The attached Form 10-QSB/A was prepared to correct various spelling errors
within the text of the document.
In addition, as stated in Footnote 1, Basis of Presentation, certain
reclassification entries were made with regard to the Consolidated Financial
Statements for the three months ended March 31, 1996 so that the presentation
of the information is consistent with reporting for the Consolidated Financial
Statements for the three months ended March 31, 1997. The effects of the
reclassifications on the March 31, 1996 Statement of Cash Flows were
erroneously not considered. The revises Statement of Cash Flows included
herewith corrects the oversight.
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended March 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-8898
Midcoast Energy Resources, Inc.
(Exact name of Registrant as Specified in Its Charter)
Nevada 76-0378638
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 Louisiana, Suite 2950
Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 650-8900
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the 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
On March 31, 1997, there were outstanding 2,499,999 shares of the
Company's common stock, par value $.01 per share.
Transitional Small Business Disclosure Format. Yes No X
<TABLE>
MIDCOAST ENERGY RESOURCES, INC., and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Three Months Ended
March 31, March 31,
1996 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income applicable to common shareholders $ 358,927 $1,131,907
Adjustments to arrive at net cash provided (used) in
operating activities-
Depreciation, depletion and amortization 150,759 255,016
Gain on sale of operating pipeline (20,347) -
Recognition of deferred income (20,750) (20,750)
Income on partnership investments - -
Minority interest in consolidated subsidiaries 20,633 59,754
Issuance of common stock to employees - 17,875
Changes in working capital accounts-
(Increase) decrease in accounts receivable (57,909) 3,870,682
Increase (decrease) in accounts payable and
accrued liabilities 874,929 (2,366,449)
Net cash provided by operating activities 1,306,242 2,948,035
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,285,652) (425,026)
Acquisition escrow deposit (Note 2) - (2,000,000)
Other 71,268 (197,131)
Net cash used in investing activities (1,214,384) (2,622,157)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank debt borrowings 2,628,000 2,110,000
Bank debt repayments (1,284,507) (362,285)
Proceeds from notes payable to shareholders and affiliates 100,000 -
Repayments on notes payable to shareholders and affiliates (660,000) -
Dividends on common stock - (200,000)
Net cash provided by financing activities 783,493 1,547,715
NET INCREASE IN CASH AND CASH EQUIVALENTS 875,351 1,873,593
CASH AND CASH EQUIVALENTS, beginning of period 106,152 1,167,825
CASH AND CASH EQUIVALENTS, end of period $ 981,503 $3,041,418
CASH PAID FOR INTEREST $ 142,932 $ 95,282
CASH PAID FOR INCOME TAXES $ - $ 51,476
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial information has been prepared by Midcoast
Energy Resources, Inc. ("Midcoast" or "the Company") in accordance with the
instructions to Form 10-QSB. The information furnished reflects all
adjustments, all of which were of a normal recurring nature, which are, in the
opinion of the Company, necessary for a fair presentation of the results for
the interim periods presented. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including significant accounting
policies, normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Certain reclassification entries were
made with regard to the Consolidated Financial Statements for the three months
ended March 31, 1996 so that the presentation of the information is consistent
with reporting for the Consolidated Financial Statements for the three months
ended March 31, 1997. It is suggested that the financial information be read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1996.
2. ACQUISITIONS
In March 1997, the Company entered into a definitive purchase and sale
agreement (the "Agreement") to acquire the stock of three subsidiaries of
Atrion Corporation ("Atrion") for cash consideration of approximately $39.4
million subject to post closing adjustments and up to $2 million of deferred
contingent payments to be paid over an eight-year period. The Agreement
contains representations and warranties, indemnities and conditions to closing
customary to transactions of this type. The three subsidiaries include
Alabama Tennessee Natural Gas Company ("ATNG"), Tennessee River Intrastate Gas
Company, Inc. ("TRIGAS") and AlaTenn Energy Marketing Company, Inc. ("ATEMCO")
(collectively the "Atrion Subsidiaries"). ATNG owns and operates a 288 mile
interstate pipeline, with two compressor stations, that runs from Selmer,
Tennessee to Huntsville, Alabama. TRIGAS owns and operates a 38 mile pipeline
extending from Barton, Alabama to Courtland, Alabama and a one mile pipeline
in Morgan County, Alabama, which transport gas to two industrial customers.
ATEMCO is a natural gas marketing company which primarily services the natural
gas needs of the customers on ATNG and TRIGAS. The acquisition has been
approved by the board of directors of both the Company and Atrion, however,
the acquisition is subject to approval by Atrion's shareholders. In
conjunction with executing the purchase and sale agreement, Midcoast was
required to deposit $2.0 million in an escrow account maintained by the trust
department of a bank. In the event that Midcoast is unable or unwilling to
consummate the transaction after the necessary approvals have been received,
the escrowed money will be paid to Atrion as compensation for all damages.
On the other hand, the agreement also stipulates that if Atrion is unable or
unwilling to consummate the transaction, which includes not receiving
shareholder approval, Midcoast will receive $2.0 million as cash compensation
for all damages. Consummation of the transaction is anticipated during the
second quarter of 1997 with financing to be provided by Bank One, Texas N.A.
(See Note 3).
3. BANK DEBT
In anticipation of acquiring the Atrion Subsidiaries, the Company executed
a commitment letter in March 1997 with its existing bank lender, Bank One,
Texas N.A. to increase the Company's borrowing availability under its
agreement (the "Credit Agreement") to $43.5 million. Pursuant to the
consummation of the acquisition, the Credit Agreement will be amended to
include a $7.0 million working capital line of credit and two reducing
revolving lines of credit with total availability of $36.5 million. Available
credit under the reducing revolving lines will be reduced by a total of
approximately $244,000 per month beginning June 1, 1997 with a balloon payment
of $7.0 million on August 31, 1997. In addition to the fees currently required
under the Credit Agreement, a $100,000 fee will be due upon consummation of
the Atrion subsidiaries acquisition in consideration for extending the
financing.
4. COMMITMENTS AND CONTINGENCIES
In January 1997, the Compensation Committee approved an amendment to the
Employment Agreement of Dan C. Tutcher, the Chief Executive Officer and
President of the Company extending the term to December 2001 and pursuant to
which he receives a base annual salary of $95,000 in 1997, $125,000 in 1998
and 1999 and $150,000 in 2000 and 2001. He may further participate in any
such executive level bonuses or salary increases as the Compensation
Committee may approve, is also entitled to reimbursement for reasonable
automobile expenses not to exceed $500 each month and is eligible for
participation in the Company's group insurance plans. Mr. Tutcher is required
to devote his full business time and attention to the Company.
In September 1996, an involuntary petition for relief under Chapter 11 of the
United States Bankruptcy Code was filed against Stewart Petroleum Company
("Stewart") in the United States Bankruptcy Court for the District of Alaska
(the "Court") by certain working interest owners in the West McArthur River
Unit ("WMRU") Production Facility, operated by Stewart. The Company receives
a throughput fee for all oil and natural gas transported through the WMRU
pipeline; however, payment of the Company's throughput fees since August 1996
have been suspended by the Court, and only those claims deemed to be necessary
to avoid immediate and irreparable harm to the Stewart estate have been paid.
Stewart consented to an order for relief in January 1997 and Stewart, with
the petitioners, subsequently filed a joint Disclosure Statement and Plan of
Reorganization, as amended (the "Stewart Plan"). In April 1997, the Court
approved the Disclosure Statement and scheduled a Confirmation Hearing on the
Stewart Plan for May 22, 1997. The Stewart Plan provides for the payment of
the Company's claim and the Company believes it is adequately protected. As
such, the Company is continuing to accrue revenue for the throughput fees from
August 1996 to March 1997 which amounts to $142,959.
5. EMPLOYEE BENEFITS
In February 1997, the Company's Compensation Committee approved the granting
of 160,000 incentive stock options to certain key employees. The options were
issued at an exercise price equal to the fair market value on the date of
grant which was $10.50. The options vest in equal amounts over a five-year
period and expire in ten years from the date of grant. However, those options
issued to employees who own 10% or more of the Company's common stock were
valued at 110% of fair market value on the date of grant ($11.55), vest in
equal amounts over a four and one-half year period, and expire five years from
the date of grant.
6. SUBSEQUENT EVENTS
In April 1997, the Board approved the adoption of the 1997 Non-Employee
Director Stock Option Plan (the "Director Plan"), which was subsequently
approved by the Company's shareholders in May 1997. The Director Plan
provides for the grant to non-employee: (i) Existing Directors (as defined)
on the Effective Date (as defined) a non-qualified stock option ("NQO") to
purchase 5,000 shares of common stock and (ii) New Directors (as defined) on
their initial election a NQO to purchase 15,000 shares of common stock, both
at an exercise price equal to the fair market value of the common stock on the
date of grant. The Director Plan also entitles each non-employee director to
receive a NQO to purchase 5,000 shares of common stock on each date he is
reelected to the Board.
The Compensation Committee has no discretion as to the selection of the
non-employee directors to whom NQOs are to be granted or Cash Fee Awards (as
defined) paid, the number of shares subject to any NQO granted, the exercise
price to any NQO granted or the ten-year maximum term of any NQO granted
thereunder. The Compensation Committee has the authority to interpret and
construe any provision of the Director Plan and to adopt such rules and
regulations for administering the Director Plan as it deems necessary. All
decisions and determinations of the Compensation Committee are final and
binding on all parties. The Company has agreed to indemnify each member of
the Compensation Committee against any cost, expense or liability arising out
of any action, omission or determination relating to the Director Plan, unless
such action, omission or determination was taken or made in bad faith and
without reasonable belief that it was in the best interest of the Company.
The Director Plan provides for the adjustment of the number of shares or
exercise price of any option awarded thereunder, in conjunction with any stock
dividend, any subdivision or combination of the outstanding shares of common
stock and any merger, consolidation, recapitalization of the Company or other
similar event which affects the issued and outstanding shares of common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Operating Revenues:
Operating revenues generated during the three months ended March 31, 1997
totaled approximately $13.0 million as compared to $5.6 million for the three
months ended March 31,1996, which represents a 132% increase in 1997. The
numerous pipeline acquisitions made during the second half of 1996 are the
primary reason for this increase, as well as the introduction of natural gas
processing revenues in connection with the acquisition of the Harmony gas
processing plant and gathering system (the "Harmony System"). Processing
revenues totaled approximately $1.5 million during the three months ended
March 31, 1997.
Operating Expenses:
Operating expenses for the three months ended March 31, 1997 totaled
approximately $11.7 million, or 131% higher than the comparable 1996 period.
As explained in the preceding section, the primary explanation for the
increase can be attributed to the numerous pipeline acquisitions made during
the second half of 1996 and the introduction of gas processing costs.
Depreciation, depletion, and amortization expense was approximately $255,000
in 1997, as compared to approximately $151,000 in 1996. The increase in 1997
is primarily attributable to the pipeline acquisitions in 1996.
General and administrative expenses incurred for the three months ended
March 31, 1997 were approximately $374,000 or 88% higher than the same period
in 1996. The Company continued to control its general and administrative
expenses in 1997, despite the Company's tremendous growth, by effectively
assimilating new business using existing resources.
Interest expense through three months of 1997 and 1996, was approximately
$95,000 and $120,000, respectively. The Company was servicing an average of
approximately $4.5 million in debt through March 31, 1997 as compared to an
average of $4.7 million in debt through March 31, 1996. The decline in
interest expense is primary attributable to lower interest rates paid by the
Company under the Credit Agreement negotiated in August 1996.
Earnings:
The Company recognized operating income and net income of $1.3 million and
$1.1 million respectively, for the three months ended March 31, 1997 as
compared to operating income and net income of $.5 million and $.4 million
for the three months ended March 31, 1996. Operating income increased by 143%
over 1996, primarily due to the pipeline acquisitions discussed above,
including the gas processing income generated from the acquisition of the
Harmony System.
Capital Resources and Liquidity
Prior to its common stock offering in August 1996, the Company had
historically funded its capital requirements through cash flow operations and
borrowings from affiliates and various commercial lenders. In August 1996,
the Company repaid all outstanding bank and related party indebtedness except
for the debt of two subsidiaries, which totaled approximately $5.0 million,
with proceeds from the Company's common stock offering. Also, the Company
established a new $40 million credit facility with Bank One, Texas N.A. in
August 1996.
The new credit facility provided a three-year committee with an initial
borrowing availability of $10.5 million comprised of a $1.5 million working
capital line of credit and a $9.0 million reducing revolving line of credit
(collectively the "Credit Agreement"). However, the borrowing availability
under each line is subject to revision, on a semi-annual basis, based on the
performance of the Company's existing assets and any asset dispositions or
additions from new construction or acquisitions.
In anticipation of acquiring the Atrion Subsidiaries, the Company executed
a commitment letter in March 1997 with its existing bank lender, Bank One,
Texas N.A. to increase the Company's borrowing availability under its Credit
Agreement to $43.5 million. Pursuant to the consummation of the acquisition,
the Credit Agreement will be amended to include a $7.0 million working capital
line of credit and two reducing revolving lines of credit with total
availability of $36.5 million. Available credit under the reducing revolving
lines will be reduced by a total of approximately $244,000 per month beginning
June 1, 1997 with a balloon payment of $7.0 million on August 31, 1997. The
Credit Agreement contains a number of covenants that, among other things,
require the Company to maintain certain financial ratios, and limit the
Company's ability to incur additional indebtedness, transfer or sell assets,
create liens, or enter into a merger or consolidation.
When borrowings under the Credit Agreement are less than 50% of available
credit, at the Company's option, interest will accrue at the London Interbank
Offering Rate plus 2.5% or the Bank One, Texas N.A. base rate plus .25%.
When borrowings are greater than 50% of available credit, an additional .25%
will be added to the above interest rates. In addition, the Company is
subject to a non-recurring 1% facility fee as funds are borrowed, as well as
a .375% commitment fee payable quarterly on the unused portion of borrowing
availability. The Credit Agreement is secured by all accounts receivable,
contracts, and a first lien security interest in the Company's pipeline
systems.
For the three months ended March 31, 1997, the Company generated cash flow
from operating activities of approximately $2.9 million. The Company believes
that its existing Credit Agreement and funds provided by operations are
sufficient for it to meet its operating cash needs for the foreseeable future.
However, in March 1997 the Company entered into a definitive agreement to
acquire the Atrion Subsidiaries for cash consideration of $39.4 million with
an additional $2.0 million of deferred contingent payments to be made over an
eight-year period.
Based on the Company's revised borrowing availability under the Credit
Agreement as discussed above, adequate funds will be available to the Company
for the acquisition to be consummated subject to Atrion's shareholders
approval expected during the second quarter of 1997. However, the revised
Credit Agreement will call for a balloon payment of $7.0 million on August 31,
1997.
The Company is currently evaluating its options with respect to providing
funding for repayment of the $7.0 million, which may include additional debt
or equity financing. There can be no assurance, however, that the Company's
efforts to raise additional capital or obtain new financing will be
successful.
As of December 31, 1996, the Company had net operating loss ("NOL")
carryforwards of approximately $11.0 million expiring in various amounts from
1999 through 2008. These NOLs were generated by the Company's predecessor.
The ability of the Company to utilize the carryforwards is dependent upon the
Company generating sufficient taxable income and could be affected by annual
limitations on the use of such carryforwards due to a change in stockholder
control under the Internal Revenue Code. The Company's future issuances of
equity securities could trigger such a limitation. The Company believes,
however, that such a limitation would not materially impact the Company's
ability to utilize the NOL carryforwards prior to their expiration.
This report includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act of 1934. All statements other than statements of historical fact
included in this report are forward looking statements. Such forward looking
statements include, without limitation, statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Capital Resources and Liquidity" regarding Midcoast's estimate of the
sufficiency of existing capital resources, its ability to raise additional
capital to fund cash requirements for future operations, whether funds
provided by operations will be sufficient to meet its operational needs in the
foreseeable future, and its ability to utilize NOL carryforwards prior to
their expiration.
Although Midcoast believes that the expectations reflected in such forward
looking statements are reasonable, it can give no assurance that such
expectations reflected in such forward looking statements will prove to be
correct. The ability to achieve Midcoast's expectations is contingent upon
a number of factors which include (I) timely approval of Midcoast's
acquisition candidates by appropriate government and regulatory agencies, (ii)
effect of any current or future competition, (iii) retention of key personnel
and (iv) obtaining and timing of sufficient financing to fund operations.
Important factors that could cause actual results to differ materially from
the Company's expectations ("Cautionary Statements") are disclosed in this
report, including without limitation those statements made in conjunction with
the forward looking statements included in this report. All subsequent
written and oral forward looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
Signature
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MIDCOAST ENERGY RESOURCES, INC.
(Registrant)
BY: /s/ Richard A. Robert
Richard A. Robert
Principal Financial Officer
Treasurer
Principal Accounting Officer
Date: May 22, 1997
