<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
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)
Registrant's telephone number, including area code (330) 425-2330
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
SERIES A 6% CONVERTIBLE NON-CUMULATIVE PREFERRED STOCK, $0.01 PAR VALUE
(Title of class)
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK, $0.01 PAR VALUE
(Title of class)
WARRANTS TO PURCHASE COMMON STOCK, $0.01 PAR VALUE
(Title of class)
<PAGE> 2
Indicate by check mark whether the Registrant (1) has filed all Reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes X. No _____.
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _____
As of June 9, 2000, the Registrant had outstanding 15,199,749 shares of Common
Stock, 73,046 shares of Series A Preferred Stock, and 232,864 shares of Series B
Preferred Stock. All Common shares reflect the 1 for 5 reverse Common Stock
split effective June 7, 1999.
The aggregate market value of Common Stock held by non-affiliates of the
Registrant at June 9, 2000 was $7,415,790 which value has been computed on the
basis of $3.66 per share of Common Stock, the mean between the closing bid and
ask price as reported for that day on Nasdaq.
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE
Part of Form 10-K
-----------------
Part III (Items 10, 11, 12, and 13)
Document Incorporated by Reference
----------------------------------
Portions of the Registrant's definitive Proxy Statement to be used in connection
with its 2000 Annual Meeting of Stockholders.
Except as otherwise indicated, the information contained in this Report is as of
March 31, 2000.
<PAGE> 3
PART I
ITEM 1. BUSINESS.
GENERAL
North Coast Energy, Inc., an affiliate of NUON, NV, a Delaware
corporation, with its subsidiaries and predecessors, ("North Coast" or the
"Company"), is an independent natural gas and oil company engaged in
exploration, development and production activities primarily in the Appalachian
Basin. The Company's strategy focuses primarily on its acquisition of proved
developed and undeveloped properties and on the enhancement, drilling and
development of such properties. As used in this Annual Report on Form 10-K, the
terms "Company" and "North Coast" mean North Coast Energy, Inc., its
subsidiaries and predecessors, unless the context otherwise requires. The
Company currently has three wholly-owned subsidiaries, NCE Securities, Inc.
("NCE Securities"), North Coast Operating Company ("NCOC"), and Peake Energy,
Inc. ("Peake"), two of which are considered active (NCE Securities and Peake).
The Company began operations in 1981. In 1990, the Company acquired the
assets and properties of 21 Drilling Programs ("Drilling Programs")* through an
exchange offer (the "Exchange Offer") in which the Company issued publicly
traded stock. In 1997, NUON International Projects, BV ("NUON") and the Company
formed a strategic alliance that has resulted in NUON acquiring a majority
ownership position (86%) in the Company as of June 9, 2000. Moreover, NUON has
provided significant financial and technical resources that have enabled the
Company to acquire additional oil and gas producing assets, increase its daily
production and reserves, improve its efficiency as an owner/operator and
substantially improve its financial results.
As of March 31, 2000, North Coast owned interests in 3,785 wells,
operating 3,697 of these wells. In connection with the drilling and development
of the wells it operates, North Coast currently owns approximately 1,400 miles
of natural gas gathering pipelines. At March 31, 2000, the Company had estimated
net proved reserves of approximately 124.9 Bcf of natural gas and 1,021,400
barrels of oil. Daily net production as of March 31, 2000 was approximately
23,800 million cubic feet of natural gas equivalents.
*Reference herein to Drilling Programs is synonymous with any of the 29 separate
Ohio limited partnerships currently managed by the Company, and those that were
dissolved as a result of the Exchange Offer.
SIGNIFICANT EVENTS
On June 7, 1999, a 1 for 5 reverse stock split became effective thereby
reducing the number of shares of outstanding Common Stock from 22,784,070 to
4,556,814.
In September 1999, the Company sold an additional 1,042,125 shares of
its common stock to NUON for $4,370,057 per the terms of a Stock Purchase
Agreement by and between the Company and NUON dated August 1, 1997.
In October 1999, the Company purchased producing oil and gas assets,
well operating rights and gas gathering systems from Environmental Exploration
for a purchase price of $3.5 million.
In October 1999, Omer Yonel was appointed Chief Executive Officer and a
Director of North Coast Energy. Prior to joining North Coast in January of 1999,
Mr. Yonel served as NUON's International Business Development Manager for North
America where he spent fourteen months as a liaison between the Company and its
largest share owner, NUON. Mr. Yonel has ten years of international experience
(Saudi Arabia, Denmark, Turkey, The Netherlands) in project engineering and
project management and sales in the European oil and gas industry with Schelde
Engineering & Contractors bv, and with ABB Lummus, a subsidiary of Asea Brown
Boveri (ABB).
In December 1999, the Company formed a $5.2 million investor financed
drilling program to drill 31 development wells. This was the largest single
investor financed program ever to be formed by the Company and enhanced revenues
1
<PAGE> 4
from drilling, oil and gas production, well operating, transportation and
administrative services.
In March 2000, the Company purchased the stock of Peake Energy, Inc. of
Ravenswood, West Virginia for $72.5 million, based upon the effective date of
January 1, 2000. The actual funds transferred at the time of closing were
$69,541,000 to reflect net proceeds from the effective date. The purchase was
financed through borrowings from NUON. Peake is a large, successful
producer/operator of Appalachian natural gas and oil and provides the Company a
foothold for continued growth in West Virginia and Kentucky. The acquisition of
Peake will add significantly to production, reserves and financial results. On
May 4, 2000, NUON converted $24 million of debt related to the Peake acquisition
to 9.6 million shares of common stock of the Company.
AREAS OF OPERATION
The Appalachian Basin is located in close proximity to major natural
gas markets in the northeast United States. This proximity to a substantial
number of large commercial and industrial gas markets, coupled with the
relatively stable nature of Appalachian Basin production and the availability of
transportation facilities has resulted in generally higher wellhead prices for
Appalachian natural gas than those prices available in the Gulf Coast and
Mid-continent regions. The Appalachian Basin is the oldest gas and oil-producing
region in the United States and includes portions of Ohio, Pennsylvania, New
York, West Virginia, Kentucky and Tennessee. Historically, most production in
the Appalachian Basin has been from wells drilled to a number of relatively
shallow blanket formations at depths of 1,000 to 7,500 feet. These formations
are generally characterized as long-lived reserves that produce for more than 20
years.
The Company's drilling operations in the Appalachian Basin have
principally involved drilling to the Clinton/Medina sandstone geologic
formation. This formation is an oil and gas bearing sandstone formation, which
underlies a large section of eastern Ohio and western Pennsylvania in varying
thicknesses and at depths ranging generally from 2,800 to 7,500 feet.
Substantially all of the wells that the Company drills in this area have
estimated depths of between 3,500 and 6,700 feet.
In 1998, the Company began a seismic data program that led to the
inception of exploration drilling on a portion of its Ohio leasehold acreage.
The exploration drilling has focused on the Knox unconformity, a sequence of
sandstones and dolomites which includes the Rose Run, Beekmantown and
Trempealeau productive zones, at depths ranging from 2,500 to 8,000 feet. In the
Company's area of interest the Knox is targeted at approximately 2,000 feet
below the Clinton formation at between 6,000 and 7,000 feet. To date, the
Company's exploration in the Knox has resulted in two discoveries on two
exploration wells.
The Company also maintains leasehold acreage in portions of Ohio,
Pennsylvania and West Virginia with other potential producing formations.
ACQUISITIONS
Recent Acquisitions
Peake Energy, Inc.
------------------
In March 2000, the Company acquired 100% of the stock of Peake Energy,
Inc. of Ravenswood, West Virginia providing the Company with a new foothold in
the Appalachian Basin. The Company's objective in acquiring Peake was to
increase production, reserves and the overall critical mass to allow it to more
effectively operate in a cost efficient manner. Peake operates approximately
1,900 wells with daily net production of approximately 16 million cubic feet of
gas equivalents and has proved net reserves in excess of 74 Bcfe. Peake operates
900 miles of gas gathering systems and associated natural gas compression
facilities. Through Peake, the Company has greatly increased its development
drilling and exploration opportunities in the Appalachian Basin. Peake will
substantially increase revenues and cash flow to the Company's financial
results.
2
<PAGE> 5
Environmental Exploration Company
---------------------------------
In October 1999, the Company acquired the oil and gas assets and well
operating rights of Environmental Exploration and its affiliate, Loma
Enterprises, Inc., of North Canton, Ohio. The assets included 220 producing
wells and a series of natural gas gathering systems. The Company's primary
objective in acquiring these assets was to increase daily net production through
cost-effective operations. The majority of the assets are in close proximity to
existing North Coast operations and permitted the integration of the acquired
assets with no additional general and administrative and minimal field-level
personnel costs.
Kelt Ohio, Inc.
---------------
In fiscal 1999, the Company acquired the assets of Kelt Ohio, Inc.
("Kelt") including the working interest and operations of over 900 wells located
in Ohio, well drilling, servicing and oilfield equipment, natural gas
compressors and gas gathering systems and additional drilling locations.
Acquisition Strategy
The Company's acquisition strategy focuses on properties and other oil
and gas entities that can provide:
A. enhanced cash flow,
B. additional drilling and development opportunities,
C. synergies with North Coast properties,
D. enhancement potential of current operations, or
E. economies of scale and cost efficiencies.
Since 1994 the Company has completed the acquisition of the working
interest in approximately 3,300 wells, various gas gathering systems and
additional drilling locations. The Company has also acquired additional
interests in its prior Drilling Programs by offering investors an exit strategy
from the Drilling Programs.
EXPLORATION AND DEVELOPMENT
Exploration and development activities conducted by the Company have
primarily involved the acquisition of proved undeveloped oil and gas properties
and the drilling and development of such properties by the Company or in
conjunction with Drilling Programs and joint ventures.
The Company's strategy focuses on increasing its natural gas and oil
reserves, as well as production, drilling and oilfield service revenues, by
acquiring undeveloped oil and gas properties in the Appalachian Basin and
financing and conducting the drilling and development of these properties by the
Company or in conjunction with the Drilling Programs. The Company is pursuing a
strategy of increasing reserves through drilling and development, the
acquisition of other gas and oil companies and producing properties.
DRILLING ACTIVITY
North Coast continually evaluates undeveloped prospects originated by
its staff or other independent geologists as well as other gas and oil
companies. If review of a prospect indicates that it may be geologically and
economically attractive, the Company will attempt to obtain a lease of the
mineral rights on the acreage.
Typically, the Company will acquire the entire working interest in a
lease in consideration of paying a lease bonus and annual rentals subject to a
landowner's royalty and, where the property is acquired through a third party,
possibly an overriding royalty interest. During fiscal year 2000, the Company
participated in the drilling of 35 wells.
DRILLING PROGRAMS
From the Company's inception in 1981 through March 31, 2000, North
Coast has raised approximately
3
<PAGE> 6
$92,000,000 and has sponsored 50 Drilling Programs to engage in oil and gas
drilling and development operations.
Each Drilling Program has been conducted as a separate limited
partnership with the Company serving as managing general partner of each.
Currently, North Coast serves as the managing general partner of 29 Drilling
Programs. To maintain the marketability of its Drilling Programs, the Company
continually reviews program structure and performance and makes modifications
from program to program, as it deems appropriate. These modifications have
included changes to the compensation arrangements between the Company and the
Drilling Programs, including charges for its drilling and administrative
services, and changes in the Company's interest in the Drilling Programs.
The Company acts as operator and general contractor for drilling and
production operations, undertaking to drill and complete Drilling Program wells
and to serve as operator for producing wells. At March 31, 2000 the Company
operated 415 wells for the Drilling Programs. In the Drilling Programs,
typically the entire working interest in the leasehold is acquired by the
Program, although only the minimum required acreage for a well is assigned by
the Company to the Drilling Program.
As managing general partner, North Coast is subject to full liability
for the obligations of the Drilling Programs although it is indemnified by each
program to the extent of the assets of the Drilling Programs under certain
circumstances. The partnership interests in the Drilling Programs constitute
securities and the Company is subject to potential liability for failure to
comply with applicable federal and state securities laws and regulations under
certain circumstances.
Typically, each Drilling Program is structured as a "functional
allocation" program whereby the non-industry investors contribute cash in an
aggregate amount equal to the intangible drilling and development costs to be
incurred for the Drilling Program wells. The Company contributes the drill sites
to the Drilling Program and agrees to contribute all tangible equipment
necessary to drill, complete and produce each well, as well as organizational
and syndication costs of the Drilling Program. The allocation of partnership
revenues in each Drilling Program may vary depending upon the structure chosen
by the Company, with the Company's initial percentage interest ranging from 20%
to 40%.
Interests in North Coast's Drilling Programs are sold to investors
through securities dealers registered with the NASD. In each program, NCE
Securities, a subsidiary of the Company, a member of the NASD and a
broker-dealer registered with the SEC, acts as placement agent and enters into
selling agreements with a number of broker-dealers to assist it in selling the
interests.
The Drilling Programs raised $2.7 million from investors during fiscal
year 1998, $3.5 million in fiscal year 1999 and $5.2 million in fiscal year
2000. The Company intends to sponsor a Drilling Program for fiscal year 2000 and
has prepared the necessary documentation. The offering will have maximum
subscriptions of up to $6 million at the Company's discretion.
DRILLING SERVICES
North Coast derives revenue and net income from the drilling services
it provides to the Drilling Programs. North Coast enters into turnkey (fixed
price) contracts with the Drilling Programs to drill program wells. Pursuant to
these drilling contracts, the Company is responsible for the drilling and
development of the wells. The Company subcontracts with third parties for the
performance of a substantial portion of the operations required to drill,
complete and equip these wells for production. The Company manages and
supervises all necessary drilling and related service and equipment operations
on these wells and contracts a number of third party services including contract
drilling, fracturing, logging and pipeline construction, which are performed by
subcontractors who specialize in those operations. Since North Coast contracts
with the Drilling Programs on a turnkey basis, North Coast is responsible for
drilling and completing the wells, regardless of the actual cost. Consequently,
North Coast is subject to the risk that prices incurred in the actual drilling
and development operations could increase or decrease beyond its contract price
thereby rendering its drilling contracts more or less profitable. The Company
continually monitors the cost incurred in drilling, completion and production
operations and reviews its turnkey contract prices for each Drilling Program in
order to reduce the risk of unprofitable drilling operations. These turnkey
drilling prices are subject to change based
4
<PAGE> 7
on competition, the return sought by Drilling Program investors, North Coast's
revenue and profit considerations and other industry conditions.
OIL FIELD SERVICE OPERATIONS
As of March 31, 2000, North Coast operated 3,985 wells located in Ohio,
Pennsylvania, West Virginia and Kentucky. As operator of producing wells, North
Coast is responsible for the maintenance and verification of all production
records, contracting for oil and gas sales, distribution of production proceeds
and information, and compliance with various state and federal regulations.
Generally, the Company provides the routine day-to-day production operations for
producing wells and also subcontracts certain oil field operations that require
third party services.
North Coast receives a monthly operating fee for each producing well it
operates for third parties and is reimbursed for most unaffiliated third party
costs associated with operations and production of the wells. Each third party
pays North Coast their specified operating fee based upon their aggregate
interest in the wells, exclusive of North Coast's ownership interest.
GAS-GATHERING ACTIVITIES
In connection with the drilling and development of the wells that it
operates, North Coast has acquired, constructed and owns approximately 1,400
miles of gas-gathering pipelines in various counties throughout Ohio,
Pennsylvania, West Virginia and Kentucky. These pipelines carry natural gas from
the wellhead to the gas transmission systems of various utilities for sale to
such utilities, to natural gas brokers purchasing gas for resale to others or to
industrial purchasers pursuant to self-help gas purchase arrangements. The
Company continues its acquisition and construction of pipelines and gathering
systems and the establishment of compressor facilities in order to expand the
number of natural gas purchasers available to the Company.
For such gas-gathering services, the Company collects certain
allowances from public utilities, end-users or other natural gas purchasers,
including natural gas brokers. These gathering fees or transportation allowances
averaged approximately $.37 per Mcf of natural gas at March 31, 2000.
MARKETS
The ability of the Company to market oil and gas depends to an extent,
on factors beyond its control. The potential effects of governmental regulation
and market factors including alternative domestic and imported energy sources,
available pipeline capacity, and general market conditions are not entirely
predictable.
Natural Gas. Natural gas is generally sold pursuant to individually
negotiated gas purchase contracts, which vary in length from spot market sales
of a single day to term agreements that may extend several years. Customers of
the Company purchasing natural gas include marketing affiliates of the major
pipeline companies, natural gas marketing companies, and a variety of
commercial/public authorities, industrial, and institutional end users who
ultimately consume the gas. Gas purchase contracts define the terms and
conditions unique to each of these sales. The price received for natural gas
sold on the spot market may vary daily reflecting changing market conditions.
As discussed, the deliverability and price of natural gas are subject
to both governmental regulation and supply/demand forces. During the past
several years, regional natural gas surpluses and shortages have occurred
resulting in wide fluctuations in the prices paid to producers.
The lengths of the contracts as defined in the "Term" provision in the
Company's gas purchase agreements vary widely. Additionally, several of the
Company's contracts provide for monthly pricing which are derived from published
NYMEX or Appalachian price indexes. The Columbia Transmission (TCO) and
Consolidated Natural Gas (CNG) Index prices, which create a basis for spot sales
prices in the Mid Atlantic and northeastern United States, ranged from $2.05 to
$3.28 per MMBtu during fiscal 2000. As of March 31, 2000, approximately 10% of
the Company's natural gas contracts are fixed price contracts with industrial
end-users. The prices received from these
5
<PAGE> 8
contracts range between $2.66 and $4.43 per Mcf. The remainder of the Company's
natural gas contracts are with utilities and marketers. The prices received from
these contracts range between $2.09 and $3.495 per Mcf. For the fiscal year
ended March 31, 2000, the Company received an average price of $2.58 per Mcf.
During fiscal year 2000, Interstate Gas Supply, Inc. purchased 22% of the gas
produced by North Coast.
Due to the seasonality of supply and demand, prices paid by purchasers
for natural gas will continue to fluctuate. The Company has pursued a strategy
of varying the length and pricing provisions of its gas purchase contracts so as
to maintain flexibility to react to those fluctuating prices. Due to current
market conditions, the duration of recently renegotiated fixed price contracts
have been extended 1 to 3 years in length. The Company committed a larger
portion of its natural gas to longer-term arrangements to optimize revenues
derived from these sales.
During the past several years, an overabundance of natural gas supplies
and promulgation of State and Federal regulations pertaining to the sale,
transportation, and marketing of natural gas resulted in increasing competition
and declining prices. However, recent trends have shown that supply tightness is
starting to take effect. This is evidenced by increased future natural gas
prices as indicated by the Nymex price trends. This upward trend in prices has
been attributed to the upcoming struggle to maximize storage refill during a
period of increased demand caused by new gas-fired electric generation projects
and declining domestic production. It is likely that supply and demand factors
will continue to be the driving force in the evolving marketplace.
Crude Oil. Oil produced from the Company's properties is generally sold
at the prevailing field price to one or more of a number of unaffiliated
purchasers in the area. Generally, purchase contracts for the sale of oil are
cancelable on 30 days notice. The price paid by these purchasers is generally an
established, or "posted," price that is offered to all producers. The Company
received an average price of $20.08 per barrel for its oil during fiscal 2000;
however, during the last several years prices paid for crude oil have fluctuated
substantially. The price posted for purchase contracts for the sale of oil at
March 31, 2000, was $23.65. Future oil prices are difficult to predict due to
the impact of worldwide economic trends, coupled with supply and demand
variables, and such non-economic factors as the impact of political
considerations on OPEC pricing policies and the possibility of supply
interruptions. Oil production comprised approximately 6% of North Coast's total
oil and gas production calculated on an equivalent Mcf basis for fiscal year
2000. Therefore a price increase or decrease in oil prices has a minimal effect
on revenues when compared to the effect of the price of natural gas. To the
extent that the prices, which the Company receives for its crude oil, increases
or decreases from current levels, revenues from oil production will be affected
accordingly.
COMPETITION
The gas and oil industry is highly competitive in all phases. The
Company encounters strong competition from other independent oil companies in
acquiring economically desirable properties as well as in marketing production
therefrom and obtaining external financing. Many of the Company's competitors
may have financial resources, personnel and facilities equal to or greater than
those of the Company.
REGULATION
Exploration and Production. The exploration, production and sale of
natural gas and oil are subject to various types of local, state and federal
laws and regulations. Such laws and regulations govern a wide range of matters,
including the drilling and spacing of wells, allowable rates of production,
restoration of surface areas, plugging and abandonment of wells and requirements
for the operation of wells. Such regulations may adversely affect the rate at
which the Company's wells produce gas and oil. In addition, legislation and new
regulations concerning gas and oil exploration and production operations are
constantly being reviewed and proposed. Most of the states in which the Company
owns and operates properties have laws and regulations governing several of the
matters enumerated above. Compliance with the laws and regulations affecting the
gas and oil industry generally increases the Company's cost of doing business
and consequently affects its profitability.
Environmental Matters. The discharge of oil, gas or other pollutants
into the air, soil or water may give rise to liabilities to the government and
third parties and may require the Company to incur costs to remedy the
discharge.
6
<PAGE> 9
Natural gas, oil or other pollutants (including salt water brine) may be
discharged in many ways, including from a well or drilling equipment at a drill
site, leakage from pipelines or other gathering and transportation facilities,
leakage from storage tanks and sudden discharges from damage or explosion at
natural gas facilities or gas and oil wells. Discharged hydrocarbons may migrate
through soil to water supplies or adjoining property, giving rise to additional
liabilities. A variety of federal and state laws and regulations govern the
environmental aspects of natural gas and oil production, transportation and
processing and may, in addition to other laws, impose liability in the event of
discharges (whether or not accidental), failure to notify the proper authorities
of a discharge, and other noncompliance with those laws. Compliance with such
laws and regulations may increase the cost of gas and oil exploration,
development and production although the Company does not currently anticipate
that compliance will have a material adverse effect on capital expenditures or
earnings of the Company.
The Company does not believe that its environmental risks are
materially different from those of comparable companies in the oil and gas
industry. The Company believes its present activities substantially comply, in
all material respects, with existing environmental laws and regulations.
Nevertheless, no assurance can be given that environmental laws will not, in the
future, result in a curtailment of production or material increase in the cost
of production, development or exploration or otherwise adversely affect the
Company's operations and financial condition. Although the Company maintains
liability insurance coverage for certain liabilities from pollution, such
environmental risks generally are not fully insurable; the amount of such
coverage is currently $1,000,000 and is provided on a "claims made" basis.
Marketing and Transportation. The interstate transportation and sale
for resale of natural gas is regulated by the Federal Energy Regulatory
Commission (the "FERC") under the Natural Gas Act of 1938 ("NGA"). The wellhead
price of natural gas is also regulated by FERC under the authority of the
Natural Gas Policy Act of 1978 ("NGPA"). The Natural Gas Wellhead Decontrol Act
of 1989 (the "Decontrol Act"), which was enacted on July 26, 1989, eliminated
all gas price regulation effective January 1, 1993. In addition, FERC recently
has proposed several rules or orders concerning transportation and marketing of
natural gas. The impact of these rules and other regulatory developments on the
Company cannot be predicted.
In 1992 FERC finalized Order 636, regulations pertaining to the
restructuring of the interstate transportation of natural gas. Pipelines serving
this function have since been required to "unbundle" the various components of
their service offerings, which include gathering, transportation, storage, and
balancing services. In their current capacity, pipeline companies must provide
their customers with only the specific service desired, on a non-discriminatory
basis. Although North Coast is not an interstate pipeline, the Company believes
the changes brought about by Order 636 have increased competition in the
marketplace, resulting in greater market volatility.
Various rules, regulations and orders, as well as statutory provisions
may affect the price of natural gas production and the transportation and
marketing of natural gas.
OPERATING HAZARDS AND UNINSURED RISKS
The Company's gas and oil operations are subject to all operating
hazards and risks normally incident to drilling for and producing gas and oil,
such as encountering unusual formations and pressures, blow-outs, environmental
pollution, and personal injury. The Company will maintain such insurance
coverage as it believes to be appropriate, taking into account the size of the
Company and its proposed operations. The Company currently does not maintain
insurance coverage for physical loss or damage to equipment located on the wells
or for selected properties (such as crude oil stored in tanks). The Company's
insurance policies also have standard exclusions. Losses can occur from an
uninsurable risk or in amounts more than existing insurance coverage. The
occurrence of an event, which is not insured or not fully insured, could have an
adverse impact on the Company's revenues and earnings.
EMPLOYEES
At March 31, 2000, the Company had 144 full-time employees, including
103 field employees, 3 petroleum engineers, 4 geologists, 7 accountants, 2 land
men, 1 attorney, and 2 gas marketers. No employees are represented by a union
and the Company believes that it maintains good relations with its employees.
7
<PAGE> 10
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 of oil and
gas wells in the Appalachian Basin area, including fluctuations in both tangible
and intangible drilling costs, the amount of funds raised in the fiscal 2001
Drilling Programs, equity investment, available financing and the ability to
locate productive oil and gas prospects for development by the Company.
ITEM 2. PROPERTIES.
Oil and Gas Properties
----------------------
In the following tables, "gross" refers to the total acres or wells in
which the Company has a working interest and "net" refers to gross acres or
wells multiplied by the Company's percentage working interests therein. Royalty
interests held by the Company will not affect the Company's working interests
(net wells) in its properties and will not be reflected in net wells.
PROVED RESERVES. The following table reflects the estimates of North
Coast's proved reserves as of March 31, 2000.
RESERVES
Oil Reserves (Bbls):
Proved Developed 920,400
Proved Undeveloped 101,000
---------
Total 1,021,400
Gas Reserves (Mcf):
Proved Developed 109,174,000
Proved Undeveloped 15,694,000
-----------
Total 124,868,000
Production. The following table summarizes the net oil and gas
production (on a rounded basis), average sales prices, and average production
(operating) expenses per equivalent unit of production for the periods
indicated.
PRODUCTION
<TABLE>
<CAPTION>
Production Sales Price Average Operating
Years Ended Oil Gas Cost per Equivalent
March 31: (Bbls) (Mcf) Per Bbl Per Mcf Mcf (1)
--------- ------ ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1998 13,900 1,116,000 $16.18 $2.50 $0.70 (2)
1999 28,100 2,688,000 $11.39 $2.57 $0.91
2000 31,000 2,947,000 $20.08 $2.58 $1.14
</TABLE>
(1) For calculation of average operating cost per equivalent Mcf, the
standard ratio of 6:1 for gas to oil was used.
(2) Includes costs for the rework of ten wells located in Pennsylvania
and relocation of production facilities in Louisiana.
PRODUCTIVE WELLS. The following table sets forth the number of gross
and net productive oil and gas wells of the Company as of March 31, 2000. Wells
are classified as gas or oil according to their predominant product stream.
8
<PAGE> 11
PRODUCTIVE WELLS
Gross Wells (1) Net Wells
Oil Gas Total Oil Gas Total
--- --- ----- --- --- -----
388 3,397 3,785 367 2581 2,948
(1) Gross wells include 237 wells in which the Company owns a royalty
interest.
ACREAGE. The following table sets forth the Developed and Undeveloped
Acreage of the Company, on both a gross and net basis, as of March 31, 2000. The
amounts included in proved undeveloped acreage recognizes only the acreage
directly offsetting locations to wells that have indicated commercial production
in the objective formation which North Coast fully expects to drill in the near
future.
LEASEHOLD ACREAGE
Total Leasehold Acreage:
Gross Acres 380,378
Net Acres 292,492
Developed Acreage:
Gross Acres 175,264
Net Acres 140,971
Proved Undeveloped Acreage:
Gross Acres 4,830
Net Acres 4,830
Undeveloped Acreage (includes Proved Undeveloped Acreage):
Gross Acres 205,114
Net Acres 151,521
DRILLING ACTIVITY. The following table sets forth the results of
drilling activities on the Company's properties. Such information and the
results of prior drilling activities should not be considered as necessarily
indicative of future performance, nor should it be assumed that there is
necessarily any correlation between the number of productive wells drilled and
the oil and gas reserves generated thereby.
All wells were drilled by March 31 of their respective years and are
reflected in the Drilling Activities table. Wells in which the Company owns only
a royalty interest are not reflected in the table below.
DRILLING ACTIVITIES
<TABLE>
<CAPTION>
Fiscal year ended March 31,
---------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Exploratory Wells (1)
Productive
Gross 1 0 0
Net 1 0 0
Dry
Gross 0 0 0
Net 0 0 0
</TABLE>
9
<PAGE> 12
DRILLING ACTIVITIES (CONTINUED)
<TABLE>
<CAPTION>
Fiscal year ended March 31,
---------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Development Wells (2)
Productive (3)
Gross 34 37 16
Net 8.15 20.20 4.50
Dry
Gross 0 0 1
Net 0 0 .22
Total Wells (4)
Productive
Gross 35 37 16
Net 9.15 20.20 4.50
Dry
Gross 0 0 1
Net 0 0 .22
</TABLE>
(1) Exploratory Wells are those wells drilled outside the confines of a known
productive reservoir area.
(2) Development Wells are those wells drilled within the confines of a known
productive reservoir.
(3) The number of productive wells for fiscal 2000 includes 2 gross wells and
0.4 net wells as productive development wells that are awaiting pipeline
connection or well completion operations at March 31, 2000.
(4) Total Wells is the sum of the Exploratory and Development Wells.
FACILITIES
North Coast owns a 12,000 square foot building, its corporate
headquarters, in Twinsburg, Ohio. The office facility is in a centralized
location, which during fiscal 1997 allowed the Company to relocate certain
operations and personnel from its Cleveland and Youngstown offices. As part of
the Peake acquisition North Coast acquired 11,280 square feet of office and
operation facilities near Ravenswood, Jackson County, West Virginia. North Coast
also owns or leases operating facilities in Youngstown and Cambridge Ohio and
Maben and Clarksburg, West Virginia. It also leases a small operating facility
in Shrewsbury, Kentucky.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company is
a party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year ended March 31, 2000,
there were no matters submitted to a vote of security holders through the
solicitation of proxies or otherwise.
Executive Officers of the Registrant*
Gerald W. Merriam, age 42, joined North Coast in September 1999 as Vice
President, Exploration and Production. He has 19 years experience in the oil and
gas industry. Prior to joining North Coast, he was Vice President,
Operations/Engineering for Meridian Exploration Corporation. From 1992 to 1997
when he joined Meridian, Mr. Merriam was engineering manager for Ashland
Exploration, Inc. He holds a B.S. in Chemical Engineering from the University of
Pittsburgh.
10
<PAGE> 13
Ron Huff, age 45, joined North Coast in May 2000 as Chief Financial Officer. Mr.
Huff has 23 years of broad-based experience in the energy industry with
particular emphasis in financing, strategic planning, and mergers and
acquisitions. He held various senior level positions with energy companies in
Houston, Texas from 1977-1986. Mr. Huff joined Belden & Blake Corporation in
Ohio in 1986 and most recently held the position of President and Chief
Financial Officer. He also has venture capital experience having sourced,
evaluated and placed private equity in a variety of industries. Mr. Huff
graduated from the University of Wyoming and is a certified public accountant.
Thomas A. Hill, age 42, has served as Secretary and General Counsel of North
Coast Energy since August 1988. Mr. Hill joined Capital Oil & Gas, Inc. in 1984
before its acquisition by North Coast. He graduated from Hiram College with a
Bachelor of Arts degree in History and Political Science and from George
Washington University National Law Center with a Juris Doctor degree. Mr. Hill
is a member of the state bars of Ohio, Pennsylvania, Texas, Oklahoma and the
District of Columbia and the Energy Bar Association.
*The description of the Company's executive officers called for in this item is
included herein pursuant to instruction 3 to Section (b) of Item 401 of
Regulation S-K.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock is traded on the Nasdaq SmallCap Market under the
symbol "NCEB." The following tables sets forth, the high and low bid and ask
prices for the Common Stock for the fiscal periods indicated.
Common Stock
(Amounts rounded to the nearest 32nd)
<TABLE>
<CAPTION>
High Low
---- ---
Bid Ask Bid Ask
--- --- --- ---
<S> <C> <C> <C> <C>
FISCAL 1999
First Quarter.............................................. $5-15/16 $6-1/4 $3-3/4 $4-7/32
Second Quarter............................................. 5-5/16 5-5/8 2-3/16 2-13/16
Third Quarter.............................................. 4-11/16 5 2-1/2 2-13/16
Fourth Quarter............................................. 4-3/8 4-11/16 2-1/2 2-13/16
FISCAL 2000
First Quarter.............................................. $5-5/16 $5-15/16 $2-7/8 $3-3/8
Second Quarter............................................. 4-15/16 5 3-5/16 3-11/16
Third Quarter.............................................. 3-15/16 4-1/8 1-13/16 2
Fourth Quarter............................................. 3-5/16 3-7/16 1-15/16 2-5/16
</TABLE>
As of June 9, 2000, there were 15,199,749 shares of Common Stock
outstanding, which were held by approximately 1,300 holders of record. On June
7, 1999, a 1 for 5 reverse stock split became effective thereby reducing the
number of shares of outstanding Common Stock from 22,784,070 to 4,556,814.
Of the total 15,199,749 outstanding shares of the Company's Common
Stock, 9,600,000 were issued on May 4, 2000, to NUON in compliance with NUON's
election to convert a $24,000,000 Non-Negotiable Subordinated Convertible
Promissory Note from debt to equity. The Note had been entered into between the
Company and NUON on March 17, 2000, and represented a portion of the financing
that had been provided by NUON in conjunction with the purchase of the stock of
Peake Energy, Inc.
Holders of Series A Preferred Stock may be entitled to receive
semi-annual non-cumulative cash dividends at an annual rate of $.60 per share
when and if declared by the Board of Directors. Such dividends are payable on
June 1 and December 1 of each year. The Series A Preferred Stock is convertible
to 2.3 shares of Common Stock prior to the
11
<PAGE> 14
reverse stock split and is convertible to .46 shares of Common Stock after the
reverse stock split. The holders of Series B Preferred Stock are entitled to
receive quarterly cumulative cash dividends at an annual rate of $1.00 per
share. The Series B Preferred Stock is convertible to 6.56 shares of Common
Stock prior to the reverse stock split and is convertible to 1.311 shares of
Common Stock after the stock split. For the year ended March 31, 2000, the
Company paid $232,864 in aggregate cash dividends on its Series B Preferred
Stock.
Whenever dividends on the Series B Preferred Stock have not been paid
for an amount equal to six quarterly dividend payments, the number of directors
of the Company may be increased, and the holders of the Series B will be
entitled to elect such additional directors on the Board of Directors. Such
voting right will terminate when all such distributions accrued and in default
have been paid in full or set apart for payment. The Company has dividends in
arrears on its Series B Preferred Stock of $326,010 at March 31, 2000.
The Company has never paid any cash dividends on its Common Stock and
is currently restricted from paying cash dividends on any of its common stock
under the terms of its credit facility. The Company currently intends to retain
future earnings in order to provide funds for use in the operation of its
business.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth-selected financial data for the Company
for each of the five fiscal years in the period ended March 31, 2000, 1999,
1998, 1997, and 1996.
<TABLE>
<CAPTION>
Years Ended March 31
(In thousands, except per share amounts)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $16,494 $13,942 $8,591 $9,665 $10,860
Net Income (Loss) 1,312 870 262 292 (1,254)
Net Income (Loss) per Share(1) .21 .16 (.00) (.75) (1.19)
Total Assets 123,618 43,573 22,312 21,229 20,243
Long-term Debt (less current portion) 90,122 21,494 7,171 10,721 8,955
</TABLE>
(1) Net Income (Loss) per share has been restated to reflect stock dividends
and all per share amounts have been restated to give retroactive effect to
the reverse stock split effective June 7, 1999.
The following table sets forth summary unaudited financial information on a
quarterly basis for the past two years.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
2000
----
June 30 Sept. 30 Dec. 31 Mar. 31
------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues $2,414 $2,553 $3,546 $ 7,981
Net Income (Loss) (561) (245) 589 1,529
Net Income (Loss) per share (1) (.14) (.07) .10 .25
Total Assets 44,550 51,140 51,061 123,618
Long Term Debt (less current portion) 23,543 21,516 20,340 90,122
1999
June 30 Sept. 30 Dec. 31 Mar. 31
------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues $2,506 $2,601 $3,057 $5,778
Net Income (Loss) (97) 12 261 694
Net Income (Loss) per share (1) (0.05) (0.01) 0.04 0.14
Total Assets 40,176 42,389 43,994 43,573
Long Term Debt (less current portion) 24,641 21,672 20,734 21,494
</TABLE>
12
<PAGE> 15
(1) Net Income (Loss) per share has been restated to reflect stock dividends
and all per share amounts have been restated to give retroactive effect to
the reverse stock split effective June 7, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
North Coast is engaged in the acquisition and enhancement of developed
producing properties and the exploration, development and production of
undeveloped natural gas and oil properties, owned by the Company or in
conjunction with joint ventures or partnerships sponsored and managed by the
Company. North Coast derives its revenues from its own oil and gas production,
turnkey drilling, well operations, gas gathering, transportation and gas
marketing services it provides for third parties.
During the fiscal year ended March 31, 2000, North Coast executed
successful acquisition and drilling and development activities that resulted in
significant increases in its operations, proved reserves and financial results.
Well operations increased from 1,711 wells operated at March 31, 1999 to 3,785
at March 31, 2000. North Coast's proved developed natural gas reserves increased
to 109.2 Bcf for fiscal 2000 from 41.2 Bcf for the fiscal year ended March 31,
1999 and proved developed oil reserves increased to 920,400 barrels from 322,700
barrels. The increase in well operations and proved reserves at the fiscal
year-end resulted from the acquisitions of properties and reserves of
Environmental Exploration and Peake Energy, Inc. combined with a successful
exploration program and drilling and development activities. The proved gas
reserves (developed and undeveloped) increased to 124.9 Bcf for fiscal 2000 from
52.5 Bcf for fiscal 1999. The increase in proved gas reserves was due to the
increases mentioned previously for the proved developed reserves. Proved oil
reserves (developed and undeveloped) increased to 1,021,400 barrels for fiscal
2000 from 425,200 barrels for fiscal 1999. North Coast recognizes as proved
undeveloped reserves only the potential oil and gas which can reasonably be
expected to be recovered from drillable locations which it owned (or had rights
to) at fiscal year end which are directly offsetting locations to wells that
have indicated commercial production in the objective formation and which North
Coast fully expects to drill in the very near future. Changes in the
Standardized Measure of Discounted Future Net Cash Flows are set forth in Note
12 of the Company's financial statements. The above mentioned additions and
sales of natural gas, coupled with the development costs associated with
undeveloped acreage, create timing differences which are reflected in the other
category of the Standardized Measure. Of the Company's total proved reserves,
approximately 88% are proved developed and approximately 12% are proved
undeveloped based upon equivalent unit Mcfs. Proved undeveloped acreage requires
considerable capital expenditures to develop. Management believes that a
significant percentage of the proved undeveloped reserves should be recovered in
future years, although no assurance of such recovery can be given.
The following table is a review of the results of operations of the
Company for the fiscal years ended March 31, 2000, 1999 and 1998. All items in
the table are calculated as a percentage of total revenues.
<TABLE>
<CAPTION>
Revenues: 2000 1999 1998
----- ---- ----
<S> <C> <C> <C>
Oil and gas production 50% 52% 35%
Drilling revenues 27 26 35
Well operating, transportation and other 18 15 19
Administrative and agency fees 5 7 11
-- -- --
Total Revenues 100% 100% 100%
---- ---- ----
Expenses:
Oil and gas production expenses 22% 19% 10%
Drilling costs 21 21 29
Oil and gas operations 10 9 8
General and administrative expenses 14 15 26
Depreciation, depletion, amortization, impairment and other 15 18 15
Abandonment of oil and gas properties 0 0 0
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Expenses (continued)
Provision (credit) for income taxes 0 0 0
Other 10 12 9
-- -- -
Total Expenses 92% 94% 97%
-- --
Net Income 8% 6% 3%
== == ==
Net Income (Loss) Applicable to Common Stock(1) 7% 5% 0%
== == ==
</TABLE>
(1) Dividends were paid or accrued on the Series B cumulative preferred
stock in the amount of $232,864, $236,654, and $268,264 for fiscal
2000, 1999, and 1998.
The following discussion and analysis reviews the results of operations
and financial condition for the Company for the years ended March 31, 2000, 1999
and 1998. This review should be read in conjunction with the Financial
Statements and other financial data presented elsewhere herein.
COMPARISON OF FISCAL 2000 TO FISCAL 1999
REVENUES
Oil and gas production increased from 2.9 Bcf equivalent in fiscal 1999
to 3.1 Bcfe in fiscal 2000. The acquisition of assets from Environmental
Exploration was completed in October of 1999 and has provided six months of
operating results for the fiscal year and the acquisition of Peake Energy, Inc.
in March of 2000 has resulted in 14 days of operating results to the Company for
the year ended March 31, 2000. Increased production also resulted from the
Company's drilling and development activities. Oil and gas production revenues
increased $989,439 (14%) to $8,223,202 for fiscal 2000 compared to $7,233,763
for fiscal 1999. The increase in oil and gas revenues is attributed to higher
volumes and higher prices received for oil and gas sold.
The Company received an average price of $20.08 and $11.39 per barrel
of oil for fiscal 2000 and 1999, and $2.58 and $2.57 per Mcf for natural gas for
fiscal years 2000 and 1999, respectively.
Drilling revenues increased $689,764 (19%) to $4,375,922 for fiscal
2000 compared to $3,686,158 for fiscal 1999 due to the increase in the number of
wells recognized in revenue for the comparable year ends. Drilling revenues were
recognized on 26 wells for fiscal year 2000 compared to 23 for fiscal 1999.
Well operating, transportation and other revenues increased $978,334
(47%) to $3,040,547 for fiscal 2000 compared to $2,062,213 for fiscal 1999. The
increases result primarily from increased volumes of gas transported through
facilities owned by North Coast and an increase in wells operated for third
parties. The Company also recognized $276,012 in revenues from oilfield services
provided to third parties.
EXPENSES
Oil and gas production expense increased to $3,572,027 for fiscal 2000
from $2,601,555 for fiscal 1999 primarily as a result of the wells acquired and
operated during the fiscal year. North Coast's average operating cost per
equivalent Mcf was $1.14.
Drilling costs for fiscal 2000 increased $526,985 (18%) as a result of
the increased number of Drilling Program wells drilled and completed compared to
fiscal 1999. The Company maintained a 26% profit margin for wells drilled during
the fiscal year.
Oil and gas operations expense increased $373,449 (31%) as a result of
the increase in the number of wells
14
<PAGE> 17
operated by the Company through its acquisition and drilling activities.
General and administrative expense increased $237,076 (11%) as a result
of a one-time payment of $370,000 to a former executive officer of the Company
in lieu of continuing his employment contract. As a percentage of revenues,
general and administrative expenses, excluding the one-time payment of $370,000,
decreased to 12% in fiscal year 2000 from 15% in fiscal year 1999.
Depreciation, depletion, amortization, impairment and other decreased
$76,744 primarily as a result of higher prices paid for oil and gas.
Interest expense increased $216,631 to $2,057,739 from $1,841,108
primarily reflecting the increase in the average outstanding borrowings
resulting from the Company's acquisition activities.
Income from operations for fiscal 2000 increased $520,157 (20%) to
$3,144,594 from $2,624,437 for fiscal 1999. The increase in income from
operations was primarily due to higher production and higher prices paid for
natural gas and oil and increased drilling revenues, well operating,
transportation and other revenues.
The Company's net income as a result of the aforementioned areas of
improvement increased $441,602 (51%) to $1,311,816 for the fiscal year ended
March 31, 2000 from $870,214 for the fiscal year ended March 31, 1999.
COMPARISON OF FISCAL 1999 TO FISCAL 1998
REVENUES
Oil and gas production increased from 1.2 bcf equivalent in fiscal 1998
to 2.9 bcf equivalent in fiscal 1999. Oil and gas production revenues increased
$4,219,834 (140%) to $7,233,763 for fiscal 1999 compared to $3,013,929 for
fiscal 1998 primarily due to the increased production volumes. This increase in
oil and gas revenue and production was primarily associated with the properties
acquired from Kelt. The Company received an average price of $11.39 and $16.18
per barrel of oil for fiscal 1999 and 1998, respectively, and $2.57 and $2.50
per Mcf for natural gas for fiscal year 1999 and 1998, respectively.
Drilling revenues increased by $697,787 (23%) to $3,686,158 for
fiscal 1999 compared to $2,988,371 for fiscal 1998 due to the increase in the
number of wells recognized in revenue for the comparable periods. Drilling
revenues were recognized on 23 wells for fiscal 1999 compared to 20 wells for
fiscal 1998.
For fiscal 1999, well operating, transportation and other revenues
increased $439,605 (27%) compared to fiscal 1998. This increase was primarily
due to the increase in revenue from gas transportation and oilfield services,
which was a result of the Kelt acquisition. North Coast has utilized the
oilfield equipment from the acquisition to provide services to its oilfield
operations.
EXPENSES
Oil and gas production expense increased to $2,601,555 for fiscal 1999
from $840,346 for fiscal 1998 primarily due to the Kelt acquisition. North
Coast's average operating cost per equivalent Mcf increased to $0.91 for the
year ended March 31, 1999 compared to $0.70 for the year ended March 31, 1998
primarily due to the integration of the assets and operating staff from the Kelt
acquisition for the year ended March 31, 1999.
Drilling costs for fiscal 1999 compared to fiscal 1998 increased
$410,714 (16%). This increase between comparable periods was due to the larger
number of Drilling Program wells drilled and completed during the fiscal year
ended 1999 compared to the fiscal year ended 1998. North Coast's profit margin
was 21% for fiscal 1999 compared to 16% for fiscal 1998.
Oil and gas operations expenses increased $547,842 (84%) for fiscal
1999 compared to fiscal 1998. This increase is due to an increase in gas
purchases related to unaffiliated third party gas sales, increased costs
associated
15
<PAGE> 18
with the utilization of oilfield equipment acquired in the Kelt acquisition and
the increase in costs due to the integration of the Kelt operations.
General and administrative expense decreased $107,013 (5%) primarily as
a result of a reallocation of overhead expenses related to integration of the
assets acquired from Kelt as well as a reduction in consulting fees in fiscal
1999 compared to fiscal 1998. As a percentage of revenues, general and
administrative expense decreased from 26% in fiscal 1998 to 15% in fiscal 1999.
Depreciation, depletion, amortization, impairment, and other increased
$1,237,344 (100%) for fiscal 1999 compared to fiscal 1998. The increase is
primarily due to the increased depletion associated with the wells acquired from
Kelt and the increased depreciation associated with the oilfield equipment and
saleslines also acquired from Kelt.
Interest expense increased to $1,841,108 for fiscal 1999 from $839,342
for fiscal 1998. This increase reflects the increase in the average outstanding
borrowings for the comparable periods due to the increase in debt associated
with the Kelt acquisition, the investment in the enhancement and development
activities and North Coast's contributions to the Drilling Program wells.
Income from operations for fiscal 1999 increased to $2,624,437 from
$1,033,918 for fiscal 1998. The increase in income from operations was primarily
due to higher production volumes, the increased price of natural gas and
increased drilling revenues. The aforementioned increases in volumes, price, and
drilling revenue also increased the Company's net income $608,076 (232%) to
$870,214 for fiscal 1999 from $262,138 for fiscal 1998.
INFLATION AND CHANGES IN PRICES
Inflation affects the Company's operating expenses as well as interest
rates, which may have an affect on the Company's profitability. Oil and gas
prices have not followed inflation and have fluctuated during recent years as a
result of other forces such as OPEC, economic factors, demand for and supply of
natural gas in the United States and within the Company's regional area of
operation. Oil prices during the Company's fiscal year have increased as a
result of continued production constraints by members of OPEC which has reduced
the available supply of crude oil to world markets. Natural gas prices have also
increased particularly during the fourth quarter of the fiscal year ended March
31, 2000, and more so subsequent to that date. These increases in price are
attributed to lower storage supplies following the winter of 1999/2000 and
higher natural gas demand for the generation of electricity in the United
States. As a result of these market forces, North Coast received an average
price of $20.08 per barrel of oil for fiscal 2000 compared $11.39 for fiscal
1999. The Company received an average price of $2.58 per Mcf for its natural gas
for fiscal 2000 compared to $2.57 for fiscal 1999.
The Company cannot predict the duration of the current strength of oil
and gas markets and price, as those forces noted above as well as other
variables may change.
Currently, North Coast sells natural gas under fixed price contracts,
on the spot market and through a fixed price commodity hedge. The Company has
positioned itself to take advantage of current market conditions by fixing a
greater portion of its gas to contracts of a year or longer at prices
substantially higher than were received in recent years. Additionally, the
Company continues to acquire and construct new pipeline systems to transport
natural gas from Company wells and third parties.
LIQUIDITY AND CAPITAL RESOURCES
North Coast's working capital was $5,351,000 at March 31, 2000,
compared to $2,399,000 at March 31, 1999. The increase of $2,951,000 in working
capital reflects the working capital acquired in the Peake transaction and the
funds received from the formation of the fiscal 2000 Drilling Program. As of
March 31, 2000, the Company had $20,000,000 outstanding under its Credit
Facility and $72,500,000 in borrowings from NUON. On May 4, 2000, the Company
converted $24 million of the NUON debt into 9.6 million common shares.
16
<PAGE> 19
The following table summarizes the Company's financial position at
March 31, 2000 and 1999:
<TABLE>
<CAPTION>
(Amounts in Thousands) 2000 1999
---- ----
Amount % Amount %
------ -- ------ --
<S> <C> <C> <C> <C>
Working capital $ 5,351 5 $2,399 6
Property and equipment 104,763 91 36,418 89
Other 4,491 4 1,857 5
-------- ---- -------- ----
Total $114,605 100 $40,674 100
======== === ======= ===
Long-term debt $ 90,122 79 $21,494 53
Deferred income taxes and other liability 1,091 1 1,238 3
Stockholders' equity 23,392 20 17,942 44
-------- --- -------- ---
Total $114,605 100 $40,674 100
======== === ======= ===
</TABLE>
The oil and gas exploration and development activities of North Coast
historically have been financed through the Drilling Programs, through
internally generated funds, and from bank financing.
The following table summarizes North Coast's Statements of Cash Flows
for the years ended March 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
(Amounts in Thousands) 2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net cash provided by operating activities $ 3,901 $ 2,385 $ 1,186
Net cash used for investing activities (75,443) (20,913) (2,122)
Net cash provided by financing activities 75,792 18,906 1,012
-------- -------- -------
Increase (decrease) in cash and cash equivalent $ 4,250 $ 378 $ 76
======== ======== =======
</TABLE>
As the above table indicates, North Coast's cash provided by operating
activities is $3,901,000 for fiscal 2000 compared to a $2,385,000 increase for
fiscal 1999.
Net cash used for investing activities increased to $75,442,712 for
fiscal 2000 from $20,912,938 for fiscal 1999. This increase was due to the
acquisition of Peake Energy, Inc. and the assets of Environmental Exploration.
Net cash from financing activities increased $56,886,991 for fiscal
2000 compared to fiscal 1999. This increase reflects the Company's borrowings
from NUON to finance the Peake acquisition. Also reflected is the receipt of
$4,370,057 from NUON on September 29, 1999 for the issuance of Common Stock of
the Company and the subsequent payment of a portion of the Company's Credit
Facility.
On February 9, 1998, the Company entered into an agreement with ING
(US) Capital Corporation to replace the $20 million revolving credit facility
with its previous lender. An amended credit facility dated May 29, 1998,
("Credit Agreement") expanded the Company's $20 million revolving credit
facility with ING ("ING") to a $25 million revolving credit facility ("Credit
Facility"). The Credit Agreement also provides for a borrowing base that is
determined semiannually by the lender based upon the Company's financial
position, oil and gas reserves, as well as outstanding letters of credit
($150,000 at March 31, 2000), as defined. The Credit Agreement requires payment
of an agent fee (0.75% for Credit Agreement) on amounts available and 1/2%
commitment fee on amounts not borrowed up to the available line. At March 31,
2000, the Company's borrowing base was $25 million subject to reduction for the
outstanding letters of credit. Available borrowings under the facility at March
31, 2000, were $4,850,000 and may subsequently be adjusted upon the semiannual
reserve study and borrowing base determination (see Note 4 to the Company's
March 31, 2000, financial statements). The Credit Facility provides that the
payment of cash dividends with respect to the Common Stock of the Company is
prohibited. As of March 31, 2000, the Company had $20,000,000 outstanding under
the Credit Facility, and was in compliance with its loan covenants. Amounts
borrowed under the Credit Facility bear interest at the prime rate of the
lending bank plus .75% or Libor plus 2.50%. The line of credit is reviewed
semi-annually and extended by an amendment to the current facility or converted
to a term loan
17
<PAGE> 20
on July 2, 2000. The lender has performed its September 30, 1999, semi-annual
borrowing base review and has provided a third amendment to the Credit Facility
which continues the facility without payment of principal until September 30,
2000. The lender has indicated that, in the future, it intends to discontinue
lending in the oil and gas business in the United States and has requested that
the Company find another lender. North Coast is currently reviewing options with
several lenders that are interested in providing at least a $100 million credit
facility.
The amounts borrowed under its revolving line of credit are secured by
the Company's receivables, inventory, equipment and a first mortgage on certain
of the Company's interests in oil and gas wells and reserves. The mortgage notes
are secured by certain land and buildings.
In addition, at March 31, 2000, the Company had approximately $34,800
outstanding under a mortgage note payable for its facility in Youngstown. The
mortgage note bears interest at the rate of 8% and requires the Company to make
monthly payments of approximately $1,019 through July 2003. The Company
purchased a building for its headquarters and entered a mortgage note on May 13,
1996, for $540,000 over a 15-year term with an interest rate of 8.58% to be
renegotiated every five years. The amount outstanding under the mortgage note at
March 31, 2000, was $464,800.
On September 29, 1999, the Company sold an additional 1,042,125 shares
of its Common Stock for $4,370,057 to NUON International Projects BV, a limited
liability company organized under the laws of the Netherlands (NUON), pursuant
to the terms of a stock purchase agreement ("Agreement") by and between the
Company and NUON dated August 1, 1997. By exercising its option to purchase
additional shares by September 30, 1999, NUON's stock ownership increased to 62%
of the Company's outstanding Common Stock. The Company issued 80,400 warrants
representing the right of the holders to purchase one share of Common Stock for
$4.375 per share in connection with the sale of Common Stock to NUON.
The Company acquired certain assets and assumed certain rights and
obligations of Environmental Exploration, headquartered in North Canton, Ohio.
The acquisition was made pursuant to a Purchase and Sale Agreement dated October
7, 1999, with an effective date of September 30, 1999. The purchase price for
the acquired assets was approximately $3.5 million. The Company funded the
acquisition using cash from the third installment under the 1997 NUON Agreement.
North Coast acquired 100% of the stock of Peake Energy, Inc. per the
terms of a Stock Purchase Agreement dated March 17, 2000. The Company borrowed
$72.5 million from NUON to finance the acquisition. On May 4, 2000, the Company
converted $24 million of the NUON debt to 9.6 million common shares.
On April 30, 1999, the Company's chief executive officer resigned and
under a separation agreement was entitled to certain payments in lieu of his
existing employment contract and as consideration for non-compete provisions. A
warrant to purchase common stock was also a part of the separation provisions.
Management of North Coast believes that general economic conditions and various
sources of available capital, including cash flow from operations, borrowings
from the anticipated new credit facility and funds raised in Drilling Programs
will be sufficient to fund the Company's obligations, and operations through
fiscal 2001.
YEAR 2000 READINESS DISCLOSURE
North Coast developed an action plan and identified the resources 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. SFAS 133,
as
18
<PAGE> 21
amended by SFAS 137, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The effect of the anticipated adoption of this
standard is expected to have no material effect on the Company's financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements."
SAB 101 summarizes the staff's views and provides guidance on applying generally
accepted accounting principles to revenue recognition. SAB 101, as amended by
SAB 101A and SAB 101B, must be adopted no later than the fourth fiscal quarter
of fiscal years beginning after December 15, 1999. The Company has not
determined the effects, if any, the SAB may have on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary interest rate risk exposure results from floating
rate debt including debt under the Company's revolving Credit Facility and the
two Non-Negotiable Subordinated Promissory Notes between the Company and NUON.
At March 31, 2000, approximately 99% of the Company's total long-term debt
consisted of floating rate debt. Subsequent to the fiscal year end, $24,000,000
of the aggregate $72,500,000 NUON debt was converted to equity. If interest
rates were to increase 100 basis points (1%) from March 31, 2000, and assuming
no changes in long-term debt (other than the NUON conversion) from the March 31,
2000, levels, the additional annual expense would be approximately $725,000 on a
pre-tax basis. The Company currently does not hedge its exposure to this
floating interest rate risk.
Subsequent to March 31, 2000, and effective with May 2000 production,
the Company has entered into a natural gas hedging program to eliminate exposure
to changes in natural gas prices that may affect a substantial portion of its
net production contracted to one large industrial customer. The hedging program
involves the use of a financial swap and fixes the Company's price at $3.51 per
Mcf through December 2001. Gains or losses on the hedging program are recognized
monthly as additions to or subtractions from oil and gas sales. The Company had
no material futures-related contracts at March 31, 2000.
The information included in this Item is considered to constitute
"forward looking statements" for purposes of the statutory safe harbor provided
in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
The following pages contain the Financial Statements and supplementary
data required by Item 8 of Part II of Form 10-K.
19
<PAGE> 22
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Carel W.J. Kok was elected as a Director in December 1998 and currently serves
as Chairman of the Board of Directors of the Company. Mr. Kok has been Manager
of Business Development with the International Division of the NUON Energy Group
since October 1996. From 1990 to 1995, he was with Royal Dutch Shell Group
working in a variety of downstream commercial, trading and new business
development functions in East Asia, the Middle East, as well as Western and
Eastern Europe. Mr. Kok was co-founder of the Lone Star Europe Holding, a U.S.
Dutch joint venture with the American chain Lone Star Steakhouse & Saloon. Mr.
Kok has also served on the Boards of Calortex Ltd., a retail gas distribution
company in the United Kingdom serving nearly 500,000 customers and has served as
Chairman of the Board of the Sino-foreign joint venture company Shantou Dan Nan
Windpower Development Company, Ltd., a joint venture now operating the largest
windfarm in China. Mr. Kok holds a B.A. from Princeton University and an M.B.A.
from the Rotterdam School of Management at Erasmus University.
Omer Yonel was appointed Executive Vice President-Corporate Development in
January 1999; in May 1999 was promoted to Chief Operating Officer and in October
1999 was promoted to Chief Executive Officer and appointed as a Director. Mr.
Yonel has ten years' of international experience in project engineering, project
management and sales in the European oil and gas industry. Prior to joining NUON
in January 1998, he was a project manager for the construction of co-generation
plants at Schelde Engineering & Contractors bv. Previous to his service with
Schelde, Mr. Yonel held various project engineering, management and sales
positions at ABB Lummus, an Asea Brown Boveri subsidiary that provides
engineering, management and consultancy services to global chemical,
petrochemical, petroleum refining, oil and gas and other industries. Mr. Yonel
holds a B.S. degree in Civil Engineering from American Bosphorus University in
Istanbul, Turkey as well as a Master of Service degree in Civil Engineering from
Delft University of Technology in Holland.
Cok van der Horst was appointed to the Board of Directors in October 1999. Mr.
van der Horst is currently the Director, NUON East and North Holland, where he
was the Chief Financial Officer between 1993 and 1999, and was also in charge of
technical affairs, information technology, personnel and activities in the
national energy market. He has recently assumed responsibilities in the area of
mergers, acquisitions and divestments for the parent company, NUON n.v. Prior to
joining NUON in January of 1993, Mr. van der Horst was chairman of the board of
PEB, the energy distribution company of the province of Friesland (a regional
government in The Netherlands). At PEB he was responsible for the financial and
economic policy. Mr. van der Horst holds a Master's Degree in business
administration from Erasmus University in Rotterdam.
Jos J. M. Smits was appointed to the Board of Directors in September 1997. Mr.
Smits has been Manager-Purchasing and Trade for NUON Energy Group since July
1994. From October 1992 until July 1994, Mr. Smits was Managing Director of Fels
bv, a Dutch manufacturer of building materials. Mr. Smits holds a degree in
Economics from the University of Amsterdam, The Netherlands.
Garry Regan participated in the organization of North Coast's predecessor in
1981, has been an executive officer and Director since such time, serving as
President since August, 1988. He holds a B.S. degree from Ohio State University
and a Masters degree from Indiana University. Mr. Regan is a member of the
Independent Petroleum Association of America. Mr. Regan also serves as a
Director and President of NCE Securities a wholly owned subsidiary of the
Company and a registered broker-dealer.
Ralph Bradley was elected as a Director of North Coast in December 1997. Mr.
Bradley is currently President of Bradley Energy International, which provides
energy solutions for the world market, and Bradley Energy USA, which provides
individuals with the opportunity to own various aspects of natural gas
production. Prior to forming these entities, Mr. Bradley was chief executive
officer of The Eastern Group, Inc., and its predecessor, Eastern States
Exploration Company, Inc. Mr. Bradley currently chairs the Compensation and
Stock Option Committee of the Board
20
<PAGE> 23
of Directors.
C. Rand Michaels was elected as a Director of North Coast in 1996. Mr. Michaels
retired from the office of Vice Chairman of Range Resources Corporation
(formerly Lomak Petroleum, Inc.) and is a Director of Range Resources
Corporation, served as the President and Chief Executive Officer of Lomak
Petroleum, Inc. from 1976 through 1988 and Chairman of the Board from 1984
through 1988, when he became Vice Chairman of Lomak Petroleum, Inc. Mr. Michaels
received his B.S. from Auburn University and his M.B.A. from the University of
Denver. Mr. Michaels is also a director of American Business Computers
Corporation of Akron, Ohio, a public company serving the beverage dispensing and
fast food industries. Mr. Michaels currently chairs the Audit Committee of the
Board of Directors.
Information required by this Item 10 as to the Executive Officers of the Company
is included in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 is incorporated by reference to
the information set forth under the caption "Executive Compensation" in the
Company's definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders, since such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Company's
fiscal year pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 12 is incorporated by reference to
the information set forth under the captions "Principal Shareholders" and "Share
Ownership of Directors and Officers" in the Company's definitive Proxy Statement
for the 2000 Annual Meeting of Stockholders, since such Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the Company's fiscal year pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 13 is incorporated by reference to
the information set forth under the caption "Transactions with Management" in
the Company's definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders, since such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Company's
fiscal year pursuant to Regulation 14A.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
The following Consolidated Financial Statements of the Registrant and its
subsidiaries are included in Part II, Item 8:
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Auditor's Reports on the Financial Statements F-3 - F-4
Consolidated balance sheets F-5 - F-6
Consolidated statements of operations F-7
Consolidated statements of stockholders' equity F-8
Consolidated statements of cash flows F-9 - F-10
Notes to consolidated financial statements F-11 - F-32
(a) (2) Financial Statements Schedules
</TABLE>
21
<PAGE> 24
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(a) (3) Exhibits
Reference is made to the Exhibit Index.
(b) Reports on Form 8-K:
The Company's report on Form 8-K dated April 5, 1999.
The Company's report on Form 8-K dated March 22, 2000.
The Company's report on Form 8-K/A dated May 23, 2000.
22
<PAGE> 25
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
2000 CONSOLIDATED FINANCIAL REPORT
F-1
<PAGE> 26
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONTENTS
--------------------------------------------------------------------------------
Page
AUDITORS' REPORTS ON THE FINANCIAL STATEMENTS F-3 - F-4
FINANCIAL STATEMENTS
Consolidated balance sheets F-5 - F-6
Consolidated statements of operations F-7
Consolidated statements of stockholders' equity F-8
Consolidated statements of cash flows F-9 - F-10
Notes to consolidated financial statements F-11 - F-32
F-2
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
North Coast Energy, Inc.
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of North
Coast Energy, Inc. (a Delaware corporation) and subsidiaries as of March 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of North
Coast Energy, Inc. and subsidiaries as of March 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States.
HAUSSER + TAYLOR LLP
Cleveland, Ohio
June 26, 2000
F-3
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
North Coast Energy, Inc.
Cleveland, Ohio
We have audited the accompanying consolidated statement of operations
and the related statements of stockholders' equity and cash flows of North Coast
Energy, Inc. (a Delaware corporation) and subsidiaries for the year ended March
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of North Coast Energy, Inc. and subsidiaries for the year ended March
31, 1998, in conformity with accounting principles generally accepted in the
United States.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
June 4, 1998.
F-4
<PAGE> 29
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 6,206,686 $ 1,956,617
Accounts receivable:
Trade, net 7,202,492 2,740,394
Affiliates 205,775 115,278
Inventories 450,718 210,556
Other, net 297,720 275,000
------------ -----------
Total current assets 14,363,391 5,297,845
PROPERTY AND EQUIPMENT, at cost
Land 222,822 97,822
Oil and gas properties (successful efforts) 102,177,522 42,964,679
Pipelines 15,798,806 6,543,928
Vehicles 1,970,687 937,613
Furniture and fixtures 627,414 588,473
Building and improvements 1,845,457 823,225
------------ -----------
122,642,708 51,955,740
Less accumulated depreciation, depletion, amortization and
impairment 17,879,417 15,537,255
------------ -----------
104,763,291 36,418,485
OTHER ASSETS, net 4,491,322 1,857,137
------------ -----------
$ 123,618,004 $ 43,573,467
============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE> 30
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt $ 3,124,600 $ 97,600
Accounts payable 4,963,160 2,355,982
Accrued expenses 357,716 444,808
Billings in excess of costs on uncompleted contracts 568,056 -
----------- ----------
Total current liabilities 9,013,532 2,898,390
LONG-TERM DEBT, net of current portion
Affiliates 72,500,000 -
Non-affiliates 17,622,181 21,493,922
----------- ----------
90,122,181 21,493,922
ACCRUED PLUGGING LIABILITY 724,535 872,408
DEFERRED INCOME TAXES 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) 731 738
Series B, Cumulative Convertible Preferred stock, par
value $.01 per share; 625,000 shares authorized; 232,864
issued and outstanding (aggregate liquidation value of
$2,328,640 plus dividends in arrears of $326,010) 2,329 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 26,274,574 21,914,939
Retained deficit (2,942,075) (4,021,027)
----------- ----------
Total stockholders' equity 23,391,556 17,942,547
----------- ----------
$ 123,618,004 $ 43,573,467
=========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE> 31
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
REVENUE
<S> <C> <C> <C>
Oil and gas production $ 8,223,202 $ 7,233,763 $ 3,013,929
Drilling revenues 4,375,922 3,686,158 2,988,371
Well operating, transportation and other 3,040,547 2,062,213 1,622,608
Administrative and agency fees 854,024 960,166 965,724
----------- ----------- -----------
16,493,695 13,942,300 8,590,632
COSTS AND EXPENSES
Oil and gas production expenses 3,572,027 2,601,555 840,346
Drilling costs 3,454,287 2,927,302 2,516,588
Oil and gas operations 1,573,963 1,200,514 652,672
General and administrative expenses 2,346,024 2,108,948 2,215,961
Depreciation, depletion, amortization, impairment
and other 2,402,800 2,479,544 1,242,200
Abandonment of oil and gas properties - - 88,947
----------- ----------- -----------
13,349,101 11,317,863 7,556,714
----------- ----------- -----------
INCOME FROM OPERATIONS 3,144,594 2,624,437 1,033,918
OTHER INCOME (EXPENSE)
Interest income 162,413 82,505 62,263
Other 62,548 4,380 5,299
Interest expense (2,057,739) (1,841,108) (839,342)
----------- ----------- -----------
(1,832,778) (1,754,223) (771,780)
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,311,816 870,214 262,138
PROVISION FOR INCOME TAXES - - -
----------- ----------- -----------
NET INCOME $ 1,311,816 $ 870,214 $ 262,138
=========== =========== ===========
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCK (after dividends on cumulative Preferred Stock
of $232,864, $236,654 and $268,264, respectively) $ 1,078,952 $ 633,560 $ (6,126)
=========== =========== ===========
NET INCOME PER SHARE (basic and diluted) $ 0.21 $ 0.16 $ -
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-7
<PAGE> 32
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock
----------------------- -------------------------- ------------------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1997 76,951 $ 770 269,464 $ 2,695 2,150,779 $ 21,508
Net income - - - - - -
Shares converted (1,470) (15) (1,200) (12) 3,273 33
Dividends on Series B Preferred stock ($.25
per share) - - - - - -
Issuance of common stock - - - - 1,165,144 11,651
Issuance of stock bonus common shares - - - - 3,390 34
------ ----- ------- ------- --------- --------
BALANCE, MARCH 31, 1998 75,481 755 268,264 2,683 3,322,586 33,226
Net income - - - - - -
Shares converted (1,665) (17) (35,400) (354) 81,333 813
Dividends on Series B Preferred stock ($.85
per share) - - - - - -
Issuance of common stock - - - - 1,149,425 11,494
Issuance of stock bonus common shares - - - - 3,470 35
------ ----- ------- ------- --------- --------
BALANCE, MARCH 31, 1999 73,816 738 232,864 2,329 4,556,814 45,568
Net income - - - - - -
Shares converted and other transactions (720) (7) - - 767 8
Dividends on Series B Preferred stock $1.00
per share) - - - - - -
Issuance of common stock - - - - 1,042,125 10,421
------ ----- ------- ------- --------- --------
BALANCE, MARCH 31, 2000 73,096 $ 731 232,864 $ 2,329 5,599,706 $ 55,997
====== ===== ======= ======= ========= ========
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Additional Total
Paid-in Retained Stockholders'
Capital Deficit Equity
------- ------- ------
<S> <C> <C> <C>
BALANCE, MARCH 31, 1997 $ 12,169,227 $ (4,884,589) $ 7,309,611
Net income - 262,138 262,138
Shares converted (6) - -
Dividends on Series B Preferred stock ($.25
per share) - (67,066) (67,066)
Issuance of common stock 4,812,322 - 4,823,973
Issuance of stock bonus common shares 10,597 - 10,631
------------ ------------ ------------
BALANCE, MARCH 31, 1998 16,992,140 (4,689,517) 12,339,287
Net income - 870,214 870,214
Shares converted (442) - -
Dividends on Series B Preferred stock ($.85
per share) - (201,724) (201,724)
Issuance of common stock 4,913,506 - 4,925,000
Issuance of stock bonus common shares 9,735 - 9,770
------------ ------------ ------------
BALANCE, MARCH 31, 1999 21,914,939 (4,021,027) 17,942,547
Net income - 1,311,816 1,311,816
Shares converted and other transactions (1) - -
Dividends on Series B Preferred stock ($1.00
per share) - (232,864) (232,864)
Issuance of common stock 4,359,636 - 4,370,057
------------ ------------ ------------
BALANCE, MARCH 31, 2000 $ 26,274,574 $ (2,942,075) $ 23,391,556
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-8
<PAGE> 33
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 1,311,816 $ 870,214 $ 262,138
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, amortization, impairment
and other 2,402,800 2,479,544 1,242,200
Abandonment of oil and gas properties - - 88,947
(Gain) loss on sale of property and equipment - 2,008 (1,609)
Deferred income taxes - - (12,000)
Stock bonus - 9,770 10,631
Change in:
Accounts receivable (826,595) (1,447,947) (19,692)
Inventories and other current assets (104,776) (193,276) 24,179
Other assets, net 289,815 241,701 (109,154)
Accounts payable 494,178 531,242 (62,667)
Accrued expenses (234,965) 194,735 (70,182)
Billings in excess of costs on uncompleted contracts 568,056 (302,881) (166,480)
---------- ---------- ----------
Total adjustments 2,588,513 1,514,896 924,173
---------- ---------- ----------
Net cash provided by operating activities 3,900,329 2,385,110 1,186,311
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,238,712) (4,824,062) (2,124,052)
Acquisition of net assets of Kelt Ohio, Inc. - (16,488,876) -
Acquisition of net assets of Environmental Exploration (3,500,000) - -
Acquisition of Peake (69,704,000) - -
Proceeds on sale of property and equipment - 400,000 2,000
---------- ---------- ----------
Net cash used by investing activities (75,442,712) (20,912,938) (2,122,052)
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-9
<PAGE> 34
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended March 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of accounts payable used to finance property
and equipment additions $ - $ - $ (87,161)
Borrowings under revolving credit facility 2,000,000 20,062,370 6,765,265
Repayment of borrowings under revolving credit facility (2,827,635) (5,800,000) (8,840,000)
Repayments under note payable to stockholder - - (1,453,674)
Payments on long-term debt (112,797) (107,315) (106,698)
Cash paid for deferred financing fees - (150,000) (88,223)
Proceeds from issuance of long-term debt 72,595,691 177,130 65,031
Net proceeds from issuance of common stock 4,370,057 4,925,000 4,823,973
Distributions and dividends (232,864) (201,724) (67,066)
----------- ----------- ----------
Net cash provided by financing activities 75,792,452 18,905,461 1,011,447
----------- ----------- ----------
INCREASE IN CASH AND EQUIVALENTS 4,250,069 377,633 75,706
CASH AND EQUIVALENTS AT BEGINNING OF
YEAR 1,956,617 1,578,984 1,503,278
----------- ----------- ----------
CASH AND EQUIVALENTS AT END OF YEAR $ 6,206,686 $ 1,956,617 $ 1,578,984
=========== =========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,906,346 $ 1,763,000 $ 887,000
Income taxes - 103,000 51,000
Supplemental disclosures of noncash investing and financing
activities:
Long-term debt incurred for the purpose of property
and equipment $ - $ - $ 65,000
Accounts payable incurred for the purchase of property
and equipment - - 22,000
Accounts payable incurred for deferred financing fees - - 88,000
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-10
<PAGE> 35
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Organization - North Coast Energy, Inc. ("North Coast"), a
Delaware corporation, was formed in August 1988 to engage in
the exploration, development and production of oil and gas,
the acquisition of producing oil and gas properties, and the
organization and management of oil and gas partnerships.
B. Principles of Consolidation - The consolidated financial
statements include the accounts of North Coast Energy, Inc.
and its wholly owned subsidiaries (collectively, "the
Company"), North Coast Operating Company ("NCOC") and NCE
Securities, Inc. ("NCE Securities"). In addition, the
Company's investments in oil and gas drilling partnerships,
which are accounted for under the proportional consolidation
method, are reflected in the accompanying financial
statements. The Company's ownership of revenues in these
drilling partnerships is as follows:
Capital Drilling Fund 1986-1 Limited Partnership 13.2%
North Coast Energy/Capital Appalachian Drilling Program
Limited Partnership:
1987-1 54.2%
1987-2 48.4%
1988-1 44.4%
1988-2 62.6%
1989 45.0%
North Coast Energy Appalachian Drilling Program Limited
Partnership:
1990-1 49.5%
1990-2 44.3%
1990-3 43.0%
1991-1 39.0%
1991-2 33.9%
1991-3 41.8%
1992-1 29.7%
1992-2 38.6%
1992-3 58.6%
1993-1 43.8%
1993-2 38.2%
1993-3 39.0%
1994-1 39.3%
1994-2 31.2%
1994-3 35.2%
1995-1 20.0%
1995-2 20.8%
1996-1 20.0%
1996-2 20.0%
1997-1 38.2%
1997-2 22.1%
1998-1 20.1%
1999-1 20.9%
All significant intercompany accounts and transactions have
been eliminated.
F-11
<PAGE> 36
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. Inventories - Inventories consist of material, pipe and
supplies valued at cost.
D. Cash Equivalents - Investments having an original maturity of
90 days or less that are readily convertible into cash have
been included in, and are a significant portion of, the cash
and equivalents balances.
E. Property and Equipment - Property and equipment are stated at
cost and are depreciated or depleted principally on methods
and at rates designed to amortize their costs over their
estimated useful lives (proved oil and gas properties using
the unit-of- production method based upon estimated proved
developed oil and gas reserves, pipelines using the
straight-line method over 10 to 25 years, vehicles, furniture
and fixtures using accelerated methods over 5 to 7 years,
building and improvements using various methods over 31 - 40
years).
F. Oil and Gas Investments and Properties - The Company uses the
successful efforts method of accounting for oil and gas
producing activities. Under successful efforts, costs to
acquire mineral interests in oil and gas properties, to drill
and equip exploratory wells that find proved reserves, and to
drill and equip developmental wells are capitalized.
Costs to drill exploratory wells that do not find proved
reserves, costs of developmental wells on properties the
Company has no further interest in, geological and geophysical
costs, and costs of carrying and retaining unproved properties
are expensed.
Unproved oil and gas properties that are significant are
periodically assessed for impairment of value and a loss is
recognized at the time of impairment by providing an
impairment allowance. Other unproved properties are expensed
when surrendered or expired.
When a property is determined to contain proved reserves, the
capitalized costs of such properties are transferred from
unproved properties to proved properties and are amortized by
the unit-of-production method based upon estimated proved
developed reserves. To the extent that capitalized costs of
groups of proved properties having similar characteristics
exceed the estimated future net cash flows, the excess
capitalized costs are written down to the present value of
such amounts. Estimated future net cash flows are determined
based primarily upon the estimated future proved reserves
related to the Company's current proved properties and, to a
lesser extent, certain future net cash flows related to
operating and administrative fees due the Company related to
its management of various partnerships. The Company follows
Statement of Financial Accounting Standards ("SFAS") No. 121
which requires a review for impairment whenever circumstances
indicate that the carrying amount of an asset may not be
recoverable. Impairment is recorded on a drilling program or
property (or groups of properties) specific basis, as
applicable. The estimated future net cash flows for SFAS No.
121 incorporates an escalation of revenues of 4% per annum and
an escalation of lease operating cost of 4% per annum
discounted at a rate of 10%.
On sale or abandonment of an entire interest in an unproved
property, gain or loss is recognized, taking into
consideration the amount of any recorded impairment if the
property had been assessed. If a partial interest in an
unproved property is sold, the amount received is treated as a
reduction of the cost of the interest retained.
F-12
<PAGE> 37
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. Revenue Recognition - The Company recognizes revenue on
drilling contracts using the completed contract method of
accounting for both financial reporting purposes and income
tax purposes. This method is used because the typical contract
is completed in three months or less and the Company's
financial position and results of operations do not vary
significantly from those which would result from use of the
percentage-of-completion method.
Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined.
Billings in excess of costs on uncompleted contracts are
classified as current liabilities.
Oil and gas production revenue is recognized as income as it
is extracted and sold from the properties. Other revenue is
recognized at the time it is earned and the Company has a
contractual right to such revenue.
H. Per Share Amounts - The computation of basic and diluted
earnings per share does not assume the conversion of the
unconverted Series A (1998) and Series B (1999 and 1998)
Preferred stock or the effect of warrants and stock options
outstanding (2000, 1999 and 1998) due to either, the average
market price of the common shares being lower than the prices
of all of the options and warrants currently outstanding, or
the effect being anti-dilutive. For the years ended March 31,
2000 and 1999, the conversion of Series A stock had the effect
of increasing the denominator (average outstanding shares) by
16,847 and 17,116 shares, respectively, while the conversion
of Series B stock increased the denominator by 76,321 shares
in 2000. Assumed debt conversion of NUON's $24 million loan
(2000) added approximately 400,000 of common shares to the
denominator. For the year ended March 31, 2000, additions to
the numerator for Series B Preferred stock dividends and
interest on convertible debt amounted to approximately
$100,000.
The average number of outstanding shares used in computing
basic (diluted) net income per share was 5,084,434
(5,577,602), 3,949,818 (3,966,934) and 2,821,298 (2,821,298)
for the years ended March 31, 2000, 1999 and 1998,
respectively.
I. Risk Factors - The Company operates in an environment with
many financial risks including, but not limited to, the
ability to acquire additional economically recoverable oil and
gas reserves, the continued ability to market drilling
programs, the inherent risks of the search for, development of
and production of oil and gas, the ability to sell oil and gas
at prices which will provide attractive rates of return, the
volatility and seasonality of oil and gas production and
prices, and the highly competitive nature of the industry and
worldwide economic conditions. The Company's ability to expand
its reserve base, diversify its operations and continue its
marketing efforts for and investments in drilling programs is
also dependent upon the Company's ability to obtain the
necessary capital through operating cash flow, additional
borrowings or additional equity funds.
J. Accounting Estimates - The preparation of financial statements
in conformity with accounting principles generally accepted in
the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
F-13
<PAGE> 38
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. Financial Instruments - The Company's financial instruments
include cash and equivalents, accounts receivable, accounts
payable and debt obligations. The book value of cash and
equivalents, accounts receivable and accounts payable are
considered to be representative of fair value because of the
short maturity of these instruments. The Company believes that
the carrying value of its borrowings under its bank credit
facility and other debt obligations approximates their fair
value as they bear interest at adjustable interest rates which
change periodically to reflect market conditions. The
Company's accounts receivable are concentrated in the oil and
gas industry. The Company does not view such a concentration
as an unusual credit risk.
L. Reclassifications - Certain reclassifications were made to
prior period financial statement presentations to conform with
current period presentations.
NOTE 2. ACQUISITIONS
On March 17, 2000, the Company acquired Peake Energy, Inc.
("Peake") through a purchase of all of Peake's outstanding capital
stock (the "Acquisition") from Belden & Blake Corporation ("BBC").
Peake owns oil and gas properties consisting of approximately 1,900
wells and in excess of 900 miles of natural gas gathering lines in
West Virginia, Kentucky and Virginia.
The Acquisition was consummated pursuant to a Stock Purchase
Agreement dated March 17, 2000 ("Closing Date") between the Company
and BBC, with an effective date of January 1, 2000 ("Effective
Date").
The purchase price for the Peake stock was $72.5 million subject to
various adjustments. The cash paid in connection with the
Acquisition was obtained from loans from NUON International
Projects B.V. ("NUON"), the Company's majority stockholder (see
Note 4). The purchase price was determined through arm's-length
negotiation between the Company and BBC and was based upon the
Company's valuation of Peake's business and assets. There were no
material relationships between the Company, its officers, directors
or affiliates, and BBC or its officers, directors and affiliates.
The estimated final acquisition cost (which includes $69,600,000
for the stock following the closing adjustment, intervening
transactions between the Effective Date and Closing Date and direct
acquisition costs of $104,000 incurred by the Company) was
allocated to the net assets acquired based on estimated fair values
and no goodwill was recorded. The estimated fair value of tangible
assets and liabilities acquired was $71,817,000 and $2,113,000,
respectively. The acquisition was accounted for as a purchase and,
accordingly, the operating results related to the acquisition are
included in the Company's consolidated results of operations from
the Closing Date (March 17, 2000).
F-14
<PAGE> 39
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. ACQUISITIONS (CONTINUED)
The following summary presents fiscal 2000 and 1999 unaudited pro
forma consolidated results of operations as if the acquisition had
occurred on the first day of each fiscal year and includes
adjustments for the issuance of 9.6 million common shares to NUON
for conversion of the $24 million promissory note (which occurred
subsequent to year end), estimated amounts of depreciation,
depletion and amortization of fixed assets acquired based on their
estimated fair values, and increased interest expense and income
taxes. The pro forma amounts include Peake's operation based on
Peake's fiscal years ended December 31, 1999 and 1998. The pro
forma results are for illustrative purposes only and do not purport
to be indicative of the actual results which would have occurred
had the transaction been consummated as of an earlier date, nor are
they indicative of results of operations which may occur in the
future. These results do not reflect any synergies that may or may
not be achieved.
<TABLE>
<CAPTION>
Unaudited Pro Forma
Year Ended March 31,
-----------------------------
<S> <C> <C>
2000 1999
---- ----
(Dollars in Thousands, Except
Per Share Amounts)
REVENUES $33,095 $35,579
======= =======
NET INCOME $ 2,327 $ 4,401
======= =======
NET INCOME, applicable to common stock (after
Preferred stock dividends of $233 and $236) $ 2,094 $ 4,165
======= =======
NET INCOME PER SHARE (basic and diluted) $ 0.14 $ 0.31
======= =======
</TABLE>
Effective September 11, 1999, the Company acquired, for $3.5
million, the working interest and operations in approximately 220
producing wells, proved undeveloped locations and gas gathering
systems from Environmental Exploration of North Canton, Ohio.
F-15
<PAGE> 40
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. ACQUISITIONS (CONTINUED)
Effective April 8, 1998, the Company acquired significantly all of
the assets and operations and assumed certain liabilities of Kelt
Ohio, Inc. ("Kelt") pursuant to a Purchase and Sale Agreement dated
April 8, 1998 (as amended May 12, 1998). The assets acquired from
Kelt, an oil and gas producer headquartered in Cambridge, Ohio,
include approximately 900 natural gas and oil wells, undeveloped
acreage, brine disposal facilities, drilling and service rigs, and
natural gas compressors and gas gathering systems. The Company
funded the acquisition primarily with borrowings under its
revolving credit facility.
The acquisition cost (which includes approximately $16,000,000 paid
to Kelt and direct acquisition costs of $488,876 incurred by the
Company) was allocated to the net assets acquired based on
estimated fair values and no goodwill was recorded. The estimated
fair value of tangible assets and liabilities acquired was
$17,488,876 and $1,000,000, respectively. The acquisition was
accounted for as a purchase and, accordingly, the operating results
related to the acquisition are included in the Company's
consolidated statement of operations for significantly all of the
Company's fiscal 1999 and 2000 years.
NOTE 3. BILLINGS IN EXCESS OF COSTS ON UNCOMPLETED CONTRACTS
Billings in excess of costs on uncompleted contracts consist of the
following at March 31:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Billings on uncompleted contracts $ 671,840 $ -
Costs incurred on uncompleted contracts 103,784 -
--------- --------
$ 568,056 $ -
========= ========
</TABLE>
At March 31, 2000, four wells were in the process of being
completed.
F-16
<PAGE> 41
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. LONG-TERM DEBT
Long-term debt consists of the following at March 31:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
NUON Non-Negotiable Subordinated Promissory
Note due February 28, 2015 interest at LIBOR
rate $ 48,500,000 $ -
NUON Non-Negotiable Subordinated Convertible
Promissory Note due February 28, 2015 interest
at LIBOR rate convertible at $2.50 share 24,000,000 -
Revolving credit notes payable - bank 20,000,000 20,827,635
Mortgage note payable to a bank, secured by land
and a building, requiring monthly payments of
approximately $5,248 (including interest at 8.58%)
through May 2001. Thereafter, the balance of the
note will be amortized over a ten-year period, at
an interest rate to be renegotiated every five years 464,818 487,673
Various installment and mortgage notes payable 281,963 276,214
------------ -------------
93,246,781 21,591,522
Less current portion 3,124,600 97,600
------------ -------------
$ 90,122,181 $ 21,493,922
============ =============
</TABLE>
On March 17, 2000, in connection with the Peake acquisition, NUON
loaned $72.5 million to the Company in the form of a $48.5 million
Non-Negotiable Subordinated Promissory Note and a $24.0 million
Non-Negotiable Subordinated Convertible Promissory Note. Interest
on both notes is payable semi-annually and accrues interest at the
six month LIBOR plus 2.30%. The principal amount of each note is
payable on February 28, 2015. Subsequent to year end (May 2000),
NUON converted the principal amount of the Convertible note to
shares of the Company's common stock based upon the exchange price
of $2.50 per share. The conversion election was subject to
stockholder approval. Both notes are (were) subordinated to the
Company's senior debt. NUON has the right to secure the
indebtedness by a lien on Peake's assets, subject to the rights of
the senior lender. The Company agreed to grant NUON registration
rights for shares issued in the conversion.
F-17
<PAGE> 42
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. LONG-TERM DEBT (CONTINUED)
On February 9, 1998, the Company entered into an agreement with ING
(U.S.) Capital LLC (successor in interest to ING (U.S.) Capital
Corporation) ("ING Capital") to replace the $20,000,000 revolving
credit facility with its previous lender. On May 29, 1998, the
Company entered into an amended Credit Agreement with its lender
increasing the Credit Facility from $20,000,000 to $25,000,000. The
Agreement provides for a borrowing base which is determined
semi-annually by the lender based upon the Company's financial
position, oil and gas reserves, as well as outstanding letters of
credit ($150,000 at March 31, 2000), as defined. At March 31, 2000,
the Company's borrowing base was $25,000,000 subject to reduction
for the outstanding letters of credit. Available borrowings under
the facility at March 31, 2000 were $4,850,000 and may subsequently
change based upon the semi-annual reserve study and borrowing base
determination.
In June 1999, the Company and ING Capital entered into an amended
credit agreement that extended the commitment period until and
including July 2, 2000. At the termination of the commitment
period, borrowings on the note are due and payable in 20 equal
quarterly installments beginning in September 2000. ING Capital has
indicated to the Company that sometime in the future it will
discontinue lending to the oil and gas industry. The Company is
currently in the process of reviewing its options and financing
needs with several prospective lenders.
Amounts outstanding under the reducing revolving line of credit
bear interest at the lending bank's prime rate plus .75% or LIBOR
plus 2.50%, or approximately 8.56% and 7.65% at March 31, 2000 and
March 31, 1999, respectively. The weighted average interest rate on
these borrowings was 8.4%, 8.3% and 10.1% for the years ended March
31, 2000, 1999 and 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. Additionally, the
Company is restricted from paying cash dividends on any of its
common stock under the terms of its credit facility. The Company
was in compliance with all covenants and restrictions at March 31,
2000.
The revolving credit facility and the notes are collateralized by
substantially all of the Company's assets including receivables,
inventory, equipment and a first mortgage on certain of the
Company's interests in oil and gas wells and reserves.
Future maturities of long-term debt for the years ended March 31
are as follows:
2001 $ 3,124,600
2002 4,119,100
2003 4,106,700
2004 4,056,300
2005 4,036,600
Thereafter 73,803,481
-----------
$93,246,781
===========
F-18
<PAGE> 43
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. LONG-TERM DEBT (CONTINUED)
The Company is exposed to market risk from changes in interest
rates since it, at times, funds its operations through long-term
and short-term borrowings. The carrying amount of the Company's
long-term debt approximates fair value, as all of the Company's
significant debt instruments carry adjustable interest rates which
change periodically to reflect market conditions.
NOTE 5. STOCKHOLDERS' EQUITY
A. Sale of Common Stock
In September 1997, the Company sold 1,149,426 shares of its
common stock for $5 million to NUON, a limited liability
company organized under the laws of the Netherlands, pursuant
to the terms of a stock purchase agreement ("Agreement") by
and between the Company and NUON dated August 1, 1997. In
September 1999 and 1998, NUON exercised its option under the
Agreement to purchase an additional 1,042,125 and 1,149,425,
respectively, shares of common stock at $4.35 per share.
Additionally, in September 1999, NUON purchased an additional
107,301 shares from the Company's former Chief Executive
Officer. NUON, which owns 3,448,277 shares of the Company's
common stock at March 31, 2000, has no further rights or
options to purchase shares under the Agreement (see Note 5.G.
regarding conversion of NUON debt to common stock that
occurred subsequent to year end).
B. Preferred Stock
The Board of Directors of North Coast has designated 563,270
shares of the 2,000,000 shares of preferred stock authorized
as Series A, 6% Noncumulative Convertible Preferred stock
(Series A Preferred stock) and 625,000 shares of Preferred
stock as Series B, Cumulative Convertible Preferred stock
(Series B Preferred stock).
Stockholders of Series A Preferred stock are entitled to vote
such shares on any and all matters submitted to a vote of the
stockholders of the Company based upon the number of votes
such stockholders would have if the Series A Preferred stock
had been converted into shares of common stock of the Company.
Holders of shares of Series A Preferred stock are entitled to
receive, when and if declared by the Board of Directors,
noncumulative cash dividends at an annual rate of $.60 per
share. Shares of Series A Preferred stock are senior to shares
of common stock with respect to such cash dividends and junior
to shares of Series B Preferred stock.
Series A Preferred stock is convertible, at the stockholder's
option, into shares of common stock at the conversion rate of
.46 shares of common stock for each share of Series A
Preferred stock converted.
All of, but not less than all, the outstanding shares of
Series A Preferred stock shall, at the option of North Coast,
be converted into fully paid and nonassessable shares of
common stock at the conversion price, upon the consummation of
the sale of shares of common stock of North Coast pursuant to
an effective registration statement under the Securities Act
of 1933, as amended; provided that such sale yields gross
proceeds to the Corporation of not less than $5,000,000 and is
made at a public offering price per share of not less than 1.5
times the conversion price in effect on such date.
F-19
<PAGE> 44
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
B. Preferred Stock (Continued)
In the case where North Coast issues warrants or rights to
purchase shares of common stock of the Company, each record
holder of outstanding shares of Series A Preferred stock will
receive the kind and amount of such warrants or rights so
issued which such holder would have been entitled to upon such
issuance had all of the holders of shares of Series A
Preferred stock been converted, as defined.
The Series A Preferred stock is redeemable at the option of
North Coast at a price of $10 per share. North Coast does not
have any obligation to redeem the Series A Preferred stock.
In the event of a voluntary or involuntary liquidation,
dissolution or winding up of North Coast, holders of the
Series A Preferred stock are entitled to be paid $10 per share
out of the assets of North Coast but after payment of other
indebtedness of North Coast, after payment or distribution to
the holders of Series B Preferred stock, but prior to any
distribution to holders of the common stock.
Holders of shares of Series B Preferred stock are entitled to
receive, when, as and if declared by the Board of Directors,
cash dividends at an annual rate of $1.00 per share, payable
quarterly.
In the event of any liquidation, dissolution or winding up of
the Company, holders of shares of Series B Preferred stock are
entitled to receive the liquidation preference of $10 per
share, plus an amount equal to any accrued and unpaid
dividends to the payment date, before any payment or
distribution is made to the holders of common stock and Series
A Preferred stock, as defined. After payment of the
liquidation preference, the holders of such shares will not be
entitled to any further participation in any distribution of
assets by the Company.
Generally, each outstanding share of Series B Preferred stock
has no vote, however in certain instances required by Delaware
General Corporation Law or by the certificate of designation,
each share will be entitled to one-fifth vote, excluding
shares held by the Company or any entity controlled by the
Company, which shares shall have no voting rights. So long as
any Series B Preferred stock is outstanding, the Company
cannot, without the affirmative vote of the holders of at
least 66 2/3 percent of all outstanding shares of Series B
Preferred stock, voting separately as a class, (i) amend,
alter or repeal any provision of the Company's Restated
Certificate of Incorporation or Bylaws so as to affect
adversely the relative rights, preferences, qualifications,
limitations or restrictions of the Series B Preferred stock,
(ii) authorize or issue, or increase the authorized amount of,
any additional class or series of stock of the Corporation, or
any security convertible into stock of such class or series,
having rights senior to the Series B Preferred stock as to
dividends or liquidation, or (iii) effect any reclassification
of the Series B Preferred stock. Additionally, the Series A
Preferred stock's certificate of designation restricts the
ability to significantly modify the Company's capital
structure where such modification could be at a detriment to
the Series B Preferred stockholders.
F-20
<PAGE> 45
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
B. Preferred Stock (Continued)
Whenever distributions on the Series B Preferred stock have
not been paid, as defined, the number of directors of the
Company may be increased, and the holders of the Series B will
be entitled to elect such additional directors to the Board of
Directors, as defined. Such voting right will terminate when
all such distributions accrued and in default have been paid
in full or set apart for payment, as defined. The amount of
dividends in arrears attributable to Series B Preferred is
$326,010 ($1.40 per share) as of March 31, 2000.
Effective December 18, 1995, the Series B Preferred stock was
redeemable at the option of the Company, at $10 per share plus
any accrued and unpaid dividends, as defined.
There is no mandatory redemption or sinking fund obligation
with respect to the Series B Preferred stock. In the event
that the Company has failed to pay accrued dividends on the
Series B Preferred stock, it may not redeem any of the
outstanding shares of the Series B Preferred stock until all
such accrued and unpaid distributions have been paid in full.
The holders of Series B Preferred stock have the right,
exercisable at their option, to convert any or all of such
shares into 1.311 (1.15 per share of Preferred stock plus .161
per share related to Preferred dividends in arrears at March
31, 2000) shares of common stock.
C. Common Stock Warrants
In fiscal 2000, 1999 and 1998, in conjunction with the NUON
Agreement, the Company issued (each year) warrants to purchase
26,800 shares of common stock for $4.375 per share. These
warrants (half of which are issued to a former
director/officer) expire between September 2002 and September
2004.
Effective April 1999, in connection with the signing of a
separation agreement, the Company's then Chief Executive
Officer received a ten-year warrant to purchase, at $5.00 per
share, 60,000 shares of the Company's common stock.
The Company granted Range Resources, a shareholder of the
Company, certain warrants to purchase 40,000 shares of common
stock at $6.00 per share and 60,000 shares of common stock at
$5.00 per share, as defined. These warrants were exercisable
on June 13, 1995 and expire or expired on June 13, 2000 and
1998, respectively. In addition to the Range Resources expired
warrants, warrants covering 575,000 shares of common stock
with an exercise price of $13.05 per share and 50,000 Series B
Units (consisting of one share of Series B Preferred stock and
five warrants to purchase .23 shares of common stock at $13.05
per share) with an exercise price of $12.00 per Unit expired
in the year ended March 31, 1998.
F-21
<PAGE> 46
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
D. Stock Options and Stock Appreciation Rights
North Coast has a stock option plan ("the Option Plan") to
provide incentives to stimulate interest in the development
and financial success of the Company. The Option Plan provides
for the granting of stock options to purchase common stock at
an option price determined by North Coast's Stock Option and
Compensation Committee ("the Committee"). Options granted
during 2000, 1999, and 1998 have been at or above fair market
value of the stock at the date of grant. The Committee shall
determine the expiration date but no option shall be
exercisable for a period of more than 10 years. The aggregate
fair market value of the common stock exercisable for the
first time during any calendar year shall not exceed $100,000.
Options granted under the Option Plan terminate upon, or
within 90 days of the employee leaving the Company. The
Company, from time to time, may issue additional options
outside the plan. The original plan expired August 17, 1999.
On December 13, 1999, the Shareholders approved the adoption
of the North Coast Energy, Inc. 1999 Employee Stock Option
Plan, effective October 18, 1999. The only significant changes
between the original Option Plan and the 1999 Option Plan was
an increase to 400,000 in the aggregate number of options that
may be granted under the Option Plan and a provision
permitting certain family transfers.
Stock option transactions during 2000, 1999 and 1998 are
summarized as follows:
Options Price
Outstanding Range
----------- -----
March 31, 1997 102,671
Options exercised (50) $3.90
Options canceled (41,273) $3.90-$24.55
--------
March 31, 1998 61,348
Options granted 20,000 $4.38
Options canceled (46,428) $3.90-$8.10
--------
March 31, 1999 34,920
Options granted 30,715 $4.38
Options canceled (3,500) $8.10
--------
March 31, 2000 62,135
========
F-22
<PAGE> 47
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
D. Stock Options and Stock Appreciation Rights (Continued)
In the years ended March 31, 2000 and 1999, the Company
granted 20,000 options to a Company director at $4.375 per
share with one-third shares vesting on that date and one-third
vesting each year after. In fiscal 2000, the Company granted
5,000 options to a Director/Officer of the Company, 3,429
options to an executive officer and another 2,286 options to a
key employee.
A summary of stock options outstanding and exercisable at
March 31, 2000 follows:
Options Option
Exercisable at March 31, 2000 through: Outstanding Price
-------------------------------------- ----------- -----
May 17, 2001 8,740 $4.90
March 19, 2003 920 $6.90
September 4, 2006 1,760 $3.90
April 1, 2003 6,667 $4.38
April 1, 2004 6,667 $4.38
April 1, 2005 6,666 $4.38
October 18, 2009 5,000 $4.38
December 13, 2009 2,286 $4.38
December 20, 2009 3,429 $4.38
------
42,135
Non vested options 20,000 $4.38
------
Total 62,135
======
Stock appreciation rights may be awarded by the Committee at
the time or subsequent to the time of the granting of options.
Stock appreciation rights awarded shall provide that the
option holder shall have the right to receive an amount equal
to 100% of the excess, if any, of the fair market value of the
shares of common stock covered by the option over the option
price payable, as defined. No stock appreciation rights have
been awarded under the plan.
The Company has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock Based Compensation."
Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Company's
two stock option plans been determined based on the fair value
at the grant date for awards in fiscal 2000, 1999 and 1998
consistent with the provisions of SFAS No. 123, the Company's
net income per share would not change.
F-23
<PAGE> 48
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
E. Stock Bonus Plan
The Company has a Key Employees Stock Bonus Plan ("the Bonus
Plan") to provide key employees, as defined, with greater
incentive to serve and promote the interests of the Company
and its shareholders. The aggregate number of shares of common
stock which may be issued as bonuses shall be 46,000 shares of
common stock, as defined. The expenses of administering the
Bonus Plan shall be borne by the Company. The Bonus Plan
terminates on February 1, 2001. The Company issued 3,470 and
3,340 shares of common stock related to this plan during
fiscal 1999 and 1998, respectively, and 25,120 shares of
common stock since inception.
F. 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.
G. Conversion of NUON Debt
On March 17, 2000, the Company as maker entered into two
Non-Negotiable Subordinated Promissory Notes in the amounts of
$24 million and $48.5 million with NUON as Holder. The Notes
in the aggregate represented the total amount of the financing
for the Peake Energy, Inc. transaction. The $24 million Note
contained a conversion feature and NUON, subsequent to year
end, converted the Note for 9,600,000 shares of the Common
Stock of the Company valued at $2.50 per share. The issuance
required shareholder approval which, after the filing of a
Definitive Information Statement on Form 14C, was obtained on
May 3, 2000, by majority consent in writing. The shares were
issued to NUON on May 4, 2000.
NOTE 6. INCOME TAXES
The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 is an asset and
liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's consolidated
financial statements or tax returns. The provision for income taxes
consisted of the following:
2000 1999 1998
---- ---- ----
Current provision $ - $ - $ 12,000
Deferred provision - - (12,000)
-------- -------- ----------
Total $ - $ - $ -
======== ======== ==========
F-24
<PAGE> 49
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. INCOME TAXES (CONTINUED)
Income taxes differed from the amount computed by applying the
federal statutory rates to pretax book income as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------------- ----------------- -----------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Provision based on
the statutory rate $446,000 34.0 $296,000 34.0 $ 89,000 34.0
Tax effect of:
Statutory depletion (456,000) (34.8) (306,000) (35.2) (132,000) (50.4)
Other - net 10,000 0.8 10,000 1.2 43,000 16.4
-------- ----- -------- ----- -------- -----
Total $ - - $ - - $ - -
======== ===== ======== ===== ======== =====
</TABLE>
The components of the net deferred tax liability as of March 31,
2000 and 1999 were as follows:
2000 1999
---- ----
DEFERRED TAX LIABILITIES
Property and equipment $(1,994,000) $(1,322,000)
DEFERRED TAX ASSETS
Alternative minimum tax credit carryforwards 397,000 397,000
Net operating loss carryforwards 1,620,000 1,181,000
Other financial reserves 60,000 57,000
Less: valuation allowance (392,200) (622,200)
----------- -----------
Total deferred tax assets 1,684,800 1,012,800
----------- -----------
Net deferred tax liability $ (309,200) $ (309,200)
=========== ===========
As of March 31, 2000, the Company had operating loss, percentage
depletion and alternative minimum tax credit carryforwards of
approximately $4,770,000, $3,200,000 and $397,000, respectively.
The 34% tax effect of the percentage depletion carryover has been
shown as a reduction of the deferred tax liability related to
property and equipment in the above presentation. The operating
loss carryforwards begin to expire in 2012. The percentage
depletion and alternative minimum tax carryforwards can be carried
forward indefinitely. Realization of these items is subject to
certain limitations and is contingent upon future earnings.
Additionally, a significant portion of the carryforwards may be
subject to limitations imposed by Internal Revenue Code Section
382, which could further restrict the Company's utilization and
realization of such carryforwards. Due to the uncertainty of the
realization of certain tax carryforwards, the Company has
established a valuation allowance against these carryforward
benefits.
F-25
<PAGE> 50
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. PROFIT SHARING PLAN
The Company has a profit sharing plan that provides retirement and
death benefits to participants and covers substantially all
employees. Company contributions are discretionary and are
allocated to the participants' accounts based upon their
compensation and are subject to a graded vesting schedule which
allows 20% vesting after two years of vesting service with an
additional 20% vesting for each complete year of vesting service
thereafter. Contributions of approximately $75,000, $50,000 and
$30,000 were accrued or paid for the years ended March 31, 2000,
1999 and 1998, respectively. The Plan was amended effective April
1, 2000, to permit the immediate participation of individuals who
are employed by Peake Energy, Inc. and to change the Plan's
Trustee.
North Coast provides no significant post-retirement and/or
post-employment benefits other than the profit sharing plan
discussed above.
NOTE 8. COMMITMENTS AND CONTINGENCIES
North Coast Energy, Inc., as general partner of several limited
partnerships, has committed to fund certain costs (primarily
tangible well costs and saleslines additions) of the partnerships
as they are incurred. At March 31, 2000, management estimates the
commitment to fund such costs to be approximately $943,000. The
commitment is expected to be funded by September 30, 2000.
The Company shares in unlimited liability to third parties with
respect to the operations of the partnerships it has sponsored and
may be liable to limited partners for losses attributable to breach
of fiduciary obligations. In certain partnerships, certain
investors have participated as co-general partners in such
partnerships. To make such investments more acceptable to potential
investors (from a standpoint of risks to such investors), North
Coast has agreed to indemnify these investor-general partners from
any partnership liability which they may incur in excess of their
contributions.
The Company has entered into employment contracts with certain of
its officers that provide for a minimum annual salary and
incentives based on the Company's sales and profitability. The
commitment, including minimum incentives, amounts to $275,000,
$330,000 and $330,000, respectively, for the years ending March 31,
2000, 1999 and 1998 plus CPI adjustments. In addition, each
employment contract provides for: reimbursement of certain business
expenses; life insurance of $1,000,000; disability benefits for a
stated period of time as defined; and termination benefits of
between one and three years' salary.
F-26
<PAGE> 51
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INDUSTRY SEGMENTS AND MAJOR CUSTOMERS
North Coast and its subsidiaries operate in a single industry
segment, the acquisition, exploration and development of oil and
gas properties primarily in the Appalachian Basin. North Coast and
its subsidiaries both originate and acquire prospects and drill, or
cause to be drilled, such prospects through joint drilling
arrangements with other independent oil companies or through
limited partnerships sponsored by the Company.
The Company's revenue is derived from oil and gas production and
oil and gas related activities in the Appalachian Basin. Gas
production revenues represented 92%, 96% and 93% of total oil and
gas production revenues for the years ended March 31, 2000, 1999
and 1998, respectively. In 2000 (1999), the Company sold gas to two
major purchasers that accounted for 22% (52%) and 19% (13%) of its
gas production revenues. In 1998, the Company sold gas to major
purchasers that accounted for 32% and 21%, respectively, of its gas
production revenues. A significant portion of trade accounts
receivable at March 31, 2000 and 1999 was attributable to these
purchasers.
NOTE 10. RELATED PARTY TRANSACTIONS
The Company believes that the terms of related party transactions
are as favorable to the Company as could have been obtained from
unaffiliated third parties.
Accounts receivable from affiliates consist primarily of
receivables from the partnerships managed by the Company and are
for administrative fees charged to the partnerships and to
reimburse the Company for amounts paid on behalf of the
partnerships. Significantly all of the Company's revenues, other
than oil and gas production revenue, are generated from or a result
of the organization and management of oil and gas partnerships
sponsored by the Company. During the years ended March 31, 2000 and
1999, the Company acquired limited partnership interests in oil and
gas drilling programs that it had sponsored at a cost of
approximately $90,000 and $450,000, respectively.
During fiscal 1999, a company owned by an employee of the Company
repaired two compressors for $51,000 and the Company paid a $37,500
finder's fee to an employee. During fiscal 1998, the Company
purchased wells and a pipeline from a shareholder for $62,000,
purchased 28 wells from an employee for $339,000 and paid a $75,000
finder's fee to an employee.
NOTE 11. 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. SFAS 133, as amended by SFAS 137, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000.
The effect of the adoption of this standard is expected to have no
material effect on the Company's financial statements.
F-27
<PAGE> 52
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. ACCOUNTING STANDARDS (CONTINUED)
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in
Financial Statements." SAB 101 summarizes the staff's views and
provides guidance on applying generally accepted accounting
principles to revenue recognition. SAB 101, as amended by SAB 101A
and SAB 101B, must be adopted no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The
Company has not determined the effects, if any, the SAB may have on
its financial statements.
NOTE 12. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)
The following supplemental unaudited oil and gas information is
required by SFAS No. 69, "Disclosures About Oil and Gas Producing
Activities."
The tables on the following pages set forth pertinent data with
respect to the Company's oil and gas properties, all of which are
located within the continental United States.
CAPITALIZED COSTS RELATING TO OIL AND GAS
PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Proved oil and gas properties $102,177,522 $ 42,964,679 $ 25,754,748
Accumulated depreciation, depletion,
amortization and impairment (14,432,570) (12,742,541) (10,892,238)
------------ ------------ ------------
Net capitalized costs $ 87,744,952 $ 30,222,138 $ 14,862,510
============ ============ ============
</TABLE>
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------
2000 1999 1998
------------ ------------ ----------
<S> <C> <C> <C>
Property acquisition costs $ 56,952,518 $ 13,687,040 $ 277,742
Exploration costs 86,812 110,295 194,503
Development costs 2,173,513 4,125,422 2,149,440
</TABLE>
Property acquisition costs include purchases of proved and unproved
oil and gas properties acquired in business acquisitions.
F-28
<PAGE> 53
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) (CONTINUED)
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
March 31,
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Oil and gas production $ 8,223,202 $ 7,233,763 $ 3,013,929
(Loss) gain on sale of oil and gas properties - (2,008) 1,700
Production costs (3,572,027) (2,601,555) (840,346)
Exploration expenses - (110,295) (194,503)
Depreciation, depletion, amortization,
impairment and other (1,690,029) (1,863,012) (627,636)
Abandonment of oil and gas properties - - (88,947)
----------- ----------- -----------
2,961,146 2,656,893 1,264,197
Provision for income taxes 626,075 561,056 278,123
----------- ----------- -----------
Results of operations for oil and gas
producing activities (excluding corporate
overhead and financing costs) $ 2,335,071 $ 2,095,837 $ 986,074
=========== =========== ===========
</TABLE>
Provision for income taxes was computed using the statutory tax
rates for the years ended March 31, 2000, 1999 and 1998 and
reflects permanent differences, including the Partnership's results
of operations for oil and gas producing activities that are
reflected in the Company's consolidated income tax provision
(credit) for the periods.
F-29
<PAGE> 54
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) (CONTINUED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
Oil Gas
(BBLS) (MCF)
--------- -----------
<S> <C> <C>
Balance, March 31, 1997 120,200 16,959,000
Extensions, discoveries and other additions 3,000 1,333,000
Production (13,900) (1,116,000)
Revisions of previous estimates 26,400 1,153,000
Sales of reserves in place - (527,000)
--------- -----------
Balance, March 31, 1998 135,700 17,802,000
Extensions, discoveries and other additions 264,100 34,976,000
Production (28,100) (2,688,000)
Revisions of previous estimates 53,500 2,682,000
Sales of reserves in place - (251,000)
--------- -----------
Balance, March 31, 1999 425,200 52,521,000
Extensions and discoveries 45,900 6,483,000
Purchase of reserves in place 604,700 73,324,000
Production (31,000) (2,947,000)
Revisions of previous estimates (23,400) (4,513,000)
Sales of reserves in place - -
--------- -----------
Balance, March 31, 2000 1,021,400 124,868,000
========= ===========
PROVED DEVELOPED RESERVES
March 31, 1997 120,200 14,472,000
March 31, 1998 126,700 15,087,000
March 31, 1999 322,700 41,214,000
March 31, 2000 924,000 109,174,000
</TABLE>
F-30
<PAGE> 55
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Future cash inflows from sales of oil
and gas $ 372,429,000 $ 142,552,000 $ 46,349,000
Future production costs (137,203,000) (47,105,000) (12,997,000)
Future development costs (13,417,000) (11,597,000) (2,178,000)
Future income tax expense (66,169,000) (24,774,000) (8,959,000)
------------- ------------- ------------
Future net cash flows 155,640,000 59,076,000 22,215,000
Effect of discounting future net cash
flows at 10% per annum (87,320,000) (33,650,000) (11,557,000)
------------- ------------- ------------
Standardized measure of discounted
future net cash flows $ 68,320,000 $ 25,426,000 $ 10,658,000
============= ============= ============
</TABLE>
CHANGES IN THE STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------
2000 1999 1998
------------- ------------- ------------
<S> <C> <C> <C>
Balance, beginning of year $ 25,426,000 $ 10,658,000 $ 10,345,000
Extensions and discoveries 4,570,000 30,710,000 728,000
Purchase of reserves in place 60,482,000 - -
Sales of oil and gas, net of production costs (4,651,000) (4,632,000) (2,173,000)
Net changes in prices and production costs 1,477,000 (533,000) 130,000
Net changes in development costs (1,820,000) (8,287,000) (104,000)
Revisions of previous quantity estimates (3,497,000) 2,272,000 1,122,000
Sales of reserves in place - (107,000) (259,000)
Net change in income taxes (18,374,000) (6,367,000) (246,000)
Accretion of discount 3,586,000 1,066,000 1,035,000
Other 1,121,000 646,000 80,000
------------- ------------- ------------
Balance, end of year $ 68,320,000 $ 25,426,000 $ 10,658,000
============= ============= ============
</TABLE>
F-31
<PAGE> 56
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) (CONTINUED)
Under the guidelines of SFAS No. 69, estimated future cash flows
are determined based on year-end prices for crude oil, current
allowable prices applicable to expected natural gas production,
estimated production of proved crude oil and natural gas reserves,
estimated future production and development costs of reserves based
on current economic conditions, and the estimated future income tax
expenses, based on year-end statutory tax rates (with consideration
of true tax rates already legislated) to be incurred on pretax net
cash flows less the tax basis of the properties involved. Such cash
flows are then discounted using a 10% rate.
The estimated quantities of proved oil and gas reserves and
standardized measure of discounted future net cash flows include
reserves from proved undeveloped acreage. The proved undeveloped
acreage includes only the acreage directly offsetting locations to
wells that have indicated commercial production in the objective
formation and which North Coast expects to drill in the near future
using prices, operating costs and development costs expected in the
area of interest. The quantities for fiscal 2000, 1999 and 1998
were reviewed by an independent petroleum engineering firm.
The methodology and assumptions used in calculating the
standardized measure are those required by SFAS No. 69. It is not
intended to be representative of the fair market value of the
Company's proved reserves. The valuation of revenues and costs does
not necessarily reflect the amounts to be received or expended by
the Company. In addition to the valuations used, numerous other
factors are considered in evaluating known and prospective oil and
gas reserves.
F-32
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /S/ Omer Yonel Chief Executive Officer June 26, 2000
------------------------
Omer Yonel
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ Omer Yonel Chief Executive Officer and Director June 26, 2000
------------------------ (principal executive officer)
Omer Yonel
/S/ Garry Regan President and Director June 26, 2000
------------------------
Garry Regan
/S/ Ron Huff Chief Financial Officer June 26, 2000
------------------------ (principal accounting and financial officer)
Ron Huff
/S/ Carel W. J. Kok Chairman of the Board and Director June 28, 2000
------------------------
Carel W. J. Kok
/S/ Cok Van Der Horst Director June 28, 2000
------------------------
Cok van der Horst
/S/ Jos J. M. Smits Director June 28, 2000
------------------------
Jos J. M. Smits
Director June __, 2000
------------------------
Ralph L. Bradley
/S/ C. Rand Michaels Director June 28, 2000
------------------------
C. Rand Michaels
</TABLE>
23
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENTS PAGE
------- ------------------------ ----------
<S> <C> <C>
3.1 Certificate of Incorporation of the Registrant dated August 30, 1988. (B)
3.2 Certificate of Stock Designation of the Registrant filed September 12, 1988. (B)
3.3 Certificate of Stock Designation of the Registrant filed September 14, 1989. (B)
3.4 Certificate of Correction filed March 22, 1991. (C)
3.5 Certificate of Amendment to Certificate of Incorporation filed November 4, 1992. (A)
3.6 Certificate of Stock Designation filed December 29, 1992. (D)
3.7 Certificate of Amendment to Certificate of Incorporation filed August 29, 1994. (G)
3.8 Certificate of Amendment of Certificate of Incorporation filed December 16, 1998. (J)
3.9 Certificate of Correction filed November 15, 1999. (_)
10.1 1988 Stock Option Plan. (B)
10.2 Form of Profit Sharing Plan. (B)
10.3 Form of Indemnity Agreement between the Registrant and each of its Directors and (B)
executive officers.
10.4 North Coast Energy, Inc. Key Employees Stock Bonus Plan. (B)
10.5 Stock Option Agreement dated as of May 17, 1991 between Registrant and Timothy (C)
Wagers.
10.6 Stock Option Agreement dated as of May 17, 1991 between the Registrant and (C)
Thomas A. Hill.
10.7 Option Agreement dated February 22, 1994 by and between Registrant and (E)
Charles M. Lombardy, Jr.
10.8 Option Agreement dated February 22, 1994 by and between Registrant and Garry Regan. (E)
10.9 Warrant to purchase 200,000 shares of Common Stock of the Company. (G)
10.10 Warrant to purchase 300,000 shares of Common Stock of the Company. (G)
10.11 Restated Employment Agreement dated May 3, 1995 by and between Registrant and (H)
Charles M. Lombardy, Jr.
10.12 Restated Employment Agreement dated May 3, 1995 by and between Registrant and (H)
Garry Regan.
</TABLE>
24
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENTS PAGE
------- ------------------------ ----------
<S> <C> <C>
10.13 Open End Mortgage and Promissory Note by and between ING Capital and (K)
the Company dated February 9, 1998.
10.14 Purchase and Sale Agreement dated April 8, 1998 between Kelt Ohio, Inc., and (I)
North Coast Energy, Inc.
10.15 Ratification and Amendment to Purchase and Sale Agreement dated May 12, 1998 (I)
between Kelt Ohio, Inc., and North Coast Energy, Inc.
10.16 First Amendment to Credit Agreement and Promissory Note dated May 29, 1998 (I)
between ING (U.S.) Capital Corporation and North Coast Energy, Inc.
10.17 Second Amendment to Credit Agreement and Promissory Note dated September 2, 1998 (K)
between ING (U.S.) Capital Corporation and North Coast Energy, Inc.
10.18 Warrants to purchase 300,000 shares (pre-split) of Common Stock of the Company. (K)
10.19 Separation Agreement dated April 30, 1999 by and among North Coast Energy, Inc., (K)
NUON International Projects, bv, Charles M. Lombardy, Jr., and Betty M. Lombardy.
10.20 Third Amendment to Credit Agreement and Promissory Note dated June 23, 1999 (K)
between ING (U.S.) Capital Corporation and North Coast Energy, Inc.
10.21 North Coast Energy, Inc. 1999 Employee Stock Option Plan ( - )
10.22 Stock Purchase Agreement between Belden & Blake Corporation and North Coast Energy, (L)
Inc. dated March 17, 2000.
10.23 Non-Negotiable Subordinated Promissory Note in the amount of $48,500,000 between (L)
North Coast Energy, Inc. as maker and NUON International Projects, bv as holder, dated
March 17, 2000.
10.24 Non-Negotiable Subordinated Convertible Promissory Note in the amount of $24,000,000 (L)
between North Coast Energy, Inc. as maker and NUON International Projects, bv as holder
dated March 17, 2000.
10.25 Fourth Amendment to Credit Agreement and Promissory Noted dated March 17, 2000 ( - )
between ING (U.S.) Capital LLC, as Agent, and North Coast Energy, Inc., as Borrower.
10.26 Amendment to North Coast Energy, Inc. Employees' Profit Sharing Plan, effective ( - )
April 1, 2000.
21.1 List of Subsidiaries. ( - )
23.1 Consent of Hausser + Taylor LLP. _
23.2 Consent of Arthur Andersen LLP. _
27.1 Financial Data Schedule *
-------------------------
</TABLE>
25
<PAGE> 60
(A) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Registration Statement on Form S-2 (Reg. No.
33-54288).
(B) Incorporated herein by reference to the appropriate exhibits to
the Company's Registration Statement on Form S-1 (File No.
33-24656).
(C) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1991.
(D) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1993.
(E) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994.
(F) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Quarterly Report on form 10-Q for the fiscal
quarter ended September 30, 1994.
(G) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995.
(H) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1996.
(I) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Report on Form 8-K dated June 12, 1998.
(J) Incorporated herein by reference to the appropriate exhibits
to the Company's Registration Statement on Form S-1 (File No.
33-71855).
(K) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1999.
(L) Incorporated herein by reference to the appropriate exhibit to
the Registrant's Report on Form 8-K dated March 22, 2000.
*Exhibit 27.1 furnished for Securities and Exchange Commission purposes only.
26
