<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 FEBRUARY 9, 2000
- --------------------------- -------------------------------
Common Stock, $.01 par value 5,599,726
<PAGE> 2
NORTH COAST ENERGY, INC.
<TABLE>
<CAPTION>
PAGE NO.
-------
PART I - FINANCIAL INFORMATION
<S> <C>
Consolidated Balance Sheets -
December 31, 1999 (Unaudited) and March 31, 1999 (Audited) 2
Unaudited Consolidated Statements of Operations -
For the Three and Nine Months Ended December 31, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended December 31, 1999 and 1998 6
Unaudited Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION 20
</TABLE>
<PAGE> 3
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and March 31, 1999
(Unaudited)
ASSETS
------
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
-------------- -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $5,422,283 $ 1,956,617
Accounts receivable:
Trade, net 3,811,698 2,740,394
Affiliates 114,934 115,278
Inventories 251,156 210,556
Deferred income taxes 57,000 57,000
Refundable income taxes 38,000 38,000
Prepaid expenses 55,825 180,000
----------- -----------
Total current assets 9,750,896 5,297,845
PROPERTY AND EQUIPMENT, at cost:
Land 97,822 97,822
Oil and gas properties (successful efforts) 47,386,907 42,964,679
Pipelines 6,682,693 6,543,928
Vehicles 1,035,687 937,613
Furniture and fixtures 609,611 588,473
Buildings and improvements 837,957 823,225
----------- -----------
56,650,677 51,955,740
Less accumulated depreciation, depletion,
amortization and impairment (17,051,694) (15,537,255)
------------ ------------
39,598,983 36,418,485
OTHER ASSETS
Advanced royalties 1,439,000 1,570,000
Other, net 271,950 287,137
----------- ------------
1,710,950 1,857,137
$51,060,829 $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
December 31, 1999 and March 31, 1999
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,314,000 $ 97,600
Accounts payable 1,918,288 2,355,982
Accrued expenses 415,667 444,808
Billings in excess of costs on uncompleted contracts 2,946,240 -
----------- -----------
Total current liabilities 7,594,195 2,898,390
LONG-TERM DEBT, net of current portion 20,389,624 21,493,922
ACCRUED PLUGGING LIABILITY 736,635 872,408
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; 73,096
and 73,816 issued and outstanding
(aggregate liquidation value of $730,960
and 738,160, respectively) 730 738
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; 5,599,706 and 4,556,814 issued and outstanding 55,997 45,568
Additional paid-in capital 26,327,921 21,914,939
Retained deficit (4,412,802) (4,021,027)
----------- -----------
Total stockholders' equity 21,974,175 17,942,547
----------- -----------
$51,060,829 $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 December 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Oil and gas production $ 2,362,473 $ 2,202,823 $ 5,589,429 $ 5,630,426
Drilling revenues - - - 326,958
Well operating, transportation and other 782,835 493,262 2,207,310 1,427,673
Administrative and agency fees 401,053 360,792 717,177 779,200
--------- ---------- ---------- -----------
3,546,361 3,056,877 8,513,916 8,164,257
COSTS AND EXPENSES:
Oil and gas production expenses 1,008,445 1,072,629 2,356,026 2,269,790
Drilling costs 143,932 151,351 384,094 723,139
Oil and gas operations 210,356 62,285 1,212,813 507,682
General and administrative expenses 511,799 522,936 1,886,789 1,534,075
Depreciation, depletion, amortization,
impairment and other 639,503 568,572 1,594,889 1,581,044
---------- ----------- --------- ----------
2,514,035 2,377,773 7,434,611 6,615,730
--------- ---------- --------- ---------
INCOME FROM OPERATIONS 1,032,326 679,104 1,079,305 1,548,527
---------- ---------- --------- ---------
OTHER INCOME (EXPENSES)
Interest income 47,493 20,482 106,897 66,158
Other 75 (817) 1,291 1,537
Gain (loss) on sale of property
and equipment (144) (125) 208 (2,597)
Interest expense (490,536) (437,836) (1,404,828) (1,437,355)
-------------- ------------ ---------- ----------
(443,112) (418,296) (1,296,432) (1,372,257)
------------- ------------ ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 589,214 260,808 (217,127) 176,270
PROVISION FOR INCOME TAXES
Current - - - -
Deferred - - - -
------------ ------------ ------------- ---------------
- - - -
------------ ------------ ------------- ---------------
NET INCOME (LOSS) $ 589,214 $ 260,808 $ (217,127) $ 176,270
============= ============= ============= ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements
4
<PAGE> 6
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
For The Periods Ended December 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss applicable to Common
Stock (after Preferred Stock dividends
paid or in arrears of $58,216 and $58,216
for the three months ended December 31, 1999
and 1998; and $174,648 and $183,748 for the
nine months ended December 31, 1999
and 1998) $ 530,998 $ 202,592 $ (391,775) $ (7,478)
============= =========== =========== =============
NET INCOME (LOSS) PER SHARE
(basic and diluted) $ .10 $ .04 $ (.08) $ (.00)
============== ============ =========== ==============
WEIGHTED AVERAGE SHARES
OUTSTANDING 5,579,332 4,552,449 4,897,763 3,751,245
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these Financial Statements
5
<PAGE> 7
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended December 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (217,127) $ 176,270
Adjustments to reconcile net loss
to cash provided (used) by operating activities-
Depreciation, depletion, amortization, and other 1,594,889 1,581,044
Abandonment of oil and gas properties -- --
(Gain) loss on sale of property and equipment (144) 2,597
Change in:
Accounts receivable (1,070,960) (1,323,563)
Other current assets 83,575 (79,672)
Other assets 123,087 (15,243)
Accounts payable (437,694) 171,448
Other liabilities (135,773) --
Accrued expenses (29,141) 193,393
Billings in excess of costs on uncompleted contracts 2,946,240 1,908,832
------------ ------------
Total adjustments 3,074,079 2,438,836
------------ ------------
Net cash provided (used) by operating activities 2,856,952 2,615,106
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,752,143) (19,058,995)
------------ ------------
Net cash provided (used) for investing activities (4,752,143) (19,058,995)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of accounts payable used to
finance property and equipment additions -- --
Borrowings under revolving credit facility 2,000,000 17,962,370
Payments on long-term debt (83,589) (79,177)
Repayments of borrowings under revolving credit facility (900,000) (4,500,000)
Cash paid for deferred financing cost -- (150,000)
Proceeds from issuance of long-term debt 95,691 158,031
Net proceeds from the issuance of Common Stock 4,423,403 4,934,768
Distributions and dividends (174,648) (143,508)
------------ ------------
Net cash provided (used) by financing activities 5,360,857 18,182,484
------------ ------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 3,465,666 1,738,595
</TABLE>
The accompanying notes are an integral part of these Financial Statements
6
<PAGE> 8
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For The Nine Months Ended December 31, 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 $5,422,283 $3,317,579
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the period for -
Interest $1,459,800 $1,372,861
Income taxes $ - $ 68,711
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Long-term debt incurred for the purchase
of property and equipment $ 95,691 $ 158,031
Accounts payable from interest on
long-term debt $ 67,200 $ 106,872
Stock bonus given to employees $ - $ 9,759
</TABLE>
The accompanying notes are an integral part of these Financial Statements
7
<PAGE> 9
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Accounting Policies
A. General
The consolidated financial statements included herein, have been
prepared by North Coast Energy, Inc. without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position have
been made.
Information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
financial statements be read in conjunction with the financial
statements and notes thereto which are incorporated in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 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 44.5%
North Coast Energy/Capital 1988-2 Appalachian Drilling Program Limited Partnership 49.4%
North Coast Energy 1989 Appalachian Drilling Program Limited Partnership 36.7%
North Coast Energy 1990-1 Appalachian Drilling Program Limited Partnership 45.4%
North Coast Energy 1990-2 Appalachian Drilling Program Limited Partnership 37.1%
North Coast Energy 1990-3 Appalachian Drilling Program Limited Partnership 43.3%
North Coast Energy 1991-1 Appalachian Drilling Program Limited Partnership 38.0%
North Coast Energy 1991-2 Appalachian Drilling Program Limited Partnership 33.9%
North Coast Energy 1991-3 Appalachian Drilling Program Limited Partnership 39.2%
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>
8
<PAGE> 10
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 37.6%
North Coast Energy 1994-2 Appalachian Drilling Program Limited Partnership 29.4%
North Coast Energy 1994-3 Appalachian Drilling Program Limited Partnership 32.8%
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%
North Coast Energy 1999-1 Appalachian Drilling Program Limited Partnership 20.9%
</TABLE>
All significant intercompany accounts and transactions have been
eliminated.
Note 2. Long-Term Debt
<TABLE>
<CAPTION>
December 31, 1999 March 31, 1999
--------------- --------------
Long-term debt consists of the following:
<S> <C> <C>
Revolving credit notes payable - bank $21,927,635 $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 37,126 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) 470,394 487,673
Various installment notes payable, in aggregate monthly
installments (including interest) of $8,750 at December 31,
1999, and $7,500 at March 31, 1999 268,469 231,924
----------- -----------
22,703,624 21,591,522
Less current portion 2,314,000 97,600
----------- -----------
$20,389,624 $21,493,922
=========== ===========
</TABLE>
9
<PAGE> 11
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Long-Term Debt (Continued)
On February 9, 1998, the Company entered into an agreement with ING
(US) Capital 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 December 31, 1999), as
defined. At December 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 December 31, 1999 were
$2,922,365 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 9% and 7.85% at December 31, 1999 and December
31, 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 December 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.
Note 3. Billings in Excess of Costs on Uncompleted Contracts
Billings in excess of costs on uncompleted contracts consist of:
<TABLE>
<CAPTION>
December 31, March 31,
2000 2000
---- ----
<S> <C> <C>
Billings on uncompleted contracts $ 5,335,588 $ -
Costs incurred on uncompleted contracts 2,389,348 -
----------- ------------
$ 2,946,240 $ -
=========== ============
</TABLE>
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 December 31, 1999, the Company has committed to fund certain costs
of the North Coast Energy Appalachian Drilling Programs estimated to be
approximately $1,514,000 for tangible well equipment and pipeline
construction.
10
<PAGE> 12
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 5. Preferred Dividends
On December 31, 1999 and 1998, the Company paid a dividend of $58,216
on the cumulative convertible Series B Preferred Stock. For purposes of
computing earnings per share for the nine months ended December 31,
1999, dividends paid and in arrears on the cumulative convertible
Series B Preferred Stock were $174,648. Cumulative dividends in arrears
on the cumulative convertible Series B Preferred Stock are $326,010 at
December 31, 1999.
Note 6. Sale of Common Stock
Pursuant to the terms of a stock purchase agreement by and between
North Coast and NUON International bv ("NUON") dated August 1, 1997,
North Coast agreed to sell up to 1,149,426 shares of Common Stock each
year over a three year period. On September 30, 1998, North Coast sold
1,149,426 shares of its Common Stock to NUON for $4.35 per share. North
Coast also sold on September 30, 1999 1,042,125 shares of Common Stock
for $4.35 per share to conclude the Company's obligation under the
August 1, 1997 stock purchase agreement.
Effective April 30, 1999, the chief executive officer of North Coast
was paid $370,000 in lieu of continuing his employment contract by
signing a separation agreement with North Coast. NUON exercised its
option to purchase the chief executive officer's Common Stock; which
directly reduced the amount of Common Stock NUON was required to
purchase in September, 1999 under its August 1, 1997 stock purchase
agreement. Additionally, the former chief executive officer received a
ten-year warrant to purchase, at $5.00 per share, 60,000 shares of the
Company's common stock.
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.
Note 8. Acquisition of Environmental Exploration Co.
The Company acquired, effective September 11, 1999, the working
interest and operations in approximately 220 producing wells,
additional proved undeveloped locations and gas gathering systems from
Environmental Exploration of Canton, Ohio. The transaction closed
October 7, 1999 for a total purchase price of $3.5 million in cash
which was funded through the sale of stock to NUON on September 30,
1999.
11
<PAGE> 13
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.
ACQUISITIONS AND DRILLING ACTIVITIES
On October 7, 1999, the Company closed a $3.5 million cash acquisition
of 220 producing wells, undeveloped locations and gas gathering systems from
Environmental Exploration of Canton, Ohio. The transaction which was effective
September 11, 1999 included an estimated 6.6 Bcfe of net proved reserves.
The Company formed its 1999-1 development-drilling program on December
30, 1999 with total capital contributed of $5,215,000. The funds from the 1999-1
Drilling Program will enable the Company to participate in the drilling of 31
gross (30 net) wells. Drilling commenced on December 27, 1999.
The following table is a review of the results of operations of the
Company for the three and nine months ended December 31, 1999 and 1998. All
items in the table are calculated as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Oil and gas production 67% 72% 66% 69%
Drilling revenues 0 0 0 4
Well operating, transportation and other 22 16 26 17
Administrative and agency fees 11 12 8 10
---- ---- ---- ----
Total Revenues 100% 100% 100% 100%
---- ---- ---- ----
Expenses:
Oil and gas production expenses 29% 35% 28% 28%
Drilling costs 4 4 5 9
Oil and gas operations 6 2 14 6
General and administrative expenses 14 17 22 19
Depreciation, depletion, amortization and other 18 19 19 19
Other 12 14 15 17
---- ---- ---- ----
Total Expenses 83% 91% 103% 98%
---- ---- ---- ----
Net Income (Loss) 17% 9% (3)% 2%
==== ==== ==== ====
Net Income (Loss) Applicable to Common Stock 15% 7% (5)% (0)%
==== ==== ==== ====
</TABLE>
The following discussion and analysis reviews the results of operations
and the financial condition for the Company for the nine and three months ended
December 31, 1999 and 1998. The review should be read in conjunction with the
financial information presented elsewhere herein.
12
<PAGE> 14
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1999 TO NINE MONTHS ENDED DECEMBER
31, 1998.
REVENUES
Overall revenues increased to $8,513,916 for the nine months ended
December 31, 1999 compared to $8,164,257 for the nine months ended December 31,
1998.
Oil and gas production increased 29,943 Mcfe to 2,219,965 Mcfe for the
nine months ended December 31, 1999 compared to 2,190,022 Mcfe for the
comparable period ended December 31, 1998. However, primarily as a result of a
decrease in the contract price paid for the gas produced from the wells acquired
from Kelt Ohio, gas and oil revenues decreased $40,997 for the nine months ended
December 31, 1999 compared to the nine months ended December 31, 1998. The
contract for the affected wells was renegotiated upward $.28 per Mcf effective
December 1999. The Company received an average price of $16.42 and $11.35 per
barrel of oil for the nine months ended December 31, 1999 and 1998 respectively,
and $2.50 and $2.62 per Mcf for natural gas for the nine months ended December
31, 1999 and 1998 respectively.
The Company did not recognize any drilling revenues during the nine
months ended December 31, 1999 compared to $326,958 for the nine months ended
December 31, 1998. However, as a result of the increase in capital contributed
for the fiscal 2000 Drilling Program (1999-1), $5,215,000 compared to $3,515,000
in the fiscal 1999 drilling program (1998-1), the Company anticipates that the
majority of drilling revenues from the proposed 31 gross wells (30 net) will be
recognized at the year ending March 31, 2000.
For the nine months ended December 31, 1999 well operating,
transportation and other revenues increased $779,637 to $2,207,310 from
$1,427,673 for the nine months ended December 31, 1998. The increase resulted
primarily from increases in third party gas sales.
EXPENSES
For the nine months ended December 31, 1999 oil and gas production
expenses increased to $2,356,026 from $2,269,790 for the nine months ended
December 31, 1998.
Drilling costs for the nine months ended December 31, 1999 compared to
the nine months ended December 31, 1998 decreased $339,045. This decrease
between comparable periods was due to the fewer number of wells recognized in
drilling revenue during the nine months ended December 31, 1999 compared to the
nine months ended December 30, 1998 as discussed with the 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.
The increase in the purchase of third party gas resulted in an increase
in oil and gas operations expense to $1,212,813 for the nine months ended
December 31, 1999 compared to $507,682 for the nine months ended December 31,
1998.
The increase of $352,714 to $1,886,789 in general and administrative
expenses for the nine months ended December 31, 1999 compared to $1,534,075 for
the nine months ended December 31, 1998 reflects the payment of $370,000 and
$26,000 of associated legal and other costs related to the separation agreement
and employment agreement associated with the resignation of the Company's former
chief executive officer who resigned on April 30, 1999.
Income from operations for the nine months ended December 31, 1999
decreased to $1,079,305 from $1,548,527 for the nine months ended December 31,
1998 primarily as a result of the payments and costs associated with the
resignation of the former chief executive officer. The net loss for the nine
months ended December 31, 1999 was $217,127 compared to net income of $176,270
for the nine months ended December 31, 1998. The net loss applicable to Common
Stock for the nine months ended December 31, 1999 after preferred dividends of
$174,648 was $391,775 compared to a net loss for the nine months ended December
31, 1998 of $7,478 applicable to Common
13
<PAGE> 15
Stock after preferred dividends of $183,748. The increase in the net loss
applicable to Common Stock was primarily attributable to the payments made to
the former chief executive officer and associated legal and other costs.
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1999 TO THREE MONTHS ENDED
DECEMBER 31, 1998.
REVENUES
Overall revenues increased to $3,546,361 for the three months ended
December 31, 1999 from $3,056,877 for the three months ended December 31, 1998.
Oil and gas production increased 92,022 Mcfe to 938,908 Mcfe for the
three months ended December 31, 1999 compared to 846,886 Mcf for the three
months ended December 31, 1998. Revenues from oil and gas production increased
$159,650 to $2,362,473 for the three months ended December 31, 1999 from
$2,208,823 for the three months ended December 31, 1998. The increase in oil and
gas production and revenues from oil and gas production for the three months
ended December 31, 1999 compared to the three months ended December 31, 1998
primarily results from the production associated with the Environmental
Exploration acquisition.
An increase in third party gas sales resulted in an increase of
$289,573 in well operating, transportation and other revenues for the three
months ended December 31, 1999 compared to the three months ended December 31,
1998.
The increase of $40,261 in administrative and agency fees for the three
months ended December 31, 1999 compared to the three months ended December 31,
1998 reflects the increase in drilling capital raised for drilling programs for
the three months ended December 31, 1999 compared to the three months ended
December 31, 1998.
EXPENSES
Oil and gas production expenses decreased $64,184 to $1,008,445 for the
three months ended December 31, 1999 compared to $1,072,629 for the three months
ended December 31, 1998.
An increase in third party gas purchases during the three months ended
December 31, 1999 compared to the three months ended December 31, 1998 resulted
in an increase in oil and gas operations expense to $210,356 from $62,285.
Income from operations for the three months ended December 31, 1999
increased to $1,032,326 from $679,104 for the three months ended December 31,
1998. Net income for the three months ended December 31, 1999 increased $328,406
to $589,214 compared to $260,808 for the three months ended December 31, 1998
primarily as a result of an increase in oil and gas revenue, administrative and
agency fees and revenues from third party gas sales. Net income applicable to
Common Stock after preferred dividend payments of $58,216 was $530,998 for the
three months ended December 31, 1999 compared to $202,592 for the three months
ended December 31, 1998 after the payment of $58,216 in preferred dividends.
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 and demand of natural gas
in the United
14
<PAGE> 16
States and regionally have a more immediate effect on current pricing than
inflation. North Coast received an average price of $16.42 and $11.35 per barrel
for the nine months ended December 31, 1999 and 1998, respectively, and $2.50
and $2.62 per Mcf for natural gas for the nine months ended December 31, 1999
and 1998, respectively. The increase in index prices which began in mid-1999 has
enabled North Coast to lock in a substantial portion of its winter production at
prices ranging from $3.03 per Mcf to $3.46 per Mcf. 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
demand.
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 $2,157,000 at December 31, 1999
compared to $2,399,000 at March 31, 1999. The decrease of $242,000 in working
capital at December 31, 1999 reflects the payment of borrowings on the credit
facility and the reclassification of a portion of long-term debt to current. As
of December 31, 1999, the Company had $21,927,635 outstanding under its Credit
Facility.
The following table summarizes the Company's financial position at
December 31, 1999 and March 31, 1999:
<TABLE>
<CAPTION>
December 31, 1999 March 31, 1999
----------------- --------------
(Amounts in Thousands) Amount % Amount %
------ --- ------ ---
<S> <C> <C> <C> <C>
Working capital $ 2,157 5% $ 2,399 6%
Property and equipment (net) 39,599 91% 36,418 89%
Other 1,711 4% 1,857 5%
------- ------ ------- -----
Total $43,467 100% $40,674 100%
======= ====== ======= =====
Long-term debt $20,390 47% $21,494 53%
Deferred income taxes and other liabilities 1,103 3% 1,238 3%
Stockholders' equity 21,974 50% 17,942 44%
------- ------ ------- -----
Total $43,467 100% $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.
15
<PAGE> 17
The following table summarizes the Company's Statements of Cash Flows
for the nine months ended December, 1999 and 1998:
<TABLE>
<CAPTION>
Nine Months Ended December 31,
------------------------------
(Amounts in Thousands) 1999 1998
---- ----
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Net cash provided (used) by operating activities $ 2,857 35% $ 2,615 13%
Net cash provided (used) for investing activities (4,752) (58)% (19,059) (92)%
Net cash provided (used) by financing activities 5,361 65% 18,183 87%
-------- ------ ---------- -----
Increase (decrease) in cash and equivalents $3,466 42% $ 1,739 8%
====== ==== ======== ====
</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 provided by operating
activities was relatively constant between the nine months ended December 31,
1999 and 1998.
Net cash used for investing activities decreased to $4,752,143 for the
nine months ended December 31, 1999 from $19,058,995 for the nine months ended
December 31, 1998. The decrease was primarily due to the Kelt acquisition which
was completed during the nine months ended December 31, 1998. North Coast has
funded its obligations to its fiscal 1999 drilling program, and development
activities in addition to the acquisition of assets acquired from Environmental
Exploration. North Coast anticipates funding its fiscal 2000 drilling program
over the next six months.
Net cash from financing activities decreased to $5,360,857 for the nine
months ended December 31, 1999 from $18,182,484 for the nine months ended
December 31, 1998. This decrease primarily reflects the Company's borrowings
under its credit facility to finance the Kelt acquisition in 1998. The net
proceeds from the issuance of Common Stock reflect the investments of NUON for
the nine months ended December 31, 1999 and 1998.
BANK FINANCING
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 December 31, 1999). The credit
agreement requires payment of an agent fee of 0.75% on amounts available and a
0.50% commitment fee on amounts not borrowed up to the available credit line. At
December 31, 1999, North Coast's borrowing base was $25.0 million subject to
reduction for the outstanding letters of credit. Available borrowings under the
facility at December 31, 1999 were $2,922,365 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 December 31, 1999, North Coast had $21,927,635
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 provided a third amendment to the credit facility which
continues the facility without payment of principal until September 30, 2000.
The lender has also 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.
16
<PAGE> 18
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 December 31, 1999, North Coast had approximately
$37,126 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 December 31, 1999 was $470,394.
Pursuant to the terms of a stock purchase agreement by and between
North Coast and NUON dated August 1, 1997, North Coast agreed to sell up to
1,149,426 shares of Common Stock each year over a three year period. On
September 30, 1998, North Coast sold 1,149,426 shares of its Common Stock to
NUON for $4.35 per share. North Coast also sold on September 30, 1999, 1,042,125
shares of Common Stock for $4.35 per share to conclude the Company's obligation
under the August 1, 1997 stock purchase agreement. With the completion of the
Common Stock sale, NUON holds approximately 62% of the outstanding Common Stock
of North Coast.
In connection with the sale of shares of Common Stock on September 30,
1999 to NUON, a fee consisting of cash payment of $75,000 and five-year warrants
to purchase 26,800 shares of Common Stock at a price of $4.375 per share was
incurred.
Effective April 30, 1999, the chief executive officer of North Coast
was paid $370,000 in lieu of continuing his employment contract by signing a
separation agreement with North Coast. NUON exercised its option to purchase the
chief executive officer's Common Stock; which directly reduced the amount of
Common Stock NUON was required to purchase in September, 1999 under its August
1, 1997 stock purchase agreement. Additionally, the former chief executive
officer received a ten-year warrant to purchase, at $5.00 per share, 60,000
shares of the Company's Common Stock.
North Coast continues to review potential acquisitions in the oil and
gas industry and mid to downstream energy areas, in addition to its drilling and
development activities which includes investing its proportionate share of costs
to drill wells in conjunction with its fiscal 2000 Drilling Program. Management
believes the financing through equity provided from NUON, funds raised in
drilling programs and the Company's existing borrowing base or borrowings
provided by a different lender will be sufficient to fund North Coast's
obligations, operations and debt service requirements for the next year.
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
additional 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 DISCLOSURE
North Coast developed an action plan and identified the resources
required to convert its computer systems and software applications to achieve
Year 2000 readiness. The costs associated with this action plan were
approximately $60,000. The Company did not incur any significant operational
problems as a result of the year 2000 issue.
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
17
<PAGE> 19
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.
18
<PAGE> 20
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.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH COAST ENERGY, INC.
February 14, 2000 /s/ Omer Yonel
--------------------------------------------
Omer Yonel
Chief Executive Officer and Director
February 14, 2000 /s/ Tim Wagers
--------------------------------------------
Tim Wagers
Principal Accounting and Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000839950
<NAME> NORTH COAST ENERGY, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,422,283
<SECURITIES> 0
<RECEIVABLES> 3,926,632
<ALLOWANCES> 0
<INVENTORY> 251,156
<CURRENT-ASSETS> 9,750,896
<PP&E> 56,650,677
<DEPRECIATION> 17,051,694
<TOTAL-ASSETS> 51,139,854
<CURRENT-LIABILITIES> 7,594,195
<BONDS> 0
0
3,059
<COMMON> 55,997
<OTHER-SE> 21,915,119
<TOTAL-LIABILITY-AND-EQUITY> 21,974,175
<SALES> 8,513,916
<TOTAL-REVENUES> 8,513,916
<CGS> 7,434,611
<TOTAL-COSTS> 7,434,611
<OTHER-EXPENSES> (108,396)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,404,828
<INCOME-PRETAX> (217,127)
<INCOME-TAX> 0
<INCOME-CONTINUING> (217,127)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (217,127)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
