SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
For the transition period from _______________ to _______________
Commission file number 0-23451
Independent Energy Holdings plc
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
Dominion Court, 43 Station Road, Solihull, West Midlands, U.K. B91 3RT
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
American Depositary Shares representing Ordinary Shares
(Title of Class)
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
17,935,527 Ordinary Shares
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes _X_ No ___
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17 _X_ Item 18 ___
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Item Caption Page
- ---- ------------ ----
<S> <C> <C>
Table of Contents ................................................................i
Glossary ..........................................................................1
Presentation Of Information........................................................3
Exchange Rates ....................................................................3
Forward Looking Statements.........................................................4
Part I Item 1 Description of Business...........................................5
Item 2. Description of Property...........................................8
Item 3. Legal Proceedings................................................11
Item 4. Control of Registrant............................................11
Item 5. Nature of Trading Markets........................................11
Item 6. Exchange Controls and Other Limitations
Affecting Security Holders.....................................13
Item 7. Taxation.........................................................13
Item 8. Selected Financial Data..........................................17
Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................18
Item 9A.Qualitative and Quantitative Disclosure About Market Risk .......23
Item 10.Directors and Officers of Registrant.............................23
Item 11.Compensation of Directors and Executive Officers.................25
Item 12.Options to Purchase Securities from Registrant or Subsidiaries...25
Item 13.Interest of Management in Certain Transactions...................26
Part II Item 14.Description of Securities to be Registered*......................27
Part III Item 15 Defaults upon Senior Securities*.................................28
Item 16.Changes in Securities and Changes in Security
for Registered Securities* ....................................28
Part IV Item 17 Financial Statements............................................F-1
Item 18 Financial Statements and Exhibits*..............................N/A
Item 19 Financial Statements and Exhibits..............................F-27
Signature ................................................................S-1
</TABLE>
*Not applicable or the answer is negative.
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GLOSSARY
Unless the context indicates otherwise, the following terms have the
meanings shown below:
Bcf--a billion cubic feet of gas at standard conditions
Consumer--an end-user of electricity whose usage is recorded by one meter
CFD--a contract for difference, a hedging instrument
Crude oil or oil--crude oil, including condensate and natural gas liquids
Electricity Act--Electricity Act 1989
Gas or natural gas--any hydrocarbons or mixture of hydrocarbons and other
gases consisting primarily of methane which at normal operating conditions are
in a gaseous state
Generator--a producer of electricity
GW--Gigawatt, 1,000 MW
GWh--Gigawatthour, 1,000 MWh
kW--kilowatt, the unit measurement of the rate at which electricity is
consumed or generated. It is a measurement of power or capacity. One kW is
approximately the power absorbed by 0.8 horsepower
kwh--a unit of electricity equal to one kW produced or consumed for one
hour
Mcf--a thousand cubic feet of gas at standard conditions
MW--Megawatt, 1,000 kW
MWh--Megawatthour, 1,000 kWh
NGC--National Grid Company plc
Peaking plant--an electricity generating facility that generates
electricity to be sold when the "peak" demand (and hence price) for electricity
makes it advantageous to generate marginal or higher cost electricity
PES--primary electricity supplier
Proved developed reserves--the oil and gas reserves expected to be produced
through existing wells and existing equipment and operating methods (additional
oil and gas reserves expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery are included only after testing a
pilot project or after the operation of an installed program has confirmed
through production response that increased recovery will be achieved).
Proved reserves--the estimated quantities of crude oil and natural gas
which geological and engineering data demonstrate with reasonable certainty to
be recovered in future years from known reservoirs under existing economic and
operating conditions, i.e., prices and costs as of the date the estimate is
made. Prices include consideration of changes in existing prices provided only
by contractual agreements, but not escalations based upon future conditions.
<PAGE>
Proved undeveloped reserves--the oil and gas reserves expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for completion, but not including
reserves attributable to any acreage for which an application of fluid injection
or other improved recovery technique is contemplated, unless such techniques
have been proved effective by actual tests in the area and in the same reservoir
(reserves on undrilled acreage are limited to those drilling units offsetting
productive units that are reasonably certain of production when drilled; proved
reserves for other undrilled units can be claimed only where it can be
demonstrated with certainty that there is continuity of production from the
existing formation).
REC--regional electricity company
Second tier direct sales--a system where a supplier of electricity holding
a second tier license uses the distribution system of a third party to transport
power to an end user and pays a fee for the use of the distribution system
Second tier license--a license issued by the regulator enabling the holder
to be a supplier of electricity
Supplier--the entity that provides and charges the user (customer) for
electricity. The supplier may generate the electricity or purchase it from the
Pool.
The Pool--the Electricity Pool of England and Wales, a trading mechanism
where the physical trading of electricity between generators and suppliers
occurs
TWh--Terawatthour, 1,000 GWh
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PRESENTATION OF INFORMATION
Independent Energy Holdings plc is a public limited company incorporated in
England and Wales, which conducts its operations through subsidiaries. The term
"Independent Energy" or the "Company" as used in this Annual Report on Form 20-F
(the "Annual Report") refers to the Independent Energy Holdings plc and/or its
subsidiaries as appropriate.
The audited consolidated financial statements of the Company as of and for
the year ended December 31, 1995, the six months ended June 30, 1996, the fiscal
year ended June 30, 1997 and the fiscal year ended June 30, 1998 contained
elsewhere in this Report are presented in conformity with generally accepted
accounting principles in the United Kingdom ("U.K. GAAP") together with a
reconciliation of net income (loss) and shareholders' equity to generally
accepted accounting principles in the United States ("U.S. GAAP"). In 1996, the
Company changed its fiscal year end from December 31 to June 30. Accordingly,
this Report includes audited financial statements as of and for the six months
ended June 30, 1996.
The Company publishes its financial statements in pounds sterling ("pounds"
or "(pound)"). One pound consists of one hundred pence (100p). In this Report,
currency amounts are expressed in pounds or in United States dollars ("dollars"
or "$"). For the convenience of the reader, this Report presents certain
translations into dollars of certain pound amounts. These translations should
not be construed as representations that the pound amounts actually represent
such dollar amounts or could be converted into dollars at the rates indicated or
at any other rate. Unless otherwise specified herein, such translations have
been made at the noon buying rate in New York City for cable transfers in pounds
as certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate") on the dates specified herein.
The principal office of the Company is located at Dominion Court, 43
Station Road, Solihull, West Midlands, U.K. B91 3RT and its telephone number is
011-44-121-705-1111.
EXCHANGE RATES
The table below sets forth, for the periods and dates indicated, the
exchange rate for the dollar against the pound based on the Noon Buying Rate,
expressed in dollars per pound. Such rates are not used by the Company in the
preparation of its consolidated financial statements and the notes thereto
included elsewhere in this Report.
Dollar/Pound Exchange Rates
(dollar per pound)
--------------------------------------
At End Average
Year End December 31, of Period Rate (1) High Low
- --------------------- --------- -------- ---- ---
1993 ............................... 1.48 1.50 1.59 1.42
1994 ............................... 1.57 1.54 1.64 1.46
1995 ............................... 1.55 1.58 1.64 1.53
1996 ............................... 1.71 1.57 1.71 1.49
1997 ............................... 1.64 1.64 1.70 1.58
1998 (through June 30)(2) .......... 1.66 1.66 1.69 1.61
- ----------
(1) The average of the Noon Buying Rates on the last business day of each full
month during the relevant period.
(2) On October 7, 1998 the Noon Buying Rate was $1.70 to (pound)1.00.
3
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FORWARD LOOKING STATEMENTS
This Report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements regarding the Company's expected future
financial position, results of operations, cash flows, financing plans, business
strategy, budgets, projected costs and capital expenditures, competitive
positions, growth opportunities, plans and objectives of management for future
operations and words such as "anticipate," "believe," "plan," "estimate,"
"expect," "intend" and other similar expressions are forward-looking statements.
Such forward-looking statements are inherently uncertain, and actual future
results and trends for the Company may differ materially depending on a variety
of factors. Factors that may affect the plans or results of the Company include,
without limitation, (i) success in implementing the Company's business
strategies, including the continued expansion of the Company's operations
following the final phase of that commenced in September 1998, (ii) the cost of
electricity purchases, (iii) the nature and extent of future competition and
(iv) the changes in the general economic condition in the U.K. and/or in the
markets in which the Company competes. Many of such factors are beyond the
control of the Company and its management.
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PART I
Item 1. Description of Business
Overview
Independent Energy is the largest independent marketer of electricity in
the United Kingdom (i.e., not a part of the government-owned electricity
industry at the time of its privatization in 1990). The Company was founded to
capitalize on the market opportunities created by the deregulation of the United
Kingdom electricity market and has assembled a core management team with
extensive industry experience from a number of leading U.K. energy firms,
including Scottish Power plc, National Power plc, Scottish Hydro-Electric plc
and Midlands Electricity plc. Since commencing electricity sales in April 1996,
management believes that it has established Independent Energy as a reliable
alternative provider of electricity. The Company currently has over 1,400
customers, primarily in the light industrial, commercial and public sector
markets. The Company increased its revenue from (pound)11.1 million ($18.4
million) for the fiscal year ended June 30, 1997 to (pound)58.0 million ($96.3
million) for the fiscal year ended June 30, 1998. The Company's revenue for the
three months ended June 30, 1998 was (pound)23.1 million ($38.4 million).
Deregulation of the U.K. electricity industry commenced in April 1990 and
has encompassed each of the supply (marketing), transportation and generation
segments of the industry. The supply segment is being deregulated in three
phases. The first two phases have been completed and enabled consumers with 100
kW or greater peak demand to choose their electricity supplier. The final phase
will enable all remaining consumers to choose their supplier and began in
September 1998 and is expected to be completed in June 1999. With respect to the
deregulation of the generation segment, anyone who obtains the requisite permits
and licenses may install and operate generation facilities. A spot market,
called the Electricity Pool of England and Wales (the "Pool"), was established
for the bulk trading of electricity in England and Wales between generators and
suppliers. All generating plants with a capacity of 100 MW or greater are
required to sell their output to the Pool. Plants with less than 100 MW capacity
may sell their output to consumers, suppliers or the Pool, which is required to
purchase the output at the prevailing spot market price. The deregulation of the
transportation segment enabled suppliers to transport electricity at regulated
rates without discrimination over bulk transmission lines operated by the
National Grid Company plc ("NGC") and distribution lines operated by the twelve
regional electricity companies ("RECs").
The first two phases of deregulation of the supply segment of the U.K.
electricity industry enabled approximately 55,000 commercial and industrial
customers with aggregate annual electricity expenditures of approximately
(pound)4.6 billion to select their supplier. The Company specifically targets
consumers on the lower end of the >100 kW consumer range, a market segment which
the Company estimates to include approximately 30,000 consumers with aggregate
annual electricity expenditures of approximately (pound)1.6 billion. The
completion of the final phase of deregulation will substantially increase the
size of the market available to the Company as an additional 1.5 million
commercial consumers and 24.0 million domestic (residential) consumers with
aggregate annual electricity expenditures of approximately (pound)11.1 billion
will be able to choose their electricity supplier. Within this market, the
Company intends to selectively target approximately 150,000 commercial consumers
with peak demand usage of 20 kW to 100 kW and approximately 16.5 million
domestic and commercial consumers with peak demand usage of less than 20 kW. The
Company estimates that these markets have aggregate annual electricity
expenditures of approximately (pound)7.9 billion.
The U.K. Electricity Market
The U.K. electricity market is comprised of approximately 1.9 million
commercial, industrial and public sector consumers and 24.0 million residential
consumers, with aggregate annual expenditures of approximately (pound)16.0
billion ($26.9 billion). The supply segment of the U.K. electricity industry is
being deregulated in three phases. The first two phases have been completed and
enabled the largest 55,000 commercial consumers to choose their electricity
supplier. The third phase commenced in September 1998 and is expected to be
completed by June 1999, at which time all consumers, both commercial and
domestic (residential), will be able to choose their supplier.
5
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Electricity Supply and Sales
The Company generally sells electricity at fixed prices pursuant to
contracts with a stated term, typically one or two years. Neither the Company
nor its customers may terminate such contracts during their term absent
extraordinary circumstances, such as the Company losing its supply license.
However, the Company may renegotiate the pricing terms of contracts if a
customer's demand and pattern usage changes significantly during the term of a
contract. The contracts also contain a provision that allows the Company to pass
through to customers increases in transportation and metering costs. Although
the vast majority of the Company's contracts are for fixed prices, the Company
does sell to certain customers that have unusual demand and pattern usage based
on prices that differ for volumes consumed during various times of the day.
The Company purchases a substantial majority of its electricity from the
Pool. In the fiscal year ended June 30, 1998, the Company purchased
approximately 97% of its electricity from the Pool. The other source of the
Company's electricity is its internal supply generated from Company-owned
generating plants. Electricity from the Pool is purchased by the Company at spot
market prices. Pool electricity is priced in half-hour increments. Generally,
Pool prices are higher during the daytime than at night and are higher in winter
months compared to summer months. The Pool purchases electricity from generators
at a certain price and resells electricity at a higher price, which includes a
margin to cover such costs as transmission losses and standby purchases of
electricity. Accordingly, the Company's internally generated electricity
provides a number of cost advantages to the Company in that the Company avoids
the Pool price as well as certain transportation costs and also generally
receives a higher margin on the electricity it generates internally. In
addition, the Company is credited by the Pool for supplying its electricity to
customers within a local distribution area and for reductions in power losses on
the local network.
The Pool maintains a settlement system that monitors usage by all
consumers. Consumers in the >100 kW market have meters that measure usage by the
half-hour. All other consumers meters are read monthly. Each <100 kW consumer
has an assigned usage profile which estimates their usage throughout each day
over a month. The Pool requires all suppliers, including the Company, to pay for
all electricity consumed by their customers 28 days in arrears. However,
customers generally pay within 25 days on average. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The Company has adopted a number of risk management practices to reduce the
risk of fluctuating electricity prices incurred in connection with its customer
contracts. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Management Activities."
Marketing and Customers
The Company has established Independent Energy as a reliable alternative
provider of electricity in the U.K. market. The Company believes it can offer
such consumers better pricing and service than they currently receive from their
RECs or other suppliers. In a recent market survey, the Company was rated the
best overall electricity supplier in the U.K., based on price and service
criteria. The Company believes that the <100 kW commercial sector and the
domestic market represent a significant opportunity for it to expand its revenue
and customer base. As of June 30, 1998, the Company had entered into contracts
to supply an additional 3,000 customers pending the final phase of deregulation.
In addition, the Company believes that there remain additional opportunities to
expand its base of 1,400 customers within the 55,000-consumer market deregulated
in the first two phases of deregulation.
In order to take advantage of new market opportunities pending the final
phase of deregulation, the Company is currently exploring several new marketing
channels. Through strategic marketing, the Company believes it can obtain as
customers the smaller sites of some of its already existing 100 kW customers.
The Company intends to target customers with predictable usage patterns and
volumes.
As part of its marketing strategy, the Company also seeks to capitalize on
the brand names of strategic marketing partners by offering electricity services
as part of a joint marketing program. The Company is currently involved in
discussions with a number of such potential strategic marketing partners. In
addition, the Company is targeting the employees and customers of existing
customers and marketing partners to further increase its domestic customer base.
Within the domestic market, the Company targets those consumers that have
above-average usage,
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strong credit ratings and pay by direct debit. The Company utilizes available
consumer databases and other sources to target such customers.
The Company currently utilizes the services of approximately 150
independent commission-based sales agents employed by sales agencies that
personally call on prospective customers which have been identified by the
Company based on usage profiles and credit worthiness. The Company intends to
continue to increase its utilization of independent sales agents, and expects to
engage an aggregate of up to 1,000 independent agents to market its services by
mid-1999. The sales agencies used by the Company receive commissions calculated
based on the estimated sales volume for the customer over the life of the
contract. Fifty percent of such commissions are paid upon the execution of the
sales contract and the balance are paid following the expiration of applicable
sales contract. In addition to independent sales agents, the Company also
utilizes the services of telemarketers who solicit prospective customers.
To support these sales activities, the Company uses radio and newspaper
advertising and conducts press relations to create awareness for the Independent
Energy brand name and to educate consumers about the deregulated electricity
market. It also utilizes direct mail to target prospective customers in advance
of direct sales calls and telemarketing efforts.
Administrative Operations
The Company currently employs information systems and computerized links to
the Pool's settlement system. All of the Company's current >100kW customers have
meters which measure usage on a half-hourly basis. This information is
electronically communicated from the Pool's system to the Company each day. The
Company maintains its own billing system. Customers are billed monthly. The
Company also maintains its own call center to handle inquiries and other
communications with its customers.
As the Company expands its operations and customer base commencing in
September 1998 with the final phase of deregulation, it will have to
substantially increase its ability to handle inquiries from customers, and
substantially upgrade its billing, payment collection and debt management
systems. In addition, the U.K. Office of Electricity Regulation ("OFFER") has
introduced separate Codes of Conduct and Codes of Practice to protect domestic
customers. These regulations are wide-ranging and include provisions governing
payment arrangements, debt collection and marketing practices. Operating in this
consumer market will require sophisticated systems that can manage, control and
transmit vast quantities of electronic data. It is also necessary to ensure that
the Company can provide these services in a cost-effective manner. Accordingly,
the Company has determined to outsource such functions for customers in the >100
kW market segment, including handling customer inquiries and other
communications, billing, payment collection, debt management and related
operations. The Company has entered into a five-year contract with a third-party
service provider, Vertex Data Science Limited, to provide all of such services
as they relate to such customers. Under the terms of such contract, the Company
obtained a (pound)7.5 million bank guarantee to secure its obligations
thereunder. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Competition
The Company is the largest independent supplier of electricity in the
United Kingdom (i.e., not a part of the government-owned electricity industry at
the time of its privatization in 1990). However, substantially all of the
Company's competitors consisting primarily of the twelve RECs, the Scottish
integrated companies, Scottish Power plc and Scottish Hydro-Electric plc, and
the national generators, National Power plc, PowerGen plc and British Energy
plc, are better established with longer operating histories and generally better
access to capital. The Company competes on the basis of service and price, and
is typically awarded contracts based on competitive bids. Competitors may be
able to undertake more extensive marketing campaigns, adopt more aggressive
pricing policies and devote substantially more resources to markets than the
Company. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
faced by the Company will not materially adversely affect the Company's
business, operating results or financial condition. Further, as a strategic
response to changes in the competitive environment, the Company may make certain
pricing,
7
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service or marketing decisions or enter into acquisitions or new ventures that
could have a material adverse effect on the Company's business, operating
results or financial condition.
Environmental Regulation
The Company is subject to a number of environmental and health and safety
laws and regulations affecting many aspects of its present and future operations
including, without limitation, those regulating the planning, designing,
installation and operation of electricity generating plants and those regulating
gas exploration and production operations. Such laws and regulations generally
require the Company to obtain and comply with a wide variety of licenses,
permits and other approvals. Breaches of such laws or regulations or the terms
of related licenses, permits or approvals may result in the imposition of
criminal fines or penalties, any of which might be material, or the cessation of
operations. Environmental and health and safety laws and regulations have become
increasingly stringent and more strictly enforced in recent years. There can be
no assurance that existing environmental or health and safety laws and
regulations will not be revised or that new laws and regulations will not be
adopted or become applicable to the Company which could have an adverse impact
on its financial condition or results of operations. The implementation of
changes imposing more comprehensive or stringent requirements on the Company
could result in increased compliance costs, and could, therefore, have a
material adverse effect on the Company's results of operations.
To date, the costs of complying with environmental and health and safety
laws and regulations have not had a material adverse effect on the Company.
However, the Company is aware of some contamination as a result of the
activities of past owners or past uses of properties that it may in the future
acquire, occupy or use for the purposes of gas exploration and development
and/or electricity generation. Although the Company is not aware of any current
requirement to clean up such properties, there can be no assurance that the
Company as current owner, occupier or user of such properties will not be liable
for the cost of cleanup at such properties in the future and that such costs
will not have a material adverse effect on the Company's financial condition or
results of operations.
Employees
As of June 30, 1998, the Company had 36 employees and consultants and
utilized the services of approximately 150 independent commission-based sales
agents. None of the Company's employees are represented by unions or subject to
collective bargaining agreements. The Company considers its relations with its
employees to be satisfactory.
Item 2. Description of Property
Electricity Generation Plants
As of June 30, 1998, the Company was operating three generating plants, a 1
MW plant at Elswick in Lancashire, an 8 MW plant at Trumfleet in Yorkshire and a
9 MW plant at Caythorpe in Yorkshire. These plants generated approximately 3% of
the Company's electricity requirements during the fiscal year ended June 30,
1998. The Company anticipates that it will install three additional plants by
the spring of 1999 with 26 MW of total capacity. The total capital expenditure
requirements for such plants are estimated to be (pound)15.2 million. The
Company's strategy is to install between 10 MW and 20 MW of generating plants in
each of the twelve local distribution systems. The Company's aggregate capital
expenditure requirements for its planned generating projects for 1998 and 1999
are estimated to be (pound)89.0 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company's electricity generation plants are comprised predominately of
3,000 to 4,000 horsepower gas-fired internal combustion engines turning
generators. Electricity connections are made with the local grid network
providing a source of distribution to the Company's customers. The plants are
reasonably transportable and can be relocated at the time of economic depletion
of gas reserves at the generation site. In some cases, plants in the proximity
to the regional gas network can be operated utilizing purchased gas.
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The table below sets forth the Company's existing and certain proposed
generating facilities.
Projects in Operation
<TABLE>
<CAPTION>
Project
Facility Commercial
Project Fuel Source Net Capacity Location Operation Date
------- ----------- ------------ -------- --------------
<S> <C> <C> <C> <C>
Elswick...................... Company Gas Reserves 1 MW Elswick, Lancashire June 1996
Caythorpe.................... Company Gas Reserves 9 MW Caythorpe, Yorkshire December 1997
Trumfleet.................... Company Gas Reserves 8 MW Trumfleet, Yorkshire February 1998
</TABLE>
Planned Projects
<TABLE>
<CAPTION>
Estimated
Facility Project Estimated
Net Commercial Installation
Project Fuel Source Capacity Location Operation Date Cost
------- ----------- -------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Knypersley............ Third-Party and Company 8 MW Knypersley, October 1998 (pound).2 million
Gas Reserves West Midlands
Holditch.............. Third Party Gas 9 MW Holditch, February 1999 (pound)5.0 million
West Midlands
Ironville............. Third-Party and Company 9 MW Ironville, March 1999 (pound)5.0 million
Gas Reserves Nottinghamshire
</TABLE>
Self-generation is an important component of the Company's overall
strategy. By owning generating plants, the Company is able to fix a portion of
the cost of its electricity needs, particularly during peak consumption periods
when Pool prices are at their highest. Further, the generating plants lower the
Company's cost of service. By owning generating plants with less than 100 MW
capacities and selling the output directly to consumers within the local
distribution system, the Company obtains certain cost advantages, including
avoidance of Pool expenses, NGC transportation tariffs and transmission power
losses. The Company is credited by the Pool for cost savings to the Pool for
supplying Company-generated electricity directly to its customers within local
distribution areas because such electricity does not enter the national grid and
for reductions in power losses on the local distribution networks resulting from
the Company's generation. This credit reduces the amounts payable by the Company
to the Pool. In most of its plants, the Company further reduces its cost of
service by either owning the gas reserves which fire the plants or by obtaining
access to gas which is not generally of a commercial grade and is thus less
expensive than gas purchased from the national gas supply system.
Natural Gas Reserves
Estimated Proved Reserves and Future Net Cash Flows
As of April 1, 1998, the Company's net proved reserves of natural gas were
approximately 6.5 billion cubic feet ("Bcf"), of which 3.3 Bcf were proved
developed reserves and 3.2 Bcf were proved undeveloped reserves. Such estimates
were prepared by Gaffney, Cline & Associates Ltd., an independent petroleum
engineering firm. All of the Company's proved reserves are attributable to its
onshore properties in the U.K. The present value (discounted at 10% per annum)
of estimated future net cash flows from such proved reserves as of April 1, 1998
was (pound)6.05 million ($10.2 million) before applicable U.K. income taxes. The
estimated proved reserves and future net cash flows have been calculated in
accordance with the Securities and Exchange Commission (the "Commission")
definitions. See "Glossary."
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There are numerous uncertainties inherent in estimating quantities of
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the producer. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretations and judgment. As a result, estimates
of different engineers often vary. In addition, results of drilling, testing and
production subsequent to the date of an estimate may justify revision of such
estimates. Accordingly, reserve estimates at a specific time are often different
from the quantities of oil and gas that are ultimately recovered. Predictions
about future prices, costs and production levels of oil and gas are subject to
great uncertainty. The meaningfulness of such estimates is highly dependent upon
the accuracy of the assumptions upon which they are based.
The preceding reserve value estimate sets forth estimated future net cash
flows from the production and sale of the Company's estimated proved reserves
and the present value thereof (discounted at 10% per annum). The estimated
future net cash flows are computed after giving effect to estimated future
development and production costs, based on year-end costs and assuming the
continuation of existing economic conditions. The calculation does not take into
account the effect of delay in commencement of production, various cash outlays,
including general and administrative costs and interest expense (except for
those interest charges associated with ongoing generation plant lease costs) and
U.K. income tax expense.
The price used by Gaffney, Cline & Associates Ltd. to calculate the present
value of estimated future net cash flows from the Company's estimated net proved
reserves was based on the Pool price of electricity at April 1, 1998 after
giving effect to the location of the Company's reserves and its increased
operating margins in generating its own electricity. As an example, based on
applicable Pool prices provided by the Company, the realized power price for the
Caythorpe project equates to an equivalent natural gas price of (pound)3.28 per
thousand cubic feet ("Mcf") ($5.45 per Mcf at June 30, 1998).
In computing the present value of the estimated future net cash flows, a
discount rate of 10% per annum was used pursuant to Commission regulations to
reflect the timing of those net cash flows. Present value, regardless of the
discount rate used, is materially affected by assumptions about timing of future
production, which may prove to have been inaccurate. The reserve value
information represents an estimate only, which is subject to uncertainty for
numerous reasons.
Petroleum Licenses
The Company currently holds 16 licenses in an aggregate 887,000 net acres
(net to the Company's interest) for the exploration and development of oil and
gas properties onshore U.K. All of the Company's licenses are located in the
U.K. Landward Areas. Fourteen of the Company's licenses are Petroleum
Exploration and Development Licenses ("PEDL") as defined in The Petroleum
(Production) (Landward Areas) Regulations 1995. PEDLs have an initial term of
eleven years; however, after the first six years there is a mandatory
relinquishment of 50% of the original license area. The Company determines the
acreage to be released. The license, for purposes of development and production
activities, continues for a further period of 20 years after the initial eleven
year term. Thereafter, a further period may be agreed to ensure maximum recovery
of petroleum. The licenses convey from the U.K. Government to the licensee, the
exclusive right to explore for, to appraise, to develop, and to produce
petroleum. Petroleum belongs to licensee when produced.
Facilities
The Company maintains its headquarters in Solihull, West Midlands where it
leases 6,000 square feet of office space for approximately (pound)11,000 per
month. This lease expires in November 2002. The Company also leases 1,750 square
feet of office space in Maidenhead for its resource offices which lease expires
in April 1999. Both of these leases may be extended at the Company's option. For
a description of the Company's generating plants, see "Electricity Generation
Plants" above.
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Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings, nor is it
currently aware of any threatened material legal proceedings.
Item 4. Control of Registrant
The following table sets forth certain information concerning beneficial
ownership of the Ordinary Shares as of June 30, 1998 by (i) each person (or
group within the meaning of Section 13(d)(3) of the Exchange Act) known by the
Company to own more than 5% of the outstanding Ordinary Shares, (ii) each
director of the Company, (iii) each executive officer and (iv) all directors and
executive officers of the Company as a group. Except as otherwise noted, the
named beneficial holder has sole voting and investment power.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
--------------------------------
Number Percent Owned
----------- -------------
<S> <C> <C>
Burt H. Keenan(2).................................................. 2,653,900 14.6%
Gonsoulin Enterprises, Inc.(3)..................................... 1,055,825 5.9%
John L. Sulley(4).................................................. 470,000 2.6%
Jerry W. Jarrell(5)................................................ 410,100 2.3%
Ian Stewart(6)..................................................... 170,000 *
William E. Evans(7)................................................ 500,800 2.7%
Robert Jones(8).................................................... 410,000 2.2%
Roy Deakin(9)...................................................... 50,000 *
David May(10)...................................................... 115,000 *
All officers and directors as a group (8 persons)(11).............. 4,779,800 23.8%
</TABLE>
- ----------
* Less than 1%
(1) As used in this table, "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of, a security, or the sole or
shared investment power with respect to a security (i.e., the power to
dispose of, or to direct the disposition of, a security) and includes the
ownership of a security through corporate, partnership, or trust entities.
In addition, for purposes of this table, a person is deemed, as of any
date, to have "beneficial ownership" of any security that such person has
the right to acquire within 60 days after such date.
(2) Includes 295,400 shares issuable upon exercise of options held by Mr.
Keenan. Mr. Keenan's address is Dominion Court, 43 Station Road, Solihull,
West Midlands, United Kingdom B91 3RT.
(3) The address of this shareholder is 3417 West Admiral Doyle, New Iberia,
Louisiana 70560.
(4) Includes 410,000 shares issuable upon exercise of options held by Mr.
Sulley.
(5) Includes 272,800 shares issuable upon exercise of options held by Mr.
Jarrell.
(6) Includes 170,000 shares issuable upon exercise of options held by Mr.
Stewart.
(7) Includes 495,200 shares issuable upon exercise of options held by Mr.
Evans.
(8) Includes 350,000 shares issuable upon exercise of options held by Dr.
Jones.
(9) Includes 50,000 shares issuable upon exercise of options held by Mr.
Deakin.
(10) Includes 65,000 shares issuable upon exercise of options held by Mr. May.
(11) Includes 2,108,400 shares issuable upon exercise of options held by the
named executive officers and directors.
Item 5. Nature of Trading Markets
Alternative Investment Market
The Company's Ordinary Shares commenced trading on AIM on May 31, 1996. AIM
is a market designed primarily for emerging or smaller companies and facilitates
capital raising by such companies. Although regulated by the London Stock
Exchange, the rules for AIM companies differ from, and are generally less
demanding than, those of the Official List of the London Stock Exchange.
11
<PAGE>
More than 300 companies are traded on AIM. Trading volume on AIM is
substantially less than that on the principal national securities exchanges in
the U.S. or on the Official List of the London Stock Exchange. The liquidity of
securities traded on AIM is much less than that of companies listed on more
established exchanges.
All companies on AIM are required to appoint a nominated advisor and a
nominated broker. The nominated advisor must be a member firm of the London
Stock Exchange (or other person authorized under the U.K. Financial Services Act
of 1986) and has responsibility for providing a company with advice and guidance
regarding the Company's continuing obligations. The nominated broker must also
be a member firm of the London Stock Exchange and is required upon request to
use best endeavors to find matching bids and offers in a company's shares. The
requirement to match bids and offers does not apply if a market maker is
registered in a company's shares. A market maker is any specialist permitted to
act as a dealer, any member of the London Stock Exchange acting in the capacity
of block positioner and any member of the London Stock Exchange who, with
respect to a security, holds himself out as being willing to buy and sell such
security for his own account on a regular or continuous basis.
Trading on AIM occurs through the London Stock Exchange Alternative Trading
Service, SEATS PLUS. SEATS PLUS acts as an "order board," enabling buyers and
sellers to trade shares through the London Stock Exchange's central trading
system. It allows market makers to display firm, indicative or mid-prices in a
company's shares throughout the day and displays the details of each company's
recent trades.
Reporting and settlement of trades are the same on AIM as they are for
shares quoted on the Official List of the London Stock Exchange. Transactions in
the Ordinary Shares may be effected through the CREST system, which enables
shares to be held and transferred in the electronic form or may be held and
transferred in physical form. Under AIM rules, a company must ensure that
appropriate arrangements are in place for the physical transfers of a company's
shares to be entered on a company's register and for new certificates to be
dispatched.
The following table reflects the high and low sales price per Share, as
reported on the AIM since May 31, 1996 when the Shares commenced trading.
Pence per Share $ per Share(1)
------------------- -------------------
High Low High Low
---- --- ---- ---
1996
Second quarter 115.0p 106.0p $1.75 $1.63
Third quarter 108.0 83.5 1.68 1.30
Fourth quarter 89.5 57.5 1.40 0.98
1997
First quarter 69.5 57.5 1.14 0.97
Second quarter 92.5 72.5 1.54 1.18
Third quarter 124.5 87.5 2.00 1.48
Fourth quarter 144.5 119.5 2.41 1.95
1998
First quarter 385.0 136.5 6.46 2.26
Second quarter 627.5 325.0 10.51 5.44
- ----------
(1) The reported high and low prices for the Shares expressed as pence per
Share have been translated into dollars by converting that amount at the
Noon Buying Rate on the dates of such respective high and low prices.
As of June 30, 1998, there were approximately 802 holders of Ordinary
Shares, of which 60.6% of the total outstanding Shares were held of record by
persons with United States and Canadian addresses. The average daily trading
volume for the Shares for the years ended December 31, 1996 and 1997 and for the
six months ended June 30, 1998 was 14,959, 18,872 and 36,288 Shares,
respectively.
Nasdaq National Market
On July 24, 1998, the Company's American Depositary Shares ("ADSs"), each
representing one Ordinary Share, began trading on The Nasdaq Stock Market's
National Market ("Nasdaq"). The Bank of New York is the
12
<PAGE>
depositary of the American Depositary Receipts ("ADRs") representing ADSs. On
October 7, 1998, the AIM closing bid price for the Shares was 295p per Share and
the last reported sale on Nasdaq was $5.12 per ADS.
Dividend Policy
The Company has never declared or paid any dividends on its Ordinary
Shares. The Company currently intends to retain all future earnings to finance
future operations. Moreover, under the Companies Act 1985, dividends may only be
paid out of the profits of the Company legally available for distribution.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
There are currently no U.K. foreign exchange control restrictions on the
payment of dividends on the Ordinary Shares or on the conduct of the Company's
operations.
There are no limitations either under the laws of England or under the
Memorandum and Articles of Association of the Company restricting the right of
persons not resident in the U.K., as such, to hold or vote Ordinary Shares.
Item 7. Taxation
The following generally summarizes the principal U.S. federal and U.K. tax
consequences of the purchase, ownership and disposition of ADSs evidenced by
ADRs and, except as provided explicitly below, Shares, to beneficial owners
that, for U.S. federal income tax purposes, are citizens or residents of the
U.S. (who are not also resident or, in the case of the individuals, ordinarily
resident in the U.K. for U.K. tax purposes), corporations or partnerships
created or organized under the laws of the United States or any state thereof,
estates the income of which is subject to U.S. federal income taxation
regardless of its source or a trust if a court within the United States is able
to exercise primary supervision over the administration and control of the trust
and one or more United States persons have the authority to control all
substantial decisions of the trust (collectively "U.S. Holders"); provided,
however, to the extent and in accordance with the procedures provided in Notice
98-25 (released by the Service on April 14, 1998) and future Treasury
Regulations which will incorporate Notice 98-25, certain trusts in existence on
August 20, 1996, and treated as U.S. persons prior to such date, which elect to
continue to be treated as U.S. persons will also be considered U.S. Holders.
The statements regarding the U.S. and U.K. tax laws set out below (i) are
based on the laws in force and as interpreted by the relevant taxation
authorities as of the date of this Registration Statement and are subject to any
changes in the U.S. or the U.K. law, or on the interpretation thereof by the
relevant taxation authorities or in the double taxation conventions between the
United States and the United Kingdom (the "Conventions"), occurring after such
date, (ii) are based in part, on representations of the Depositary, and (iii)
assume that each obligation in the Deposit Agreement and any related agreement
will be performed in accordance with its terms.
The summary is of a general nature only and does not discuss all aspects of
U.S. and U.K. taxation that may be relevant to a particular investor. For
example, this summary deals only with ADRs held as capital assets and does not
address special classes of purchasers, such as dealers in securities. U.S.
Holders whose functional currency is not the U.S. dollar, insurance companies,
tax exempt organizations, financial institutions and persons subject to the
alternative minimum tax that may be subject to special rules are not discussed
below. Neither does the following summary address the tax treatment of U.S.
Holders who own, directly or by attribution, 10% or more of the Company's
outstanding voting share capital. Except as otherwise expressly provided herein,
this summary does not discuss foreign, state, local, estate or gift tax
consequences to owners of ADSs and Shares. Since its purpose is limited to brief
consideration of the more commonly relevant provisions, in no case should this
summary be taken as constituting advice to an investor as to how he will or will
not be taxed in any jurisdiction and in no circumstances is it to substitute for
professional advice.
For purposes of the Conventions and the United States Internal Revenue Code
of 1986, as amended (the "Code"), U.S. Holders will be treated as the owners of
the Shares represented by ADSs evidenced by ADRs.
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<PAGE>
Taxation of Dividends
Under current U.K. law, the Company will be required when paying a dividend
in respect of the Shares to account to the U.K. Inland Revenue for a payment
known as advance corporation tax ("ACT"). At present, the rate of ACT is equal
to one-quarter of the amount of the dividend. Dividends carry a tax credit equal
to one-quarter of the cash dividend, amounting to 20% of the sum of the cash
dividend paid and the associated tax credit. The tax credit will be available to
offset a U.K. resident individual's liability to U.K. income tax in respect of
the dividend, and may, if the U.K. resident is a non-taxpayer, be reclaimed from
the U.K. Inland Revenue in cash. A basic rate taxpayer will have no further
liability to tax on the dividend, but a higher rate taxpayer will be subject to
an additional tax liability on the difference between the higher rate tax
liability and the value of the tax credit. U.K. resident trustees of
discretionary trusts liable to account for income tax at 34% on the trust's
income may also be required to account for additional tax. A U.K. resident
corporate shareholder will not normally be liable to U.K. corporation tax on any
dividend received from the Company and will be entitled to offset the related
ACT on the dividend against ACT due on its own qualifying distributions. From
April 6, 1999, the treatment of tax credits will change. Dividends will carry a
tax credit of one-ninth of a cash dividend. Although the credit will be
available to offset a U.K. resident individual's liability to U.K. income tax in
respect of the dividend, such tax credit will not be refundable.
An Eligible U.S. Holder (as defined below) is entitled under the Convention
relating to income taxes (the "Income Tax Convention") and current U.K. law to
claim from the U.K. Inland Revenue a refund (a "Treaty Payment") for an amount
equal to the amount of the tax credit to which an individual resident in the
U.K. for U.K. tax purposes would have been entitled had he received the dividend
(the "Tax Credit Amount"), subject to a U.K. withholding tax of 15% of the sum
of the dividend paid and the related Tax Credit Amount. For example, assuming
continuance of the Tax Credit Amount at the rate of 20/80ths of the amount of
the dividend, a dividend payment of 80p to such an eligible U.S. Holder would
generally entitle the Eligible U.S. Holder to a Treaty Payment of 5p (a Tax
Credit Amount of 20p, reduced by 15% of the sum of the dividend and the Tax
Credit Amount, or 15p) from the U.K. Inland Revenue giving a total realization
of 85p (before applicable U.S. taxes). After April 5, 1999 because of the
reduction of tax credits in the U.K., as outlined above, there will be no
effective refund of tax (i.e., Treaty Payment) to Eligible U.S. Holders.
For purposes of this Registration Statement, the term "Eligible U.S.
Holder" means a U.S. Holder that is a beneficial owner of an ADS and of the cash
dividend paid thereon and that satisfies the following conditions: the U.S.
Holder (i) is an individual or a corporation resident in the U.S. for the
purposes of the Income Tax Convention (and, in the case of a corporation, is not
also resident in the U.K. for U.K. tax purposes), (ii) holds the ADSs in a
manner which is not effectively connected with a permanent establishment in the
U.K. through which such U.S. Holder carries on business or with a fixed base in
the U.K. from which such U.S. Holder performs independent personal services,
(iii) under certain circumstances, is not an investment or holding company 25%
or more of the capital of which is owned, directly or indirectly, by persons
that are not individuals resident in, and are not nationals of the U.S., and
(iv) under certain circumstances, is not exempt from federal income tax on
dividend income in the U.S. Special rules apply to a corporation which owns or,
alone or together with one or more associated corporations, controls, directly
or indirectly, 10% or more of the voting shares of the Company.
A U.S. Holder that is a U.S. partnership, trust or estate may be entitled
under the Income Tax Convention to receive a Treaty Payment in respect of a
dividend paid by the Company, but only to the extent that the income derived by
such partnership, trust or estate is subject to U.S. tax as the income of a U.S.
resident either in its hands or in the hands of its partners or beneficiaries,
as the case may be.
The provisions of the following two sentences are applicable until April 5,
1999. For U.S. federal income tax purposes, the gross amount of a dividend plus
the Tax Credit Amount (i) will be included in gross income by an Eligible U.S.
Holder (at the dollar value of the dividend payment, on the date of the receipt
by the Depositary, regardless of whether the dividend is converted into dollars)
and (ii) will be treated as foreign source dividend income to the extent paid
out of current or accumulated earnings and profits as determined for U.S.
federal income tax purposes. Subject to certain limitations, the 15% U.K.
withholding tax will be treated as a foreign income tax eligible for direct
credit against such Eligible U.S. Holder's federal income taxes. After April 5,
1999, if dividends are paid by the Company, U.S. Holders should consult their
tax advisors regarding the amounts of such dividends to be included in gross
income and the amounts of any U.K. taxes that U.S. Holders may be treated as
having paid with
14
<PAGE>
respect to such dividends for U.S. foreign tax credit purposes. For purposes of
the foreign tax credit limitations, dividends distributed by the Company will
generally constitute "passive income" or, in the case of certain U.S. Holders,
"financial services income." The consequences of these limitations will depend
on the nature and sources of each U.S. Holder's income and the deduction
appropriately allocated or apportioned thereto. No dividends received deduction
will be allowed with respect to dividends paid by the Company. If dividends paid
by the Company were to exceed its current and accumulated earnings and profits
as determined for federal income tax purposes, such excess would be treated as a
non-taxable return of capital to the extent of the U.S. Holder's adjusted basis
in the ADSs, and any excess would be treated as capital gain.
The Company may make arrangements with the U.K. Inland Revenue (the "H
Arrangements") which will permit the applicable Treaty Payments, if any, to be
paid to certain Eligible U.S. Holders at the same time as, and together with,
cash dividends paid by the Company in respect of ADSs. The H Arrangements, which
operate in respect of dividends paid on shares of U.K. companies that are
represented by ADSs evidenced by ADRs, are implemented at the discretion of the
U.K. Inland Revenue and may be amended or revoked. The H Arrangements generally
apply to Eligible U.S. Holders other than (i) estates or trusts any of the
beneficiaries of which are not resident in the U.S., (ii) investment or holding
companies 25% or more of the capital of which is owned, directly or indirectly,
by persons who are not individuals resident in, or nationals of, the U.S., (iii)
persons (other than certain pension funds) exempt from U.S. federal income tax
with respect to cash dividends paid on the Shares, (iv) persons owning 10% or
more of the Shares, and (v) certain business and investment trusts. To claim the
benefit of the H Arrangements, (i) the registered holder must complete the
declaration on the reverse of the dividend check confirming the Eligible U.S.
Holder's entitlement to the Treaty Payment and present the check for payment
within three months from the date of issue of the check or (ii) in the case of
ADRs held through The Depository Trust Company ("DTC"), the broker-dealer or
bank-member of DTC which holds the ADRs on behalf of the Eligible U.S. Holder
must complete a declaration as to the conditions entitling the Eligible U.S.
Holder to the Treaty Payment.
If the H Arrangements are not made with the U.K. Inland Revenue at the time
an Eligible U.S. Holder receives a distribution from the Company, or if the H
Arrangements are made at such time but an Eligible U.S. Holder does not qualify
for the benefits of such arrangements, such Eligible U.S. Holder must, in order
to obtain a Treaty Payment, if any, to which it is entitled, file a claim for
the Treaty Payment in the manner described in U.S. Internal Revenue Service
Revenue Procedure 80-18, 1980-1 C.B. 623 and Revenue Procedure 81-58, 1981-2
C.B. 678, as amended. Claims for such payments must be made within five years
from the January 31 following the end of the year of assessment to which they
relate. The first claim for a tax credit under these procedures is made by
sending the appropriate U.K. form in duplicate to the Internal Revenue Service
Center with which the Eligible Holder's last U.S. income tax return was filed.
Forms may be obtained from the Internal Revenue Service, Assistant Commissioner
(International), 950 L'Enfant Plaza South, S.W., Washington, D.C. 20219;
Attention: Taxpayer's Service Division. Because a claim is not considered made
until the U.K. tax authorities receive the appropriate form from the Internal
Revenue Service, forms should be sent to the Internal Revenue Service well
before the end of the applicable limitation period. Any claim by a claimant
after the first claim should be filed directly with the Financial Intermediaries
and Claims Office, Fitz Roy House, P.O. Box 40, Nottingham, England, NG2 IBD.
Taxation of Capital Gains
A U.S. Holder who is not resident or ordinarily resident in the U.K. for
U.K. tax purposes will not be liable for U.K. tax on capital gains realized on
the disposal of ADSs unless, at the time of disposal, the U.S. Holder is
carrying on a trade, profession or vocation in the U.K. through a branch or
agency which constitutes a permanent establishment or fixed base, and the ADSs
are or have been used, held or acquired for the purposes of such trade,
profession or vocation of such branch or agency.
Upon the sale or other disposition of an ADS, a U.S. Holder will generally
recognize gain or loss for U.S. federal income tax purposes in an amount equal
to the difference between the amount realized on such sale or disposition and
the U.S. Holder's adjusted tax basis in the ADS. Such gain or loss will be
capital gain or loss if the U.S. Holder holds its ADS as a capital asset.
Prospective investors should consult their tax advisors regarding the U.S.
federal income tax treatment of capital gains (which may be taxed at lower rates
than ordinary income for certain taxpayers who are individuals) and losses (the
deductibility of which is subject to limitations).
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<PAGE>
A U.S. Holder that is liable for both U.K. and U.S. tax on a gain on the
disposal of the ADSs will generally be entitled, subject to certain limitations
and pursuant to the Income Tax Convention, to credit the amount of U.K. capital
gains or corporation tax, as the case may be, paid in respect of such gain
against such U.S. Holder's U.S. federal income tax liability in respect of such
gain. U.S. Holders should seek professional tax advice to determine their
entitlement to credit U.K. tax against their U.S. federal income tax liability.
Passive Foreign Investment Company Status
PFIC Classification
Special U.S. taxation rules are applicable to U.S. persons owning shares in
a "passive foreign investment company" ("PFIC"). Investors that are not subject
to U.S. taxation in respect of income on the ADSs or that are not U.S. persons
generally will not be affected by the PFIC rules. A foreign corporation will be
classified as a PFIC for any taxable year during which either (i) 75% or more of
its gross income (including the pro rata share of the gross income of any
corporation (U.S. or foreign) in which the Company is considered to own 25% or
more of the shares by value) for the taxable year is passive income or (ii) 50%
or more of the average quarterly value of all of its assets (including the pro
rata share of the assets of any corporation in which the Company is considered
to own 25% or more of the shares by value) produce, or are held for the
production of, passive income. For this purpose, passive income generally
includes dividends, interest, royalties, rents (other than rents and royalties
derived in the active conduct of a trade or business), annuities and gains from
assets that produce passive income. Because the Company will have a relatively
large amount of passive assets, such as cash and marketable securities
(including cash derived from the issuance of ADSs in the offering), pending
investment of such assets in the Company's business, it is possible that the
Company may be or could become a PFIC in any year. Although the Company will
attempt to conduct its business so as to avoid PFIC status, the Company can
provide no assurances that it will not be a PFIC in respect of its current or
any future taxable year.
Consequences of PFIC Status
If the Company were to be classified as a PFIC, a U.S. Holder generally
would be subject to special tax rules with respect to gain realized on the sale
or any other disposition of such ADSs, and any "excess distribution" by the
Company to the U.S. Holder with respect to ADSs held for more than one taxable
year. In general, excess distributions are any distributions (including return
of capital distributions) received by the U.S. Holder in a taxable year that are
greater than 125% of the average annual distributions received by the U.S.
Holder in the three preceding taxable years (or the U.S. Holder's holding
period, if shorter). Under these rules (i) the gain or excess distribution would
be allocated ratably over the U.S. Holder's holding period for the ADSs, (ii)
the amount allocated to the current taxable year would be treated as ordinary
income, (iii) the amount allocated to each prior year would be subject to tax at
the highest rate in effect for that year and (iv) the interest charge generally
applicable to underpayments of tax would be imposed with respect to the
resulting tax attributable to each such prior year. For purposes of the
foregoing rules, a U.S. Holder who uses such ADSs as security for a loan will be
treated as having disposed of such ADSs.
For tax years beginning after 1997, a U.S. Holder of ADSs in a PFIC that
are treated as "marketable stock" may make a "mark-to-market" election. A
shareholder making the "mark-to-market" election will not be subject to the PFIC
rules described above. Instead, in general, an electing shareholder will include
in each year as ordinary income the excess, if any, of the fair market value of
the ADSs at the end of the taxable year over their adjusted basis and will be
permitted an ordinary loss in respect of the excess, if any, of the adjusted
basis of the ADSs over their fair market value at the end of the taxable year
(but only to the extent of the net amount of previously included income as a
result of the "mark-to-market" election). The electing U.S. Holder's basis in
the ADSs will be adjusted to reflect any such income or loss amounts. Guidance
on what may constitute "marketable stock" is not yet available from the United
States Department of Treasury.
If the Company is a PFIC in any year, a U.S. Holder who beneficially owns
ADSs during such year must file an annual return on IRS Form 8621 that describes
its interest in the Company, the distributions received from the Company and any
gain realized on the disposition of ADSs.
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Estate and Gift Taxes
An ADR held by an individual U.S. Holder whose domicile is determined to be
in the U.S. for purposes of the Estate Tax Treaty and who is not a national of
the U.K. will not be subject to U.K. inheritance tax on such individual's death
or on a lifetime transfer of the ADR except in certain cases where the ADR (i)
is part of the business property of a U.K. permanent establishment of an
enterprise of the U.S. or (ii) pertains to a U.K. fixed base used for the
performance of independent personal services. The Estate Tax Treaty generally
provides a credit against U.S. federal estate or gift tax liability for the
amount of any tax paid in the U.K. in a case where the ADR is subject to both
U.K. inheritance tax and to U.S. federal estate or gift tax. Similarly, a Share
or ADR comprised in a settlement generally will not be chargeable to U.K.
inheritance tax if the settlement was made when the settlor was domiciled in the
U.S. and was not a national of the U.K. An individual U.S. Holder will be
subject to U.S. estate and gift taxes with respect to the ADRs in the same
manner and to the same extent as with respect to other types of personal
property.
U.K. Stamp Duty ("SD") and U.K. Stamp Duty Reserve Tax ("SDRT")
SDRT at the then applicable rate arises upon the issue to and deposit with
the Depositary of the Shares. The current rate of SDRT on the issue and deposit
of the Shares is 1.5%. Although not contemplated, if SD were to be charged the
current rate is (pound)1.50 per (pound)100 (or part thereof). The amount of SDRT
payable would be reduced by any SD paid in connection with the same transaction.
SDRT will be payable by the Depositary in the first instance. Persons to whom
ADSs/ADRs are issued upon subsequent deposits will be responsible for payment of
SDRT, currently at the rate of 1.5%.
SD will not be payable in connection with subsequent transactions in ADSs
provided that no written contract of sale or instrument of transfer is executed
or brought into the United Kingdom, and provided that no register of those
securities is maintained within the United Kingdom (which is expected to be the
case). SDRT will not be payable in connection with subsequent transactions in
ADSs provided that the ADSs do not constitute "chargeable securities", i.e. they
are not issued or raised by a company incorporated in the U.K., they are not
registered on a register kept in the U.K. and they are not paired with shares
issued by a U.K. incorporated company. It is not contemplated that ADSs will be
"chargeable securities".
A transfer of Shares by the Depositary or its nominee to the relevant ADR
holder may give rise to UK SD at the rate of (pound)0.50 per transfer or at the
rate of (pound)1.50 per (pound)100 (or part thereof), depending upon the
relevant circumstances.
Except in the case of certain transfers (for example, by way of gift),
transfers of Shares will normally give rise to SD at the rate of (pound)0.50 per
(pound)100 (or part thereof) on the price payable or value of the Shares,
depending upon the circumstances then prevailing. SD is usually the liability of
the purchaser.
Item 8. Selected Financial Data
The following tables present selected consolidated financial data for the
Company. The selected consolidated financial data as of and for each of the
three years in the period ended December 31, 1995, as of and for the six months
ended June 30, 1996, as of and for the fiscal year ended June 30, 1997 and 1998
have been derived from the audited consolidated financial statements of the
Company and the notes thereto included elsewhere in this Report. The selected
consolidated financial data as of and for the year ended December 31, 1993 have
been derived from the audited consolidated financial statements of the Company
which are not included in this Report.
The Company's consolidated financial statements have been prepared in
accordance with U.K. GAAP which differ in certain significant respects from U.S.
GAAP. Notes 29 and 30 to the Company's consolidated financial statements
describe the principal differences between U.K. GAAP and U.S. GAAP as they
relate to the Company and provide a reconciliation to U.S. GAAP of net profit or
loss and shareholders' equity. The selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition
17
<PAGE>
and Results of Operations" and the Company's consolidated financial
statements and the notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Statement of Operations Data:
U.K. GAAP
Revenue from continuing operations.............(pound) -- (pound) -- (pound) 4,701
Revenue from discontinued operations(2)........ 452,641 118,589 --
Cost of sales.................................. 309,884 127,327 --
Administrative expenses........................ 47,408 55,367 90,915
Depreciation and amortization.................. 41,399 39,674 2,858
Profit (loss) from continuing operations....... (7,631) (89,072)
Profit (loss) from discontinued operations..... 61,581 (103,779) --
Exceptional items.............................. -- 168,191 --
Interest (expense) income, net................. (1,554) 3,275 24,029
Income tax expense (credit).................... -- 9,000 (5,576)
Net profit (loss)..............................(pound) 52,396 (pound) 58,687 (pound) (59,467)
Earnings (loss) per share...................... 167.3 p 187.4 p (176.8)p
Weighted average shares outstanding............ 31,314 31,314 33,641
U.S. GAAP
Revenue from continuing operations.............(pound) -- (pound) -- (pound) 4,701
Profit (loss) from continuing operations....... (7,631) -- (59,467)
Net profit (loss).............................. 52,396 58,687 (59,467)
Earnings (loss) per share...................... 167.3 p 187.4 p (176.8)p
Earnings (loss) per share from continuing
operations..................................... (24.4)p -- (176.8)p
Weighted average number of shares
outstanding.................................... 31,314 31,314 33,641
<CAPTION>
Six Months Fiscal Fiscal Fiscal
Ended Year Ended Year Ended Year Ended
June 30, June 30, June 30, June 30,
1996 1997 1998 1998(1)
---------------- ----------------- ------------------ -------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
U.K. GAAP
Revenue from continuing operations.............(pound) 173,701 (pound) 11,127,164 (pound) 57,988,742 $96,261,312
Revenue from discontinued operations(2)........ -- -- -- --
Cost of sales.................................. 171,448 10,872,238 55,457,472 92,059,404
Administrative expenses........................ 492,199 1,363,343 1,695,768 2,814,975
Depreciation and amortization.................. 5,681 141,850 625,638 1,038,559
Profit (loss) from continuing operations....... (495,627) (1,250,267) 209,864 348,374
Profit (loss) from discontinued operations..... -- -- -- --
Exceptional items.............................. (460,983) -- -- --
Interest (expense) income, net................. 65,417 68,674 (394,801) (655,370)
Income tax expense (credit).................... -- -- -- --
Net profit (loss)..............................(pound) (891,193) (pound) (1,181,593) (pound) (184,937) $ (306,996)
Earnings (loss) per share...................... (9.9)p (9.0)p (1.1)p $ (.02)
Weighted average shares outstanding............ 8,981,076 13,129,914 17,190,589 17,190,589
U.S. GAAP
Revenue from continuing operations.............(pound) 173,701 (pound) 11,127,164 (pound) 57,988,742 $96,261,312
Profit (loss) from continuing operations....... (1,001,908) (1,369,688) (321,076) (532,986)
Net profit (loss).............................. (1,001,908) (1,369,688) (321,076) (532,986)
Earnings (loss) per share...................... (11.1)p (10.4)p (1.9)p $ (.03)
Earnings (loss) per share from continuing
operations..................................... (11.1)p (10.4)p (1.9)p $ (.03)
Weighted average number of shares
outstanding.................................... 8,981,076 13,129,914 17,190,589 17,190,589
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1993 1994 1995
----------------- ---------------- ------------------
<S> <C> <C> <C>
Balance Sheet Data:
U.K. GAAP
Total assets................................(pound) 919,804 (pound) 1,123,878 (pound) 3,053,064
Long-term liabilities....................... 333,852 -- --
Shareholders' equity........................ 409,266 467,953 2,983,728
U.S. GAAP
Total assets................................(pound) 919,804 (pound) 1,123,878 (pound) 3,143,144
Long-term liabilities....................... 333,852 -- 90,080
Shareholders' equity........................ 409,266 467,953 2,983,728
<CAPTION>
June 30,
----------------------------------------------------------------------------
1996 1997 1998 1998(1)
------------------ ----------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
U.K. GAAP
Total assets................................ (pound) 7,995,040 (pound) 16,851,935 (pound) 40,711,927 $ 67,581,799
Long-term liabilities....................... 830,212 5,937,925 10,671,177 17,714,154
Shareholders' equity........................ 6,787,015 6,957,569 9,452,565 15,691,258
U.S. GAAP
Total assets................................ (pound) 8,333,378 (pound) 17,226,966 (pound) 41,104,602 $ 68,233,639
Long-term liabilities....................... 1,279,265 6,611,766 11,461,003 19,025,265
Shareholders' equity........................ 6,676,300 6,658,759 9,055,411 15,031,982
</TABLE>
- ----------
(1) Translations into dollars in this table are for convenience only and are
computed at the Noon Buying Rate on June 30, 1998 of $1.66 per(pound)1.
(2) The Company sold its oil and gas production services business in April
1994. Accordingly, revenue and operating profit (loss) associated with such
operations for the years ended December 31, 1993 and 1994 are reflected as
discontinued operations.
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is intended to assist in an understanding of the
Company's financial position as of June 30, 1998 and its results of operations
for the year ended December 31, 1995, the six months ended June 30, 1996, the
fiscal years ended June 30, 1997 and 1998. The Company's consolidated financial
statements and notes included elsewhere in this Report contain additional
information and should be referred to in conjunction with this discussion. Such
financial statements have been prepared in accordance with U.K. GAAP, which
differs in certain significant respects from U.S. GAAP. Notes 29 and 30 to the
Company's consolidated financial statements provide a
18
<PAGE>
description of the principal differences between U.K. GAAP and U.S. GAAP as they
relate to the Company, and a reconciliation of U.S. GAAP of net income (loss)
and shareholders' equity.
Overview
Independent Energy is the largest independent marketer of electricity in
the United Kingdom (i.e., not a part of the government-owned electricity
industry at the time of its privatization in 1990). The Company was founded to
capitalize on the market opportunities created by the deregulation of the United
Kingdom electricity market. Since commencing marketing operations in April 1996,
management believes that it has established Independent Energy as a reliable
alternative provider of electricity. The Company currently has over 1,400
customers, primarily in the light industrial, commercial and public sector
markets. The Company increased its revenue from (pound)11.1 million ($18.6
million) for the fiscal year ended June 30, 1997 to (pound)58.0 million ($96.3
million) for the fiscal year ended June 30, 1998. The Company's revenue for the
three months ended June 30, 1998 was (pound)23.1 million ($38.4 million).
The Company has incurred operating and net losses of approximately
(pound)1.6 million and (pound)2.2 million, respectively, in the aggregate,
through June 30, 1998 since commencing electricity supply operations. The
Company expects to increase its revenues pending the final phase of deregulation
of the U.K. electricity market. The Company will incur certain additional fixed
costs in anticipation of its increase in sales as well as variable costs that
increase proportionally with sales. The Company's ability to achieve
profitability will depend in large measure on its ability to attract a
sufficient number of customers to permit its fixed cost base to decline in
relation to its number of customers and as a percentage of revenues. The final
phase of deregulation of the supply segment of the industry began in September
1998.
Revenue from the sale of electricity is recognized by the Company on a
monthly basis based on the volume of electricity consumed by its customers as
determined by month-end meter readings and the contract prices associated with
such volume. Customers are billed monthly, generally at a fixed price for usage.
Because the cost of electricity purchased from the Pool fluctuates throughout
the term of sales contracts, the Company recognizes gross profit related to
electricity sales on a pro rata basis throughout the term of sales contracts
based on an estimated gross profit margin for all sales contracts. The estimated
gross profit margin considers the estimated cost of electricity, the effects of
hedging contracts entered into by the Company to mitigate Pool price exposure,
transmission and distribution costs, commissions and all other costs of sales in
supplying the electricity. The difference between the cash cost of the
electricity and the estimated cost of sales based on the estimated gross profit
margin is accounted for as either an accrual for, or a deferral of, the cost of
electricity and recorded on the balance sheet within current assets or current
liabilities, as the case may be. The Company reviews the difference between
actual gross profit and estimated gross profit on a quarterly basis.
Because the Company generally sells electricity at fixed prices and
purchases most of its electricity at fluctuating prices, the Company is exposed
to risk arising from the difference between these prices. The Company's risk
management practices are comprised of three material elements: (i) entering into
CFDs to effectively fix the price of a portion of its electricity requirements
purchased from the Pool; (ii) targeting customers that have relatively
predictable demand and pattern usage profiles; and (iii) generating a portion of
the electricity it supplies to customers.
Results of Operations
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997
Revenue. Revenue for the fiscal year ended June 30, 1998 increased
(pound)46.9 million, or 421%, to (pound)58.0 million from (pound)11.1 million
for the fiscal year ended June 30, 1997. The increase reflected a substantial
increase in the Company's sales volume of electricity to 1,410 GWh from 257 GWh
in the 1997 period, a 449% increase, primarily as a result of the Company's
increased marketing efforts.
Gross profit. Gross profit for the fiscal year ended June 30, 1998
increased (pound)2.3 million to (pound)2.5 million from (pound)255,000 for the
fiscal year ended June 30, 1997. As a percentage of revenue, gross profit for
fiscal 1998 was 4.4%
19
<PAGE>
compared to 2.3% in fiscal 1997. This increase was primarily due to the increase
in electricity sales derived from Company's generated electricity, which
generally have higher margins. In fiscal 1998, the Company generated 58.5 GWh of
electricity compared to 7.1 GWh in fiscal 1997. In addition, the additional
electricity generated by the Company in fiscal 1998 was from new larger plants
at Trumfleet and Caythorpe that produce electricity at lower costs, thereby
further increasing margins.
Administrative expenses. Administrative expenses for the fiscal year ended
June 30, 1998 increased (pound)300,000, or 24%, to (pound)1.7 million from
(pound)1.4 million for the fiscal year ended June 30, 1997. As a percentage of
revenue, administrative expenses for fiscal 1998 were 3% compared to 12% in
fiscal 1997 as the Company's administrative expenses in fiscal 1997 reflected
primarily fixed costs which did not increase materially in the 1998 period.
Depreciation and amortization. Depreciation and amortization expense for
the fiscal year ended June 30, 1998 was (pound)626,000 compared to
(pound)142,000 for fiscal 1997. The increase was primarily the result of
depreciation related to two new generation plants that commenced operations in
fiscal 1998, one in December 1997 and one in March 1998.
Operating profit (loss). The operating profit for the fiscal year ended
June 30, 1998 was (pound)210,000 compared to operating loss of (pound)1.3
million for the fiscal year ended June 30, 1997. The reduction in the loss for
fiscal 1998 was due to increased sales volumes, increased gross profit and
reduced operating expenses as a percentage of revenue as described above.
Interest income (expense). The Company had net interest expense of
(pound)395,000 in fiscal 1998 compared to net interest income of (pound)69,000
in fiscal 1997. The change was primarily due to increased interest expense
associated with debt financing used for two new generating plants in fiscal
1998.
Year Ended June 30, 1997 Compared to Twelve Months Ended June 30, 1996
Revenue. Revenue for the fiscal year ended June 30, 1997 increased
(pound)10.9 million to (pound)11.1 million from (pound)178,000 for the twelve
months ended June 30, 1996. The Company commenced sales of electricity in April
1996. The increase in sales volume was a result of a full year of commercial
operations in fiscal 1997.
Gross profit. Gross profit for the year ended June 30, 1997 increased to
(pound)255,000 from (pound)2,000 for the twelve months ended June 30, 1996. As a
percentage of revenue, gross profit for the year ended June 30, 1997 was 2.3%
compared to 1.3% for the twelve months ended June 30, 1996. The increase was
primarily due to sourcing electricity from the Company's generating plants (7.1
GWh or 3% of revenue) which generally result in higher margins. The Company did
not generate any electricity in the twelve months ended June 30, 1996. In
addition, the unit price of electricity purchased from the Pool was lower in the
year ended June 30, 1997 than for the twelve months ended June 30, 1996, thereby
further increasing margins for fiscal 1997.
Administrative expenses. Administrative expenses for the year ended June
30, 1997 increased (pound)818,000, or 150%, to (pound)1.4 million from
(pound)545,000 for the twelve months ended June 30, 1996. Moreover, as a
percentage of revenue, administrative expenses for the 1997 period were 12.3%
compared to 305.4% in the 1996 period. This increase resulted primarily from
increased marketing activities and additional staff hired as the Company
expanded its operations.
Depreciation and amortization. Depreciation and amortization for the year
ended June 30, 1997 was (pound)140,000 compared to (pound)6,000 for the twelve
months ended June 30, 1996. The increase was primarily a result of depreciation
related to the Company's Elswick generating plant which commenced operations in
July 1996.
Operating loss. Operating loss increased for the fiscal year ended June 30,
1997 to (pound)1.3 million compared to (pound)544,000 for the twelve months
ended June 30, 1996. The increase in the loss for the 1997 period was due to
operating expenses increasing as the Company formed its marketing and
administrative organization and commenced marketing activities. Such expenses
constitute primarily fixed overhead expenses and should decrease as a percentage
of revenue as the Company expands its operations.
20
<PAGE>
Interest income (expense). The Company had net interest income of
(pound)69,000 in the year ended June 30, 1997 compared to net interest income of
(pound)77,000 for the twelve months ended June 30, 1996. Interest income
decreased in the year ended June 30, 1997 primarily as a result of interest
expense of (pound)120,000 in the year ended June 30, 1997 resulting from
financing of a new generating plant in fiscal 1997 which partially offset
increased interest income resulting from greater cash on deposit resulting from
equity placements.
Liquidity and Capital Resources
The Company's principal uses of funds have been to (i) fund operating
losses associated with being a development stage company, (ii) fund working
capital requirements and (iii) fund capital expenditures, primarily the
acquisition and installation of gas-fired generating plants. From January 1,
1996 through June 30, 1998, these activities utilized funds of (pound)1.6
million, (pound)4.2 million and (pound)12.7 million, respectively.
The Company has financed its funding requirements through a combination of
equity issuances, capital lease financings and borrowings. From 1994 to 1997,
the Company raised an aggregate of (pound)10.4 million through four equity
placements in the U.K. and the U.S. In July 1998, the Company raised (pound)34.0
million net proceeds in an initial public offering of ADSs in the U.S. (the "ADS
Offering").
The Company has a credit facility with Barclays Bank plc (the "Credit
Facility"), which, as of September 30, 1998, provides for aggregate borrowings,
letters of credit and bank guarantees of (pound)31.0 million consisting of (i)
an (pound)8.0 million revolving construction facility payable in quarterly
payments of (pound)250,000 with interest of LIBOR plus 2.5% (10.4% at September
30, 1998), (ii) a line of credit of (pound)4.0 million due March 31, 1999 which
bears interest at a base rate plus 1.75% (9.25% at September 30, 1998), (iii)
(pound)10.0 million in the form of letters of credit to secure Pool electricity
purchase obligations and obligations under CFDs, (iv) a (pound)7.5 million bank
guarantee used by the Company to secure its obligations under a contract with a
third-party service provider and (v) a (pound)1.5 million overdraft facility due
March 17, 1999 which bears interest at a base rate plus 1.5% (9.0% at September
30, 1998). Pursuant to the Credit Facility, the Company has provided full cash
collateral to secure outstanding obligations under the bank guarantee. As of
September 30, 1998, the Company had outstanding borrowings under the Credit
Facility of (pound)4.25 million and had utilized commitments to issue letters of
credit in the aggregate amount of (pound)9.6 million and the bank guarantee of
(pound)7.5 million.
In June 1997, the Company issued (pound)1.4 million of promissory notes,
which mature December 31, 2002 and bear interest at 10% per annum, payable
quarterly. Such notes were repaid with the proceeds of the ADS Offering.
The Company has historically financed its generating plants primarily
through capital leases and debt financing. In June 1996, the Company executed a
capital lease for Elswick for $1.5 million. The lease is payable in quarterly
payments of $57,891 over a five-year initial term and secured by the generating
assets located at the Elswick site. After the initial term, the Company can
either extend the term for an additional five years at the then prime rate plus
1%, or purchase the equipment for 50% of its original cost. After ten years, the
Company can purchase the equipment for $1. In June 1997, a capital lease for gas
generator systems was executed for (pound)4.4 million. This lease is payable in
six monthly payments of (pound)31,423 commencing July 23, 1997 followed by 78
monthly payments of (pound)69,734. The primary term of seven years can be
extended indefinitely for an annual payment of (pound)10,958. In October 1997,
the Company entered into a capital lease covering gas generator systems for
(pound)2.7 million. This lease is payable in quarterly payments commencing
January 31, 1998 in varying amounts. The primary term of six years can be
extended by the Company indefinitely for an annual payment of (pound)6,664.
The Company estimates that its capital expenditure requirements related to
the acquisition and installation of additional generating plants for the
remainder of calendar year 1998 and for calendar year 1999 will be approximately
(pound)15.2 million and (pound)73.8 million, respectively. The Company has
historically financed its generating plants primarily through capital lease and
debt financing with equity financing representing 7% to 10% of the aggregate
financing requirements. Following the offering, the Company expects to increase
the equity portion of such capital requirements by up to 15%. Accordingly, the
Company expects to use (pound)13.7 million ($23.0 million) of the net proceeds
from the ADS Offering to fund the equity-financed portion of the acquisition and
installation of gas-fired generating plants by the Company through the end of
1999. However, although the Company is actively pursuing the acquisition and
installation of the generating plants described above, there can be no assurance
21
<PAGE>
regarding the amount and timing of expenditures for such generating plants or
that such expenditures will not vary materially from those currently
contemplated. The actual amount to be expended for the acquisition and
installation of gas-fired generating plants will depend on a number of factors,
including market conditions in the U.K. electricity industry and the Company's
success in attracting new customers.
The Company purchases substantially all of its electricity from the Pool
which is required to be paid 28 days in arrears. In contrast, the Company bills
its customers monthly and receives payments from such billings on average
approximately 25 days therefrom. Thus, the Company has significant working
capital requirements due to these timing differences. In addition, during the
colder months (October through April) when Pool prices are generally higher than
the average yearly Pool price, the Company requires additional working capital
to fund the increased cost of electricity during such months. The Company has
taken a number of measures to reduce its working capital need, including
encouraging customers to adopt shorter billing and collection cycles and to
utilize direct debit as a means of payment. As the Company expands its base of
operations, it expects working capital needs to increase significantly.
In fiscal 1998, the Company expended (pound)3.0 million for information
technology and related equipment to service customers. Such amount was utilized
for a setup fee paid to a third-party service provider under a five-year service
contract commencing in fiscal 1999. This amount will be amortized over the life
of such service contract. In addition, pursuant to the terms of such contract,
the Company obtained a (pound)7.5 million bank guarantee in the third calendar
quarter of 1998 to secure its obligations under such contract. The Credit
Facility has been amended to provide for such bank guarantee. However, the
Company was required to provide full cash collateral to secure this guarantee.
The Company believes that the remaining net proceeds from the ADS Offering,
capital lease and other debt financing and cash generated from operations will
be adequate to fund such capital expenditure requirements and working capital
needs related to the expansion of its operations.
Reconciliation of U.K. GAAP to U.S. GAAP
The Company's consolidated financial statements are prepared in accordance
with U.K. GAAP. There are significant differences between U.K. GAAP and U.S.
GAAP.
The principal difference between U.K. GAAP and U.S. GAAP relevant to the
Company occurs with respect to accounting for variable employee share options
under the Company's option program. Although the Company does not have a formal
option plan, the Company has granted options to acquire Shares to substantially
all employees of the Company. Under U.K. GAAP, the Company does not recognize
compensation cost related to the option program as described below.
Under Accounting Principles Board ("APB") No. 25, compensation for services
that the Company received as consideration for Shares issued pursuant to the
exercise of options are recognized as the difference between the quoted market
price of the number of Shares issuable pursuant to options at the measurement
date less the aggregate exercise price for Shares issuable pursuant to such
options. Compensation cost related to the option program as determined under
U.S. GAAP would have been (pound)111,000, (pound)188,000 and (pound)136,000 for
the fiscal years ended June 30, 1996, 1997 and 1998, respectively. There was no
compensation cost related to its option program for the year ended December 31,
1995.
The Company's net losses for the fiscal years ended June 30, 1996, 1997 and
1998, under U.K. GAAP were (pound)891,000, (pound)1.2 million and
(pound)185,000, respectively. Under U.S. GAAP, the Company would have reported
net losses of (pound)1.0 million, (pound)1.4 million and (pound)321,000 for the
periods ended June 30, 1996, 1997 and 1998, respectively. There was no change in
the net income or losses reported for the year ended December 31, 1995 under
U.S. GAAP.
Notes 29 and 30 to the Company's consolidated financial statements provide
a description of these and other differences between U.K. GAAP and U.S. GAAP.
22
<PAGE>
Item 9A. Quantitative and Qualitative Disclosure About Market Risk
Independent Energy is exposed to two principal risks associated with its
customers' contracts: "load shape" risk (the risk associated with a shift in the
customer's usage pattern, including absolute amounts demanded and timing of
amounts demanded) and "purchase" price risk (the cost of purchased electricity
relative to the price received from the supply customer). Generally, load shape
risk decreases as Independent Energy's portfolio of supply customers in the
supply market increases. Independent Energy manages Pool price risk by employing
a variety of risk management tools, including entering into CFDs, management of
its supply contract portfolio, and through the ownership of generating
facilities to produce a portion of its required supply of electricity. The
Company has in the past and intends to continue to enter into CFDs which are
contracts between generators, traders and suppliers that have the effect of
fixing the price of electricity for a contracted quantity of electricity over a
specific time period. Differences between the actual price set by the Pool and
the agreed prices give rise to different payments between the parties to the
particular CFD. Independent Energy's ability to manage its purchase price risk
depends, in part, on the future availability of properly priced risk management
mechanisms such as CFDs.
As of June 30, 1998, the Company had effective sales contracts in place to
supply an estimated 1,377 GWh of electricity through June 1999 and had CFDs in
place to fix the purchase price of 1,003 GWh of such demand. In addition, in
order to hedge against Pool price fluctuations related to renewals of sales
contracts and future growth, the Company's CFDs in place also fix the purchase
price of an additional 248 GWh of electricity through October 1999. As of June
30, 1998, the aggregate commitment of the Company under CFDs was (pound)34.0
million. Self-generation of electricity by the Company also provides a hedge
against electricity price fluctuations since the cost of the Company's generated
electricity has historically been less than sales prices. The Company estimates
that its three existing generating plants and the three proposed plants will
provide it with an additional 158 GWh and 160 GWh of electricity, respectively,
for the fiscal year ending June 30, 1999. As a result of its expected growth in
revenue arising from the commencement of the final phase of deregulation, the
Company has adopted a hedging policy which consists of entering into CFDs and
continuing to generate a portion of its electricity requirements to effectively
hedge a significant portion of its total estimated demand based on effective
sales contracts in place at such time.
Item 10. Directors and Officers of Registrant
Executive Officers and Directors
Certain information concerning the executive officers and directors of the
Company is set forth below.
Name Age Position
---- --- --------
Burt H. Keenan..................... 59 Executive Chairman
John L. Sulley..................... 47 Managing Director
Ian Stewart........................ 46 Executive Director--Finance
William E. Evans................... 62 Executive Director--Resources
Robert Jones....................... 52 Executive Director--Operations
Jerry W. Jarrell................... 57 Non-Executive Director
Roy Deakin......................... 66 Non-Executive Director
David May.......................... 62 Non-Executive Director
Burt H. Keenan has been Executive Chairman of the Company since its
inception in April 1991. Since 1987, he has been an associate of Chaffe &
Associates, Inc., an investment banking firm located in New Orleans, Louisiana.
From 1969 to 1986, Mr. Keenan was the founder, Chairman and Chief Executive
Officer of Offshore Logistics, Inc., a Nasdaq-traded marine and aviation oil and
gas service company. He is also a director of a number of companies, including
Telescan Incorporated, a Nasdaq-traded interactive online information business,
and Halter Marine, Inc., an American Stock Exchange listed company engaged in
shipbuilding in the U.S. Mr. Keenan holds bachelors and masters degrees in
business administration from Tulane University.
23
<PAGE>
John L. Sulley, Managing Director, joined the Company in October 1995. Mr.
Sulley has over 25 years of experience in the U.K. power industry, including
experience in engineering, operations, finance and marketing operations. From
April 1994 to October 1995, he was general commercial manager for the Supply
Division of Scottish Power plc, where he was responsible for financial
operations, strategic and business planning for the Supply Division and for the
electricity trading operations. From March 1989 to April 1994, Mr. Sulley was
responsible for starting and managing the direct sales operations at National
Power plc. Mr. Sulley holds an MBA from Glasgow University, a Masters degree in
engineering from UMIST and a BSc. in engineering from Aston University.
Ian Stewart joined the Company as Executive Director--Finance in May 1998.
From April 1996 to May 1998, Mr. Stewart served as Group Financial Controller
for the North of Scotland Water Authority. From January 1992 to March 1996, he
served as Head of Finance for the Energy Trading Division of Scottish Power plc,
which marketed electricity to large industrial and commercial businesses in the
early phases of deregulation in the U.K. During this same period, he also served
as Finance Director of Caledonian Gas, an affiliate of Scottish Power plc. Mr.
Stewart received his professional accountancy qualification from Caledonian
University.
William E. Evans, Executive Director--Resources, joined the Company in
April 1992. He is a consultant geologist-geophysicist with broad managerial
experience in exploration, having specialized in the U.K. onshore oil industry
over the past 25 years. He became chief geologist of the consulting firm
Seabrooke & Associates (later Simon Horizon) and a founder of Energy Resource
Consultants. He holds a BSc. in geology from Bristol University and a DIC in oil
technology from Imperial College, London, where he held a lectureship in
petroleum geology for three academic years.
Robert Jones joined the Company in April 1996 and is currently Executive
Director--Operations. Dr. Jones is a petroleum engineer with 26 years of
experience in drilling, field development and production operations, with
particular emphasis on operations in the U.K. From September 1993 to April 1996,
Dr. Jones was development manager for Perenco Group (formerly Kelt) where he was
responsible for drilling and completion operations and field development. Before
joining Perenco, Dr. Jones was operations manager for Taylor Woodrow Energy
Limited with specific responsibility for drilling and production operations
onshore U.K. Dr. Jones holds both a Ph.D. and a BSc. in mining engineering from
Nottingham University.
Jerry W. Jarrell became a non-executive Director of the Company in May
1998. From April 1991 to May 1998, he served as Executive Director--Finance of
the Company. He is also a private consultant to several public and private
companies. He has devoted 50% of his time to the Company since early 1996. Prior
thereto, he had devoted 20% of his time to the Company. From 1977 to 1990, he
served as Chief Financial Officer for the Woodson Companies, an oil field
construction company. From 1971 to 1977, he was Secretary, Treasurer and
Controller of Offshore Logistics, Inc., a Nasdaq-traded marine and aviation oil
and gas service company. From 1966 to 1971, he was a certified public accountant
with Arthur Andersen & Company. He holds a BS degree in accounting from
Louisiana Tech University. Mr. Jarrell is the Chairman of the Audit Committee
and a member of the Remuneration Committee of the Board of Directors.
Roy Deakin has been a non-executive director of the Company since October
1992. He is Chairman of Southern Geophysical Consultants, a U.K. company which
has provided a geophysical service function to the petroleum exploration
industry over the past 25 years. Mr. Deakin was formerly a Non-Executive
Chairman of Blackland Oil plc. Mr. Deakin is a member of the Audit and
Remuneration Committees of the Board of Directors.
David May has been a non-executive director since December 1995. He is a
specialist in venture capital companies and currently holds seven other
directorships covering a wide range of business interests. He is currently
chairman of the Berthon group of companies which was a leader in marina
development in the U.K. He is a university graduate, a qualified marine engineer
and a naval architect. Mr. May is the Chairman of the Remuneration Committee and
a member of the Audit Committee of the Board of Directors.
Term of Office of Directors and Executive Officers
With the exception of the Chairman and Managing Director, one-third of the
Directors, or if their number is not three or any multiple of three, then the
number nearest to and less than one-third, retire by rotation at each
24
<PAGE>
Annual General Meeting. In addition, any Director appointed since the latest
Annual General Meeting shall retire at the next Annual General Meeting but is
eligible for re-election. Accordingly, the terms of office expire at the next
Annual General meeting and, being eligible, such Directors may seek re-election.
Item 11. Compensation of Directors and Executive Officers
In the fiscal year ended June 30, 1998, the Company paid (pound)304,000 in
compensation to all directors and executive officers as a group, for services in
all capacities. The Company has a bonus and profit sharing plan. However, no
compensation was paid in fiscal 1998 under this plan. In fiscal 1998, the
Company accrued (pound)20,200 for pension, retirement or similar benefits for
its executive officers and directors. See Note 4 to the consolidated financial
statements of the Company included elsewhere in this Report.
Employment Contracts
Independent Energy has entered into the following agreements with its
executive officers.
Mr. Sulley and Dr. Jones have each entered into service agreements with
Independent Energy for an initial term of two years. After the initial term
which expired in May 1998, Independent Energy has the right to terminate either
agreement with 24 months prior notice. Mr. Sulley and Dr. Jones receive annual
salaries of (pound)66,000 and (pound)60,000, respectively, as well as
profit-related bonuses and other benefits.
Each of Messrs. Evans, Keenan and Jarrell have entered into consulting
agreements through entities controlled by each such person with Independent
Energy for an initial term of two years. After the initial term, either party to
the agreements may terminate the applicable agreement with 24 months prior
notice. Messrs. Evans, Keenan and Jarrell receive annual salaries of
(pound)45,000, (pound)40,000 and (pound)25,000, respectively.
Each of Messrs. Deakin and May have entered into agreements to provide
their services as non-executive directors to Independent Energy with Independent
Energy. Such contracts are terminable by either party with three months notice.
Each of Messrs. Deakin and May receive an annual fee of (pound)8,000 and an
attendance fee of (pound)650 per board meeting.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
Options to Purchase Ordinary Shares
The following table sets forth the options to purchase Ordinary Shares held
by each executive officer and director as of June 30, 1998.
<TABLE>
<CAPTION>
Number of Exercise
Name Shares Price Exercisable Date Expiration Date
---- ------ ----- ---------------- ---------------
(p)
<S> <C> <C> <C> <C>
Burt H. Keenan............................ 45,400 31.25 January 1, 1997 January 1, 2001
200,000 100.00 October 21, 1997 April 28, 2003
50,000 122.50 November 5, 2000 November 5, 2002
Jerry W. Jarrell.......................... 22,800 31.25 January 1, 1997 January 1, 2001
100,000 100.00 January 1, 1999 January 1, 2001
50,000 122.50 November 5, 2000 November 5, 2002
100,000 100.00 October 21, 1997 April 28, 2003
John L. Sulley............................ 60,000 50.00 January 1, 1997 January 1, 2001
300,000 100.00 January 1, 1999 January 1, 2001
50,000 122.50 November 5, 2000 November 5, 2002
Ian Stewart............................... 170,000 122.50 November 5, 2000 November 5, 2002
William E. Evans.......................... 150,000 100.00 January 1, 1999 January 1, 2001
295,200 1.00 May 28, 1996 January 1, 2001
50,000 122.50 November 5, 2000 November 5, 2002
Robert Jones.............................. 300,000 100.00 January 1, 1999 January 1, 2001
50,000 122.50 November 5, 2000 November 5, 2002
Roy Deakin................................ 50,000 100.00 January 1, 1997 January 1, 2001
David May................................. 50,000 100.00 January 1, 1997 January 1, 2001
15,000 122.50 November 5, 2000 November 5, 2002
---------
Total............................... 2,108,400
=========
</TABLE>
25
<PAGE>
Item 13. Interest of Management in Certain Transactions
Mr. Evans, through Altwood Petroleum Limited ("Altwood"), a corporation
controlled by him, has a 4% carried interest in the Company's oil and gas
licenses (except for the Caythorpe license). Altwood acquired his 4% interest as
compensation for his agreement in April 1992 to the assignments of the ongoing
Elswick ventures and other forthcoming projects to Eukan, and for the ownership
of Eukan to be held 95% by IPSCO.
26
<PAGE>
PART II
Item 14. Description of Securities to be Registered
Not applicable.
27
<PAGE>
PART III
Item 15. Defaults upon Senior Securities
None.
Item 16. Changes in Securities and Changes in Security for Registered Securities
None.
28
<PAGE>
PART IV
Item 17. Financial Statements
See page F-1.
Item 18. Financial Statements and Exhibits
Not applicable.
29
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Statement of Directors' Responsibilities ................................. F-2
Report of Independent Public Accountants ................................. F-3
Consolidated Statements of Operations for the year ended
December 31, 1995, the six months ended June 30, 1996,
and the years ended June 30, 1997 and 1998 ......................... F-4
Consolidated Balance Sheets as of June 30, 1997 and 1998 ................. F-5
Consolidated Cash Flow Statements for the year ended
December 31, 1995, the six months ended June 30, 1996,
and the years ended June 30, 1997 and 1998 ............................ F-6
Notes to the Consolidated Financial Statements ........................... F-7
F-1
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The following statement, which should be read in conjunction with the
report of Independent Public Accountants set out on page F-3, is made with a
view to distinguishing for shareholders the respective responsibilities of the
Directors and of the auditors in relation to the consolidated financial
statements.
The Directors are required by UK company law to prepare financial
statements for each fiscal period that give a true and fair view of the state of
affairs of the Company and Subsidiaries as at the end of the fiscal period and
of the profit or loss and cash flows for that period.
The Directors confirm that suitable accounting policies have been used and
applied consistently, and that reasonable and prudent judgments and estimates
have been made in the preparation of the financial statements. The Directors
also confirm that applicable accounting standards have been followed and that
the financial statements have been prepared on a going concern basis.
The Directors are responsible for keeping proper accounting records, for
safeguarding the assets of the Company and Subsidiaries and hence for taking
reasonable steps for the prevention and detection of fraud and other
irregularities.
F-2
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and the Shareholders
of Independent Energy Holdings plc:
We have audited the consolidated balance sheets of Independent Energy
Holdings plc and subsidiaries, as defined in Note 2 to these financial
statements, as of 30 June 1997 and 1998 and the related consolidated statements
of operations and cash flows for the year ended 31 December 1995, and the six
months ended 30 June 1996, and the years ended 30 June 1997 and 1998. These
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 in the United Kingdom, which are substantially the same as auditing
standards generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also 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 our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of Independent Energy Holdings plc
and subsidiaries as of 30 June 1997 and 1998, and the results of their
operations and their cash flows for the year ended 31 December 1995, and the six
months ended 30 June 1996, and the years ended 30 June 1997 and 1998 in
accordance with generally accepted accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain respects from accounting principles generally accepted in the United
States. The application of the latter would have affected the determination of
net results, shareholders' funds and cash flows for the year ended 31 December
1995, and the six months ended 30 June 1996 and the years ended 30 June 1997 and
1998 to the extent summarized in Notes 29 and 30 to the consolidated financial
statements.
Pannell Kerr Forster
Chartered Accountants and Registered Auditors
Nottingham, England
2 October 1998
F-3
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC AND SUBSIDIARY UNDERTAKINGS
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts stated in pounds sterling except per share data)
<TABLE>
<CAPTION>
Year Six Months
Ended Ended Year ended June 30,
December 31, Ended June 30, --------------------------
Note 1995 1996 1997 1998
------- ------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Turnover (revenue) .................. 3(e) 4,701 173,701 11,127,164 57,988,742
Cost of sales ....................... 3(f) -- (171,448) (10,872,238) (55,457,472)
----------- ----------- ----------- -----------
Gross profit ........................ 4,701 2,253 254,926 2,531,270
Depreciation and amortization........ 10/11 (2,858) (5,681) (141,850) (625,638)
Administrative expenses ............. (90,915) (492,199) (1,363,343) (1,695,768)
----------- ----------- ----------- -----------
Operating profit (loss) ............. (89,072) (495,627) (1,250,267) 209,864
Exceptional items ................... 8 -- (460,983) -- --
Interest income ..................... 6(a) 24,029 65,417 189,071 105,049
Interest expense .................... 6(b) -- -- (120,397) (499,850)
----------- ----------- ----------- -----------
Loss on ordinary
activities before taxation ....... 7 (65,043) (891,193) (1,181,593) (184,937)
Tax on loss on ordinary
Activities ....................... 15 5,576 -- -- --
----------- ----------- ----------- -----------
Retained loss for the
Period ........................... (59,467) (891,193) (1,181,593) (184,937)
=========== =========== =========== ===========
Basic earnings (losses) per
Share ............................ 9 (176.8)p (9.9)p (9.0)p (1.1)p
</TABLE>
- ----------
(1) Movements on reserves are set out in note 18.
(2) There are no material differences between results calculated on an
historical cost basis and those reported above.
(3) The results for the period reflect all recognized gains and losses.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC AND SUBSIDIARY UNDERTAKINGS
CONSOLIDATED BALANCE SHEETS
(All amounts stated in pounds sterling)
<TABLE>
<CAPTION>
June 30,
-------------------
Note 1997 1998
---- ---- ----
<S> <C> <C> <C>
Fixed Assets
Intangible assets ............................. 10 1,544,689 6,220,988
Tangible assets ............................... 11 8,503,781 18,530,667
Current Assets
Debtors:
Amounts due within one year ................... 12 4,880,460 15,339,623
Cash at bank and in hand ...................... 1,923,005 620,649
----------- -----------
6,803,465 15,960,272
Creditors
Amounts falling due within one year ........... 13 (3,956,441) (20,588,185)
----------- -----------
Net current assets ............................ 2,847,024 (4,627,913)
----------- -----------
Total Assets less Current Liabilities ......... 12,895,494 20,123,742
Creditors
Amounts falling due after more than one year .. 14 (5,937,925) (10,671,177)
----------- -----------
Net Assets .................................... 6,957,569 9,452,565
=========== ===========
Capital and Reserves
Called up share capital ....................... 17 149,914 179,355
Share premium account ......................... 18 8,044,482 10,694,974
Profit and Loss account ....................... 18 (1,236,827) (1,421,764)
----------- -----------
Shareholders' Funds ........................... 19 6,957,569 9,452,565
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC AND SUBSIDIARY UNDERTAKINGS
CONSOLIDATED CASH FLOW STATEMENTS
(All amounts stated in pounds sterling)
<TABLE>
<CAPTION>
Year Six
Ended Months Ended
December 31, June 30,
Year Ended June 30,
--------------------------
1995 1996 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Reconciliation of operating profit/(losses)
to net cash (outflow)
from operating activities
Operating profit (loss) ................ (89,072) (495,627) (1,250,267) 209,864
Depreciation and ................... 2,858 3,875 146,991 625,638
amortization
Changes in debtors ..................... (14,219) (246,360) (3,931,165) (10,459,163)
Changes in creditors ................... 8,437 229,938 2,695,153 7,483,983
Exchange movements ..................... -- 23,693 (39,535) 3,842
----------- ----------- ----------- -----------
Net cash outflow from operating ........ (91,996) (484,481) (2,378,823) (2,135,836)
activities
Returns on investments and servicing of
finance
Interest received ...................... 24,029 41,724 189,071 105,049
Interest paid .......................... -- -- (80,862) (1,074,391)
----------- ----------- ----------- -----------
24,029 41,724 108,209 (969,342)
Taxation
Tax paid ............................... (3,424) -- -- --
Capital expenditure
Purchase of tangible fixed assets ...... (56,343) -- (3,759,500) (6,775,095)
Purchase of intangible fixed assets .... (316,600) (212,199) -- (1,929,787)
Sale of tangible assets ................ -- 6,000 --
----------- ----------- ----------- -----------
(372,943) (206,199) (3,759,500) (8,704,882)
Management of liquid resources
Purchase of commercial paper ........... -- (4,300,154) -- --
Sale of commercial paper ............... -- -- 4,300,154 --
----------- ----------- ----------- -----------
-- (4,300,154) 4,300,154 --
Financing
Proceeds from exercised share warrants . 32,101 -- -- 54,141
Proceeds from exercised share options .. -- -- -- 198,750
Issue of ordinary share capital ........ 1,906,621 5,000,000 1,352,147 2,500,000
Less issue costs ....................... -- (305,520) -- (72,958)
Issue of loan notes .................... -- -- 1,400,000 --
New loans due within one year .......... 50,494 -- -- 5,000,000
New loans due in over one year ......... -- -- -- 4,000,000
Loan repayments ........................ -- -- -- (500,000)
Capital element of finance lease ....... -- (37,349) (440,386) (694,432)
repayments
----------- ----------- ----------- -----------
1,989,216 4,657,131 2,311,761 10,485,501
=========== =========== =========== ===========
(Decrease)/increase in cash in the period .. 1,544,882 (291,979) 581,801 (1,324,559)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND ORGANIZATION
Independent Energy Holdings plc and subsidiary undertakings ("the Company")
generates and markets electricity, currently only operating in the United
Kingdom. All amounts throughout this document are stated in pounds sterling
unless otherwise specified.
2. BASIS OF PRESENTATION
The consolidated financial statements include Independent Energy Holdings
plc and its wholly-owned subsidiary, Independent Energy UK Limited and the
predecessor companies (International Petroleum Service Company, Eukan Energy
Limited and Elswick Petroleum Limited).
Independent Energy UK Limited ("IEUK") was incorporated in March 1995, and
on 17 April 1995 it acquired by share exchange 100% interests in International
Petroleum Service Company ("IPSCo") a company incorporated in the State of
Delaware, Eukan Energy Limited ("Eukan") a company incorporated in the United
Kingdom and being a 95% owned subsidiary of IPSCo, and Elswick Petroleum Limited
("Elswick") also incorporated in the United Kingdom. IPSCo, Eukan and Elswick
are subsequently referred to as "the subsidiaries." This acquisition was
effected by the issue of shares in IEUK on the following basis:
(i) 1 share in IEUK for each share in IPSCo
(ii) 28 shares in IEUK for the 5% minority stake in Eukan
(iii) 1 share in IEUK for every 35 shares in Elswick
Following the share exchanges, the reorganization was accounted for under
UK GAAP merger accounting principles, which is substantially the same as the
pooling of interests method of accounting under US GAAP. This method was adopted
due to the common ownership and management control of IEUK and the subsidiaries
since their inception. The accounts of the entities that were acquired are
consolidated in the accompanying financial statements using historical data, for
the accounting periods ending 31 December 1994 and 1995. All significant
intercompany accounts and transactions have been eliminated.
On 1 January 1996, all trade and assets of the subsidiaries were
transferred to IEUK, and the now dormant companies were sold at net asset value.
In March 1996, Independent Energy Holdings plc ("IEH") was incorporated to
float on the Alternative Investment Market in the UK in order to raise funds for
expansion. On 31 May 1996 it acquired by share exchange, a 100% interest in
IEUK. Both the asset transfer and the acquisition of IEUK were accounted for
under UK GAAP acquisition accounting principles, which are substantially the
same as the purchase method of accounting under US GAAP. The accounts of IEH and
IEUK are consolidated in the accompanying financial statements for the
accounting periods ending 30 June 1996 and 1997, following a change in
accounting reference date from 31 December to 30 June. The results for June 30,
1996 therefore show a six month period only.
Under US GAAP, where an entity qualifies for the pooling of interests
accounting method, consolidated financial statements must be prepared on that
basis, reflecting all transactions at historical cost. This differs from UK GAAP
where an entity can choose either accounting method. The consolidated financial
statements prepared under UK GAAP have therefore been reconciled with the
consolidated financial statements prepared under US GAAP for each of the
accounting periods in Notes 29 and 30.
F-7
<PAGE>
3. ACCOUNTING POLICIES
The financial statements are prepared in accordance with applicable
accounting standards and generally accepted accounting principles in the United
Kingdom ("UK GAAP"). A summary of the more important accounting policies, which
have been applied consistently, is set out below.
The most significant differences between the accounting principles followed
by the Company and generally accepted accounting principles in the United States
("US GAAP") are described in Notes 29 and 30.
a) Basis of Accounting
These financial statements are prepared under the historical cost
convention.
b) Development
Expenditure on development of production facilities is capitalized to be
matched with future revenue.
The cost incurred relates to the development of natural gas fields to
facilitate commercial production of proven reserves which are used as the fuel
source for generation plants producing electricity and are included as
intangible assets.
The Company follows the full cost method of accounting for gas properties.
Accordingly, all costs associated with acquisition, exploration, and development
of gas reserves, including directly related overhead costs, are capitalized. All
capitalized costs of gas properties are amortized on the unit-of-production
method using estimates of proved reserves. Investments in unproved properties
and major development projects are not amortized until proved reserves
associated with the projects can be determined or until impairment occurs. If
the results of an assessment indicated that the properties are impaired, the
amount of the impairment is added to the capitalized costs to be amortized. In
addition, the capitalized costs are subject to a "ceiling test", which basically
limits such costs to the aggregate of the "estimated present value", discounted
at a 10 percent interest rate of future net revenues from proved reserves, based
on current economic and operating conditions, plus the lower of cost or fair
market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized.
The Company capitalizes interest on expenditures made in connection with
exploration and development projects not subject to current amortization.
Interest is capitalized only for the period that activities are in progress to
bring these projects to their intended use.
c) Depreciation and Amortization
Tangible fixed assets are written off over their estimated useful lives on
a straight line basis at the following annual rates:
Plant and machinery 5 percent on cost
Office equipment 33 percent on cost
Assets in the course of construction are the generation plants including
the generators, well development and related piping and cable connections which
are depreciated over their estimated useful lives from the date of completion.
Intangible fixed assets are amortized on unit-of-production basis using
estimates of proven resources. The proven resources are determined annually by
third party petroleum consultants.
F-8
<PAGE>
The Company periodically assesses whether any events or changes in
circumstances have occurred that would indicate that the carrying amount of
long-lived assets may not be recoverable.
d) Leasing
Assets acquired under finance leases are capitalized and depreciated over
their estimated useful lives. The interest element of the finance lease rental
payments is charged to the profit and loss account over the life of the lease.
Rentals payable under operating leases are charged to the profit and loss
account as incurred.
e) Turnover
Turnover (revenue) from the sale of electricity is recognized by the
Company on a monthly basis based on the volume of electricity consumed by its
customers as determined by month-end meter readings and the contract prices
associated with such volume. Customers are billed monthly, generally at a fixed
price for usage.
f) Deferred Energy Cost
The cost of electricity purchased from the Pool fluctuates throughout the
term of sales contracts. The Company recognizes gross profit related to
electricity sales on a pro rata basis throughout the term of sales contracts
based on an estimated gross profit margin for all sales contracts. Pool prices
tend to be higher in the colder months than in the warmer months. The estimated
gross profit margin considers the estimated cost of electricity, the effects of
hedging contracts entered into by the Company to mitigate Pool price exposure,
transmission and distribution costs, commissions and all other costs of sales in
supplying the electricity. The difference between the cash cost of the
electricity and the estimated cost of sales based on the estimated gross profit
margin is accounted for as either an accrual for, or a deferral of, the cost of
electricity and recorded on the balance sheet within current assets or current
liabilities, as the case may be. The Company reviews the difference between
actual gross profit and estimated gross profit on a quarterly basis.
g) Foreign Currency Translation
The translation of foreign currency transactions is dealt with as follows:
(i) non-monetary assets and liabilities at the balance sheet date are
translated at the rate ruling on the date on which the transaction
occurred;
(ii) monetary assets and liabilities at the balance sheet date are
translated at the rate ruling at that date;
(iii) transactions regarding turnover and operating expenses occurring
during the period, settled in sterling, are translated at the rate ruling
on the date on which the transaction occurred; and
(iv) transactions regarding turnover and operating expenses occurring
during the period, settled in foreign currency, are translated at the
average rate.
(h) Deferred Taxation
Tax deferred or accelerated is accounted for in respect of all material
timing differences to the extent that it is probable that a liability or asset
will be realized. The amount of such tax is based on expected effective tax
rates, and future changes in tax laws and rules are not anticipated for this
purpose.
F-9
<PAGE>
4. DIRECTORS
Directors' Remuneration
<TABLE>
<CAPTION>
Six
Months Year Year
Ended Ended Ended
June 30, June 30, June 30, Year Ended June 30, 1998
---------- -------- -------- -------------------------------------------------
Pension
1996 1997 1998 Salary Fees Benefits Contributions
---------- -------- -------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Executive Directors
B. H. Keenan..................... -- -- -- -- -- -- --
J. L. Sulley..................... 33,343 82,000 81,742 66,000 -- 5,842 9,900
I. Stewart....................... -- -- 11,052 8,452 -- 1,332 1,268
W. E. Evans...................... 2,120 5,700 5,817 -- -- 5,817 --
Dr. R. E. Jones.................. 7,864 74,800 75,924 60,000 -- 6,924 9,000
Non-Executive Directors
J. W. Jarrell.................... -- -- -- -- -- -- --
R. W. Deakin..................... 13,900 10,600 9,950 9,950
D. O. May........................ 7,776 11,249 9,950 9,950
------ ------- ------- ------- ------ ------ -------
65,003 184,349 194,435 134,452 19,900 19,915 20,168
====== ======= ======= ======= ====== ====== ======
</TABLE>
The directors received no remuneration in the year ended December 31, 1995.
Directors Interests in Contracts
The Company has received consultancy services from directors. These
transactions were in the normal course of business and amounted to:
<TABLE>
<CAPTION>
Year Ended Six Months Year Year
December Ended Jone Ended Ended
31, 30, June 30, June 30,
1995 1996 1997 1998
---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
B. H. Keenan .... -- 19,933 40,213 40,273
W. E. Evans ..... 24,000 22,601 44,983 45,000
J. W. Jarrell ... 1,282 13,269 25,133 25,165
J. L. Sulley .... 3,000 -- -- --
------- ------- ------- -------
28,282 55,803 110,329 110,438
======= ======= ======= =======
</TABLE>
Directors' Interests
The beneficial interests of the Directors in the ordinary shares of 1p of
IEH are as follows:
<TABLE>
<CAPTION>
Date of June 30, June 30,
Appointment 1997 1998
----------------- ------------ ----------
<S> <C> <C> <C>
B. H. Keenan.................... April 16, 1996 2,382,100 2,358,500
J. L. Sulley.................... April 16, 1996 60,000 60,000
I. Stewart ..................... June 5, 1998 -- --
W. E. Evans..................... April 16, 1996 5,600 5,600
Dr. R. E. Jones................. April 16, 1996 60,000 60,000
J. W. Jarrell .................. April 16, 1996 180,300 137,300
R. W. Deakin.................... April 16, 1996 68,200 --
D. O. May....................... April 16, 1996 50,000 50,000
</TABLE>
B. H. Keenan is a beneficial owner of Leeward Investments Limited, a
company which holds 1,742,800 ordinary shares in his holdings shown above.
F-10
<PAGE>
Directors Interests in Share Options
The Directors interests in share options as of June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
Exercise Number
Price of Shares Exercisable Dates
---------- ----------- -------------------------------
<S> <C> <C> <C>
B. H. Keenan.................... 31.25p 45,400 Jan. 1, 1997 to Jan. 1, 2001
100.00p 200,000 Oct. 21, 1997 to Apr. 28, 2003
122.50p 50,000 Nov. 5, 2000 to Nov. 5, 2002
J. L. Sulley.................... 50.00p 60,000 Jan. 1, 1997 to Jan. 1, 2001
100.00p 300,000 Jan. 1, 1999 to Jan. 1, 2001
122.50p 50,000 Nov. 5, 2000 to Nov. 5, 2002
I. Stewart ..................... 122.50p 170,000 Nov. 5, 2000 to Nov. 5, 2002
W. E. Evans..................... 1.00p 295,200 May 28, 1996 to Jan. 1, 2001
100.00p 150,000 Jan. 1, 1999 to Jan. 1, 2001
122.50p 50,000 Nov. 5, 2000 to Nov. 5, 2002
R. E. Jones..................... 100.00p 300,000 Jan. 1, 1999 to Jan. 1, 2001
122.50p 50,000 Nov. 5, 2000 to Nov. 5, 2002
J. W. Jarrell................... 31.25p 22,800 Jan. 1, 1997 to Jan. 1, 2001
100.00p 100,000 Oct. 21, 1997 to Apr. 28, 2003
100.00p 100,000 Jan. 1, 1999 to Jan. 1, 2001
122.50p 50,000 Nov. 5, 2000 to Nov. 5, 2002
D. O. May....................... 100.00p 50,000 Jan. 1, 1997 to Jan. 1, 2001
122.50p 15,000 Nov. 5, 2000 to Nov. 5, 2002
R. W. Deakin.................... 100.00p 50,000 Jan. 1, 1997 to Jan. 1, 2001
</TABLE>
No granted options have been exercised nor have any expired.
5. EMPLOYEES
(a) Employment costs (including executive directors) consist of:
<TABLE>
<CAPTION>
Six Months Year Year
Year Ended Ended Ended Ended
December 31, June 30, June 30, June 30,
1995 1996 1997 1998
------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Salaries and wages........................ -- 130,013 503,386 858,920
Social security costs..................... -- 13,058 49,948 80,729
Other pension costs....................... -- 17,363 66,216 104,762
------------- ----------- --------- ------------
-- 160,434 619,550 1,044,411
============= =========== ========= ============
</TABLE>
(b) The average number employed during the periods were:
<TABLE>
<CAPTION>
Six Months Year Year
Year Ended Ended Ended Ended
December 31, June 30, June 30, June 30,
1995 1996 1997 1998
------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Administration and management............. 6 1 2 3
Marketing and development................. -- 8 13 22
------------- ----------- --------- -----------
6 9 15 25
============= =========== ========= ===========
</TABLE>
F-11
<PAGE>
6. INTEREST RECEIVABLE AND PAYABLE AND SIMILAR INCOME AND EXPENSE
<TABLE>
<CAPTION>
Six Months Year Year
Year Ended Ended Ended Ended
December 31, June 30, June 30, June 30,
1995 1996 1997 1998
------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
(a) Interest Receivable and Similar Income:
Interest receivable.......................... 24,029 41,724 186,431 98,370
Gain on currency conversion.................. -- 23,693 -- 3,594
Other........................................ -- -- 2,640 3,085
------------- ----------- ---------- ------------
24,029 65,417 189,071 105,049
============= =========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
Six Months Year Year
Year Ended Ended Ended Ended
December 31, June 30, June 30, June 30,
1995 1996 1997 1998
------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
(b) Interest Payable and Similar Expense:
Interest payable on loans.................... -- -- 70,417 440,163
Letters of credit 43,306
Interest--other.............................. -- -- 10,445 16,381
Loss on currency conversion.................. -- -- 39,535 --
------------- ----------- ---------- ----------
-- -- 120,397 499,850
============= =========== ========== ==========
</TABLE>
7. PROFIT (LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION IS STATED AFTER
CHARGING:
<TABLE>
<CAPTION>
Six Months Year Year
Year Ended Ended Ended Ended
December 31, June 30, June 30, June 30
1995 1996 1997 1998
------------------ ----------- --------- ------------
<S> <C> <C> <C> <C>
Amortization..................................... -- -- 37,692 275,836
Depreciation..................................... 2,858 5,681 104,158 349,802
Auditors' remuneration--audit fee................ 4,500 9,000 10,500 18,000
Auditors' remuneration--other.................... -- -- 3,565 11,000
Operating lease rentals.......................... -- 28,630 109,039 138,804
</TABLE>
8. EXCEPTIONAL ITEMS
The impairment loss during the six months ended 30, June 1996 of 460,983
arose out of a project to refurbish a drilling rig for the Company's use in
developing the gas licenses. The Company made the decision to abandon this
product due to the relatively high refurbishing cost. The drilling rig carrying
cost was adjusted to the estimated salvage value. The drilling rig is presently
owned by the Company and the Company plans to sell the rig.
9. EARNINGS PER SHARE
Basic earnings (losses) per share is based on the profit (loss) after
taxation for the periods using weighted average number of ordinary shares in
issue, for 1998--17,190,589; 1997--13,129,914; 1996--8,981,076; and
1995--33,641. The effect of outstanding stock options and warrants is not shown
as it is antidilutive.
No dividend is proposed.
F-12
<PAGE>
10. FIXED ASSETS--INTANGIBLE
Intangible fixed assets consists of:
a) The expenditures related to the acquisition and development of natural gas
fields including the applicable interest and overhead costs. The gas
produced is used to fuel the generation plants producing electricity and
not sold as natural gas. The cost is amortized over the estimated
productive life of the producing property based on proven reserves.
b) The expenditures related to information technology and related equipment to
service customers. The cost at June 30, 1998 consists of a setup fee paid
to a third party service provider under a five year service agreement
commencing November 1998. This cost will be amortized over the life of the
agreement.
The movement in the account during the periods were:
<TABLE>
<CAPTION>
Natural Customer
Gas Service
Fields Agreement Total
---------- ---------- ------------
<S> <C> <C> <C> <C>
Cost
At July 1, 1996 .................... 897,184 897,184
Additions .......................... 685,197 685,197
--------- ---------
At July 1, 1997 .................... 1,582,381 1,582,381
Additions .......................... 666,768 3,000,000 3,666,768
Transfer from fixed assets--tangible 1,285,367 1,285,367
--------- --------- ---------
At June 30, 1998 ................... 3,534,516 3,000,000 6,534,516
========= ========= =========
Accumulated amortization
At July 1, 1996 .................... -- --
Charge for the period .............. 37,692 37,692
--------- ---------
At July 1, 1997 .................... 37,692 37,692
Charge for the period ............ 275,836 275,836
--------- ---------
At June 30, 1998 ................... 313,528 313,528
========= =========
Net book value
June 30, 1997 .................... 1,544,689 1,544,689
June 30, 1998 .................... 3,220,988 3,000,000 6,220,988
========= ========= =========
</TABLE>
No interest was capitalized in intangible cost in the years ended June 30,
1997 and 1998.
F-13
<PAGE>
11. FIXED ASSETS--TANGIBLE
<TABLE>
<CAPTION>
Assets in the
Office course of Plant and
Equipment Construction Equipment Total
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Cost
At June 30, 1996 ........................ 59,635 1,102,562 -- 1,162,197
Additions ............................... 55,788 7,396,701 -- 7,452,489
Transfers ............................... -- (972,059) 972,059 --
-----------
----------- ----------- ----------- -----------
At June 30, 1997 ........................ 115,423 7,527,204 972,059 8,614,686
Additions ............................... 238,344 11,402,287 21,424 11,662,055
Transfers ............................... -- (13,545,340) 12,259,973 (1,285,367)
----------- ----------- ----------- -----------
At June 30, 1998 ........................ 353,767 5,384,151 13,253,456 18,991,374
=========== =========== =========== ===========
Accumulated Depreciation
At June 30, 1996 ........................ 6,747 -- -- 6,747
Charge for the year ..................... 29,885 -- 74,273 104,158
----------- ----------- ----------- -----------
At June 30, 1997 ........................ 36,632 -- 74,273 110,905
Charge for the period ................... 59,484 -- 290,318 349,802
----------- ----------- ----------- -----------
At June 30, 1998 ........................ 96,116 -- 364,591 460,707
=========== =========== =========== ===========
Net book value
=========== =========== =========== ===========
At June 30, 1997 ........................ 78,791 7,527,204 897,786 8,503,781
=========== =========== =========== ===========
At June 30,1998 ......................... 257,651 5,384,151 12,888,865 18,530,667
=========== =========== =========== ===========
</TABLE>
Interest capitalized during the years ending June 30, 1997 and 1998 was
(pound)33,672 and (pound)701,813 respectively.
Assets in the course of construction includes leased assets totaling
(pound)4,383,327 and (pound)3,518,496 at June 30, 1997 and 1998 respectively.
Plant and equipment includes leased assets totaling (pound)946,100 and
(pound)4,476,431 at June 30, 1997 and 1998 respectively.
Capital Commitments
The Company has capital commitments of:
June 30, June 30,
1997 1998
--------- ---------
Authorized but not contracted .............. 5,317,000 6,100,000
Contracted but not provided ................ -- 4,406,695
========= =========
12. DEBTORS
June 30, June 30,
1997 1998
---------- ----------
Trade Debtors (Note 13) ...................... 2,930,964 10,905,202
Security Deposits (Note 13) .................. 1,110,744 --
Sundry Debtors ............................... 178,012 865,649
Other taxation and social security ........... 183,242 780,602
Prepayments and accrued income ............... 477,498 2,788,170
---------- ----------
4,880,460 15,339,623
========== ==========
F-14
<PAGE>
13. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
June30, June 30,
1997 1998
---------- ----------
Trade Creditors ................................ 1,096,051 6,454,443
Line of credit ................................. 4,000,000
Bank overdraft facility ........................ -- 22,203
Trade debtor financing ......................... 648,247 --
Other taxation and social security ............. 20,584 38,635
Corporation tax ................................ -- --
Financing due within one year (Note 14) ........ 313,767 2,051,832
Accruals and deferred income ................... 1,877,792 8,021,072
---------- ----------
3,956,441 20,588,185
========== ==========
The Company has working capital facilities available through its bank. At
June 30, 1998 these facilities consisted of a line of credit of (pound)4,000,000
((pound)4,000,000 utilized); (pound)6,000,000 overdraft facility ((pound)22,203
utilized) and letter of credit to secure energy purchase commitments and
contract for differences to secure energy pricing ((pound)9,625,000 issued).
These facilities are secured by a debenture on all Company assets other than
assets subject to other security agreements.
At June 30, 1997 there was a balance outstanding of(pound)648,247 under a
similar debtor financing facility which was replaced in 1998 by the above
facilities.
14. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
Due between
Due within two & five Due after
Total one year years five years
----- -------- ----------- ----------
<S> <C> <C> <C> <C>
June 30, 1997
Finance lease--Elswick ....................... 775,198 79,422 695,776 --
Finance lease--five generators ............... 4,076,494 234,345 2,327,533 1,514,616
Unsecured loan notes ......................... 1,400,000 -- -- 1,400,000
---------- ---------- ---------- ----------
6,251,692 313,767 3,023,309 2,914,616
========== ========== ========== ==========
June 30, 1998
Construction loan ............................ 4,500,000 1,000,000 3,500,000 --
Finance lease--Elswick ....................... 695,776 86,014 609,762 --
Finance lease--five generators ............... 3,842,149 502,359 2,543,438 796,352
Finance lease--three generators .............. 2,285,084 463,459 1,574,988 246,637
Unsecured loan notes ......................... 1,400,000 -- 1,400,000 --
---------- ---------- ---------- ----------
12,723,009 2,051,832 9,628,188 1,042,989
========== ========== ========== ==========
</TABLE>
The finance lease for Elswick was executed on June 20, 1996 for US
$1,466,455. The lease is payable in quarterly payments of US $57,891. The lease
is secured by the generation assets located at the Elswick site. The initial
term is five years and can be extended an additional five years under similar
terms. The Company has the option to purchase the equipment after the first five
years for 50% of the original cost of the equipment or after 10 years for US
$1.00.
The finance lease covering five 2,000 KW natural gas generator systems was
executed on June 17, 1997 for financing of (pound)4,383,327. The lease is
payable in 6 monthly payments of (pound)31,423 commencing 23 July 1997 and then
78 monthly payments of (pound)69,734. The primary term of 7 years can be
extended indefinitely for an annual rent of (pound)10,958.
The Company entered into a finance lease covering three 2,000 KW natural
gas generator systems on October 30, 1997, for financing of (pound)2,665,500.
The lease is payable in quarterly payments commencing January
F-15
<PAGE>
31, 1998 in varying amounts. The primary term of six years can be extended by
the Company indefinitely for an annual rent of (pound)6,664.
The unsecured Loan Notes were issued by IEH in June 1997. The Loan Notes
are repayable in full at December 31, 2002. Interest at 10 percent is payable
quarterly commencing June 30, 1997. The loan notes were repaid in full in July
of 1998 as part of sale of additional equity. (See Footnote No. 25)
The Company entered into a Credit Agreement on September 5, 1997, with
Barclays Bank PLC. The Credit Agreement provides a revolving construction
facility of up to (pound)8,000,000 for five years with repayment in quarterly
payments of (pound)250,000 commencing March 31, 1998. The Credit Agreement is
secured by a debenture on all Company assets other than assets subject to other
security agreements. The interest rate is based on the London Inter-bank rate
and is currently 10.35%. At June 30,1998 there was a balance outstanding under
the construction facility of (pound)4,500,000.
15. PROVISIONS FOR LIABILITIES AND CHARGES
Deferred taxation
No provisions have been made for deferred taxation in the periods up to
June 30,1998.
June 30, June 30
1997 1998
-------- --------
Capital Allowances ......................... 464,721 849,904
Other timing differences ................... (5,003)
Losses offset .............................. (459,718) (849,904)
-------- --------
-- --
======== ========
At June 30, 1998 the Company had accumulated losses of approximately
(pound)7,719,000 to be relieved in the future, of which approximately
(pound)2,741,000 have been used to offset the above deferred tax liability.
There is no time limitation on using the accumulated losses for UK tax purposes.
16. COMMITMENTS
The Company has entered into a 5 year service agreement with a leading
busines operations outsourcing company, Vertex Data Science Limited, for the
provision of call centre facilities, billing and transaction processing, to
support participation in the sub 100kW electricity supply market. A key
component of this outsourcing arrangement is the provision of a scalable system.
Under the terms of the agreement, there are obligations and penalties for
non-performance on the parties.
17. SHARE CAPITAL
a)Year ended June 30, 1998
Authorized:
28,000,000 ordinary shares of 1p each .................................. 280,000
=======
In October 1997 the Authorized shares were increased to 28,000,000
Issued and fully paid--ordinary shares of 1p each
As at June 30, 1997 .................................................... 149,914
Issued in the year ..................................................... 29,441
-------
As at June 30, 1998 .................................................... 179,355
=======
F-16
<PAGE>
In September 1997 2,631,579 ordinary shares were issued to raise equity and
in 1998 240,000 ordinary shares were issued for exercise of stock options, and
72,500 shares were issued for exercise of stock warrants.
b) Year ended June 30, 1997
Authorized:
20,000,000 ordinary shares of 1p each ........................... 200,000
Issued and fully paid--ordinary shares of 1p each
As at June 30, 1996 ............................................. 131,248
Issued in the year .............................................. 18,666
-------
As at June 30, 1997 ............................................. 149,914
=======
In June 1997 1,866,648 ordinary shares of 1p each were issued to private
investors.
18. RESERVES AND OTHER SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
Profit and
Share Loss
Premium Account
---------- ----------
<S> <C> <C>
At June 30, 1996 .............................................. 6,711,001 (55,234)
Share premium arising on private placement .................... 1,333,481 --
Retained loss for the year .................................... -- (1,181,593)
---------- ----------
At June 30, 1997 .............................................. 8,044,482 (1,236,827)
Share premium arising on private placement .................... 2,400,726 --
Share premium arising on exercise of stock options and warrants 249,766 --
Retained loss for the period .................................. -- (184,937)
---------- ----------
At June 30, 1998 ............................................. 10,694,974 (1,421,764)
========== ==========
</TABLE>
19. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
June 30 June 30
1997 1998
---------- ----------
<S> <C> <C>
New share capital subscribed for by private placement (net
of issue costs) ....................................... 1,352,147 2,427,042
Exercise of stock options and warrants ................... -- 252,891
---------- ----------
Other (losses)/gains ..................................... 1,352,147 2,679,933
Profit/(loss) on ordinary activities after tax ........... (1,181,593) (184,937)
Shareholders' funds at beginning of period ............... 6,787,015 6,957,569
---------- ----------
Shareholders' funds at end of period ..................... 6,957,569 9,452,565
========== ==========
</TABLE>
20. SHARE OPTION PLAN AND SHARE WARRANTS
The Company has a share option plan which provides for grants of options to
acquire the Company's shares to its key employees. Under the share option plan
the total number of ordinary share options that may be granted is 3,463,400
ordinary shares of 1p each.
A summary of the share options granted and the changes during the periods
is presented below. The share options granted include 250,000 share options in
aggregate to the Company's nominated broker and financial advisor granted on May
31, 1996, of which 180,000 share options were exercised in 1998 at an exercise
price of 100 pence.
Weighted
Average Number of
Exercise Price Shares
-------------- ---------
At June 30, 1996 and June 30, 1997 .............. 82p 2,778,400
Granted--November 5, 1997 ....................... 122.5p 925,000
Exercised in the period ......................... 83p (240,000)
====== ==========
At June 30, 1998 ................................ 93p 3,463,400
====== ==========
F-17
<PAGE>
The following table summarizes information regarding share options at June
30, 1998:
Weighted
Average
Number Remaining Number
Exercise Price Outstanding Contract Life Exercisable
-------------- ----------- ------------- -----------
1p .................... 295,200 2.50 295,200
31.25p ..................... 193,200 2.50 193,200
50p .................... 60,000 2.50 60,000
100p .................... 1,990,000 3.29 810,000
122.5p ..................... 925,000 4.35 --
--------- ---- ---------
3,463,400 3.45 1,358,400
========= ==== =========
The option price range at each year end was as follows:
June 30, 1997......................................... 1p to 100p
June 30, 1998......................................... 1p to 122.5p
Details of the director's options which are included in the above figures are
shown in Note 4 to the financial statements.
Share Warrants
On June 30, 1997 share warrants for 140,000 ordinary shares were granted in
association with the issue of Loan Notes of (pound)1,400,000; the warrants are
exercisable at a price of 75p at anytime until their expiration on March 31,
2002. During 1998 72,500 of the share warrants were exercised.
21. EMPLOYEE BONUS PLAN
The Company has a Bonus Pool, which is administered by the Remuneration
Committee, and based on an amount equal to:
(i) 10 percent of pre-tax net profit for the years ended June 30,
1996, 1997 and 1998;
(ii) 10 percent of pre-tax net profit in excess of a return on the
Company's equity of 25 percent, in subsequent years.
No bonuses have been earned or paid during any of the periods presented.
22. COMPANY UNDERTAKINGS
Principal Operating Subsidiary at June 30, 1998 is:
Country of
Name Incorporation Percentage Shareholdings
---- ------------- ------------------------
Independent Energy UK Limited............ England Ordinary shares 100%
The following subsidiaries do not conduct any operations:
<TABLE>
<CAPTION>
Country of
Name Incorporation Percentage Shareholdings
---- ------------- ------------------------
<S> <C> <C>
I E (Caythorpe) Limited........................... England Ordinary shares 100%
Independent Energy Generation Limited............. England Ordinary shares 100%
Independent Energy Services Limited............... England Ordinary shares 100%
Independent Energy Limited........................ England Ordinary shares 100%
Independent Energy Resources Limited.............. England Ordinary shares 100%
</TABLE>
F-18
<PAGE>
23. OBLIGATIONS UNDER OPERATING LEASES
The Company has operating lease rental commitments for agreements that
expire between two and five years, for which:
June 30, June 30,
1997 1998
--------- --------
Amount due within 1 year -- Land & Buildings.......... 54,542 202,824
-- Other..................... 50,642 67,324
24. FINANCIAL INSTRUMENTS
The Company's business involves entering into fixed price contracts to
supply electricity to its customers. The electricity to supply the customers
under these contracts is primarily purchased from the Pool at fluctuating spot
market prices. The Company is exposed to two principal risks associated with
such contracts: "load shape" risk (the risk associated with a shift in the
customer's usage pattern, including absolute amounts demanded and timing of
amounts demanded) and "purchase" price risk (the cost of purchased electricity
relative to the price received from the supply customer). The Company employs
risk management methods to maximize its return consistent with an acceptable
level of risk. Generally, load shape risk decreases as the Company's portfolio
of supply customers in the supply market increases. The Company hedges purchase
price risk by employing a variety of risk management tools, including entering
into hedging instruments known as contracts for differences (CFDs), management
of its supply contract portfolio, and through the ownership of generating
facilities to produce a portion of its required supply of electricity. The
Company's ability to manage its purchase price risk depends, in part, on the
future availability of properly priced risk management mechanisms such as CFDs.
As part of the Company's risk management practice, the Company has in the past
and continues to enter into CFDs. Generally, CFDs are contracts between
generators and suppliers that have the effect of fixing the price of electricity
for a contracted quantity of electricity over a specific time period.
Differences between the actual price set by the Pool and the agreed prices give
rise to different payments between the parties to the particular CFD.
As a result of its expected growth in revenue arising from the commencement
of the final phase of deregulation, the Company has adopted a hedging policy
which consists of entering into CFDs and continuing to generate a portion of its
electricity requirements to effectively hedge a significant portion of its total
estimated demand based on effective sales contracts in place at such time.
The Company enters into CFDs in order to hedge the price risk inherent in
Pool trading. CFDs are agreements between the Company, as a purchaser of
electricity through the Pool, and generators and traders. As at June 30, 1998
the CFDs in place covers the period from June 30, 1998, to October 3, 1999 for
1,251 GWhs of electricity. The CFDs have a notional value at June 30, 1998 of
(pound)34,000,000. The CFDs are settled monthly or daily in accordance with the
contracts.
F-19
<PAGE>
25. ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
At Beginning Other At End of
of Period Cash Flows Changes Period
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year Ended June 30, 1997
Cash at bank and in hand ........................... 1,341,204 581,801 -- 1,923,005
Leases due within one year ......................... (78,539) (883) (234,345) (313,767)
Leases due after more than one year ................ (830,212) 441,269 (4,148,982) (4,537,925)
Loans due after more than one year ................. -- (1,400,000) -- (1,400,000)
Current asset investment ........................... 4,300,154 (4,300,154) -- --
----------- ----------- ----------- -----------
Net debt ........................................... 4,732,607 (4,677,967) (4,383,327) (4,328,687)
=========== =========== =========== ===========
Year Ended June 30, 1998
Cash at bank and in hand ........................... 1,923,005 (1,302,356) -- 620,649
Bank overdraft ..................................... -- (22,203) -- (22,203)
----------- ----------- ----------- -----------
1,923,005 (1,324,559) -- 598,446
Leases due within one year ......................... (313,767) 694,432 (1,432,497) (1,051,832)
Leases due after more than one year ................ (4,537,925) (1,233,252) (5,771,177)
Loans due within one year .......................... -- (4,500,000) (500,000) (5,000,000)
Loans due after more than one year ................. (1,400,000) (4,000,000) 500,000 (4,900,000)
----------- ----------- ----------- -----------
Net debt ........................................... (4,328,687) (9,130,127) (2,665,749) (16,124,563)
=========== =========== =========== ===========
</TABLE>
26. RECONCILIATION OF NET CASH FLOWS TO MOVEMENT IN NET DEBT
Year Ended June 30, 1997
Increase in cash in the period .................................... 581,801
Cash inflow from increase in debt and lease financing ............. (920,079)
Cash inflow from decrease in liquid resources ..................... (4,300,154)
New finance leases ................................................ (4,422,862)
-----------
Movement in net debt .............................................. (9,061,294)
Net debt at June 30, 1996 ......................................... 4,732,607
-----------
Net debt at June 30, 1997 ......................................... (4,328,687)
===========
Year Ended June 30, 1998
Decrease in cash in the period .................................... (1,324,559)
Cash inflow from increase in loan financing ....................... (8,500,000)
Cash inflow from net increase in lease financing .................. (1,971,317)
-----------
Movement in net debt .............................................. (11,795,876)
Net debt at June 30, 1997 ......................................... (4,328,687)
-----------
Net debt at June 30, 1998 ......................................... (16,124,563)
===========
27. MAJOR NON-CASH TRANSACTIONS
Detailed below are the major non-cash transactions.
Year Ended June 30, 1997
During the year the Company entered into finance lease arrangements in
respect of assets with a total capital value at the inception of the lease of
(pound)4,383,327.
Year Ended June 30, 1998
During the year the Company entered into finance lease arrangements in
respect of assets with a total capital value at the inception of the lease of
(pound)2,665,500.
F-20
<PAGE>
28. SUBSEQUENT EVENT
On July 2, 1998, the authorized share capital was increased to 50,000,000
ordinary shares of 1p. On July 29, 1998, the Company issued 8,000,000
ordinary shares and concluded the sale of 8,000,000 ordinary shares in the
form of American Depositary Shares at US $8.00 per share to raise US
$64,000,000 before expenses. These shares commenced trading on the United
States Nasdaq National Stock Market on July 24, 1998. The proceeds will be
used to fund the acquisition and installation of additional generating
plants; repay certain outstanding indebtness and provide working capital
for the expansion of the Company's operations.
29. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
Financial Statements
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United Kingdom. Such principles
differ in certain respects from US GAAP. A summary of the most significant
differences applicable to the Company is set out below.
Accounting estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure in conformity with generally accepted accounting
principles of contingent assets and liabilities at the date of the financial
statements and their reported amounts of revenues and expenses during the
reported period. Accounting estimates have been employed in these financial
statements to determine reported amounts, including realizability, useful lives
of assets and income taxes. Actual results could differ from those estimates.
The principal differences between UK GAAP and US GAAP are disclosed below:
(a) Statement of Operation Differences
<TABLE>
<CAPTION>
Year Six Months
Ended Ended Year Ended Year Ended
December 31, June 30, June 30, June 30,
Note 1995 1996 1997 1998
---- ------------ ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
(Loss)/Profit on ordinary activities
after taxation under UK GAAP ................ (59,467) (891,193) (1,181,593) (184,937)
US GAAP Adjustments:
Stock based compensation--
Employee Share Option Scheme ................ (i) -- (110,715) (188,095) (136,139)
Total US GAAP Adjustments ...................... -- (110,715) (188,095) (136,139)
Deferred income taxes .......................... (ii) -- -- -- --
Net effect of US GAAP
adjustments ................................. -- (110,715) (188,095) (136,139)
Net (loss)/profit under US GAAP ................ (59,467) (1,001,908) (1,369,688) (321,076)
========== ========== ========== ==========
Primary (loss) earnings per ordinary
share under US GAAP ......................... (iii) (176.8)p (11.1)p (10.4)p (1.9)p
</TABLE>
F-21
<PAGE>
(b) Equity Reconciliation
June 30,
Note 1997 1998
---- ---------- ----------
Equity under UK GAAP ..................... 6,957,569 9,452,565
Stock based deferred compensations ....... (i) (298,810) (397,154)
Deferred income taxes .................... (ii) -- --
Acquisition Accounting ................... (iv) -- --
---------- ----------
Net effect of US GAAP adjustments ........ (298,810) (397,154)
---------- ----------
Equity under US GAAP ..................... (v) 6,658,795 9,055,411
========== ==========
(i) Employee Share Option Scheme
Under UK GAAP no compensation cost is recognized under Employee Share
Option Schemes. Under US GAAP, compensation for services that are received as
consideration for shares issued through the Employee Share Option Scheme are
recognized as the difference between the quoted market price of the stock at the
measurement date less the amount the employee is required to pay (option
exercise price). Compensation costs, as determined above, are charged to expense
over the vesting period.
The vesting period has been assumed to be the period from the date of grant
of the share option to the date the option first becomes exercisable.
The quoted market price of the stock for the periods ended June 1997 and
June 1996 has been taken from the UK's Alternative Investment Market as at May
31, 1996 being the date that dealings in the shares commenced.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Had compensation expenses been determined
as provided in SFAS 123 for stock options using the Black-Sholes option pricing
model, the pro forma effect would have been:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss applicable to ordinary shares--as reported................ (1,001,908) (1,369,688) (321,076)
Net loss applicable to ordinary shares--pro forma.................. (1,207,270) (1,460,869) (427,561)
Primary net loss per ordinary share--as reported................... (11.1)p (10.4)p (1.9)p
Primary net loss per ordinary share--pro forma..................... (13.4)p (11.1)p (2.5)p
</TABLE>
The fair value of each option grant is calculated using the following
weighted average assumptions, calculated when the options were granted in the
six months ended June 30, 1996.
Expected life (years)................................... 3.42
Interest rate........................................... 6.00%
Volatility.............................................. 10.58%
Dividend yield.......................................... 0.00%
(ii) Deferred Taxation
Under UK GAAP provision is made for deferred tax under the liability method
where in the opinion of the directors it is probable that a tax liability will
become payable within the foreseeable future. This means the full potential
liability is not necessarily provided. Additionally, deferred tax assets should
be recognized only when they are expected to be recoverable within the
foreseeable future without replacement by equivalent debit balances.
Under US GAAP deferred tax is provided in full on the liability basis.
Under the full liability method, deferred tax assets or liabilities are
recognized for differences between the financial and tax basis of assets and
liabilities and for tax loss carry forwards at the statutory rate at each
reporting date. A valuation allowance reduces deferred tax assets when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
F-22
<PAGE>
The Company has significant losses amounting to approximately
(pound)7,719,000 at June 30, 1998, available to relieve future tax on profits.
There is no time limitation on using these losses for UK tax purposes.
In recording these net tax deferred assets, FAS 109 requires the Company to
determine whether it is "more likely than not" that the Company will realize
such benefits and that all negative and positive evidence be considered (with
more weight given to evidence that is "objective and verifiable") in making the
determination. FAS 109 indicates that forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years.
FAS 109 requires recognition of future tax benefits as deferred tax assets,
subject to a valuation allowance based on the likelihood of realizing such
benefits. Even though management believes the Company will be profitable in the
future, due to the risks associated with the timing of generation facilities
becoming operational and the history of recurring losses, management believes
that it would be prudent to make a valuation allowance to offset the net
deferred tax assets.
(iii) Net (Loss)/Income per share
The differences between UK GAAP and US GAAP for calculating fully diluted
earnings (loss) per share is not shown since the effect is antidilutive.
(iv) Acquisition Accounting
The acquisition in April 1995 by Independent Energy Limited UK of IPSCo,
Eukan and Elswick was accounted for under UK GAAP merger accounting principles,
which is substantially the same as the pooling of interests method under US
GAAP. The transaction under US GAAP should be accounted for using the purchase
method of accounting. The difference in the two accounting methods has the
effect on the Balance Sheet prepared under US GAAP of a reclassification within
shareholders equity of reinstating losses of (pound)84,981 to the profit and
loss account and increasing the capital reserve accounts by the same amount.
There is no effect on total shareholders equity or on the statements of
operations or cash flow.
The acquisition by IEH of IEUK on May 31, 1996 was accounted for under UK
GAAP using acquisition accounting principles, which are substantially the same
as the purchase method of accounting under US GAAP. The transaction under US
GAAP should be accounted for in a manner similar to the pooling of interest
method. The difference between the two accounting methods has the effect on the
Balance Sheets prepared under US GAAP of a reclassification within shareholders
equity of reinstating losses of (pound)414,979 to the profit and loss account
and increasing the capital stock accounts by the same amount. There is no effect
on total shareholders equity or on the statements of operations or cash flow.
(v) US GAAP Equity Roll Forward
Shareholders equity roll forward in accordance with US GAAP:
June 30,
-------------------------
1997 1998
------------ ----------
Balance at beginning of period.................... 6,676,300 6,658,759
Other (losses)/gains.............................. 1,352,147 2,717,728
Net (loss)........................................ (1,369,688) (321,076)
------------ ----------
Balance at end of period.......................... 6,658,759 9,055,411
============ ==========
F-23
<PAGE>
30. ADDITIONAL US GAAP DISCLOSURE REQUIREMENTS
(a) Cash Flow Information
The consolidated cash flow statements are prepared in conformity with UK
GAAP. The principal differences between these statements and cash flow
statements prepared under US GAAP are as follows:
(i) Under UK GAAP, net cash flow from operating activities is determined
before considering cash flows from returns on investments and servicing of
finance and taxes paid. Under US GAAP, net cash flow from operating activities
is determined after these items.
A summary of the Company's operating, investing and financial activities
classified in accordance with US GAAP is presented below. For purposes of this
summary, cash and cash equivalents consist of cash and deposits with banks.
<TABLE>
<CAPTION>
Six Months
December 31 Year Ended Year Ended
Year Ended June 30, June 30, June 30,
1995 1996 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash (used in) operating activities ................ (71,391) (442,757) (2,270,614) (3,109,020)
Cash (used in)/provided by financ-
ing activities .................................. 1,989,216 4,657,131 2,311,761 10,489,343
Cash (used in/provided by invest-
ing activities .................................. (372,943) (4,506,353) 540,654 (8,704,882)
----------- ----------- ----------- -----------
Net increase/(decrease) in cash and
Deposits with banks ............................. 1,544,882 (291,979) 581,801 (1,324,559)
Balance at beginning of period ..................... 88,301 1,633,183 1,341,204 1,923,005
----------- ----------- ----------- -----------
Balance at end of period ........................... 1,633,183 1,341,204 1,923,005 598,446
=========== =========== =========== ===========
</TABLE>
The effect of exchange rate change on cash balances held in foreign
currencies during the periods ended June 30, 1998, June 30, 1997 and 1996 and
December 31, 1995 amounted to (pound)3,842, (pound)39,027, (pound)(10,142), and
(pound)(2,143) respectively.
(ii) The amount of taxes and interest paid, net of capitalized interest,
during the periods is:
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31 Year Ended Year Ended
December 31, June 30, June 30, June 30,
1995 1996 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest, net of capitalization......... -- -- 80,862 1,074,391
Income taxes............................ 3,424 -- -- --
</TABLE>
F-24
<PAGE>
(b) Deferred Taxation
June 30,
-------------------------
1997 1998
---------- ----------
Deferred tax liability
Non current
Fixed assets ..................................... 459,718 858,070
Current
Other ............................................ (8,166)
---------- ----------
Total deferred tax liabilities ................... 459,718 849,904
---------- ----------
Deferred tax assets
Non current
Fixed asset ...................................... -- --
Current
Losses ........................................... 1,590,849 2,392,892
---------- ----------
Total deferred tax assets ........................ 1,590,849 2,392,892
---------- ----------
Valuation allowance .............................. (1,131,131) (1,542,988)
Net deferred tax asset Provided under UK GAAP .... -- --
---------- ----------
US GAAP adjustment asset ......................... -- --
========== ==========
(c) Other disclosures
<TABLE>
<CAPTION>
Total liabilities, stockholders' equity and total assets were as follows:
<S> <C>
June 30, 1997................................................................................ 16,851,935
June 30, 1998................................................................................ 40,711,927
Total assets prepared in accordance with US GAAP were as follows:
June 30, 1997................................................................................ 17,226,966
June 30, 1998................................................................................ 41,104,602
Long term liabilities prepared in accordance with US GAAP were as follows:
June 30, 1997................................................................................ 6,611,766
June 30, 1998................................................................................ 11,461,003
(d) Commitments Under Operating Leases
The Company's commitments under operating leases as at June 30, 1998 are as
follows:
Operating leases which expire:
1999.................................................................................... 266,182
2000.................................................................................... 223,834
2001.................................................................................... 200,692
2002.................................................................................... 166,806
2003.................................................................................... 136,383
Thereafter.............................................................................. 978,969
----------
1,972,866
==========
</TABLE>
F-25
<PAGE>
(e) Financial Instruments
Disclosure of estimated fair value of financial instruments is based on the
requirements of Statements of Financial Accounting Standards No. 105, 107 and
119.
Cash, trade debtors, trade creditors and short term borrowings.
The carrying amounts of these items approximate fair value.
The CFD's for hedging of pool purchases notional value at June 30, 1998
is(pound)34 million based on volume remaining under the CFD contracts.
(f) Reconciliation of tax charge to statutory rate on losses
<TABLE>
<CAPTION>
December 31, June 30,
----------------------------------------------
1995 1996 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(Loss) on ordinary activities before taxation .............. (65,043) (891,193) (1,181,593) (184,937)
========== ========== ========== ==========
Expected tax (credit) charge at the statutory rate ......... (23,791) (293,131) (366,294) (57,330)
Increase in deferred tax liability ......................... -- (65,490) (394,228) (390,185)
Actual tax charge on continuing activities ................. -- -- -- --
---------- ---------- ---------- ----------
Difference to reconcile .................................... (23,791) (358,621) (760,522) (447,515)
========== ========== ========== ==========
Deferred tax asset not recognized .......................... (128,269) (437,574) (958,203) (802,052)
Intangible asset tax allowances ............................ 104,478 79,011 212,411 456,362
Inadmissible expenditure ................................... -- (58) (14,730) (101,825)
---------- ---------- ---------- ----------
(23,791) (358,621) (760,522) (447,515)
========== ========== ========== ==========
</TABLE>
The Company has accumulated losses to be carried forward and relieved in
the future at the following period ends of:
June 30, 1998..................................................... 7,719,000
June 30, 1997..................................................... 5,100,000
June 30, 1996..................................................... 750,000
December 31, 1995................................................. 149,000
F-26
<PAGE>
Item 19. Financial Statements and Exhibits
Exhibit
No.
- -------------
*3 Memorandum and Articles of Association, as amended, of Independent
Energy.
*4.1 Form of Deposit Agreement among Independent Energy, The Bank of
New York, as Depositary, and the holders from time to time of
American Depositary Receipts evidencing American Depositary Shares
representing Ordinary Shares
*4.2 Form of American Depositary Receipts evidencing American
Depositary Shares representing Ordinary Shares (included in
Exhibit 4.1)
*10.1 Accession Agreement to the Pooling and Settlement Agreement
*10.2 Carried Interest Agreement between Independent Energy UK Limited
and Altwood Petroleum Limited dated May 21, 1996
*10.3 Hive-up Agreement dated May 14, 1996 between Eukan Energy Limited
and Independent Energy UK Limited
*10.4 Hive-up Agreement dated May 14, 1996 between Elswick Petroleum
Limited and Independent Energy UK Limited
*10.5 Second Tier License to Supply Electricity for Independent Energy
UK Limited dated March 7, 1996 *10.6 Loan Note Instrument dated
June 30, 1997 by the Company with respect to (pound)1,400,000 10%
unsecured Notes due 2002
*10.7 Warrant Instrument dated June 30, 1997 by the Company with respect
to 140,000 Warrants to purchase ordinary shares
*10.8 Credit Agreement dated September 5, 1997 between the Company,
Independent Energy UK Limited, Barclays Bank PLC and several
lenders
**10.9 Letter Agreement regarding Amendment to Credit Agreement dated
June 4, 1998 between the Company, Independent Energy UK Limited,
Barclays Bank PLC and several lenders
**10.10 Letter of Variation dated July 15, 1998 between the Company,
Independent Energy UK Limited and Barclays Bank PLC
*10.11 Master Equipment Lease Agreement dated April 19, 1996 between
Machinery Acceptance Corporation and Independent Energy UK Limited
**10.12 Master Finance Lease Agreement dated June 17, 1997 between Debis
Financial Services Limited and Independent Energy UK Limited
**10.13 Lease Master Agreement dated October 30, 1997 between ING Lease
(UK) Limited and Independent Energy UK Limited
- ----------
* Incorporated herein by reference to the Registration Statement on Form 20-F
(File No. 0-23451) filed by Independent Energy with the Commission on
December 2, 1997.
** Incorporated herein by reference to the Registration Statement on Form F-1
(File No. 333-56223) filed by Independent Energy with the Commission on
June 5, 1998.
F-27
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INDEPENDENT ENERGY HOLDINGS
/s/ BURT H. KEENAN
---------------------------
Burt H. Keenan
Executive Chairman
October 13, 1998
S-1
