U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended June 30, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-8898
Midcoast Energy Resources, Inc.
(Exact name of Registrant as Specified in Its Charter)
Nevada 76-0378638
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 Louisiana, Suite 2950
Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 650-8900
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
On June 30, 1997, there were outstanding 2,500,000 shares of the
Company's common stock, par value $.01 per share.
<PAGE>
MIDCOAST ENERGY RESOURCES, INC., and Subsidiaries
Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1997
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of December 31, 1996
and June 30, 1997 3
Consolidated Statements of Operations for the three months
and six months ended June 30, 1996 and June 30, 1997 4
Consolidated Statement of Shareholders' Equity for
the six months ended June 30, 1997 5
Consolidated Statements of Cash Flows for the three months
and six months ended June 30, 1996 and June 30, 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 12
SIGNATURE 14
<TABLE>
MIDCOAST ENERGY RESOURCES, INC., and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, June 30,
1996 1997
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,167,825 $ 91,571
Accounts receivable, no allowance
for doubtful accounts 8,891,808 10,156,524
Materials and supplies, at average cost - 552,420
Total current assets 10,059,633 10,800,515
PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas transmission facilities 11,939,173 49,026,458
Investment in transmission facilities 1,302,303 1,336,608
Natural gas processing facilities 3,735,262 3,853,055
Oil and gas properties, using the
full-cost method of accounting 1,274,436 1,342,212
Other property and equipment 264,842 2,271,467
18,516,016 57,829,800
ACCUMULATED DEPRECIATION, DEPLETION
AND AMORTIZATION (1,550,670) (2,031,183)
16,965,346 55,798,617
OTHER ASSETS, net of amortization 278,235 1,460,419
Total assets $27,303,214 $68,059,551
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 8,464,395 $ 8,882,993
Current portion of deferred income 83,000 83,000
Short-term borrowing from bank 180,000 90,000
Current portion of long-term debt payable to banks 196,831 3,783,831
Total current liabilities 8,924,226 12,839,824
LONG-TERM DEBT PAYABLE TO BAN 4,015,146 39,288,316
OTHER LIABILITIES AND DEFERRED CREDITS 152,167 299,720
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 618,591 624,845
COMMITMENTS AND CONTINGENCIES (Note 2 and 4)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 10 million shares
authorized, 2,499,999 and 2,500,000 shares
issued and outstanding at December 31, 1996
and June 30, 1997, respectively 25,000 25,000
Paid-in capital 26,941,660 26,941,660
Accumulated deficit (13,283,876) (11,928,614)
Unearned compensation (89,700) (31,200)
Total shareholders' equity 13,593,084 15,006,846
Total liabilities and shareholders' equity $27,303,214 $68,059,551
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
MIDCOAST ENERGY RESOURCES, INC., and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
<S>
OPERATING REVENUES: <C> <C> <C> <C>
Sale of natural gas and transportation fees $ 5,159,542 $10,139,284 $10,050,121 $20,768,315
Transportation revenue 398,030 1,337,177 1,017,730 2,124,960
Natural gas processing revenue - 1,110,430 - 2,580,550
Sale of pipelines 50,000 - 72,500 -
Oil and gas revenues 49,021 74,478 99,790 151,798
Total operating revenues 5,656,593 12,661,369 11,240,141 25,625,623
OPERATING EXPENSES:
Cost of natural gas and transportation charges 4,826,636 9,827,203 9,502,574 19,810,626
Natural gas processing costs - 858,821 - 1,900,200
Cost of pipelines sold - - 2,153 -
Production of oil and gas 17,568 16,641 39,856 28,197
Depreciation, depletion and amortization 161,233 313,763 1,992 568,778
General and administrative 320,776 580,951 519,746 955,020
Total operating expenses 5,326,213 11,597,379 10,376,321 23,262,821
Operating income 330,380 1,063,990 863,820 2,362,802
NON-OPERATING ITEMS:
Interest expense (118,046) (401,384) (237,925) (496,666)
Minority interest in consolidated subsidiari (50,978) (54,860) (71,612) (114,614)
Other income (expense), net (8,202) 15,609 (27,447) 3,740
INCOME BEFORE INCOME TAXES 153,154 623,355 526,836 1,755,262
PROVISION FOR INCOME TAXES - - - -
Net income 153,154 623,355 526,836 1,755,262
5% CUMULATIVE PREFERRED STOCK DIVIDENDS (8,108) - (22,863) -
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 145,046 $ 623,355 $ 503,973 $ 1,755,262
NET INCOME PER COMMON SHARE $ .10 $ .25 $ .34 $ .70
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,492,991 2,499,999 1,479,411 2,499,999
The accompanying notes are an integral part of these consolidated financial statements.<PAGE>
</TABLE>
<TABLE>
MIDCOAST ENERGY RESOURCES INC., and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<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, 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 - 45 5,955 - - 6,000
Shares issued or vested under various
stock-based compensation arrangements - 298 38,401 - 17,100 55,799
Redemption of 200,000 shares of 5%
cumulative preferred stock (200,000) - 81,634 - - (118,366)
Sale of 1,000,000 shares of common
stock - 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
Shares vested under various stock-based
compensation arrangements - - - - 58,500 58,500
Net income - - - 1,755,262 - 1,755,262
Common stock dividends, $.08 per share - - - (400,000) - (400,000)
BALANCE, JUNE 30, 1997 (Unaudited) $ - $25,000 $26,941,660 $(11,928,614) $ (31,200) $15,006,846
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
MIDCOAST ENERGY RESOURCES, INC., and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income applicable to common shareholders $ 145,046 $ 623,355 $ 503,973 $ 1,755,262
Adjustments to arrive at net cash provided (used)
in operating activities-
Depreciation, depletion and amortization 161,233 313,763 311,992 568,778
Gain on sale of operating pipeline - - (20,347) -
Recognition of deferred income (20,750) (20,750) (41,500) (41,500)
Increase in deferred tax asset - 8 ,500 - 8,500
Minority interest in consolidated subsidiaries 50,979 54,860 71,612 114,614
Issuance of common stock to employees 38,886 - 38,886 17,875
Other - 184,723 - 184,723
Changes in working capital accounts-
Increase in accounts receivable (255,617) (5,135,399) (313,526) (1,264,717)
Increase in other current assets - (552,420) - (552,420)
Increase in accounts payable and accrued liabilities 114,933 2,854,861 989,862 488,540
Net cash provided (used) by operating activities 234,710 (1,668,507) 1,540,952 1,279,655
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (584,600) (36,949,498) (1,870,252) (39,374,524)
Other (363,520) (984,295) (292,252) (1,123,155)
Net cash used in investing activities (948,120) (37,933,793) (2,162,504) (40,497,679)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank debt borrowings 1,380,000 37,565,000 4,008,000 39,675,000
Bank debt repayments (1,250,148) (542,545) (2,534,655) (904,830)
Proceeds from notes payable to shareholders and
affiliates - - 100,000 -
Repayments on notes payable to shareholders and
affiliates - - (660,000) -
Contributions from (distributions to) joint venture
partners 285,000 (170,000) 285,000 (228,400)
Dividends on common stock - (200,000) - (400,000)
Net cash provided by financing activities 414,852 36,652,455 1,198,345 38,141,770
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (298,558) (2,949,845) 576,793 (1,076,254)
CASH AND CASH EQUIVALENTS, beginning of period 981,503 3,041,416 106,152 1,167,825
CASH AND CASH EQUIVALENTS, end of period $ 682,945 $ 91,571 $ 682,945 $ 91,571
CASH PAID FOR INTEREST $ 115,658 $ 81,266 $ 258,590 $ 210,293
CASH PAID FOR INCOME TAXES $ - $ 1,364 $ - $ 52,839
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial information has been prepared by Midcoast
Energy Resources, Inc. ("Midcoast" or "the Company") in accordance with the
instructions to Form 10-Q. The information furnished reflects all
adjustments, all of which were of a normal recurring nature, which are, in the
opinion of the Company, necessary for a fair presentation of the results for
the interim periods presented. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including significant accounting
policies, normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Certain reclassification entries were
made with regard to the Consolidated Financial Statements for the periods
presented in 1996 so that the presentation of the information is consistent
with reporting for the Consolidated Financial Statements in 1997. It is
suggested that the financial information be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996.
2. ACQUISITIONS
In May 1997, the Company consummated the acquisition of the stock of three
subsidiaries of Atrion Corporation for cash consideration of approximately
$39.4 million subject to post closing adjustments and up to $2 million of
deferred contingent payments to be paid over an eight-year period. The three
subsidiaries include Midcoast Interstate Transmission, Inc. ("MIT")(f/k/a
Alabama Tennessee Natural Gas Company), Tennessee River Intrastate Gas
Company, Inc. ("TRIGAS") and Midcoast Marketing, Inc. ("MMI")(f/k/a AlaTenn
Energy Marketing Company, Inc. (collectively the "Atrion Subsidiaries"). MIT
owns and operates a 288 mile interstate pipeline, with two compressor
stations, that runs from Selmer, Tennessee to Huntsville, Alabama. TRIGAS
owns and operates a 38 mile pipeline extending from Barton, Alabama to
Courtland, Alabama and a one mile pipeline in Morgan County, Alabama, which
transport gas to two industrial customers. MMI is a natural gas marketing
company which primarily services the natural gas needs of the customers on MIT
and TRIGAS. The acquisition was initially financed through the Company's
existing credit facility (see Note 3) until the Company completed its common
stock offering on July 2, 1997.
The following table presents selected financial data on a pro forma basis
assuming (i) the purchase of the Harmony gas processing plant and gathering
system ("Harmony System") (ii) the acquisition of the Atrion Subsidiaries,
and (iii) the issuance and sale of 2,315,000 shares of the Company's common
stock at $16.00 per share as if these events had occurred as of the beginning
of the period presented. The pro forma data reflect estimated asset,
liability, revenue and expense values of the Harmony System and the
Atrion Subsidiaries and other assumptions which are based on estimates and
subject to revision. The pro forma combined results presented are not
necessarily indicative of actual results that would have been achieved had the
acquisitions occurred at the beginning of the periods presented, or of future
results.
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
Operating Revenues (000) $31,306 $23,489 $76,634 $68,508
Net Income (000) $ 1,398 $ 1,257 $ 3,799 $ 3,411
Net Income Per Share $ .37 $ .26 $ 1.00 $ .71
For further information regarding the acquisition of the Harmony System or the
Atrion Subsidiaries, refer to the Company's Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on June 26, 1997.
3. BANK DEBT
In May 1997, the Company's borrowing availability under its agreement
(the"Credit Agreement") with its existing bank lender was increased in
anticipation of acquiring the Atrion Subsidiaries. The Credit Agreement was
amended to include (i) a $13.0 million facility of which $3.0 million can be
used for working capital needs and $10.0 million is available for issuances
of letters of credit, (ii) a $38.5 million reducing revolving line of credit
with $7.0 million reducing in August 1997 and then monthly at a rate of
$262,500 and (iii) a $5.0 million reducing revolving line of credit for use
by MIT reducing at a monthly rate of $41,667. In addition to the fees
currently required under the Credit Agreement, an additional $100,000 fee was
paid in consideration for extending the financing.
4. COMMITMENTS AND CONTINGENCIES
In January 1997, the Compensation Committee approved an amendment to the
Employment Agreement of Dan C. Tutcher, the Chief Executive Officer and
President of the Company extending the term to December 2001 and pursuant to
which he receives a base annual salary of $95,000 in 1997, $125,000 in 1998
and 1999 and $150,000 in 2000 and 2001. He may further participate in any
such executive level bonuses or salary increases as the Compensation Committee
may approve, is entitled to reimbursement for reasonable automobile
expenses not to exceed $500 each month and is eligible for participation in
the Company's group insurance plans. Mr. Tutcher is required to devote his
full business time and attention to the Company.
In September 1996, an involuntary petition for relief under Chapter 11 of the
United States Bankruptcy Code was filed against Stewart Petroleum Company
("Stewart") in the United States Bankruptcy Court for the District of Alaska
(the "Court") by certain working interest owners in the West McArthur River
Unit ("WMRU"), which was operated by Stewart. The Company receives a
throughput fee for all oil and natural gas transported through the WMRU
pipeline; however, payment of the Company's throughput fee was suspended by
the Court, and only those claims deemed to be necessary to avoid immediate
and irreparable harm to the Stewart estate were paid. Stewart consented to an
order for relief in January 1997 and subsequently filed a Disclosure
Statement and Plan of Reorganization, as amended (the "Stewart Plan"). In May
1997, the Court approved the sale to a third party of substantially all
Stewart's assets, including the WMRU. The sale, which was completed in June
1997, was effective January 1, 1997. Subsequent to the sale, the Company
negotiated an assumption agreement with the purchaser for the Company's
throughput interest, wherein the purchaser paid the Company for all accrued
but unpaid throughput fees subsequent to the effective date and agreed to pay
the Company for all future throughput fees as they become due. An order
approving the Stewart Plan was granted by the Court on August 4, 1997 and
pursuant to the Stewart Plan, the Company was paid in full for all throughput
fees which were accrued prior to January 1, 1997.
5. STOCK OPTION PLANS
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 April 1997, the Board approved the adoption of the 1997 Non-Employee
Director Stock Option Plan (the "Director Plan"), which was subsequently
approved by the Company's shareholders in May 1997. The Director Plan
provides for the grant to non-employee: (I) Existing Directors (as defined)
on the Effective Date (as defined) a non-qualified stock option ("NQO") to
purchase 5,000 shares of common stock and (ii) New Directors (as defined) on
their initial election a NQO to purchase 15,000 shares of common stock, both
at an exercise price equal to the fair market value of the common stock on the
date of grant. The Director Plan also entitles each non-employee director to
receive a NQO to purchase 5,000 shares of common stock on each date he is
reelected to the Board.
The Compensation Committee has no discretion as to the selection of the non-
employee directors to whom NQOs are to be granted or Cash Fee Awards (as
defined) paid, the number of shares subject to any NQO granted, the exercise
price to any NQO granted or the ten-year maximum term of any NQO granted
thereunder. The Compensation Committee has the authority to interpret and
construe any provision of the Director Plan and to adopt such rules and
regulations for administering the Director Plan as it deems necessary. All
decisions and determinations of the Compensation Committee are final and
binding on all parties. The Company has agreed to indemnify each member of
the Compensation Committee against any cost, expense or liability arising out
of any action, omission or determination relating to the Director Plan, unless
such action, omission or determination was taken or made in bad faith and
without reasonable belief that it was in the best interest of the Company.
The Director Plan provides for the adjustment of the number of shares or
exercise price of any option awarded thereunder, in conjunction with any stock
dividend, any subdivision or combination of the outstanding shares of common
stock and any merger, consolidation, recapitalization of the Company or other
similar event which affects the issued and outstanding shares of common stock.
Pursuant to the Director Plan, 5,000 NQOs were granted to the only Existing
Director in May 1997. The NQOs were issued at an exercise price equal to the
fair market value on the date of grant which was $15.125, and which expires
ten years from the date of grant.
6. SUBSEQUENT EVENTS
On July 27, 1997, the Company's Registration Statement on Form S-1 was
declared effective by the Securities and Exchange Commission. On July 2,
1997, after consideration of the underwriters exercising the over-allotment
option, the Company sold 2,315,000 shares of its common stock at an offering
price of $16.00 per share. The Company's stock is listed on the American
Stock Exchange under the symbol "MRS." After deducting underwriting
commissions, proceeds of $34,632,400 were received by the Company. The
proceeds were used to repay a portion of the indebtness incurred for the
acquisition of the Atrion Subsidiaries (See Note 2).
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Second quarter operating revenues increased 124%, from $5.7 million in 1996
to $12.7 million in 1997. The increased revenues were primarily the result of
numerous pipeline acquisitions made during the second half of 1996, the
purchase of the Harmony gas processing plant and gathering system (the
"Harmony System") effective August 1, 1996 and the acquisition of three
subsidiaries of Atrion Corporation (the "AlaTenn Acquisition") effective May
30, 1997. The AlaTenn Acquisition produced $5.9 million in operating revenue
during June 1997. The Harmony system generated $1.1 million in operating
revenue during the second quarter.
Operating revenues for the six months ended June 30, 1997 totaled $25.6
million, a 128% increase over the $11.2 million in operating revenue generated
for the six months ended June 30, 1996. As previously stated, the
acquisitions made in the second half of 1996 and the AlaTenn Acquisition were
the primary causes of the increased revenues.
Operating Expenses:
Second quarter operating expenses increased 118%, from $5.3 million in 1996
to $11.6 million in 1997. Operating expenses for the six months ended June 30,
1997 totaled $23.3 million, as compared to $10.4 million for the same period
in 1996. The acquisitions explained in the previous section were primarily
responsible for this 124% increase.
Depreciation, depletion and amortization expense was approximately $569,000
for the six months ended June 30, 1997 with $314,000 of the expense incurred
during the second quarter. These amounts represent a 95% increase in the
expense incurred during the second quarter and an 82% increase in the expense
for the six months ended June 30 when compared to the same periods in 1996.
The pipeline acquisitions and the purchase of the Harmony System in 1996 were
the principal causes of the increased depreciation.
General and administrative expenses were approximately $581,000 for the second
quarter and $955,000 for the six months ended June 30, 1997, as compared to
$321,000 and $520,000 for the same periods in 1996, respectively. The chief
cause of the increased expenses was the AlaTenn Acquisition. Despite the
Company's rapid growth, the Company's general and administrative expenses
increased only 81% in 1997 over 1996 for the second quarter and 84% for the
six months ended June 30. The Company has controlled its general and
administrative expenses by capitalizing on synergies between its existing
businesses and its acquisitions.
Second quarter interest expenses increased 240% from approximately $118,000
in 1996 to $401,000 in 1997. Interest expenses increased 109% from
approximately $238,000 for the six months ended June 30, 1996 to $497,000 for
the same period in 1997. The additional debt the Company incurred to complete
the AlaTenn Acquisition caused the increased interest expense. The Company
paid approximately $269,000 in interest expenses for the month of June 1997
to finance the AlaTenn Acquisition.
Earnings:
The Company recognized second quarter operating income and net income in 1997
of $1.1 million and $0.6 million, respectively, as compared to $.3 million in
operating income and $0.1 million in net income for the second quarter of
1996. Second quarter earnings per share ("EPS") increased 150% from $0.10 in
1996 to $0.25 in 1997. The Company achieved the increased EPS despite the
dilutive effects of issuing additional shares in the August 1996 stock
offering. The Company attributes the significant improvement to the positive
results derived from the numerous pipeline acquisitions in the second half of
1996, the Harmony System acquisition, and the one month of operations from the
AlaTenn Acquisition.
The Company recognized operating income and net income of $2.4 million and
$1.8 million, respectively, for the six months ended June 30, 1997 as compared
to operating income of $0.9 million and net income of $0.5 million for the
same period in 1996. The Company realized a $0.70 EPS for the first half of
1997 as compared to $0.34 for the same period in 1996. As previously stated,
the acquisitions of pipelines, the Harmony System acquisition and the AlaTenn
Acquisition were the principal reasons for the increased EPS.
Capital Resources and Liquidity
The Company had historically funded its capital requirements through cash flow
from operations and borrowings from affiliates and various commercial lenders.
However, with the completion of its initial common stock offering in August
1996 and most recently its secondary common stock offering in July 1997, the
Company's capital resources and liquidity have improved significantly. After
consideration of reducing bank indebtedness with the net proceeds from the
July 1997 equity offering, the Company's long-term debt to total
capitalization ratio is approximately 15%. This increases the Company's
financial flexibility to pursue future growth opportunities utilizing lower
cost conventional bank debt financing.
The Company established its Credit Agreement with Bank One, Texas N.A. in
August 1996. Amounts available under the Credit Agreement were increased
to $46.5 million in May 1997 in conjunction with the acquisition of the
Atrion Subsidiaries. The revised Credit Agreement provides borrowing
availability as follows: (i) a $13.0 million working capital facility, of
which $3.0 million can be used for working capital needs and $10.0 million of
which is available for issuance of letters of credit, with an initial
commitment expiring in August 1999, (ii) a $38.5 million reducing revolver
which reduces by $7.0 million in August 1997 and expires in August 1999
("Reducing Revolver") and (iii) a $5.0 million MIT reducing revolver ("MIT
Revolver") expiring in August 1999. Available credit under the Reducing
Revolver and the MIT Revolver will be reduced by a total of approximately
$362,667 per month from July 1, 1997 to August 31, 1997 and by $304,167 per
month thereafter.
At July 31, 1997, the Company had approximately $3.0 million of available
credit under the working capital facility, $30.3 million under the Reducing
Revolver and $5.0 million of available credit under the MIT Revolver. The
borrowing availability under each line is subject to revision, on a monthly
basis for the Working Capital Facility and a semi-annual basis for the
Reducing Revolver and the MIT Revolver (or otherwise at the discretion of Bank
One), 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.
With respect to the Reducing Revolver and the MIT Revolver, 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% per annum or the Bank One base rate (8.50% at July 31, 1997) plus
.25% per annum. When borrowings are greater than 50% of available credit, an
additional .25% will be added to the above interest rates. With respect to
the Working Capital Facility, the per annum interest accrues at the Bank One
base rate plus .50%. 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, the pledge of the
stock of MIT, the pledge of the stock of Magnolia Pipeline Corporation and a
first lien security interest in the Company's pipeline systems.
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 will be affected by annual
limitations on the use of such carryforwards due to a change in stockholder
control under the Internal Revenue Code triggered by the Company's July
1997 common stock offering. The Company believes, however, that the
limitation will not materially impact the Company's ability to utilize
the NOL carryforwards prior to their expiration.
Excluding the cost of the Atrion Subsidiaries acquisition, the Company expects
to have $1.3 million of capital expenditures in 1997. The Company believes
that its existing Credit Agreement and funds provided by operations will be
sufficient for it to meet its expected capital expenditures and operating
cash needs for the foreseeable future.
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, whether funds provided by
operations will be sufficient to meet its operational needs in the foreseeable
future, and its ability to utilize NOL carryforwards prior to their
expiration. Although Midcoast believes that the expectations reflected in such
forward looking statements are reasonable, it can give no assurance that such
expectations reflected in such forward looking statements will prove to be
correct. The ability to achieve Midcoast's expectations is contingent upon
a number of factors which include (i) timely approval of Midcoast's
acquisition candidates by appropriate governmental and regulatory agencies,
(ii) effect of any current or future competition, (iii) retention of key
personnel and (iv) obtaining and timing of sufficient financing to fund
operations. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
disclosed in this report, including without limitation those statements made
in conjunction with the forward looking statements included in this report.
All subsequent written and oral forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 8, 1997.
Stockholders of record at the close of business on April 14, 1997 were
entitled to vote. The stockholders voted on nominations to the board of
directors, the 1996 Incentive Stock Plan, and the 1997 Non-Employee Director
Stock Option Plan.
The stockholders elected each of the three directors nominated for the board
of directors as follows:
Directors Votes For Votes Against Abstaining Broker No-Votes
Dan C. Tutcher 2,311,302 4,673 - -
I.J. Berthelot, II 2,311,274 4,701 - -
Richard N. Richards 2,311,274 4,701 - -
The stockholders approved the 1996 Incentive Stock Plan and the 1997 Non-
Employee Director Stock Option Plan as follows:
Votes For Votes Against Abstaining Broker No-Votes
Incentive Stock Plan 1,806,362 269,388 7,039 233,186
Directors Plan 2,054,834 19,277 8,678 233,186
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
2.1 Stock Purchase Agreement dated March 18, 1997 by and
between Midcoast Energy Resources, Inc. and Atrion
Corporation (Incorporated by reference from Midcoast
Form 10-KSB for the fiscal year ended December 31,
1996, as Exhibit 2.7).
10.1 Amendment to Employment Agreement dated April 17, 1995
by and between Midcoast Energy Resources, Inc. and
I.J. Berthelot, II dated April 25, 1997. (Incorporated
by reference from Midcoast Form 10-QSB for the three
months ended March 31, 1997)
10.2 Amendment to Employment Agreement dated April 1, 1993
by and between Midcoast Energy Resources, Inc. and Dan
C. Tutcher dated April 14, 1997. (Incorporated by
reference from Midcoast Form 10-QSB for the three
months ended March 31, 1997)
10.3 Indemnity Agreement dated April 23, 1997 between
Midcoast Energy Resources, Inc. and Richard A. Robert.
(Incorporated by reference from Midcoast Registration
Statement on Form S-1 (No. 333-27885) dated June 26,1997)
10.4 Indemnity Agreement dated April 23, 1997 between
Midcoast Energy Resources, Inc. and Dan C. Tutcher.
(Incorporated by reference from Midcoast Registration
Statement on Form S-1 (No. 333-27885) dated June 26,1997)
10.5 Indemnity Agreement dated April 23, 1997 between
Midcoast Energy Resources, Inc. and I.J. Berthelot,
II.(Incorporated by reference from Midcoast
Registration Statement on Form S-1 (No. 333-27885)
dated June 26, 1997)
10.6 Indemnity Agreement dated April 23, 1997 between
Midcoast Energy Resources, Inc. and Duane S. Herbst.
(Incorporated by reference from Midcoast Registration
Statement on Form S-1 (No. 333-27885) dated June 26, 1997)
10.7 Indemnity Agreement dated April 23, 1997 between
Midcoast Energy Resources, Inc. and Richard N.
Richards. (Incorporated by reference from Midcoast
Registration Statement on Form S-1 (No. 333-27885)
dated June 26, 1997)
10.8 Indemnity Agreement dated April 23, 1997 between
Midcoast Energy Resources, Inc. and E.P. Marinos
(Incorporated by reference from Midcoast Registration
Statement on Form S-1 (No. 333-27885) dated June 26, 1997)
10.9 1997 Non-Employee Director Stock Option Plan.
(Incorporated by reference from Midcoast Form 10-QSB
for the three months ended March 31, 1997)
10.10 First Amendment to Credit Agreement dated May 30, 1997
by and between Bank One, Texas N.A. and Midcoast
Energy Resources, Inc., Magnolia Pipeline Corporation,
H&W Pipeline Corporation, Magnolia Resources, Inc.,
Magnolia Gathering Inc., Midcoast Holdings No. One,
Inc., Midcoast Gas Pipeline, Inc., Nugget Drilling
Corporation, Midcoast Marketing, Inc., AlaTenn Energy
Marketing Company, and Tennessee River Intrastate Gas Co.
(Incorporated by reference from Midcoast Regristration
Statement on Form S-1 (No.333-27885) dated June 26, 1997)
b. Reports on Form 8-K:
None<PAGE>
Signature
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MIDCOAST ENERGY RESOURCES, INC.
(Registrant)
BY: /s/ Richard A. Robert
Richard A. Robert
Principal Financial Officer
Treasurer
Principal Accounting Officer
Date: August 14, 1997
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