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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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: 0-8898
MIDCOAST ENERGY RESOURCES, INC.
(Name of small business issuer 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)
ISSUER'S TELEPHONE NUMBER: (713) 650-8900
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: Common Stock,
Par Value $.01 Per Share
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: None
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The revenues for the fiscal year ended December 31, 1996 were
$29,415,333.
The aggregate market value of the Common Stock, par value $.01 per
share, held by non-affiliates of Registrant as of February 28, 1997 was
$11,052,952. For the purposes of the determination of the above stated amount
only, all directors, executive officers, and shareholders owning in excess of
5%of the Registrant's common stock are presumed to be affiliates.
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13, or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes [X] No [ ]
The number of shares of Common Stock, par value $.01 per share,
outstanding as of March 31, 1997 was 2,499,999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be filed
with the Commission on or before April 30, 1997, are incorporated by reference
into Part III of this Annual Report on Form 10-KSB.
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TABLE OF CONTENTS
Part I
PAGE
Item 1. Business.............................................. 3
Item 2. Properties............................................ 11
Item 3. Legal Proceedings..................................... 14
Item 4. Submission of Matters to a Vote of Security Holders... 15
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters..................... 15
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 16
Item 7. Financial Statements.................................. 21
Item 8. Changes In and Disagreements With
Accountants on Accounting and Financial Disclosure.. 39
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16 (a) of the
Exchange Act........................................ 39
Item 10. Executive Compensation................................ 39
Item 11. Security Ownership of Certain Beneficial
Owners and Management............................... 39
Item 12. Certain Relationships and Related
Transactions........................................ 39
Part IV
Item 13. Financial Statement Schedule, Exhibits and Reports on Form 8-K 39
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PART I
ITEM 1. BUSINESS
GENERAL
Midcoast Energy Resources, Inc., its subsidiaries and affiliate companies
(referred to collectively as the "Company" or "Midcoast"), is a company
primarily engaged in the construction, acquisition, and operation of pipelines
for end-users, as well as the transmission, gathering and processing of natural
gas and crude oil. At December 31, 1996, forty- seven intrastate pipeline
systems are owned or operated by the Company in Alabama, Alaska, Kansas,
Louisiana, Mississippi, New York, Oklahoma, Tennessee and Texas, with 27 of the
Company's pipelines being acquired or constructed during 1996. Natural gas
marketing operations, pipeline dispositions and, to a lesser degree, oil and gas
production supplement the Company's core pipeline business. The Company's
principal growth and business strategy is to acquire or build pipelines to serve
the end-user market while also continuing to pursue opportunities in
transmission, gathering and processing of natural gas, other hydrocarbons and
non-hydrocarbon fluids or gases.
On August 9, 1996, the Company's Registration Statement on Form SB-2 was
declared effective by the U.S. Securities and Exchange Commission ("SEC"). On
August 14, 1996 the Company sold 1,000,000 shares of its common stock at an
offering price of $10.00 per share and its stock began trading on the American
Stock Exchange under the symbol "MRS." After deducting underwriting commissions
and other underwriting expenses of the offering, proceeds of approximately
$8,841,000 were received by the Company from the underwriter. The proceeds were
used to repay indebtedness and to acquire pipelines and related assets.
Immediately prior to the offering, the Company's common stock was split on a
4.460961 for 1 basis.
The Company leases its principal executive offices at Suite 2950, 1100
Louisiana Street, Houston, Texas, 77002, and its telephone number is (713)
650-8900.
REVENUE COMPONENTS
The Company derives its revenues from four primary sources: (i)
transportation fees from pipeline systems owned by the Company, (ii) the
marketing of natural gas, (iii) the processing and treating of natural gas, and
(iv) the purchase and resale of pipeline systems.
Transportation fees are received by the Company for transporting gas owned
by other parties through the Company's pipeline systems. Typically, very little
incremental operating or administrative overhead cost is incurred by the Company
to transport gas through its pipeline systems thus, a substantial portion of
transportation revenues can be recognized as operating income by the Company.
The Company's gas marketing revenues are realized through the purchase and
resale of natural gas. Generally, gas marketing activities will generate higher
revenues, and correspondingly higher expenses, than those revenues and expenses
associated with transportation activities. This relationship exists because,
unlike revenues derived from transportation activities, gas marketing revenues,
and associated expenses, include the full commodity price of the natural gas.
The operating income the Company recognizes from its gas marketing efforts is
the difference between the price at which the gas was purchased and the price at
which it was sold to the Company's customers.
The Company's natural gas processing revenues are realized from the
extraction and sale of natural gas liquids ("NGLs") such as ethane, butanes, and
natural gasoline from a natural gas stream. Once extracted, NGLs are further
separated in fractionation facilities and sold to wholesalers. Typically, the
Company enters into agreements with natural gas producers wherein the Company
and the producer share in the revenue generated from the sale of the NGLs
extracted at the Company's facilities.
In the past, the Company has also derived significant revenues by
capitalizing upon opportunities in the industry to sell pipeline systems or
assets associated with the Company's pipeline systems on favorable terms as the
Company receives offers for such systems which are suited to another company's
pipeline network.
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BUSINESS AND GROWTH STRATEGY
The Company's principal business and growth strategy is to acquire or
build pipelines to serve the end-user market while also continuing to pursue
acquisition, construction or disposition opportunities in transmission,
gathering and processing of natural gas, other hydrocarbon and non-hydrocarbon
fluids or gases. The Company will continue to seek to implement its strategy by
taking advantage of a number of market conditions and competitive factors,
including: (i) pursuing natural gas users in the chemical and manufacturing
industries who are seeking alternative suppliers to their local distribution
companies ("LDCs") due to new opportunities that may arise from regulatory
changes, (ii) aggressively seeking acquisition opportunities for end-user,
gathering, or transmission pipelines which result from divestitures by other
companies due to regulatory or strategic factors, or because the systems were
only incidentally acquired by the other company as a result of a larger
acquisition or merger, and (iii) capitalizing on the fact that many of the
Company's existing pipeline systems have the capacity to transport increased
volumes of natural gas which enable them to meet natural gas demand increases in
the area without requiring construction of additional facilities. The various
operations of the Company involve the following activities:
END-USERS. A large portion of the Company's revenue is derived from
contracting with industrial end-users or electrical generating facilities to
provide natural gas and natural gas transportation services to their facilities
through interconnect or bypass gas pipelines constructed by the Company.
End-user pipelines provide the Company's customers with a supply of natural gas
as an alternative to their current energy source, which is usually an LDC.
Frequently, the Company is able to offer its end-user customers rates lower than
the customer's LDC. The Company's contracts with end-user customers typically
provide for the payment of a transportation fee by the customer based on the
volume of gas transported through the Company's pipeline. In many of the
Company's contracts the customer has guaranteed a minimum amount of natural gas
to be transported. The Company also offers its end-user customers gas marketing
services enabling them to purchase their gas supply from the Company but without
any obligation to do so. The Company strives to structure the terms and
transportation fees for its end-user systems in such a way as to provide an
acceptable rate of return regardless of any gas marketing revenues. Eighteen of
the Company's systems are end-user pipelines.
TRANSMISSION. The Company's three transmission pipelines primarily receive
and deliver natural gas to and from other pipelines, but may also involve some
gathering functions. Effective August 1995, the Company significantly expanded
its gas transmission pipeline activities by acquiring Magnolia Pipeline
Corporation ("Magnolia"), the principal asset of which is an approximately
111-mile, primarily 16 inch to 24 inch, natural gas transmission line and
compressor station located in central Alabama (the "Magnolia System").
GATHERING. The Company's gathering systems typically consist of a network
of small diameter pipelines which collect gas or crude oil from points near
producing wells and transport it to larger pipelines for further transmission.
Gathering systems may include meters, separators, dehydration facilities, and
other treating equipment owned by the Company or others. The Company derives
revenues from gathering systems by transporting gas or crude oil owned by others
through its pipelines for a transportation fee, by purchasing gas and utilizing
its pipelines to transport the gas to a customer in another location where the
gas is resold or, in certain instances, by purchasing gas and arranging for the
delivery and resale of an equivalent quantity of gas to a customer not directly
served by the Company's pipelines. Transactions with customers not directly
served by the Company's pipelines are typically accomplished by entering into
agreements whereby the Company exchanges gas in its pipelines for gas in the
pipelines of other transmission companies. The Company currently owns an
interest in or operates twenty-six gathering systems.
NATURAL GAS PROCESSING. The Company entered the natural gas processing
business in October 1996 with its purchase of a 150 mile gathering system and
gas processing plant in central Mississippi (the "Harmony System") from a
division of Koch Industries, Inc. ("Koch"). See "-- Pipeline Construction,
Acquisition and Disposition." Harmony's gas plant includes a refrigerated
propane NGL extraction plant with sulphur removal and full fractionation
facilities. Gas is gathered from numerous producers through the Harmony
gathering system and transported to the plant, where it is separated into NGLs,
residue gas, and sulphur. The NGLs and sulphur are then sold to various
wholesalers and the residue gas is sold at the plant's tailgate. The Company's
processing operations can be adversely affected by a decline in NGL prices,
declines in gas throughput, or increase in shrinkage or fuel costs.
GAS MARKETING. The majority of the Company's gas marketing activities
occur on pipeline systems owned by the Company and for those customers served by
the Company's pipeline systems. The Company's marketing activities include
providing gas supply and sales services to some of its end-user customers by
purchasing the gas supply from other marketers or pipeline affiliates and
reselling the gas to the end-user. The Company also purchases gas directly
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from well operators on many of the Company's gathering systems and resells the
gas to other marketers or pipeline affiliates. Typically, there are more
marketing opportunities associated with the Company's gathering systems since
many of the well operators lack the desire, expertise, or aggregate volumes to
effectively market their product on their own. Many of the contracts pertaining
to the Company's gas marketing activities are month-to-month spot market
transactions with numerous gas suppliers or producers in the industry. Such
contracts contain no ongoing obligation by the Company to provide for or
purchase future gas supplies.
Generally, the Company purchases the gas under contracts that contain
terms which provide for a price determination based upon prevailing market
conditions. Simultaneous with the purchase of gas by the Company, the Company
resells the gas at a higher price under a sales contract which is comparable in
its terms to the purchase contract, including any price escalation provisions.
The Company earns a margin on such contracts equal to the difference between the
purchase price paid by the Company for such gas supply and the price at which
the gas is then resold. Typically, gas marketing is characterized by small
margins since there are numerous companies of greatly varying size and financial
capacity who compete with the Company in the marketing of natural gas.
Accordingly, historical operating income associated with this revenue stream has
varied depending on market conditions. The Company believes the marketing of gas
is an important complement to its transportation services, and will be an
ongoing part of the Company's operations.
GROWTH STRATEGY. The Company believes that its experience in the strategic
location, design, engineering, construction and operation of pipelines, as well
as in federal, state and local regulatory matters involving pipelines, makes it
well positioned to continue to take full advantage of changes in the natural gas
industry. Growth is anticipated primarily through aggressively pursuing the
industrial end-user market by acquiring and constructing new pipeline systems.
The Company believes that it is one of the few independent companies in the
industry which has pursued supplying the industrial end-user market through new
pipeline connections. As more chemical and manufacturing companies seek
alternatives to their LDCs for their natural gas supply, the Company and its
personnel will offer the expertise they have gained through their involvement in
the regulatory permitting, construction, and operation of eighteen end-user
pipelines in six states. The Company will also continue to expand its current
market base by working with many of its existing customers, such as Mid-America
Pipeline Company ("Mapco"), Owens-Corning Fiberglas Corporation ("Owens"), Koch
and Tyson Foods, Inc. ("Tyson"), to provide natural gas service to additional
facilities operated by these customers.
The Company typically designs its systems to transport greater volumes
than needed in the immediate future to provide capacity to accommodate growth in
natural gas consumption and production in proximity to the pipeline systems. As
a result, the Company believes that under existing conditions, its pipeline
systems can quickly increase their volumes with little capital expenditure
should additional demand develop in these areas. The Company also benefits from
lower overhead than major interstate carriers and LDCs and the resultant ability
to offer reduced rates which should allow it to compete effectively with
entrenched LDCs and gas transmission carriers for their existing and new
end-user customers.
Recent regulatory changes have led to an overall consolidation of the
gathering and transmission pipeline segments in the industry. These
consolidations have resulted in increased opportunities for pipeline
acquisitions by the Company as major pipeline companies divest themselves of
pipeline systems only incidentally acquired by them in connection with larger
acquisitions or as a result of their divestitures of such pipeline systems due
to internal changes in their strategic focus. For example, in 1995 and 1996, the
Company acquired ownership of, or interests in, 31 pipeline systems, including
end-user, gathering and transmission lines, from major pipeline companies.
Moreover, the Company's acquisitions in 1995 of Magnolia and Five Flags Pipe
Line Company ("Five Flags"), as well as the acquisitions in 1996, by an
affiliate, of seven pipeline systems from Seahawk Natural Gas Company
("Seahawk"), the acquisition by the Company, through its wholly-owned
subsidiary, Magnolia, of ten pipeline systems from Texas Southeastern Gas
Gathering Company ("TSGGC") and the acquisition of the Harmony System from a
division of Koch further illustrate the existence of such opportunities in the
marketplace and the Company's ability to rapidly capitalize on them. Not only
has the industry trend to consolidate increased the availability of attractive
acquisitions in the market place but the overall consolidation in the industry
has also presented the Company with advantageous opportunities to sell pipeline
systems which the Company owns, such as Five Flags, on favorable terms. The
Company will continue to consider and evaluate such divestiture opportunities as
the Company receives favorable offers for their existing systems or assets. See
"--Pipeline Construction, Acquisition and Disposition" and " Properties."
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PIPELINE CONSTRUCTION, ACQUISITION AND DISPOSITION
During 1996, the Company constructed or acquired ownership of, or
interests in, 29 pipelines, 22 of which were gathering systems, one of which was
a transmission line and six of which were end-user pipelines. See " Properties."
The Company remains actively engaged in seeking pipeline acquisitions and
construction opportunities. The Company plans to evaluate investments in
pipelines which involve not only natural gas, but also liquified petroleum gas,
as well as both hydrocarbon and non-hydrocarbon gases, such as nitrogen.
Management believes that more acquisition opportunities will become available as
major pipeline companies divest systems due to regulatory considerations or need
to spin-off smaller non-strategic systems acquired in connection with larger
acquisitions. The Company believes it can capitalize on these opportunities due
to the strategic locations of its pipelines and proximity to other companies'
pipeline systems and in large part to the Company's experience and relationships
with others in the pipeline industry.
CONSTRUCTION OF SYSTEMS. In most instances, the Company contracts for the
construction of its pipeline projects on the basis of a competitive bidding
process. The bids received are usually based on a price per foot for the
installation of the pipeline, boring under roads or railroads, other directional
bores and environmental restoration services. Usually, the same contractor is
also retained on most construction projects to install the meter stations for
volume measurements at either end of the pipeline system, on a cost plus basis.
During the actual construction phase of a project, the Company has at least one,
and in most instances two, Company project managers or inspectors at the
construction site, who are in charge of ensuring that the engineering
specifications are implemented and who manage the day-to-day construction
activities. Depending on the size of the particular construction project, the
Company may hire additional contract inspectors to support and work with the
Company's personnel in the management of the construction project.
The Company's recent activities in pursuit of acquisition, construction or
disposition opportunities in transmission and gathering of natural gas include
the following:
MAGNOLIA SYSTEM ACQUISITION. Effective August 1995, the Company acquired
100% of the outstanding capital stock of Magnolia. Magnolia's principal asset
consists of approximately 111 miles of 6 inch to 24 inch gas pipelines and an
approximately 4000 horsepower compressor station, located in central Alabama.
Magnolia was purchased from a subsidiary of The Williams Companies ("Williams")
for a total purchase price of $3,200,000, and the Company assumed the operations
of the pipeline in September 1995. Williams had acquired Magnolia as part of its
acquisition of Transco Energy Company ("Transco"), earlier in 1995. The Magnolia
System is primarily a transmission pipeline with interconnections to one major
interstate pipeline and one major intrastate pipeline. The system also includes
some gathering lines which connect coal-seam gas production in the Black Warrior
Basin with the Magnolia System. There is the potential for several
interconnections to other pipelines in the area which could provide additional
supply or market options for gas on the Magnolia System. These additional
interconnections could enhance Magnolia's revenues and will be pursued by the
Company. See also "Properties."
FIVE FLAGS SYSTEM ACQUISITION AND DISPOSITION. In September 1995, the
Company and Rainbow Investments Company, a Texas corporation controlled by a
former director and officer of the Company ("Rainbow"), jointly reacquired 100%
of the outstanding capital stock of Five Flags, which the Company had previously
owned until September 1993, from an affiliate of The Coastal Corporation
("Coastal"). Total cash consideration of $2,052,000 was paid to Coastal, of
which the Company's share was $1,872,450 for 91.25% of Five Flags' capital
stock. In October 1995, the Company and Rainbow jointly sold 100% of the capital
stock of Five Flags to Koch Gateway Pipeline Company for cash consideration of
$4,664,865. After retiring the purchase money note, the net proceeds to the
Company from the sale of Five Flags were $2,183,226.
SEAHAWK ACQUISITION. In February 1996, the Company formed Pan Grande
Pipeline, L.L.C. , a Texas limited liability company ("Pan Grande") with
Resource Energy Development Company, L.L.C., a North Carolina limited liability
company ("Resource"). The Company and Resource each owned 50% of Pan Grande.
Subsequent to its formation, Pan Grande entered into an agreement with Seahawk
to acquire six onshore gas gathering and transmission systems. Seahawk was
acquired by Tejas Power Corporation ("TPC"), as part of TPC's acquisition of
substantially all of the pipeline systems owned by Seagull Energy Corporation.
The six systems, the Allen Hill, Chapa, Guadalupe, Guerra, Loma Novia, and
Puckett Systems, are located in Tom Green, Live Oak, Culberson and Loving, Webb
and Duval, Duval and McMullen and Pecos counties, Texas respectively. A seventh
system, the Salt Creek, located in Kent and Scurry counties in Texas, was also
acquired from Seahawk by Pan Grande in September 1996. Together the seven
systems comprise approximately 116 miles of natural gas gathering and
transmission lines with a design throughput of 175 million cubic feet of natural
gas per day. The purchase of the seven systems by Pan Grande was financed with
capital contributions from the Company and Resource and with a five-year note
from a bank to Pan Grande . In August
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1996, Resources sold its interest in Pan Grande to four companies. The Allen
Hill and Puckett systems were sold in September 1996 for a profit of
approximately $60,000. See "Properties -- Pipeline Systems."
TEXAS SOUTHEASTERN GAS GATHERING COMPANY. In May 1996, the Company,
through its wholly-owned subsidiary, Magnolia, acquired nine gathering pipeline
systems and one transmission pipeline system from TSGGC. The systems were
acquired pursuant to a purchase and sales agreement dated March 12, 1996 for a
total purchase price of $390,000 less purchase price adjustments giving effect
to operating income since the effective date of January 1, 1996. These systems
total approximately 113 miles of 2 inch to 10 inch diameter pipeline with
associated equipment. Five systems (Fayette, Happy Hill, Moores Bridge, Detroit
and Sizemore) are located in Alabama, and five systems (Millbrook, Greenwood
Springs, Heidelberg-TGP, Heidelberg-Koch and Baxterville) are located in
Mississippi. The bulk of the systems are located within 100 miles of the
Magnolia System. The Company has integrated the operation of these systems with
the Magnolia System. TSGGC had acquired these systems in 1994 as part of a
larger acquisition package. See " Properties -- Pipeline Systems."
HARMONY SYSTEM. In October 1996, Midcoast consummated the acquisition of
the Harmony System from Koch Hydrocarbons Company, a division of Koch, for cash
consideration of approximately $3,640,000, subject to post purchase price
adjustments. The Harmony System gathers gas from producing fields located in
Mississippi. It consists of over 150 miles of high and low pressure gas
gathering pipeline with 4620 horsepower of compression. The processing plant is
a refrigerated propane natural gas liquid extraction plant with design capacity
of over 20 MMcf/d. The plant has sulfur extraction as well as full fractionation
facilities and markets propane, butanes, natural gasoline, condensate and
sulfur. See "Properties -- Pipeline Systems."
ESPERANZA. In November 1996, Midcoast acquired four natural gas gathering
pipelines from Esperanza Transmission Corporation for cash consideration of
$810,000. All four pipelines are located in southern Texas and collectively
include 19 miles of pipeline which gather natural gas from producing fields in
the area. See "Properties -- Pipeline Systems."
ATRION ENERGY SUBSIDIARIES. 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 $2 million
of deferred contingent payments to be paid in equal amounts over an eight-year
period (the "Consideration"). The Consideration was determined through extensive
negotiations between the Company and Atrion . 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 compression stations, that runs from Selmer, Tennessee to
Huntsville, Alabama. The system serves an eight county area in Alabama,
Mississippi and Tennessee. Gas transportation customers include 17
municipalities and 8 industrial companies. The system is certificated by the
Federal Energy Regulatory Commission ("FERC") to deliver approximately 133,000
MMBtu of firm transportation per day. TRIGAS owns and operates a 38 mile
pipeline extending from Barton, Alabama to Courtland, Alabama that was
originally constructed to transport gas to an industrial customer's cogeneration
facility. TRIGAS has since constructed facilities to also serve a second
industrial customer. 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 certain regulatory approvals, and
approval by Atrion's shareholders. Consummation of the transaction is
anticipated during the second quarter of 1997 with financing to be provided by
Bank One, Texas N.A. under the Company's existing credit facility.
MARKETS AND MAJOR CUSTOMERS
The natural gas industry has undergone major transformations, which have
included significant changes in government regulation. As a consequence, the
industry has experienced a marked increase in competition and volatility in
natural gas prices. The result has been an increase in gas sold directly to
end-users by producers and other nontraditional suppliers, and an increasing
reluctance of end-users to enter into long-term contracts. Consumers have shown
an increased willingness to switch fuels between gas and oil in response to
their relative price fluctuations, and there is a growing use of gas purchase
contracts that require price adjustments in response to market conditions.
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During the year ended December 31, 1996, the Company derived approximately
31% and 15% of its natural gas sales and transportation revenues from Mapco and
affiliates, and Westlake Petrochemicals Corporation ("Westlake"), respectively.
Mapco is a Fortune 500 natural gas liquids pipeline company. The Company
furnishes natural gas to Mapco and its affiliates through various pipeline
systems in several states for fuel to nine turbine pump stations and a main
fractionation facility owned by Mapco under several long-term agreements.
Westlake is an international petrochemicals company. The Company supplies
Westlake's ethylene/styrene plant complex in Louisiana through a pipeline under
an agreement entered into in June 1993 containing a three-year primary and
seven-year secondary term, respectively. A majority of the Mapco and Westlake
agreements provide for guaranteed minimum cumulative volume restrictions and
additional transportation fees to be paid to the Company for actual volumes
transported. The Westlake agreement also provides for an option to purchase the
pipeline for a nominal fee after the end of the primary term, with notice to the
Company, should an event impair Westlake's ability to transport gas to their
facilities. Furthermore, the Westlake agreement provides that Westlake pay a
fixed monthly operations fee to the Company, adjusted annually by current price
indices. In addition, Westlake has periodically purchased a portion of its gas
supply from the Company. The Company has many other long-term commitments with
significant customers. See "Properties".
SALES AND MARKETING
The Company aggressively pursues new acquisition opportunities, as well as
end-user and gathering customers. As such, the Company relies on its management
team to identify suitable construction or acquisition projects involving
end-user, gathering or transmission customers either through direct sales
efforts, referrals, or existing relationships within the industry. The Company's
senior management devotes much of its time and effort to develop such projects
and works with both new and existing customers to meet their gas supply needs.
Management also benefits from their relationships with others in the industry
who often notify the Company of assets which are being offered for sale, or of
new gathering or end-user construction opportunities.
NATURAL GAS SUPPLY
The Company's end-user pipelines have connections with major interstate
and intrastate pipelines which management believes have ample supplies of
natural gas in excess of the volumes required for these systems. In connection
with the construction and acquisition of its gathering systems, evaluations were
made of well and reservoir data furnished by producers to determine the
availability of gas supply for the systems. Based on those evaluations, it is
management's belief that adequate gas supply exists for the Company to recoup
its investment with an adequate rate of return. As such, management does not
routinely obtain independent evaluations of reserves dedicated to its systems
due to the cost of such evaluations, and accordingly, does not have estimates of
total reserves dedicated to its systems or of the anticipated life of such
producing reserves.
COMPETITION
The gas pipeline, processing and marketing industries are highly
competitive. In marketing gas, the Company has numerous competitors, including
marketing affiliates of interstate pipelines, the major integrated oil
companies, and local and national gas gatherers, brokers and marketers of widely
varying sizes, financial resources and experience. Local utilities and
distributors of gas are, in some cases, engaged directly, and through
affiliates, in marketing activities that compete with the Company.
The Company competes against other companies in the transmission,
gathering, processing and marketing businesses for supplies of gas and for sales
to customers. Competition for gas supplies is primarily based on efficiency,
reliability, availability of transportation and the ability to offer a
competitive price for the gas. Competition for customers is primarily based upon
reliability and price of deliverable gas. For customers that have the capability
of using alternative fuels, such as oil and coal, the Company also competes
against companies capable of providing these alternative fuels at a competitive
price.
GOVERNMENT REGULATION
Various aspects of the transportation, sale and marketing of natural gas
are subject to or affected by extensive federal regulation under the Natural Gas
Act ("NGA"), the Natural Gas Policy Act of 1978 ("NGPA"), the Natural Gas
Wellhead Decontrol Act of 1989 ("Decontrol Act") and regulations promulgated by
FERC.
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NATURAL GAS TRANSMISSION INDUSTRY. Historically, interstate pipeline
companies acted as wholesale merchants by purchasing natural gas from producers,
transporting that natural gas from the fields to their markets, and reselling
the natural gas to LDCs and large end-users. Prior to the enactment of the NGPA
in 1978 and the Decontrol Act of 1989, all sales of natural gas for resale in
interstate commerce, including sales by producers, were subject to the rates and
service jurisdiction of the FERC under the NGA and NGPA. However, as a result of
the NGPA and the Decontrol Act, all so-called "first sales" of natural gas were
federally deregulated, thus allowing all types of non-pipeline and non-local
distribution sellers to market their natural gas free from federal controls.
Moreover, pursuant to Section 311 of the NGPA, the FERC promulgated regulations
by which wholly-intrastate natural gas pipeline companies could engage in
interstate transactions without becoming subject to the FERC's full rates and
service jurisdiction under the NGA. At the same time, however, the FERC has
retained its traditional jurisdiction over the activities of interstate
pipelines. Thus, under the NGA and NGPA, the transportation and sale of natural
gas by interstate pipeline companies have been subject to extensive regulation,
and the construction of new facilities, the extension of existing facilities and
the commencement and cessation of sales or transportation services by interstate
pipeline companies generally have required prior FERC authorization.
The NGA exempts gas gathering facilities from the direct jurisdiction of
FERC. The Company believes that its gathering facilities and operations meet the
current tests that FERC uses to grant nonjurisdictional gathering facility
status. However, FERC's articulation and application of the tests used to
distinguish between jurisdictional pipelines and nonjurisdictional gathering
facilities have varied over time. While the Company believes the current
definitions create nonjurisdictional status for the Company's gathering
facilities, no assurance is available that such facilities will not, in the
future, be classified as regulated transmission facilities and thus, the rates,
terms, and conditions of the services rendered by those facilities would become
subject to regulation by FERC.
Commencing in 1985, the FERC adopted regulatory changes that have
significantly altered the transportation, sale and marketing of natural gas.
These changes were intended to foster competition in the natural gas industry
by, among other things, transforming the role of the interstate pipeline
companies from wholesale marketers of natural gas to primarily natural gas
transporters, and mandating that interstate pipeline companies provide open and
nondiscriminatory transportation services to all producers, distributors,
marketers and other shippers that seek such services (so-called "open access"
requirements). As an incentive to cause the interstate pipeline companies to
revamp their services, the FERC also sought to expedite the certification
process for new services, facilities and operations of those pipeline companies
providing "open access" services. Throughout the early years of this process,
the FERC's actions in these areas were subject to extensive judicial review and
generated significant industry comment and proposals for modification to
existing regulations.
In April 1992, the FERC issued its most comprehensive restructuring
ruling, Order 636, a complex regulation that has had a major impact on natural
gas pipeline operations, services and rates. Among other things, Order 636
generally required each interstate pipeline company to "unbundle" its
traditional wholesale services and make available on an open and
nondiscriminatory basis numerous constituent services (such as gathering
services, storage services and firm and interruptible transportation services)
and to adopt a new rate making methodology to determine appropriate rates for
those services. To the extent the pipeline company or its sales affiliate makes
natural gas sales as a merchant in the future, it will do so pursuant to a
blanket sales certificate that puts those entities in direct competition with
all other sellers pursuant to private contracts. However, pipeline companies
were not required by Order 636 to remain merchants of natural gas, and several
of the interstate pipeline companies have elected to become transporters only.
The FERC required that each pipeline company develop the specific terms of
service in individual restructuring proceedings by means of a compliance filing
that set forth the pipeline company's new, detailed procedures. In subsequent
orders, the FERC largely affirmed the significant features of Order 636 and
denied requests for stay of the implementation of the new rules pending judicial
review. In July 1996 , the United States Court of Appeals for the District of
Columbia Circuit largely upheld Order 636. FERC orders approving the individual
pipeline restructuring proceedings, however, are the subject of numerous appeals
to the United States Courts of Appeals. The outcome of such proceedings and the
ultimate impact that they may have on the Company's business is uncertain.
REGULATION OF THE COMPANY'S FACILITIES. The Company's operations can be
affected significantly by government regulation. Its pipeline systems are
regulated by federal, state and local regulatory agencies. These regulations are
extremely complex and subject to changing administrative interpretations. The
Company's pipeline operations are generally not subject to regulation by the
FERC which is an independent commission within the Department of Energy that has
authority over the transportation and marketing of various categories of natural
gas sold in interstate commerce. The production and sale of oil and gas is
subject to federal, state and local government regulations including the
9
<PAGE>
imposition of excise taxes, the prevention of waste, pollution controls,
conservation of natural resources, and maximum daily production allowables for
oil and gas wells.
The Company's operations are further subject to regulation by various
agencies of the states in which the Company operates. As in the case of
potential federal regulatory changes, there can be no assurances that state
regulatory measures will not adversely affect the Company's business and
financial condition. In such events, the state's regulatory authorities could
temporarily suspend or hinder operations in a particular state, depending on the
authority's view of its jurisdiction. Although, regulators at the state level
have generally followed the FERC's lead by allowing increased competition, there
can be no assurance that every state will follow this practice without the
pressure of litigation. State regulatory requirements and policies vary from
state to state. The regulatory requirements of Texas, Kansas, Louisiana,
Mississippi, New York, Alabama and Tennessee have the greatest impact on the
Company due to the concentration of the Company's operations in those states.
The Company's operations in Texas are subject to the Texas Gas Utility
Regulatory Act, as implemented by the Texas Railroad Commission. Generally, the
Texas Railroad Commission is vested with authority to ensure that rates charged
for natural gas sales and transportation services are just and reasonable. The
Company must make filings with the Texas Railroad Commission for all new and
increased rates.
The Company's operations in Kansas are subject to the jurisdiction of the
Kansas Corporation Commission (the "KCC") with regard to pipeline safety
standards and certification procedures. The KCC has granted the Company
Certificates of Public Convenience and Necessity for its pipelines in Kansas.
The State of Louisiana Office of Conservation, Pipeline Division has
safety and certification jurisdiction over the Company's operations in
Louisiana. The Company was granted Certificates of Transportation, to
Interconnect, and to Construct and Operates its system in Louisiana.
The State of New York Public Service Commission has safety and
certification jurisdiction over the Company's New York operations and has
granted a Certificate of Public Necessity Convenience for the Albany system.
The Magnolia System in Alabama is subject to the jurisdiction of the FERC
with respect to the transportation rates under Section 311 (a)(2) of the NGA.
This pipeline and the Company's other pipelines in Alabama are subject to the
jurisdiction of the Alabama Public Service Commission-Pipeline Safety Section
with regard to operational, environmental and safety considerations.
The Company's operations in Mississippi, Oklahoma and Tennessee are
subject to the jurisdiction of these state's respective Public Service
Commissions with regard to operational, environmental and safety considerations.
ENVIRONMENTAL AND SAFETY MATTERS. The Company's activities in connection
with the operation and construction of pipelines and other facilities for
transporting, processing, treating or storing natural gas and other products are
subject to environmental and safety regulation by numerous federal, state and
local authorities. This can include ongoing oversight regulation as well as
construction or other permits and clearances which must be granted in connection
with new projects or expansions. On the federal level, these agencies can
include the Environmental Protection Agency ("EPA"), the Occupational Safety and
Health Administration, the U.S. Army Corp. of Engineers, the U.S. Fish and
Wildlife Service and others. State regulatory agencies or boards can include
various air and water quality control boards, historical and cultural resources
offices, fish and game services and others. These regulations can increase the
cost of planning, designing, initial installation and the operations of such
facilities. Sanctions for violation of these regulations include a variety of
civil and criminal enforcement measures including monetary penalties, assessment
and remediation requirements and injunctions as to future compliance. The
following is a discussion of certain environmental and safety concerns related
to the Company. It is not intended to constitute a complete discussion of the
various federal, state and local statutes, rules, regulations, or orders to
which the Company's operations may be subject.
In most instances, the regulatory requirements of the various state and
federal agencies relate to the release of substances into the environment and
include measures to control water and air pollution. Moreover, the Company,
without regard to fault, could incur liability under the comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended, or
state counterparts, in connection with the disposal or other releases of
hazardous substances. Further, the recent trend in environmental legislation and
regulations is toward stricter standards, and this will likely continue in the
future.
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<PAGE>
Environmental laws and regulations may also require the acquisition of a
permit before certain activities may be conducted by the Company. Further, these
laws and regulations may limit or prohibit activities on certain lands lying
within wilderness areas, wetlands, areas providing habitat for certain species
or other protected areas. As an employer, the Company is required to maintain a
workplace free of recognized hazards likely to cause death or serious injury and
to comply with specific safety standards. The Company is also subject to other
federal, state and local laws covering the handling, storage or discharge of
materials used by the Company, or otherwise relating to protection of the
environment, safety and health.
Management believes, based on its current knowledge, that the Company has
obtained and is in current compliance with all necessary and material permits
and that the Company is in substantial compliance with applicable material
environmental and safety regulations.
The Company maintains insurance coverages that it believes are customary
in the industry, although it is not fully insured against all environmental and
safety risks. The Company is not aware of any existing environmental or safety
claims that would have a material impact upon its financial position or results
of operations. See "-- Insurance."
INSURANCE
The Company presently maintains general comprehensive liability insurance
coverage with aggregate policy limits of $21,000,000 and per accident policy
limits of $11,000,000 which includes, among other items and subject to certain
conditions, coverage for pollution and waste disposal. The Company maintains
property insurance considered to be customary in the industry. There can be no
assurance, however, that insurance coverage will be available or adequate for
any particular risk or loss. Although, management believes that the Company's
assets are adequately covered by insurance, a substantial uninsured loss could
have a materially adverse impact on the Company and its financial position.
EMPLOYEES AND CONTRACT SERVICE ORGANIZATIONS
As of December 31, 1996, the Company had 27 full-time employees. The
Company has arrangements with other unaffiliated independent pipeline operating
companies who service and operate the Company's extensive field operations and
provide for emergency response measures. The Company is not party to any
collective bargaining agreements. There have been no significant labor disputes
in the past.
ITEM 2. PROPERTIES
PIPELINE SYSTEMS
The Company owns an interest in or operates forty-seven intrastate
end-user, gathering and gas transmission systems situated in the states of
Alabama, Alaska, Kansas, Louisiana, Mississippi, New York, Oklahoma, Tennessee,
and Texas. Certain information concerning the Company's pipelines is summarized
in the following table:
<TABLE>
<CAPTION>
DATE OF AVERAGE DAILY PERCENTAGE
ACQUISITION DAILY VOLUME OWNERSHIP
OR INITIAL LENGTH VOLUME(1) CAPACITY(1) OR INTEREST
PIPELINE SYSTEM OPERATION LOCATION IN MILES (MMBTU/D) (MMBTU/D) IN SYSTEM
- --------------- --------- -------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
END-USER:
Burnet................ December 1989 Burnet Co., TX 1.3 639 3,000 100%
Conway................ December 1989 Rice Co., KS --(2) 9,118 14,000 100%
Turkey Creek.......... January 1991 Fort Bend Co., TX 15.6 935 5,000 100%
OC/Kansas............. June 1991 Wyandotte Co., KS 1.0 2,581 6,500 100%
Cat Springs........... December 1991 Austin Co., TX 1.1 162 3,000 100%
Clemens Dome.......... February 1992 Brazoria Co., TX --(2) 165 3,000 100%
Stratton Ridge........ February 1992 Brazoria Co., TX 1.2 169 3,000 100%
Tuscaloosa (3)........ September 1992 Tuscaloosa, AL 2.6 -- (3) 1,500 100%
Augusta............... July 1993 Butler Co., KS 0.5 166 5,000 100%
Westlake.............. November 1993 Calcasieu Parish, LA 1.3 4,403 50,000 100%
Quindaro.............. November 1994 Wyandotte Co., KS 3.1 519 60,000 100%
OC/Albany............. December 1994 Albany Co., NY 0.5 1,306 3,000 100%
Guadalupe............. February 1996 Culberson/Loving Co,TX 9.1 279 10,000 50%(4)
11
<PAGE>
South Fulton.......... September 1996 Obion Co., TN 0.6 NAV 1,200 -- (5)
Power Paper........... August 1996 Roane Co., TN 2.1 1,743 5,000 100%
Salt Creek............ September 1996 Kent & Scurry Co., TX 39.1 3,190 20,000 50%(4)
Cuero................. October 1996 DeWitt Co., TX 5.4 72 2,000 100%
STEC.................. October 1996 Victoria Co., TX 4.0 101 10,000 100%
TRANSMISSION:
H&W................... October 1993 Escambia Co., AL 9.0 Inactive 15,000 100%
Magnolia.............. September 1995 Central AL 111.0 28,316 120,000 100%
Moores Bridge......... May 1996 Tuscaloosa Co., AL 4.5 109 4,000 100%
GATHERING:
Sinton................ July 1992 San Patricio Co., TX 2.8 Inactive 3,000 100%
Fitzsimmons........... April 1993 Duval Co., TX -- (2) 152 3,000 100%
Zmeskal............... June 1994 Victoria Co., TX -- (2) 307 3,000 100%
Cook Inlet Gas........ July 1994 Cook Inlet, AK 2.7 92(8) 15,000 -- (5)
Cook Inlet Oil........ July 1994 Cook Inlet, AK 2.7 3543(6) 20,000 (6) -- (5)
Foss.................. December 1994 Custer Co., OK 4.1 388 5,000 100%
Flores................ January 1996 Starr Co., TX 9.9 1,469 5,000 60%(7)
Chapa................. February 1996 Live Oak Co., TX 24.7 3,823 50,000 50%(4)
Guerra................ February 1996 Webb & Duval Cos, TX 18.8 5,930 50,000 50%(4)
Loma Novia............ February 1996 Duval/McMullen Co, TX 15.2 7,909 25,000 50%(4)
Baxterville........... May 1996 Lamar Co., MS 1.4 Inactive 2,000 100%
Detroit............... May 1996 Lamar Co., AL 16.5 76 3,000 100%
Fayette............... May 1996 Fayette Co., AL 62.8 1,235 10,000 100%
Greenwood Sprgs....... May 1996 Monroe Co., MS 7.9 144 5,000 100%
Happy Hill............ May 1996 Fayette Co., AL 5.5 92 3,000 100%
Heidelberg-Koch....... May 1996 Jasper Co., MS 1.0 157 3,000 100%
Heidelberg-TGP........ May 1996 Jasper Co., MS 3.5 680 2,500 100%
Millbrook............. May 1996 Wilkinson Co., MS 8.9 288 5,000 100%
Sizemore.............. May 1996 Lamar Co., AL 1.0 17 3,000 100%
Lake Rosemound........ September 1996 Wilkinson Co., MS 18.4 3,037 10,000 100%
Chaparral............. October 1996 Monroe Co., MS 9.6 138 3,000 100%
Harmony............... October 1996 Central MS 150.4 5,224 20,000 100%
Minnie Bock........... November 1996 Nueces Co., TX 14.0 2,014 10,000 100%
Minnie Bock East...... November 1996 Nueces Co., TX 2.5 302 5,000 100%
Port.................. November 1996 Nueces Co., TX 1.5 1,045 5,000 100%
Rowden................ November 1996 Duval Co., TX 1.0 203 3,000 100%
------- --------
TOTALS 599.8 88,695
======= --------
</TABLE>
(1) All volume and capacity information is approximate. Average daily volumes
are based on total volumes transported during the twelve month period
ended December 31, 1996, except for certain systems noted on the above
table which were acquired or placed in service after January 1, 1996, in
which case such average daily volumes are based on total volumes
transported from the date of acquisition or initial operation through
December 31, 1996. NAV means the pipeline has not been placed in service.
(2) This system is less than a quarter-mile in length.
(3) Construction suspended pursuant to an injunction prohibiting the
completion of the pipeline.
(4) This system is owned by Pan Grande, which the Company owns a 50% interest
in, and is operated by the Company.
(5) The Company receives throughput charges from these systems.
(6) Volume is reflected in barrels of oil production per day, and are not
included in totals.
(7) This system is owned by Starr County Gathering System, a Joint Venture of
which the Company owns a 60% interest and is operated by the Company.
(8) Average usage since the line was placed in service in December 1996.
The revolving line of credit with Bank One-Texas, N.A. entered into in
August 1996 is secured by all accounts receivable, contracts and a first lien
security interest in all pipelines directly owned by the Company. The note
payable to a bank entered into by Pan Grande in March 1996 for the acquisition
of the Guadalupe, Chapa, Guerra and Loma Novia systems is secured by all of the
assets of each respective system, and all transportation revenues pertaining to
them, with proportionate guarantees in an amount equal to the respective
ownership interests of the members. The note
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<PAGE>
payable to a bank entered into by Starr County Gathering System, a Joint
Venture, in January 1996 is secured by all of the assets of the Flores system
and all transportation revenues pertaining to the system, with guarantees by
each partner, proportionate to their partnership interest. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Capital
Resources and Liquidity." The following are summaries of the Company's principal
pipeline systems:
THE BURNET, CONWAY, TURKEY CREEK, CAT SPRINGS, CLEMENS DOME AND STRATTON
RIDGE SYSTEMS each serve a Mapco or Mapco affiliate facility. The Conway system
supplies a Mapco LPG Fractionation facility with 100% of their gas requirements,
as well as a Koch Isomerization unit. The other systems all supply Seminole
Pipeline Company ("Seminole"), a Mapco affiliate, mainline pump stations. The
agreements under which these systems operate provide for five-year terms
commencing upon the initial delivery of natural gas, with the exception of the
Conway System agreement which provides for a one year term. The various
agreements continue thereafter on a year-to-year basis unless terminated by
either party upon 90 days written notice, with the exception of the Conway
System agreement. These agreements also provide for guaranteed minimum
cumulative volumes which can serve to extend the contracts should the minimum
volumes not be met within the particular contract term, with the exception of
the Conway System agreement.
THE WESTLAKE SYSTEM supplies a Westlake ethylene/styrene plant complex in
Calcasieu Parish, Louisiana with a portion of their gas requirements through a
1.3-mile 8 inch pipeline system connected to a Sabine Pipeline Company
interstate pipeline. The system was constructed by the Company and placed in
service during November 1993 and provides gas supply to the plant under an
agreement entered into in June 1993. The agreement provides for a three-year
primary term commencing upon the initial delivery of natural gas, followed by a
seven-year secondary term. At the expiration of the secondary term, Westlake
retains ownership of the pipeline. The agreement provided for a guaranteed
minimum volume of 7,500 MMBtu/day and an option to purchase the pipeline for a
nominal fee after the end of the primary term, with notice to the Company,
should an event impair Westlake's ability to transport gas to their facilities.
The agreement also provides that Westlake pay a monthly operations fee to the
Company. In addition, Westlake has periodically purchased a portion of its gas
supply from the Company.
THE MAGNOLIA SYSTEM transports gas for Sonat Marketing Company ("Sonat
Marketing") a subsidiary of Sonat, Inc. ("Sonat"), Transco Energy Marketing
Company ("Transco Marketing"), a subsidiary of Transco and Perry Gas Companies,
Inc. ("Perry Gas") in the Black Warrior Basin, Alabama through a system
consisting of 81 miles of 24 inch pipeline, 18 miles of 16 inch pipeline, and 12
miles of 6 inch, 8 inch and 12 inch pipeline. The Magnolia System is located in
central Alabama and also includes a compressor station which has three Solar gas
turbines with C160 gas compressors, each rated at 1,340 horsepower. The system
was acquired by the Company from Williams pursuant to an agreement with an
effective date of August 1995. The Company assumed the operations of the
pipeline during September 1995. The system also connects coal-seam gas
production in the Black Warrior Basin with Transco's interstate pipeline.
Magnolia currently has a long-term contract with Transco Marketing as well
as contracts with Sonat Marketing and Perry Gas. The Company transports gas for
Sonat Marketing under an agreement entered into in July 1990 (the "Sonat
Agreement"), for Transco Marketing under an agreement entered into in July 1990
and amended in August 1995 (the "Transco Agreement"), and for Perry Gas under an
agreement entered into in November 1995 (the "Perry Gas Agreement"). The Sonat
and Perry Gas Agreements provide for one-year primary terms commencing upon the
initial delivery of natural gas and continue thereafter on a month-to-month
basis unless terminated by either party upon 30 days written notice. The Transco
Agreement, as amended, provides for a ten-year term from the date of amendment.
The Transco Agreement continues thereafter on a month-to-month basis.
THE COOK INLET GAS AND CRUDE OIL SYSTEMS consist of two separate lines, a
2.7-mile 6 inch natural gas gathering pipeline and a 2.7-mile 8 inch crude oil
gathering pipeline. The pipelines were placed in service during July 1994 and
connect the West McArthur River Unit ("WMRU") Production Facility, operated by
Stewart Petroleum Company ("Stewart"), to a delivery point at the Unocal Oil
Trading Bay Production Facility on the west side of Cook Inlet near Anchorage,
Alaska. The Company receives a throughput charge from Stewart for all oil and
gas transported through the system for the life of the WMRU wells, which was
subject to guaranteed minimum volumes, by Stewart for the first two years the
pipeline was in service. All produced gas has been utilized on site as fuel for
production equipment and the gas gathering system was inactive until December
1996 when the line was placed into service to transport gas as additional fuel
for the production facilities.
13
<PAGE>
In September 1996, an involuntary bankruptcy petition was filed against
Stewart by certain working interest owners in the WMRU, and in January 1997, the
United States Bankruptcy Court for the District of Alaska (the "Court") entered
an order for relief under Chapter 11 of the United States Bankruptcy Code. The
payment of the Company's throughput fees since August 1996 has 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 allowed to be paid. It is the
Company's belief that it is adequately protected, however there can be no
assurance that the Company will prevail against any challenges to its position.
See "Legal Proceedings."
THE HARMONY SYSTEM , located in Jasper, Wayne, Greene and Clarke counties,
Mississippi, consists of 150.4 miles of 2 inch to 6 inch natural gas gathering
pipelines with 4620 horsepower of compression. The system gathers gas from
producing fields in Mississippi from numerous operators. The system also
includes a refrigerated propane natural gas liquid extraction plant with a
design capacity of 20 MMcf/d. The plant has sulphur extraction, and full
fractionation facilities and markets propane, butane, natural gasoline,
condensate and sulphur. The processing plant, located in Clarke county, is the
only sour gas gathering, processing and sulphur extraction facility in the area,
in which there are numerous producing oil wells which are presently flaring the
associated produced gas. It is management's belief these existing wells, as well
as new drilling activity will provide a ready market for expansion of the
system.
OIL AND GAS PROPERTIES
The Company owns several non-operated interests in producing and
non-producing oil and gas properties. For the year ended December 31, 1996,
revenues from the Company's oil and gas properties were less than 1% of its
total revenues and for the same period the Company's oil and gas properties
represented less than 5% of its total assets. The Company owns working interests
in 3,560 gross acres of oil and gas leases and interests in 12 producing wells.
In 1995, the Company acquired a 21.5% working interest from Exxon Corporation
("Exxon") in two leases together covering approximately 1,700 gross acres in
Starr County, Texas on which are located nine active and one shut-in wells, one
of which was drilled and completed as a producing well during the past year. In
1996, the Company acquired varying overriding royalty interests across three
tracts in the East Vealmoor Unit for approximately $950,000. The property is
located in Borden and Howard Counties, Texas and is operated by Exxon. Although
it is not expected to become a major line of business for the Company,
management expects that acquisition and ownership of non-operated oil and as
interests will remain a facet of the Company's business for the foreseeable
future.
TITLE TO PROPERTIES
The Company, as part of its construction process, must obtain certain
right-of-way agreements from landowners whose property the proposed pipeline
will cross. The terms and cost of these agreements can vary greatly due to a
number of factors. In addition, as part of its acquisition process, the Company
will typically evaluate the underlying right-of-way agreements for the
particular pipeline to be acquired to determine that the pipeline owner has met
all terms and conditions of the underlying right-of-way agreement and that the
agreement is still in full force and effect.
The Company typically relies upon outside service organizations to review
the right-of-way agreements and to make suggestions to the seller as to any
curative work required before closing. The Company typically does not receive a
title opinion or title policy as to these right-of-way agreements due to the
complexity of the records and attendant expense. Occasionally, the Company may
seek to initiate condemnation proceedings where permitted under state law, to
obtain a right-of-way necessary for pipeline construction projects. The Company
believes that this process is consistent with standards in the pipeline
industry, and that it holds good title to its pipeline systems, subject only to
defects which the company believes are not material to the ownership of its
properties or results of operations. Substantially all of the Company's pipeline
systems are pledged to secure the revolving line of credit with Bank One -Texas
N.A. entered into in August 1996 or other affiliate debt. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Capital Resources and Liquidity."
ITEM 3. LEGAL PROCEEDINGS
On September 13, 1996 an involuntary petition for relief under Chapter 11
of the United States Bankruptcy Code was filed against Stewart in the Court by
certain working interest owners in the WMRU. Stewart consented to an order for
relief on January 24, 1997 and Stewart, with the petitioners, subsequently filed
their joint Plan of Reorganization and Disclosure Statement, as amended on March
13, 1997 (the "Stewart Plan"). The payment of the Company's throughput fees 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. The
Court has not ruled upon the Stewart Plan
14
<PAGE>
nor the validity of any claim against Stewart. The Company believes that it is
adequately protected, but there can be no assurance that the Company will
prevail against any challenge to its position.
The Company is currently involved in certain other litigation. Management
believes that all such other litigation arose in the ordinary course of business
and that costs of settlements or judgments arising from such suits will not have
a material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters during the fourth quarter of 1996
to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company is a successor to Nugget Oil Corporation ("Nugget") which was
traded on the Nasdaq National Market until October 30, 1986 when Nugget's stock
was delisted from the Nasdaq National Market. The Company's common stock was not
listed on a stock exchange for the period from October 30, 1986 to August 1996.
The common stock of the Company began trading August 9, 1996 on the American
Stock Exchange under the symbol "MRS." The following table sets forth the high
and low sales prices for the common stock for the period from August 9, 1996 to
December 31, 1996.
DIVIDENDS
1996 HIGH LOW PAID PER SHARE
---- ---- --- --------------
Third Quarter (from August 9, 1996) $ 10 1/4 $ 9 1/16 $.08
Fourth Quarter ............... $ 10 7/8 $ 9 13/16 $.08
On February 28, 1997, the closing price for the common stock, as reported
by the American Stock Exchange, was $13.625 per share.
STOCKHOLDERS MATTERS
In May 1996, the Board of Directors of the Company ("Board") approved the
redemption, for $118,366, of the 5% cumulative preferred stock ("5% Preferred")
held by a director and officer and two former directors and officers of the
Company. The shares were redeemed for ten percent of the stated liquidation
value ($1,183,665). Subsequently, no shares of the Company's preferred stock
remain outstanding. Following redemption of the 5% Preferred, the Company's
Articles of Incorporation were amended to reflect only one class of outstanding
securities, the Company's common stock.
In July 1996, the Company's articles of incorporation were amended to
increase the number of authorized common shares from 6,000,000 shares to
10,000,000 shares. In addition, the Board authorized 4.460961 for 1 stock split
in connection with the Company's common stock offering. See Note 8 to the
Consolidated Financial Statements.
As of March 1, 1997, there were 311 holders of record of common stock. The
Company believes that there are substantially more beneficial holders of common
stock.
DIVIDEND POLICY
The Company historically paid dividends on its 5% cumulative preferred
stock, which was redeemed in May 1996. Holders of shares of the Company's common
stock are entitled to receive cash dividends out of funds of the Company legally
available subject to the qualification that dividends need not be declared or
paid by the Board if to do
15
<PAGE>
so would be in violation of laws or of restrictions under contractual
arrangements (including credit agreements) to which the Company is or may
hereafter become a party. The Board declared the Company's initial common stock
dividend on August 16, 1996, which was paid on September 3, 1996.
It is the Company's policy to continue to pay a quarterly dividend,
however, the ability of the Company to pay regular quarterly dividends will
depend on the earnings and financial condition of the Company, and payment of
future dividends may be restricted by the Company's financial condition and the
Company's credit agreements. Therefore, there can be no assurances that future
dividends will be paid. There are currently no restrictions, contractual or
otherwise, on the Company's right to declare and pay dividends to the holders of
common stock in accordance with applicable state laws.
RECENT SALES OF UNREGISTERED SECURITIES
The following table reflects sales by the Company of unregistered
securities during 1996 . Common share amounts have been adjusted for the
4.460961 to 1 stock split effected prior to the Company's public offering in
August 1996. Except as otherwise disclosed, the issuances by the Company of the
securities sold in the transactions referenced below were not registered under
the Securities Act, pursuant to the exemption contemplated in Section 4(2)
thereof, for transactions not involving a public offering. No underwriter was
involved in the transactions and no commissions were paid. The consideration for
which the shares of the Company's common stock were issued is indicated below:
DATE SHARES CONSIDERATION PURCHASER
------------- ------ ------------- ----------------
March 1, 1996 446 Financing Rainbow
April 8, 1996 892 Services Karen Callaway
334 Services Donna J. Haddock
446 Services Ronald Harris
2,676 Services Duane S. Herbst
446 Services Barbara A. Jordon
8,921 Services Richard A. Robert
557 Services Kathy C. Smith
April 17, 1996 7,275 Services Bill G. Bray
4,460 Services Mark W. Fuqua
July 1, 1996 2,007 Services E.P. Marinos
2,007 Services Richard N. Richards
Additionally, pursuant to an engagement letter executed with Triumph
Resources Corporation, in February 1996, for the purpose of assisting the
Company in connection with its offering of equity securities, the Company
granted three-year warrants to purchase 34,349 shares of the Company's common
stock at $7.85 per share. The warrants are subject to an 18-month lock-up
agreement and have certain piggyback registration rights.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
"Consolidated Financial Statements" and the notes thereto included in Item 7
herein.
GENERAL
Since its formation, the Company has grown significantly as a result of
the construction and acquisition of new pipeline facilities. The Company's long
term strategy is to continue this expansion by capitalizing on changing
regulatory and industry dynamics to construct or acquire new end-user, gathering
and transmission pipelines, process and market natural gas, and take advantage
of favorable opportunities to sell pipeline systems which the Company owns. In
pursuit of this strategy, during 1996, the Company has acquired or constructed
27 pipelines. See "Business --Pipeline Construction, Acquisition and
Disposition." All acquisitions were accounted for under the purchase method
16
<PAGE>
of accounting for business combinations and accordingly, the results of
operations for such pipelines are included in the Company's financial statements
only from the applicable date of acquisition. As a result, the Company believes
its historical results of operations for the periods presented are not directly
comparable. The Company believes the acquisitions will have a positive impact on
its future results of operations, and more importantly, the Company believes
that the historical results of operations do not fully reflect the operating
efficiencies and improvements that are expected to be achieved by integrating
the acquired and newly constructed pipeline systems and realizing other
synergies.
The Company's results of operations are determined primarily by the
volumes of gas transported, purchased and sold, or processed through its
pipeline systems and processing facility, as well as the results of its
divestiture activities. Most of the Company's operating costs do not vary
directly with volume on existing systems, thus increases or decreases in volumes
on existing systems generally have a direct effect on net income. Also, the
addition of new pipeline systems should result in a larger percentage of
revenues being added to operating income because fixed overhead components are
allocated over more systems. The Company derives its revenues from four primary
sources: (i) transportation fees from pipeline systems owned by the Company,
(ii) the marketing of natural gas (iii) the processing and treating of natural
gas, and (iv) the purchase and resale of pipeline systems.
Transportation fees are received by the Company for transporting gas owned
by other parties through the Company's pipeline systems. Typically, there is
very little incremental operating or administrative overhead cost incurred by
the Company to transport gas through its pipeline systems and thus, a
substantial portion of transportation revenues is recognized as operating income
by the Company.
The Company's gas marketing revenues are realized through the purchase and
resale of natural gas to the Company's customers. Generally, gas marketing
activities will generate higher revenues and correspondingly higher expenses,
than those revenues and expenses associated with transportation activities. This
relationship exists because, unlike revenues derived from transportation
activities, gas marketing revenues, and associated expenses, include the full
commodity price of the natural gas acquired. The operating income the Company
recognizes from its gas marketing efforts is the difference between the price at
which the gas was purchased and the price at which it was resold to the
Company's customers. It is the Company's strategy to focus its marketing
activities where the Company has a fixed asset investment rather than on third
party off-systems sales. The Company's marketing activities have historically
varied greatly in response to market fluctuations.
The Company's natural gas processing revenues are realized from the
extraction and sale of NGLs such as ethane, butanes, and natural gasoline from a
natural gas stream. Once extracted, NGL's are further separated in fractionation
facilities and sold to wholesalers. Typically, the Company enters into
agreements with natural gas producers wherein the Company and the producer share
in the revenue generated from the sale of the NGL's extracted at the Company's
facilities. The Company entered the processing business in October 1996 with its
purchase of the Harmony System. The Company's processing operations can be
adversely affected by a decline in NGL prices, declines in gas throughput or
increase in shrinkage or fuel costs.
The Company has also in the past derived significant revenues by
capitalizing upon opportunities in the industry to sell pipeline systems or
assets associated with the Company's pipeline systems on favorable terms as the
Company receives offers for such systems which are suited to another company's
pipeline network. Although no substantial divestitures are currently under
consideration, the Company will from time to time solicit bids for selected
properties which are no longer suited to its business strategy.
The Company has had quarter to quarter fluctuations in its results in the
past due to the fact that the Company's natural gas sales and transportation
fees can be affected by changes in demand for natural gas primarily because of
the weather. Furthermore, future results could differ materially from historical
results due to a number of factors including but not limited to interruption or
cancellation of existing contracts, the impact of competitive products and
services and pricing of and demand for such products and services, and the
presence of competitors with greater financial resources.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995.
OPERATING REVENUES
Operating revenues generated during the twelve months ended December 31,
1996 totaled approximately $29.4 million dollars as compared to $15.6 million
dollars in 1995, which represented an 88% increase in 1996. The increase
17
<PAGE>
was primarily attributable to a 131% increase in the sale of natural gas and
transportation fees and the introduction of natural gas processing revenues in
1996. These factors were mitigated by a 95% decrease in the revenue derived from
the sale of pipelines.
The 131% increase in sales of natural gas and transportation fees
represents the effect of constructing or acquiring 27 pipelines in 1996. In
addition, the Company experienced increased marketing opportunities where the
Company has a fixed asset investment. Marketing of gas on Company-owned
pipelines increased from approximately $7.5 million to $17.0 million for the
year ended December 31, 1995 and 1996, respectively.
The Company's acquisition of the Harmony System in October 1996 marked the
Company's entrance into the natural gas processing business. During its first
partial year of ownership in 1996, the Harmony System contributed approximately
$2.5 million in processing revenues.
Revenue from the sale of pipelines decreased from approximately $4.1
million in 1995 to $.2 million in 1996. The sale of the Five Flags System
represented all the revenue derived in 1995 whereas only three small pipelines
were sold during 1996. The Company elected to focus its efforts on consummating
construction and acquisition opportunities in 1996 as opposed to divestiture
opportunities.
OPERATING EXPENSES
Operating expenses for the year ended December 31, 1996 totaled
approximately $26.8 million dollars, or 106% higher than for the year ended
December 31, 1995. As explained in "Operating Revenues" above, the primary
explanation for the increase in 1996 can be attributed to increased gas
marketing on Company-owned pipelines and the introduction of natural gas
processing costs mitigated by a decline in the cost of pipelines sold.
Depreciation, depletion, and amortization expense was approximately $.8
million in 1996, as compared to $.5 million in 1995. The increase can be
attributed to the addition of 27 pipelines in 1996.
General and administrative expenses incurred for the year ended December
31, 1996 were approximately $1.2 million compared with $.8 million in 1995. The
Company's attempts to assimilate new pipeline systems utilizing existing
personnel and resources, enabled the Company to limit the increase in general
and administrative expenses to 55%, despite the 88% increase in operating
revenues and the 146% increase in total assets.
Interest expense totaled approximately $.4 million and $.3 million for
1996 and 1995, respectively. The Company was servicing an average of
approximately $4.4 million in debt during 1996 as compared to an average of
approximately $3.3 million in debt during 1995. The increased debt service in
1996 was attributable to the acquisition of Magnolia, effective August 1995, and
various other acquisitions during 1996 mitigated by the repayment of all the
Company's outstanding debt at August 1996, except for the debt of Pan Grande and
Starr County, with proceeds from the common stock offering. However, during the
fourth quarter of 1996, the Company added $3.5 million in long-term bank debt in
connection with acquisitions of which the Harmony System was the largest. See
"Business -- Pipeline Construction, Acquisition and Disposition."
EARNINGS
The Company recognized operating income and net income applicable to
common shareholders of $2.6 million and $1.9 respectively, for the year ended
December 31, 1996, as compared to operating income of $2.6 and net income
applicable to common shareholders of $2.1 million for the year ended December
31, 1995. The Company increased operating earnings and reported only an 11%
decline in net income in 1996, despite the loss of $2.1 million in earnings from
the sale of pipelines. Without considering the income generated from the sale of
pipelines, operating income rose from $.4 million in 1995 to $2.5 million in
1996 and 1995 reflected a net loss applicable to common shareholders of $.05
million compared to net income applicable to common shareholders of $1.8 million
in 1996. The Company has achieved these increases in 1996 through marketing and
transportation revenues generated from numerous pipeline additions, capitalizing
on operating efficiencies, and successfully assimilating the new pipeline
additions with limited increases to operating and personnel costs.
18
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Prior to its common stock offering in August 1996, the Company had
historically funded its capital requirements through cash flow from 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 Pan Grande and Starr County, which totalled 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 commitment 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"). Available credit under the
revolving line was reduced by $107,150 per month beginning October 1, 1996. At
December 31, 1996, the Company had approximately $5.2 million and $1.3 million
of available credit under the reducing revolving line and working capital line,
respectively. 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. 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. The Company's
borrowing availability was increased to $43.5 million in March 1997 in
conjunction with the proposed Atrion Subsidiaries acquisition. See Note 13 to
the Consolidated Financial Statements and "Business -- Pipeline Construction,
Acquisition and Disposition."
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 ( 8.25% at
December 31, 1996) 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 year ended December 31, 1996, the Company generated cash flow from
operating activities of approximately $2.6 million and had approximately $6.5
million available to the Company under the Credit Agreement. 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.
At December 31, 1996, the Company was not committed to make any capital
expenditures during 1997. However, in March 1997 the Company entered into a
definative 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 consumated subject to
Atrion's shareholders and regulatory approvals both 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 contigent upon a
number of factors which include (i) timely approval of Midcoast's acquisition
candidates by appropriate govermental 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
19
<PAGE>
without limitation those statements made in conjuction 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.
ITEM 7. FINANCIAL STATEMENTS
20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Midcoast Energy Resources, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Midcoast
Energy Resources, Inc. and subsidiaries as of December 31, 1995 and 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Midcoast
Energy Resources, Inc., and subsidiaries as of December 31, 1995 and 1996, and
the results of their operations and their cash flows for each of the years then
ended, in conformity with generally accepted accounting principles.
Hein + Associates LLP
Certified Public Accountants
Houston, Texas
March 27, 1997
21
<PAGE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 106,152 $ 1,167,825
Accounts receivable, no
allowance for doubtful accounts ............... 2,319,667 8,891,808
Asset held for resale ........................... 210,447 --
------------ ------------
Total current assets .................. 2,636,266 10,059,633
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas transmission facilities .............. 7,365,421 11,939,173
Investment in transmission facilities ............ 1,284,609 1,302,303
Natural gas processing facilities ................ -- 3,735,262
Oil and gas properties, using the
full-cost method of accounting ................. 302,293 1,274,436
Other property and equipment ..................... 85,819 264,842
------------ ------------
9,038,142 18,516,016
ACCUMULATED DEPRECIATION, DEPLETION
AND AMORTIZATION ............................... (831,981) (1,550,670)
------------ ------------
8,206,161 16,965,346
DEFERRED CONTRACT COSTS AND OTHER
ASSETS, net of amortization .................... 246,081 278,235
------------ ------------
Total assets .......................... $ 11,088,508 $ 27,303,214
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ......... $ 2,086,138 $ 8,464,395
Current portion of deferred income ............... 83,000 83,000
Short-term borrowing from bank ................... 25,000 180,000
Current portion of long-term debt payable to banks 540,998 196,831
------------ ------------
Total current liabilities ............. 2,735,136 8,924,226
------------ ------------
LONG-TERM DEBT PAYABLE TO:
Banks .......................................... 2,926,947 4,015,146
Shareholders and affiliates .................... 1,033,822 --
------------ ------------
Total long-term debt .................. 3,960,769 4,015,146
------------ ------------
DEFERRED INCOME .................................. 235,167 152,167
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ... -- 618,591
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (Note 8):
5% cumulative preferred stock, $1 par value,
1 million shares authorized at December 31,
1995, 200,000 shares issued and outstanding
at December 31, 1995 with a liquidation
preference of $1,183,665 ...................... 200,000 --
Common stock, $.01 par value, 10 million shares
authorized, 1,465,680 and 2,499,999 shares
issued and outstanding at December 31, 1995 and
1996, respectively ........................... 14,657 25,000
Paid-in capital .................................. 18,824,681 26,941,660
Accumulated deficit .............................. (14,775,102) (13,283,876)
Unearned compensation ............................ (106,800) (89,700)
------------ ------------
Total shareholders' equity ................ 4,157,436 13,593,084
------------ ------------
Total liabilities and shareholders' equity $ 11,088,508 $ 27,303,214
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
22
<PAGE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
December 31, December 31,
1995 1996
------------ ------------
<S> <C> <C>
OPERATING REVENUES:
Sale of natural gas and transportation fees .. $ 11,469,394 $ 26,495,975
Natural gas processing revenue ................ -- 2,459,683
Sale of pipelines ............................. 4,092,850 211,888
Oil and gas revenue ........................... 60,046 247,787
------------ ------------
Total operating revenues .......... 15,622,290 29,415,333
------------ ------------
OPERATING EXPENSES:
Cost of natural gas and transportation charges 9,895,793 23,169,573
Natural gas processing costs .................. -- 1,442,681
Cost of pipelines sold ........................ 1,909,624 131,055
Production of oil and gas ..................... 11,544 58,472
Depreciation, depletion and amortization ..... 451,551 817,807
General and administrative .................... 784,653 1,222,531
------------ ------------
Total operating expenses .......... 13,053,165 26,842,119
------------ ------------
Operating income .................. 2,569,125 2,573,214
NON-OPERATING ITEMS:
Interest expense ............................... (339,324) (412,629)
Minority interest in consolidated subsidiaries . -- (197,731)
Other income (expense), net .................... (36,400) (48,765)
------------ ------------
INCOME BEFORE INCOME TAXES ...................... 2,193,401 1,914,089
PROVISION FOR INCOME TAXES (Note 9) ............. -- --
------------ ------------
Net income ........................ 2,193,401 1,914,089
5% CUMULATIVE PREFERRED STOCK DIVIDENDS ......... (59,183) (22,863)
------------ ------------
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS .... $ 2,134,218 $ 1,891,226
============ ============
NET INCOME PER COMMON SHARE ..................... $ 1.48 $ 1.00
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING .................. 1,439,606 1,885,596
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
23
<PAGE>
MIDCOAST ENERGY RESOURCES INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
5%
CUMULATIVE TOTAL
PREFERRED COMMON PAID-IN ACCUMULATED UNEARNED SHAREHOLDERS'
STOCK STOCK CAPITAL DEFICIT COMPENSATION EQUITY
--------- ------- ----------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 ....................... $ 200,000 $14,023 $18,740,252 $(16,909,320) $ (38,400) $ 2,006,555
Shares issued or vested
under various stock-based
compensation arrangements
(Note 12) ...................................... -- 634 84,429 -- (68,400) 16,663
Net income ..................................... -- -- -- 2,193,401 -- 2,193,401
5% cumulative preferred
stock dividends ................................ -- -- -- (59,183) -- (59,183)
--------- ------- ----------- ------------ --------- ------------
BALANCE, December 31, 1995 ....................... $ 200,000 $14,657 $18,824,681 $(14,775,102) $(106,800) $ 4,157,436
Shares issued in connection
with a financing agreement
with an affiliate (Note 6) .................... -- 45 5,955 -- -- 6,000
Shares issued or vested under
various stock-based compensation
arrangements (Note 12) ........................ -- 298 38,401 -- 17,100 55,799
Redemption of 200,000 shares of 5%
cumulative preferred stock (Note 8) .......... (200,000) -- 81,634 -- -- (118,366)
Sale of 1,000,000 shares of common
stock (Note 8) ................................ -- 10,000 7,990,989 -- -- 8,000,989
Net income .................................... -- -- -- 1,914,089 -- 1,914,089
5% cumulative preferred stock
dividends ..................................... -- -- -- (22,863) -- (22,863)
Common stock dividends, $.08 per share......... -- -- -- (400,000) -- (400,000)
--------- ------- ----------- ------------ --------- ------------
BALANCE, DECEMBER 31, 1996 ....................... $ -- $25,000 $26,941,660 $(13,283,876) $ (89,700) $ 13,593,084
========= ======= =========== ============ ========= ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
24
<PAGE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income applicable to common shareholders ...................................... $ 2,134,218 $ 1,891,226
Adjustments to arrive at net cash provided (used) in
operating activities-
Depreciation, depletion and amortization ....................................... 451,551 817,807
Gain on sale of operating pipelines ............................................ -- (80,833)
Recognition of deferred income ................................................. (83,000) (83,000)
Increase in deferred tax asset ................................................. (43,868) (40,000)
Minority interest in consolidated subsidiaries ................................. -- 197,731
Issuance of common stock to employees .......................................... 16,663 48,486
Changes in working capital accounts-
Increase in accounts receivable ............................................. (321,155) (6,574,566)
Increase in accounts payable and accrued liabilities ....................... 206,455 6,387,125
----------- -----------
Net cash provided by operating activities ............................ 2,360,864 2,563,976
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .............................................................. (3,885,282) (9,390,966)
Sale of operating pipelines ....................................................... -- 211,888
Other ............................................................................. (40,655) 216,873
----------- -----------
Net cash used in investing activities ................................ (3,925,937) (8,962,205)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank debt borrowings .............................................................. 5,857,505 9,288,000
Bank debt repayments .............................................................. (5,011,023) (8,388,968)
Proceeds from notes payable to shareholders and affiliates ........................ 3,906,272 100,000
Repayments on notes payable to shareholders and affiliates ........................ (3,147,450) (1,133,822)
Proceeds from notes payable ....................................................... 3,200,000 --
Repayments on notes payable ....................................................... (3,200,000) --
Redemption of 5% cumulative preferred stock ....................................... -- (118,366)
Net proceeds from common stock offering ........................................... -- 8,113,058
Dividends on common stock ......................................................... -- (400,000)
----------- -----------
Net cash provided by financing activities ............................ 1,605,304 7,459,902
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ......................................... 40,231 1,061,673
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of year ....................................... 65,921 106,152
----------- -----------
CASH AND CASH EQUIVALENTS, end of year ............................................. $ 106,152 $ 1,167,825
=========== ===========
CASH PAID FOR INTEREST ............................................................. $ 323,376 $ 410,897
=========== -----------
CASH PAID FOR INCOME TAXES ......................................................... $ -- $ 40,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
25
<PAGE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND INFORMATION:
Midcoast Energy Resources, Inc. ("Midcoast" or "the Company") was formed
on May 11, 1992, as a Nevada corporation and, in September 1992, became the
successor to Nugget Oil Corporation. The merger was accounted for as a pooling
of interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company, all of its wholly-owned subsidiaries and those subsidiaries in
which the Company owns a controlling interest or is in a control position. As of
December 31, 1996, the Company's wholly-owned subsidiaries include Magnolia
Pipeline Corporation ("Magnolia"), Magnolia Resources, Inc., Magnolia Gathering,
Inc., H&W Pipeline Corporation, Midcoast Holdings No. One, Inc., Midcoast
Marketing, Inc. and Nugget Drilling Corporation. The consolidated subsidiaries
in which the Company owns a controlling interest or is in a control position
include Starr County Gathering System, a Joint Venture ("Starr County") and Pan
Grande Pipeline, L.L.C., a Texas limited liability company ("Pan Grande"). All
significant intercompany transactions and balances have been eliminated.
INCOME TAXES
Midcoast and its subsidiaries file a consolidated federal income tax
return. Midcoast accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109--"Accounting for Income Taxes."
Under SFAS 109, the Company recognizes deferred income taxes for the differences
between the financial and income tax bases of its assets and liabilities.
PROPERTY, PLANT AND EQUIPMENT
Natural gas transmission, processing and distribution facilities and other
equipment are depreciated by the straight-line method at rates based on the
following estimated useful lives of the assets:
Natural gas transmission facilities 15--25 years
Pipeline right-of-ways 17.5 years
Natural gas processing facilities 30 years
Other property and equipment 3--7 years
Repairs and maintenance are charged to expense as incurred; renewals and
betterments are capitalized.
The Company accounts for its oil and gas production activities using the
full cost method of accounting. Under this method of accounting, all costs,
including indirect costs related to exploration and development activities, are
capitalized as oil and gas property costs. No gains or losses are recognized on
the sale or disposition of oil and gas reserves, except for sales which include
a significant portion of the total remaining reserves.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers
short-term, highly liquid investments that have a maturity of three months or
less as of the date of purchase as cash equivalents.
26
<PAGE>
ASSET HELD FOR RESALE
Assets for which the Company anticipates consummating a sales transaction
within one year of the balance sheet date are valued at the lower of cost or
market and classified as current assets.
TRANSPORTATION AND EXCHANGE IMBALANCES
Transportation and exchange gas imbalance volumes are accounted for using
the sales method of accounting. Transportation and exchange gas imbalances are
not material as of December 31, 1995 and 1996.
DEFERRED CONTRACT COSTS
Costs incurred to construct natural gas transmission facilities pursuant
to long-term natural gas sales or transportation contracts, which upon
completion of construction are assigned to the contracting party, are
capitalized as deferred contract costs. These costs are amortized over the life
of the initial contract on a straight-line basis.
STOCK ISSUANCE COSTS
Direct costs incurred by the Company in connection with its offering of
securities (see Note 8) were applied as a reduction of the offering proceeds.
REVENUE RECOGNITION
Customers are invoiced and the related revenue is recorded as natural gas
deliveries are made. Pipeline sales are recognized upon closing the sale
transaction. Oil and gas revenue from the Company's interests in producing wells
is recognized as oil and gas is produced from those wells.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 121
entitled "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" which is effective for fiscal years beginning after
December 15, 1995. SFAS No. 121 specifies certain events and circumstances which
indicate the cost of an asset or assets may be impaired, the method by which the
evaluation should be performed, and the method by which writedowns, if any, of
the asset or assets are to be determined and recognized. The adoption of this
pronouncement in 1996 did not have a material impact on the Company's financial
condition or operating results.
The FASB also issued SFAS No. 123, "Accounting for Stock Based
Compensation," effective for fiscal years beginning after December 15, 1995.
This statement allows companies to choose to adopt the statement's new rules for
accounting for employee stock based compensation plans. For those companies who
choose not to adopt the new rules, the statement requires disclosures as to what
earnings per share would have been if the new rules had been adopted. Management
intends to adopt the disclosure requirements of this statement in the year in
which stock based compensation as defined in SFAS No. 123 is granted.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the Company's
management to make estimates and assumptions that effect the amounts reported in
these financial statements and accompanying notes. Actual results could differ
from those estimates.
NET INCOME PER COMMON SHARE
Net income per common share was computed by dividing net income applicable
to common shareholders by the weighted average common shares outstanding. All
share and per share amounts in the accompanying consolidated
27
<PAGE>
financial statements have been adjusted to reflect the approximate 4.46 to 1
stock split authorized by the Board of Directors ("Board") in May 1996 (see Note
8).
3. PIPELINE ACQUISITION AND SUBSEQUENT SALE:
In September 1995, the Company and an affiliate owned by a former officer
and director of the Company jointly acquired 100% of the outstanding capital
stock of Five Flags Pipe Line Company ("Five Flags") from an unaffiliated
company. Total cash consideration of $2,052,000 was paid on September 13, 1995
of which Midcoast's share was $1,872,450 for 91.25% of Five Flags capital stock
and the affiliate's share was $179,550 for 8.75% of Five Flags capital stock.
The investment was financed by a former officer and director of the Company (see
Note 6).
The acquisition of Five Flags' stock was made as an investment to be
resold to another unaffiliated company pursuant to an agreement for purchase and
sale of stock. On October 2, 1995, Midcoast and the affiliate jointly sold 100%
of the capital stock of Five Flags for cash consideration of which the Company's
share was $4,092,850. A portion of the proceeds from the sale was used to repay
a related party promissory note of $1,872,450 plus accrued interest (see Note
6). The remainder of the proceeds was used to partially finance Midcoast's
acquisition of Magnolia (see Note 4).
4. PIPELINE CONSTRUCTION AND ACQUISITIONS:
In June 1995, Midcoast acquired a 23% working interest in two oil and gas
production leases located in Starr County, Texas, which together comprise
approximately 1,700 acres. The $194,000 purchase price was partially funded by a
$173,822 loan from an affiliated company owned by certain former officers and
directors of the Company (see Note 6). As consideration for advising the Company
in the acquisition of the working interest, a consultant to the Company was
assigned one percent of the Company's working interest. In addition, a one-half
percent working interest was assigned to the affiliated company which extended
the loan for the acquisition.
In September 1995, Midcoast acquired 100% of the outstanding capital stock
of Magnolia, an Alabama corporation, from Williams Holdings of Delaware, Inc.
("Williams Holdings") an unaffiliated company. The acquisition was made pursuant
to the Agreement for Sale and Purchase of Stock dated July 27, 1995 and had an
effective date of August 1, 1995. The acquisition was accounted for under the
purchase method of accounting. The total purchase price of $3,200,000 was
allocated to property, plant, and equipment as the principal asset of Magnolia
consists of approximately 111 miles of natural gas pipeline located in central
Alabama. Initially, the acquisition was financed by Midcoast issuing a $500,000
subordinated debenture ("Debenture") and a $2,700,000 non-recourse promissory
note ("Note") to Williams Holdings. The Debenture accrued interest at 10% and
had a final maturity of September 15, 1996 but was redeemable at the option of
Midcoast. The Note was non-interest bearing and was due on October 9, 1995.
However, the Debenture and the Note were paid in full on October 2, 1995 using
the proceeds from the sale of Five Flags (see Note 3) and borrowings of
$1,200,000 from an affiliate owned by a former officer and director of the
Company (see Note 6). In December 1995, the $1,200,000 related party note was
repaid using a new $1,500,000 credit facility with a commercial lender which in
turn was repaid in August 1996 (see Note 5).
In February 1996, the Company and Resource Energy Development Company,
L.L.C. ("Resource"), an unaffiliated third party, jointly formed Pan Grande each
owning a 50% interest. The companies joined together for the purpose of
acquiring, owning and operating pipelines. In March 1996, Pan Grande acquired
six pipeline systems consisting of approximately 77 miles of pipeline located in
Texas from an unaffiliated third party for cash consideration of $1,000,000. Pan
Grande financed $800,000 of the acquisition with a credit facility obtained from
a commercial lender (see Note 5). The remaining $200,000 of the purchase price
was obtained through equal $100,000 capital contributions from Midcoast and
Resource. Midcoast's $100,000 capital contribution was financed through a loan
from an affiliate owned by a former officer and director of the Company (see
Note 6) which was repaid in August 1996 (see Note 5). In August 1996, Resource
sold its 50% interest to four companies as follows: GMI Energy, Inc. (15%),
Commercial Natural Gas, Inc. (15%), Redcon, Inc. (10%) and Transtate Gas
Systems, Inc. (10%). In September 1996, Pan Grande acquired the Salt Creek
natural gas pipeline system ("Salt Creek System") from an unaffiliated third
party. Cash consideration of $650,000 was paid by Pan Grande of which Midcoast's
share of $325,000 was funded from the proceeds of the common stock offering
described in Note 8. The Salt Creek System consists of approximately 39 miles of
pipeline in Texas and currently transports gas for fuel use at the Salt Creek
carbon dioxide injection plant and oil
28
<PAGE>
lifting unit operated by Mobil Exploration and Producing. Also, in September
1996, Pan Grande sold two pipelines extending approximately 9 miles to two
unaffiliated third parties for cash consideration of approximately $189,000.
Midcoast acts as manager of Pan Grande and operates all the systems.
In May 1996, Magnolia, a wholly-owned subsidiary, acquired nine gathering
pipeline systems and one transmission pipeline system from Texas Southeastern
Gas Gathering Company ("TSGGC"). The TSGGC systems were acquired pursuant to a
purchase and sale agreement dated March 12, 1996 for cash consideration of
approximately $390,000 less purchase price adjustments. These systems total
approximately 113 miles of 2 inch to 10 inch diameter pipeline with associated
equipment. Five systems are located in Alabama, and five systems are located in
Mississippi. The bulk of the systems are located within 100 miles of Magnolia's
existing system and the Company has integrated the operation of these systems
with Magnolia's system. The acquisition was financed by amending a credit
facility with a bank (see Note 5).
Construction of a two-mile pipeline in Roane County, Tennessee commenced
in March 1996. The pipeline was constructed pursuant to a long-term
transportation agreement with an industrial customer and was completed in August
1996. Construction costs were approximately $443,000. The construction was
financed from cash generated from operations and long-term bank financing (see
Note 5).
In October 1996, Midcoast consummated the acquisition of the Harmony gas
processing plant and pipeline system ("Harmony System") from Koch Hydrocarbons
Company, a division of Koch Industries, Inc. for cash consideration of
approximately $3,640,000. The Harmony system gathers gas from producing fields
located in Mississippi. It consists of over 150 miles of high and low pressure
gas gathering pipeline with 4620 horsepower of field and inlet compression. The
processing plant is a refrigerated propane natural gas liquid extraction plant
with design capacity of over 20 MMcf/d. The plant has sulfur extraction as well
as full fractionation facilities and markets propane, butanes, natural gasoline,
condensate and sulfur. The acquisition was partially funded with proceeds from
the Company's sale of common stock described in Note 8 and the remainder was
financed through a new revolving line of credit with Bank One, Texas N.A.
discussed in Note 5. Midcoast's 1996 operating revenues, net income applicable
to common shareholders, and net income per share on an unaudited pro forma basis
assuming the purchase of the Harmony System had occurred on January 1, 1996 are
$33 million, $2.3 million, and $1.21, respectively. These pro forma amounts were
prepared using assumptions which are based on estimates and subject to revision.
The pro forma combined results are not necessarily indicative of actual results
that would have been achieved had the acquisition occurred on January 1, 1996,
or of future results. For further information regarding the acquisition of the
Harmony System, refer to the Company's Form 8-K Report filed with the United
States Securities and Exchange Commission ("SEC") on October 7, 1996.
In October 1996, Midcoast acquired four natural gas gathering pipelines
from Esperanza Transmission Corporation for cash consideration of $810,000. All
four pipelines are located in southern Texas and collectively include 19 miles
of pipeline which gather natural gas from producing fields in the area. The
acquisition was financed using the new revolving line of credit with Bank One,
Texas N.A. discussed in Note 5.
In November 1996, Midcoast, in conjunction with a group of investors,
acquired overriding royalty interests ranging from 5.99% to 6.25% across three
oil and gas productive tracts in Howard County, Texas. These tracts are part of
the East Vealmoor Unit operated by Exxon Corporation and were purchased for cash
consideration of approximately $1,350,000 from unaffiliated third parties, of
which Midcoast's share was $950,000 for 70.37% of the group's interest. As
consideration for identifying and negotiating the acquisition, Midcoast's
interest is subject to a 25% reversionary interest after it recoups its original
investment to be assigned to certain parties who developed the transaction.
29
<PAGE>
5. DEBT OBLIGATIONS:
At December 31, 1995 and 1996, the Company had outstanding debt
obligations as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1995
-------------------- --------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Note payable to a bank under a $750,000 working
capital line of credit expiring September 1, 1996.
Advanced and unpaid principal bore interest at the
bank's prime rate plus 1% which was accrued and
paid monthly (repaid in August 1996) $ 25 $ -- $ -- $ --
Note payable to a bank under a term loan which
bore interest at the bank's prime rate plus 1%,
principal and accrued interest were payable in 59
monthly installments of $6,915, with a final lump
sum payment of the remaining unpaid principal and
interest due on October 13, 1999 (repaid in August
1996) 59 215 -- --
Note payable to a bank under a term loan which
bore interest at the bank's prime rate plus 1%,
principal of $3,438 and accrued interest were
payable in monthly installments with a final lump
sum payment of the remaining unpaid principal and
interest due on February 15, 1998 (repaid in
August 1996) 41 79 -- --
Note payable to a bank under a term loan which
bore interest at the bank's prime rate plus 1.5%,
principal of $27,778 and accrued interest were
payable in 35 monthly installments, with a final
lump sum payment of the remaining unpaid principal
and interest due on December 15, 1997 (repaid in
August 1996) 333 333 -- --
Revolving credit line with a bank under a $1.25
million reducing promissory note which bore
interest at the bank's prime rate plus 1.5%.
Available credit was reduced monthly by $20,833
beginning December 1, 1995. Accrued interest and
any principal amounts as may be required to cause
the outstanding principal to not exceed the amount
of credit then available were payable monthly,
with a final maturity of November 1, 1998 (repaid
in August 1996) 108 1,000 -- --
Revolving credit line with a bank under a $1.85
million reducing promissory note which bore
interest at the bank's prime rate plus 1%.
Available credit was reduced monthly by $17,860
beginning February 1, 1996 and $23,000 beginning
June 1, 1996. Accrued interest and any principal
amounts as may be required to cause the
outstanding principal to not exceed the amount of
credit then available were payable monthly, with a
final maturity of January 15, 1999 (repaid in
August 1996) -- 1,300 -- --
30
<PAGE>
Note payable to an affiliate owned by certain
former officers and directors which bore interest
at the Mercantile Bank, Corpus Christi prime rate
plus 1.5%. Principal and accrued interest were due
in full at maturity on April 1, 1997 (repaid in
August 1996) -- 200 -- --
Note payable to an affiliate owned by certain
former officers and directors which bore interest
at the Mercantile Bank, Corpus Christi prime rate
plus 1%. Monthly payments equal to 25% of the net
revenue derived from the Starr County oil and gas
production acquisition (see Notes 4 and 6) was
allocated to interest then principal. Any
remaining principal and accrued interest was due
in full at maturity on April 1, 1997 (repaid in
July 1996) -- 174 -- --
Note payable to an affiliate owned by a former
officer and director which bore interest at the
Mercantile Bank, Corpus Christi Prime rate plus
5%. Principal and accrued interest were due in
full at maturity on January 1, 1997 (repaid in
January 1996) -- 660 -- --
Note payable by Starr County to a bank under a
term loan bearing interest at the prime rate plus
1% (9.25% at December 31, 1996), principal and
accrued interest are payable in 47 monthly
installments of $4,408 with a final payment of the
remaining unpaid principal and interest due on
January 15, 2000 -- -- 43 92
Note payable by Pan Grande to a bank under a term
loan bearing interest at the prime rate plus 1%
(9.25% at December 31, 1996), principal and
accrued interest are payable in 59 installments of
$16,754 with a final payment of the remaining
unpaid principal and interest due on March 15,
2001 -- -- 154 423
Reducing revolving credit line with a bank under a
$40 million promissory note (see following
discussion for terms) -- -- -- 3,500
Revolving credit line with a bank for working
capital needs under a $40 million promissory note
(see following discussion for terms) -- -- 180 --
------- ------- ------- --------
$ 566 $ 3,961 $ 377 $ 4,015
======= ======= ======= ========
</TABLE>
In December 1992, the Company entered into a financing agreement with a
bank under which the Company could borrow up to $1,800,000. This credit facility
included a term loan of $1,400,000 which was payable in 36 monthly installments,
the first 35 installments being the amount of $30,435 principal plus accrued
interest, and the 36th and final installment being the amount of the balance of
principal ($334,775) plus accrued interest then remaining outstanding and
unpaid. In conjunction with obtaining a new debt facility with another bank in
October 1995, the term loan was repaid in full.
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<PAGE>
In addition to the term loan discussed above, the Company had a line of
credit of $400,000 under the bank financing agreement. In September 1994, the
line of credit was renewed and the available line raised to $750,000. The line
of credit, as amended in July 1996, expired on September 1, 1996. Borrowings
under this credit facility were collateralized by the Company's
non-transportation based accounts receivable.
In July 1993, the same bank provided the Company with an additional
$360,000 facility under which the Company obtained advances of funds as needed
for construction of pipelines. In conjunction with obtaining a new debt facility
with another bank in October 1995, the term loan was repaid in full.
In December 1994, a $1,000,000 credit facility financing the Company's
investment in transmission facilities in Alaska was repaid and replaced with a
long-term financing agreement with a new bank. Under the agreement, principal
and accrued interest were paid in 35 monthly installments of $27,778 plus
accrued interest with a final lump sum payment of the remaining unpaid principal
and interest due on December 15, 1997. This facility was secured by the
throughput fee the Company receives on its investment in Alaska.
In October 1994, the Company obtained $335,000 under a long-term financing
agreement with a bank. The funds were utilized to partially finance the
construction of a three-mile pipeline in Kansas City, Kansas. In connection with
this financing agreement, one of the Company's pipeline systems was subject to a
negative pledge to keep the pipeline free and clear of all liens and
encumbrances.
In November 1994, $165,000 was extended by a bank to partially finance the
construction of a pipeline in Albany, New York. Under this agreement, the term
loan, as amended, was payable in monthly installments of $3,438 principal plus
accrued interest and the final installment on February 15, 1998 being the amount
of the balance of principal and accrued interest of $34,653 then remaining
outstanding and unpaid. In connection with this financing agreement, one of the
Company's pipeline systems was subject to a negative pledge to keep the pipeline
free and clear of all liens and encumbrances.
In October 1995, the Company entered into a new financing agreement with a
bank. The new agreement provided for an initial $1,250,000 revolving line of
credit with the amount of available credit being reduced by $20,833 per month
beginning December 1, 1995. Upon maturity on November 1, 1998, the balance of
principal plus accrued interest then remaining outstanding and unpaid was
payable in full. The funds were used to repay bank debt. In connection with this
financing agreement, eight of the Company's pipeline systems were subject to a
negative pledge to keep the pipelines free and clear of all liens and
encumbrances.
In December 1995, the Company entered into a new financing agreement with
a bank. The agreement provided for an initial $1,500,000 revolving line of
credit with the amount of available credit being reduced by $17,860 per month.
In May 1996, the revolving line of credit was amended to increase the available
credit by $350,000 and adjust the monthly reduction of availability from $17,860
to $23,000. This amendment was made to finance the TSGGC acquisition discussed
in Note 4. Upon maturity on January 15, 1999, the balance of principal plus
accrued interest then remaining outstanding and unpaid was payable in full. The
funds were used to repay $1,200,000 in debt owed to an affiliate for partially
financing the Magnolia acquisition (see Note 4) and other working capital needs.
In connection with this financing agreement, a $50,000 certificate of deposit
and all of Magnolia's stock was pledged as collateral. Also, Magnolia's pipeline
system was subject to a negative pledge to keep the pipeline free and clear of
all liens and encumbrances.
In March 1996, $343,000 was extended by a bank to partially finance the
construction of two pipelines in Tennessee. Under this agreement, the term loan
was payable in 60 monthly installments of principal and accrued interest of
$7,185 beginning August 15, 1996. In connection with this financing agreement,
all proceeds from the transportation agreements with the industrial customers on
the two pipelines to be constructed were pledged as collateral.
All of the above referenced bank debt was personally guaranteed by the
three largest stockholders of the Company, one of which is also an officer and
director of the Company.
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<PAGE>
In December 1994, an affiliate owned by former officers and directors of
the Company provided a loan of $275,000 of which $75,000 was repaid during 1995.
The loan, as amended, accrued interest at the prime rate plus 1.5% and matured
on April 1, 1997. The proceeds of the loan were used for general corporate
purposes including the repayment of other indebtedness. No collateral was
required to obtain this loan.
In May 1995, an affiliate owned by former officers and directors of the
Company provided a $173,822 loan to partially finance the acquisition of a 23%
working interest in oil and gas production from two leases located in Starr
County, Texas. The loan, as amended in March 1996, matured on April 1, 1997. No
collateral was required to obtain this loan, although, as additional
consideration for extending the loan, the affiliated company was assigned a
one-half percent working interest in the oil and gas properties.
In December 1995, an affiliate owned by a former officer and director of
the Company provided a loan of $660,000. The proceeds of the loan were used for
general corporate purposes including the repayment of other indebtedness. No
collateral was required to obtain this loan. In January 1996, the loan was
repaid in full.
In March 1996, an affiliate owned by a former officer and director of the
Company provided a loan commitment of $175,000. The Company drew $100,000 to
fund its equity contribution in a Pan Grande in which the Company has a 50%
interest (see Note 4). The note, as amended, bore interest at the prime rate
plus 2.5% and was payable in 59 monthly installments of $1,667 plus accrued
interest and a final installment at March 15, 2001 in the amount of the
remaining principal and accrued interest then outstanding and unpaid. The note
was secured by the Company's interest in Pan Grande.
In August 1996, the Company repaid all the outstanding indebtedness
described above with proceeds from the common stock offering discussed in Note
8. Total principal repayments amounted to approximately $4,973,000.
Additionally, in August 1996, the Company established a new $40 million
credit facility with Bank One, Texas N.A. The new credit facility provided a
three-year commitment 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").
Available credit under the revolving line is reduced by $107,150 per month
beginning October 1, 1996. At December 31, 1996, the Company had approximately
$5.2 million and $1.3 million of available credit under the reducing revolving
line and working capital line, respectively. 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. This review was made in
conjunction with the Company's acquisition in March 1997 (see Note 13).
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 for 30, 60, or 90 day terms (approximately 5.50% at December 31,
1996) plus 2.5% or the Bank One, Texas N.A. base rate (8.25% at December 31,
1996) 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 facility is secured by all accounts receivable,
contracts, and a first lien security interest in all the Company's pipeline
systems.
The Company is in compliance with various normal covenants and certain
financial ratios as required by the Credit Agreement.
In January 1996, Starr County, in which Midcoast owns a 60% interest and
acts as manager, obtained $175,000 from a bank lender to finance the acquisition
of a gas gathering pipeline. Principal and accrued interest are payable in 47
monthly installments of $4,408 with a final payment of the remaining principal
and interest due on January 15, 2000. The loan is secured by the pipeline and
related contracts. Furthermore, each member of Starr County has guaranteed the
loan in an amount equal to their respective ownership interest. Therefore,
Midcoast has guaranteed 60% of the loan value. Additionally Midcoast's portion
of the loan is further guaranteed by the three largest stockholders of the
Company, one of which is also an officer and director.
33
<PAGE>
In March 1996, Pan Grande obtained $800,000 from a bank to partially
finance the acquisition of six pipelines (see Note 4). Principal and accrued
interest is payable in 59 monthly installments of $16,754 with a final payment
of the remaining unpaid principal and interest due on March 15, 2001. The loan
is secured by the pipelines and related contracts. Furthermore, each member of
Pan Grande has guaranteed the loan in an amount equal to their respective
ownership interest. Therefore, Midcoast has guaranteed 50% of the loan value.
The aggregate maturities of long-term debt for the five years following
December 31, 1996 are as follows:
FOR THE YEAR ENDING
DECEMBER 31 (IN THOUSANDS)
1997 $ 197
1998 215
1999 231
2000 69
2001 and thereafter 3,500
------
Total $4,212
======
6. RELATED PARTY TRANSACTIONS:
In December 1994, an affiliate owned by certain former officers and
directors of the Company provided a $275,000 loan which, as amended, bore
interest at the Mercantile Bank, Corpus Christi prime rate plus 1.5%. Interest
was payable monthly and principal and remaining accrued interest were due in
full at maturity on April 1, 1997. The proceeds of the loan were used for
general corporate purposes including the repayment of other indebtedness.
Principal of $75,000 was repaid in November 1995 with the remaining $200,000
repaid in August 1996 with proceeds from the common stock offering (see Note 8).
Cash payments of $39,106 were made for interest during the term of the loan.
In April 1994, affiliates owned by former officers and directors of the
Company extended the collateral to obtain the long-term bank financing for the
Alaska investment. The collateral was outstanding for a period of approximately
eight months at which point the Company replaced the loan with another
commercial lender and the collateral was released. In consideration for
extending the collateral on the initial loan, the Company assigned a five
percent net revenue interest on the net income derived from the Company's
investment in the oil and natural gas gathering pipelines near Cook Inlet,
Alaska. However, the five percent net revenue interest applies only after all
costs associated with the investment have been recouped by the Company. As of
December 31, 1996, no amounts have been paid under the assignment of the net
revenue interest.
In May 1995, an affiliate owned by former officers and directors of the
Company provided a $173,822 loan to partially finance the acquisition of a 23%
working interest in oil and gas production from two leases located in Starr
County, Texas. The loan, as amended in March 1996, bore interest at the
Mercantile Bank, Corpus Christi prime rate plus 1% and matured on April 1, 1997.
However, the loan was repaid in full in August 1996 with proceeds from the
Company's common stock offering (see Note 8). Cash payments of interest
amounting to $3,346 and $18,124 were made during 1995 and 1996, respectively. No
collateral was required to obtain this loan, although, as additional
consideration for extending the loan, the affiliated company was assigned a
one-half percent working interest in the oil and gas properties.
The Five Flags acquisition discussed in Note 3 was financed by a former
officer and director of the Company. A promissory note in the amount of
$1,872,450 was executed by the Company which provided for monthly payments of
interest beginning April 1, 1996 until December 31, 1996 at which time both
principal and accrued interest would be due in full. Interest accrued at the
prime rate plus 2%. However, the note plus accrued interest of approximately
$10,500 was repaid in full in October 1995 using the proceeds from the sale of
the Five Flags investment.
In addition to the $660,000 general corporate purposes loan provided in
December 1995 and repaid in January 1996 (including accrued interest of $4,039)
as discussed in Note 5 herein, $1,200,000 was borrowed from an
34
<PAGE>
affiliate owned by a former officer and director of the Company in October 1995.
These funds were used in conjunction with the remainder of the sales proceeds of
Five Flags to fully retire a $500,000 debenture and $2,700,000 note due the
seller of Magnolia. The loan agreement called for interest to be accrued at the
prime rate plus 5% and was due monthly beginning April 1, 1996. The loan was to
mature on January 31, 1997, however, upon consummation of the new $1,500,000
bank credit facility in December 1995, the note plus accrued interest of $35,260
was repaid in full.
As additional consideration for extending the $1,200,000 loan, Midcoast
granted the affiliate a 5% net revenue interest in Magnolia's earnings before
interest, income taxes and depreciation to be paid on a monthly basis. The net
revenue interest, as amended in May 1996, applied only after Magnolia's
acquisition cost has been recouped by the Company. No amounts related to
Magnolia's earnings were paid under the assignment of the net revenue interest.
Midcoast had the right to repurchase this net revenue interest from the
affiliate for a cash payment of $25,000. However, the repurchase amount was
increased an additional $25,000 on November 1, 1995 and each following month up
to a maximum of $500,000. In July 1996, the Company exercised it's right to
repurchase the net revenue interest for cash consideration of $250,000.
In March 1996, the Company borrowed $100,000 from an affiliate owned by a
former officer and director of the Company for its equity contribution in Pan
Grande (see Note 4) pursuant to a promissory note. The note, as amended, bore
interest at the prime rate plus 2.5% and was payable in 59 monthly installments
of $1,667 plus accrued interest and a final installment at March 15, 2001 in the
amount of the remaining principal and accrued interest then outstanding and
unpaid. The note was secured by the Company's interest in Pan Grande. The
affiliate also committed to lend up to an additional $75,000 in the event an
additional system was purchased by Pan Grande. In consideration for the
financing of the equity contribution and the commitment for additional
financing, the Company issued the affiliate 4,460 shares of the Company's common
stock. The note plus accrued interest of $4,896 was repaid in full in August
1996 with proceeds from the Company's common stock offering (see Note 8).
7. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT CONTRACTS
The Chief Executive Officer and President of the Company ( the
"President"), has an employment agreement with the Company which terminates in
December 1997, pursuant to which he receives a base annual salary of $125,000
adjusted for salary increases the Board may approve. The Company is currently
negotiating a new employment agreement with the President to extend his term to
December 2001. In 1994 and 1995, two key employees of the Company entered into
three-year and four-year employment agreements, respectively. In April 1996, the
three-year employment agreement referred to above was renegotiated to extend the
term an additional two years. These agreements may be terminated by mutual
consent or at the option of the Company for cause, death or disability. In the
event termination is due to death, disability or defined changes in the
ownership of the Company, the full amount of compensation remaining to be paid
during the term of the agreement will be paid to the employee or their estate,
after discounting at 12% to reflect the current value of unpaid amounts.
LEASES
In March 1996, Midcoast entered into a new non-cancelable operating lease
for its office space which expires on January 31, 1999. Previously, Midcoast had
another non-cancelable lease which expired in June 1995 and converted to a
month-to-month arrangement until the new lease was executed. Rent expense of
$50,600, and $72,700 was incurred during the years ended 1995 and 1996,
respectively under these operating leases. As of December 31, 1996, future
minimum lease payments due under this lease are approximately $73,125 in 1997,
$77,859 in 1998, and $6,488 in 1999.
INVESTMENT IN ALASKA
In September 1996, an involuntary bankruptcy petition was filed in the
United States Bankruptcy Court for the District of Alaska (the "Court") against
Stewart Petroleum Company ("Stewart") who operates the West McArthur River
(WMRU) production field and pipeline in Alaska in which Midcoast invested. The
Company receives a throughput fee for all oil and natural gas transported
through the WMRU pipeline. In January 1997, Stewart consented
35
<PAGE>
to an order for relief under Chapter 11 of the United States Bankruptcy Code.
The Bankruptcy Court has not ruled on any disclosure statement, plan of
reorganization, nor on the validity of any claims against Stewart. The payment
of the Company's throughput fees since August production have been suspended,
and only those claims which are "necessary to avoid immediate and irreparable
harm to the Stewart estate" have been allowed to be paid by the Court. However,
it is the Company's belief that its position is adequately protected and as such
is continuing to accrue revenue for the throughput fees from August through
December 1996 which amount to approximately $96,000.
8. CAPITAL STOCK:
At December 31, 1996, the Company had authorized 10 million shares of
common stock of which 2,499,999 shares were issued and outstanding. There are
66,689 shares issued and outstanding at December 31, 1996 which are subject to a
vesting schedule in connection with employee agreements entered into during
1994, 1995 and 1996 (see Note 12).
In May 1996, the Board approved the redemption of the 5% cumulative
preferred stock ("5% Preferred") for $118,366 held by a director and officer and
two former directors and officers of the Company. The shares were redeemed for
ten percent of the stated liquidation value ($1,183,665). Subsequently, no
shares of the Company's preferred stock remain outstanding. Following redemption
of the Company's 5% Preferred, the Company's articles of incorporation were
amended to reflect only one class of outstanding securities, the Company's
common stock.
In July 1996, the Board and a majority of the Company's shareholders
authorized amending the Company's articles of incorporation to increase the
number of authorized common shares from 6,000,000 shares to 10,000,000 shares.
In addition, the Board authorized an approximate 4.46 for 1 stock split in
anticipation of the Company's common stock offering discussed below.
On August 9, 1996, the Company's Registration Statement on Form SB-2 was
declared effective by the SEC. On August 14, 1996, the Company sold 1,000,000
shares of its common stock at an offering price of $10.00 per share. The
Company's stock is listed on the American Stock Exchange under the symbol "MRS."
Under the terms of the underwriting agreement, the underwriters received
warrants to acquire 100,000 shares at 142% of the initial offering price per
share. The securities underlying these warrants are subject to piggyback
registration rights. After deducting underwriting commissions and other
underwriting expenses of the offering, proceeds of approximately $8,841,000 were
received by the Company from the underwriter. The proceeds were used to repay
indebtedness with the remainder applied to acquisitions of pipelines and related
assets.
The Company issued warrants to purchase 34,349 shares of the Company's
common stock at $7.85 per share. These warrants, which are subject to an
eighteen-month lock-up agreement and have certain piggyback registration rights,
were issued in connection with the Company's common stock offering.
9. INCOME TAXES:
The Company has a net operating loss ("NOL") carryforward of approximately
$11.0 million expiring in various amounts from 1999 through 2008. In addition,
the Company has an investment tax credit ("ITC") carryforward of approximately
$348,000 which expires primarily in 1997. These loss carryforwards were
generated by the Company's predecessor. The ability of the Company to utilize
the carryforwards is dependent upon the Company maintaining profitable
operations and staying in compliance with certain Internal Revenue Service
("IRS") code provisions and regulations associated with changes in shareholder
control. Failure to adhere to these IRS requirements could result in a
significant limitation of the Company's ability to utilize its NOL and ITC
carryforwards and could also result in a loss of utilization altogether.
36
<PAGE>
The tax effect of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1995 and 1996, are as follows (in
thousands):
DECEMBER 31
1995 1996
Net operating and capital loss carryforwards $ 5,124 $ 3,723
Investment tax credit carryforwards 354 348
Alternative minimum tax credit 44 86
Financial basis of assets in excess of tax basis (644) (344)
Valuation allowance (4,834) (3,727)
------- -------
Net deferred tax assets $ 44 $ 86
======= =======
The valuation allowance declined $1,107,000 from December 31, 1995 to
December 31, 1996 because of net operating loss carryforwards used in 1996 and
capital loss carryforwards which expired.
A reconciliation of the 1995 and 1996 provision for income taxes to the
statutory United States tax rate is as follows (in thousands):
1995 1996
Federal tax computed at statutory rate $ 771 $ 643
Utilization of net operating loss carryforwards (771) (643)
----- -----
Actual provision $ - $ -
====== =====
10. MAJOR CUSTOMERS:
For the years ended December 31, 1995 and 1996, the Company derived over
10% of its sales of natural gas and transportation fees from Mid-America
Pipeline Company and affiliates, and Westlake Petrochemicals Corporation. They
accounted for 40% and 14% during 1995, and 31% and 15% during 1996,
respectively.
11. CONCENTRATION OF CREDIT RISK:
The Company derives revenue from gas transmission and gathering services
for commercial companies located in Alabama, Alaska, Kansas, Louisiana, New
York, Oklahoma, Tennessee and Texas. Two of Midcoast's largest customers account
for 44% or approximately $4.0 million of the outstanding accounts receivable at
December 31, 1996. These accounts receivable were subsequently collected under
normal credit terms and the Company believes that future accounts receivable
with these companies will continue to be collected under normal credit terms
based on previous experience. The Company performs ongoing evaluations of its
customers and generally does not require collateral. The Company assesses its
credit risk and provides an allowance for doubtful accounts for any accounts
which it deems doubtful of collection. At December 31, 1996, no provision for
doubtful accounts was provided.
The Company maintains deposits in banks which may exceed the amount of
federal deposit insurance available. Management periodically assesses the
financial condition of the institutions and believes that any possible deposit
loss is minimal.
12. EMPLOYEE BENEFITS:
The Company issued a total of 63,343 and 26,007 common shares of the
Company's common stock to certain key employees in 1995 and 1996, respectively.
Of the shares issued in 1995 and 1996, 57,991 and 8,921 respectively were issued
in connection with employment agreements with certain employees and vest in
equal amounts: the 57,991 shares over a four-year period and the 8,921 shares
over a three-year period. The shares were valued at the estimated fair market
value on the date of issuance. Compensation expense is being recognized ratably
over the vesting period.
In May 1996, the Board of the Company adopted the Midcoast Energy
Resources, Inc. 1996 Incentive Stock Plan (the "Incentive Plan"). All employees,
including officers (whether or not directors) and consultants of the Company and
its subsidiaries are currently eligible to participate in the Incentive Plan.
Persons who are not in an
37
<PAGE>
employment or consulting relationship with the Company or any of its
subsidiaries, including non-employee directors, are not eligible to participate
in the Incentive Plan. Under the Incentive Plan, the Compensation Committee may
grant incentive awards (the "Incentive Awards") with respect to a number of
shares of common stock that in the aggregate do not exceed 200,000 shares of
common stock, subject to adjustment upon the occurrence of certain
recapitalizations of the Company.
The Incentive Plan provides for the grant of (i) options, both incentive
stock options and non-qualified options, (ii) shares of restricted stock, (iii)
performance awards payable in cash or common stock, (iv) shares of phantom
stock, and (v) stock bonuses (collectively, the "Incentive Awards"). In
addition, the Incentive Plan provides for the grant of cash bonuses payable when
a participant is required to recognize income for federal income tax purposes in
connection with the vesting of shares of restricted stock or the issuance of
shares of common stock upon the grant of a performance award or a stock bonus,
provided, that such cash bonus may not exceed the fair market value (as defined)
of the shares of common stock received on the grant or exercise, as the case may
be, of an Incentive Award. No Incentive Award may be granted under the Incentive
Plan after ten years from the Incentive Plan adoption date.
In February 1997, certain key employees were granted a total of 160,000
incentive stock options (see Note 13).
In December 1996, the Company established a defined contribution 401(k)
Profit Sharing Plan for its employees. The plan provides participants a
mechanism for making contributions for retirement savings. Each participant may
contribute certain amounts of eligible compensation. The Company makes a
matching contribution to the plan which amounted to approximately $16,000 in
1996.
13. SUBSEQUENT EVENTS:
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.
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 $2 million of deferred contingent
payments to be paid in equal amounts 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"). ATNG owns
and operates a 288 mile interstate pipeline, with two compression stations, that
runs from Selmer, Tennessee to Huntsville, Alabama. TRIGAS owns and operates a
38 mile pipeline extending from Barton, Alabama to Courtland, Alabama that
transports 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 certain
regulatory approvals, and 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 consumate 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. as discussed below.
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 the
Credit Agreement to $43.5 million. Pursuant to the consummation of the
acquisition, the Credit Agreement will be amended
38
<PAGE>
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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 9, 10, 11 and 12 is incorporated herein
by reference to the Company's definitive proxy statement to be filed with the
SEC in connection with its annual shareholders' meeting to be held on May 8,
1997.
PART IV
ITEM 13. FINANCIAL STATEMENT SCHEDULE, EXHIBITS, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
All financial statements of Midcoast Energy Resources, Inc. and
subsidiaries are included under Item 7 beginning on Page 21 of this
Form 10-KSB.
2. Exhibits
The following instruments are included as exhibits to this report.
Those exhibits below incorporated by reference herein are indicated as
such by the information supplied in the parenthetical thereafter. If no
parenthetical appears after an exhibit, copies of the instrument have
been included herewith.
2.1 Agreement for Purchase and Sale of Stock dated September 6,
1995, by and between Midcoast Holdings No. One, Inc. and Koch
Gateway Pipeline Company (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31,
1995, as Exhibit 10.25).
2.2 First Amendment to Agreement for Purchase and Sale of Stock
dated September 6, 1995, by and between Midcoast Holdings No.
One, Inc. and Koch Gateway Pipeline Company dated October 2,
1995 (Incorporated by reference from Midcoast Form 10-KSB for
the fiscal year ended December 31, 1995, as Exhibit 10.26).
2.3 Agreement for Purchase and Sale of Stock dated September 13,
1995, by and between Five Flags Holding Company and Midcoast
Holdings No. One, Inc. (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31,
1995, as Exhibit 10.27).
39
<PAGE>
2.4 Agreement for Purchase of Stock dated September 13, 1995, by
and between Midcoast Holdings No. One, Inc. and Rainbow
Investments Company (Incorporated by reference from Midcoast
Form 10-KSB for the fiscal year ended December 31, 1995, as
Exhibit 10.28 ).
2.5 Agreement for Purchase and Sale of Stock dated July 27, 1995,
by and between Williams Holdings of Delaware, Inc. and
Midcoast Holdings No. One, Inc. (Incorporated by reference
from Midcoast Form 8-K dated September 22, 1995).
2.6 Agreement for Sale and Purchase of Harmony Gas Processing
Plant and Related Gathering System dated October 3, 1996 by
and between Koch Hydrocarbon Company, a division of Koch
Industries, Inc. And Midcoast Holdings No. One, Inc.
(Incorporated by reference from Midcoast Form 8-K dated
October 21, 1996, as Exhibit 2.1).
2.7 Stock Purchase Agreement dated March 18, 1997 by and between
Midcoast Energy Resources, Inc. and Atrion Corporation.
3.1 Articles of Incorporation of Midcoast Energy Resources, Inc.
(Incorporated by reference from Midcoast Form 10-KSB for the
fisical year ended December 31, 1992).
3.2 Certificate of Amendment of Articles of Incorporation of
Midcoast Energy Resources, Inc. (Incorporated by reference
from Midcoast Registration Statement on Form SB-2 (No.
333-4643) dated August 8, 1996).
3.3 Bylaws of Midcoast Energy Resources, Inc. (Incorporated by
reference from Midcoast Form 10-KSB for the fiscal year ended
December 31, 1992).
4.1 Shareholder Agreement by and between Midcoast Energy
Resources, Inc. and Bill G. Bray dated April 30, 1994
(Incorporated by reference from Midcoast Form 10-KSB for the
fiscal year ended December 31, 1994).
4.2 Shareholder Agreement by and between Midcoast Energy
Resources, Inc., and Duane S. Herbst dated April 30, 1994
(Incorporated by reference from Midcoast Form 10-KSB for the
fiscal year ended December 31, 1994).
4.3 Shareholder Agreement by and between Midcoast Energy
Resources, Inc., and Richard A. Robert dated April 30, 1994
(Incorporated by reference from Midcoast Form 10-KSB for the
fiscal year ended December 31, 1994).
4.4 Shareholder Agreement by and between Midcoast Energy
Resources, Inc., and Iris J. Berthelot, II dated April 30,
1994 (Incorporated by reference from Midcoast Form 10-KSB for
the fiscal year ended December 31, 1994).
4.5 Specimen Certificate for Shares of Common Stock, par value
$.01 per share. (Incorporated by reference from Midcoast
Registration Statement on Form SB-2 (No. 333-4643) dated
August 8, 1996).
4.6 Representative's Warrants. (Incorporated by reference from
Midcoast Registration Statement on Form SB-2 (No. 333-4643)
dated August 8, 1996).
42
<PAGE>
4.7 Voting Proxy Agreement by and between Midcoast Energy
Resources, Inc., Stevens G. Herbst, Kenneth B. Holmes, Jr.,
Rainbow Investments Company and Texas Commerce Bank National
Association. (Incorporated by reference from Midcoast
Registration Statement on Form SB-2 (No. 333-4643) dated
August 8, 1996).
4.8 Registration Rights Agreement by and between Midcoast Energy
Resources, Inc. and Stevens G. Herbst. (Incorporated by
reference from Midcoast Registration Statement on Form SB-2
(No. 333-4643) dated August 8, 1996).
4.9 Registration Rights Agreement by and between Midcoast Energy
Resources, Inc. and Kenneth B. Holmes, Jr. (Incorporated by
reference from Midcoast Registration Statement on Form SB-2
(No. 333-4643) dated August 8, 1996).
4.10 Registration Rights Agreement by and between Midcoast Energy
Resources, Inc. and Rainbow Investments Company. (Incorporated
by reference from Midcoast Registration Statement on Form SB-2
(No. 333-4643) dated August 8, 1996).
10.1 Employment Agreement by and between Midcoast Energy Resources,
Inc., and Dan C. Tutcher dated January 1, 1993 (Incorporated
by reference from Midcoast Form 10-KSB for the fiscal year
ended December 31, 1992).
10.2 Amendment dated April 1, 1993 to the Employment Agreement by
and between Midcoast Energy Resources, Inc., and Dan C.
Tutcher dated January 1, 1993 (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31,
1993).
10.3 Employment Agreement by and between Midcoast Energy Resources,
Inc., and Richard A. Robert dated April 30, 1994 (Incorporated
by reference from Midcoast Form 10-KSB for the fiscal year
ended December 31, 1994).
10.4 Employment Agreement by and between Midcoast Energy Resources,
Inc., and Bill G. Bray dated July 1, 1994 (Incorporated by
reference from Midcoast Form 10-KSB for the fiscal year ended
December 31, 1994).
10.5 Assignment of Net Revenue Interest dated July 1, 1994 by and
between Texline Gas Company and Midcoast Energy Resources,
Inc. (Incorporated by reference from Midcoast Form 10-KSB for
the fiscal year ended December 31, 1994).
10.6 Assignment of Net Revenue Interest dated July 1, 1994 by and
between Rainbow Investments Co. and Midcoast Energy Resources,
Inc. (Incorporated by reference from Midcoast Form 10-KSB for
the fiscal year ended December 31, 1994).
10.7 Agreement dated March 31, 1994 by and between Midcoast Energy
Resources, Inc., and Stewart Petroleum Company (Incorporated
by reference from Midcoast Form 10-KSB for the fiscal year
ended December 31, 1993).
10.8 Employment Agreement by and between Midcoast Energy Resources,
Inc. and I.J. Berthelot, II dated April 17, 1995 (Incorporated
by reference from Midcoast Form 10-KSB for the fiscal year
ended December 31, 1995).
10.9 Amendment to Employment Agreement dated April 17, 1995 by and
between Midcoast Energy Resources, Inc. and I.J. Berthelot,
II, dated December 8, 1995 (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31,
1995).
41
<PAGE>
10.10 Operating Agreement of Pan Grande Pipeline, L.L.C. by and
between Midcoast Holdings No. One, Inc. and Resource Energy
Development, L.L.C. dated February 28, 1996 (Incorporated by
reference from Midcoast Form 10-KSB for the fiscal year ended
December 31, 1995).
10.11 Amendment dated April 8, 1996 to the Employment Agreement by
and between Midcoast Energy Resources, Inc. and Richard A.
Robert dated April 30, 1994 (Incorporated by reference from
Midcoast Form 10-QSB for the three-month period ended March
31, 1996).
10.12 Warrant by and between Triumph Resources Corporation and
Midcoast Energy Resources, Inc. (Incorporated by reference
from Midcoast Registration Statement on Form SB-2 (No.
333-4643) dated August 8, 1996)
10.13 Midcoast Energy Resources, Inc. 1996 Incentive Stock Plan.
(Incorporated by reference from Midcoast Registration
Statement on Form SB-2 (No. 333-4643) dated August 8, 1996)
10.14 Credit Agreement dated August 22, 1996 by and between Bank
One, Texas N.A. and Midcoast Energy Resources, Inc.; Magnolia
Pipeline Corporation and H&W Pipeline Corporation.
(Incorporated by reference from Midcoast Form 10-QSB for the
nine-month period ended September 30, 1996.)
21.1 Schedule listing subsidiaries of Midcoast Energy Resources,
Inc.
27.1 Financial Data Schedule for the year ended December 31, 1996.
(b) Reports of Form 8-K
A report on Form 8-K was filed during the fourth quarter of 1996. Such
report was filed on October 21, 1996 to report the acquisition of the
Harmony gas processing plant and pipeline system ("Harmony System") from
Koch Hydrocarbons Company, a division of Koch Industries, Inc. , for cash
consideration of approximately $3.6 million. In addition, a report on Form
8-K/A was filed on November 13, 1996 as an amendment to the Form 8-K filed
on October 21, 1996 mentioned above. The amendment was filed to include
the financial statements required including the audited Historical Summary
of Revenue and Direct Operating Expenses for the six months ended June 30,
1996 and 1995 and for the year ended December 31, 1995 for the Harmony
System, the unaudited Midcoast Pro Forma Balance Sheet as of June 30,
1996, and the unaudited Midcoast Pro Forma Statement of Operations for the
six months ended June 30, 1996 and for the year ended December 31, 1995.
43
<PAGE>
Signatures
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
MIDCOAST ENERGY RESOURCES, INC.
(Registrant)
BY:/S/ DAN C. TUTCHER
Dan C. Tutcher
Chief Executive Officer
Date: March 31, 1997
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities on March 31,
1997.
SIGNATURES CAPACITY IN WHICH SIGNED
/S/ DAN C. TUTCHER Chairman of the Board
(Dan C. Tutcher) Chief Executive Officer
and President
/S/ E.P. MARINOS Director
(E. P. Marinos)
/S/ RICHARD N. RICHARDS Director
(Richard N. Richards)
/S/ I. J. BERTHELOT, II Vice President of Operations
(I. J. Berthelot, II) and Director
/S/ RICHARD A. ROBERT Treasurer, Principal Financial Officer
43
<PAGE>
(Richard A. Robert) and Principal Accounting Officer
44
ASSET PURCHASE AGREEMENT
between
ATRION CORPORATION
and
MIDCOAST ENERGY RESOURCES, INC.
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS.................................................. 1
2. PURCHASE AND SALE............................................ 4
3. PURCHASE PRICE; PAYMENT...................................... 4
(a) Purchase Price...................................... 4
(b) Consolidated Net Book Value Determination........... 5
(c) Adjustment to Purchase Price........................ 7
(d) Contingent Deferred Purchase Price.................. 7
4. REPRESENTATIONS AND WARRANTIES AS TO SELLER.................. 8
(a) Organization and Existence.......................... 8
(b) Approvals........................................... 8
(c) Consents............................................ 8
(d) No Violation........................................ 8
(e) Validity and Binding Effect......................... 9
(f) Shares.............................................. 9
(g) No Brokers.......................................... 9
(h) Public Utility Holding Company Act.................. 9
5. REPRESENTATIONS AND WARRANTIES AS TO SUBSIDIARIES............ 9
(a) Organization and Existence.......................... 9
(b) Capitalization...................................... 10
(c) No Violation........................................ 10
(d) Financial Statements................................ 10
(e) Taxes............................................... 11
(f) Title to Properties................................. 11
(g) Gas Purchase Contracts, Gas Sales Contracts, Gas
Storage Contracts and Gas Transportation Agreements
................................................... 12
(h) No Leases........................................... 12
(i) No Defaults......................................... 12
(j) Compliance with Applicable Law...................... 12
(k) Insurance........................................... 13
(l) Litigation.......................................... 13
(m) Employee Matters.................................... 13
(n) Patents, Copyrights, Trademarks, Etc................ 14
(o) Employee Benefit Plans.............................. 14
(p) Environmental Matters............................... 14
(q) Real Property....................................... 15
(r) Changes............................................. 15
(s) Tariffs............................................. 16
i
<PAGE>
(t) Material Misstatements or Omissions................. 16
(u) Assets Owned........................................ 16
(v) No Partnership...................................... 17
(w) No Customer Curtailments............................ 17
(x) Gas Imbalances...................................... 17
6. BUYER'S REPRESENTATIONS AND WARRANTIES....................... 17
(a) Organization and Existence.......................... 17
(b) Approvals........................................... 17
(c) Consents............................................ 17
(d) No Violation........................................ 17
(e) Validity and Binding Effect......................... 18
(f) Financial Wherewithal............................... 18
(g) No Brokers.......................................... 18
(h) Material Misstatements or Omissions................. 18
(i) Investment Representation........................... 18
7. COVENANTS.................................................... 19
(a) Seller's Covenants.................................. 19
(b) Certain Restructurings.............................. 20
(c) Audited Financial Statements........................ 21
(d) Schedules........................................... 22
(e) Fulfillment of Conditions........................... 22
(f) Stockholder Approval................................ 22
8. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS TO CLOSE......... 22
(a) Representations and Warranties...................... 22
(b) Covenants........................................... 22
(c) Legal Opinion....................................... 23
(d) Deliveries of Consents.............................. 23
(e) No Litigation....................................... 23
(f) No Material Adverse Change.......................... 23
(g) Officers' Certificates.............................. 23
(h) Regulatory Approvals................................ 23
(i) Resignations........................................ 23
(j) Stockholder Approval................................ 23
9. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE......... 23
(a) Representations and Warranties...................... 24
(b) Covenants........................................... 24
(c) Legal Opinion....................................... 24
(d) No Litigation....................................... 24
(e) Officer's Certificate............................... 24
(f) Regulatory Approvals................................ 24
ii
<PAGE>
(g) Stockholder Approval................................ 24
10. CLOSING...................................................... 24
11. TRANSACTIONS AT CLOSING...................................... 25
(a) Deliveries By the Sellers to the Buyer.............. 25
(b) Deliveries by the Buyer to the Sellers.............. 25
(c) Deliveries by the Seller, Buyer and Subsidiaries.... 26
12. TERMINATION RIGHTS........................................... 26
(a) Termination......................................... 26
(b) Effect of Termination............................... 26
13. INDEMNITY.................................................... 27
(a) By the Seller....................................... 27
(b) By Buyer............................................ 27
(c) Limitations......................................... 27
(d) Indemnification Procedure........................... 28
(e) Attorneys Fees...................................... 29
(f) Insurance........................................... 29
(g) Exclusive Remedy.................................... 29
14. SPECIFIC PERFORMANCE......................................... 29
15. PUBLIC ANNOUNCEMENTS......................................... 30
16. POST-CLOSING COVENANTS....................................... 30
(a) Necessary Action.................................... 30
(b) Access To Books and Records......................... 30
(c) Rights of Way....................................... 30
(d) Severance Policy.................................... 30
(e) Office Space........................................ 31
(f) Guaranteed Obligations.............................. 31
(g) Special Account..................................... 31
(h) Termination of Gas Contract......................... 32
17. TAXES........................................................ 33
(a) Obligations Regarding Taxes......................... 33
(b) Section 338(h)(10) Election......................... 33
18. ARBITRATION.................................................. 34
19. CASUALTY LOSSES.............................................. 35
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20. PROHIBITED ACTIVITIES OF SELLER.............................. 35
21. MISCELLANEOUS................................................ 36
(a) Notices............................................. 36
(b) Binding Effect...................................... 36
(c) Expenses............................................ 37
(d) Merger.............................................. 37
(e) Waiver.............................................. 37
(f) Counterpart Execution............................... 37
(g) Governing Law....................................... 37
(h) Survival of Warranties, Representations, and
Agreements.......................................... 37
(i) Including........................................... 38
(j) Gender.............................................. 38
(k) Captions............................................ 38
(l) Knowledge Defined................................... 38
(m) Schedules........................................... 38
(n) Further Assurances.................................. 38
(o) Severability........................................ 38
(p) No Third Party Beneficiary.......................... 38
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ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT made this ___ day of ___________, 1997, by and between
ATRION CORPORATION and MIDCOAST ENERGY RESOURCES, INC.
W I T N E S S E T H:
WHEREAS, the Seller is the owner of all of the issued and
outstanding capital stock of the Subsidiaries;
WHEREAS, each of ATNG and TRIGAS is engaged in the business of owning and
operating natural gas pipelines and ATEMCO is engaged in the business of natural
gas marketing (each Subsidiary's business as described being hereinafter
referred to as the "Business" and the Subsidiaries' businesses being sometimes
hereinafter referred to, collectively, as the "Businesses"); and
WHEREAS, the Seller desires to sell the Shares to the Buyer, and the Buyer
desires to purchase the Shares from the Seller, upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and
agreements hereinafter set forth, the parties hereby agree as follows:
1. DEFINITIONS. The following terms, wherever used in this
Agreement, shall have the respective meanings indicated below:
(a) "Actual Value" means the Consolidated Net Book Value as
determined in accordance with Section 3(b)(iii)(C).
(b) "Agreement" means this Stock Purchase Agreement.
(c) "ATEMCO" means AlaTenn Energy Marketing Company, Inc., an
Alabama corporation.
(d) "ATNG " means Alabama-Tennessee Natural Gas Company, an
Alabama corporation.
(e) "Business" or "Businesses" shall have the meaning described in
the recitals to this Agreement.
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(f) "Buyer" means Midcoast Energy Resources, Inc., a Nevada
corporation.
(g) "Buyer's Value" shall have the meaning set forth in Section
3(b)(ii).
(h) "Closing" means the closing of the purchase and sale of the
Shares as described in Section 10.
(i) "Closing Date" means the date of Closing as provided in
Section 10.
(j) "Closing Date Balance Sheet" means the Draft Closing Date Balance Sheet
together with any revisions thereto as described in Section 3(b).
(k) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(l) "Consolidated Net Book Value" shall mean the consolidated net book value of
the Subsidiaries as of the Closing Date as reflected in the Closing Date Balance
Sheet.
(m) "Contingent Deferred Purchase Price" shall have the meaning
set forth in Section 3(d).
(n) "Contracts" means any and all contracts, leases, commitments,
licenses, permits and other agreements of the Subsidiaries.
(o) "Contract Year" shall have the meaning set forth in Section
3(d).
(p) "Damages" means all debts, obligations, losses, costs of defense, damages,
liabilities, claims, judgments, awards, settlements, taxes, penalties,
assessments, and other costs and expenses (including attorneys fees as provided
in Section 13(e) and any prejudgment interest in any litigated or arbitrated
matter) which may be incurred, made or levied against the Subsidiaries, or any
of them, the Buyer or the Seller; provided, however, that such term shall not
include any special, punitive, exemplary, consequential or indirect damages,
except that it shall include damages for lost profits which flow as a direct
result of the loss and, provided further, that each of the parties shall have a
duty to exercise reasonable diligence and ordinary care in attempting to
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minimize all such damages as would a person of ordinary prudence under the same
or similar circumstances.
(q) "Draft Closing Date Balance Sheet" shall have the meaning set
forth in Section 3(b)(i).
(r) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
(s) "Escrow Agent" means Mercantile Bank, N.A.
(t) "Escrow Deposit" means the cash and other property held by the Escrow Agent
pursuant to the Escrow Agreement among the Escrow Agent, the Seller and the
Buyer executed contemporaneously herewith.
(u) "FERC" means the Federal Energy Regulatory Commission.
(v) "Fiduciary Out" shall have the meaning set forth in Section
12.
(w) "Financial Statements" means the unaudited financial statements of the
Subsidiaries (including balance sheets and statements of income and expense) for
the calendar years ended December 31, 1994, December 31, 1995 and December 31,
1996.
(x) "HSR Act" refers to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
(y) "Hazardous Substances" means asbestos, any other substance, product,
chemical or chemical byproduct, waste or material defined, or regulated or
designated as hazardous, toxic or dangerous by any federal, state or local
statute, regulation or ordinance presently in effect or that may be promulgated
in the future, as such statutes, regulations and ordinances may be amended from
time to time.
(z) "Indemnification Claim" means any claim, demand, action, lawsuit,
proceeding, event or condition with respect to which a claim for indemnification
may be made pursuant to Section 13.
(aa) "Indemnification Payments" shall have the meaning set forth in
Section 13(a).
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(bb) "Material Adverse Effect" means an adverse effect which would result in
Damages in the aggregate amount of Fifteen Thousand Dollars ($15,000) or more.
(cc) "Original Value" shall have the meaning set forth in Section
3(b)(iii)(C).
(dd) "Plans" means all "employee benefit plans" (as such term is defined in
Section 3(3) of ERISA) sponsored or maintained by any of the Subsidiaries on the
date of execution of this Agreement.
(ee) "Preliminary Purchase Price" means Thirty-Nine Million Three
Hundred Seventy-Three Thousand Dollars ($39,373,000).
(ff) "Pro Rata" shall have meaning set forth in Section 3(d).
(gg) "Public Announcements" shall have the meaning set forth in
Section 15.
(hh) "Purchase Price" means the Preliminary Purchase Price adjusted
pursuant to Sections 3(b) and 3(c).
(ii) "Section 338(h)(10) Election" means a joint election under Code Section
338(h)(10) with respect to the purchase of the Shares pursuant to this
Agreement.
(jj) "Seller" means Atrion Corporation, a Delaware corporation.
(kk) "Shares" means all of the shares of capital stock of the
Subsidiaries.
(ll) "Subsidiary" or "Subsidiaries" means ATNG, TRIGAS and ATEMCO.
(mm) "Third Party Claim" means an Indemnification Claim involving a claim,
demand, action, lawsuit or proceeding by a third party.
(nn) "TRIGAS" means Tennessee River Intrastate Gas Company, an
Alabama corporation.
2. PURCHASE AND SALE. Subject to the terms and conditions set forth in this
Agreement and based upon the representations and warranties made herein, at the
Closing, the Seller shall sell, assign and deliver the Shares to the Buyer and
the Buyer shall purchase and acquire the Shares from the Seller.
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3. PURCHASE PRICE; PAYMENT.
(a) PURCHASE PRICE. The purchase price for the Shares shall be the Preliminary
Purchase Price, as adjusted in the manner provided in Sections 3(b) and 3(c)
below, plus the Contingent Deferred Purchase Price as described in Section 3(d)
below. At Closing, Buyer shall pay the Seller the Preliminary Purchase Price
less the Escrow Deposit, in cash, by wire transfer to an account designated by
the Seller. Contemporaneously herewith, the Buyer has deposited with Escrow
Agent the sum of Two Million Dollars ($2,000,000). The parties agree to cause
the Escrow Agent to pay the Escrow Deposit, by wire transfer to an account
designated by the applicable party, on the following basis:
(i) if the Closing occurs, the Escrow Deposit shall be paid
to the Seller at Closing as part of the Purchase Price;
(ii) if the Closing does not occur due to the failure of one or more
conditions precedent in Section 8 hereof to be satisfied and the Buyer
terminates this Agreement pursuant to Section 12(a)(ii)(A) or 12 (a)(ii)(B)
hereof, then the Escrow Deposit shall be paid to the Buyer within three (3)
business days following termination;
(iii) if the Closing does not occur due to a termination of this
Agreement which results from the exercise by the Seller of the Fiduciary Out or
the failure of the stockholders of the Seller to approve this Agreement at a
meeting of the stockholders held to consider such approval, then the Escrow
Deposit shall be paid to the Buyer within three (3) business days following
termination;
(iv) if the Closing does not occur due to the failure of one or more
conditions precedent in Sections 9(a), (b), (c) or (e) hereof to be satisfied
or, with respect to Section 9(d), the failure of said condition to be satisfied
on account of an action brought by a creditor or stockholder of the Buyer, and
this Agreement is terminated by the Seller pursuant to Section 12(a)(ii)(A) or
12(a)(ii)(B) hereof, then the Escrow Deposit shall be paid to the Seller within
three (3) business days following termination;
(v) if the Closing does not occur by July 3, 1997 and this Agreement is
terminated by either the Seller or the Buyer pursuant to Section 12(a)(ii)(B)
hereof for any reason whatsoever other than due to the failure of one or more
conditions precedent in Sections
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9(a), (b), (c) or (e) hereof, or, with respect to Section 9(d), other than due
to the failure of said condition to be satisfied on account of an action brought
by a creditor or stockholder of the Buyer, then the Escrow Deposit shall be paid
to the Buyer within three (3) business days following termination; or
(vi) if the Closing does not occur due to the Buyer's termination of
this Agreement pursuant to Section 19 hereof, then the Escrow Deposit shall be
paid to the Buyer within three (3) business days following termination.
(vii) Notwithstanding Sections 3(a)(i) through (vi) above, to the
extent the Escrow Deposit exceeds Two Million Dollars ($2,000,000), such excess
shall be the property of and be paid to the Buyer at Closing or, if Closing does
not occur, within three (3) business days following termination of this
Agreement.
(b) CONSOLIDATED NET BOOK VALUE DETERMINATION.
(i) Within forty-five (45) days after the Closing Date, the Seller
shall prepare and deliver to the Buyer a draft consolidated balance
sheet for the Subsidiaries as of 9:00 a.m. Central Time on the Closing
Date (the "Draft Closing Date Balance Sheet"). The Seller will prepare
the Draft Closing Date Balance Sheet in accordance with generally
accepted accounting principles applied on a basis consistent with the
preparation of the pro forma balance sheet attached hereto as Exhibit A
utilizing the same adjustments used in preparing said attached pro
forma balance sheet including the removal of all prepaid insurance
amounts.
(ii) If the Buyer has any objections to the Draft Closing Date Balance
Sheet, it shall deliver a detailed statement describing its objections
to the Seller within thirty (30) days after receiving the Draft Closing
Date Balance Sheet and including therein the Buyer's calculation of
Consolidated Net Book Value (the "Buyer's Value"). The Buyer and the
Seller shall use reasonable efforts to resolve any such objections
themselves. If the parties do not obtain a final resolution within
thirty (30) days after the Seller has received the statement of
objections, however, the Buyer and the Seller shall select an
accounting firm mutually acceptable to them which shall resolve any
remaining objections. If the Buyer and the Seller are unable to agree
on the choice of an accounting firm, they shall select a
nationally-recognized
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accounting firm by lot (after excluding their respective regular
outside accounting firms). The determinations made by the accounting
firm so selected shall be set forth in writing and shall be conclusive
and binding upon the parties. The Seller shall revise the Draft Closing
Date Balance Sheet as appropriate to reflect the resolution of any
objections thereto pursuant to this Section 3(b).
(iii) In the event the parties submit any unresolved objections to an
accounting firm for resolution as provided in Section 3(b)(ii) above,
the Buyer and the Seller shall share responsibility for the fees and
expenses of the accounting firm as follows:
(A) if the accounting firm resolves all of the remaining
objections in favor of the Buyer, the Seller shall be
responsible for all of the fees and expenses of the accounting
firm;
(B) if the accounting firm resolves all of the remaining
objections in favor of the Seller, the Buyer shall be
responsible for all of the fees and expenses of the accounting
firm; and
(C) if the accounting firm resolves some of the remaining
objections in favor of the Buyer and the rest of the
remaining objections in favor of the Seller (the
Consolidated Net Book Value so determined shall be
referred to herein as the "Actual Value"), the Seller
shall be responsible for that fraction of the fees and
expenses of the accounting firm equal to (x) the
difference between the consolidated net book value of the
Subsidiaries reflected in the Draft Closing Date Balance
Sheet (the "Original Value") and the Actual Value over
(y) the difference between the Original Value and the
Buyer's Value, and the Buyer shall be responsible for the
remainder of the fees and expenses.
(iv) The Buyer shall make the books, records and financial staff of the
Subsidiaries available to the Seller and its accountants and other
representatives and shall generally cooperate with Seller in the
preparation of the Draft Closing Date Balance Sheet, and the Seller
will make the work papers and backup materials used in preparing the
Draft Closing Date Balance Sheet available to the Buyer and its
accountants and
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other representatives, in each case at reasonable times and upon
reasonable notice at any time during (A) the preparation by the Seller
of the Draft Closing Date Balance Sheet, (B) the review by the Buyer of
the Draft Closing Date Balance Sheet and (C) the resolution by the
parties of any objections thereto.
(c) ADJUSTMENT TO PURCHASE PRICE. The Purchase Price shall be
adjusted as follows:
(i) If the Consolidated Net Book Value, as finally determined pursuant
to Section 3(b) above, exceeds Fourteen Million Four Hundred Thirty-Six
Thousand Dollars ($14,436,000), upward by an amount equal to such
excess;
(ii) If the Consolidated Net Book Value, as finally determined pursuant
to Section 3(b) above, is less than Fourteen Million Four Hundred
Thirty-Six Thousand Dollars ($14,436,000), downward by an amount equal
to such deficiency;
(iii) Downward by the amount of a casualty loss to physical assets of
the Subsidiaries suffered through the Closing Date, as to which the
insurance proceeds or other rights of Seller against third parties
arising from such casualty are not assignable to Buyer; as provided in
Section 19 of this Agreement;
(iv) Downward by any excess of (A) the amount of liabilities reflected
on the pro forma balance sheet attached hereto as Exhibit A which are
relieved and taken into income by Seller for the period from December
31, 1996 to the Closing Date, reduced by the federal and state income
tax liability associated therewith, over (B) One Hundred Fifty Thousand
Dollars ($150,000); and
(v) Downward by the product of Thirteen Thousand Dollars ($13,000) and
the number of days, if any, which elapses from the later of (A) May 19,
1997 and (B) the first date on which all of the conditions set forth in
Sections 9(a), (b), (c), (e) and the first sentence of Section 9(d) are
satisfied, to the Closing Date.
The net amount owing by Buyer to Seller or by Seller to Buyer, as applicable by
reason of such adjustments to the Preliminary Purchase Price shall be paid in
immediately available funds by wire
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transfer or other means within three (3) business days after such determinations
have been made.
(d) CONTINGENT DEFERRED PURCHASE PRICE. The Contingent Deferred
Purchase Price, up to a maximum of Two Million Dollars
($2,000,000), shall be paid as provided on Schedule 3(d).
4. REPRESENTATIONS AND WARRANTIES AS TO SELLER. The Seller
hereby represents and warrants to the Buyer as of the date hereof
as follows:
(a) ORGANIZATION AND EXISTENCE. The Seller is a corporation, duly organized,
validly existing and in good standing under the laws of Delaware and has all
requisite power and authority to enter into and perform its obligations under
this Agreement. Seller is duly qualified to do business and is in good standing
in all jurisdictions where the nature of properties owned or leased by the
Seller or the activities conducted by the Seller make such qualification
necessary except where a failure to be so qualified would not have a Material
Adverse Effect on the operations, assets or financial condition of the Seller or
any of the Subsidiaries, individually or collectively.
(b) APPROVALS. Subject to stockholder approval, if necessary, the Seller's
execution, delivery and performance of this Agreement has been duly authorized
by all necessary corporate and other action and no further corporate or other
action is necessary on the part of the Seller for it to execute and deliver this
Agreement and to consummate and perform its obligations hereunder.
(c) CONSENTS. Except as set forth in Schedule 4(c) of the Disclosure Schedule
delivered contemporaneously herewith (the "Disclosure Schedule"), no consent,
approval or authorization of, or the making of any declaration or filing with,
any governmental authority or any other person is necessary in connection with
the execution, delivery or performance by the Seller of this Agreement (other
than pursuant to the HSR Act), except such consents, approvals, authorizations,
declarations and filings which, if not obtained or made, would not prevent or
impede the consummation of the transactions contemplated hereby or have a
Material Adverse Effect on the operations, assets or financial condition of the
Buyer or any of the Subsidiaries, individually or collectively.
(d) NO VIOLATION. Except as set forth in Schedule 4(d) of the
Disclosure Schedule, neither the execution and delivery of this
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Agreement by the Seller nor the fulfillment of or compliance with the terms or
provisions hereof will: (i) violate or conflict with any provision of the
Articles of Incorporation or Bylaws of the Seller, (ii) conflict with, result in
any breach or violation of, constitute a default under, give rise to a right of
termination, cancellation or acceleration under or result in the creation of any
lien, security interest or loss of a benefit under any contract or other
agreement, mortgage, lease, license or other instrument or obligation to which
the Seller is a party or by which it or any of its assets is bound, except where
such conflicts, breaches, violations, defaults, terminations or other events
would not, individually or in the aggregate, prevent or impede the consummation
of the transactions contemplated hereby; or (iii) result in the violation of any
provision of any applicable law, rule, regulation or ordinance or any order,
decree, writ or injunction of any court, administrative agency or governmental
authority by which the Seller is bound, except where such violations would not
prevent or impede the consummation of the transactions contemplated hereby.
(e) VALIDITY AND BINDING EFFECT. This Agreement has been duly executed and
delivered on behalf of the Seller and, assuming the valid and binding execution
of this Agreement by the Buyer, constitutes the legal, valid and binding
obligation of the Seller, enforceable against the Seller in accordance with its
terms subject to (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights generally
and (ii) the availability of specific performance and other equitable remedies
(regardless of whether such enforcement is considered in a proceeding in equity
or at law).
(f) SHARES. The Seller holds of record and owns all of the Shares, free and
clear of all liens, security interests, restrictions, pledges, claims and
encumbrances of every nature. The Seller is not a party to any option, warrant,
right or other contract or commitment that would require the Seller to sell any
of the Shares. The Seller is not a party to any voting trust, proxy or other
agreement or understanding with respect to the voting of the Shares.
(g) NO BROKERS. Neither the Seller nor any Subsidiary has employed any broker,
finder, investment banker or consultant in connection with this Agreement that
would be entitled to a broker's, finder's or similar fee or commission in
connection herewith.
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(h) PUBLIC UTILITY HOLDING COMPANY ACT. Seller is not a "holding company" or a
"subsidiary company" of a "holding company" or an affiliate of a "holding
company", or an "affiliate" of a "subsidiary company" of a "holding company," in
each case within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
5. REPRESENTATIONS AND WARRANTIES AS TO SUBSIDIARIES. The Seller
hereby represents and warrants to the Buyer as of the date hereof
as follows:
(a) ORGANIZATION AND EXISTENCE. Each Subsidiary is a corporation, duly
organized, validly existing and in good standing under the respective laws of
its state of incorporation and has all requisite power and authority to enter
into and perform its obligations under this Agreement. Each Subsidiary is duly
qualified to do business and is in good standing as a foreign corporation in all
jurisdictions where the nature of the properties owned or leased or the
activities conducted by such Subsidiary make such qualification necessary and
where a failure to be so qualified would have a Material Adverse Effect on the
assets, operations or financial condition of such Subsidiary. The Subsidiaries
have all requisite power and authority and all licenses, permits and
authorizations necessary to own, lease and operate their respective properties
and to carry on their respective Businesses as such Businesses are presently
being conducted, except where the failure to obtain such licenses, permits and
authorizations would not have a Material Adverse Effect on the operations,
assets or financial condition of the Subsidiaries, individually or collectively.
(b) CAPITALIZATION. The entire authorized capital stock of ATNG consists of Five
Thousand Four Hundred (5,400) shares, of which Five Thousand Four Hundred
(5,400) shares are issued and outstanding. The entire authorized capital stock
of TRIGAS consists of One Thousand (1,000) shares, of which One Thousand (1,000)
shares are issued and outstanding. The entire authorized capital stock of ATEMCO
consists of One Thousand (1,000) shares, of which One Thousand (1,000) shares
are issued and outstanding. The Seller is the owner of all of the issued and
outstanding shares of each of the Subsidiaries and all such shares have been
duly authorized, are validly issued, fully paid, nonassessable and free of
preemptive rights. There are no outstanding or authorized options, warrants,
purchase rights, subscriptions rights, conversion rights, exchange rights or
other contracts or
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commitments that would require any Subsidiary to issue, sell or otherwise cause
to become outstanding any of its capital stock.
(c) NO VIOLATION. Except as set forth in Schedule 5(c) of the Disclosure
Schedule, neither the execution and delivery of this Agreement by the Seller nor
the fulfillment of or compliance with the terms or provisions hereof will: (i)
violate or conflict with any provision of the Articles of Incorporation or
Bylaws of any Subsidiary (ii) conflict with, result in any breach or violation
of, constitute a default under, give rise to a right of termination,
cancellation or acceleration under or result in the creation of any lien,
security interest or loss of a benefit under any contract or other agreement,
mortgage, lease, license or other instrument or obligation to which any
Subsidiary is a party or by which it or any of its assets is bound; or (iii)
result in the violation of any provision of any applicable law, rule, regulation
or ordinance or any order, decree, writ or injunction of any court,
administrative agency or governmental authority by which any Subsidiary is
bound.
(d) FINANCIAL STATEMENTS. The Seller has furnished Buyer with copies of the
Financial Statements. The Financial Statements have been prepared in accordance
with generally accepted accounting principles consistently applied throughout
the periods indicated, except as adjusted to reflect elimination of
inter-company assets and liabilities among the Seller (including any affiliates
of the Seller) and the Subsidiaries which items have been reclassified as equity
and except as otherwise disclosed therein, and fairly present the financial
position of the Subsidiaries taken as a whole. Except as and to the extent (x)
reflected or reserved against in the Financial Statements, (y) disclosed in one
or more Schedules to this Agreement or (z) of liabilities and obligations
incurred in the ordinary course of business since December 31, 1996, none of the
Subsidiaries, as of the date of this Agreement has any material liability or
obligation of any nature (whether absolute, accrued, contingent or otherwise)
which should be reflected as a liability on the Financial Statements under
generally accepted accounting principles consistently applied.
(e) TAXES. Except as disclosed in Schedule 5(e) of the Disclosure Schedule, (i)
all federal, state, county and local tax returns and reports, of whatever type,
required to be filed by or with respect to each Subsidiary, as of the date
hereof and as of the Closing Date, have been or will have been filed and all
taxes (including, without limitation, penalties, interest, assessments and other
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charges imposed thereon) shown to be due on said returns and reports have been
paid; (ii) none of the Subsidiaries is delinquent in the payment of any taxes,
assessments or penalties due and payable by such entity to the United States or
any other taxing authority with respect to any period ended prior to the date
hereof; (iii) none of the federal income tax returns for any tax year after 1991
of any of the Subsidiaries has been audited by the Internal Revenue Service;
(iv) there are no federal, state or local tax liens upon any property or assets
of any of the Subsidiaries, except for liens for taxes not yet due and payable;
(v) there are no present disputes with any taxing authority relating to taxes of
any nature payable by or affecting any of the Subsidiaries; and (vi) no waivers
of statutes of limitations as to any tax matters have been given or requested
with respect to any Subsidiary.
(f) TITLE TO PROPERTIES. Except as otherwise specified in Schedule 5(f) of the
Disclosure Schedule and except such title matters which do not have a Material
Adverse Effect on the operations, assets or financial condition of the
Subsidiaries, individually or collectively, each of the Subsidiaries has: (i)
good and marketable title to its assets, free and clear of all liens, mortgages,
security agreements, options, pledges, charges, covenants, conditions,
restrictions and other encumbrances and claims of any kind or character
whatsoever (other than tax liens for taxes not yet due and payable); and (ii)
all rights-of-way and easements necessary to own, operate and maintain its
Business as presently conducted. Except as set forth in Schedule 5(f) of the
Disclosure Schedule, no person has any right, title or interest or any claim
thereto in any of such properties or assets, the existence of which, either
individually or in the aggregate, would prevent or impede the consummation of
the transactions contemplated hereby or have a Material Adverse Effect on the
operations, assets or financial condition of any of the Subsidiaries,
individually or collectively.
(g) GAS PURCHASE CONTRACTS, GAS SALES CONTRACTS, GAS STORAGE CONTRACTS AND GAS
TRANSPORTATION AGREEMENTS. All Gas Purchase Contracts, Gas Sales Contracts, Gas
Storage Contracts and Gas Transportation Contracts to which any of the
Subsidiaries is a party or is otherwise bound are listed in Schedule 5(g) of the
Disclosure Schedule. Copies of all such Contracts, together with all amendments,
modifications, revocations and notices pertaining thereto have been delivered or
made available to Buyer. Except as set forth on Schedule 5(g) of the Disclosure
Schedule, no Subsidiary is party to any arrangement under which it will be
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obligated, by virtue of a prepayment arrangement, a "take-or-pay" arrangement or
any other arrangement, to transport or deliver hydrocarbons at some future time
without then or thereafter receiving full payment therefor, or to pay for
hydrocarbons or their transportation without then receiving such hydrocarbons.
(h) NO LEASES. Except as set forth in Schedule 5(h) of the Disclosure Schedule,
all the equipment and real property (other than rights-of-way, licenses, permits
and easements) which are material to the operations of each of the Subsidiaries
is owned by such Subsidiary and not leased or rented.
(i) NO DEFAULTS. None of the Subsidiaries is in breach or default under any term
or provision of any of its Contracts except where such breaches or defaults
would not, either individually or in the aggregate, prevent or impede the
consummation of the transactions contemplated hereby or have a Material Adverse
Effect on the assets, operations or financial condition of any of the
Subsidiaries. All of the Contracts are in full force and effect, and constitute
legal, valid and binding obligations of the applicable Subsidiary except where
the failure to be in full force and effect and legal, valid and binding would
not, either individually or in the aggregate, have a Material Adverse Effect on
the assets, operations or financial condition of such Subsidiary. None of the
Subsidiaries has received any written notice from any other party indicating any
intent to rescind or dishonor any material provision contained in any of the
Contracts. Except as set forth in Schedule 5(i) of the Disclosure Schedule, none
of the Subsidiaries is a party to any contract to sell any portion of its assets
other than in the ordinary course of business.
(j) COMPLIANCE WITH APPLICABLE LAW. Except as set forth in Schedule 5(j) of the
Disclosure Schedule, to the Seller's knowledge, the Subsidiaries are in
compliance with every applicable law, rule, regulation, ordinance, license,
permit and other governmental action and authority and every order, writ, and
decree of every court, administrative agency or other governmental authority in
connection with the ownership, operation and maintenance of their Businesses,
properties and assets, except where the non-compliance with which, either
individually or in the aggregate, would not prevent or impede the consummation
of the transactions contemplated hereby or have a Material Adverse Effect on the
operations, assets or financial condition of the Subsidiaries. All filings and
notices required to be made by the Subsidiaries with the regulatory agencies of
the federal government
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and any state, county or municipality have been made or given, except where the
failure to make such filings and notices, either individually or in the
aggregate, would prevent or impede the consummation of the transactions
contemplated hereby or have a Material Adverse Effect on the operations, assets
or financial condition of the Subsidiaries, individually or collectively.
(k) INSURANCE. The Subsidiaries maintain in effect insurance on their respective
assets as described in Schedule 5(k) of the Disclosure Schedule. Such insurance
policies are in full force and effect on the date hereof and will remain in
effect through the Closing; provided, however, that the parties acknowledge that
the Seller may cancel all or any portion of such insurance policies at Closing.
None of the Subsidiaries is in default with respect to any provision contained
in any insurance policy covering any portion of its assets, except where such
default would not prevent or impede the consummation of the transactions
contemplated hereby or have a Material Adverse Effect on the operations, assets
or financial condition of the Subsidiaries, individually or collectively.
(l) LITIGATION. Except as set forth in Schedule 5(l) of the Disclosure Schedule,
there are no pending suits, actions or proceedings, against or involving any of
the Subsidiaries and, to the knowledge of the Seller, there are no
investigations or threatened suits, actions or proceedings against or involving
such Subsidiaries, except such suits, actions, proceedings or investigations
which would not, either individually or in the aggregate, have a Material
Adverse Effect on the operations, assets or financial condition of any of the
Subsidiaries. No Subsidiary is in default with respect to any judgment, order,
writ, injunction, decree or award from any court or other governmental
instrumentality or arbitrator having jurisdiction over such Subsidiary which
default or violation has had or will have a Material Adverse Effect on the
operations, assets or financial condition of such Subsidiary.
(m) EMPLOYEE MATTERS. Except as set forth in Schedule 5(m) of the Disclosure
Schedule, none of the Subsidiaries is a party to any written employment
contract, brokerage commission contract or consulting contract or any union or
collective bargaining contract. To the Seller's knowledge, each Subsidiary is in
compliance with all laws relating to the employment of labor, including, without
limitation, provisions thereof relating to wages, hours, equal opportunity and
the payment of social security and other taxes
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where the noncompliance with which would either individually or in the aggregate
have a Material Adverse Effect on the assets, operations or financial condition
of the Subsidiaries. The Seller is not aware of any union organization effort,
strike, walk-out, boycott, slow-down, sick-out, work stoppage or similar labor
relations problem relating to the Business of any Subsidiary.
(n) PATENTS, COPYRIGHTS, TRADEMARKS, ETC. Except as set forth in Schedule 5(n)
of the Disclosure Schedule, to the Seller's knowledge, the present conduct of
the Business of each Subsidiary does not conflict with, infringe upon or violate
the patents, trademarks, servicemarks, trade names, copyrights or trade secrets
or other intangible assets of any other person or entity, and none of the
Subsidiaries has received any notice of any infringement thereof, except where
such conflicts, infringements and violations would not, either individually or
in the aggregate, have a Material Adverse Effect on the operations, assets or
financial condition of the Subsidiaries, individually or collectively.
(o) EMPLOYEE BENEFIT PLANS. All Plans are set forth in Schedule 5(o) of the
Disclosure Schedule. To the Seller's knowledge, the Plans have been operated,
administered and funded in compliance in all material respects with the
applicable provisions of ERISA, the Code and all applicable regulations
promulgated thereunder (including the minimum funding requirements of Section
302 of ERISA and Section 412 of the Code). Without limiting the generality of
the foregoing:
(i) To the Seller's knowledge, no Subsidiary has any liability with
respect to any other "employee benefit plan" and has never sponsored,
maintained, made or been required to make contribution to any "multi-employer
plan" as such term is defined in Section 3(37) of ERISA).
(ii) To the Seller's knowledge, no "reportable event" (as such term is
defined in Section 4043(a) of ERISA) and no transaction described in Section 406
of ERISA has occurred with respect to any of the Plans.
(iii) There are no pending claims by, against or on behalf of the Plans
other than routine claims by participants and beneficiaries for benefits due and
owing under the Plans.
(iv) None of the assets of any of the Subsidiaries is subject
to a lien pursuant to Section 302(f) or Section 4068 of ERISA.
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(v) To the Seller's knowledge, no Subsidiary nor any affiliate of any
Subsidiary has engaged in any transaction or is a successor to or parent
corporation of any party which has engaged in any transaction which would
subject it to liability under Section 4069 of ERISA.
(p) ENVIRONMENTAL MATTERS. Except as set forth in Schedule 5(p) of the
Disclosure Schedule, (i) to the Seller's knowledge, there are no Hazardous
Substances present upon any real property owned or occupied by any Subsidiary;
(ii) to the Seller's knowledge, there has been no spill, release, discharge,
dispersal, deposit, storage or disposal of any Hazardous Substances by any
Subsidiary which has not been corrected; (iii) none of the Subsidiaries is
subject to any order, permit or directive, directed to it as opposed to the
industry in general, relating to the generation, recycling, reuse, sale,
storage, handling, transport or disposal of Hazardous Substances or directing
cleanup of or payment of cleanup costs of Hazardous Substances, the cost of
compliance with which, either individually or in the aggregate, would have a
Material Adverse Effect on the operations, assets or financial condition of such
Subsidiary; (iv) there are no notices, claims, orders, directives, litigation,
administrative or other proceedings, judgments or orders of which the Seller is
aware relating to any Hazardous Substances or other forms of pollution relating
in any way to any above-mentioned property of any Subsidiary with which such
Subsidiary has not complied in all material respects, except where the cost of
compliance with which, either individually or in the aggregate, would have a
Material Adverse Effect on the operations, assets or financial condition of such
Subsidiary; and (v) to the Seller's knowledge, no persons have been exposed to a
Hazardous Material through activities, conditions, or circumstances pertaining
to any of the Subsidiaries such that the Subsidiaries (or their assets) are
reasonably likely to incur liability to such persons for personal injuries,
damages or death resulting from such exposure.
(q) REAL PROPERTY. The Seller has no knowledge of any threatened termination or
reduction of the current access to or from the real property used by any
Subsidiary in its Business to existing roads or the sewer or other utility
services presently serving such real property. No Subsidiary has received any
notice that its real property is in violation of any zoning, laws, statutes,
ordinances or building or use restrictions applicable to such real property or
which prohibit the use of such real property for its current use or uses.
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(r) CHANGES. Except as set forth in Schedule 5(r) of the
Disclosure Schedule, since December 31, 1996 each of the
Subsidiaries has:
(i) conducted the operation of its Business only in the
ordinary course of business consistent with past practice;
(ii) preserved its corporate existence and retained its
business organization intact;
(iii) paid all compensation and other obligations to its
employees when the same were due and payable;
(iv) not mortgaged, pledged, subjected to lien, charged,
encumbered or granted a security interest in or to any of its
assets;
(v) not sold or transferred any of its assets except for
sales of inventory in the ordinary course of business;
(vi) not suffered any material damage, destruction or loss
(whether or not covered by insurance) affecting its assets;
(vii) not waived any right of substantial value; and
(viii) not terminated any contract, agreement or arrangement with any
customer or supplier or received notice of termination with respect to any such
material contract, agreement or arrangement.
(s) TARIFFS. Except as set forth in Schedule 5(s) of the Disclosure Schedule, to
the extent that the operations of any of the Subsidiaries are subject to a
tariff approved by FERC, those operations are in compliance with each such
tariff, except where such noncompliance would not have a Material Adverse Effect
on the assets, operations or financial condition of the Subsidiaries taken as a
whole. Seller has no knowledge of any refund claim of any customers or any
refund obligation of any Subsidiary imposed under an order issued by FERC and,
except as set forth in Schedule 5(s) of the Disclosure Schedule, has no
knowledge of any facts or circumstances which would give rise to any such refund
claim or refund obligation. Except as set forth in Schedule 5(s) hereto, there
are no customer complaints pending or, to Seller's knowledge, threatened against
any Subsidiary before FERC, which would, either individually or in the
aggregate, have a Material Adverse Effect on
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the operations, assets or financial condition of the Subsidiaries
taken as a whole.
(t) MATERIAL MISSTATEMENTS OR OMISSIONS. No statement, representation, warranty
or covenant made by the Seller in this Agreement or in any Exhibit or Schedule
to this Agreement contains or will contain any untrue statement of material fact
or omits or will omit to state any material fact necessary in order to make the
statements herein or therein, in the light of the circumstances under which they
were made, not misleading.
(u) ASSETS OWNED. The Subsidiaries own, or have rights of way, licenses, leases,
permits or easements with respect to, all of the material assets used in the
Businesses or held in storage for use in the Businesses, including those
described in Schedule 5(u) of the Disclosure Schedule, and they own the various
other assets described or referred to in said Schedule 5(u). Other than sales or
assignments to their customers and among themselves, the Subsidiaries have not
sold or assigned any rights of way, licenses, leases, permits or easements, in
whole or in part, or any undivided interest therein, to any parties whatsoever,
except as disclosed in said Schedule 5(u).
(v) NO PARTNERSHIP. None of the Subsidiaries is a party to any
partnership or joint ventures.
(w) NO CUSTOMER CURTAILMENTS. Except as set forth on Schedule 5(w) of the
Disclosure Schedule, neither Seller nor any of the Subsidiaries has received
written notice of any threatened or planned plant closings of customers of the
Subsidiaries or the curtailment by such customers of future gas purchases by
such customers from the Subsidiaries.
(x) GAS IMBALANCES. Except as accrued for on the Draft Closing Date Balance
Sheet and reserved for thereon, there will be no gas imbalances as of the
Closing Date for which the Subsidiaries, or any of them, shall have any
liability or other obligation which is not offset by a corresponding receivable.
6. BUYER'S REPRESENTATIONS AND WARRANTIES. The Buyer hereby
represents and warrants to the Seller as of the date hereof as
follows:
(a) ORGANIZATION AND EXISTENCE. The Buyer is a corporation, duly
organized, validly existing and in good standing under the laws of
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Nevada and has all requisite power and authority to enter into and perform its
obligations under this Agreement. The Buyer is duly qualified to do business and
is in good standing in all jurisdictions where the nature of properties owned or
leased by the Buyer or the activities conducted by the Buyer make such
qualification necessary and except where a failure to be so qualified would have
a Material Adverse Effect on the assets, operations or financial condition of
the Seller.
(b) APPROVALS. The Buyer's execution, delivery and performance of this Agreement
has been duly authorized by all necessary and other corporate action and no
further corporate or other action is necessary on the part of the Buyer for it
to execute and deliver this Agreement and to consummate and perform its
obligations hereunder.
(c) CONSENTS. Except as set forth in Schedule 6(c) hereto, no consent, approval
or authorization of, or the making of any declaration or filing with, any
governmental authority or any other person is necessary in connection with the
execution, delivery or performance by the Buyer of this Agreement (other than
pursuant to the HSR Act), except such consents, approvals, authorizations,
declarations and filings which, if not obtained or made, would not prevent or
impede the consummation of the transactions contemplated hereby.
(d) NO VIOLATION. Except as set forth in Schedule 6(d) of the Disclosure
Schedule, neither the execution and delivery of this Agreement by the Buyer nor
the fulfillment of or compliance with the terms or provisions hereof will: (i)
violate or conflict with any provision of the Articles of Incorporation or
Bylaws of the Buyer, (ii) conflict with, result in any breach or violation of,
constitute a default under, give rise to a right of termination, cancellation or
acceleration under or result in the creation of any lien, security interest or
loss of a benefit under any contract or other agreement, mortgage, lease,
license or other instrument or obligation to which the Buyer is a party or by
which it or any of its assets is bound, except where such conflicts, breaches,
violations,defaults, terminations and other events would not, individually or in
the aggregate, prevent or impede the consummation of the transactions
contemplated hereby; or (iii) result in the violation of any provision of any
applicable law, rule, regulation or ordinance or any order, decree, writ or
injunction of any court, administrative agency or governmental authority by
which the Buyer is bound, except where such violations
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would not prevent or impede the consummation of the transactions
contemplated hereby.
(e) VALIDITY AND BINDING EFFECT. This Agreement has been duly executed and
delivered on behalf of the Buyer and, assuming the valid and binding execution
of this Agreement by the Seller, constitutes the legal, valid and binding
obligation of the Buyer, enforceable against the Buyer in accordance with its
terms subject to (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights generally
and (ii) the availability of specific performance and other equitable remedies
(regardless of whether such enforcement is considered in a proceeding in equity
or at law).
(f) FINANCIAL WHEREWITHAL. The Buyer has the financial ability to
consummate the transactions contemplated by this Agreement.
(g) NO BROKERS. The Buyer has not employed any broker, finder,
investment banker or consultant in connection with this Agreement
that would be entitled to a broker's, finder's or similar fee or
commission in connection herewith.
(h) MATERIAL MISSTATEMENTS OR OMISSIONS. No statement, representation, warranty
or covenant made by the Buyer in this Agreement or in any Exhibit or Schedule to
this Agreement, contains or will contain any untrue statement of material fact
or omits or will omit to state any material fact necessary in order to make the
statements herein or therein in the light of circumstances under which they were
made, not misleading.
(i) INVESTMENT REPRESENTATION. Buyer is purchasing the Shares for investment
purposes only and not with a view to any distribution thereof in violation of
the Securities Act of 1933, as amended, or any applicable state securities law.
Buyer has such knowledge and experience in business and financial affairs in
general, and of the Businesses of the Subsidiaries as conducted and regulated in
the states where they are located in particular, as to be capable of evaluating
the merits and risks of purchasing the Shares, taking into account the accuracy
of the representations and warranties contained in Sections 4 and 5 hereof, and
also the accuracy of any other information provided to Buyer.
7. COVENANTS.
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(a) SELLER'S COVENANTS. The Seller covenants and agrees that from
and after the execution and delivery of this Agreement to and
including the Closing Date:
(i) ACCESS; DELIVERY OF DOCUMENTS. The Seller shall cause the
Subsidiaries to give the Buyer and its representatives access during normal
business hours and upon reasonable notice to the properties and the books and
records of the Subsidiaries and shall furnish or cause to be furnished such
information concerning the Subsidiaries as the Buyer may reasonably request. The
Buyer agrees not to disturb the normal operations of the Subsidiaries. In
addition, upon the Buyer's request, the Seller shall provide to the Buyer or
cause to be provided to the Buyer copies of any and all agreements relating to
the respective Businesses of the Subsidiaries. Buyer shall maintain the
confidentiality of all information furnished to Buyer pursuant to this Section
7(a)(i) and, in the event this Agreement is terminated, shall return copies of
any such information to Seller or, at Seller's request, shall destroy such
materials.
(ii) CONDUCT OF BUSINESS.
(A) AFFIRMATIVE REQUIREMENTS. Except as otherwise
contemplated by this Agreement, the Seller shall cause each of
the Subsidiaries to:
(1) carry on its business in the ordinary course
(2) maintain its assets in as good working order
and condition as at present, ordinary wear and tear
excepted;
(3) perform all of its obligations in all material
respects under agreements relating to or respecting its
assets, properties and rights;
(4) use its good faith reasonable efforts to keep
in full force and effect present insurance coverage;
(5) use its good faith reasonable efforts (consistent
with its ordinary course of business) to maintain and preserve
its Business intact, retain its present employees and maintain
its relationships with customers and others having business
relations with it;
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(6) use its good faith reasonable efforts to
maintain all licenses and certifications necessary to
conduct its Business; and
(7) respond to any reasonable inquiry by the Buyer
concerning the conduct and operation of its Business.
(B) PROHIBITIONS. Except as otherwise contemplated by this
Agreement, the Seller shall cause each Subsidiary to not, without the
prior written consent of the Buyer:
(1) enter into any material contract or commitment
or incur or agree to incur any material liability or
indebtedness except in the ordinary course of business;
(2) increase in any material respect the
compensation payable after the date hereof to any
salaried employee or agent of such Subsidiary;
(3) purchase, sell, assign, lease or otherwise
acquire, transfer or dispose of any material property or
equipment, except in the ordinary course of business;
(4) enter into or agree to enter into any material
agreements or arrangements which are outside the ordinary
course of business which grant any rights to purchase any of
its material assets;
(5) except as identified in Schedule 7(a)(ii)(B)(5)
of the Disclosure Schedule, commit to, authorize or engage in
any material capital projects or capital expenditures relating
to its Business or its assets;
(6) merge or consolidate into or with any other
corporation or other entity;
(7) engage in any business other than the Business;
(8) enter into any transaction other than in the
ordinary course of business; or
(9) commit or agree to do any of the actions
described in Sections 7(a)(ii)(B)(1) through (8) above.
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(b) CERTAIN RESTRUCTURINGS. The parties acknowledge and agree
that the Seller and the Buyer shall cause the following actions to
be taken with respect to the Subsidiaries:
(i) certain benefit plans shall be restructured as follows:
(1) the Atrion Thrift Plan shall be partially terminated with
respect to participants employed by the Subsidiaries in accordance with
the provisions of Exhibit B hereto and their account balances shall be
distributed to such participants;
(2) the liabilities of the Subsidiaries under the Atrion
Supplemental Executive Thrift Plan shall be transferred to and assumed
by the Seller and certain assets of the Atrion Supplemental Executive
Thrift Plan Trust shall be transferred to and accepted by a trust
established by the Seller in accordance with the provisions of Exhibit
C hereto;
(3) the Atrion Retirement Plan shall be partially terminated
with respect to participants employed by the Subsidiaries in accordance
with the provisions of Exhibit D hereto and their accrued benefits
shall be distributed to such participants;
(4) the ATNG Post-Retirement, Medical and Health Voluntary
Employee Benefit Association (the "VEBA") shall be continued by the
Buyer as provided in Exhibit E hereto; provided, however, that on or
before the Closing Date, Seller shall cause ATNG to amend such VEBA to
provide that no further funding shall be made for the benefits provided
under the VEBA and that, once the funds in the VEBA have been
exhausted, no further benefits will be provided to retirees thereunder;
and
(5) the liabilities of the Subsidiaries under the Atrion
Supplemental Executive Retirement Plan shall be transferred to and
assumed by the Seller in accordance with the provisions of Exhibit F
hereto;
(ii) the liability of ATNG for deferred director fees payable
to J. Kenneth Smith shall be assumed by Seller; and
(iii) the following assets and liabilities shall be assigned
to the Seller or one of its non-Subsidiary affiliates:
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(A) the computer equipment, software and other property
listed and described on Exhibit G hereto;
(B) the liability for accrued and unused vacation of
those persons listed on Exhibit H hereto; and
(C) any deferred tax assets and liabilities relating to the
items assumed or assigned pursuant to this Section 7(b).
(c) AUDITED FINANCIAL STATEMENTS. Prior to Closing, Seller shall allow
accountants selected by Buyer to prepare and deliver to Buyer audited balance
sheets and statements of income and expense of the Subsidiaries for the fiscal
years ended December 31, 1995 and December 31, 1996, at Buyer's expense. Seller
shall cause the Subsidiaries to fully cooperate with such accountants and grant
them such access to information as shall be reasonably necessary to perform such
work.
(d) SCHEDULES. It is understood and agreed that from time to time prior to
Closing the parties may deliver to one another modifications or supplements to
the Schedules of the Disclosure Schedule relating to the respective parties'
representations and warranties; provided, however, except as provided in the
following sentence, no such modification or supplement will affect the rights or
obligations of the parties to this Agreement (including without limitation a
party's rights to terminate this Agreement if the other party fails to meet the
condition that its representations and warranties be true and correct in all
material respects without such modification or supplement having been made)
until after the Closing Date. Notwithstanding any other provision hereof, if the
Closing occurs, any such supplement or amendment of any Schedule will be
effective to cure and correct for indemnification purposes (but only for such
purposes) any breach of any representation, warranty or covenant that would have
existed by reason of such party not having made such supplement or amendment.
(e) FULFILLMENT OF CONDITIONS. Each of the parties shall use its good faith
reasonable efforts to satisfy the conditions to the closing of the transactions
contemplated hereby, including, without limitation, complying promptly with all
requirements of the HSR Act.
(f) STOCKHOLDER APPROVAL. Seller shall call a meeting of its
stockholders to consider approval of this Agreement and the
transactions contemplated hereby, which meeting shall be held as
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soon as reasonably practicable after the execution of this
Agreement.
8. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS TO CLOSE. The
obligations of the Buyer under this Agreement with respect to the
purchase and sale of the Shares shall be subject to the fulfillment
on or prior to the Closing Date of each of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. All of the representations and warranties of
the Seller contained in this Agreement shall be true and correct in all material
respects when made and as of the Closing Date as if made on such date. The
parties acknowledge and agree that the dollar limitation in the definition of
the term "Material Adverse Effect" shall not be taken into account and shall
have no relevance in determining whether said representations and warranties are
true and correct in all material respects.
(b) COVENANTS. The Seller shall have complied with and performed in all material
respects all of the agreements, covenants and conditions required by this
Agreement to be performed or complied with by it on or prior to the Closing
Date.
(c) LEGAL OPINION. The Buyer shall have been furnished with an
opinion of the Seller's counsel, dated the Closing Date, in the
form of Exhibit I attached hereto.
(d) DELIVERIES OF CONSENTS. The Seller shall have delivered to the Buyer such
instruments, consents and approvals of third parties as are necessary to
consummate the transactions contemplated by this Agreement.
(e) NO LITIGATION. There shall not have been instituted by any creditor of the
Seller or other third party any suit or proceeding to restrain or invalidate
this transaction which would involve expense or lapse of time that would be
materially adverse to the Buyer's interest.
(f) NO MATERIAL ADVERSE CHANGE. There shall not have occurred
(after the date hereof) any material adverse change, whether or not
covered by insurance, in the operations, assets or financial
condition of the Subsidiaries, individually or collectively.
(g) OFFICERS' CERTIFICATES. At the Closing, the Seller shall have
furnished to the Buyer a certificate dated the Closing Date signed
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by the Chief Executive Officer and the Chief Financial Officer of the Seller,
the Controller, the Vice President of Operations and Engineering, and the Vice
President of Regulatory Affairs and Customer Service of ATNG and the President
of ATEMCO to the effect that all of the representations and warranties of the
Seller contained in the Agreement remain in all material respects true and
correct as of the Closing Date after taking into account any modifications or
supplements to the Schedules hereto delivered by the Seller to the Buyer and
that the Seller has performed and satisfied in all material respects all
covenants and conditions required by this Agreement to be performed or satisfied
by the Seller on or prior to Closing.
(h) REGULATORY APPROVALS. All regulatory approvals shall have been obtained and
all applicable waiting periods (and any extensions thereof) under the HSR Act
shall have expired or otherwise been terminated by the parties.
(i) RESIGNATIONS. The Buyer shall have received the resignations
of the officers and directors of the Subsidiaries set forth on
Schedule 8(i) of the Disclosure Schedule.
(j) STOCKHOLDER APPROVAL. The stockholders of the Seller shall
have approved this Agreement and the transactions contemplated
hereby.
9. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE. The
obligations of the Seller under this Agreement with respect to the
purchase and sale of the Shares shall be subject to the fulfillment
on or prior to the Closing Date of each of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. All of the representations and warranties by
the Buyer contained in this Agreement shall be true and correct in all material
respects when made and as of the Closing Date as if made on such date.
(b) COVENANTS. The Buyer shall have complied with and performed in all material
respects all of the agreements, payments, assumptions, covenants and conditions
required by this Agreement to be performed and complied with by it on or prior
to the Closing Date.
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(c) LEGAL OPINION. The Seller shall have been furnished with an
opinion of the Buyer's counsel, dated the Closing Date, in the form
of Exhibit J attached hereto.
(d) NO LITIGATION. There shall not have been instituted by any creditor or
stockholder of the Buyer any suit or proceeding to restrain or invalidate this
transaction which would involve expense or lapse of time that would be
materially adverse to the Seller's interest. In addition, there shall not have
been instituted by any third party any suit or proceeding to restrain or
invalidate this transaction which would involve expense or lapse of time that
would be materially adverse to the Seller's interest.
(e) OFFICER'S CERTIFICATE. At the Closing, the Buyer shall have furnished to the
Seller a certificate dated the Closing Date signed by the Chief Executive
Officer, the Chief Financial Officer, and the Vice President of Operations of
the Buyer to the effect that all of the representations and warranties of the
Buyer, contained in the Agreement remain in all material respects true and
correct as of the Closing Date after taking into account any modifications or
supplements to the Schedules hereto delivered by the Buyer to the Seller and
that the Buyer has performed and satisfied in all material respects all
covenants and conditions required by this Agreement to be performed or satisfied
on or prior to Closing.
(f) REGULATORY APPROVALS. All regulatory approvals shall have been obtained and
all applicable waiting periods (and any extensions thereof) under the HSR Act
shall have expired or otherwise been terminated by the parties.
(g) STOCKHOLDER APPROVAL. The stockholders of the Seller shall
have approved this Agreement and the transactions contemplated
hereby.
10. CLOSING. The Closing shall be held at the offices of Berkowitz, Lefkovits,
Isom & Kushner, A Professional Corporation, at 1600 SouthTrust Tower,
Birmingham, Alabama at 10:00 a.m. local time on the third business day following
the date on which all the conditions specified in Sections 8(h) and 8(j) hereof
shall have been satisfied or on such other date as the parties hereto shall
mutually agree (the "Closing Date"). For all purposes hereof, the Closing of the
purchase and the sale of the Shares and the transfer of the benefits and burdens
of ownership thereof shall be deemed to occur at 9:00 a.m. Central Time on the
Closing Date.
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11. TRANSACTIONS AT CLOSING.
(a) DELIVERIES BY THE SELLERS TO THE BUYER. At the Closing, the
Seller shall deliver (or cause to be delivered) the following to
the Buyer:
(i) stock certificates evidencing the Shares duly endorsed
for transfer to the Buyer or accompanied by appropriate assignment
documents;
(ii) resolutions of the Board of Directors and stockholders of the
Seller certified as true and correct by the Secretary of the Seller, authorizing
and approving the execution of this Agreement by the Seller and the sale and
delivery of the Shares;
(iii) the legal opinion of the Seller's legal counsel;
(iv) consents and approvals with respect to the transfer of
the Shares, if any;
(v) certificate of the applicable officers of the Seller and
the Subsidiaries dated the Closing Date, as described in Section
8(g) hereof; and
(vi) the pipeline agreements attached as Exhibit K; and
(vii) Certificates of Good Standing as to Seller and the Subsidiaries
for their respective states of incorporation, and Certificates of Good Standing
as to the Subsidiaries for those states in which the Subsidiaries are qualified
to do business.
(b) DELIVERIES BY THE BUYER TO THE SELLERS. At the Closing, the
Buyer shall deliver (or cause to be delivered) the following to the
Seller:
(i) by wire transfer to Seller's account an amount of cash equal to the
Preliminary Purchase Price, less the Escrow Deposit, as described in Section
3(a) hereof;
(ii) resolutions of the Board of Directors of the Buyer, certified as
true and correct by the Secretary of the Buyer, authorizing and approving the
execution of this Agreement by the Buyer and the purchase of the Shares;
(iii) the legal opinion of counsel for the Buyer;
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(iv) certificate of the officers of the Buyer dated the
Closing Date, as described in Section 9(e) hereof; and
(v) the pipeline agreements attached as Exhibit K.
(c) DELIVERIES BY THE SELLER, BUYER AND SUBSIDIARIES. The parties shall cause
all of the notices and other documents described in Sections 16(g) and 16(h) to
be delivered to the appropriate parties.
12. TERMINATION RIGHTS.
(a) TERMINATION. In addition to the termination rights provided in Section 19
hereof, this Agreement may be terminated by the Seller if the Board of Directors
of the Seller receives a proposal to purchase the Shares or substantially all of
the assets of the Subsidiaries (an "Acquisition Proposal") and the Seller
notifies the Buyer in writing of all the material terms, conditions and other
provisions of the Acquisition Proposal and that the Seller desires to consider
acceptance of such proposal and Buyer does not make, within ten (10) business
days following receipt of the Seller's notice, an offer which the Board of
Directors of the Seller believes, in good faith, to be at least as favorable to
the stockholders of the Seller as said Acquisition Proposal (the "Fiduciary
Out"). In addition to the Fiduciary Out and any termination rights granted to
the parties elsewhere in this Agreement, this Agreement may be terminated by
either the Buyer or the Seller upon written notice to the other party if (i) the
stockholders of the Seller at a stockholders meeting held to consider such
approval do not approve this Agreement; or (ii) provided the terminating party
is not then in breach of any provision of this Agreement, upon the occurrence of
any of the following:
(A) If on the Closing Date any of the conditions precedent to the obligations of
the terminating party set forth in this Agreement have not been satisfied or
waived in writing; or
(B) If the Closing does not occur on or before July 3, 1997.
(b) EFFECT OF TERMINATION. In the event this Agreement is terminated, the Escrow
Deposit shall be paid as provided in Section 3(a). In addition, in the event
this Agreement is terminated due to the exercise of the Fiduciary Out or the
failure of the stockholders of the Seller to approve this transaction at a
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stockholders meeting held to consider such approval and in these events only,
then, within five (5) business days following termination, the Seller shall pay
to the Buyer, in cash, the sum of Two Million Dollars ($2,000,000). The only
liability of Seller to Buyer in the event of any termination of this Agreement
shall be the payment of the foregoing sum as provided in this Section 12(b).
13. INDEMNITY.
(a) BY THE SELLER. The Seller agrees to indemnify and hold the Buyer and the
Subsidiaries harmless against and shall reimburse the Buyer and the Subsidiaries
for any and all Damages which arise from any of the following (provided,
however, that Seller shall not be required to reimburse more than one party for
any item of Damage):
(i) the breach of any representation, warranty, agreement or
covenant of the Seller contained in this Agreement (including any
Exhibit or Schedule hereto); and
(ii) all actual, alleged, claimed or purported liabilities and
obligations of the Seller and the Subsidiaries and all claims and demands made
in respect thereof, whether known or unknown, whether arising out of contract,
tort, misrepresentation, strict liability, violations of environmental laws or
waste management practices, or violation of any other laws or otherwise relating
to, or arising from the ownership, operation or control of the Businesses prior
to Closing except those which are reflected or reserved against on the Closing
Date Balance Sheet.
(b) BY BUYER. The Buyer agrees to indemnify and hold the Seller
harmless against and shall reimburse the Seller for any and all
Damages which arise from any of the following:
(i) the breach of any representation, warranty, agreement or
covenant of the Buyer contained in this Agreement (including any
Exhibit or Schedule hereto);
(ii) all actual, alleged, claimed or purported liabilities and
obligations of the Subsidiaries which are reflected or reserved against on the
Closing Date Balance Sheet; and
(iii) all actual, alleged, claimed or purported liabilities and
obligations of the Buyer and the Subsidiaries and all claims and demands made in
respect thereof, whether known or unknown, whether arising out of contract,
tort, misrepresentation, strict
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liability, violations of environmental laws or waste management practices or
violation of any other laws or otherwise relating to, or arising from the
ownership, operation or control of the Businesses following Closing.
(c) LIMITATIONS.
(i) ON SELLER'S INDEMNIFICATION. Except as hereafter provided, in no
case shall the Seller's liability to make indemnification payments to the Buyer
("Indemnification Payments") under the foregoing provisions of this Section 13
exceed, in the aggregate, Ten Million Dollars ($10,000,000) and, except as
hereinafter provided, the liability to make indemnification payments shall
expire as to any item that is not the subject of a claim made within eighteen
(18) calendar months immediately following the Closing Date; provided, however,
that such time limitation shall not apply to covenants or agreements required to
be performed following Closing. Notwithstanding any provision contained herein,
the Buyer shall only be entitled to Indemnification Payments to the extent that
the aggregate Damages incurred by the Buyer exceed Five Hundred Thousand Dollars
($500,000) and then only to the extent of such excess; provided, however, that
the foregoing dollar threshold and limitation shall not apply to any
Indemnification Payments arising out of state sales taxes, federal income taxes
or state income or income-based taxes and, provided further, that claims with
respect to state sales taxes, federal income taxes and state income or
income-based taxes may be made within the applicable statute of limitations
respecting such tax matters.
(ii) ON BUYER'S INDEMNIFICATION. In no case shall the Buyer's liability
to make indemnification payments to the Seller with respect to breaches of the
Buyer's representations and warranties contained in Section 6 hereof exceed, in
the aggregate, Ten Million Dollars ($10,000,000) and the foregoing
indemnification obligation with respect to breaches of the Buyer's
representations and warranties contained in Section 6 hereof shall expire as to
any item that is not the subject of a claim made within eighteen (18) calendar
months immediately following the Closing Date. Notwithstanding any provision
contained herein, the Seller shall only be entitled to indemnification payments
with respect to breaches of the Buyer's representations and warranties contained
in Section 6 hereof to the extent that the aggregate Damages incurred by the
Seller exceed Five Hundred Thousand Dollars ($500,000) and then only to the
extent of such excess.
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(d) INDEMNIFICATION PROCEDURE. Promptly after an indemnified party becomes aware
of an Indemnification Claim, such indemnified party shall, if a claim in respect
thereof is to be made against any party, give written notice to the latter of
the nature of the Indemnification Claim. In case any such Indemnification Claim
involves a Third Party Claim, the indemnified party shall give the indemnifying
party notice within thirty (30) days following its receipt of notice of such
Third Party Claim. The indemnifying party shall, following notice and
consultation with the indemnified party (i) defend against any such claim or
litigation in such manner as it may deem appropriate with legal counsel of its
choice and (ii) compromise or settle such litigation or claim on such terms as
is approved by the indemnified party such approval not to be unreasonably
withheld. The indemnifying party shall be responsible for and shall pay in
accordance with the parameters specified in this Section 13, the amount of all
liabilities, damages, costs of settlement, fees, costs and expenses, including
attorney's fees, incurred in connection with the defense against, investigation
of and settlement of any such claim or litigation. If no settlement of any such
claim is made, the indemnifying party will satisfy any judgment rendered with
respect to such claim or in such litigation before the indemnified party is
required to do so, and will pay, in accordance with the parameters specified in
this Section 13, all costs and expenses, incurred by the indemnified party with
respect thereto. The indemnified party shall cooperate with the indemnifying
party with respect to any such defense.
(e) ATTORNEYS FEES. Subject to the limitations and in accordance with the
procedures of this Section 13, the indemnified party may recover attorneys fees
from the indemnifying party in connection with any Third Party Claims made
against such indemnified party. Notwithstanding the foregoing, the indemnifying
party shall not be liable for any attorneys' fees incurred by the indemnified
party in connection with a Third Party Claim once the indemnifying party has
assumed the defense of such Third Party Claim. With respect to any other claims
which an indemnified party may have against an indemnifying party pursuant to
this Section 13, such indemnified party shall not be entitled to recover
attorneys fees.
(f) INSURANCE. The Seller shall not be required to indemnify the Buyer for any
Damages to the extent the Buyer has insurance which actually pays for such
Damages; provided, however, that Buyer shall promptly make claims and seek
payment of such proceeds.
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(g) EXCLUSIVE REMEDY. Notwithstanding any provision of this Agreement to the
contrary, the sole remedy of a party for any breach of any of the
representations, warranties or covenants contained in this Agreement or any
claim relating to the ownership or operation of the respective Businesses of the
Subsidiaries shall be to exercise the rights under this Section 13, which shall
be subject to the procedures and limitations set forth in this Section 13,
excluding, however, any cause of action for specific performance.
14. SPECIFIC PERFORMANCE. The parties acknowledge that they will be irreparably
damaged in the event this Agreement is not specifically enforced. In the event
of any controversy concerning any provision of this Agreement the same shall be
enforceable in a court of equity or by decree of specific performance or by
temporary or permanent injunction or any other legal or equitable remedy,
without the necessity of showing actual damages or furnishing a bond or other
security. Except as otherwise expressly provided in this Agreement, such remedy
shall, however, be cumulative and not exclusive, and shall be in addition to any
other remedy the aggrieved party may have. Notwithstanding the foregoing
provisions, if Seller shall terminate this Agreement and be entitled to receive
the Escrow Deposit, Seller shall not be entitled to specific performance,
damages, or any other right or remedy against Buyer for Buyer's breach of any
covenants, representations or warranties or for any other matter or thing
pertaining to this Agreement, it being expressly understood and agreed that the
Escrow Deposit shall be agreed liquidated damages for any and all such causes of
action against Buyer.
15. PUBLIC ANNOUNCEMENTS. The parties shall issue a joint press release or, at
the election of the parties, separate press releases mutually-acceptable to the
parties, announcing the execution and delivery of this Agreement and the closing
of the transaction contemplated hereby. Except for any such press releases, the
parties shall not issue or make any press release or make any public statement
prior to or in connection with the Closing (the "Public Announcements") with
respect to this Agreement or the transactions contemplated hereby without the
other party's prior written consent except as may be required by law in the
opinion of such party's counsel. In the event the foregoing exception is
applicable, no Public Announcement will be made without written notice and a
copy of the proposed Public Announcements being provided to the other parties to
this Agreement no less than three
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(3) business days prior to the issuance of such Public
Announcements.
16. POST-CLOSING COVENANTS.
(a) NECESSARY ACTION. From time to time after the Closing Date, the Seller
shall, if requested by the Buyer, take such actions and make, execute and
deliver to the Buyer such additional instruments of transfer, as may be
necessary or proper to (i) transfer the Shares to the Buyer; and (ii) consummate
the transactions contemplated hereby. Notwithstanding the foregoing and except
as otherwise provided in this Agreement, the Seller shall not be responsible for
any filing fees or other payments which may be required by third parties in
consummating the transactions contemplated hereby.
(b) ACCESS TO BOOKS AND RECORDS. Following Closing and for ten (10) years
thereafter, the Seller shall have the right to review any records transferred to
the Buyer pursuant hereto which relate to the Businesses, upon reasonable notice
to the Buyer during normal business hours and to copy the same at the sole
expense of the Seller.
(c) RIGHTS OF WAY. Buyer shall grant to Seller certain limited license rights on
ATNG's rights of way and easements and Buyer shall maintain AlaTenn Pipeline
Company, Inc.'s existing right-of-way and properties with respect to its
gaseous-oxygen pipeline as set forth in the pipeline agreements attached hereto
as Exhibit K.
(d) SEVERANCE POLICY. Buyer shall provide severance benefits to the full-time
employees of ATNG as of the Closing Date (other than Jerry Howard, Jeffery
Strickland and George Petty) as provided on Exhibit L hereto for any such
employee terminated during the twelve (12) month period following Closing;
provided, however, that if any employee of a Subsidiary refuses a transfer to a
job at another location of the business of the Buyer or any of its affiliates
(provided such transfer is made by Buyer in good faith and the job entails the
same responsibilities and provides the same or greater base salary), then the
Buyer shall not be obligated to honor such severance obligation with respect to
such employee. Seller shall reimburse the Buyer for fifty percent (50%) of such
severance benefits paid to any such employee promptly upon receipt of an invoice
for the same, said reimbursement not to exceed, in the aggregate, Fifty Thousand
Dollars ($50,000) for all severed employees. Notwithstanding the foregoing, in
the event any such
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employee becomes an employee of Seller or any affiliate of Seller within six (6)
months following termination of such employee's employment with the applicable
Subsidiary, then the Seller shall promptly reimburse to Buyer, upon receipt of
an invoice therefor, an amount equal to the portion of the unreimbursed
severance benefits paid or to be paid to such employee by the Buyer.
Reimbursements made to Buyer pursuant to the immediately preceding sentence
shall be without regard to the Fifty Thousand Dollar ($50,000) limitation and
such reimbursements shall not be counted toward the accumulation of such dollar
limitation.
(e) OFFICE SPACE. For a period of six (6) months following Closing, Buyer shall
provide Seller with office space, office equipment, personnel and access to
equipment, all as more particularly described on Exhibit M hereto.
(f) GUARANTEED OBLIGATIONS. Buyer shall cause the Subsidiaries to
satisfy or fulfill all obligations of the Subsidiaries which are
guaranteed by Seller when such obligations are required to be
satisfied or fulfilled.
(g) SPECIAL ACCOUNT. The parties acknowledge that Seller has guaranteed
obligations of the Subsidiaries under certain Gas Purchase Contracts, Gas Sales
Contracts and Gas Transportation Contracts, which Guaranties are listed on
Schedule 16(g) hereto (the "Guaranties"). Prior to Closing, Buyer and Seller
shall cause the Subsidiaries to establish a separate corporate bank account with
Compass Bank (the "Special Account"). From and after the Closing the Buyer shall
cause all collections of accounts receivable of the Subsidiaries with respect to
their sales of natural gas purchased under the Gas Purchase Contracts or
transported under Gas Transportation Contracts which at such time remain under
the Guaranties to be paid into the Subsidiaries' existing accounts at Compass
Bank (the "Bank") and to be transferred on a daily basis from the Bank to the
Special Account. At Closing, Seller, Buyer and the Subsidiaries shall provide
(a) to the Subsidiaries' customers to which natural gas is sold or for whom it
is transported, irrevocable written instructions to make payments therefor to
the Subsidiaries' accounts at the Bank until otherwise instructed in writing by
Seller and Buyer, and (b) to the Bank, irrevocable written instructions to
transfer all funds in the Subsidiaries' accounts at the Bank to the Special
Account on a daily basis until otherwise instructed in writing by Seller and
Buyer. Funds in the Special Account shall be used to pay only the obligations
under the Gas Purchase Contracts and Gas Transportation
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Contracts except that the Buyer shall have the right to withdraw monthly for its
own uses from such account the amount by which the parties agree the revenues
from sales of gas purchased or transported under the Gas Purchase Contracts or
Gas Transportation Contracts exceed the payment obligations under the Gas
Purchase Contracts and Gas Transportation Contracts for such month. All payments
from the Special Account shall be applied to such obligations in chronological
order based on the respective due dates thereof; PROVIDED, HOWEVER, that all
such payables shall be paid as soon as possible after receipt of invoices
therefor if funds are available in the Special Account. Nothing contained herein
shall be construed as a limitation on the Buyer's and the Subsidiaries'
obligations to pay said obligations. The Special Account shall be closed (and
any balance remaining therein transferred to such other Buyer account or
accounts as may be specified by Buyer), and Seller shall, at Buyer's request,
sign any joint notification requested by Buyer instructing the Bank or any
customer of Buyer either to make payment or transfer funds or take other action
relating to Buyer's funds other than as described above, upon the later of (i)
the full payment of the obligations under the Gas Purchase Contracts and Gas
Transportation Contracts and (ii) termination of all Guaranties. Seller shall
have the right to audit and review all accounts, books and records relating to
the Special Account during normal business hours and upon reasonable notice, to
confirm Buyer's compliance with terms hereof. At Closing, Seller and Buyer shall
cause the Subsidiaries to execute and deliver a Security Agreement pursuant to
which Subsidiaries shall grant a security interest in the Special Account to
secure the payment and performance by the Subsidiaries of their obligations
under the applicable Gas Purchase Contracts and Gas Transportation Contracts.
Such Security Agreement shall be in form and substance reasonably acceptable to
Seller and shall provide that upon default Seller shall have all rights and
remedies of a secured party under the Uniform Commercial Code in effect in the
applicable jurisdiction, and that the Subsidiaries shall cooperate in giving the
Bank appropriate notice of existence of such security interest and the
Subsidiaries shall otherwise take any and all actions (including the filing of
appropriate financing statements) reasonably required by Seller to perfect such
security interest.
(h) TERMINATION OF GAS CONTRACTS. Buyer agrees to use its good
faith reasonable efforts following the Closing to obtain the
release of Seller from any Guaranty with respect to any of the Gas
Purchase Contracts, Gas Sales Contracts or Gas Transportation
Contracts which have terms extending beyond the Closing. In the
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event any such Guaranty is still in effect ninety (90) days after the Closing,
Buyer shall cause the applicable Subsidiary to terminate the applicable Gas
Purchase Contract or Gas Transportation Contract (if such Gas Transportation
Contract is terminable) at the end of such ninety-day period or purchase or
transport no additional gas thereunder so long as such Guaranty remains in
effect. At Closing, Buyer and Seller shall cause each applicable Subsidiary to
grant to Seller an irrevocable power of attorney giving Seller the right and
power to terminate such Gas Purchase Contracts or Gas Transportation Contracts
or cause no gas to be purchased or transported thereunder, on behalf of such
Subsidiary, at the end of such ninety (90)-day period. At Closing and therafter,
Buyer shall assume and perform all of Seller's obligations under the Agreement
dated as of January 26, 1990 by and among Champion International Corporation,
ATEMCO and TRIGAS and Seller.
17. TAXES.
(a) OBLIGATIONS REGARDING TAXES. Seller shall cause each Subsidiary to be
included in the respective consolidated federal income tax returns of the
applicable affiliated group of corporations which includes Seller (and the
income tax returns of any foreign, state or local taxing jurisdiction that
requires consolidated or combined income tax returns of affiliated groups of
corporations), for all periods ending on or before the Closing Date and will
timely file such returns and pay all taxes shown to be due thereon. For states
where short-period tax returns due to a change in ownership are required and the
state income tax year closes as a result of the sale of subsidiary stock with
respect to which a 338(h)(10) election is made, Seller will file the appropriate
state tax return for the applicable Subsidiary and pay the applicable taxes for
the period beginning with the beginning of the tax year through and including
the Closing Date. In states where short- period tax returns due to a change in
ownership are not allowed and the state income tax year does not close as a
result of the sale of the subsidiary stock with respect to which a 338(h)(10)
election is made, Seller shall prepare proforma federal and state returns which
report the taxable income from operations and gain from the sale from the
beginning of the Subsidiary's tax year through and including the Closing Date,
and pay to the Buyer the amount that would otherwise be due if the state
required a short-period return. Buyer shall have the opportunity to review such
pro forma returns for a period of twenty (20) days. Buyer shall be responsible
for and shall prepare and file all tax returns and pay all taxes with
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respect to the Subsidiaries for all periods following the Closing Date. Each
party shall cooperate with the other and grant the other access to information
as shall be reasonably necessary to prepare and file such returns.
(b) SECTION 338(H)(10) ELECTION. Seller and Buyer agree that Buyer may elect
that the parties should make one or more timely and effective elections under
Section 338(h)(10) of the Code (the "Section 338(h)(10) Election"). Upon written
notice by Buyer to Seller that the Section 338(h)(10) Election is to be made,
Seller agrees to cause the "common parent" (as defined in Section 1504 of the
Code) of the "affiliated group" (as defined in Section 1504 of the Code) that
includes the Seller and the Subsidiaries for the taxable period that includes
the Closing Date to join in the Section 338(h)(10) Election. Buyer agrees to
join in the Section 338(h)(10) Election. If Buyer elects to make a Section
338(h)(10) Election, Buyer will cause to be filed one or more fully executed
Forms 8023 on or before the time and in the place and manner provided by the
United States Treasury regulations under Section 338 of the Code, and will
provide notice of such filing to Seller. As soon as practicable after Buyer
elects to make a Section 338(h)(10) Election, Buyer and Seller shall allocate
the modified aggregate deemed sales price and the adjusted grossed-up basis
resulting from the Section 338(h)(10) Election in the manner set forth on
Exhibit N hereto and the parties shall use such allocation for all federal,
state and local income tax reporting purposes. The Buyer shall be liable for any
and all liability for any taxes arising, directly or indirectly, from a
liquidation, merger, sale or other disposition of any of the properties and/or
assets of the Subsidiaries subsequent to the Closing Date, or from an actual or
deemed election pursuant to Section 338 of the Code with respect to the
Subsidiaries or their respective properties and/or assets, other than any
liability for taxes arising from a properly filed Section 338(h)(10) Election.
Anything to the contrary in this Agreement notwithstanding, the parties'
covenants, agreements, rights and obligations with respect to any tax covered by
this Section 17(b) shall survive the Closing and shall not terminate until
twenty (20) business days after the expiration of all statutes of limitations
(including any and all extensions thereof) applicable to such tax or the
assessment thereof, and any claim for indemnification against claims resulting
from or arising out of the breach of any such covenant or agreement shall be
made, if at all, prior to the expiration of such period.
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18. ARBITRATION. The parties acknowledge and agree that this Agreement and the
performance of the transactions contemplated hereby evidence transactions which
involve a substantial nexus with interstate commerce. Accordingly, any dispute,
controversy or claim of any kind or nature which may arise between the parties
(including any dispute, controversy or claim relating to the validity of this
arbitration clause) with respect to this Agreement or the transactions
contemplated hereby, shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. Such arbitration proceedings shall be held in
Birmingham, Alabama, and shall be heard by an arbitrator mutually agreeable to
the Seller and the Buyer and, to the extent practicable, who is knowledgeable
and experienced in the type of matter that is the subject of the dispute. If the
parties are unable to agree on an arbitrator, then the arbitrator shall be
selected by the American Arbitration Association. The parties understand and
agree that the decision of the arbitrator shall be final and binding upon both
the Seller and the Buyer, and that the arbitrator shall have all powers provided
by law, and may award any legal or equitable relief, including, without
limitation, money damages, declaratory relief and injunctive relief; provided,
however, that the arbitrator's authority to award money damages shall be limited
to those falling within the definition of Damages. The arbitrator shall charge
all fees and expenses of the arbitration equally to the parties, except that
each party shall bear and pay all of its own attorneys' fees, accountants' fees,
expert witness fees and other fees and costs incurred by it in connection with
its preparation for and participation in the arbitration.
19. CASUALTY LOSSES. The Seller assumes all risk of loss, damage or destruction
to the physical assets of the Subsidiaries due to fire or other casualty up to
and including the Closing Date. In the event that there shall have been
suffered, between the date hereof and the Closing Date, damage to or destruction
to the physical assets of the Subsidiaries the cost of repairs or replacement of
which the Buyer reasonably determines to be in an amount greater than Two
Million Seven Hundred Fifty Thousand Dollars ($2,750,000), then the Buyer may
elect promptly after receiving all relevant facts regarding such occurrence (i)
to terminate this Agreement by giving written notice of such termination to the
Seller, or (ii) to waive such breach and consummate this Agreement, in which
case then at the Closing all
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claims to insurance proceeds or other rights of the Seller against third parties
arising from such casualty or loss shall (to the extent assignable) be
separately assigned by the Seller to the Buyer at the Closing. To the extent not
so assignable, such claims may be pursued by the Buyer, for its own account and
benefit, in the name of the Seller or, alternatively, the Buyer may elect to
reduce the Purchase Price by the amount of such loss.
20. PROHIBITED ACTIVITIES OF SELLER. In order to protect the
goodwill and business interests of the Subsidiaries following the
Closing, Seller covenants and agrees that it and its affiliates,
now or hereafter existing, will not:
(a) directly or indirectly, request or advise any party to any gas
sales, purchase or transportation contract, now or hereafter existing, with any
of the Subsidiaries, to withdraw, curtail or cancel any service to or from such
Subsidiary under the terms of any such contract;
(b) aid, abet or otherwise assist any person, firm, or corporation
seeking to interfere with the Subsidiaries' relationship with the parties to, or
the terms, of any gas sales, purchase or transportation contract, now or
hereafter existing, with any of the Subsidiaries;
(c) without the approval of the Chief Executive Officer of
the Buyer, directly or indirectly, induce or attempt to influence
any employee of the Subsidiaries to leave or terminate his
employment; or
(d) acting alone or in conjunction with others, directly or indirectly,
in any of the states of Alabama, Tennessee and Mississippi for a period of three
(3) years from the Closing Date, engage in any businesses in competition with
the businesses presently conducted by the Subsidiaries, whether for its own
account or for others, other than Central Gas Company's transporting and selling
of gas to the city of Florence, Alabama through its existing interconnect with
Tennessee Gas Pipeline and Tennessee River Development Company's transporting
and selling of gas to the city of Florence, Alabama through its existing
interconnect with Texas Eastern Transmission Company.
21. MISCELLANEOUS.
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(a) NOTICES. All notices and other communications required or permitted to be
given hereunder shall be in writing and shall be deemed to have been duly given
when personally delivered or deposited in the United States mail, by registered
or certified mail, return receipt requested, postage prepaid, and addressed to
the party to whom such notice relates at the following addresses:
IF TO SELLER ATRION CORPORATION
3230 Second Street
Muscle Shoals, Alabama 35662-3809
With a Copy to: Berkowitz, Lefkovits, Isom & Kushner
A Professional Corporation
1600 SouthTrust Tower
Birmingham, Alabama 35203
Attention: B.G. Minisman, Jr.
IF TO BUYER: MIDCOAST ENERGY RESOURCES, INC.
1100 Louisiana
Suite 2950
Houston, Texas 77002
With a Copy to: Ronald L. Chachere, Esq.
Suite 970
Mercantile Tower MT115
Corpus Christi, Texas 78477
or at such alternative addresses as may be specified by the parties by notice
given in the manner provided herein.
(b) BINDING EFFECT. All agreements made and entered into in connection with this
transaction shall be binding upon and inure to the benefit of the parties
hereto, their successors and assigns. No assignment of any right, title,
interest or obligation hereunder shall be effective unless approved in writing
by all of the other parties to this Agreement; provided, however, that Buyer
shall be permitted to assign this Agreement, including its rights and
obligations hereunder, to Midcoast Holdings No. One, Inc., provided further,
however, that Buyer shall not be released from any liabilities or obligations
hereunder as a result of such assignment.
(c) EXPENSES. Except as otherwise provided in Section 13 hereof,
each of the parties hereto shall each bear its own expenses and
costs, including the fees of any attorney retained by it, incurred
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in connection with the preparation of this Agreement and the
consummation of the transactions contemplated hereby.
(d) MERGER. This Agreement, along with the Exhibits and Schedules referred to
herein merges all previous negotiations between the parties hereto and
constitutes the entire agreement and understanding between the parties with
respect to the subject matter of this Agreement. No alteration, modification or
change of this Agreement shall be valid except by an agreement in writing
executed by the parties hereto.
(e) WAIVER. No failure or delay by any party hereto in exercising any right,
power or privilege hereunder (and no course of dealing between or among any of
the parties) shall operate as a waiver of any such right, power or privilege. No
waiver of any default on any one occasion shall constitute a waiver of any
subsequent or other default. No single or partial exercise of any such right,
power or privilege shall preclude the further or full exercise thereof. No
waiver of any right, power or privilege hereunder shall be enforceable unless in
writing and executed by the party against whom such enforcement is sought. The
waiver by any party hereto of any of the conditions precedent to its obligations
under this Agreement shall not preclude it from seeking redress for breach of
this Agreement other than with respect to the condition so waived.
(f) COUNTERPART EXECUTION. This Agreement may be executed and
delivered by telecopy and may be executed in two (2) or more
counterparts, each of which when so executed shall be an original,
but all of which together shall constitute one agreement.
(g) GOVERNING LAW. This Agreement shall be construed and
enforceable in accordance with, and be governed by, the internal
laws of the State of Alabama without regard to the principles of
conflicts of laws.
(h) SURVIVAL OF WARRANTIES, REPRESENTATIONS, AND AGREEMENTS. Except as otherwise
provided herein, the representations, warranties, agreements and
indemnifications of the Seller and the Buyer contained in this Agreement shall
not be discharged or dissolved upon, but shall survive the Closing, subject to
the limitations specified in Section 13 hereof, and shall be unaffected by any
investigation made by any party at any time.
43
<PAGE>
(i) INCLUDING. Wherever terms such as "include" or "including" are used in this
Agreement, they shall mean include or including without limiting the generality
of any description or word preceding such term.
(j) GENDER. Throughout this Agreement, wherever the context so permits, the
masculine gender shall be deemed to include the feminine gender and vice versa,
and both shall be deemed to include the neuter and vice-versa, and the singular
shall be deemed to include the plural and vice-versa.
(k) CAPTIONS. The captions or headings in this Agreement are made for
convenience and general reference only and shall not be construed to describe,
define or limit the scope or intent of the provisions of this Agreement.
(l) KNOWLEDGE DEFINED. The phrases, "knowledge," "to the knowledge" or similar
words or phrases used herein with respect to the Seller or the Subsidiaries
shall mean the actual knowledge of the Chief Executive Officer and Chief
Financial Officer of the Seller, the Controller, the Vice President of
Operations and Engineering, and Vice President of Regulatory Affairs and
Customer Service of ATNG, and the President of ATEMCO, without investigation.
(m) SCHEDULES. For purposes of this Agreement, any item set forth
on a Schedule of any party shall be deemed set forth on all
Schedules of such party.
(n) FURTHER ASSURANCES. In case at any time after the Closing any further action
is necessary to carry out the purposes of this Agreement, Seller and Buyer will
take or cause to be taken such further action (including the execution and
delivery of such further instruments and documents) as the other party
reasonably may request, all without further consideration.
(o) SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall continue in full force and effect and shall
in no way be affected, impaired or invalidated.
44
<PAGE>
(p) NO THIRD PARTY BENEFICIARY. This Agreement does not confer
upon any person not a party hereto (other than an assignee of a
party hereto) any rights or remedies hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first
above written.
SELLER:
ATRION CORPORATION
By:/S/ JERRY A. HOWARD
Its President
BUYER:
MIDCOAST ENERGY RESOURCES, INC.
By:/S/ DAN C. TUTCHER
Its President
45
<PAGE>
EXHIBIT 21.1
Subsidiaries of Midcoast Energy Resources, Inc.
<TABLE>
<CAPTION>
State of Year of Ownership Interest
SUBSIDIARIES INCORPORATION INCORPORATION BY MIDCOAST ENERGY
<S> <C> <C> <C>
Midcoast Holding No. One, Inc. Delaware 1993 100%
Midcoast Marketing, Inc. Texas 1991 100%
Magnolia Pipeline Corporation Alabama 1989 100%
Magnolia Resources, Inc. Mississippi 1996 100%
Magnolia Gathering, Inc. Alabama 1996 100%
Starr County Gathering System,
A Joint Venture Texas 1996 60%
Pan Grande Pipeline, L.L.C. Texas 1996 50%
Nugget Drilling Corporation* Minnesota 1982 100%
H & W Pipeline Corporation* Alabama 1976 100%
</TABLE>
- ----------
* Presently Inactive
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,167,825
<SECURITIES> 0
<RECEIVABLES> 8,891,808
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,059,633
<PP&E> 18,516,016
<DEPRECIATION> 1,550,670
<TOTAL-ASSETS> 27,303,214
<CURRENT-LIABILITIES> 8,924,226
<BONDS> 0
0
0
<COMMON> 25,000
<OTHER-SE> 13,568,084
<TOTAL-LIABILITY-AND-EQUITY> 27,303,214
<SALES> 29,415,333
<TOTAL-REVENUES> 29,415,333
<CGS> 24,801,781
<TOTAL-COSTS> 26,842,119
<OTHER-EXPENSES> 48,765
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 412,629
<INCOME-PRETAX> 1,914,089
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,914,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,891,226
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
</TABLE>
