<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
Registrants' telephone number, including area code: (330) 425-2330
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at August 11, 2000
--------------------------- ------------------------------
Common Stock, $.01 par value 15,199,749
<PAGE> 2
NORTH COAST ENERGY, INC.
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets -
June 30, 2000 (Unaudited) and March 31, 2000 (Audited) 2
Unaudited Consolidated Statements of Operations -
For the Three Months Ended June 30, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended June 30, 2000 and 1999 5
Unaudited Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
PART II - OTHER INFORMATION 18
<PAGE> 3
<TABLE>
<CAPTION>
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and March 31, 2000
--------------------------------------------------------------------------------------------
June 30, March 31,
ASSETS 2000 2000
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 8,298,334 $ 6,206,686
Accounts receivable:
Trade, net 11,943,277 7,202,492
Affiliates 253,723 205,775
Inventories 445,526 450,718
Other, net 596,357 297,720
------------ ------------
Total current assets 21,537,217 14,363,391
PROPERTY AND EQUIPMENT, at cost
Land 222,822 222,822
Oil and gas properties (successful efforts) 102,613,968 102,177,522
Pipelines 15,908,673 15,798,806
Vehicles 1,970,687 1,970,687
Furniture and fixtures 637,312 627,414
Building and improvements 1,845,457 1,845,457
------------ ------------
123,198,919 122,642,708
Less accumulated depreciation, depletion,
amortization and impairment 19,756,417 17,879,417
------------ ------------
103,442,502 104,763,291
OTHER ASSETS, net 4,480,686 4,491,322
------------ ------------
$129,460,405 $123,618,004
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
<TABLE>
<CAPTION>
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and March 31, 2000
--------------------------------------------------------------------------------------------------------
June 30, March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 2000
------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 4,723,240 $ 3,124,600
Accounts payable 8,088,463 4,963,160
Accrued expenses 325,621 357,716
Billings in excess of costs on uncompleted contracts -- 568,056
------------- -------------
Total current liabilities 13,137,324 9,013,532
LONG-TERM DEBT, net of current portion 67,493,061 90,122,181
ACCRUED PLUGGING LIABILITY 724,336 724,535
DEFERRED INCOME TAXES, net 366,246 366,200
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Series A, 6% Noncumulative Convertible Preferred stock,
par value $.01 per share; 563,270 shares authorized;
73,096 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 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; 15,199,706 and 5,599,706 issued
and outstanding 151,997 55,997
Additional paid-in capital 50,178,567 26,274,574
Retained deficit (2,594,186) (2,942,075)
------------- -------------
Total stockholders' equity 47,739,438 23,391,556
------------- -------------
$ 129,460,405 $ 123,618,004
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
<TABLE>
<CAPTION>
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended June 30, 2000 and June 30, 1999
--------------------------------------------------------------------------------------------------
June 30, June 30,
2000 1999
-------------- -------------
<S> <C> <C>
REVENUE
Oil and gas production 6,568,086 $ 1,511,866
Drilling revenues 671,840 --
Well operating, transportation and other 856,090 745,568
Administrative and agency fees 156,977 157,035
----------- -----------
8,252,993 2,414,469
COSTS AND EXPENSES
Oil and gas production expenses 2,423,571 606,534
Drilling costs 652,459 104,385
Oil and gas operations 334,385 561,395
General and administrative expenses 570,432 803,975
Depreciation, depletion, amortization, impairment
and other 1,877,000 480,331
----------- -----------
5,857,847 2,556,620
----------- -----------
INCOME FROM OPERATIONS 2,395,146 (142,151)
OTHER INCOME(EXPENSES)
Interest 87,428 17,189
Other 561 561
Interest Expense (2,077,030) (436,458)
----------- -----------
(1,989,041) (418,708)
INCOME BEFORE PROVISION (CREDIT) FOR
INCOME TAXES 406,105 (560,859)
PROVISION (CREDIT) FOR INCOME TAXES -- --
----------- -----------
NET INCOME(LOSS) $ 406,105 $ (560,859)
=========== ===========
NET INCOME/(LOSS) APPLICABLE TO COMMON STOCK $ 347,889 $ (619,075)
(after dividends on cumulative Preferred Stock of $58,216 for =========== ===========
June 30, 2000 and June 30, 1999)
NET INCOME/(LOSS) PER SHARE (basic and diluted) $ 0.03 $ (0.14)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
<TABLE>
<CAPTION>
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended June 30, 2000 and June 30, 1999
------------------------------------------------------------------------------------------------
June 30 June 30
2000 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(loss) 406,105 (560,859)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, amortization, impairment
and other 1,877,000 480,331
(Gain) loss on sale of property and equipment -- 177
Deferred Liability (153)
Change in:
Accounts receivable (4,788,733) 2,216
Inventories and other current assets (293,445) (39,231)
Other assets, net 10,636 48,660
Accounts payable 3,125,303 (397,759)
Accrued expenses (32,095) (76,874)
Billings in excess of costs on uncompleted contracts (568,056) --
----------- -----------
Total adjustments (669,543) 17,520
----------- -----------
Net cash used by operating activities (263,438) (543,339)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (556,211) (665,314)
----------- -----------
Net cash used by investing activities (556,211) (665,314)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving credit facility $ 3,000,000 2,000,000
Payments on long-term debt (30,487) (25,885)
Proceeds from issuance of long-term debt -- 95,691
Distributions and dividends (58,216) (58,216)
----------- -----------
Net cash provided by financing activities 2,911,297 2,011,590
----------- -----------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS 2,091,648 802,937
CASH AND EQUIVALENTS AT BEGINNING OF
YEAR 6,206,686 1,956,617
----------- -----------
CASH AND EQUIVALENTS AT END OF YEAR $ 8,298,334 $ 2,759,554
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 370,861 $ 411,887
Income taxes -- 15,234
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 7
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Accounting Policies
A. General
The consolidated financial statements included herein, have been
prepared by North Coast Energy, Inc. without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position have
been made.
Information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
financial statements be read in conjunction with the financial
statements and notes thereto which are incorporated in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 2000.
The results of the operations for the interim period 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.
The average number of outstanding shares used in computing basic and
diluted net income (loss) per share was 11,612,893 for basic and
11,646,517 for diluted on June 30, 2000 while 4,557,249 was used for
basic and diluted on June 30, 1999.
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>
<S> <C> <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%
</TABLE>
6
<PAGE> 8
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 1. Summary of Accounting Policies (Continued)
<TABLE>
<S> <C> <C>
North Coast Energy 1992-1 Appalachian Drilling Program Limited Partnership 29.7%
North Coast Energy 1992-2 Appalachian Drilling Program Limited Partnership 38.4%
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.
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).
7
<PAGE> 9
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Acquisitions (Continued)
The following summary presents the three months ended June 30, 2000 and
June 30, 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.
<TABLE>
<CAPTION>
Unaudited Pro Forma
Three Months Ended June 30,
----------------------------------
2000 1999
--------- ----------
(Dollars in Thousands, Except
Per Share Amounts)
<S> <C> <C>
REVENUES $ 8,253 $ 5,962
======= =======
NET INCOME $ 406 $ (159)
======= =======
NET INCOME, applicable to common stock (after
Preferred stock dividends of $58,216 and $58,216) $ 348 $ (217)
======= =======
NET INCOME PER SHARE (basic and diluted) $ 0.03 $ (0.02)
======= =======
</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.
8
<PAGE> 10
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 3. Billings in Excess of Costs on Uncompleted Contracts
Billings in excess of costs on uncompleted contracts consist of the
following:
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
----------------- --------------------
<S> <C> <C>
Billings on uncompleted contracts $ - $ 671,840
Costs incurred on uncompleted contracts $ - 103,784
--------- ---------
$ - $ 568,056
========= =========
</TABLE>
Note 4. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
---------------- ------------------
<S> <C> <C> <C>
NUON Non-Negotiable Subordinated Promissory
Note due February 28, 2015 interest at LIBOR
rate plus 2.30% $48,500,000 $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 notes payable - bank 23,000,000 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 459,120 464,818
Various installment and mortgage notes payable 257,181 281,963
----------- -----------
72,216,301 93,246,781
Less current portion 4,723,240 3,124,600
----------- -----------
$67,493,061 $90,122,181
=========== ===========
</TABLE>
9
<PAGE> 11
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 4. Long-Term Debt (Continued)
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.
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 June 30, 2000), as defined.
At June 30, 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 June 30, 2000 were $1,850,000; however, no
additional borrowings are available after the termination dated July 2,
2000.
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 ($23,000,000) 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 8.98% and 8.56% at June 30, 2000 and March 31, 2000,
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 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.
10
<PAGE> 12
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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. 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 road bond deposits against damage.
At June 30, 2000, the Company committed to fund certain costs of the
North Coast Energy Appalachian Drilling Programs estimated to be
approximately $157,000 for tangible well equipment and pipeline
construction.
On April 30, 1999, Charles M. Lombardy, Jr., the Chief Executive Officer
of the Company, was paid $370,000 in lieu of continuing his employment
contract by signing a separation agreement with the Company.
Additionally, Lombardy received a ten-year warrant to purchase, at $5.00
per share, 60,000 shares of the Company's common stock. NUON purchased
the 107,301 common shares for $470,000 directly reducing the amount of
common shares NUON would be required to purchase under the NUON
Agreement.
Note 6. Preferred Dividends
On June 30, 1999 and June 30, 2000 the Company paid a dividend of
$58,216 on the cumulative convertible Series B Preferred Stock.
Cumulative dividends in arrears on the cumulative convertible Series B
Preferred Stock are $326,010 at June 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 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 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.
11
<PAGE> 13
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 $253,000 during the quarter ended June 30, 2000. As part
of the financial instrument North Coast on July 24, 2000 supplied a
letter of credit to the purchaser of the Company's financial hedge as
collateral for its market to market exposure.
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
North Coast Energy, Inc., an affiliate of NUON N.V., ("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 months ended June 30, 2000 and June 30, 1999. All items in
the table are calculated as a percentage of total revenues.
Three Months
Ended
June 30,
2000 1999
---- ----
Revenues:
Oil and gas production 80% 62%
Drilling revenues 8 0
Well operating, transportation and other 10 31
Administrative and agency fees 2 7
---- ----
Total Revenues 100% 100%
===== ====
Expenses:
Oil and gas production expenses 29% 25%
Drilling costs 8 4
Oil and gas operations 4 23
General and administrative expenses 7 33
Depreciation, depletion, amortization and other 23 20
Other 24 18
----- ----
Total Expenses 95% (123)%
----- ----
Net Income (Loss) 5% (23)%
===== ====
Net Income (Loss) Applicable to Common Stock 4% (26)%
===== ====
The following discussion and analysis reviews the results of operations
and the financial condition for the Company for the three months ended June 30,
2000 and June 30, 1999. The review should be read in conjunction with the
financial information presented elsewhere herein.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 TO THREE MONTHS ENDED JUNE 30,
1999.
REVENUES
Oil and gas production increased $5,056,220 (334%) to $6,568,086 for the
three months ended June 30, 2000 from $1,511,866 for the three months ended June
30, 1999. The increase in oil and gas production revenues reflects the first
full quarter of increased production resulting from North Coast Energy's
acquisition of Peake Energy, Inc. in March 2000. The increased oil and gas
revenues also reflect the additional production resulting from the Company's
drilling and development activities and higher commodity prices for natural gas
and oil. North Coast's production volumes for the three months ended June 30,
2000 were 2,057,281 Mcf of natural gas and 26,926
13
<PAGE> 15
barrels of oil compared to 560,024 Mcf of natural gas and 6,730 barrels of oil
for the three months ended June 30, 1999. The Company received an average price
of $2.84 and $2.54 per Mcf of natural gas and $26.93 and $13.54 per barrel of
oil for the three months ended June 30, 2000 and 1999, respectively. The Company
recognized $671,840 in drilling revenues on four wells from its fiscal 2000
Drilling Program during the three month period ended June 30, 2000 compared to
zero drilling revenues recognized for the comparable period a year ago. The
increase reflects both the timing of the drilling and completion of the wells
and the response from the investment community to the Company's year-end
drilling program. North Coast raised $5.2 million for its fiscal 2000 drilling
program compared to $3.5 million for fiscal 1999.
Well operating, transportation and other revenues increased $110,522 (15%)
to $856,090 for the three months ended June 30, 2000 compared to $745,568 for
the three months ended June 30, 1999. This increase primarily reflects an
increase in transportation fees of approximately $316,000 resulting from
increased volumes of natural gas transported through the Company's natural gas
gathering systems while recognizing a decrease of $233,000 from third-party gas
sales.
EXPENSES
Oil and gas production expenses increased $1,817,037 (300%) to $2,423,571
for the three months ended June 30, 2000 from $606,534 for the three months
ended June 30, 1999. This increase in expense primarily reflects the increased
operating costs associated with the 1,900 wells acquired in the acquisition of
Peake Energy, Inc.
Drilling costs increased $548,074 to $652,459 for the three months ended
June 30, 2000 from $104,385 at June 30, 1999. The increase in drilling costs
reflects the costs recognized in the drilling and completion of the
four-carryover wells from the fiscal 2000 Drilling Program and the technical
staff additions to the Company's exploration group.
Oil and gas operations decreased $227,010 (40%) to $334,385 for the three
months ended June 30, 2000 compared to $561,395 for the three months ended June
30, 1999. This decrease is related to third-party gas purchases of approximately
$230,000 that were made in the three months ended June 30, 1999. (See
third-party gas sales above.)
General and administrative expenses decreased $233,543 (29%) to $570,432
for the three months ended June 30, 2000 from $803,975 for the period ended June
30, 1999. The decrease primarily reflects the one-time payment of $370,000 under
a separation agreement paid to a former executive of the Company.
Depreciation, depletion and amortization increased $1,396,669 (291%) from
$480,331 for the period ended June 30, 1999 to $1,877,000 for the period ended
June 30, 2000 primarily due to the Peake acquisition.
Other income and expense increased by $1,570,333 (375%) to $1,989,041 for
the three months ended June 30, 2000 from $418,708 for the three months ended
June 30, 1999. This increase reflects the additional borrowings from the
Company's majority shareholder NUON International Projects, B.V. ("NUON") to
finance the March 2000 acquisition of Peake.
Net income of $406,105 for the three months ended June 30, 2000 reflects
an increase of $966,964 from a loss of $560,859 for the three months ended June
30, 1999. The Company's net income applicable to common stock was $347,889 or
$0.03 per share compared to a loss of $619,075 or a loss of $0.14 per share for
the three months ended June 30, 1999. Dividends paid on the Company Series B
Preferred Stock were $58,216 for the three months ended June 30, 2000 and June
30, 1999.
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.
14
<PAGE> 16
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 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 quarter
ended June 30, 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 $26.93 per barrel of oil for the three months ended June 30, 2000
compared to $13.54 for the three months ended June 30, 1999. The Company
received an average price of $2.84 per Mcf for its natural gas for the three
months ended June 30, 2000 compared to $2.54 for the three months ended June 30,
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 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
uncontracted 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 Company wells and third parties.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $8,400,000 at June 30, 2000 compared to
$5,351,000 at March 31, 2000. The increase of $3,049,000 in working capital at
June 30, 2000 reflects borrowings on the credit facility. As of June 30, 2000,
the Company had $23,000,000 outstanding under its Credit Facility.
The following table summarizes the Company's financial position at June
30, 2000 and March 31, 2000:
<TABLE>
<CAPTION>
(Amounts in Thousands) June 30, 2000 March 31, 2000
----------------------- ----------------------
Amount % Amount %
------ --- ------ ---
<S> <C> <C> <C> <C>
Working capital $ 8,400 7% $ 5,351 5%
Property and equipment (net) 103,442 89% 104,763 91%
Other 4,481 4% 4,491 4%
---------- ----- --------- -----
Total $ 116,323 100% $ 114,605 100%
========== ===== ========= =====
Long-term debt $ 67,493 58% $ 90,122 79%
Deferred income taxes and other liabilities 1,091 1% 1,091 1%
Stockholders' equity 47,739 41% 23,392 20%
---------- ----- ----------- -----
Total $ 116,323 100% $ 114,605 100%
========== ===== ========= =====
</TABLE>
CAPITAL RESOURCES AND REQUIREMENTS
The oil and gas exploration and development activities of North Coast
historically have been financed through the Drilling Programs, through
internally generated funds, and from bank and equity financings.
15
<PAGE> 17
The following table summarizes the Company's Statements of Cash Flows for
the three months ended June 30, 2000 and June 30, 1999:
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------------------
(Amounts in Thousands) 2000 1999
-------------------- --------------------
Amount % Amount %
------ --- ------ ----
<S> <C> <C> <C> <C>
Net cash provided (used) by operating activities $ (263) (5)% $ (543) (22)%
Net cash provided (used) for investing activities (556) (11)% (665) (27)%
Net cash provided (used) by financing activities 2,911 56% 2,012 80%
-------- --- ------ ---
Increase (decrease) in cash and equivalents $ 2,092 40% $ 803 32%
======== === ====== ===
</TABLE>
Note: All items in the previous table are calculated as a percentage
of total cash sources. Total cash sources include the following
items if positive: cash flow from operations before working
capital changes, changes in working capital, net cash provided
by investing activities and net cash provided by financing
activities, plus any decrease in cash and cash equivalents.
As the above table indicates, the Company's cash used by operating
activities decreased $263,000 for the three months ended June 30, 2000 compared
to $543,000 for the three months ended June 30, 1999. The decrease in net cash
provided by operating activities reflect the $967,000 increase in net income for
the period, the additional cash flow from the Peake acquisition, and the
recording of the initial activity of the Peake acquisition from our March 31,
2000 financial statements. The change in net cash provided by operating
activities in June 1999 did not reflect an acquisition of Peake's size while the
period changes were relatively small.
Net cash used for investing activities decreased $556,000 for the three
months ended June 30, 2000 compared to $665,000 for the three months ended June
30, 1999. The decrease was primarily due to the timing of invoices and
completion of work on the fiscal 2000 Drilling Program versus the timing of
invoices and completion of work on the fiscal 1999 Drilling Program.
Net cash from financing activities increased $2,911,000 for the three
months ended June 30, 2000 compared to $2,012,000 for the three months ended
June 30, 1999. This increase primarily reflects the additional borrowing under
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 June 30,
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 June 30, 2000, the Company's borrowing
base was $25 million subject to reduction for the outstanding letters of credit.
Available borrowings under the facility at June 30, 2000, were $1,850,000 (see
Note 4 to the Company's June 30, 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 June 30, 2000, the Company had
$23,000,000 outstanding under the Credit Facility. Amounts borrowed under the
Credit Facility bear interest at the prime rate of the lending bank plus .75% or
Libor plus 2.50%. 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. The Company is currently in the process of
reviewing its options and financing needs with several prospective lenders.
16
<PAGE> 18
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 June 30, 2000, the Company had approximately $34,504
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
June 30, 2000, was $459,120.
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, pursuant to the
terms of a stock purchase agreement ("Agreement") by and between the Company and
NUON dated August 1, 1997. 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.
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.
17
<PAGE> 19
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
On May 4, 2000, the Company issued 9,600,000 shares of common stock to
NUON International Projects B.V., ("NUON") pursuant to the conversion
feature contained in a $24,000,000 Non-Negotiable Subordinated
Convertible Promissory Note (the "Note") dated March 17, 2000 between
the Company as Maker and NUON International Projects B.V. as Holder. As
outlined in an Information Statement filed on April 12, 2000, pursuant
to Regulation 14C and mailed to all holders of the Company's common
stock and Series A Preferred stock, the value per share of the issued
stock was $2.50, and a fairness opinion was filed as an attachment to
the Information Statement. The $24,000,000 represented by the Note was
used by the Company as part of the financing to purchase the common
stock of Peake Energy, Inc. from Belden & Blake Corporation on March
17, 2000. One of the provisions of the Note granted NUON demand
registration rights as to all 9,600,000 shares, but to date that right
has not been exercised.
The Note is incorporated herein by reference to the appropriate exhibit
to Registrant's Report on Form 8-K dated March 22, 2000.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On or about April 12, 2000, an Information Statement pursuant to
Regulation 14C was mailed to all holders of record on April 4, 2000, of
the Company's common stock and Series A Preferred stock advising that
not less than twenty days following the mailing of the Information
Statement a written consent to corporate action would be approved by a
majority of the holders of the issued and outstanding shares of common
stock and Series A Preferred stock whereby 9,600,000 shares of the
Company's common stock would be issued to NUON International Projects
B.V. ("NUON") pursuant to the conversion feature of a $24,000,000
Non-Negotiable Subordinated Convertible Promissory Note (the "Note")
dated March 17, 2000.
The Note had been entered into by the Company as Maker and NUON as
Holder in conjunction with the financing of the purchase by the Company
from Belden & Blake Corporation of all of the issued and outstanding
common stock of Peake Energy, Inc. On March 27, 2000, NUON exercised
its conversion right under the Note by providing the Company with its
written election. On May 3, 2000, more than twenty days after the
mailing of the Information Statement, a majority of the shareholders
executed a written consent in accordance with Delaware law to the
issuance of shares of the Company's common stock to NUON in exchange
for cancellation of the $24,000,000 Note. On May 4, 2000, 9,600,000
shares of the Company's common stock were issued to NUON and the
$24,000,000 Note was canceled.
The Note is incorporated herein by reference to the appropriate exhibit
to Registrant's Report on Form 8-K dated March 22, 2000.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a). Exhibits
10.24 $24,000,000 Non-Negotiable Subordinated Convertible
Promissory Note dated March 17, 2000 between the Company as
Maker and NUON International Projects B.V. as Holder,
incorporated herein by reference to the appropriate exhibit to
Registrant's Report on Form 8-K dated March 22, 2000.
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.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH COAST ENERGY, INC.
August 14, 2000 /s/ Omer Yonel
--------------------------------------
Omer Yonel
Chief Executive Officer and Director
August 14, 2000 /s/ Ron Huff
--------------------------------------
Ron Huff
Principal Accounting and Financial Officer
19
