<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
---
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at November 8, 2000
---------------------------- -------------------------------
Common Stock, $.01 par value 15,204,749
<PAGE> 2
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets -
September 30, 2000 (Unaudited) and March 31, 2000 (Audited) 3
Unaudited Consolidated Statements of Operations -
For the Three and Six Months Ended September 30, 2000 and 1999 5
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended September 30, 2000 and 1999 6
Unaudited Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial Condition and Results of Operations 16
PART II - OTHER INFORMATION 25
</TABLE>
<PAGE> 3
NORTH COAST ENERGY, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and March 31, 2000
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
ASSETS September 30, March 31,
------ 2000 2000
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 15,121,329 $ 6,206,686
Accounts receivable:
Trade, net 5,163,596 7,202,492
Affiliates 182,900 205,775
Inventories 776,117 450,718
Other, net 301,468 297,720
------------ ------------
Total current assets 21,545,410 14,363,391
PROPERTY AND EQUIPMENT, at cost
Land 222,822 222,822
Oil and gas properties (successful efforts) 103,175,424 102,177,522
Pipelines 15,924,864 15,798,806
Vehicles 1,982,775 1,970,687
Furniture and fixtures 788,419 627,414
Building and improvements 1,858,470 1,845,457
------------ ------------
123,952,774 122,642,708
Less accumulated depreciation, depletion, amortization
and impairment 21,945,978 17,879,417
------------ ------------
102,006,796 104,763,291
OTHER ASSETS, net 3,744,792 4,491,322
------------ ------------
$127,296,998 $123,618,004
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
NORTH COAST ENERGY, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and March 31, 2000
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, March 31,
------------------------------------ 2000 2000
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 127,300 $ 3,124,600
Accounts payable 6,457,344 4,963,160
Accrued expenses 365,321 357,716
Billings in excess of costs on uncompleted contracts -- 568,056
------------- -------------
Total current liabilities 6,949,965 9,013,532
LONG-TERM DEBT, net of current portion
Affiliates 10,000,000 72,500,000
Non-affiliates 60,564,294 17,622,181
------------- -------------
70,564,294 90,122,181
ACCRUED PLUGGING LIABILITY 722,567 724,535
DEFERRED INCOME TAXES 366,246 366,200
STOCKHOLDERS' EQUITY:
Series A, 6% Noncumulative Convertible
Preferred stock, par value $.01 per share;
563,270 shares authorized; 73,096 issued
and outstanding (aggregate liquidation
value of $730,960) 731 731
Series B, Cumulative Convertible Preferred stock, par value
$.01 per share; 625,000 shares authorized, 232,864 issued
and outstanding (aggregate liquidation value $2,328,640
plus dividends in arrears of $326,010) 2,329 2,329
Undesignated Serial Preferred stock, par value $.01 per share;
811,730 shares authorized; none issued and outstanding -- --
Common Stock, par value $.01 per share; 60,000,000 shares
authorized; 15,199,706 and 5,599,706 issued and outstanding 151,997 55,997
Additional paid-in capital 50,178,556 26,274,574
Retained deficit (1,639,687) (2,942,075)
------------- -------------
Total stockholders' equity 48,693,926 23,391,556
------------- -------------
$ 127,296,998 $ 123,618,004
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
NORTH COAST ENERGY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the periods ended September 30, 2000 and 1999
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Oil and gas production $ 7,576,947 $ 1,715,090 $ 14,145,032 $ 3,226,956
Drilling revenues -- -- 671,840 --
Transportation fees 896,081 94,030 1,526,100 242,298
Gas marketing revenues 618,987 347,290 1,136,585 601,562
Administrative and agency fees 151,521 159,089 308,497 316,124
Well operating services 494,721 224,045 958,220 472,812
Other 419,197 13,542 740,972 107,803
------------ ------------ ------------ ------------
10,157,454 2,553,086 19,487,246 4,967,555
COSTS AND EXPENSES
Oil and gas production expenses 2,833,243 666,948 5,015,495 1,212,781
Drilling costs 322,559 135,777 975,018 240,162
Transportation costs 209,400 74,100 399,100 134,800
Gas marketing costs 555,354 305,980 1,062,809 542,878
Well operating costs 266,070 113,025 742,500 368,912
Other 126,889 22,057 178,508 90,667
General and administrative expenses 744,688 571,015 1,480,120 1,374,990
Depreciation, depletion, amortization,
impairment and other 2,520,261 475,054 4,659,561 955,386
------------ ------------ ------------ ------------
7,578,464 2,363,956 14,513,111 4,920,576
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 2,578,990 189,130 4,974,135 46,979
OTHER INCOME (EXPENSE)
Interest income 199,693 42,215 287,120 59,404
Other 21,789 1,007 22,350 1,568
Interest expense (1,438,357) (477,834) (3,515,386) (914,292)
------------ ------------ ------------ ------------
(1,216,875) (434,612) (3,205,916) (853,320)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 1,362,115 (245,482) 1,768,219 (806,341)
PROVISION FOR INCOME TAXES 349,400 -- 349,400 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 1,012,715 $ (245,482) $ 1,418,819 $ (806,341)
============ ============ ============ ============
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK (after
dividends on Cumulative Preferred Stock of
$58,216 for the three months ended September 30,
2000 and 1999 and $116,432 for the six months
ended September 30, 2000 and 1999 $ 954,499 $ (303,698) $ 1,302,387 $ (922,773)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE
(basic and diluted) $ 0.06 $ (0.07) $ 0.10 $ (0.20)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,418,819 $ (806,341)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, amortization, impairment
and other 4,659,561 955,386
(Gain) loss on sale of property and equipment -- (352)
Change in:
Accounts receivable 2,023,771 (3,006)
Inventories and other current assets (306,548) (173,080)
Other assets, net 203,930 152,928
Accounts payable 1,494,186 (385,891)
Other liabilities -- (132,760)
Accrued expenses 5,683 (18,341)
Billings in excess of costs on
uncompleted contracts (568,056) --
------------ ------------
Total adjustments 7,512,527 394,884
------------ ------------
Net cash provided (used) by operating activities $ 8,931,346 $ (411,457)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,345,067) (703,509)
------------ ------------
Net cash used by investing activities $ (1,345,067) $ (703,509)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended September 30, 2000 and 1999
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving credit facility 3,000,000 2,000,000
Borrowings under credit agreement 60,000,000 --
Repayment of borrowings under revolving credit facility (23,000,000) (900,000)
Payments on long-term debt (62,555,187) (55,086)
Proceeds from issuance of long-term debt 23,999,983 --
Net proceeds from issuance of common stock -- 4,385,548
Distributions and dividends (116,432) (116,432)
------------ ------------
Net cash provided by financing activities $ 1,328,364 $ 5,314,030
INCREASE IN CASH AND EQUIVALENTS 8,914,643 4,199,064
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 6,206,686 1,956,617
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 15,121,329 $ 6,155,681
============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 3,280,936 $ 913,400
Supplemental disclosures of noncash investing
and financing activities:
Long-term debt incurred for the purpose of property
and equipment -- $ 95,691
Accounts payable incurred for the purchase of property
and equipment -- $ 3,500,000
Accounts payable from interest on long-term debt $ 234,450 $ 123,100
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 8
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Accounting Policies
A. General
The consolidated financial statements included herein, have been
prepared by North Coast Energy, Inc. without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position have
been made.
Information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
financial statements be read in conjunction with the financial
statements and notes thereto which are incorporated in the Company's
Annual Report on Form 10-K/A for the fiscal year ended March 31, 2000.
The results of the operations for the interim periods may not
necessarily be indicative of the results to be expected for the full
year. In addition, the preparation of these financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B. Principles of Consolidation
The consolidated financial statements include the accounts of North
Coast Energy, Inc. and its wholly owned subsidiaries (the Company),
Peake Energy, Inc. (Peake), North Coast Operating Company (NCOC), and
NCE Securities, Inc. (NCE Securities). In addition, the Company's
investments in oil and gas drilling partnerships, which are accounted
for under the proportional consolidation method, are reflected in the
accompanying financial statements. The Company's ownership of revenues
in these drilling partnerships are as follows:
<TABLE>
<CAPTION>
<S> <C>
Capital Drilling Fund 1986-1 Limited Partnership 13.2%
North Coast Energy/Capital 1987-1 Appalachian Drilling Program Limited Partnership 54.2%
North Coast Energy/Capital 1987-2 Appalachian Drilling Program Limited Partnership 48.4%
North Coast Energy/Capital 1988-1 Appalachian Drilling Program Limited Partnership 44.4%
North Coast Energy/Capital 1988-2 Appalachian Drilling Program Limited Partnership 62.6%
North Coast Energy 1989 Appalachian Drilling Program Limited Partnership 45.0%
North Coast Energy 1990-1 Appalachian Drilling Program Limited Partnership 49.5%
North Coast Energy 1990-2 Appalachian Drilling Program Limited Partnership 44.3%
North Coast Energy 1990-3 Appalachian Drilling Program Limited Partnership 43.0%
North Coast Energy 1991-1 Appalachian Drilling Program Limited Partnership 39.0%
North Coast Energy 1991-2 Appalachian Drilling Program Limited Partnership 33.9%
North Coast Energy 1991-3 Appalachian Drilling Program Limited Partnership 41.8%
North Coast Energy 1992-1 Appalachian Drilling Program Limited Partnership 29.7%
North Coast Energy 1992-2 Appalachian Drilling Program Limited Partnership 38.6%
</TABLE>
8
<PAGE> 9
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Accounting Policies (Continued)
<TABLE>
<CAPTION>
<S> <C>
North Coast Energy 1992-3 Appalachian Drilling Program Limited Partnership 58.6%
North Coast Energy 1993-1 Appalachian Drilling Program Limited Partnership 43.8%
North Coast Energy 1993-2 Appalachian Drilling Program Limited Partnership 38.2%
North Coast Energy 1993-3 Appalachian Drilling Program Limited Partnership 39.0%
North Coast Energy 1994-1 Appalachian Drilling Program Limited Partnership 39.3%
North Coast Energy 1994-2 Appalachian Drilling Program Limited Partnership 31.2%
North Coast Energy 1994-3 Appalachian Drilling Program Limited Partnership 35.2%
North Coast Energy 1995-1 Appalachian Drilling Program Limited Partnership 20.0%
North Coast Energy 1995-2 Appalachian Drilling Program Limited Partnership 20.8%
North Coast Energy 1996-1 Appalachian Drilling Program Limited Partnership 20.0%
North Coast Energy 1996-2 Appalachian Drilling Program Limited Partnership 20.0%
North Coast Energy 1997-1 Appalachian Drilling Program Limited Partnership 38.2%
North Coast Energy 1997-2 Appalachian Drilling Program Limited Partnership 22.1%
North Coast Energy 1998-1 Appalachian Drilling Program Limited Partnership 20.1%
North Coast Energy 1999-1 Appalachian Drilling Program Limited Partnership 20.9%
</TABLE>
All significant intercompany accounts and transactions have been
eliminated.
C. Per Share Amounts
The average number of outstanding shares used in computing basic
(diluted) net income per share was 15,199,706 (15,233,330) and
4,551,111 (4,585,080) for the three months ended September 30, 2000 and
1999, respectively, and 13,406,299 (13,439,924) and 4,559,041
(4,593,041) for the six months ended September 30, 2000 and 1999,
respectively.
D. 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
9
<PAGE> 10
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2. Acquisitions (Continued)
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 $69.6 million for the stock following the closing
adjustment, intervening transactions between the Effective Date and
Closing Date and direct acquisition costs of $174,800 incurred by the
Company) was allocated to the net assets acquired March 17, 2000. The
following summary presents the three and six months ended September 30,
2000 and 1999 unaudited pro forma consolidated results of operations as
if the acquisition had occurred on the first day of each period and
includes adjustments for the issuance of 9.6 million common shares to
NUON for conversion of the $24 million promissory note, 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 year ended December 31, 1999. 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.
Unaudited Pro Forma
For the period ended September 30,
Three Months Ended Six Months Ended
2000 1999 2000 1999
-------- -------- -------- --------
(Dollars in Thousands, Except Per Share Amounts)
REVENUES $ 10,157 $ 6,100 $ 19,487 $ 12,062
======== ======== ======== ========
NET INCOME 1,013 156 1,419 (3)
======== ======== ======== ========
NET INCOME, applicable to
common stock (after Preferred
stock dividends of $58,216
and $116,432) 954 98 1,302 (119)
======== ======== ======== ========
NET INCOME PER SHARE
(basic and diluted) $ 0.06 $ 0.02 $ 0.10 $ (0.01)
======== ======== ======== ========
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.
10
<PAGE> 11
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Billings in Excess of Costs on Uncompleted Contracts
Billings in excess of costs on uncompleted contracts consist of the
following:
September 30, March 31,
2000 2000
------------- -------------
Billings on uncompleted contracts $ -- $ 671,840
Costs incurred on uncompleted contracts -- 103,784
------------- -------------
$ -- $ 568,056
============= =============
At September 30, 2000 all billing contracts were complete.
Note 4. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
------------- -------------
<S> <C> <C>
NUON Non-Negotiable Subordinated Promissory
Note due February 28, 2015; interest at LIBOR
rate plus 2.30% $ 10,000,000 $ 48,500,000
NUON Non-Negotiable Subordinated Convertible
Promissory Note due February 28, 2015; interest
at LIBOR rate plus 2.30% convertible at $2.50 share -- 24,000,000
Revolving credit note payable-Bank interest at a 60,000,000 --
varying rate based on LIBOR plus 1.25% to
2.00% (See note below)
Revolving credit note payable converted to term loan-
Bank interest rate of LIBOR plus 2.30% -- 20,000,000
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 454,603 464,818
Various installment and mortgage notes payable 236,991 281,963
------------- -------------
70,691,594 93,246,781
Less current portion 127,300 3,124,600
------------- -------------
$ 70,564,294 $ 90,122,181
============= =============
</TABLE>
11
<PAGE> 12
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Long-term Debt (Continued)
Effective September 26, 2000, the Company entered into a Credit
Agreement (the "Agreement") with Union Bank of California, NA ("UBOC")
as Agent and certain other financial institutions as lenders
(collectively "UBOC") to replace the $25 million revolving credit
facility with ING (U.S.) Capital LLC. ING Capital had indicated to the
Company that it intended to discontinue lending to the oil and gas
industry and the commitment period under the facility terminated on
July 2, 2000. The maturity date for the new facility is September 26,
2005.
The Agreement with UBOC provides for an initial borrowing base of $65
million, which is subject to redetermination by the lenders on a
semi-annual basis, and a maximum loan amount of $125 million. There is
also a $5 million sub-limit for letters of credit issued under the
borrowing base, with outstanding letters of credit under the Agreement
as of September 30, 2000 of $150,000. Available borrowings under the
facility as of September 30, 2000 were $5 million. The initial
borrowing was $60 million with $30 million on a three-month interest
basis and $30 million on a six month interest basis.
Amounts outstanding under the senior secured revolving credit facility
bear interest based upon usage as a percentage of the borrowing base,
to wit: 0-50% at the UBOC reference rate (RR) or LIBOR plus 1.50%;
51-75% at the UBOC RR or LIBOR plus 1.75%; 76-100% at the UBOC RR plus
.25% or LIBOR plus 2.00%, or approximately 8.75% at September 30, 2000
on the six month borrowing and 8.66% on the amount borrowed for the
three month period.
The Agreement required the Company to pay a facility fee on the initial
borrowing base and at the time of each increase in the borrowing base,
a commitment or "unused" fee payable quarterly in arrears on the
unutilized portion of the borrowing base at a rate of .375% per annum,
and agent fees as established by a separate agreement paid
semi-annually. The Agreement also contains certain restrictive
covenants, including working capital, and EBITDA interest coverage and
fixed charge coverage calculations, as defined. Additionally, the
Company is restricted from paying cash dividends on any of its common
stock under the terms of the Agreement.
The revolving credit facility and the notes are collateralized by a
perfected first priority mortgage, security interest and assignment of
production covering at least 80% of the Company's oil and gas
properties, as well as its receivables, inventory, and equipment.
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 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
12
<PAGE> 13
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Long-term Debt (Continued)
$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. As a result of the execution of the UBOC Agreement, the
Company paid $38.5 million of the original $48.5 million Non-Negotiable
Subordinated Promissory Note plus accrued interest to NUON on September
29, 2000. There remains $10 million of the loan outstanding, which
continues to accrue interest per the terms of the Note.
Note 5. Commitment and Contingencies
The Company and a commercial bank have issued standby letters of credit
which provide a guaranteed total amount of $150,000 in lieu of coverage
provided by insurance for performance and road bond deposits against
damage.
On April 30, 1999, Charles M. Lombardy, Jr., the Chief Executive
Officer of the Company, was paid $370,000 in lieu of continuing his
employment contract by signing a separation agreement with the Company.
Additionally, Lombardy received a ten-year warrant to purchase, at
$5.00 per share, 60,000 shares of the Company's common stock. NUON
purchased the 107,301 common shares owned by Lombardy for $470,000
directly reducing the amount of common shares NUON would be required to
purchase under the NUON Agreement.
Note 6. Preferred Dividends
The Company paid a dividend of $58,216 on the Cumulative Convertible
Series B Preferred Stock for the three months ended September 30, 2000
and 1999, and $116,432 for the six months ended September 30, 2000 and
1999. Cumulative dividends in arrears on the Cumulative Convertible
Series B Preferred Stock are $326,010 at September 30, 2000.
Note 7. Reverse Stock Split
On March 17, 1999, the Company's Board of Directors authorized a
1-for-5 reverse split of its common stock effective June 7, 1999 for
stockholders of record at the close of business on May 12, 1999. The
par value of the common stock was not changed. All share and per-share
amounts in the accompanying consolidated financial statements have been
restated to give retroactive effect to the reverse stock split.
Note 8. Sale of Common Stock and Conversion of Note
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
13
<PAGE> 14
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Sale of Common Stock and Conversion of Note (Continued)
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, shares, respectively, 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 has no further rights or options to purchase shares under
the Agreement. 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. After the conversion of the debt, NUON owns 85.96% of
the Company's common stock.
Note 9. Hedge
The Company's primary commodity market risk exposure is to changes in
the pricing applicable to its natural gas and oil production, which is
normally priced with reference to a defined benchmark, such as natural
gas or light, sweet crude oil traded on the New York Mercantile
Exchange (NYMEX) or published indices based on prices of spot gas
delivered to various regional pipelines. Actual prices received vary
from the benchmark depending on quality and location differentials.
Occasionally, the Company enters into financial market transactions
with creditworthy counterparties, primarily to reduce the risk
associated with the pricing of a portion of the natural gas that it
sells. The Company has entered into a financial instrument whereby the
Company has hedged 5,000 DTH of daily production from May 2000 to
December 31, 2001, at a price of $3.05/DTH. This "fixed price" hedge
calls for a monthly settlement such that if the Inside FERC, First of
the Month, Columbia Gas Transmission Appalachian Index is less than the
$3.05/DTH, the counterparty pays the Company for the difference times
the DTH hedged during the month. If the Columbia Gas Transmission
Appalachian Index is greater than $3.05 DTH, the Company remits to the
counterparty the excess times the number of DTH. As a result of this
arrangement, the Company's oil and gas revenues were reduced by
$636,100 for the quarter ended September 30, 2000 and $889,000 for the
six months ended September 30, 2000. As part of the financial
instrument North Coast, on July 24, 2000, supplied a letter of credit
in the amount of $1.2 million to the purchaser of the Company's
financial hedge as collateral for its mark to market exposure, and on
October 6, 2000, an additional letter of credit in the amount of
$750,000.
Note 10. 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 and SFAS 138, 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.
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
14
<PAGE> 15
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Accounting Standards (Continued)
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.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation" an interpretation of APB Opinion No. 25 ("FIN 44").
This Interpretation clarifies the definition of employee for purposes of
applying Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), the criteria for determining whether
a plan qualifies as a noncompensatory plan, the accounting consequence of
various modifications to the terms of a previously issued stock option or
award, and accounting for an exchange of stock compensation awards in a
business combination. This Interpretation is effective July 1, 2000, but
certain conclusions in this Interpretation cover specific events that
occur after December 15, 1998, or January 12, 2000. The Company believes
that the impact of FIN. 44 will not have a material effect on its
financial position or results of operations.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
North Coast Energy, Inc., an affiliate of nv NUON, ("North Coast",
the "Company") a Delaware corporation and its subsidiaries, are engaged in the
acquisition and enhancement of developed producing natural gas and oil
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 and turnkey drilling,
well operations, gas gathering, transportation and gas marketing services it
provides for third parties.
The following table is a review of the results of operations of the
Company for the three and six months ended September 30, 2000 and September 30,
1999. All items in the table are calculated as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas production 75% 67% 73% 65%
Drilling revenues 0 0 3 0
Transportation fees 9 4 8 5
Gas marketing revenues 6 13 6 12
Administrative and agency fees 1 6 1 6
Well operating services 5 9 5 10
Other 4 1 4 2
------------ ------------ ------------ ------------
Total Revenues 100% 100% 100% 100%
============ ============ ============ ============
Costs and expenses:
Oil and gas production expenses 28 26% 26% 24%
Drilling costs 3 5 5 5
Transportation costs 2 3 2 3
Gas marketing costs 6 12 5 11
Well operating costs 3 5 4 7
Other 1 1 1 2
General and administrative expenses 7 22 7 28
Depreciation, depletion, amortization
impairment and other 25 19 24 19
Interest expense 12 17 16 17
------------ ------------ ------------ ------------
Total Expenses 87 110% 90% 116%
------------ ------------ ------------ ------------
Subtotal 13% (10)% 10% (16)%
Provision for income taxes 3% 0% 3% 0%
------------ ------------ ------------ ------------
Net Income (Loss) 10% (10)% 7% (16)%
============ ============ ============ ============
</TABLE>
16
<PAGE> 17
The following discussion and analysis reviews the results of operations
and the financial condition for the Company for the six and three months ended
September 30, 2000 and 1999. The review should be read in conjunction with the
financial information presented elsewhere herein.
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 2000 TO SIX MONTHS ENDED SEPTEMBER
30, 1999.
REVENUES
Oil and gas revenues increased $10,918,076 (338%) to $14,145,032 for
the six months ended September 30, 2000 compared to oil and gas revenues of
$3,226,956 for the six months ended September 30, 1999. The increase in oil and
gas revenues reflects increased production resulting from the Company's
acquisition activities, successful exploration and developmental drilling
program and the higher natural gas and oil prices that the Company has received
for its increasing volumes of natural gas and oil. For the six months ended
September 30, 2000, the Company's production volumes increased 3,130,886 MCFE
(mcf equivalents) to 4,411,937 MCFE compared to 1,281,051 MCFE for the six
months ended September 30, 1999. The Company received an average price of $3.10
and $2.53 per MCF for natural gas sold for the six months ended September 30,
2000 and 1999, respectively, and $27.27 and $14.48 per barrel of oil sold for
the six months ended September 30, 2000 and 1999 respectively.
During the six months ended September 30, 2000 the Company recognized
drilling revenues of $671,840 resulting from four year end drilling program
wells, which were in progress during the current fiscal year. No drilling
revenues were recognized during the six months ended September 30, 1999. North
Coast anticipates drilling additional wells in connection with its drilling
program to be formed prior to the end of the calendar year. The Company raised
$5,276,230 and $3,515,000 for its fiscal 2000 and 1999 drilling programs
respectively.
Transportation fees increased $1,283,802 (530%) to $1,526,100 for the
six months ended September 30, 2000, compared to $242,298 for the six months
ended September 30, 1999. This increase results from the additional natural gas
gathering systems acquired in the Peake acquisition.
Gas marketing revenues increased $535,023 (89%) to $1,136,585 for the
six months ended September 30, 2000, compared to $601,562 for the six months
ended September 30, 1999 primarily as a result of an increase in third party
natural gas marketed by the Company's internal gas marketing department to its
industrial and commercial customers for the six months ended September 30, 2000.
Administrative and agency fees declined $7,627 (2%) to $308,497
compared to $316,124 for the six months ended September 30, 1999, as a result of
the elimination of the portion of the limited partners' interest that the
Company purchased.
Well operating revenues increased $485,408 (103%) to $958,220 for the
six months ended September 30, 2000, from $472,812 for the six months ended
September 30, 1999. This increase reflects the increase in the number of wells
the Company receives third party operating revenues from, as a result of both
its drilling programs and its acquisition activities.
The increase in other revenues of $633,169 (587%) to $740,972 for the
six months ended September 30, 2000, from $107,803 for the six months ended
September 30, 1999, reflects increased revenues from the Company's oilfield
services activities as well as payment for Section 29 Tax Credit monetization
acquired in the Peake acquisition.
17
<PAGE> 18
EXPENSES
For the six months ended September 30, 2000 oil and gas production
expenses increased $3,802,714 (314%) to $5,015,495 from $1,212,781 for the six
months ended September 30, 1999, reflecting the increased costs associated with
over 2,100 additional wells acquired or drilled by the Company since September
30, 1999.
Drilling expenses increased $734,856 (306%) to $975,018 for the six
months ended September 30, 2000, from $240,162 for the six months ended
September 30, 1999, primarily as a result of the carry over drilling activities
from the Company's year end drilling program and the additional technical staff
expenses related to North Coast's exploration program.
Transportation costs increased $264,300 (196%) to $399,100 for the six
months ended September 30, 2000, from $134,800 for the six months ended
September 30, 1999 primarily as a result of the costs associated with the
acquired gathering systems, the increased volumes of natural gas and the
increase in third party gas transported through the Company's gathering lines.
Gas marketing costs increased $519,931 (96%) to $1,062,809 for the
six months ended September 30, 2000, from $542,878 for the six months ended
September 30, 1999, primarily as a result of the costs associated with the
acquired gathering systems, the increased volumes of natural gas and the
increase in third party gas purchases through the Company's gas marketing
department.
Well operating costs reflecting the Company's expenses relating to
third party well operating increased $373,588 (101%) to $742,500 for the six
months ended September 30, 2000 from $368,912 for the six months ended September
30, 1999, as a result of the increase in number of wells operated for third
parties through the Company's partnership and acquisition activities.
Other expenses, primarily reflecting the Company's oilfield services
activities increased $87,841 (97%) to $178,508 for the six months ended
September 30, 2000, from $90,667 for the six months ended September 30, 1999, as
a result of the increased volume of services provided by this activity.
General and administrative expenses increased $105,130 (8%) to
$1,480,120 for the six months ended September 30, 2000, from $1,374,990 for the
six months ended September 30, 1999, primarily reflecting the additional
administrative staff acquired or hired following the Peake acquisition as well
as the realignment of personnel to profit centers. The prior year's financial
statements have been reclassified to conform with the current period
presentation.
Depreciation, depletion, amortization, impairment, and other (DD&A)
increased $3,704,175 (388%) to $4,659,561 for the six months ended September 30,
2000, from $955,386 for the six months ended September 30, 1999. This increase
reflects the additional production volumes attributable to the Company's oil and
gas sales as a result of the company's drilling and acquisition activities. In
addition, DD&A also contains $542,000 in amortization of the Section 29 Tax
Credit monetization.
Net income for the six months ended September 30, 2000, increased
$2,225,160 to $1,418,819 from a loss of $806,341 for the six months ended
September 30. 1999. The increase in net income reflects the increase in
production combined with an increase in natural gas and oil prices as well as
improved financial results from the Company's other streams of income. The
Company's net income attributable to common stock was $1,302,387 ($.10/share)
for the six months ended September 30, 2000, compared to a loss of $922,773
($(.20)/share) for the six months ended September 30, 1999, reflecting dividend
earned on the Company's Series B Cumulative Preferred Stock.
18
<PAGE> 19
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1999
REVENUES
Oil and gas revenues increased $5,861,857 (342%) to $7,576,947 for the
three months ended September 30, 1999, from $1,715,090 the three months ended
September 30, 2000. The increase in oil and gas revenues reflects significantly
higher volumes of gas and oil production attributable to the Company as a result
of its acquisition activities and its successful exploration, development, and
drilling activities combined with higher prices received for both oil and
natural gas. The Company's production volumes for the three months ended
September 30, 2000 were 2,193,100 MCFE (mcf equivalents) of natural gas compared
to 680,647 MCFE for the three months ended September 30, 1999. The Company
received an average price of $3.18 and $2.53 per mcf for natural gas sold for
the three months ended September 30, 2000 and 1999, respectively.
Transportation fees increased $802,051 (853%) to $896,081 for the three
months ended September 30, 2000, compared to $94,030 for the three months ended
September 30, 1999. This increase results from the additional natural gas
gathering systems acquired in the Peake acquisition.
Gas marketing revenues increased $271,697 (78%) to $618,987 for the
three months ended September 30, 2000, compared $347,290 for the three months
ended September 30, 1999. This increase results from the additional natural gas
gathering systems acquired in the Peake acquisition along with third party gas
sales to the Company's industrial and commercial customers.
Revenues from administrative and agency fees were reasonably flat and
the Company did not recognize any drilling revenues.
Well operating revenues increased $270,676 (121%) to $494,721 for the
three months ended September 30, 2000, compared to $224,045 for the three
months ended September 30, 1999, primarily due to the increased number of wells
operated for third parties resulting from the Company's acquisition activities
and drilling programs.
Other revenues attributable to North Coast's oilfield services
activities and revenues from Section 29 Tax Credit monetization increased
$405,655 (2,996%) to $419,197 for the three months ended September 30, 2000,
from $13,542 on September 30, 1999. The Company acquired the Section 29 Tax
Credit monetization with the acquisition of Peake Energy.
EXPENSES
Oil and gas production expenses increased $2,166,295 (325%) to
$2,833,243 for the three months ended September 30, 2000, from $666,948 for the
three months ended September 30, 1999, reflecting the costs associated with over
2,100 newly drilled or acquired wells.
Drilling costs increased $186,782 (138%) to $322,559 for the three
months ended September 30, 2000, compared to $135,777 at September 30, 1999,
reflecting the growth and costs of additional technical staff for the Company's
exploration activities.
Transportation costs increased $135,300 (183%) for the three months
ended September 30, 2000, to $209,400 on September 30, 2000, from $74,100 on
September 30, 1999, primarily as a result of the costs associated with the
acquired gas gathering systems, the increased volumes of natural gas and the
increase of third party gas sales through the Company's gas marketing
department.
19
<PAGE> 20
Gas marketing costs increased $249,374 (82%) for the three months ended
September 30, 2000, from $305,980 to $555,354 primarily as a result of the costs
associated with the acquired gas gathering systems, the increased volumes of
natural gas and the increase of third party gas purchases through the Company's
gas marketing department.
Well operating costs increased $153,045 (135%) to $266,070 for the
three months ended September 30, 2000, from $113,025 for the three months ended
September 30, 1999, as a result of the increase in number of wells operated for
third parties and the Company's costs associated with these operations.
Other expenses related primarily to the Company's oilfield services
activities increased $104,832 (475%) to $126,889 for the three months ended
September 30, 2000, from $22,057 for the three months ended September 30, 1999,
as a result of an increase in the amount of services provided.
General and administrative expenses increased $173,673 (30%) to
$744,688 for the three months ended September 30, 2000, from $571,015 for the
three months ended September 30, 1999.
The increase in depreciation, depletion, amortization, impairment and
other (DD&A) of $2,045,207 (431%) to $2,520,261 for the three months ended
September 30, 2000, from $475,054 for the three months ended September 30,
1999, reflects increased production volumes resulting from North Coast's
drilling and acquisition activities. In addition, DD&A also contains $274,000
of the Section 29 Tax Credit monetization.
Net income for the three months ended September 30, 2000 increased
$1,258,197 to $1,012,715 ($.06/share) from a loss of $245,482 ($(.07)/share)
for the three months ended September 30, 1999 primarily reflecting higher
production volumes of natural gas and oil and higher prices received as well as
increases in other areas of income attributable to the Company's drilling and
operating activities.
OTHER EVENTS
On May 4, 2000, the Company's majority shareholder, NUON, converted $24
million of debt related to the March 17, 2000, Peake acquisition to 9.6 million
shares of common stock of the Company.
As detailed below, on September 26, 2000, the Company entered into a
$125 million credit agreement with a consortium of banks lead by Union Bank of
California to replace its prior credit facility.
INFLATION AND CHANGES IN PRICES
Inflation affects the Company's operating expenses as well as interest
rates, which may have an effect 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 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 during the six
months ended September 30, 2000. These increases in price are attributed to
lower storage supplies following the winter of 1999/2000 and higher natural gas
demand for electric generation in the United States. As a result of these market
forces, the Company received an average
20
<PAGE> 21
price of $27.27 per barrel of oil for the six months ended September 30, 2000,
compared to $14.48 for the six months ended September 30, 1999. The Company
received an average price of $3.10 per Mcf for its natural gas for the six
months ended September 30, 2000, compared to $2.53 for the six months ended
September 30, 1999.
The Company can not predict the duration of the current strength of oil
and gas markets and prices, as those forces noted above as well as other
variables may change.
Currently, the Company 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 its
gas contracts of a year or longer at prices substantially higher than were
received in recent years while keeping a portion of its natural gas production
un-contracted and available for sale in today's rising gas price market.
Additionally, the Company continues to acquire and construct new pipeline
systems to transport natural gas from the Company wells and third parties.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $14,595,000 at September 30, 2000,
compared to $5,351,000 at March 31, 2000. The increase of $9,244,000 in working
capital at September 30, 2000 reflects the cash flow from operations.
The following table summarizes the Company's financial position at September 30,
2000 and March 31, 2000:
<TABLE>
<CAPTION>
(Amounts in thousands) September 30, March 31,
2000 2000
Amount % Amount %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Working Capital $ 14,595 12% $ 5,351 5%
Property and equipment (net) 102,007 85% 104,763 91%
Other 3,745 3% 4,491 4%
-------- -------- -------- --------
Total $120,347 100% $114,605 100%
======== ======== ======== ========
Long-term debt $ 70,564 59% $ 90,122 79%
Deferred income taxes and other liabilities 1,089 1% 1,091 1%
Stockholders' equity 48,694 40% 23,392 20%
-------- -------- -------- --------
Total $120,347 100% $114,605 100%
======== ======== ======== ========
</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 and equity financing.
21
<PAGE> 22
The following table summarizes the Company's Statements of Cash Flow for the
six months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
(Amounts in Thousands) September 30, September 30,
2000 1999
Amount % Amount %
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net cash provided (used by) operating activities $ 8,931 92% $ (411) (7)%
Net cash provided (used by) investing activities (1,345) (14)% (704) (13)%
Net cash provided (used by) financing activities 1,328 14% 5,314 97%
---------- ---------- ---------- ----------
Increase (decrease) in cash and equivalents $ 8,914 92% $ 4,199 77%
========== ========== ========== ==========
</TABLE>
Note: All items in the previous table are calculated as a percentage of total
cash sources. Total cash sources include the following items if positive: cash
flow from operations before working capital changes, changes in working capital,
net cash provided by investing activities and net cash provided by financing
activities, plus any decrease in cash and cash equivalents.
As the above table indicates, the Company's cash provided by operating
activities increased $8,931,000 for the six months ended September 30, 2000,
compared to $(411,000) for the six months ended September 30, 1999. This
increase reflects the added cash flow that is generated by the Company's
acquisition of Peake. Net income increased by $2,200,000 and depreciation,
depletion, and amortization increased by $3,700,000. The increased activity
also made the working capital components increase cash by $2,853,000.
Net cash used for investing activities increased $1,345,000 for the six
months ended September 30, 2000, from $704,000 for the three months ended
September 30, 1999. This increase in cash used for investing activities
reflects the Company's increase in drilling and exploration for its own
account. Ten wells were deepened or drilled since the beginning of the fiscal
year.
Net cash from financing activities decreased $1,328,000 for the six
months ended September 30, 2000 from $5,314,000 for the six months ended
September 30, 1999. This decrease primarily reflects less borrowing due to
additional cash generated by operations.
Effective September 26, 2000, the Company entered into a Credit
Agreement (the "Agreement") with Union Bank of California, NA ("UBOC") as Agent
and certain other financial institutions as lenders (collectively "UBOC") to
replace the $25,000,000 revolving credit facility with ING (U.S.) Capital LLC.
ING Capital had indicated to the Company that it intended to discontinue lending
to the oil and gas industry and the commitment period under the facility
terminated on July 2, 2000. The maturity date for the new facility is September
26, 2005.
The Agreement with UBOC provides for an initial borrowing base of
$65,000,000, which is subject to redetermination by the lenders on a semi-annual
basis, and a maximum loan amount of $125,000,000. There is also a $5,000,000
sub-limit for letters of credit issued under the borrowing base, with
outstanding letters of credit under the Agreement as of September 30, 2000 of
$150,000. Available borrowings under the facility as of September 30, 2000 were
$5,000,000. The initial borrowing was $60,000,000 with $30,000,000 on a
three-month interest basis and $30,000,000 on a six month interest basis.
22
<PAGE> 23
Amounts outstanding under the senior secured revolving credit facility
bear interest based upon usage as a percentage of the borrowing base, to wit:
0-50% at the UBOC reference rate (RR) or LIBOR plus 1.50%; 51-75% at the UBOC RR
or LIBOR plus 1.75%; 76-100% at the UBOC RR plus .25% or LIBOR plus 2.00%, or
approximately 8.75% at September 30, 2000 on the six month borrowing and 8.66%
on the amount borrowed for the three month period.
The amounts borrowed under its reducing revolving line of credit are
secured by the Company's receivables, inventory, equipment and a first mortgage
on the Company's interests in oil and gas wells and reserves. The mortgage notes
are secured by land and buildings.
The Agreement required the Company to pay a facility fee of .50% on the
initial borrowing base and a commitment or "unused" fee payable quarterly in
arrears on the unutilized portion of the borrowing base at a rate of .375% per
annum. The Agreement also contains certain restrictive covenants, including
working capital, and EBITDA interest coverage and fixed charge coverage
calculations, as defined. Additionally, the Company is restricted from paying
cash dividends on any of its common stock under the terms of the Agreement.
The revolving credit facility and the notes are collateralized by a
perfected first priority mortgage, security interest and assignment of
production covering at least 80% of the Company's oil and gas properties, as
well as its receivables, inventory, and equipment.
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 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. As a result of the execution of the
UBOC Agreement, the Company paid $38.5 million of the original $48.5 million
Non-Negotiable Subordinated Promissory Note plus accrued interest to NUON on
September 29, 2000. There remains $10 million of the loan outstanding, which
continues to accrue interest per the terms of the Note.
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 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.
23
<PAGE> 24
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" an interpretation of APB Opinion No. 25 ("FIN 44"). This
Interpretation clarifies the definition of employee for purposes of applying
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously issued stock option or award, and accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after December 15, 1998, or
January 12, 2000. The Company believes that the impact of FIN. 44 will not have
a material effect on its financial position or results of operations.
24
<PAGE> 25
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On or about September 15, 2000, a Proxy Statement was mailed to all
holders of record as of August 18, 2000, of the Company's common stock
and Series A Preferred Stock along with a Notice of Annual Meeting of
Stockholders to be held on October 6, 2000. At the meeting the
stockholders were asked to consider and act upon the election of two
directors whose terms of office expire in 2003, and the proposal to
authorize, approve and adopt the North Coast Energy, Inc. 2000 Employee
Stock Bonus Plan to replace a similar plan that is due to expire
February 1, 2001. The Proxy Statement filed with the Securities and
Exchange Commission on September 15, 2000, is incorporated by reference
herein.
At the Annual Meeting of Stockholders held on October 6, 2000, director
Ralph L. Bradley was reelected, and nominee Ron L. Langenkamp was
elected, to three year terms by identical votes of 14,912,693 in favor
and 8,967 votes opposed. Director Jos J.M. Smits' term expired and he
retired from the Board, being replaced by Mr. Langenkamp. Directors'
Carel W.J. Kok, Omer Yonel, Cok van der Horst, C. Rand Michaels and
Garry Regan continue in office. The North Coast Energy, Inc. 2000
Employee Stock Bonus Plan was adopted by a vote of 14,871,460 in favor
and 12,235 votes opposed.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a). Exhibits
10.27 $125,000,000 Credit Agreement dated September 26, 2000,
between North Coast Energy, Inc. as Borrower, Union Bank of
California, NA, as Agent, Bank One, Texas, NA, as Syndication
Agent, and certain financial institutions as Lenders.
27.1 Financial Data Schedule*
b). Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter for which
this report was filed.
*Exhibit 27.1 furnished for Securities and Exchange Commission purposes only.
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<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH COAST ENERGY, INC.
November 14, 2000 /s/ Omer Yonel
------------------------------------
Omer Yonel
Chief Executive Officer and Director;
Acting Principal Financial Officer
26
