cash equivalent item on the accompanying
Consolidated Balance Sheets. The Company is obligated to purchase the
9
<PAGE> 11
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 4. Commitment and Contingencies (continued)
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.
Note 5. Preferred Dividends
On June 30, 1999, the Company paid a dividend of $58,216 on the
cumulative convertible Series B Preferred Stock. On June 30, 1998, the
Company paid a dividend of $26,826 on the cumulative convertible Series
B Preferred Stock. For purposes of computing earnings per share for the
three months ended June 30, 1998, dividends paid and in arrears on the
cumulative convertible Series B Preferred Stock were $67,066.
Cumulative dividends in arrears on the cumulative convertible Series B
Preferred Stock are $326,010 at June 30, 1999.
Note 6. Sale of Common Stock
On September 29, 1998 the Company sold 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. 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 1,149,425 shares of Common Stock by
September 30, 1999. Be exercising their option to purchase additional
shares by September 30, 1998, Nuon's stock ownership increased to 51%
of the Company's outstanding Common Stock. Nuon also exercised the
right to appoint two directors at the Company's December 1998 Annual
Meeting.
A portion of the proceeds from the sale of Common Stock was utilized to
reduce the amount outstanding under the Company's Credit Facility with
the remaining proceeds being used for working capital purposes.
Note 7. 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.
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
North Coast Energy, Inc., ("North Coast", the "Company") a Delaware
corporation, is an independent natural gas and oil company engaged in
exploration, development and production activities primarily in the Appalachian
Basin of Ohio and Pennsylvania. The Company's strategy focuses primarily on the
acquisition of proved developed and proved undeveloped natural gas and oil
properties and on the enhancement or development of such properties by the
Company or in conjunction with drilling partnerships which the Company sponsors
and manages (the "Drilling Programs"). The Drilling Programs are funded through
the sale of partnership interests to non-industry investors and by contributions
from the Company.
The following table is a review of the results of operations of the
Company for the three months ended June 30, 1999 and 1998. All items in the
table are calculated as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months
Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Oil and gas production 62% 63%
Drilling revenues 0 13
Well operating, transportation and other 31 16
Administrative and agency fees 7 8
---- ----
Total Revenues 100% 100%
---- ----
Expenses:
Oil and gas production expenses 25% 22%
Drilling costs 4 16
Oil and gas operations 23 10
General and administrative expenses 33 18
Depreciation, depletion, amortization and other 20 21
Other 18 17
---- ----
Total Expenses (123)% 104%
---- ----
Net Loss (23)% (4)%
==== ====
Net Loss Applicable to Common Stock (26)% (7)%
==== ====
</TABLE>
The following discussion and analysis reviews the results of operations
and the financial condition for the Company for the three months ended June 30,
1999 and 1998. The review should be read in conjunction with the financial
information presented elsewhere herein.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 TO THREE MONTHS ENDED JUNE 30,
1998.
REVENUES
Oil and gas production revenues decreased $53,046 (3%) to $1,511,866
for the three months ended June 30, 1999 compared to $1,564,912 for the prior
corresponding period. This decrease in oil and gas revenue was due to a decrease
in North Coast's production of 15,390 Mcfe (MCF equivalents) to 600,404 Mcfe for
the three months ended June 30, 1999 compared to 615,794 for the three months
ended June 30, 1998. The Company received an average price of $13.54 and $12.58
per barrel of oil for the three months ended June 30, 1999 and 1998,
11
<PAGE> 13
respectively, and $2.54 and $2.55 per Mcf for natural gas for the three months
ended June 30, 1999 and 1998, respectively.
Drilling revenues for the period were $326,958 for the three months
ended June 30, 1998 with no drilling revenues recognized for the three months
ended June 30, 1999. Drilling revenues were recognized on 2 wells for the three
months ended June 30, 1998 which were in process from fiscal 1998 while North
Coast completed all contracted wells in fiscal 1999. North Coast anticipates
drilling additional wells in conjunction with its drilling program to be formed
prior to the end of the calendar year. North Coast raised $3,515,000 for its
fiscal 1999 Drilling Program and $2,718,000 for its fiscal 1998 Drilling
Programs.
For the three months ended June 30, 1999, well operating,
transportation and other revenues increased $341,512 (85%) to $745,568 compared
to $404,056 for the three months ended June 30, 1998. This increase was
primarily due to increased revenues of $239,957 from unaffiliated third party
gas sales and $94,261 from oilfield services.
EXPENSES
Drilling costs for the three months ended June 30, 1999 compared to the
three months ended June 30, 1998 decreased $290,792 (74%). This decrease between
comparable periods was due to the fewer number of wells recognized in drilling
revenue during the three months ended June 30, 1999 compared to the three months
ended June 30, 1998 as discussed with drilling revenues above. The Company
allocates overhead to this activity although it is anticipated that wells will
not be contracted, drilled and completed until the fourth quarter.
Oil and gas operations increased $312,525 (126%) to $561,395 for the
three months ended June 30, 1999 compared to $248,870 for the three months ended
June 30, 1998. This increase was primarily due to increased costs of $68,611
associated with utilization of oilfield equipment and $236,898 in gas purchases
related to unaffiliated third party gas sales.
General and administrative expenses increased $359,849 (81%) to
$803,975 for the three months ended June 30, 1999 from $444,126 for the three
months ended June 30, 1998 primarily due to payments made to the former chief
executive officer who resigned from North Coast on April 30, 1999. Under a
separation agreement, this executive was paid approximately $370,000 instead of
his existing employment contract with additional costs incurred of $26,000
associated with legal and other expenses.
The net loss for the three months ended June 30, 1999 increased to
$560,859 from $96,498 for the three months ended June 30, 1998. The Company's
net loss attributable to common stock was $619,075 for the three months ended
June 30, 1999 compared to $163,564 for the three months ended June 30, 1998.
Dividends on the Company's series B cumulative preferred stock were paid in cash
for the three months ended June 30, 1999 of $58,216 and for the three months
ended June 30, 1998 dividends of $67,066 were paid or in arrears.
OTHER EVENTS
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.
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 $13.54 and $12.58 per
barrel for the three months ended June 30, 1999 and 1998, respectively, and
$2.54 and $2.55 per
12
<PAGE> 14
Mcf for natural gas for the three months ended June 30, 1999 and 1998,
respectively. On average, Appalachian natural gas price indices decreased
$0.05/Mcf during this same period from $2.36 to $2.31 per Mcf. North Coast's
stable gas prices can be attributed to continuing its strategy of increasing
commercial and industrial end-users to its portfolio of customers. This strategy
allows North Coast the greatest opportunity to exceed the average regional
prices, while minimizing the effects of a negative fluctuation. The
industry-wide weakness of natural gas prices can be attributed to the effects of
a relatively mild winter, which lessened demand for natural gas. Although it was
anticipated that there could be a decline in gas prices during the summer
months, the demand for gas by storage facilities, the above normal summer
temperatures, and decreased drilling rig counts, have thus far kept natural gas
prices above last summer's. Other variables potentially effecting gas prices are
increased competition from Canadian gas, effects of gas storage and FERC Order
636. FERC Order 636 may have contributed to the lower spot market prices by
mandating an unbundling of pipeline service and allowing open access to a
variety of geographical markets. Management cannot predict what long-term
effects FERC Order 636 will have on either spot market prices or longer term gas
contracts.
Currently, North Coast sells natural gas under both fixed price
contracts and on the spot market. The spot market price North Coast receives for
gas production is related to several variables, including the weather and the
effects of gas storage. North Coast anticipates that spot market prices will
continue to fluctuate in response to various factors primarily weather and
market conditions.
In an effort to position itself to take advantage of future increases
in demand for natural gas, North Coast continues to construct new pipeline
systems in the Appalachian Basin and to contract with other pipeline systems in
the region to transport natural gas production from its wells.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $3,693,000 at June 30, 1999 compared
to $2,399,000 at March 31, 1999. The increase of $1,294,000 in working capital
at June 30, 1999 reflects borrowings on the credit facility to fund
approximately $800,000 to an escrow account for the possible purchase of North
Coast's common stock from the former chief executive officer and to fund reduced
accounts payable and accrued expenses. As of June 30, 1999, the Company had
$22,827,635 outstanding under its Credit Facility.
The following table summarizes the Company's financial position at June
30, 1999 and March 31, 1999:
<TABLE>
<CAPTION>
(Amounts in Thousands) JUNE 30, 1999 MARCH 31, 1999
------------- --------------
AMOUNT % AMOUNT %
------- ------- ------- -------
<S> <C> <C> <C> <C>
Working capital $ 3,693 9% $ 2,399 6%
Property and equipment (net) 36,614 87% 36,418 89%
Other 1,797 4% 1,857 5%
------- ------- ------- -------
Total $42,104 100% $40,674 100%
======= ======= ======= =======
Long-term debt $23,543 56% $21,494 53%
Deferred income taxes and other liabilities 1,238 3% 1,238 3%
Stockholders' equity 17,323 41% 17,942 44%
------- ------- ------- -------
Total $42,104 100% $40,674 100%
======= ======= ======= =======
</TABLE>
CAPITAL RESOURCES AND REQUIREMENTS
The oil and gas exploration and development activities of North Coast
historically have been financed through the Drilling Programs, through
internally generated funds, and from bank and equity financings.
13
<PAGE> 15
The following table summarizes the Company's Statements of Cash Flows
for the three months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
(Amounts in Thousands) 1999 1998
---- ----
AMOUNT % AMOUNT %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net cash provided (used) by operating activities $ (543) (27)% $ (1,238) (7)%
Net cash provided (used) for investing activities (665) (33)% (16,326) (91)%
Net cash provided (used) by financing activities 2,012 100 % 17,288 96 %
-------- -------- -------- --------
Increase (decrease) in cash and equivalents $ 803 40 % $ (276) (2)%
======== ======== ======== ========
</TABLE>
Note: All items in the previous table are calculated as a percentage of
total cash sources. Total cash sources include the following items
if positive: cash flow from operations before working capital
changes, changes in working capital, net cash provided by investing
activities and net cash provided by financing activities, plus any
decrease in cash and cash equivalents.
As the above table indicates, the Company's cash used by operating
activities decreased to $543,000 for the three months ended June 30, 1999 from
$1,238,000 for the three months ended June 30, 1998. This decrease reflects the
changes in net income, accounts receivable and billing in excess of costs on
uncompleted contracts for the three months ended June 30, 1999 compared to
relatively smaller change in accounts payable for the three months ended June
30, 1998.
Net cash used for investing activities decreased to $665,000 for the
three months ended June 30, 1999 from $16,326,000 for the three months ended
June 30, 1998. The decrease was primarily due to the Kelt acquisition which was
completed during the quarter ended June 30, 1998. North Coast has funded its
obligation to its fiscal 1999 drilling program and development activities
associated with completing wells acquired from Kelt and the development of
proved undeveloped reserves.
Net cash from financing activities decreased to $2,012,000 for the
three months ended June 30, 1999 from $17,288,000 for the three months ended
June 30, 1998. This decrease primarily reflects the Company's borrowings under
its credit facility to finance the Kelt acquisition.
On February 9, 1998, North Coast entered into an agreement with ING
(U.S.) Capital Corporation to replace the $20.0 million revolving credit
facility with its previous lender. North Coast's amended credit facility, dated
May 29, 1998, expanded North Coast's $20.0 million revolving credit facility
with ING to a $25.0 million revolving credit facility. The credit agreement also
provides for a borrowing base which is determined semi-annually by the lender
based upon North Coast's financial position, oil and gas reserves, as well as
outstanding letters of credit ($150,000 at June 30, 1999). The credit agreement
requires payment of an agent fee of 0.75% on amounts available and a 0.50%
commitment fee on amounts not borrowed up to the available credit line. At June
30, 1999, North Coast's borrowing base was $25.0 million subject to reduction
for the outstanding letters of credit. Available borrowings under the facility
at June 30, 1999 were $2,022,365 and may change based upon the semi-annual
reserve study and borrowing base determination. (See note 5 to North Coast's
March 31, 1999 financial statements relating to long-term debt.) The credit
facility provides that the payment of dividends with respect to the common stock
is prohibited. As of June 30, 1999, North Coast had $22,827,635 outstanding
under the credit facility, and was in compliance with its loan covenants.
Amounts borrowed under the credit facility bear interest at the prime rate of
the lending bank plus 0.75% or LIBOR plus 2.50%. The revolving line of credit is
reviewed semi-annually and may be extended by an amendment to the current
facility or converted to a term loan on July 2, 2000.
The lender has performed its September 30, 1998 semi-annual borrowing
base review and has provided a third amendment to the credit facility which
continues the facility without payment of principal until September 30, 2000.
The lender has indicated that, in the future, it intends to discontinue lending
in the oil and gas business in the United States and has requested that North
Coast find another lender. North Coast is currently reviewing options with
several lenders that are interested in providing at least a $25 million credit
facility.
14
<PAGE> 16
The amounts borrowed under its reducing revolving line of credit are
secured by North Coast's receivables, inventory, equipment and a first mortgage
on North Coast's interests in oil and gas wells and reserves. The mortgage notes
are secured by land and buildings.
In addition, at June 30, 1999, North Coast had approximately $44,290
outstanding under a mortgage note payable for its facility in Youngstown. The
mortgage note bears interest at the rate of 8% and requires North Coast to make
monthly payments of approximately $1,019 through July 2003. North Coast entered
into a mortgage note for its headquarters on May 13, 1996 for $540,000 with a
15-year term and an interest rate of 8.58%. The mortgage note may be
renegotiated every five years. The amount outstanding under the mortgage note
at June 30, 1999 was $487,673.
On September 29, 1998 North Coast sold an additional 1,149,425 shares
of its common stock for $5.0 million to Nuon, pursuant to the terms of the 1997
purchase and sale agreement between North Coast and Nuon dated August 1, 1997.
By exercising its option to purchase additional shares by September 30, 1998,
Nuon's stock ownership increased to 51% of the outstanding common stock and Nuon
gained the ability to appoint additional directors at North Coast's next annual
meeting. North Coast also issued 26,800 warrants representing the right of the
holder to purchase one share of common stock for $4.375 per share in connection
with the sale of common stock to Nuon. Pursuant to the terms of the agreement
and subject to the satisfaction of certain conditions, Nuon may purchase an
additional 1,149,426 shares of common stock by September 30, 1999. North Coast
is also obligated to issue 26,800 warrants when and if Nuon purchases an
additional 1,149,426 shares with 13,400 of the potential warrants due to Mr.
Siegel and 13,400 of the potential warrants due to Mr. Berns. The additional
warrants represent the right to purchase one share of common stock for $4.375
per share.
On April 30, 1999, the chief executive officer resigned from North
Coast. Under a separation agreement, he was paid $370,000 instead of continuing
his employment contract and for non-competition. Additionally, he received a
ten-year warrant to purchase, at $5.00 per share, 60,000 shares of the Company's
common stock. Also, North Coast could be obligated to purchase his common stock
for $4.375 per share by October 10, 1999. North Coast has escrowed approximately
$800,000 in accordance with the separation agreement to allow it to purchase his
shares. North Coast would not be obligated to purchase the former executive's
shares of common stock if Nuon elects to purchase his shares prior to September
30, 1999 in accordance with the separation agreement. Upon Nuon's purchase of
the former executive's shares North Coast would be entitled to the escrowed
funds. However, Nuon would have the right to reduce its option under the 1997
purchase and sale agreement to the extent to which it purchases the former
executive's shares. Nuon is not obligated to exercise its option to acquire
1,149,426 shares nor is it obligated to acquire the former chief executive
officer's shares.
North Coast continues to review potential acquisitions in the oil and
gas industry and mid to downstream energy areas, in additional to its drilling
and development activities. North Coast also anticipates continuing its
corporate drilling and development program, anticipates investing approximately
$300,000 in the drilling of five development wells in the next quarter and
anticipates drilling wells in conjunction with its drilling programs. North
Coast will continue to need financing to complete the aforementioned activities.
Management believes financing through equity provided from Nuon, funds raised in
drilling programs and the Company's existing borrowing base with a different
lender will be sufficient to fund North Coast's obligations, operations and debt
service requirements for the next year.
If Nuon does not purchase the additional shares related to the 1997
sales and purchase agreement and elects not to purchase the former chief
executive's common shares, North Coast would be forced to change its strategy of
growth. North Coast would reduce its projects accordingly in an effort to
conserve cash. Also, if suitable financing on acceptable terms could not be
negotiated prior to September 30, 2000 with another lender North Coast would be
required to make quarterly principle payments currently in excess of $1 million.
Without equity or other financing North Coast may have to cut costs, reduce
staff or sell assets to meet this ongoing principal payment obligation.
Management believes, however, that financing at some acceptable level would be
available before September 30, 2000.
YEAR 2000 READINESS DISCLOSURE
North Coast has developed an action plan and identified the resources
required to convert its computer systems and software applications to achieve
Year 2000 compliance with no anticipated effect on its customers or disruption
of its
15
<PAGE> 17
business operations. North Coast has already implemented the first three phases
of its four-phase action plan. In phase one, North Coast assessed its
information technology and non-IT systems. The term "computer equipment and
software" includes systems that are commonly thought of as IT systems, including
accounting, data processing, telephone, scanning equipment and other
miscellaneous systems. Those items not considered IT systems include alarms, fax
machines and monitors for field operations. Both IT and non-IT systems may
contain embedded technology which complicates Year 2000 identification and
assessment efforts. In phase two North Coast included the upgrade of its PC
equipment and software.
In phase three, North Coast tested existing systems and determined
whether those systems suspect to Year 2000 compliance problems should be
replaced. In phase three, North Coast replaced systems and software because of
the Year 2000 issue and because the Kelt acquisition necessitated newer and more
compatible systems. North Coast estimates that the cost to complete phases one,
two and three, which primarily includes the purchase of software and hardware
upgrades under normal maintenance agreements with third party vendors, will be
approximately $60,000. To date, North Coast has incurred approximately 83.0% of
these anticipated costs.
Phase four of North Coast's action plan involves the implementation of
North Coast's Year 2000 compliant software and the reevaluation of all of North
Coast's material systems. North Coast may engage independent consultants to
assist in completing phase four. The additional cost of these independent
consultants has not been determined and has not yet been included in North
Coast's Year 2000 compliance cost estimates.
In addition, North Coast has discussed Year 2000 compliance issues with
its vendors and customers. Although North Coast has no reason to believe that
its vendors and customers will not be Year 2000 compliant, North Coast is unable
to determine the extent to which Year 2000 issues will effect its vendors and
customers. North Coast continues to discuss procedures necessary to address this
issue with its vendors and customers.
North Coast presently does not plan to incur significant operational
problems due to the Year 2000 issue. However, there can be no assurance that the
Year 2000 issue will not materially impact North Coast's financial condition or
results of operations, or adversely effect its relationship with customers,
vendors and others. Additionally, there can be no assurance that the Year 2000
issues of other entities will not have a material impact on North Coast's
systems or results of operations. North Coast plans to establish a contingency
plan for dealing with the most reasonably likely worst-case scenario. To date,
this scenario has not been clearly identified. North Coast plans to complete
this analysis and contingency planning by the second quarter of fiscal 2000.
ACCOUNTING STANDARDS
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. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of FASB
Statement No. 133." SFAS No. 137 delayed the original implementation date of
SFAS No. 133 until June 15, 2000. The effect of the adoption or anticipated
adoption of the above standards is expected to have no material effect on North
Coast's financial statements.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that may cause such a difference include, but are not limited to, the
competition within the oil and gas industry, the price of oil and gas in the
Appalachian Basin area, the weather in the Company's geographic region, possible
acquisitions by the Company, the cost of the locating and drilling oil and gas
wells in the Appalachian Basin area, the amount of funds raised in Drilling
Programs, the availability of financing, the availability of equity and the
ability to locate productive oil and gas prospects for development by the
Company.
16
<PAGE> 18
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a). Exhibits
27.1 Financial Data Schedule*
b). Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter for
which this report was filed.
*Exhibit 27.1 furnished for Securities and Exchange Commission purposes only.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH COAST ENERGY, INC.
August 13, 1999 /s/ Saul Siegel
------------------------------------------
Saul Siegel
Chief Executive Officer and Director
August 13, 1999 /s/ Tim Wagers
------------------------------------------
Tim Wagers
Principal Accounting and Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000839950
<NAME> NORTH COUNTRY ENERGY, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,759,554
<SECURITIES> 0
<RECEIVABLES> 2,853,456
<ALLOWANCES> 0
<INVENTORY> 209,787
<CURRENT-ASSETS> 6,137,797
<PP&E> 52,619,579
<DEPRECIATION> (16,005,214)
<TOTAL-ASSETS> 44,549,564
<CURRENT-LIABILITIES> 2,444,857
<BONDS> 0
0
3,067
<COMMON> 45,572
<OTHER-SE> 17,274,832
<TOTAL-LIABILITY-AND-EQUITY> 44,549,564
<SALES> 2,414,469
<TOTAL-REVENUES> 2,414,469
<CGS> 2,556,620
<TOTAL-COSTS> 2,556,620
<OTHER-EXPENSES> (17,573)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 436,281
<INCOME-PRETAX> (560,859)
<INCOME-TAX> 0
<INCOME-CONTINUING> (560,859)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (560,859)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
