<PAGE>
PROSPECTUS Filed Pursuant to Rule 424(B)(1)
JULY 23, 1998 Registration No. 333-56223
LOGO
[LOGO OF INDEPENDENT ENERGY HOLDINGS PLC]
8,000,000 AMERICAN DEPOSITARY SHARES
REPRESENTING 8,000,000 ORDINARY SHARES
Each of the American Depositary Shares ("ADSs") offered hereby represents
one ordinary share, nominal value 1p per share (each, a "Share" or "Ordinary
Share"), of Independent Energy Holdings plc, a public limited company
organized under the laws of England and Wales ("Independent Energy" or the
"Company"). The ADSs will be evidenced by American Depositary Receipts
("ADRs"). See "Description of American Depositary Receipts." All of the Shares
represented by ADSs offered hereby are being sold by the Company.
Prior to this offering, there has been no public trading market in the
United States for the Shares or the ADSs. The ADSs have been approved for
listing, subject to issuance, on The Nasdaq Stock Market's National Market
("Nasdaq") under the symbol "INDYY."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS
PRICE AND PROCEEDS TO
TO THE COMMISSIONS INDEPENDENT
PUBLIC (1) ENERGY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per ADS.................................... $8.00 $0.52 $7.48
Total (3).................................. $64,000,000 $4,160,000 $59,840,000
- --------------------------------------------------------------------------------
</TABLE>
(1) Independent Energy has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by Independent Energy, estimated at
$2,000,000.
(3) Independent Energy has granted to the Underwriters an option, exercisable
at the direction of the Representatives of the Underwriters within 30
days after the date hereof, to purchase up to 1,200,000 additional ADSs
on the same terms and conditions set forth above solely to cover over-
allotments, if any. If such option is exercised in full, the total Price
to the Public, Underwriting Discounts and Commissions and Proceeds to
Independent Energy will be $73,600,000, $4,784,000 and $68,816,000,
respectively. See "Underwriting."
The ADSs are being offered hereby by the several Underwriters, when, as and
if delivered to and accepted by the Underwriters and subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of ADRs evidencing the ADSs will be made in New York,
New York against payment therefor on or about July 29, 1998.
DONALDSON, LUFKIN & JENRETTE
JOHNSON RICE & COMPANY L.L.C.
SOUTHCOAST CAPITAL L.L.C.
<PAGE>
THE POWER TO CHOOSE
[MONTAGE OF PHOTOGRAPHS INCLUDING A CONTROL PANEL OPERATING GAS PRODUCTION
EQUIPMENT, GAS WELLHEADS, ELECTRICITY GENERATORS, CONTROL EQUIPMENT USED TO
OPERATE GENERATORS AND ELECTRICITY CONSUMERS.]
LOGO
[LOGO OF INDEPENDENT ENERGY HOLDINGS PLC]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE ADSS OR THE
ORDINARY SHARES. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION
WITH THE OFFERING AND MAY BID FOR AND PURCHASE ADSS OR ORDINARY SHARES IN THE
OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY
OF THIS PROSPECTUS, NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
THE SECURITIES HEREBY OFFERED MAY NOT BE OFFERED TO PERSONS IN THE UNITED
KINGDOM EXCEPT TO PERSONS WHOSE ORDINARY ACTIVITIES INVOLVE THEM IN ACQUIRING,
HOLDING, MANAGING OR DISPOSING OF INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE
PURPOSES OF THEIR BUSINESSES, OR OTHERWISE IN CIRCUMSTANCES WHICH DO NOT
CONSTITUTE AN OFFER TO THE PUBLIC IN THE UNITED KINGDOM WITHIN THE MEANING OF
THE PUBLIC OFFERS OF SECURITIES REGULATIONS 1995.
THIS DOCUMENT HAS NOT BEEN APPROVED BY AN AUTHORIZED PERSON FOR THE PURPOSES
OF SECTION 57 OF THE FINANCIAL SERVICES ACT 1986. ACCORDINGLY, THIS DOCUMENT
MAY NOT BE ISSUED TO ANY PERSON IN THE UNITED KINGDOM UNLESS THAT PERSON IS OF
THE KIND DESCRIBED IN ARTICLE 11(3) OF THE FINANCIAL SERVICES ACT 1986
(INVESTMENT ADVERTISEMENTS) (EXEMPTION) ORDER 1996 OR ARTICLE 8(1) OF THE
FINANCIAL SERVICES ACT 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTION) (NO.2)
ORDER 1995 OR IS A PERSON TO WHOM THIS DOCUMENT MAY OTHERWISE BE ISSUED
LAWFULLY.
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
Independent Energy is registered and exists under the laws of England and
Wales. All but two of the directors and officers of Independent Energy and
certain of the experts named herein are residents of the United Kingdom
("U.K.") or otherwise reside outside the United States ("U.S."), and all or a
substantial portion of their assets and all or substantially all of the assets
of the Company are located outside the U.S. Independent Energy has appointed
an agent for service of process in the U.S., as described below, but it may be
difficult for investors to effect service within the U.S. upon those
directors, officers and experts who are not residents of the U.S., or to
enforce against them judgments of U.S. courts predicated upon the civil
liability of Independent Energy and such directors, officers and experts under
the U.S. federal securities laws. Independent Energy has been advised by its
English solicitors, Masons, that there is doubt as to the enforceability in
England whether by means of original actions or actions for the enforcement of
judgments of U.S. courts of the civil liabilities predicated upon the U.S.
federal securities laws.
Independent Energy has appointed CT Corporation System, 1633 Broadway, New
York, New York 10019, as its agent for service of process in the U.S. in
respect of any investigation or administrative proceeding conducted by the
Commission and any civil suit or action brought against or involving
Independent Energy in a U.S. court arising out of or related to or concerning
the offering of ADSs or Shares under this Prospectus.
3
<PAGE>
AVAILABLE INFORMATION
Independent Energy has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement on Form F-1 and a Registration
Statement on Form F-6 (together with all amendments and exhibits thereto,
herein collectively referred to as the "Registration Statements" or,
individually, as a "Registration Statement") pursuant to the United States
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
ADSs offered hereby. This Prospectus, which constitutes a part of the
Registration Statement on Form F-1, does not contain all of the information
set forth in the Registration Statements, certain items of which are contained
in exhibits and schedules to the Registration Statements as permitted by the
rules and regulations of the Commission. For further information with respect
to Independent Energy and the Ordinary Shares represented by ADSs, reference
is made to the Registration Statements, including the exhibits thereto, and
financial statements and notes filed as a part thereof. Statements made in
this Prospectus concerning the contents of any document referred to herein are
not necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statements, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed in its entirety by such reference. The
Registration Statements (including the exhibits and schedules thereto) filed
with the Commission by Independent Energy may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: New York Regional Office, Seven World Trade Center, 13th Floor,
New York, New York 10048; and Chicago Regional Office, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material may be
obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Independent Energy recently became subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Independent Energy intends to fulfill its obligations with respect to such
requirements by filing periodic reports and other information with the
Commission. As a foreign private issuer, Independent Energy is exempt from
certain provisions of the Exchange Act, prescribing the furnishing and content
of proxy statements and certain periodic reports and from provisions of the
Exchange Act relating to short-swing profits reporting and liability.
Independent Energy will furnish The Bank of New York, a New York banking
corporation which has its principal office located in New York, New York, as
Depositary (the "Depositary"), for the ADRs, with annual reports containing a
review of operations, annual audited consolidated financial statements
prepared under accounting policies conforming with generally accepted
accounting principles in the United Kingdom ("U.K. GAAP") and an opinion
thereon by the independent chartered accountants to the Company. The annual
reports will include a reconciliation of net income (loss) and shareholders'
equity to amounts estimated to be in accordance with generally accepted
accounting principles in the United States ("U.S. GAAP") and the amounts of
earnings per Ordinary Share computed under U.S. GAAP. Independent Energy will
also furnish the Depositary with quarterly reports for the first three
quarters of each fiscal year which will include unaudited interim condensed
consolidated financial information prepared in accordance with U.K. GAAP. The
Depositary will arrange for the mailing of such reports to all record holders
of ADSs. Independent Energy will also furnish to the Depositary copies of all
notices of shareholders' meetings and other reports and communications that
are distributed generally to its shareholders. The Depositary will arrange for
the mailing of such notices, reports and communications to all record holders
of ADSs. See "Description of American Depositary Receipts."
4
<PAGE>
PRESENTATION OF CERTAIN FINANCIAL INFORMATION
The audited consolidated financial statements of the Company as of and for
the years ended December 31, 1994 and 1995, the six months ended June 30,
1996, the fiscal year ended June 30, 1997 and the nine months ended March 31,
1998 contained elsewhere in this Prospectus 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, the Prospectus 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 "(Pounds)"). One pound consists of one hundred pence (100p). In this
Prospectus, currency amounts are expressed in pounds or in United States
dollars ("dollars" or "$"). For the convenience of the reader, this Prospectus
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 rate of $1.68 per (Pounds)1, 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 March 31, 1998. The Noon Buying Rate on July 21, 1998 was $1.64 per
(Pounds)1. See "Exchange Rates."
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, and the Company's consolidated financial statements and notes
thereto, appearing elsewhere in this Prospectus. Independent Energy Holdings
plc is a holding company and conducts its operations through its sole wholly
owned operating subsidiary, Independent Energy UK Limited ("IEUKL"). As used
herein, references to the "Company" or "Independent Energy" refer to
Independent Energy Holdings plc, IEUKL and their predecessors. Unless otherwise
specified, the information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. For a description of certain terms
contained herein, see "Glossary" included elsewhere in this Prospectus.
THE COMPANY
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 (Pounds)11.1 million ($18.6
million) for the fiscal year ended June 30, 1997 to (Pounds)34.9 million ($58.6
million) for the nine months ended March 31, 1998. The Company's revenue for
the two months ended May 31, 1998 was (Pounds)14.8 million ($24.9 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 is scheduled
to begin in September 1998 and 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
(Pounds)4.6 billion to select their supplier. The Company specifically targets
consumers on the lower end of the (greater than) 100 kW consumer range, a market
segment which the Company estimates to include approximately 30,000 consumers
with aggregate annual electricity expenditures of approximately (Pounds)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 (Pounds)11.1
billion will be able to choose their electricity supplier. Within this market,
the Company intends to selectively target approximately 150,000 commercial
6
<PAGE>
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 (Pounds)7.9 billion.
BUSINESS STRATEGY
The Company's objectives are to expand its revenue base and to increase its
operating margins. The Company is pursuing these objectives through a business
strategy comprised of the following elements:
Expand Customer Base. The Company intends to continue to expand its customer
base through increased penetration of the currently deregulated (greater than)
100 kW market and to enter into the (less than) 100 kW market upon the final
phase of deregulation expected to begin in September 1998. The Company believes
it can effectively compete in all of its targeted market segments on the basis
of price and quality of service. Within the commercial segment of the (less
than) 100 kW consumer market, the Company believes it can leverage its
relationships with its existing customer base to obtain a number of the smaller
sites operated by its existing customers in the (greater than) 100 kW consumer
market. The Company intends to penetrate the domestic (residential) segment of
the (less than) 100 kW consumer market by, among other things, capitalizing on
the relationships and marketing channels of selected strategic marketing
partners to offer electricity services as a jointly packaged range of products
to an already well-established customer base. The Company also intends to
significantly increase its number of commissioned sales agents and to enhance
its direct mail and telemarketing capabilities to further achieve its customer
expansion goals. As a result of its marketing efforts to date, the Company has
signed contracts for an additional 3,000 customers in the (less than) 100 kW
consumer market which will become effective pending deregulation.
Install Additional Generating Capacity. By generating a portion of the
electricity that it supplies, the Company believes it can reduce its exposure
to fluctuating Pool prices and lower its cost of sales. The Company currently
operates three generating plants with a capacity of 18 MW and expects to have a
total of six generating plants with an aggregate capacity of 44 MW operational
by the end of 1998. The Company's objective is to install additional generating
facilities to provide it with approximately 10 MW to 20 MW of aggregate
capacity in each of the twelve local distribution areas in England and Wales.
Management views the operation of its own generating plants as an important
part of its overall risk management strategy. Moreover, 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.
Leverage Management Expertise. Mr. Burt H. Keenan, the founder and Executive
Chairman of the Company, has built a management team with extensive experience
in the U.K. electricity and energy industry. Prior to joining the Company, Mr.
John L. Sulley, Managing Director of the Company, held senior management
positions with National Power plc ("National Power") where he established its
electricity marketing operations and managed the installation of small
generating plants at customer sites, and with Scottish Power plc ("Scottish
Power") where he was responsible for the financial, strategic and business
planning for supply and electricity trading operations. In addition, other
members of management have held senior positions with Scottish Power, National
Power, Scottish Hydro-Electric plc ("Scottish Hydro") and Midlands Electricity
plc ("Midlands Electricity").
Maintain Prudent Risk Management Practices. The Company generally enters into
fixed price sales contracts with customers for a stated period, typically one
or two years. Most of the Company's supply of electricity is purchased from the
Pool at fluctuating spot market prices. In addition to generating a portion of
the electricity it sells, the Company has sought to reduce the risks associated
with fluctuating Pool prices by selectively targeting customers with relatively
predictable usage profiles and by entering into hedging instruments known as
contracts for differences ("CFDs"). Management intends to enter into CFDs to
cover a significant portion of the customer contracts it enters into in the
future. By utilizing such risk management practices, management believes it can
balance its objective of profit maximization with acceptable levels of risk.
7
<PAGE>
Expand Product Offerings. The Company believes that significant opportunities
exist to cost-effectively market additional energy products and services to its
electricity customer base. In particular, the U.K. natural gas industry has
been deregulated in a manner similar to that of the electricity industry. The
Company is currently exploring ways to market natural gas to its customer base
through strategic acquisitions, joint ventures and other marketing
affiliations.
8
<PAGE>
THE OFFERING
ADSS OFFERED................ 8,000,000(1)
ORDINARY SHARES TO BE
OUTSTANDING AFTER THE
OFFERING................... 25,935,527(1)(2)
VOTING RIGHTS............... The holders of ADRs, acting through the
Depositary, are entitled to the same voting
rights as holders of Ordinary Shares. See
"Description of American Depositary Receipts--
Voting of Deposited Securities."
USE OF PROCEEDS............. The Company intends to use the net proceeds from
the offering as follows: (i) approximately $28.0
million to fund the equity-financed portion of
the acquisition and installation of gas-fired
generating plants by the Company over the next 18
months and to fund the acquisition of additional
information technology and related equipment to
service the Company's expanding customer base;
(ii) approximately $13.3 million to repay certain
outstanding indebtedness; and (iii) the remainder
for working capital and general corporate
purposes, including increased working capital
requirements associated with the projected
expansion of the Company's operations and
possible strategic acquisitions. See "Use of
Proceeds."
LISTING OF ADSS............. The ADSs offered hereby have been approved for
listing, subject to issuance, on Nasdaq.
NASDAQ NATIONAL MARKET
SYMBOL..................... INDYY
- ------------------------
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Excludes 3,530,900 Shares issuable pursuant to the exercise of options and
warrants outstanding on June 30, 1998. See "Management."
9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary historical consolidated financial data for the fiscal year ended
June 30, 1997 and as of and for the nine months ended March 31, 1998 are
derived from the Company's audited consolidated financial statements included
elsewhere in this Prospectus. The summary consolidated financial data for the
nine months ended March 31, 1997 have been derived from the unaudited
consolidated financial statements of the Company included elsewhere herein and,
in the opinion of the Company, have been prepared on a basis substantially
consistent with that of the audited periods. In the opinion of the Company, the
unaudited interim financial statements reflect all adjustments necessary to
present fairly such information for the nine month period ended March 31, 1997.
The summary consolidated balance sheet data at March 31, 1998 have been
adjusted to give effect to the Offering and the application of the estimated
net proceeds therefrom.
The Company's historical 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 income
(loss) and total shareholders' equity. The summary financial data should be
read in conjunction with "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's consolidated financial statements and the notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
FISCAL YEAR ENDED ----------------------------------------------------
JUNE 30, 1997 1997 1998 1998(1)
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
U.K. GAAP
Revenue................. (Pounds)11,127,164 (Pounds)5,490,338 (Pounds)34,921,839 $58,668,690
Cost of sales........... 10,872,238 5,360,559 33,634,538 56,506,024
Administrative expenses. 1,363,343 1,036,849 1,337,395 2,246,824
Depreciation and amorti-
zation................. 141,850 97,299 301,608 506,701
Operating loss.......... (1,250,267) (1,004,369) (351,702) (590,859)
Interest income (ex-
penses), net........... 68,674 44,809 (74,403) (124,997)
Net loss................ (1,181,593) (959,560) (426,105) (715,856)
Loss per share.......... (9.0)p (7.3)p (2.5)p $ (0.04)
Weighted average shares
outstanding............ 13,129,914 13,124,800 16,967,802 16,967,802
U.S. GAAP
Revenue................. (Pounds)11,127,164 (Pounds)5,490,338 (Pounds)34,921,839 $58,668,690
Net loss................ (1,369,688) (1,100,630) (521,709) (876,471)
Loss per share.......... (10.4)p (8.4)p (3.1)p $ (0.05)
Weighted average shares
outstanding............ 13,129,914 13,124,800 16,967,802 16,967,802
OPERATING DATA:
Electricity sales (GWh). 256 131 842 842
Customers (at end of pe-
riod) (2).............. 324 135 1,225 1,225
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------------
AS
ACTUAL ACTUAL(1) ADJUSTED(1)
<S> <C> <C> <C>
BALANCE SHEET DATA:
U.K. GAAP
Working capital.................. (Pounds) (632,586) $ (1,062,744) $54,425,256
Total assets..................... 31,145,922 52,325,149 96,893,149
Long-term liabilities............ 11,155,703 18,741,581 16,389,581
Shareholders' equity............. 9,128,506 15,335,890 73,175,890
U.S. GAAP
Working capital.................. (Pounds) (632,586) $ (1,062,744) $54,425,256
Total assets..................... 31,536,121 52,980,683 97,548,683
Long-term liabilities............ 11,940,316 20,059,731 17,707,731
Shareholders' equity............. 8,734,092 14,673,275 72,513,275
</TABLE>
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(1) Translations into dollars in this table are solely for convenience and are
computed at the Noon Buying Rate on March 31, 1998 of $1.68 per (Pounds)1.
(2) Customers include end-users whose usage is recorded by one meter.
10
<PAGE>
RISK FACTORS
Prospective purchasers of the ADSs should carefully read this entire
Prospectus and, in particular, the information set forth below. This
Prospectus includes forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of 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 prospective purchasers of ADSs must
recognize that actual results may differ from the Company's expectations.
Actual future results and trends for the Company may differ materially
depending on a variety of factors discussed in this "Risk Factors" section and
elsewhere in this Prospectus. 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 deregulation expected to
commence 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.
LIMITED HISTORY OF BUSINESS OPERATIONS
The Company has a limited operating history in the electricity supply
industry, having only commenced sales of electricity in April 1996. Moreover,
direct sales of electricity have to date not been implemented by an
independent operator (i.e., an entity that was not part of the U.K.
electricity industry at the time of its privatization in 1990) on a scale
envisioned by the Company. Although initial consumer acceptance of the
Company's services has been encouraging, the Company is unable to predict with
certainty how consumer demand for these services may develop over time. The
Company's future profitability depends in large measure on consumer acceptance
of the Company as an attractive alternative to its competitors as a supplier
of electricity. In addition, there can be no assurance that the Company will
be able to supply electricity at a reasonable cost, that the Company will be
able to price its services competitively or, if priced competitively, that the
Company will be able to achieve margins sufficient to allow it to achieve
profitability. See "--Historical Operating Losses."
HISTORICAL OPERATING LOSSES
The Company has incurred operating and net losses of approximately
(Pounds)2.1 million and (Pounds)2.5 million, respectively, in the aggregate
through March 31, 1998 since commencing electricity supply operations.
Accordingly, there can be no assurance that the Company's operations will
become profitable. Failure to become profitable or generate sufficient
positive operating cash flows would impact the Company's ability to sustain
operations and obtain required additional capital. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." The Company is in a stage in its business
development in which certain categories of expenses may increase at rates
comparable to or greater than the rate of increase of the Company's revenues,
principally as a result of the implementation of the Company's plans to expand
its operations and serve a greater number of customers. The Company's ability
to achieve profitability will depend in large measure on its ability to
attract a sufficient number of customers to cover higher operating expenses
associated with increased marketing activities.
GOVERNMENT REGULATION; RISK OF POSTPONEMENT OF FINAL PHASE OF DEREGULATION
The Company's activities are subject to extensive laws and regulations
regarding generating and marketing of electricity primarily by the U.K. Office
of Electricity Regulation. These laws and regulations and their interpretation
and enforcement are subject to change. The final phase of deregulation of the
supply segment of
11
<PAGE>
the industry is currently scheduled to begin in September 1998; however, the
final phase was initially scheduled to occur in April 1998 and was
subsequently postponed. Accordingly, there can be no assurance that the timing
of the final phase of deregulation will not be further postponed. If
deregulation is further postponed, the Company's operations and financial
condition could be materially adversely affected.
In addition, there currently is a moratorium in the U.K. on the construction
of gas-fired generating plants with capacities exceeding 50 MW. Although the
Company does not intend to build any generating plants exceeding such
capacity, there can be no assurance that additional or more stringent
requirements will not be imposed on the Company's operations in the future.
Failure to comply with such laws and regulations could result in fines against
the Company, or loss of required permits. Any such event could have a material
adverse effect on the Company. See "The Structure of the United Kingdom
Electricity Industry."
RISK OF INABILITY TO SUCCESSFULLY MANAGE GROWTH
Since the commencement of electricity sales in April 1996, the Company has
experienced rapid revenue growth and expects to continue to experience rapid
growth and development in a relatively short period of time, due primarily to
the final phase of deregulation of the U.K. electricity market scheduled to
begin in September 1998. The development of the Company's operations will
depend on, among other things, the Company's ability to expand its customer
base in a timely manner at reasonable costs. In addition, the anticipated
growth of the Company's staff may require continued development of the
Company's operating and financial controls and may place additional stress on
the Company's management and operational resources. If the Company is unable
to manage its expected rapid growth and development successfully, the
Company's operating results and financial condition could be materially
adversely affected. In order to handle the Company's expected growth in
customers, the Company intends to outsource a number of important functions,
including billing processing and certain sales functions. There can be no
assurance that the Company will be able to obtain such services from outside
sources in the future on acceptable terms or, if so, that the Company will be
able to control the quality and cost-efficiency of any such third-party
services.
RISK OF ELECTRICITY PRICE FLUCTUATIONS; RISK RELATED TO GROSS PROFIT
RECOGNITION POLICY
The Company's business generally involves entering into fixed price
contracts to supply electricity to its customers. The Company obtains the
electricity to satisfy its obligations under such contracts primarily by
purchases from the U.K. spot market known as the Pool. See "Business and
Properties." Because the price of electricity purchased from the Pool can be
volatile, to the extent that the Company purchases electricity from the Pool,
the Company is exposed to risk arising from differences between the fixed
price at which it sells electricity to customers and the fluctuating prices at
which it purchases electricity, unless it can effectively hedge such exposure.
The Company's ability to manage such risk at acceptable levels will depend, in
part, on generating a portion of the electricity it markets at favorable
costs, its ability to implement and manage an appropriate hedging strategy and
the development of an adequate market for hedging instruments. There can be no
assurance that this risk will be effectively mitigated and that the Company
will not incur losses from such market risk.
Because the Company's sales have been growing rapidly, a portion of the
Company's sales contracts at any one time are not protected by such hedging
contracts. If the price of Pool electricity rises significantly, the Company
could sustain significant losses and its financial condition could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Management Activities."
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 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
12
<PAGE>
on a pro rata basis throughout the term of sales contracts based on
management's estimate of gross profit margin for all sales contracts. 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 its estimate of gross profit on a quarterly basis.
Accordingly, to the extent the Company has not effectively hedged its
electricity purchases from the Pool, such reviews could result in the
incurrence of an operating loss which could have a material adverse effect on
the Company's results of operations or financial condition.
ADDITIONAL FINANCING REQUIREMENTS OF THE COMPANY
The Company's operations have been financed to date through sales of its
equity securities, capital lease financings and bank financing. The Company
will require significant additional capital to expand its marketing
organization, increase its marketing efforts and install additional
electricity generating plants. The Company believes that proceeds from this
offering, existing bank facilities and cash generated from operations should
be sufficient to fund its operations in the near term. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation--
Liquidity and Capital Resources." However, no assurance can be given that
additional funds will not be required or that any funds which may be required
will be available, if at all, on acceptable terms. If additional funds are
required, the inability of the Company to raise such funds will have an
adverse effect on its operations. If capital for planned expansion is not
available, the Company will have to reduce or eliminate its planned expansion.
Even if such additional financing is available on satisfactory terms, it could
result in significant additional dilution of the equity ownership of the
Company to existing shareholders and the book value of their outstanding
Shares.
COMPETITION
The competitive electricity supply market currently predominantly consists
of twelve RECs, two Scottish integrated electricity companies and three
generating companies. All of these competitors have more experience, greater
financial and management resources and better name recognition than the
Company. Management is unaware of any other entity (other than sales agents
and self suppliers) which is both generating and supplying to end users as an
independent (that is, not part of the electricity supply industry at
privatization) in the market. The number of suppliers in the market in which
the Company competes and plans to compete is expected to increase pending the
final phase of deregulation expected to commence in September 1998. The
Company cannot predict the extent to which new participants will enter the
markets in which it competes. The Company's business, financial condition and
results of operations could be materially and adversely affected if additional
competitors with greater resources than the Company were to enter the
industry. See "Business and Properties--Competition."
DEPENDENCE ON KEY PERSONNEL
The continued success of the Company is highly dependent on the personal
efforts and abilities of its executive officers. The Company has entered into
employment agreements with each of its executive officers and has key man life
insurance in place for Messrs. Keenan, Sulley and Jones. If any of its
executive officers become unable to continue in or devote adequate time to
their present roles, or the Company is unable to attract and retain other
skilled management personnel, the Company's operations and financial condition
could be adversely affected. See "Management."
ENVIRONMENTAL REGULATION
The Company's operations are subject to regulatory requirements relating to
environmental matters and health and safety. Environmental and health and
safety legislation and policy in the U.K. are evolving in a manner which has
resulted in stricter standards and enforcement, and in more stringent fines
and penalties for non-compliance. Compliance with such regulatory requirements
relating to existing and proposed projects carries a heightened degree of
responsibility for companies and their directors, officers and employees. The
cost of
13
<PAGE>
compliance associated with changes in environmental and health and safety laws
and regulations could require significant expenditures, and breaches of such
laws and regulations may result in the imposition of fines and penalties, any
of which may be material or the cessation of operations. In addition,
environmental and health and safety laws and regulations can increase the cost
of planning, designing, installing and operating generating plants. There can
be no assurance that these costs will not have a materially adverse effect on
the Company's financial condition or results of operations in the future. See
"Business and Properties--Environmental Regulation."
RISK OF OPERATING GENERATING PLANTS
The Company's operation of generating plants involves many risks, including
the breakdown or failure of power generation equipment, pipelines,
transmission lines or other equipment or processes, fuel interruption and
performance below expected levels of output or efficiency.
RISKS OF NATURAL GAS OPERATIONS
The Company's natural gas operations are subject to all of the risks
generally relating to the exploration for and production of natural gas,
including blowouts, fires, equipment failure and other risks which can result
in personal injuries, loss of life and property and environmental damage.
Although the Company believes that it maintains adequate insurance with
respect to its natural gas operations in accordance with industry practice, in
certain circumstances the Company's insurance may not cover or be adequate to
cover the consequences of such events. The occurrence of an event that is not
fully covered by insurance could have a material adverse effect on the
financial position and results of operations of the Company. Moreover, there
can be no assurance that the Company will be able to maintain adequate
insurance in the future at rates that it considers reasonable.
FOREIGN EXCHANGE RISKS
Fluctuations in the exchange rate between the pound and the dollar are
likely to affect the market price of the ADSs. Such fluctuations will also
affect the dollar conversion value of any cash dividends paid in pounds to the
Depositary.
NO PRIOR MARKET FOR THE ADSS
Prior to the offering, there has been no public market for the ADSs. The
offering price for the ADSs will be determined primarily through negotiations
between the Company and the representatives of the Underwriters. The market
price of the ADSs could be subject to significant fluctuations in response to
various factors and events, including, among other things, the depth and
liquidity of the trading market, variations in the Company's operating results
and the difference between actual results and the results expected by
investors and analysts. In addition, the stock markets in recent years have
experienced broad price fluctuations that have often been unrelated to the
operating performances of companies. These broad market fluctuations also may
adversely affect the market price of the ADSs. The Company has applied for
approval of the ADSs for listing on the Nasdaq National Market. There can be
no assurance that an active public market for the ADSs will develop or, if
developed, will continue, or that the ADSs will trade in the public market at
or above the initial public offering price. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of ADSs or Shares in the public market
following the offering, or the perception that such sales may occur, could
have an adverse effect on the market price of the ADSs. Upon completion of the
offering, 25,935,527 Shares will be outstanding and 3,530,900 Shares will be
issuable pursuant to the exercise of outstanding options and warrants.
Moreover, the Company may issue additional shares and options and warrants to
purchase additional shares up to the maximum authorized capital of the
Company, which was increased to 50,000,000 Shares at the extraordinary general
meeting of the Company held on July 2, 1998.
14
<PAGE>
See "Description of Share Capital." Subject to an agreement that restricts the
sale of Shares by the officers, directors and certain shareholders of
Independent Energy without the prior approval of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") for 180 days following the date of this
Prospectus, all of the outstanding Shares will be eligible for public sale,
subject to volume and other limitations of Rule 144 under the Securities Act
of 1933, as amended (the "Securities Act"). Moreover, the Company has issued
options to its employees and consultants and warrants to investors under which
additional Shares may be issued and the Board of Directors of the Company has
authority to issue further Shares. See "Management."
DILUTION TO NEW INVESTORS
At an initial public offering price of $8.00, purchasers of ADSs in the
Offering will experience immediate and substantial dilution in the as adjusted
net tangible book value of their Shares in the amount of $5.16 per ADS. See
"Dilution." If the Company issues additional Shares in the future, including
Shares which may be issued pursuant to earn-out arrangements, option grants or
future acquisitions, purchasers of ADSs in the Offering may experience further
dilution in the net tangible book value per share.
FUTURE PREEMPTIVE RIGHTS MAY BE UNAVAILABLE TO ADS HOLDERS
The United Kingdom Companies Act 1985 requires the Company, whenever it
issues new Shares for cash, subject to limited exceptions in respect of
employee Share programs, to grant preemptive rights to all of its
Shareholders, giving them the right to purchase a sufficient number of Shares
to maintain their existing ownership percentage. The Company has disapplied
statutory preemptive rights in respect of its unissued but authorized share
capital for the five-year period commencing July 2, 1998. In any event, the
Company may not be able to offer preemptive rights to U.S. holders of ADSs
unless a registration statement under the Securities Act is effective with
respect to such rights and underlying Shares, or an exemption from the
registration requirements of the Securities Act is available. The Company
intends to evaluate at the time of any rights offering the costs and potential
liabilities associated with any such registration statement as well as the
indirect benefits to it of enabling U.S. holders of ADSs to exercise any
preemptive rights they may have and any other factors that the Company
considers appropriate at the time, and then make a decision as to whether to
file such a registration statement. No assurance can be given that any
registration statement would be filed or that such registration statement
would be declared effective if filed or that an exemption from registration
would be available. To the extent holders of ADSs are unable to exercise such
rights because a registration statement has not been filed and declared
effective, the Depositary will attempt to sell such holders' preemptive rights
and distribute the net proceeds of the sale, net of the Depositary's fees and
expenses, to the holders of the ADSs, provided that a secondary market for
such rights exists and a premium can be recognized over the cost of any such
sale. A secondary market for the sale of preemptive rights may develop if the
subscription price of the Shares upon exercise of the rights is below the
prevailing market price of the Shares. However, there can be no assurance both
that a secondary market in preemptive rights will develop in connection with
any future issuance of Shares or, if such market does develop, a premium will
be recognized on such sale. If such rights cannot be sold, they will expire
and holders of ADSs will not realize any value from the grant of such
preemptive rights. In either case, the equity interests of the holders of ADSs
would be diluted proportionately. See "Description of Share Capital--Issue of
Additional Shares."
15
<PAGE>
COMPANY BACKGROUND AND HISTORY
In April 1991, Mr. Burt H. Keenan, Executive Chairman of the Company,
founded International Petroleum Services Company ("IPSCO"), a predecessor of
the Company, to provide onshore production services to oil and gas operators
in the U.K, and to acquire U.K. oil and gas licenses. IPSCO sold its
production services business in April 1994. From 1992 to 1995, a subsidiary of
IPSCO and an affiliate acquired U.K. onshore oil and gas licenses with the
objective of developing gas reserves and, in turn, generating electricity from
such reserves for sale in the deregulated market. IEUKL was formed in March
1995, and subsequently acquired IPSCO and its affiliates.
In 1995, the Company adopted its current business strategy in order to
exploit opportunities in electricity marketing created by the ongoing
deregulation of the U.K. electricity industry. In order to implement this
strategy, the Company recruited management with extensive experience in the
marketing, generation, engineering, finance and operations aspects of the U.K.
electricity industry. Mr. John L. Sulley, Managing Director of the Company,
joined the Company from Scottish Power plc in December 1995. In March 1996,
Independent Energy was formed as the holding company for IEUKL and, in May
1996, the Company's Shares commenced trading on AIM.
The principal executive office of the Company is located at Dominion Court,
43 Station Road, Solihull, West Midlands, United Kingdom B91 3RT, and its
telephone number is 011 44 121 705 1111.
USE OF PROCEEDS
The net proceeds to the Company from the offering are estimated to be $57.8
million ($66.8 million if the Underwriters' over-allotment option is exercised
in full), after deducting underwriting discounts and commissions and fees and
expenses of the offering payable by the Company. The Company intends to use
the net proceeds of the offering as follows: (i) approximately $28.0 million
to fund the equity-financed portion of the acquisition and installation of
gas-fired generating plants by the Company over the next 18 months and to fund
the acquisition of additional information technology and related equipment to
service the Company's expanding customer base; (ii) approximately $13.3
million to repay certain outstanding indebtedness; and (iii) the remainder for
working capital and general corporate purposes, including increased working
capital requirements associated with the projected expansion of the Company's
operations and possible strategic acquisitions.
Of the $13.3 million of outstanding indebtedness that the Company intends to
repay with a portion of the proceeds of the offering, (i) $6.7 million
((Pounds)4.0 million) is outstanding under a line of credit with Barclays Bank
plc ("Barclays") due March 31, 1999, which bears interest at a base rate plus
1.75% per annum (9.25% at June 30, 1998), (ii) $4.2 million ((Pounds)2.5
million) is outstanding under an overdraft facility with Barclays due March
17, 1999, which bears interest at a base rate plus 1.5% per annum (9.0% at
June 30, 1998) and (iii) $2.4 million ((Pounds)1.4 million) is outstanding
under promissory notes, which mature December 31, 2002 and bear interest at
10% per annum, payable quarterly.
Although the Company is actively pursuing the acquisition and installation
of the generating plants described above, there can be no assurance 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.
Pending application of the net proceeds from the offering, the Company
intends to maintain the net proceeds in interest-bearing bank accounts or
invest the proceeds in short-term, investment grade securities.
16
<PAGE>
EXCHANGE RATES
The Company's financial statements are prepared in pounds sterling.
Fluctuation in the exchange rates between the pound and the dollar will affect
the dollar equivalent of the pound prices of the Shares traded on the AIM and,
as a result, are likely to affect the market price of the ADSs in the U.S.
Fluctuations in the exchange rate between the pound and the dollar will also
affect the dollar amounts received by holders of ADSs on conversion by the
Depositary of cash dividends paid in pounds on the Shares represented by the
ADSs. See "Description of American Depositary Receipts."
There are currently no U.K. foreign exchange control restrictions on the
payment of dividends on the Shares.
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 Prospectus.
<TABLE>
<CAPTION>
DOLLAR/POUND EXCHANGE RATES
(DOLLAR PER POUND)
---------------------------
AT END AVERAGE
YEAR ENDED DECEMBER 31, OF PERIOD RATE(1) HIGH LOW
<S> <C> <C> <C> <C>
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 July 21)....................... 1.64 1.66 1.69 1.61
</TABLE>
- -------------------------
(1) The average of the Noon Buying Rates on the last business day of each full
month during the relevant period.
17
<PAGE>
NATURE OF TRADING MARKET AND MARKET INFORMATION
Prior to the Offering, there has been no public market for the Ordinary
Shares or the ADSs in the United States. 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.
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.
18
<PAGE>
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.
<TABLE>
<CAPTION>
PENCE PER $ PER
SHARE ADS(1)
------------ -----------
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
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
Third quarter (through July 21, 1998)........ 627.5 592.5 10.48 9.66
</TABLE>
- -------------------------
(1) The reported high and low prices for the Shares expressed as pence per
Share have been translated into dollars per ADS (each representing one
Share) by converting that amount at the Noon Buying Rate on the dates of
such respective high and low prices.
As of April 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.
On July 21, 1998, the AIM closing bid price for the Shares was 605.0p per
Share.
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.
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. See
"Description of Share Capital."
19
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1998 (i) the actual
capitalization of the Company and (ii) the consolidated capitalization of the
Company as adjusted to give effect to the offering and the application of
estimated net proceeds therefrom of $57.8 million ((Pounds)34.4 million). See
"Use of Proceeds." This table should be read in conjunction with the "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------------------------
ACTUAL AS ADJUSTED AS ADJUSTED(1)
<S> <C> <C> <C>
Long-term debt
(including current
portion thereof)....... (Pounds)13,420,433 (Pounds)12,020,433 $20,194,327
Shareholders' equity(2)
Ordinary Shares,
nominal value 1p per
share, 28,000,000
Shares authorized,
17,793,027 Shares
issued and
outstanding.......... 177,930 257,930 433,323
Additional paid-in
capital.............. 10,613,508 44,962,079 75,536,293
Retained deficit...... (1,662,932) (1,662,932) (2,793,726)
------------------ ------------------ -----------
Total shareholders'
equity................. (Pounds) 9,128,506 (Pounds)43,557,077 $73,175,890
------------------ ------------------ -----------
Total capitalization.... (Pounds)22,548,939 (Pounds)55,577,510 $93,370,217
================== ================== ===========
</TABLE>
- -------------------------
(1) Translations into dollars in this table are solely for convenience and are
computed at the Noon Buying Rate on March 31, 1998 of $1.68 per (Pounds)1.
The Noon Buying Rate on July 21, 1998 was $1.64. per (Pounds)1.
(2) Excludes 3,673,400 Shares issuable on March 31, 1998 pursuant to
outstanding options and warrants.
20
<PAGE>
DILUTION
Dilution per Share equals the difference between the offering price per
Share (as represented by an ADS) and the net tangible book value per Share
after giving effect to the offering. The net tangible book value per Share has
been determined by dividing the net tangible book value of the Company
determined in accordance with U.K. GAAP (total tangible asset book value less
total liabilities) by the number of outstanding Shares on March 31, 1998
(excluding 3,673,400 Shares issuable on March 31, 1998 pursuant to outstanding
options and warrants). At March 31, 1998, the net tangible book value per
Share was $0.86 (at the Noon Buying Rate on such date). After giving effect to
the sale of 8,000,000 ADSs at $8.00 per ADS and after deducting underwriting
discounts, commissions and fees and expenses, the net tangible book value of
the Company at March 31, 1998 would have been $73.2 million, or $2.84 per
Share (at the Noon Buying Rate). This represents an immediate dilution of
$5.16 per Share to new investors purchasing ADSs in the offering and an
immediate increase in net tangible book value of $1.98 per Share to the
Company's existing shareholders, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Offering price per Share (represented by an ADS)................... $8.00
Net tangible book value per Share at March 31, 1998 before the
Offering........................................................ $0.86
Increase in net tangible book value per Share attributable to new
investors....................................................... 1.98
-----
Net tangible book value per Share after the Offering(1)............ 2.84
-----
Dilution per ADS to new investors.................................. $5.16
=====
</TABLE>
- -------------------------
(1) Determined by dividing the total number of Shares assumed to be
outstanding after the Offering into the pro forma net tangible book value
of the Company allocable to such Shares, after giving effect to the
application of the net proceeds of the offering (assuming no exercise of
the Underwriters' over-allotment option).
If the Underwriters' over-allotment option is exercised in full, the
increase in net tangible book value per Share attributable to the Offering,
net tangible book value per Share after giving effect to the Offering and
dilution per Share to new investors would be $2.18, $3.04, and $4.96,
respectively.
The following table sets forth, as of March 31, 1998, the differences
between the existing shareholders of Independent Energy and the new investors
with respect to the number of ADSs purchased or to be purchased, the average
price per Share or ADS, as applicable, and the total consideration paid or to
be paid.
<TABLE>
<CAPTION>
SHARES
PURCHASED(1) AVERAGE TOTAL CONSIDERATION
------------------ PRICE ----------------------
NUMBER PERCENT PER SHARE AMOUNT PERCENT
<S> <C> <C> <C> <C> <C>
Current shareholders........ 17,793,027 69.0% $1.02 $18,129,616(2) 22.1%
Investors in the offering... 8,000,000 31.0 8.00 64,000,000 77.9%
---------- ----- ----- ----------- -----
Total..................... 25,793,027 100.0% $3.18 $82,129,616 100.0%
========== ===== ===== =========== =====
</TABLE>
- -------------------------
(1) Assumes no exercise by the Underwriters of their over-allotment option.
(2) Total contributed capital prior to the Offering.
21
<PAGE>
SELECTED CONSOLIDATED 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
two 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 as
of and for the nine months ended March 31, 1998 have been derived from the
audited consolidated financial statements of the Company and the notes thereto
included elsewhere in this Prospectus. The selected consolidated financial
data for the nine months ended March 31, 1997 have been derived from the
unaudited consolidated financial statements of the Company included elsewhere
herein and, in the opinion of the Company, have been prepared on a basis
substantially consistent with that of the audited periods. In the opinion of
the Company, the unaudited interim financial statements reflect all
adjustments necessary to present fairly such information for the nine month
period ended March 31, 1997. 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 Prospectus.
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 and Results of Operations" and the Company's consolidated
financial statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------- SIX MONTHS ENDED FISCAL YEAR ENDED
1993 1994 1995 JUNE 30, 1996 JUNE 30, 1997
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
U.K. GAAP
Revenue from
continuing
operations..... (Pounds) -- (Pounds) -- (Pounds) 4,701 (Pounds) 173,701 (Pounds)11,127,164
Revenue from
discontinued
operations(2).. 452,641 118,589 -- -- --
Cost of sales... 309,884 127,327 -- 171,448 10,872,238
Administrative
expenses....... 47,408 55,367 90,915 492,199 1,363,343
Depreciation and
amortization... 41,399 39,674 2,858 5,681 141,850
Loss from
continuing
operations..... (7,631) -- (89,072) (495,627) (1,250,267)
Profit (loss)
from
discontinued
operations..... 61,581 (103,779) -- -- --
Exceptional
items.......... -- 168,191 -- (460,983) --
Interest
(expense)
income, net.... (1,554) 3,275 24,029 65,417 68,674
Income tax
expense
(credit)....... -- 9,000 (5,576) -- --
Net profit
(loss)......... (Pounds)52,396 (Pounds)58,687 (Pounds)(59,467) (Pounds)(891,193) (Pounds)(1,181,593)
Earnings (loss)
per share...... 167.3 p 187.4 p (176.8)p (9.9)p (9.0)p
Weighted average
shares
outstanding.... 31,314 31,314 33,641 8,981,076 13,129,914
U.S. GAAP
Revenue from
continuing
operations..... (Pounds) -- (Pounds) -- (Pounds) 4,701 (Pounds) 173,701 (Pounds)11,127,164
Loss from
continuing
operations..... (7,631) -- (59,467) (1,001,908) (1,369,688)
Net profit
(loss)......... 52,396 58,687 (59,467) (1,001,908) (1,369,688)
Earnings (loss)
per share...... 167.3 p 187.4 p (176.8)p (11.1)p (10.4)p
Earnings (loss)
per share from
continuing
operations..... (24.4)p -- (176.8)p (11.1)p (10.4)p
Weighted average
number of
shares
outstanding.... 31,314 31,314 33,641 8,981,076 13,129,914
<CAPTION>
NINE MONTHS ENDED MARCH 31,
-----------------------------------------------------
1997 1998 1998(1)
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
U.K. GAAP
Revenue from
continuing
operations..... (Pounds)5,490,338 (Pounds)34,921,839 $58,668,690
Revenue from
discontinued
operations(2).. -- -- --
Cost of sales... 5,360,559 33,634,538 56,506,024
Administrative
expenses....... 1,036,849 1,337,395 2,246,824
Depreciation and
amortization... 97,299 301,608 506,701
Loss from
continuing
operations..... (1,004,369) (351,702) (590,859)
Profit (loss)
from
discontinued
operations..... -- -- --
Exceptional
items.......... -- -- --
Interest
(expense)
income, net.... 44,809 (74,403) (124,997)
Income tax
expense
(credit)....... -- -- --
Net profit
(loss)......... (Pounds) (959,560) (Pounds) (426,105) $ (715,856)
Earnings (loss)
per share...... (7.3)p (2.5)p $ (0.04)
Weighted average
shares
outstanding.... 13,124,800 16,967,802 16,967,802
U.S. GAAP
Revenue from
continuing
operations..... (Pounds)5,490,338 (Pounds)34,921,839 $58,668,690
Loss from
continuing
operations..... (1,100,630) (521,709) (876,471)
Net profit
(loss)......... (1,100,630) (521,709) (876,471)
Earnings (loss)
per share...... (8.4)p (3.1)p $ (0.05)
Earnings (loss)
per share from
continuing
operations..... (8.4)p (3.1)p $ (0.05)
Weighted average
number of
shares
outstanding.... 13,124,800 16,967,802 16,967,802
</TABLE>
(footnotes on following page)
22
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------------------------------- ------------------------------------
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
U.K. GAAP
Total assets.... (Pounds)919,804 (Pounds)1,123,878 (Pounds)3,053,064 (Pounds)7,995,040 (Pounds)16,851,935
Long-term
liabilities.... 333,852 -- -- 830,212 5,937,925
Shareholders'
equity......... 409,266 467,953 2,983,728 6,787,015 6,957,569
U.S. GAAP
Total assets.... (Pounds)919,804 (Pounds)1,123,878 (Pounds)3,143,144 (Pounds)8,333,378 (Pounds)17,226,966
Long-term
liabilities.... 333,852 -- 90,080 1,279,265 6,611,766
Shareholders'
equity......... 409,266 467,953 2,983,728 6,676,300 6,658,795
<CAPTION>
MARCH 31,
------------------------------
1998 1998(1)
<S> <C> <C>
BALANCE SHEET
DATA:
U.K. GAAP
Total assets.... (Pounds)31,145,922 $52,325,149
Long-term
liabilities.... 11,155,703 18,741,158
Shareholders'
equity......... 9,128,506 15,335,890
U.S. GAAP
Total assets.... (Pounds)31,536,121 $52,980,683
Long-term
liabilities.... 11,940,316 20,059,731
Shareholders'
equity......... 8,734,092 14,673,275
</TABLE>
- -------------------------
(1) Translations into dollars in this table are for convenience only and are
computed at the Noon Buying Rate on March 31, 1998 of $1.68 per (Pounds)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.
23
<PAGE>
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 March 31, 1998 and its results of
operations for the year ended December 31, 1995, the six months ended June 30,
1996, the fiscal year ended June 30, 1997 and the nine months ended March 31,
1997 and 1998. The Company's consolidated financial statements and notes
included elsewhere in this Prospectus 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 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 (Pounds)11.1 million
($18.6 million) for the fiscal year ended June 30, 1997 to (Pounds)34.9
million ($58.6 million) for the nine months ended March 31, 1998. The
Company's revenue for the two months ended May 31, 1998 was (Pounds)14.8
million ($24.9 million).
The Company has incurred operating and net losses of approximately
(Pounds)2.1 million and (Pounds)2.5 million, respectively, in the aggregate,
through March 31, 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. See "Risk Factors--Historical Operating Losses." The final phase of
deregulation of the supply segment of the industry is currently scheduled to
begin in September 1998; however, the final phase was initially scheduled to
occur in April 1998 and was subsequently postponed. If deregulation is further
postponed, the Company's operations and financial condition could be
materially adversely affected. See "Risk Factors--Government Regulation; Risk
of Postponement of Final Phase of Deregulation."
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 reconciles the
difference between actual gross profit and estimated gross profit on a
quarterly basis. See "Risk Factors--Risk Related to Electricity Price
Fluctuations; Risk Related to Gross Profit Recognition Policy" and "--
Liquidity and Capital Resources."
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
24
<PAGE>
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. See "--Risk
Management Activities."
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997
Revenue. Revenue for the nine months ended March 31, 1998 increased
(Pounds)29.4 million, or 536%, to (Pounds)34.9 million from (Pounds)5.5
million for the nine months ended March 31, 1997. The increase reflected a
substantial increase in the Company's sales volume of electricity to 842 GWh
from 131 GWh in the 1997 period, a 542% increase, primarily as a result of the
Company's increased marketing efforts.
Gross profit. Gross profit for the nine months ended March 31, 1998
increased (Pounds)1.1 million to (Pounds)1.3 million from (Pounds)130,000 for
the nine months ended March 31, 1997. As a percentage of revenue, gross profit
for the 1998 period was 3.7% compared to 2.4% in the 1997 period. This
increase was primarily due to the increase in electricity sales derived from
Company's generated electricity, which generally have higher margins. In the
1998 period, the Company generated 26.2 GWh of electricity compared to 5.3 GWh
in the 1997 period. In addition, the additional electricity generated by the
Company in the 1998 period 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 nine months ended
March 31, 1998 increased (Pounds)300,000, or 29%, to (Pounds)1.3 million from
(Pounds)1.0 million for the nine months ended March 31, 1997. As a percentage
of revenue, administrative expenses for the 1998 period were 4% compared to
19% in the 1997 period as the Company's administrative expenses in the 1997
period reflected primarily fixed costs which did not increase materially in
the 1998 period.
Depreciation and amortization. Depreciation and amortization expense for the
nine months ended March 31, 1998 was (Pounds)302,000 compared to
(Pounds)97,000 for the 1997 period. The increase was primarily the result of
depreciation related to two new generation plants that commenced operations in
the 1998 period, one in December 1997 and one in March 1998.
Operating loss. The operating loss decreased for the nine months ended March
31, 1998 to (Pounds)351,000 compared to (Pounds)1.0 million for the nine
months ended March 31, 1997. The reduction in the loss for the 1998 period 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
(Pounds)74,000 in the 1998 period compared to net interest income of
(Pounds)45,000 in the 1997 period. The change was primarily due to increased
interest expense associated with debt financing used for two new generating
plants in the 1998 period.
YEAR ENDED JUNE 30, 1997 COMPARED TO TWELVE MONTHS ENDED JUNE 30, 1996
Revenue. Revenue for the fiscal year ended June 30, 1997 increased
(Pounds)10.9 million to (Pounds)11.1 million from (Pounds)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
(Pounds)255,000 from (Pounds)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 (Pounds)818,000, or 150%, to (Pounds)1.4 million from
(Pounds)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
25
<PAGE>
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 (Pounds)140,000 compared to (Pounds)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 (Pounds)1.3 million compared to (Pounds)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.
Interest income (expense). The Company had net interest income of
(Pounds)69,000 in the year ended June 30, 1997 compared to net interest income
of (Pounds)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 (Pounds)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.
SIX MONTHS ENDED JUNE 30, 1996
The Company began marketing electricity in January 1996 and generated its
first revenue from electricity sales in April 1996 resulting in revenue for
the six months ended June 30, 1996 of (Pounds)174,000. There was no revenue
from the sale of electricity prior to this period. Gross profit in this period
was 1.3%. The operating expenses during the period were (Pounds)498,000
including costs associated with establishing the Company's marketing
organization and initiating marketing activities. All of these costs were
expensed during the period. The period resulted in a net operating loss of
(Pounds)496,000 due to the relatively low revenue during the start-up period
and expenses related to development of the business.
The exceptional loss of (Pounds)461,000 incurred in the 1996 period related
to the adjustment of the carrying cost of a drilling rig owned by the Company
to fair market value.
YEAR ENDED DECEMBER 31, 1995
The Company's activity in 1995 was limited to the development of its gas
licenses and start-up costs associated with the electricity marketing and
generating business. The Company utilizes the gas reserves from its licenses
properties to fuel its generating plants.
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
March 31, 1998, these activities utilized funds of (Pounds)2.1 million,
(Pounds)2.7 million and (Pounds)11.3 million, respectively.
The Company has financed its funding requirements through a combination of
equity issuances, capital lease financings and borrowings. Since 1994, the
Company has raised an aggregate of (Pounds)10.4 million through four equity
placements in the U.K. and the U.S.
The Company has a credit facility with Barclays Bank plc (the "Credit
Facility"), which provides for aggregate borrowings, letters of credit and
bank guarantees of (Pounds)35.0 million (which will reduce to (Pounds)31.5
million effective August 1, 1998) consisting of (i) a (Pounds)8.0 million
revolving construction facility payable in quarterly payments of
(Pounds)250,000 with interest of LIBOR plus 2.5% (10.35% at June 30, 1998),
(ii) a line of credit of (Pounds)4.0 million due March 31, 1999 which bears
interest at a base rate plus 1.75% (9.25% at June 30, 1998), (iii)
(Pounds)10.0 million in the form of letters of credit to secure Pool
electricity purchase obligations and obligations under CFDs, (iv) a
(Pounds)7.0 million bank guarantee to be used by the Company to secure its
obligations under a contract with a third-party service provider and (v) a
(Pounds)6.0 million overdraft facility (which will reduce to (Pounds)1.5
million effective August 1, 1998) due March 17, 1999 which bears interest at a
base rate plus 1.5% (9.0% at June 30, 1998). Pursuant to the Credit Facility,
the Company will be required to provide full cash collateral to secure
outstanding obligations under the bank guarantee. As of July 20, 1998, the
Company had outstanding borrowings under the
26
<PAGE>
Credit Facility of (Pounds)12.0 million and had utilized commitments to issue
letters of credit in the aggregate amount of (Pounds)9.6 million. In addition,
in June 1997, the Company issued (Pounds)1.4 million of promissory notes,
which mature December 31, 2002 and bear interest at 10% per annum, payable
quarterly. The Company intends to repay (Pounds)7.9 million ($13.3 million) of
outstanding indebtedness with a portion of the net proceeds from the offering,
comprised of (i) (Pounds)4.0 million ($6.7 million) outstanding under the line
of credit, (ii) (Pounds)2.5 million ($4.2 million) outstanding under the
overdraft facility and (iii) (Pounds)1.4 million ($2.4 million) outstanding
under the promissory notes. See "Use of Proceeds."
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 (Pounds)4.4
million. This lease is payable in six monthly payments of (Pounds)31,423
commencing July 23, 1997 followed by 78 monthly payments of (Pounds)69,734.
The primary term of seven years can be extended indefinitely for an annual
payment of (Pounds)10,958. In October 1997, the Company entered into a capital
lease covering gas generator systems for (Pounds)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 (Pounds)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 (Pounds)15.2 million and (Pounds)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 (Pounds)13.7 million ($23.0
million) of the net proceeds from the 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 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.
See "Use of Proceeds" and "Business--Electricity Generation."
The Company estimates that its capital expenditure requirements related to
the final phase of supply deregulation commencing in September 1998 will be
(Pounds)3.0 million ($5.0 million) and will be funded with a portion of the
net proceeds from the offering. Such expenditures will primarily be used to
acquire certain information technology and related equipment associated with
expanding its customer base.
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.
Pursuant to the terms of a contract with a third-party service provider, the
Company will be required to obtain a (Pounds)7.0 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 will be required to provide full cash collateral to
secure this guarantee. See "Business and Properties--Administrative
Operations."
The Company believes that the net proceeds from the offering of ADSs,
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.
27
<PAGE>
RISK MANAGEMENT ACTIVITIES
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 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 25, 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 1,009 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
25, 1998, the aggregate commitment of the Company under CFDs was (Pounds)34.3
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 expected to be operating by the end of 1998 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.
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 (Pounds)111,000, (Pounds)188,000 and (Pounds)96,000
for the fiscal years ended June 30, 1996 and 1997 and the nine months ended
March 31, 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 and 1997
and the nine months ended March 31, 1998, under U.K. GAAP were
(Pounds)891,000, (Pounds)1.2 million and (Pounds)426,000, respectively. Under
U.S. GAAP, the Company would have reported net losses of (Pounds)1.0 million,
(Pounds)1.4 million and (Pounds)522,000 for the periods ended June 30, 1996
and 1997 and March 31, 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.
28
<PAGE>
BUSINESS AND PROPERTIES
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, National Power, Scottish Hydro and Midlands
Electricity. 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 (Pounds)11.1 million ($18.6 million) for
the fiscal year ended June 30, 1997 to (Pounds)34.9 million ($58.6 million)
for the nine months ended March 31, 1998. The Company's revenue for the two
months ended May 31, 1998 was (Pounds)14.8 million ($24.9 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 is
scheduled to begin in September 1998 and 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.
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 NGC and distribution lines operated by the
twelve 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
(Pounds)4.6 billion to select their supplier. The Company specifically targets
consumers on the lower end of the (greater than) 100 kW consumer range, a market
segment which the Company estimates to include approximately 30,000 consumers
with aggregate annual electricity expenditures of approximately (Pounds)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 (Pounds)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 (Pounds)7.9 billion.
BUSINESS STRATEGY
The Company's objectives are to expand its revenue base and to increase its
operating margins. The Company is pursuing these objectives through a business
strategy comprised of the following elements:
Expand Customer Base. The Company intends to continue to expand its customer
base through increased penetration of the currently deregulated (less than) 100
kW market and to enter into the (less than) 100 kW market upon the final phase
of deregulation expected to begin in September 1998. The Company believes it can
effectively compete in all of its targeted market segments on the basis of price
and quality of service. Within the commercial segment of the (less than) 100 kW
consumer market, the Company believes it can leverage its relationships with its
existing
29
<PAGE>
customer base to obtain a number of the smaller sites operated by its existing
customers in the (greater than) 100 kW consumer market. The Company intends to
penetrate the domestic (residential) segment of the (less than) 100 kW consumer
market by, among other things, capitalizing on the relationships and marketing
channels of selected strategic marketing partners to offer electricity services
as a jointly packaged range of products to an already well-established customer
base. The Company also intends to significantly increase its number of
commissioned sales agents and to enhance its direct mail and telemarketing
capabilities to further achieve its customer expansion goals. As a result of its
marketing efforts to date, the Company has signed contracts for an additional
3,000 customers in the (less than) 100 kW consumer market which will become
effective pending deregulation.
Install Additional Generating Capacity. By generating a portion of the
electricity that it supplies, the Company believes it can reduce its exposure
to fluctuating Pool prices and lower its cost of sales. The Company currently
operates three generating plants with a capacity of 18 MW and expects to have
a total of six generating plants with an aggregate capacity of 44 MW
operational by the end of 1998. The Company's objective is to install
additional generating facilities to provide it with approximately 10 MW to 20
MW of aggregate capacity in each of the twelve local distribution areas in
England and Wales. Management views the operation of its own generating plants
as an important part of its overall risk management strategy. Moreover, 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.
Leverage Management Expertise. Mr. Burt H. Keenan, the founder and Executive
Chairman of the Company, has built a management team with extensive experience
in the U.K. electricity and energy industry. Prior to joining the Company, Mr.
John L. Sulley, Managing Director of the Company, held senior management
positions with National Power where he established its electricity marketing
operations and managed the installation of small generating plants at customer
sites, and with Scottish Power where he was responsible for the financial,
strategic and business planning for supply and electricity trading operations.
In addition, other members of management have held senior positions with
Scottish Power, National Power, Scottish Hydro and Midlands Electricity.
Maintain Prudent Risk Management Practices. The Company generally enters
into fixed price sales contracts with customers for a stated period, typically
one or two years. Most of the Company's supply of electricity is purchased
from the Pool at fluctuating spot market prices. In addition to generating a
portion of the electricity it sells, the Company has sought to reduce the
risks associated with fluctuating Pool prices by selectively targeting
customers with relatively predictable usage profiles and by entering into
hedging instruments known as CFDs. Management intends to enter into CFDs to
cover a significant portion of the customer contracts it enters into in the
future. By utilizing such risk management practices, management believes it
can balance its objective of profit maximization with acceptable levels of
risk.
Expand Product Offerings. The Company believes that significant
opportunities exist to cost-effectively market additional energy products and
services to its electricity customer base. In particular, the U.K. natural gas
industry has been deregulated in a manner similar to that of the electricity
industry. The Company is currently exploring ways to market natural gas to its
customer base through strategic acquisitions, joint ventures and other
marketing affiliations.
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
(Pounds)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 is scheduled to commence
in September 1998 and be completed by June 1999, at which time all consumers,
both commercial and domestic (residential) will be able to choose their
supplier.
30
<PAGE>
The following table sets forth a breakdown of the U.K. electricity market by
consumer category and size, annual electricity volumes sold and annual
expenditures.
U.K. ELECTRICITY MARKET
<TABLE>
<CAPTION>
ESTIMATED
ANNUAL ANNUAL
NUMBER OF ELECTRICITY EXPENDITURES
CONSUMER SIZE CONSUMERS VOLUMES (POUNDS IN
(PEAK USAGE) (IN THOUSANDS)(1) (IN TWH)(1) BILLIONS)(2)
<S> <C> <C> <C>
PHASE I AND PHASE II OF
DEREGULATION
(greater than) 1 MW.............. 5 74.0 (Pounds) 2.6
100 kW-1 MW...................... 50 50.0 2.0
------ ----- ------------
Subtotals...................... 55 124.0 4.6
------ ----- ------------
PHASE III OF DEREGULATION
20-100 kW........................ 580 28.7 1.4
10-20 kW(3)...................... 1,950 21.0 1.4
Domestic(4)...................... 23,000 97.0 8.3
------ ----- ------------
Subtotals...................... 25,530 146.7 11.1
------ ----- ------------
Totals......................... 25,585 270.7 (Pounds)15.7
====== ===== ============
</TABLE>
- -------------------------
Source: U.K. Office of Electricity Regulation, The Competitive Electricity
Market From 1998: Price Restraints September 1996 ("OFFER") and MarketLine
International, Industrial Electricity 1998 ("MarketLine")
(1) Figures obtained from either OFFER or MarketLine.
(2) Figures obtained by multiplying annual electricity volumes (in TWh) by
average nominal cost of electricity (in pence per kWh) for 1993/1994.
These figures are estimates only. Actual annual expenditures may vary
depending on the average nominal cost of electricity.
(3) Includes approximately 1.0 million residential consumers that are
designated "non-domestic" consumers based on peak demand usage.
(4) Includes all remaining residential consumers.
INDEPENDENT ENERGY'S TARGET CUSTOMERS
The following table sets forth the Company's estimated targeted customers
within the U.K. electricity market and management's estimates with respect to
such targeted customers' annual electricity volumes and expenditures.
Principal factors which the Company seeks in its customers are predictable
usage patterns and volumes, above-average usage, strong credit ratings and
payment by direct debit.
<TABLE>
<CAPTION>
ANNUAL ANNUAL
NUMBER OF ELECTRICITY EXPENDITURES
CONSUMER SIZE CONSUMERS VOLUMES (IN (POUNDS IN
(PEAK USAGE) (IN THOUSANDS) TWH) BILLIONS)(1)
<S> <C> <C> <C>
(greater than) 100 kW................... 30 40.0 (Pounds)1.6
20-100 kW............................... 150 7.2 0.3
10-20 kW................................ 1,500 16.1 1.1
Domestic................................ 15,000 80.0 6.8
------ ----- -----------
Totals................................ 16,680 143.3 (Pounds)9.8
====== ===== ===========
</TABLE>
- -------------------------
(1) Assumes an average cost of electricity of 4p per kWh.
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
31
<PAGE>
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 nine months ended March 31, 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 (greater than) 100 kW market have meters that measure usage by
the half-hour. All other consumers meters are read monthly. Each (less than) 100
kW consumer has an assigned usage profile which estimates their usage throughout
each day over a month. The Pool requires all suppliers to pay, including the
Company, 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 (less than) 100 kW commercial sector and
the domestic market represent a significant opportunity for it to expand its
revenue and customer base. As of May 31, 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 that is currently deregulated.
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 and expects to have a number of such arrangements in place prior to
the commencement of the final phase of deregulation in September 1998 that
management believes will give it access to up to 15.0 million domestic
consumers. 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 intends to target those
consumers that have above-average usage, 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
32
<PAGE>
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 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 (less than) 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 will be required to obtain a (Pounds)7.0 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."
ELECTRICITY GENERATION
As of July 23, 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 nine months ended
March 31, 1998. The Company anticipates that it will install three additional
plants by the end of 1998 with 26 MW of total capacity. The total capital
expenditure requirements for such plants are estimated to be (Pounds)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, together with the projects it intends to
complete in 1999, are estimated to be (Pounds)89.0 million. The Company
expects to fund up to 15% of such aggregate estimated capital expenditure
requirements ((Pounds)13.7 million) with a portion of the net proceeds from
the offering. See "Use of Proceeds" and "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.
33
<PAGE>
The table below sets forth the Company's existing and certain proposed
generating facilities.
PROJECTS IN OPERATION
<TABLE>
<CAPTION>
PROJECT
COMMERCIAL
FACILITY OPERATION
PROJECT FUEL SOURCE NET CAPACITY LOCATION 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
NET COMMERCIAL ESTIMATED
PROJECT FUEL SOURCE CAPACITY LOCATION OPERATION DATE INSTALLATION COST
<S> <C> <C> <C> <C> <C>
Knypersley.............. Third-Party and Company 8 MW Knypersley, August 1998 (Pounds)5.2 million
Gas Reserves West Midlands
Holditch................ Third-Party Gas 9 MW Holditch, October 1998 (Pounds)5.0 million
West Midlands
Ironville............... Third-Party and Company 9 MW Ironville, December 1998 (Pounds)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 (Pounds)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 Commission definitions.
See "Glossary."
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
34
<PAGE>
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
(Pounds)3.28 per thousand cubic feet ("Mcf") ($5.51 per Mcf).
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.
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 and Scottish Hydro, and the national
generators, National Power, PowerGen and British Energy, 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, 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. See "Risk
Factors-- Competition."
35
<PAGE>
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.
LITIGATION
The Company is not a party to any material legal proceedings, nor is it
currently aware of any threatened material legal proceedings.
FACILITIES
The Company maintains its headquarters in Solihull, West Midlands where it
leases 6,000 square feet of office space for approximately (Pounds)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."
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.
36
<PAGE>
THE STRUCTURE OF THE UNITED KINGDOM ELECTRICITY INDUSTRY
INDUSTRY STRUCTURE AND BACKGROUND
The electric industry in the United Kingdom consists of the following
elements:
Generation: the production of electricity at power stations;
Transmission: the bulk transfer of electricity across the high voltage
transmission system;
Distribution: the transfer of electricity from the high voltage
transmission system and its delivery, across low voltage
distribution systems, to consumers; and
Supply: the bulk purchase of electricity by suppliers and its sale to
consumers.
Great Britain has two separate but connected markets, each with a different
commercial framework. In England and Wales, electricity is produced by
generators, the largest of which are National Power, PowerGen plc ("PowerGen")
and British Energy plc ("British Energy"). Electricity is transmitted through
the national grid transmission system by NGC and distributed by the twelve
RECs in their respective authorized areas.
In Scotland, there are two vertically integrated companies, Scottish Power
and Scottish Hydro, each generating, transmitting, distributing and supplying
electricity within its respective authorized areas as well as competing to
supply electricity elsewhere. Scottish Nuclear, a subsidiary of British
Energy, sells all the electricity it generates to Scottish Power and Scottish
Hydro by agreement.
The interconnection between the two transmission systems, owned by Scottish
Power and NGC, is capable of transferring electricity between Scotland and
England and Wales. There is also an interconnection with France, owned by
Electricite de France and NGC, through which electricity can be transferred
between the transmission systems of France and England and Wales.
Virtually all electricity generated in England and Wales is sold by
generators and bought by suppliers through the Pool. There is no equivalent to
the Pool in Scotland, but Scottish Power and Scottish Hydro are obligated by
their licenses to offer electricity for sale to second tier suppliers. They
are also required to provide access to their transmission and distribution
systems on a non-discriminatory basis to competing suppliers and generators.
The industry structure described above became effective April 1990. At the
same time, a licensing regime was introduced for the electricity industry both
in England and Wales and in Scotland. The Regulator (as described below) was
first appointed in 1989.
The RECs, which at that time collectively owned The National Group Grid plc
("NGG"), NGC's holding company, were privatized in December 1990. National
Power and PowerGen were privatized in March 1991, Scottish Power and Scottish
Hydro were privatized in June 1991 and British Energy was privatized in July
1996. Since the summer of 1995, a majority of RECs have been acquired by other
companies.
DISTRIBUTION OF ELECTRICITY
Each of the RECs is required to offer terms for connection to and/or use of
its distribution system to other persons. In providing use of its distribution
system, a REC must not discriminate between its own supply business and that
of any other authorized electricity operator, or between those of other
authorized electricity operators; nor may its charges differ except where
justified by differences in cost.
SUPPLY OF ELECTRICITY
The Electricity Act deregulated the generation and marketing of electricity.
Generation of electricity was completely deregulated upon effectiveness of the
Electricity Act on April 1, 1990. Deregulation of supply is being phased in
commencing with (greater than) 1 MW consumers on April 1, 1990 and on April 1,
1994 for (greater than) 100 kW consumers. According to statistics provided by
the OFFER, there are about 60,000 100 kW or greater peak demand customers in the
U.K. Beginning in September 1998 and continuing through June 1999, the remaining
37
<PAGE>
1.9 million commercial and 24 million domestic customers in the U.K. will be
able to purchase electricity from any supplier with no price regulation other
than a "backstop" price for the domestic customer. The Company is licensed by
OFFER.
Subject to minor exceptions, all electricity customers in the United Kingdom
must be supplied by a licensed supplier. Licensed suppliers purchase
electricity and make use of the transmission and distribution networks to
achieve delivery to customers' premises.
There are two types of licensed suppliers: public electricity (or first
tier) suppliers ("PESs") and second tier suppliers. PESs are the RECs,
Scottish Power and Scottish Hydro, each supplying in its respective authorized
area. Second tier suppliers include the Company, National Power, PowerGen,
Nuclear Electric, Scottish Power, Scottish Hydro, other PESs supplying outside
their respective authorized areas and other independent suppliers.
THE POOL
The Pool was established at the time of privatization for bulk trading of
electricity in England and Wales between generators and suppliers. The Pool
reflects two principal characteristics of the physical generation and supply
of electricity from a particular generator to a particular supplier. First, it
is not possible to trace electricity from a particular generator to a
particular supplier. Second, it is not practicable to store electricity in
significant quantities, creating the need for a constant matching of supply
and demand. Subject to exceptions for small generating plants such as the
Company's generating plants, all electricity generated in England and Wales
must be sold and purchased through the Pool. All licensed generators and
suppliers must become and remain signatories to the Pooling and Settlement
Agreement, which governs the constitution and operation of the Pool and the
calculation of payments due to and from generators and suppliers. The Pool
also provides centralized settlement of accounts and clearing. The Pool itself
does not buy or sell electricity.
The Pool compiles and ranks in ascending order the half hourly electricity
volumes and prices bid by the generators. Based on this ranking, the Pool
purchases from the generators in ascending order the total half hour volume of
electricity needed to fulfill the Pool's forecasted demand for that period.
The price bid which corresponds to the cumulative volume which fulfills the
total estimated demanded by the Pool is the price which the Pool pays to all
generators. Through this marginal cost pricing system, the generators are
scheduled on or off according to their respective bids.
A computerized system (the settlement system) is used to calculate prices
and to process metered, operational and other data and to carry out the other
procedures necessary to calculate the payments due under the Pool trading
arrangements. The settlement system is administered on a day-to-day basis by
Energy Settlements and Information Services, Limited, a subsidiary of NGC, as
settlement system administrator.
The Pool is obligated to purchase all electricity generated by plants with
capacity of less than 100 MW, "small generators," at the Pool price, affording
the Company a source of sale for all its generated electricity. Alternatively,
"small generators" can bypass the Pool and sell direct to customers or other
suppliers. All suppliers purchase electricity from the Pool at the same half-
hour price.
The mechanism for trading electricity is currently under review by the
Regulator. Accordingly, there can be no assurance that this mechanism will not
change. The Company is unable to predict the impact, if any, on its operations
as a result of any such change.
REGULATION UNDER THE ELECTRICITY ACT 1989
THE REGULATOR
The principal legislation governing the structure and regulation of the
electricity industry in the United Kingdom is the Electricity Act 1989 (the
"Electricity Act"). The Electricity Act established the industry structure
described above so as to enable privatization to take place. The Electricity
Act also created the institutional framework under which the industry is
currently regulated, including the office of the Regulator,
38
<PAGE>
who is appointed by the United Kingdom Secretary of State for Trade and
Industry (the "U.K. Secretary of State"). The present Regulator, Professor
Stephen Littlechild, was appointed for a five-year term commencing September
1, 1989 and has since been reappointed for a further five-year term.
The Regulator's functions under the Electricity Act include granting
licenses to generate, transmit or supply electricity (a function that he
exercises under a general authority from the U.K. Secretary of State);
proposing modifications to licenses; determining certain disputes between
electricity licensees and customers; and setting standards of performance for
electricity licensees.
The Regulator exercises concurrently with the Director General of Fair
Trading certain functions relating to monopoly and merger situations under the
Fair Trading Act 1973 and certain functions relating to courses of conduct
which have, or are intended or likely to have, the effect of restricting,
distorting or preventing competition in the generation, transmission or supply
of electricity under the Competition Act 1980.
The Electricity Act requires the Regulator and the U.K. Secretary of State
to exercise their functions in the manner each considers is best calculated to
ensure that all reasonable demands for electricity are satisfied; to ensure
that license holders are able to finance their licensed activities; and to
promote competition in the generation and supply of electricity. Subject to
these duties, the U.K. Secretary of State and the Regulator are required to
exercise their functions in the manner which each considers is best
calculated: to protect the interests of customers for electricity supplied by
licensed suppliers in respect of price, continuity of supply, and the quality
of electricity supply services; to promote efficiency and economy on the part
of licensed electricity suppliers and the efficient use of electricity
supplied to customers; to promote research and development by persons
authorized by license to generate, transmit or supply electricity, and to
secure the establishment of machinery for promoting the health and safety of
workers in the electricity industry. The U.K. Secretary of State and the
Regulator also have a duty to take into account the effect on the physical
environment of activities connected with the generation, transmission or
supply of electricity.
In performing their duties to protect the interests of customers in respect
of prices and other terms of supply, the U.K. Secretary of State and the
Regulator have a duty to take into account in particular the interests of
customers in rural areas. In performing their duties to protect the interests
of customers in respect of the quality of electricity supply services, they
have a duty to take into account in particular the interests of those who are
disabled or of pensionable age.
LICENSES
Second Tier Supply Licenses. Other than a PES in its authorized area and
subject to certain other exceptions, a supplier of electricity to premises in
the United Kingdom must possess a second tier supply license. Subject to the
restrictions described in "--Supply of Electricity" above, second tier
licensees may compete for the supply of electricity with one another and with
the PES for the relevant area. Currently, there are approximately 39 second
tier supply license holders for England and Wales and approximately 25 second
tier supply license holders for Scotland.
The Company has two supply licenses, one for England and Wales and one for
Scotland. The license for England and Wales was granted on March 7, 1996 and
the license for Scotland was granted on February 25, 1997. The term of each
license is 25 years.
Generation Licenses. Electricity generators operating a generating plant
with capacity in excess of 10 MW in the United Kingdom are required to have a
generation license. The conditions attached to a generation license in England
and Wales require the holder, among other things, to comply with a grid code,
be a member of the Pool and submit relevant generating sets for central
dispatch. The conditions attached to generation licenses in Scotland require
the holder, among other things, to comply with a grid code. Failure to comply
with any of the generation license conditions may subject the licensee to a
variety of sanctions, including enforcement orders by the Regulator, or if an
enforcement order is not complied with, license revocation. Because none of
the Company's existing generating plants exceeds 10 MW, the Company's
generating plants are not required to be licensed.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Certain information concerning the executive officers and directors of the
Company is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Burt H. Keenan......................... 58 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....................... 56 Non-Executive Director
Roy Deakin............................. 66 Non-Executive Director
David May.............................. 62 Non-Executive Director
</TABLE>
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.
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.
40
<PAGE>
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 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.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
In the fiscal year ended June 30, 1997, the Company paid (Pounds)295,000 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 1997 under this plan. In fiscal 1997, the
Company accrued (Pounds)18,900 for pension, retirement or similar benefits for
its executive officers and directors. See Note 5 to the consolidated financial
statements of the Company included elsewhere in this Prospectus.
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 (Pounds)66,000 and (Pounds)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
(Pounds)45,000, (Pounds)40,000 and (Pounds)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
41
<PAGE>
three months notice. Each of Messrs. Deakin and May receive an annual fee of
(Pounds)8,000 and an attendance fee of (Pounds)650 per board meeting.
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 May 31, 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>
CERTAIN RELATIONSHIPS AND RELATED 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.
In June 1997, Gonsoulin Enterprises, Inc. ("Gonsoulin"), which beneficially
owns 5.9% of the outstanding Shares, purchased (Pounds)625,000 of the
Company's 10% promissory notes due December 31, 2002. In connection with such
transaction, Gonsoulin received warrants to purchase 62,500 Shares at 75p per
Share. The Company intends to repay such notes, together with certain other
indebtedness, with the net proceeds of the offering. See "Use of Proceeds."
42
<PAGE>
PRINCIPAL SHAREHOLDERS
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)
---------------------------
PERCENT OWNED
-----------------
BEFORE AFTER
NUMBER OFFERING OFFERING
<S> <C> <C> <C>
Burt H. Keenan(2)............................ 2,653,900 14.6% 10.1%
Gonsoulin Enterprises, Inc.(3)............... 1,055,825 5.9% 4.1%
John L. Sulley(4)............................ 470,000 2.6% 1.8%
Jerry W. Jarrell(5).......................... 410,100 2.3% 1.6%
Ian Stewart(6)............................... 170,000 * *
William E. Evans(7).......................... 500,800 2.7% 1.9%
Robert Jones(8).............................. 410,000 2.2% 1.6%
Roy Deakin(9)................................ 50,000 * *
David May(10)................................ 115,000 * *
All officers and directors as a group (8 per-
sons)(11)................................... 4,779,800 23.8% 17.0%
</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.
43
<PAGE>
DESCRIPTION OF SHARE CAPITAL
The following contains certain information concerning Independent Energy's
capital structure and related summary information concerning certain
provisions of Independent Energy's Memorandum and Articles of Association
(Charter) and applicable English law. Such summary information is not complete
and is qualified in its entirety by reference to the Memorandum and Articles
of Association of Independent Energy, a copy of which have been filed as an
exhibit to the Registration Statement of which this Prospectus is part and
which is available for inspection as part of that Registration Statement.
GENERAL
The Company's authorized share capital is (Pounds)500,000 divided into
50,000,000 Ordinary Shares of 1p nominal value each, of which 17,935,527
Ordinary Shares were issued and outstanding as of June 30, 1998.
The share capital of the Company may be increased, consolidated and divided
into shares of larger amounts than the Ordinary Shares, sub-divided into
shares of smaller amount than the Ordinary Shares, and unissued Ordinary
Shares may be canceled by an ordinary resolution of shareholders in a general
meeting of the Company. The share capital of the Company may be reduced by
special resolution of shareholders in a general meeting of the Company and
confirmation by the English courts. The Company may, with the prior approval
of an ordinary resolution of shareholders at a general meeting, purchase its
own shares.
DESCRIPTION OF ORDINARY SHARES
All of the issued and outstanding Ordinary Shares are duly authorized,
validly issued and fully paid.
DIVIDEND RIGHTS
Holders of Ordinary Shares are entitled to receive such dividends as may be
recommended by the Board of Directors of the Company and declared by the
Company in a general meeting (but no larger dividend may be declared than is
recommended by the Board of Directors of the Company, and the Company, in a
general meeting may declare a smaller dividend) and such interim dividends as
the Board of Directors of the Company may decide.
The Company or the Board of Directors may fix a date as the record date by
reference to which a dividend on the Ordinary Shares will be declared or paid,
whether or not it is before the date on which the declaration is made. Any
dividend on the Ordinary Shares unclaimed for a period of 12 years from its
date of payment shall be forfeited and shall revert to the Company. No
dividend on an Ordinary Share will bear interest.
RIGHTS IN LIQUIDATION
Subject to the rights attached to any shares issued on special terms and
conditions, upon any liquidation or winding up of the Company, after all debts
and liabilities of the Company and the expenses of the liquidation have been
discharged, any surplus assets will be divided among the holders of Ordinary
Shares in proportion to their holdings after deducting any amounts remaining
unpaid in respect of such shares.
NOTIFICATION OF INTEREST IN SHARES
Section 198 of the Companies Act of 1985 obliges any person (subject to
exception) who acquires an interest of 3% or more in the Ordinary Shares to
notify the Company of his interest within two business days following the day
on which the obligation to notify arises. After the 3% level is exceeded,
similar notification must be made in respect of whole percentage figure
increases or decreases, rounded down to the next whole number. For the
purposes of the notification obligation, the interest of a person in the
shares means any kind of interest in shares (subject to certain exceptions)
including any shares (i) in which his spouse or his child or stepchild, is
interested, (ii) in which a corporate body is interested where either (a) that
corporate body or its
44
<PAGE>
directors are accustomed to act in accordance with that person's directions or
instructions, or (b) that person controls one third or more of the voting
power of that corporation body, (or (iii) in which another party is interested
where the person and that other party are parties to a "concert party"
agreement under Section 204 of the Companies Act 1985 and any interest in
Shares is in fact acquired by any one of the parties pursuant to the
agreement. A "concert party" agreement is an agreement which provides for one
or more parties to it to acquire interests in shares of a particular company
and imposes obligations or restrictions on any one or more of the parties as
to the use, retention or disposal of such interests.
In addition, Section 212 of the Companies Act 1985 enables the Company, by
notice in writing, to require a person whom the Company knows is or has
reasonable cause to believe to be, or to have been at any time during the
three years immediately preceding the date on which the notice is issued,
interested in shares to confirm that fact or (as the case may be) to indicate
whether or not that is the case, and where he holds or has during this
relevant time held an interest in the Shares, to give such further information
as may be required relating to his interest and any other interest in the
Shares of which he is aware.
In addition to the restrictions on the rights attaching to shares imposed by
the Companies Act 1985 for noncompliance with Section 212 of that act, the
Company's Memorandum and Articles of Association apply additional
restrictions. The restrictions imposed or applied can potentially include
disenfranchisement, loss of entitlement to dividends and other payments and
restrictions on alienability.
VOTING RIGHTS AND SHAREHOLDERS MEETINGS
Under English law, there are two types of general meeting of shareholders,
annual general meetings and extraordinary general meetings. An annual general
meeting must be held at least once in each calendar year and not later than 15
months from the previous annual general meeting. At the annual general meeting
matters such as the election of directors, appointment of auditors and the
fixing of their remuneration, approval of the annual accounts and the
directors' report and declaration of dividends are dealt with. Any other
general meeting is known as an extraordinary general meeting.
The Directors may convene an extraordinary general meeting and must convene
one if demanded by holders of not less than 10% of the paid-up shares. An
annual general meeting and an extraordinary general meeting called to pass a
special resolution shall be called by at least 21 clear days' notice
specifying the place, day and time of the meeting and the general nature of
the business to be transacted. No business may be transacted at any general
meeting unless a quorum of two persons entitled to vote on the business to be
transacted is present in person or by proxy.
At a general meeting, a simple majority of the votes cast is sufficient to
pass an ordinary resolution. A special resolution requires a majority of not
less than 75% of the votes of those shareholders as (being entitled to do so)
vote in person or by proxy on the resolution in question. A small number of
matters relating to variation of the rights attaching to different classes of
shares and proceedings in a winding-up require the authority of an
extraordinary resolution, which requires the same majority as a special
resolution.
Subject to the restrictions referred to in the following paragraph, at a
meeting of shareholders every holder of shares who (being an individual) is
present in person or (being a corporation) is present by a representative or
proxy not being himself a member shall have one vote on a show of hands, and
on a poll (which can be demanded by the Chairman of the meeting, not less than
three shareholders present in person or by proxy having the right to vote at
the meeting, a holder or holders of Shares or his or their proxy representing
not less than 10% of the total voting rights of all shareholders having the
right to attend and vote at the meeting or by a holder or holders of shares or
his or their proxy conferring a right to attend and vote at the meeting on
which an aggregate sum has been paid up equal to not less than one tenth of
the total sum paid up on all shares conferring that right), every holder of
Shares present in person or by proxy shall have one vote for every share held.
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A holder of shares may not be entitled (save as a proxy for another member)
to be present or vote at any general meeting:
(a) in respect of any Shares held by him in relation to which he or any
other person appearing to be interested in those Shares has been served
with a notice under Section 212 of the Companies Act 1985, requiring him to
provide information in accordance with that section and containing a
statement that upon failure to supply such information before the
expiration period specified in the notice (which may not be less than 28
days) the registered holder of the Share is not entitled to vote in respect
of those Shares, and the person on whom such notice was served fails to
supply the information within the specified period; or
(b) unless all amounts presently payable by him in respect of such Shares
have been paid.
All or any of the rights or privileges attached to the shares may, subject
to certain provisions of the Companies Act 1985, be varied either with the
consent in writing of the holders of not less than 75% in nominal value of the
issued shares or with the sanction of an extraordinary resolution passed at a
separate meeting of the holders of shares, but not otherwise.
TRANSFER OF SHARES
The instrument of transfer of a share may be in any usual form or in any
other form of which the Directors approve and shall be executed by or on
behalf of the transferor and, unless the share is fully paid, by or on behalf
of the transferee. The Directors may, in their absolute discretion without
giving any reason therefor, refuse to register the transfer of a share which
is not fully paid provided that any such refusal will not prevent dealings in
the shares from taking place on an open and proper basis. The Directors may
decline to register a transfer to person known to be a minor, bankrupt or
person who is mentally disordered at a patient for the purpose of any statute
relating to mental health. Subject thereto, the Articles of Association
contain no restrictions on the registration of transfers of fully paid shares
provided that all stamp duty payable thereon has been paid and the transfers
are accompanied by any certificate for the shares and such other evidence (if
any) as the Directors may require to prove the title of the intending
transferor or his right to transfer the shares, any instrument of transfer is
in respect of one class of Shares and in the case of a transfer to joint
holders, and to no more than four such joint holders. The register of members
may be closed at such times and for such periods as the Directors may
determine not exceeding thirty days in each year. The Company has resolved
that title to any Shares may be transferred by means of CREST being a relevant
system for the purposes of the Uncertified Securities Regulations 1995.
ISSUE OF ADDITIONAL SHARES
Subject to the provisions of the Companies Act 1985, the authorized but
unissued shares are at the disposal of the Directors who may issue, grant
options over or otherwise dispose of them to such persons an on such terms as
they deem appropriate.
By virtue of Section 80 of the Companies Act 1985, the Directors may not,
subject to limited exceptions in respect of employee share schemes, exercise
any power to issue shares (or grant any right to subscribe for or convert
other securities into shares) unless they have been authorized to do so by an
ordinary resolution. Any such authority must state the maximum amount of
shares which may be issued under it and the date of which it will expire,
which must not be more than five years from the date the resolution is passed.
On July 2, 1998, a special resolution was passed authorizing the Directors
pursuant to Section 80 of the Companies Act 1985 to exercise all the powers of
the Company to issue shares up to a nominal amount of (Pounds)320,644.73,
being the whole of the authorized but unissued share capital, for its period
of five years.
If Shares are to be issued for cash, Section 89 of the Companies Act 1985,
requires, subject to limited exceptions in respect of employee share schemes,
such shares first be offered to existing holders of shares in proportion to
their holdings. However, Section 95 of the Companies Act 1985 provides that in
certain circumstances the directors of a company may by special resolution be
given power to issue shares as if Section 89 did not apply. On July 2, 1998, a
special resolution was passed disapplying the provisions of Section 89 in
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respect of the issue of shares in connection with a rights issue and otherwise
in respect of the issue of shares up to an aggregate nominal amount of
(Pounds)320,644.73, such authority to expire five years from the date of
passing of that resolution.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Ordinary Shares is Lloyds Bank
Registrars, The Causeway, Worthing, West Sussex BN99 6DA England, United
Kingdom.
There are no restrictions under the Company's Memorandum and Articles of
Association or under English Law that limit the rights of persons not resident
in the United Kingdom, as such, to hold or to vote shares. No shareholder
having an address outside the United Kingdom shall be entitled to have notice
served upon him unless such shareholder has given to the Company an address
within the United Kingdom to which such notices shall be served.
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DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
The following is a summary of the material provisions of the Deposit
Agreement (including any exhibits thereto, the "Deposit Agreement") among the
Company, the Depositary and all persons in whose name an ADR is registered on
the books of the Depositary (the "Owners") and any person owning any
beneficial interest in the ADSs evidenced by any ADR, and who may or may not
be the Owner of such ADR (the "Beneficial Owners") from time to time of the
ADRs issued thereunder. A copy of the Deposit Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is part and
which is available for inspection as part of that Registration Statement. In
addition, copies of the Deposit Agreement are available for inspection at the
principal office of the Depositary in New York (the "Principal New York
Office"), which is presently located at 101 Barclay Street, New York, New York
10286. Terms used herein and not otherwise defined shall have the respective
meanings set forth in the Deposit Agreement.
ADSs evidenced by ADRs are issuable by the Depositary pursuant to the terms
of the Deposit Agreement. Each ADS represents, as of the date hereof, the
right to receive one Share deposited under the Deposit Agreement (together
with any additional Shares deposited thereunder and all other securities,
property and cash received and held thereunder at any time in respect of or in
lieu of such deposited Shares, the "Deposited Securities") with the Custodian,
currently the London office of The Bank of New York (together with any
successor or successors thereto, the "Custodian"). An ADR may evidence any
number of ADSs. Only persons in whose names ADRs are registered on the books
of the Depositary will be treated by the Depositary and the Company as Owners.
DEPOSIT, TRANSFER AND WITHDRAWAL
In connection with the deposit of Shares under the Deposit Agreement, the
Depositary or the Custodian may require the following in form satisfactory to
it: (i) a written order directing the Depositary to execute and deliver to, or
upon the written order of, the person or persons designated in such order an
ADR or ADRs evidencing the number of ADSs representing such deposited Shares
(a "Delivery Order"); (ii) proper endorsements or duly executed instruments of
transfer in respect of such deposited Shares; (iii) instruments assigning to
the Custodian or its nominee any distribution on or in respect of such
deposited Shares or indemnity therefor; and, (iv) proxies entitling the
Custodian to vote such deposited Shares until the shares are registered in the
name of the Custodian or its nominee. As soon as practicable after the
Custodian receives Deposited Securities pursuant to any such deposit or
pursuant to the form of ADR, the Custodian shall present such Deposited
Securities for registration of transfer into the name of the Depositary or its
nominee or the Custodian or its nominee, to the extent such registration is
practicable, at the cost and expense of the person making such deposit (or for
whose benefit such deposit is made) and shall obtain evidence satisfactory to
it of such registration. Deposited Securities shall be held by the Custodian
for the account and to the order of the Depositary at such place or places and
in such manner as the Depositary shall determine. Deposited Securities may be
delivered by the Custodian to any person only under the circumstances
expressly contemplated in the Deposit Agreement.
After any such deposit of Shares, the Custodian shall notify the Depositary
of such deposit and of the information contained in any related Delivery Order
by letter, first class airmail postage prepaid, or, at the request, risk and
expense of the person making the deposit, by cable, telex or facsimile
transmission. After receiving such notice from the Custodian, the Depositary,
subject to the terms and conditions of the Deposit Agreement, shall execute
and deliver at the Transfer Office which is presently located at the Principal
New York Office, to or upon the order of any person named in such notice, an
ADR or ADRs registered as requested and evidencing the aggregate ADSs to which
such person is entitled.
Subject to the terms and conditions of the Deposit Agreement, the Depositary
may so issue ADRs for delivery at the Transfer Office only against deposit
with the Custodian of (i) Shares in form satisfactory to the Custodian; (ii)
rights to receive Shares from the Company or any registrar, transfer agent,
clearing agent or other entity recording Share ownership or transactions: or,
(iii) other rights to receive Shares (until such Shares are
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actually deposited pursuant to (i) or (ii) above, "Pre-released ADRs") only if
(a) Pre-released ADRs are fully collateralized (marked to market daily) with
cash or U.S. government securities held by the Depositary for the benefit of
Owners (but such collateral shall not constitute "Deposited Securities"), (b)
each recipient of Pre-released ADRs agrees in writing with the Depositary that
such recipient (1) owns such Shares, (2) assigns all beneficial right, title
and interest therein to the Depositary, (3) holds such Shares for the account
of the Depositary and (4) will deliver such Shares to the Custodian as soon as
practicable and promptly upon demand therefor and (c) all Pre-released ADRs
evidence not more than 30% of all such ADSs. The Depositary may retain for its
own account any earnings or collateral for Pre-released ADRs and its charges
for issuance thereof. At the request, risk and expense of the person
depositing Shares, the Depositary may accept deposits together with other
specified instruments for forwarding to the Custodian and may deliver ADRs at
a place other than its office. Every person depositing Shares under the
Deposit Agreement represents and warrants that such Shares are validly issued
and outstanding, fully paid, nonassessable and free of preemptive rights, that
the person making such deposit is duly authorized so to do and that such
Shares are not "restricted securities" as such term is defined in Rule 144
under the Securities Act. Such representations and warranties shall survive
the deposit of Shares and issuance of ADRs.
Subject to the terms and conditions of the Deposit Agreement, upon surrender
of an ADR in form satisfactory to the Depositary at the Transfer Office, the
Owner thereof is entitled to delivery at the Custodian's office of the
Deposited Securities at the time represented by the ADSs evidenced by such ADR
at the request, risk and expense of the Owner thereof, the Depositary may
deliver such Deposited Securities at such other place as may have been
requested by the Owner.
DISTRIBUTIONS ON DEPOSITED SECURITIES
Subject to the terms and conditions of the Deposit Agreement, to the extent
practicable, the Depositary will distribute by mail to each Owner entitled
thereto on the record date set by the Depositary therefor at such Owner's
address shown on the ADR Register, in proportion to the number of Deposited
Securities (on which the following distributions on Deposited Securities are
received by the Custodian) represented by ADSs evidenced by such Owner's ADRs:
Cash. Any dollars available to the Depositary resulting from a cash dividend
or other cash Distribution or the net proceeds of sales of any other
distribution or portion thereof authorized in the Deposit Agreement ("Cash"),
on an averaged or other practicable basis, subject to (i) appropriate
adjustments for taxes withheld and (ii) deduction of the Depositary's expenses
in (1) converting any foreign currency to dollars by sale or in such other
manner as the Depositary may determine to the extent that it determines that
such conversion may be made on a reasonable basis, (2) transferring foreign
currency or dollars to the U.S. by such means as the Depositary may determine
to the extent that it determines that such transfer may be made on a
reasonable basis, (3) obtaining any approval or license of any governmental
authority required for such conversion or transfer, which is obtainable at a
reasonable cost and within a reasonable time and (4) making any sale by public
or private means in any commercially reasonable manner;
Shares. (i) Additional ADRs evidencing whole ADSs representing any Shares
available to the Depositary resulting from a dividend or free distribution on
Deposited Securities consisting of Shares (a "Share Distribution") and (ii)
dollars available to it resulting from the net proceeds of sales of Shares
received in a Share Distribution, which Shares would give rise to fractional
ADSs if additional ADRs were issued therefor, as in the case of Cash;
Rights. (i) Warrants or other instruments in the discretion of the
Depositary representing rights to acquire additional ADSs evidenced by ADRs in
respect of any rights to subscribe for additional Shares or rights of any
nature available to the Depositary as a result of a distribution on Deposited
Securities ("Rights"), to the extent that the Company timely furnishes to the
Depositary evidence satisfactory to the Depositary that the Depositary may
lawfully distribute same (the Company has no obligation to so furnish such
evidence), or (ii) to the extent the Company does not so furnish such evidence
and sales of Rights are practicable any dollars available to the
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Depositary from the net proceeds of sales of Rights as in the case of Cash, or
(iii) to the extent the Company does not so furnish such evidence and such
sales cannot practicably be accomplished by reason of the nontransferability
of the Rights, limited markets therefor, their short duration or otherwise,
nothing (and any Rights may lapse); and
Other Distributions. (i) Securities or property available to the Depositary
resulting from any distribution on Deposited Securities other than Cash, Share
Distributions and Rights ("Other Distributions"), by any means that the
Depositary may deem equitable and practicable, or (ii) to the extent the
Depositary deems distribution of such securities or property not to be
equitable and practicable, any dollars available to the Depositary from the
net proceeds of sales of Other Distributions as in the case of Cash.
Such dollars available will be distributed by checks drawn on a bank in the
U.S. for whole dollars and round fractional amounts to the nearest whole cent
(any fractional cents being withheld without liability for interest and added
to future Cash distributions).
To the extent that the Depositary determines in its discretion that any
distribution is not practicable with respect to any Owner, the Depositary may
make such distribution as it so determines is practicable, including the
distribution of foreign currency, securities or property (or appropriate
documents evidencing the right to receive foreign currency, securities or
property) or the retention thereof as Deposited Securities with respect to
such Owner's ADRs (without liability for interest thereon or the investment
thereof).
There can be no assurance that the Depositary will be able to effect any
currency conversion or to sell or otherwise dispose of any distributed or
offered property, subscription or other rights, Shares or other securities in
a timely manner or at a specified rate or price, as the case may be.
DISCLOSURE OF INTERESTS
To the extent that the provisions of or governing any Disposed Securities
may require disclosure of or impose limits on beneficial or other ownership of
Deposited Securities, other Shares and other securities and may provide for
blocking transfer, voting or other rights to enforce such disclosure or
limits, Owners and all persons holding ADRs agree to comply with all such
disclosure requirements and ownership limitations and to cooperate with the
Depositary in the Depositary's compliance with any Company instructions in
respect thereof, and, in the Deposit Agreement, the Depositary has agreed to
use reasonable efforts to comply with such Company instructions.
Notwithstanding any provision of the Deposit Agreement, by being an Owner of
an ADR, each such Owner agrees to provide such information as the Company may
request in a disclosure notice (a "Disclosure Notice") given pursuant to the
United Kingdom Companies Act 1985 (as amended from time to time and including
any statutory modification or reenactment thereof, the "Companies Act") or the
Articles of Association of the Company. In the Deposit Agreement each Owner
acknowledges that it understands that failure to comply with a Disclosure
Notice may result in the imposition of sanctions against the Owner of the
Shares in respect of which the non-complying person is or was, or appears to
be or has been, interested as provided in the Companies Act and the Articles
of Association which currently include, the withdrawal of the voting rights of
such Shares and the imposition of restrictions on the rights to receive
dividends on and to transfer such Shares. In addition, in the Deposit
Agreement each Owner agrees to comply with the provisions of the Companies Act
with regard to the notification to the Company of interests in Shares, which
currently provide, inter alia, that any Owner who is or becomes directly or
indirectly interested (within the meaning of the Companies Act) in 3% or more
of the outstanding Shares, or is aware that another person for whom it holds
such ADRs is so interested, must within two business days after becoming so
interested or so aware (and thereafter in certain circumstances upon any
change to the particulars previously notified) notify the Company as required
by the Companies Act.
RECORD DATES
The Depositary may fix a record date which shall be as near as practicable
to any corresponding record date set by the Company for the determination of
the Owners who shall be entitled to receive any distribution on or in respect
of Deposited Securities, to give instructions for the exercise of any voting
rights, to receive any notice or to act in respect of other matters and only
such Owners shall be so entitled.
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VOTING OF DEPOSITED SECURITIES
As soon as practicable after receipt from the Company of notice of any
meeting or solicitation of consents or proxies of owners of Shares or other
Deposited Securities, the Depositary shall mail to Owners a notice stating (i)
such information as is contained in such notice and any solicitation
materials, (ii) that each Owner on the record date set by the Depositary
therefor will be entitled to instruct the Depositary as to the exercise of the
voting rights, if any, pertaining to the Deposited Securities represented by
the ADSs evidenced by such Owner's ADRs and (iii) the manner in which such
instruction may be given, including instructions to give a discretionary proxy
to a person designated by the Company. Upon receipt of instructions of an
Owner on such record date in the manner and on or before the date established
by the Depositary for such purpose, the Depositary shall endeavor insofar as
practicable and permitted under the provisions of or governing Deposited
Securities to vote or cause to be voted (or to grant a discretionary proxy to
a person designated by the Company to vote in accordance with (iii) above) the
Deposited Securities represented by the ADSs evidenced by such Owner's ADRs in
accordance with such instructions. The Depository will not itself exercise any
voting discretion in respect of any Deposited Securities.
INSPECTION OF TRANSFER BOOKS
The Deposit Agreement provides that the Depositary will keep books at its
Transfer Office for the registration, registration of transfer, combination
and split-up of ADRs, which at all reasonable times will be open for
inspection by the Owners and the Company for the purpose of communication with
Owners in the interest of the business of the Company or a matter related to
the Deposit Agreement.
REPORTS AND OTHER COMMUNICATIONS
The Depositary shall make available for inspection by Owners at the Transfer
Office reports and communications received from the Company which are both (i)
received by the Depositary as the Holder of the Deposited Securities and (ii)
made generally available to the holders of such Deposited Securities by the
Company. The Depositary shall also send to the Owners copies of such reports
when furnished by the Company. Any such reports and communications furnished
to the Depositary by the Company shall be furnished in English.
On or before the first date on which the Company makes any communication
available to holders of Deposited Securities or any securities regulatory
authority or stock exchange, by publication or otherwise, the Company shall
transmit to the Depositary and the Custodian a copy of the notice thereof (in
English) in the form given or to be given to holders of Shares or other
Deposited Securities. The Depositary will, at the Company's expense, arrange
for the prompt mailing of copies thereof to all Owners. In connection with any
registration statement under the Securities Act relating to the ADRs or with
any undertaking contained therein, the Company and the Depositary shall each
furnish to the other and to the Commission or any successor governmental
agency such information as shall be required to make such filings or comply
with such undertakings. The Company has delivered to the Depositary, the
Custodian and any Transfer Office, a copy of all provisions of or governing
the Shares and any other Deposited Securities issued by the Company or any
affiliate of the Company and, promptly upon any change thereto, the Company
shall deliver to the Depositary, the Custodian and any Transfer Office, a copy
of such provisions as so changed. The Depositary and its agents may rely upon
the Company's delivery thereof for all purposes of the Deposit Agreement.
CHANGES AFFECTING DEPOSITED SECURITIES
Subject to the terms and conditions of the Deposit Agreement, the Depositary
may, in its discretion, amend the form of ADR or distribute additional or
amended ADRs (with or without calling the ADRs for exchange) or cash,
securities or property on the record date set by the Depositary therefor to
reflect any change in par value, split-up, consolidation, cancellation or
other reclassification of Deposited Securities, any Share Distribution or
Other Distribution not distributed to Owners or any cash, securities or
property available to the Depositary in respect of Deposited Securities from
(and, in the Deposit Agreement, the Depositary is authorized to surrender
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any Deposited Securities to any person and to sell by public or private sale
any property received in connect on with) any recapitalization,
reorganization, merger, consolidation, liquidation, receivership, bankruptcy
or sale of all or substantially all the assets of the Company, and to the
extent the Depositary does not so amend the ADR or make a distribution to
Owners to reflect any of the foregoing, or the net proceeds thereof, whatever
cash, securities or property results from any of the foregoing shall
constitute Deposited Securities and each ADS shall automatically represent its
pro-rata interest in the Deposited Securities as then constituted.
AMENDMENT AND TERMINATION OF DEPOSIT AGREEMENT
The ADRs and the Deposit Agreement may be amended by the Company and the
Depositary, provided that any amendment that imposes or increases any fees or
charges (other than stock transfer or other taxes and other governmental
charges, transfer or registration fees, cable, telex or facsimile transmission
costs, delivery costs or other such expenses), or that shall otherwise
prejudice any substantial existing right of Owners, shall become effective 30
days after notice of such amendment shall have been given to the Owners. Every
Owner of an ADR at the time any amendment to the Deposit Agreement so becomes
effective shall be deemed, by continuing to hold such ADR, to consent and
agree to such amendment and to be bound by the Deposit Agreement as amended
thereby. In no event shall any amendment impair the right of the Owner of any
ADR to surrender such ADR and receive the Deposited Securities represented
thereby, except in order to comply with mandatory provisions of applicable
law.
The Depositary may, and shall at the written direction of the Company,
terminate the Deposit Agreement and the ADRs by mailing notice of such
termination to the Owners at least 90 days prior to the date fixed in such
notice for such termination. After the date so fixed for termination, the
Depositary and its agents will perform no further acts under the Deposit
Agreement and the ADRs, except to advise Owners of such termination, receive
and hold (or sell) distributions on Deposited Securities and deliver Deposited
Securities as soon as practicable after the expiration of one year from the
date so fixed for termination. The Depositary shall sell the Deposited
Securities and shall thereafter (as long as it may lawfully do so) hold in a
segregated account the net proceeds of such sales, together with any other
cash then held by it under the Deposit Agreement, without liability for
interest, in trust for the pro rata benefit of the Owners not theretofore
surrendered. After making such sale, the Depositary shall be discharged from
all obligations in respect of the Deposit Agreement and the ADRs, except to
account for such net proceeds and other cash. After the date so fixed for
termination, the Company shall be discharged from all obligations under the
Deposit Agreement except for its obligations to the Depositary and its agents.
CHARGES OF DEPOSITARY
The Depositary may charge each person to whom ADRs are issued against
deposits of Shares, including deposits in respect of Share Distributions,
Rights and Other Distributions and each person surrendering ADRs for
withdrawal of Deposited Securities, $5.00 for each 100 ADSs (or portion
thereof) evidenced by the ADRs delivered or surrendered, and a fee of $.02 or
less per American Depositary Share (or portion thereof) for any cash
distribution made pursuant to the Deposit Agreement. The Company will pay all
other charges and expenses of the Depositary and any agent of the Depositary
(except the Custodian) pursuant to agreements from time to time between the
Company and the Depositary, except (i) stock transfer or other taxes and other
governmental charges (which are payable by Owners or persons depositing
Shares), (ii) cable, telex and facsimile transmission and delivery charges
incurred at the request of persons depositing, or Owners delivering, Shares,
ADRs or Deposited Securities (which are payable by such persons or Owners),
(iii) transfer or registration fees for the registration of transfer of
Deposited Securities on any applicable register in connection with the deposit
or withdrawal of Deposited Securities (which are payable by persons depositing
Shares or Owners withdrawing Deposited securities; there are no such fees in
respect of the Shares as of the date of the Deposit Agreement) and (iv)
expenses of the Depositary in connection with the conversion of foreign
currency into dollars (which are paid out of such foreign currency).
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LIABILITY OF OWNERS FOR TAXES
If any tax or other governmental charge shall become payable by or on behalf
of the Custodian or the Depositary with respect to the ADRs, any Deposited
Securities represented by the ADSs evidenced thereby or any distribution
thereon, such tax or other governmental charge shall be paid by the Owner
thereof to the Depositary. The Depositary may refuse to effect any
registration, registration of transfer, split-up or combination thereof or,
subject to the terms and conditions of the Deposit Agreement, any withdrawal
of such Deposited Securities until such payment is made. The Depositary may
also deduct from any distributions on or in respect of Deposited Securities,
or may sell by public or private sale for the account of the Owner thereof any
party or all of such Deposited Securities (after attempting by reasonable
means to notify the Owner thereof prior to such sale), and may apply such
deduction or the proceeds of any such sale in payment of such tax or other
governmental charge, the Owner thereof remaining liable for any deficiency,
and shall reduce the number of ADSs evidenced thereby to reflect any such
sales of Deposited Securities. In connection with any distribution to Owners,
the Company will remit to the appropriate governmental authority or agency all
amounts (if any) required to be withheld and owing to such author to or agency
by the Company; and the Depositary and the Custodian will remit to the
appropriate governmental authority or agency all amounts (if any) required to
be withheld and owing to such authority or agency by the Depositary or the
Custodian. If the Depositary determines that any distribution in property
other than cash (including Shares or rights) on Deposited Securities is
subject to any tax that the Depositary or the Custodian is obligated to
withhold, the Depositary may dispose of all or a portion of such property in
such amounts and in such manner as the depositary deems necessary and
practicable to pay such taxes, by public or private sale, and the Depositary
shall distribute the net proceeds of any such sale or the balance of any such
property after deduction of such taxes to the Owners entitled thereto.
GENERAL LIMITATIONS
The ADRs provide that the Depositary, the Company, their agents and each of
them shall: (i) incur no liability (a) if any present or future law,
regulation or any country or of any governmental or regulatory authority or
stock exchange, the provisions of or governing any Deposited Security, act of
God, war or other circumstance beyond its control shall prevent, delay or
subject to any civil or criminal penalty any act which the Deposit Agreement
or the ADRs provides shall be done or performed by it, or (b) by reason of any
exercise or failure to exercise any discretion given it in the Deposit
Agreement or the ADRs; (ii) assume no liability except to perform its
obligations to the extent they are specifically set forth in the ADRs and the
Deposit Agreement without gross negligence or bad faith; (iii) be under no
obligation to appear in, prosecute or defend any action, suit or other
proceeding in respect of any Deposited Securities or the ADR; or (iv) not be
liable for any action or inaction by it in reliance upon the advice of or
information from legal counsel, accountants, any person presenting Shares for
deposit, any Owner, or any other person believed by it to be competent to give
such advice or information. The Depositary, its agents and the Company may
rely and shall be protected in acting upon any written notice, request,
direction or other document believed by them to be genuine and to have been
signed or presented by the proper party or parties. The Depositary and its
agents will not be responsible for any failure to carry out any instructions
to vote any of the Deposited Securities, for the manner in which any such vote
is cast or for the effect of any such vote. The Depositary and its agents may
own and deal in any class of securities of the Company and its affiliates and
in ADRs. The Company has agreed to indemnify the Depositary and its agents
under certain circumstances and the Depositary has agreed to indemnify the
Company against losses incurred by the Company to the extent such losses are
due to the negligence or bad faith of the Depositary. Notwithstanding the
foregoing, no disclaimer of liability under the Securities Act is intended by
any provision of the ADRs.
Prior to the issue, registration, registration or transfer, split-up or
combination of any ADR, the delivery of any distribution in respect thereof,
or, subject to the terms and conditions of the Deposit Agreement, the
withdrawal of any Deposited Securities, the Company, the Depositary or the
Custodian may require: (i) payment with respect thereto of (a) any stock
transfer or other tax or other governmental charge, (b) any stock transfer or
registration fees in effect for the registration of transfers of Shares or
other Deposited Securities upon any applicable register, and (c) any
applicable charges as provided in the Deposit Agreement; (ii) the product on
of proof satisfactory to it of (a) the identity and genuineness of any
signature and (b) such other information,
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including without limitation, information as to citizenship, residence,
exchange control approval, beneficial ownership of any securities, compliance
with applicable law, regulations, provisions of or governing Deposited
Securities and terms of the Deposit Agreement and the ADRs, as it may deem
necessary or proper; and (iii) compliance with such regulations as the
Depositary may establish consistent with the Deposit Agreement. The issuance
of ADRs, the acceptance of deposits of Shares, the registration, registration
of transfer, split-up or combination of ADRs or, subject to the terms of the
Deposit Agreement, the withdrawal of Deposited Securities may be suspended,
generally or in particular instances, when the ADR register for Deposited
Securities is closed or when any such action is deemed advisable by the
Depositary or the Company.
GOVERNING LAW
The Deposit Agreement is governed by and shall be construed in accordance
with the laws of the State of New York.
THE DEPOSITARY
The Depositary is The Bank of New York, a New York banking corporation,
which has its principal office located in New York, New York. The Bank of New
York is a commercial bank offering a wide range of banking and trust services
to its customers in the New York metropolitan area, throughout the United
States and around the world.
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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 discussion of U.S. tax consequences is based on
the advice of Akin, Gump, Strauss, Hauer & Feld, L.L.P. and the discussion of
U.K. tax consequences is based on the advice of Masons.
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.
PROSPECTIVE PURCHASERS OF ADSS ARE STRONGLY ADVISED TO CONSULT WITH THEIR
OWN TAX ADVISORS WITH RESPECT TO THE CONTENTS OF THIS SUMMARY AND THE U.S.
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, THE U.K. TAX CONSEQUENCES AND TAX
CONSEQUENCES IN OTHER JURISDICTIONS, OF THE OWNERSHIP OF ADSS AND THE SHARES
REPRESENTED THEREBY AS APPLICABLE IN THEIR PARTICULAR TAX SITUATIONS.
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.
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
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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 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
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<PAGE>
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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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 (Pounds)1.50 per (Pounds)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 (Pounds)0.50 per transfer or at
the rate of (Pounds)1.50 per (Pounds)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 (Pounds)0.50
per (Pounds)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.
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UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement,
dated July 23, 1998 (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), Johnson Rice & Company L.L.C. and Southcoast Capital
L.L.C. are acting as representatives (the "Representatives"), have severally
agreed to purchase from the Company an aggregate of 8,000,000 ADSs. The number
of ADSs that each Underwriter has agreed to purchase is set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS ADSS
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation............. 4,305,000
Johnson Rice & Company L.L.C.................................... 922,500
Southcoast Capital L.L.C........................................ 922,500
Bear, Stearns & Co. Inc......................................... 100,000
BT Alex. Brown Incorporated..................................... 100,000
CIBC Oppenheimer Corp........................................... 100,000
A.G. Edwards & Sons, Inc........................................ 100,000
Howard, Weil, Labouisse, Friedrichs Incorporated................ 100,000
Lehman Brothers Inc............................................. 100,000
J.P. Morgan Securities Inc...................................... 100,000
Morgan Stanley & Co. Incorporated............................... 100,000
Prudential Securities Incorporated.............................. 100,000
Warburg Dillon Read LLC......................................... 100,000
Schroder & Co. Inc.............................................. 100,000
Smith Barney Inc................................................ 100,000
J.C. Bradford & Co.............................................. 50,000
Fahnestock & Co. Inc............................................ 50,000
Gaines, Berland Inc............................................. 50,000
Harris Webb & Garrison, Inc..................................... 50,000
Janney Montgomery Scott Inc..................................... 50,000
Edward D. Jones & Co., L.P...................................... 50,000
Legg Mason Wood Walker, Incorporated............................ 50,000
McDonald & Company Securities, Inc.............................. 50,000
Morgan Keegan & Company, Inc. .................................. 50,000
Parker/Hunter Incorporated...................................... 50,000
Pennsylvania Merchant Group..................................... 50,000
Raymond James & Associates, Inc................................. 50,000
Sands Brothers & Co., Ltd....................................... 50,000
---------
Total......................................................... 8,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the ADSs offered hereby are
subject to approval by their counsel of certain legal matters and to certain
other conditions. The Underwriters are obligated to purchase and accept
delivery of all the ADSs offered hereby (other than those shares covered by
the over-allotment option described below) if any are purchased.
The Underwriters initially propose to offer the ADSs in part directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and in part to certain dealers (including the Underwriters) at
such price less a concession not in excess of $0.31 per share. The
Underwriters may allow, and such dealers may re-allow, to certain other
dealers a concession not in excess of $0.10 per share. After the initial
offering of ADSs, the public offering price and other selling terms may be
changed by the Representatives at any time without notice. The Underwriters do
not intend to confirm sales to any accounts over which they exercise
discretionary authority.
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The Company has granted to the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of 1,200,000 additional ADSs at the
initial public offering price less underwriting discounts and commissions. The
Underwriters may exercise such option solely to cover overallotments, if any,
made in connection with the Offering. To the extent that the Underwriters
exercise such option, each Underwriter will become obligated, subject to
certain conditions, to purchase its pro rata portion of such additional shares
based on such Underwriter's percentage underwriting commitment as indicated in
the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
Each of the Company and its executive officers and directors has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any Shares, ADSs or ADRs or any
securities convertible into or exercisable or exchangeable for Shares, ADSs or
ADRs (including, without limitation, Shares, ADSs or ADRs or securities
convertible into or exercisable or exchangeable for shares, ADSs or ADRs which
may be deemed to be beneficially owned in accordance with the rules and
regulations of the SEC) or (ii) enter into any swap or other arrangement that
transfers all or a portion of the economic consequences associated with the
ownership of any Share, ADS or ADR (regardless of whether any of the
transactions described in clause (i) or (ii) is to be settled by the delivery
of Shares, ADSs or ADRs or such other securities, in cash or otherwise) for a
period of 180 days after the date of this Prospectus without the prior written
consent of DLJ. In addition, during such period, the Company has also agreed
not to file any registration statement with respect to, and each of its
executive officers and directors has agreed not to make any demand for, or
exercise any right with respect to, the registration of any Shares, ADSs or
ADRs, or any securities convertible into or exercisable or exchangeable for
Shares, ADSs or ADRs without DLJ's prior written consent.
Prior to the offering, there has been no established trading market for the
ADSs. The initial public offering price for the shares of ADSs offered hereby
will be determined by negotiation among the Company and the Representatives.
The factors to be considered in determining the initial public offering price
include the history of and the prospects for the industry in which the Company
competes, the past and present operations of the Company, the historical
results of operations of the Company, the prospects for future earnings of the
Company, the recent market prices of securities of generally comparable
companies and the general condition of the securities markets at the time of
the offering.
Application has been made to list the ADSs on the Nasdaq National Market. In
order to meet the requirements for listing the ADSs on Nasdaq, the
Underwriters have undertaken to sell to a minimum of 300 round lot holders.
Application will be made for the Shares represented by the ADSs to be admitted
for trading on the AIM.
Other than in the United States, no action has been taken by the Company or
the Underwriters that would permit a public offering of the shares of ADSs
offered hereby in any jurisdiction where action for that purpose is required.
The ADSs offered hereby may not be offered or sold, directly or indirectly,
nor may this Prospectus or any other offering material or advertisements in
connection with the offer and sale of any such ADSs be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of such jurisdiction.
Persons into whose possession this Prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the offering of
the ADSs and the distribution of this Prospectus. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any ADSs
offered hereby in any jurisdiction in which such an offer or a solicitation is
unlawful.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the ADSs.
Specifically, the Underwriters may overallot the offering, creating a
syndicate short position. The Underwriters may bid for and purchase ADSs in
the open market to cover such syndicate short position or to stabilize the
price of the ADSs. In addition, the underwriting syndicate may reclaim
61
<PAGE>
selling concessions from syndicate members if the syndicate repurchases
previously distributed ADSs in syndicate covering transactions, in
stabilization transactions or otherwise. These activities may stabilize or
maintain the market price of the ADSs above independent market levels. The
Underwriters are not required to engage in these activities, and may end any
of these activities at any time.
Each Underwriter has undertaken to the Company that (i) it has not offered
or sold and prior to the date six months after their date of issue will not
offer or sell any ADSs to persons in the United Kingdom except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which do not constitute an offer to
the public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied with and will comply with
all applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the ADSs offered hereby in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received
by it in connection with the offering to a person who is of a kind described
in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom the document
may otherwise lawfully be issued or passed on.
LEGAL MATTERS
Certain legal matters in connection with the offering made hereby are being
passed upon for the Company by Akin, Gump, Strauss, Hauer & Feld, L.L.P.,
special U.S. counsel for the Company, and Masons, English counsel for the
Company. Certain legal matters in connection with the Offering are being
passed upon for the Underwriters by Davis Polk & Wardwell, U.S. counsel for
the Underwriters. The validity of the Ordinary Shares represented by the ADSs
and certain other legal matters will be passed upon by Masons. Akin, Gump,
Strauss, Hauer & Feld, L.L.P. and Davis Polk & Wardwell may rely upon Masons
with respect to matters of English law in relation to such matters.
EXPERTS
The consolidated balance sheets as of December 31, 1995, June 30, 1996 and
1997 and March 31, 1998 and the consolidated statements of operations and cash
flows for each of the years ended December 31, 1994 and 1995, the six months
ended June 30, 1996, the fiscal year ended June 30, 1997 and the nine months
ended March 31, 1998 have been included herein and in the Registration
Statement in reliance upon the audit reports of Pannell Kerr Forster,
chartered accountants, appearing elsewhere herein, and upon the authority of
such firm as experts in accounting and auditing.
The estimates of net proved reserves of natural gas of the Company as of
April 1, 1998 included herein have been excerpted from, and included herein in
reliance upon, the report of Gaffney, Cline & Associates Ltd., an independent
petroleum engineering firm, and upon the authority of such firm as experts in
estimation of petroleum reserves.
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Statement of Directors' Responsibilities.................................. F-2
Report of Independent Public Accountants.................................. F-3
Consolidated Statements of Operations for the years ended December 31,
1994 and 1995, the six months ended June 30, 1996, the year ended June
30, 1997 and the nine months ended March 31, 1997 (unaudited) and 1998... F-4
Consolidated Balance Sheets as of December 31, 1995, June 30, 1996 and
1997 and March 31, 1998.................................................. F-5
Consolidated Cash Flow Statements for the years ended December 31, 1994
and 1995, the six months ended June 30, 1996, the year ended June 30,
1997 and the nine months ended March 31, 1997 (unaudited) and 1998....... F-6
Notes to the Consolidated Financial Statements............................ F-7
</TABLE>
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 31 March 1998, 30 June 1997 and 1996, and December 31, 1995,
and the related consolidated statements of operations and cash flows for the
years ended 31 December 1995 and 1994, the six months ended 30 June 1996, the
year ended 30 June 1997 and the nine months ended 31 March 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 31 March 1998, June 30, 1997 and 1996, and December 31,
1995, and the results of their operations and their cash flows for the years
ended 31 December 1995 and 1994, the six months ended 30 June 1996, the year
ended 30 June 1997 and the nine months ended 31 March 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 two years ended 31
December 1995 and 1994, the six months ended 30 June 1996, the year ended 30
June 1997 and the nine months ended 31 March 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
4 June 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>
NINE MONTHS ENDED
YEAR ENDED YEAR ENDED SIX MONTHS YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ENDED JUNE JUNE 30, -------------------------
NOTE 1994 1995 30, 1996 1997 1997 1998
----- ------------ ------------ ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
TURNOVER (REVENUE)--
CONTINUING............. 4 -- 4,701 173,701 11,127,164 5,490,338 34,921,839
--Discontinued....... 4 118,589 -- -- -- -- --
Cost of sales........... (127,327) -- (171,448) (10,872,238) (5,360,559) (33,634,538)
-------- ------- -------- ----------- ---------- -----------
GROSS PROFIT............ (8,738) 4,701 2,253 254,926 129,779 1,287,301
Depreciation and
amortization........... 11/12 (39,674) (2,858) (5,681) (141,850) (97,299) (301,608)
Administrative expenses. (55,367) (90,915) (492,199) (1,363,343) (1,036,849) (1,337,395)
-------- ------- -------- ----------- ---------- -----------
OPERATING LOSS--
CONTINUING............. 4 -- (89,072) (495,627) (1,250,267) (1,004,369) (351,702)
--Discontinued..... 4 (103,779) -- -- -- -- --
Exceptional items....... 9 168,191 -- (460,983) -- -- --
Interest income......... 7 4,081 24,029 65,417 189,071 156,776 84,572
Interest expense........ 7 (806) -- -- (120,397) (111,967) (158,975)
-------- ------- -------- ----------- ---------- -----------
(LOSS)/PROFIT ON
ORDINARY ACTIVITIES
BEFORE TAXATION........ 8 67,687 (65,043) (891,193) (1,181,593) (959,560) (426,105)
Tax on loss on ordinary
activities............. (9,000) 5,576 -- -- -- --
-------- ------- -------- ----------- ---------- -----------
RETAINED (LOSS)/PROFIT
FOR THE PERIOD......... 58,687 (59,467) (891,193) (1,181,593) (959,560) (426,105)
======== ======= ======== =========== ========== ===========
BASIC EARNINGS (LOSSES)
PER SHARE.............. 10 187.4 p (176.8)p (9.9)p (9.0)p (7.3)p (2.5)p
</TABLE>
Movements on reserves are set out in note 19.
There are no material differences between results calculated on an
historical cost basis and those reported above.
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,
DECEMBER 31, --------------------- MARCH 31,
NOTE 1995 1996 1997 1998
---- ------------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets........ 11 657,757 897,184 1,544,689 3,228,937
Tangible assets.......... 12 707,436 1,155,450 8,503,781 17,687,858
CURRENT ASSETS
Debtors:
Amounts due within one
year.................... 14 54,688 301,048 4,880,460 9,236,883
Investment............... 13 -- 4,300,154 -- --
Cash at bank and in hand. 1,633,183 1,341,204 1,923,005 992,244
--------- --------- ---------- -----------
1,687,871 5,942,406 6,803,465 10,229,127
CREDITORS
AMOUNTS FALLING DUE
WITHIN ONE YEAR......... 15 (69,336) (377,813) (3,956,441) (10,861,713)
--------- --------- ---------- -----------
NET CURRENT ASSETS....... 1,618,535 5,564,593 2,847,024 (632,586)
--------- --------- ---------- -----------
Total Assets less Current
Liabilities............. 2,983,728 7,617,227 12,895,494 20,284,209
CREDITORS
AMOUNTS FALLING DUE AFTER
MORE THAN ONE YEAR...... 16 -- (830,212) (5,937,925) (11,155,703)
--------- --------- ---------- -----------
NET ASSETS............... 2,983,728 6,787,015 6,957,569 9,128,506
========= ========= ========== ===========
CAPITAL AND RESERVES
Called up share capital.. 18 40,623 131,248 149,914 177,930
Capital reserve.......... 19 543,946 -- -- --
Share premium account.... 19 2,524,143 6,711,001 8,044,482 10,613,508
Profit and Loss account.. 19 (124,984) (55,234) (1,236,827) (1,662,932)
--------- --------- ---------- -----------
SHAREHOLDERS' FUNDS...... 20 2,983,728 6,787,015 6,957,569 9,128,506
========= ========= ========== ===========
</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 ENDED SIX MONTHS NINE MONTHS ENDED
DECEMBER 31, ENDED YEAR ENDED MARCH 31,
-------------------- JUNE 30, JUNE 30, -----------------------
1994 1995 1996 1997 1997 1998
--------- --------- ---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
RECONCILIATION OF
OPERATING (LOSSES) TO
NET CASH (OUTFLOW) FROM
OPERATING ACTIVITIES
Operating (loss)....... (103,779) (89,072) (495,627) (1,250,267) (1,004,369) (351,702)
Depreciation,
amortization and
result on asset sales. 39,674 2,858 3,875 146,991 97,299 301,608
Changes in debtors..... 139,467 (14,219) (246,360) (3,931,165) (2,737,018) (4,356,423)
Changes in creditors... (112,454) 8,437 229,938 2,695,153 1,029,883 2,958,318
Exchange movements..... -- -- 23,693 (39,535) (163,434) (1,241)
--------- --------- ---------- ---------- ---------- ----------
Net cash outflow from
operating activities.. (37,092) (91,996) (484,481) (2,378,823) (2,777,639) (1,449,440)
RETURNS ON INVESTMENTS
AND SERVICING OF
FINANCE
Interest received...... 4,081 24,029 41,724 189,071 155,336 81,524
Interest paid.......... (806) -- -- (80,862) (70,968) (653,006)
--------- --------- ---------- ---------- ---------- ----------
3,275 24,029 41,724 108,209 84,368 (571,482)
TAXATION
Tax paid............... -- (3,424) -- -- -- --
CAPITAL EXPENDITURE
Purchase of tangible
fixed assets.......... (425,744) (56,343) -- (3,759,500) (1,654,582) (6,764,254)
Purchase of intangible
fixed assets.......... (95,302) (316,600) (212,199) -- (351,030) (536,938)
Sale of tangible
assets................ 354,196 -- 6,000 -- -- --
--------- --------- ---------- ---------- ---------- ----------
(166,850) (372,943) (206,199) (3,759,500) (2,005,612) (7,301,192)
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 -- -- -- --
Proceeds from exercised
share options......... -- -- -- -- -- 170,000
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.............. 286,026 50,494 -- -- -- 1,000,000
New loans due in over
one year.............. -- -- -- -- -- 4,000,000
Loan repayments........ (33,852) -- -- -- -- (250,000)
Capital element of
finance lease
repayments............ -- -- (37,349) (440,386) (56,779) (242,470)
--------- --------- ---------- ---------- ---------- ----------
252,174 1,989,216 4,657,131 2,311,761 (56,779) 7,104,572
(Decrease)/increase in
cash in the period..... 51,507 1,544,882 (291,979) 581,801 (4,755,662) (2,217,542)
========= ========= ========== ========== ========== ==========
</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.
3. ACCOUNTING POLICIES
The financial statements are prepared in accordance with 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.
F-7
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 are 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 reconciles 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>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(i) Interim Financial Data
In the opinion of the management of the Company, the accompanying unaudited
financial statements are prepared in accordance with accounting principles
generally accepted in the United Kingdom ("UK GAAP") which differ in certain
respects from US generally accepted accounting principles ("US GAAP"). A
summary of the significant differences is set forth in Notes 29 and 30 to the
Consolidated Financial Statements. The unaudited financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of March 31, 1997, and
the results of operations and cash flows for the nine months ended March 31,
1997. The results of operations and cash flows for the nine months ended March
31, 1997, are not necessarily indicative of the results of operations or cash
flows reported for the remainder of fiscal 1997 or any subsequent period.
4. DISCONTINUED OPERATIONS
The Company was engaged in the oil and gas services business until March
1994 when the majority of the oil and gas services operational assets were
sold. The activities of this business are disclosed as a discontinued
activity.
5. DIRECTORS
Directors' Remuneration
<TABLE>
<CAPTION>
SIX YEAR NINE
MONTHS ENDED MONTHS
ENDED JUNE ENDED
JUNE 30, 30, YEAR ENDED JUNE 30, 1997 MARCH 31,
-------- ------- ------------------------------------- ---------
PENSION
1996 1997 SALARY FEES BENEFITS CONTRIBUTIONS 1998
-------- ------- ------- ------ -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
EXECUTIVE DIRECTORS
B. H. Keenan............ -- -- -- -- -- -- --
J. W. Jarrell........... -- -- -- -- -- -- --
J. L. Sulley............ 33,343 82,000 66,000 -- 6,100 9,900 61,500
W. E. Evans............. 2,120 5,700 -- -- 5,700 -- 4,275
Dr. R. E. Jones......... 7,864 74,800 60,000 -- 5,800 9,000 56,100
NON-EXECUTIVE DIRECTORS
R. W. Deakin............ 13,900 10,600 -- 10,600 -- -- 7,300
D. O. May............... 7,776 11,249 -- 11,249 -- -- 7,300
------ ------- ------- ------ ------ ------ -------
65,003 184,349 126,000 21,849 17,600 18,900 136,475
====== ======= ======= ====== ====== ====== =======
</TABLE>
The directors received no remuneration in the years ended December 31, 1995
and 1994.
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>
SIX YEAR NINE
YEAR ENDED MONTHS ENDED MONTHS
DECEMBER 31, ENDED JUNE ENDED
------------- JUNE 30, 30, MARCH 31,
1994 1995 1996 1997 1998
------ ------ -------- ------- ---------
<S> <C> <C> <C> <C> <C>
B. H. Keenan........................... -- -- 19,933 40,213 30,212
W. E. Evans............................ 14,521 24,000 22,601 44,983 33,750
J. W. Jarrell.......................... -- 1,282 13,269 25,133 18,882
J. L. Sulley........................... -- 3,000 -- -- --
------ ------ ------ ------- ------
14,521 28,282 55,803 110,329 82,844
====== ====== ====== ======= ======
</TABLE>
F-10
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, MARCH 31,
APPOINTMENT 1996 1997 1998
-------------- --------- --------- ---------
<S> <C> <C> <C> <C>
B. H. Keenan................. April 16, 1996 2,380,000 2,382,100 2,358,500
J. W. Jarrell................ April 16, 1996 180,200 180,300 137,300
J. L. Sulley................. April 16, 1996 60,000 60,000 60,000
W. E. Evans.................. April 16, 1996 5,600 5,600 5,600
Dr. R. E. Jones.............. April 16, 1996 60,000 60,000 60,000
R. W. Deakin................. April 16, 1996 68,200 68,200 68,200
D. O. May.................... April 16, 1996 50,000 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.
The ordinary shares in which R. W. Deakin has interests is held by Southern
Geophysical Pension Fund of which he is a beneficiary.
Directors Interests in Share Options
The Directors interests in share options as of March 31, 1998 are as
follows:
<TABLE>
<CAPTION>
NUMBER
EXERCISE OF
PRICE 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. 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
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
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
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>
F-11
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
No granted options have been exercised nor have any expired.
6. EMPLOYEES
(a) Employment costs (including executive directors) consist of:
<TABLE>
<CAPTION>
NINE
YEAR ENDED YEAR MONTHS
DECEMBER 31 SIX MONTHS ENDED ENDED
------------ ENDED JUNE JUNE 30 MARCH 31
1994 1995 30 1996 1997 1998
----- ----- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
Salaries and wages.............. -- -- 130,013 503,386 598,126
Social security costs........... -- -- 13,058 49,948 56,917
Other pension costs............. -- -- 17,363 66,216 74,028
----- ----- ------- ------- -------
-- -- 160,434 619,550 729,071
===== ===== ======= ======= =======
</TABLE>
(b) The average number employed during the periods were:
<TABLE>
<CAPTION>
NINE
YEAR ENDED YEAR MONTHS
DECEMBER 31 SIX MONTHS ENDED ENDED
------------ ENDED JUNE JUNE 30 MARCH 31
1994 1995 30 1996 1997 1998
----- ----- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
Administration and
management............. 8 6 1 2 3
Marketing and
development............ -- -- 8 13 21
----- ----- --- --- ---
8 6 9 15 24
===== ===== === === ===
</TABLE>
7. INTEREST RECEIVABLE AND PAYABLE AND SIMILAR INCOME AND EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED YEAR NINE MONTHS ENDED
DECEMBER 31 SIX MONTHS ENDED MARCH 31
------------ ENDED JUNE JUNE 30 ------------------
1994 1995 30 1996 1997 1997 1998
----- ------ ---------- ------- ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
(a) INTEREST RECEIVABLE AND
SIMILAR INCOME:
Interest receivable....... 4,081 24,029 41,724 186,431 155,336 78,452
Gain on currency conver-
sion...................... -- -- 23,693 -- -- 3,035
Other..................... -- -- -- 2,640 1,440 3,085
----- ------ ------ ------- ------- ------
4,081 24,029 65,417 189,071 156,776 84,572
===== ====== ====== ======= ======= ======
</TABLE>
F-12
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR NINE MONTHS ENDED
DECEMBER 31 SIX MONTHS ENDED MARCH 31 1998
------------ ENDED JUNE JUNE 30 -------------------
1994 1995 30 1996 1997 1997 1998
----- ----- ---------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
(b) INTEREST PAYABLE AND
SIMILAR EXPENSE:
Interest payable on
loans................... -- -- -- 70,417 70,968 145,379
Interest--other.......... 806 -- -- 10,445 -- 13,596
Loss on currency
conversion.............. -- -- -- 39,535 40,999 --
----- ----- --- ------- ------- -------
806 -- -- 120,397 111,967 158,975
===== ===== === ======= ======= =======
</TABLE>
8. PROFIT (LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION IS STATED AFTER
CHARGING:
<TABLE>
<CAPTION>
YEAR ENDED YEAR NINE MONTHS ENDED
DECEMBER 31 SIX MONTHS ENDED MARCH 31 1998
------------ ENDED JUNE JUNE 30 -------------------
1994 1995 30 1996 1997 1997 1998
------ ----- ---------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Amortization............... -- -- -- 37,692 28,269 138,057
Depreciation............... 39,674 2,858 5,681 104,158 69,030 163,551
Auditors' remuneration--
audit fee................. 1,900 4,500 9,000 10,500 9,000 15,000
Auditors' remuneration--
other..................... 275 -- -- 3,565 1,255 7,000
Operating lease rentals.... -- -- 28,630 109,039 82,790 86,396
</TABLE>
9. EXCEPTIONAL ITEMS
<TABLE>
<CAPTION>
YEAR ENDED YEAR NINE MONTHS
DECEMBER 31 SIX MONTHS ENDED ENDED MARCH 31
------------ ENDED JUNE JUNE 30 ----------------
1994 1995 30 1996 1997 1997 1998
------- ---- ---------- ------- ----------- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Profit on sale of fixed
assets....................... 164,858 -- -- -- -- --
Discounts on early repayment
of loan...................... 3,333 -- -- -- -- --
Impairment Loss............... -- -- (460,983) -- -- --
------- --- -------- --- --- ---
168,191 -- (460,983) -- -- --
======= === ======== === === ===
</TABLE>
The impairment loss 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.
10. 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--16,967,802; 1997--13,129,914; 1996--8,981,076; 1995--33,641;
and 1994--31,314. The effect of outstanding stock options and warrants is not
shown as it is antidilutive.
Nine months ended March 31, 1997 (unaudited) basic losses per share is based
on the weighted average number of ordinary shares in issue of 13,124,800.
No dividend is proposed.
F-13
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. FIXED ASSETS--INTANGIBLE
Intangible fixed assets are 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. The movement in the account during the periods were:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ----------------- MARCH 31,
1995 1996 1997 1998
------------ ------- --------- ---------
<S> <C> <C> <C> <C>
Cost
Beginning of period................. 341,157 657,757 897,184 1,582,381
Additions........................... 316,600 239,427 685,197 536,938
Transfer from fixed assets--
tangible........................... -- -- -- 1,285,367
------- ------- --------- ---------
End of Period....................... 657,757 897,184 1,582,381 3,404,686
======= ======= ========= =========
Accumulated amortization
Beginning of period................. -- -- -- 37,692
Charge for the period............... -- -- 37,692 138,057
------- ------- --------- ---------
End of Period....................... -- -- 37,692 175,749
======= ======= ========= =========
Net book value end of period.......... 657,757 897,184 1,544,689 3,228,937
======= ======= ========= =========
</TABLE>
No interest was capitalized in intangible cost.
F-14
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. FIXED ASSETS--TANGIBLE
<TABLE>
<CAPTION>
ASSETS IN
THE COURSE
OFFICE OF PLANT AND
EQUIPMENT CONSTRUCTION EQUIPMENT TOTAL
--------- ------------ --------- ----------
<S> <C> <C> <C> <C>
COST
At January 1, 1995.............. 4,263 637,394 15,748 657,405
Additions....................... -- 56,343 -- 56,343
------- ---------- --------- ----------
At December 31, 1995............ 4,263 693,737 15,748 713,748
Additions....................... 55,372 863,500 -- 918,872
Transfers....................... -- 15,748 (15,748) --
Impairment adjustment........... -- (463,084) -- (463,084)
Disposals....................... -- (7,339) -- (7,339)
------- ---------- --------- ----------
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....................... 164,902 10,458,955 9,138 10,632,995
Transfers....................... -- (7,292,051) 6,006,684 (1,285,367)
------- ---------- --------- ----------
At March 31, 1998............... 280,325 10,694,108 6,987,881 17,962,314
======= ========== ========= ==========
ACCUMULATED DEPRECIATION
At January 1, 1995.............. 457 -- 2,997 3,454
Charge for the year............. 609 -- 2,249 2,858
------- ---------- --------- ----------
At December 31, 1995............ 1,066 -- 5,246 6,312
Charge for the period........... 5,681 -- -- 5,681
Disposals....................... -- -- (3,145) (3,145)
Impairment adjustment........... -- -- (2,101) (2,101)
------- ---------- --------- ----------
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........... 39,502 -- 124,049 163,551
------- ---------- --------- ----------
At March 31, 1998............... 76,134 -- 198,322 274,456
======= ========== ========= ==========
NET BOOK VALUE
At January 1, 1995.............. 3,806 637,394 12,751 653,951
======= ========== ========= ==========
At December 31, 1995............ 3,197 693,737 10,502 707,436
======= ========== ========= ==========
At June 30, 1996................ 52,888 1,102,562 -- 1,155,450
======= ========== ========= ==========
At June 30, 1997................ 78,791 7,527,204 897,786 8,503,781
======= ========== ========= ==========
At March 31, 1998............... 204,191 10,694,108 6,789,559 17,687,858
======= ========== ========= ==========
</TABLE>
Interest was capitalized during the year ending December 31, 1995
((Pounds)5,494), year ending June 30, 1997 ((Pounds)33,672) and nine months
ending March 31, 1998 ((Pounds)591,435).
Assets in the course of construction includes leased assets totaling
(Pounds)4,383,327 and (Pounds)7,048,827 at June 30, 1997 and March 31, 1998
respectively.
Plant and equipment includes leased assets totaling (Pounds)946,100 at June
30, 1997 and March 31, 1998.
F-15
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Capital Commitments
The Company has capital commitments of:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ------------------- MARCH 31,
1995 1996 1997 1998
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Authorized but not contracted........ -- -- 5,317,000 5,000,000
Contracted but not provided.......... 450,000 47,920 -- 89,000
======= ========= ========= =========
13. FIXED ASSETS--INVESTMENTS
<CAPTION>
JUNE 30,
DECEMBER 31, ------------------- MARCH 31,
1995 1996 1997 1998
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Commercial paper..................... -- 4,300,154 -- --
======= ========= ========= =========
</TABLE>
Investments were made in commercial paper issued by "blue chip" companies in
order to safeguard assets whilst maintaining flexibility yet maximizing
returns in the six months ended June 30, 1996.
14. DEBTORS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ----------------- MARCH 31,
1995 1996 1997 1998
------------ ------- --------- ---------
<S> <C> <C> <C> <C>
Trade Debtors (Note 15)................ 5,524 80,396 2,930,964 5,268,581
Security Deposits (Note 15)............ -- -- 1,110,744 --
Sundry Debtors......................... -- -- 178,012 525,685
Other taxation and social security..... 35,524 178,634 183,242 982,484
Prepayments and accrued income......... 13,640 42,018 477,498 2,460,133
------ ------- --------- ---------
54,688 301,048 4,880,460 9,236,883
====== ======= ========= =========
</TABLE>
15. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ----------------- MARCH 31,
1995 1996 1997 1998
------------ ------- --------- ----------
<S> <C> <C> <C> <C>
Trade Creditors...................... 55,958 110,682 1,096,051 2,642,306
Bank overdraft facility.............. -- -- -- 1,286,781
Trade debtor financing............... -- -- 648,247 --
Other taxation and social security... 144 29,760 20,584 32,567
Corporation tax...................... -- -- -- --
Financing due within one year (Note
16)................................. -- 78,539 313,767 2,264,730
Accruals and deferred income......... 13,234 158,832 1,877,792 4,635,329
------ ------- --------- ----------
69,336 377,813 3,956,441 10,861,713
====== ======= ========= ==========
</TABLE>
The Company has working capital facilities available through its bank. At
March 31, 1998 these facilities consisted of a line of credit of
(Pounds)4,000,000 (none utilized); (Pounds)2,500,000 overdraft facility
((Pounds)1,286,781 utilized) and letter of credit to secure energy purchase
commitments and contract for differences to secure energy pricing
((Pounds)6,500,000 issued). These facilities are secured by a debenture on all
Company assets other than assets subject to other security agreements.
F-16
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At June 30, 1997 there was a balance outstanding of (Pounds)648,247 under a
similar debtor financing facility which was replaced in 1998 by the above
facilities.
16. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
DUE DUE BETWEEN DUE AFTER
WITHIN TWO & FIVE FIVE
TOTAL ONE YEAR YEARS YEARS
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995.................... -- -- -- --
========== ========= ========= =========
JUNE 30, 1996
Finance lease--Elswick............... 908,751 78,539 830,212 --
========== ========= ========= =========
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
========== ========= ========= =========
MARCH 31, 1998
Construction loan.................... 4,750,000 1,000,000 3,750,000 --
Finance lease--Elswick............... 711,940 83,811 628,129 --
Finance lease--five generators....... 3,960,671 490,918 2,485,517 984,236
Finance lease--three generators...... 2,597,822 690,001 1,542,688 365,133
Unsecured loan notes................. 1,400,000 -- 1,400,000 --
---------- --------- --------- ---------
13,420,433 2,264,730 9,806,334 1,349,369
========== ========= ========= =========
</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 (Pounds)4,383,327. The lease is
payable in 6 monthly payments of (Pounds)31,423 commencing 23 July 1997 and
then 78 monthly payments of (Pounds)69,734. The primary term of 7 years can be
extended indefinitely for an annual rent of (Pounds)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 (Pounds)2,665,500. The
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 rent of (Pounds)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 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 (Pounds)5,000,000 for five years with repayment in quarterly
payments of (Pounds)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 10.2%. At March 31, 1998 there was a balance outstanding
under the construction facility of (Pounds)4,750,000.
F-17
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. PROVISIONS FOR LIABILITIES AND CHARGES
Deferred taxation
No provisions have been made for deferred taxation in the periods up to
March 31, 1998.
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ----------------- MARCH
1995 1996 1997 31, 1998
------------ ------- -------- --------
<S> <C> <C> <C> <C>
Capital Allowances.................... -- 65,490 464,721 955,279
Other timing differences.............. -- -- (5,003) (5,003)
Losses offset......................... -- (65,490) (459,718) (950,276)
---- ------- -------- --------
-- -- -- --
==== ======= ======== ========
</TABLE>
At March 31, 1998 the Company had accumulated losses of approximately
(Pounds)8,300,000 to be relieved in the future, of which approximately
(Pounds)2,600,000 have been used to offset the above deferred tax liability.
There is no time limitation on using the accumulated losses for UK tax
purposes.
18. SHARE CAPITAL
a) Nine months ended March 31, 1998
<TABLE>
<S> <C>
AUTHORIZED:
28,000,000 ordinary shares of 1p each................................... 280,000
</TABLE>
In October 1997 the Authorized shares were increased to 28,000,000.
<TABLE>
<S> <C>
ISSUED AND FULLY PAID--ORDINARY SHARES OF 1P EACH
As at June 30, 1997..................................................... 149,914
Issued in the nine month period......................................... 28,016
-------
As at March 31, 1998.................................................... 177,930
=======
</TABLE>
In September 1997 2,631,579 ordinary shares were issued to raise equity and
in January to March 1998 170,000 ordinary shares were issued for exercise of
stock options.
b) Year ended June 30, 1997
<TABLE>
<S> <C>
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
=======
</TABLE>
In June 1997 1,866,648 ordinary shares of 1p each were issued to private
investors.
c) Six months ended June 30, 1996
<TABLE>
<S> <C>
AUTHORIZED:
20,000,000 ordinary shares of 1p each................................... 200,000
=======
</TABLE>
F-18
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
IEH was incorporated on March 12, 1996 with share capital of 100,000
(Pounds)1 ordinary shares. On May 21, 1996 the ordinary shares were sub-
divided into shares of 1p each and a further 10,000,000 ordinary shares were
authorized to increase the share capital to (Pounds)200,000.
<TABLE>
<S> <C>
ISSUED AND FULLY PAID
13,124,800 ordinary shares of 1p each.................................. 131,248
=======
</TABLE>
Two shares of (Pounds)1 each (now 200 shares of 1p each) were issued on
formation of IEH 8,124,600 shares of 1p each were issued to acquire IEUK,
1,772,524 ordinary shares of 1p each were issued to US private investors, and
3,227,476 ordinary shares of 1p each were issued to investors on The
Alternative Investment Market.
d) Year ended December 31, 1995
<TABLE>
<S> <C>
AUTHORIZED
1,000,000 ordinary shares of (Pounds)1 each........................... 1,000,000
=========
</TABLE>
IEUK was incorporated on March 15, 1995, with share capital of 1,000
(Pounds)1 ordinary shares. On 6 April 1995 the authorized share capital was
increased to (Pounds)1,000,000.
<TABLE>
<S> <C>
ISSUED AND FULLY PAID
40,623 ordinary shares of (Pounds)1 each................................. 40,623
======
</TABLE>
IEUK acquired through a merger, effective April 17, 1995, IPSCo, Eukan (a
subsidiary of IPSCo) and Elswick. This merger, including the acquisition of a
minority interest, resulted in the issue of 21,625 ordinary shares of
(Pounds)1 each for a total consideration of (Pounds)21,625, allocated as
follows:
Issue of 17,300 ordinary shares of (Pounds)1 each to acquire the entire
ordinary share capital of IPSCo.
Issue of 4,297 ordinary shares of (Pounds)1 each to acquire the entire
ordinary share capital of Elswick.
Issue of 28 ordinary shares of (Pounds)1 each to acquire the 5% minority
interest in Eukan Energy Limited, the remaining 95% being owned by IPSCo.
In conjunction with the merger, certain loan and trade creditors of Eukan
agreed to convert their debt into equity in IEUK which resulted in the issue
of 9,689 ordinary shares of (Pounds)1 each for a total consideration of
(Pounds)636,520.
In September 1995, a share offer resulted in the issue of 9,309 ordinary
shares of (Pounds)1 each for a total consideration of (Pounds)1,906,621.
F-19
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. RESERVES AND OTHER SHAREHOLDERS' FUNDS
As detailed in Note 2 the reporting entity changes from IEU Ltd to IEH plc
in the six months ended June 30, 1996. The closing reserves at December 31,
1995 represent the pre-acquisition reserves on the acquisition of IEU Ltd by
IEH plc and hence has been eliminated by acquisition accounting.
<TABLE>
<CAPTION>
PROFIT AND
SHARE CAPITAL LOSS
PREMIUM RESERVE ACCOUNT
---------- -------- ----------
<S> <C> <C> <C>
JANUARY 1, 1995............................. 68,493 -- (65,517)
Share premium arising on conversion of debt
to equity.................................. 626,831 -- --
Share premium arising on shares issued in
period..................................... 1,897,312 -- --
Total called up share capital and share pre-
mium of merger companies................... (68,493) 844,722 --
Issue of IEUK shares in exchange for shares
in Elswick, Eukan and IPSCo................ -- (21,625) --
Elimination of Eukan investment acquired
from IPSCo................................. -- (279,151) --
Retained loss for the year.................. -- -- (59,467)
---------- -------- ----------
AT DECEMBER 31, 1995........................ 2,524,143 543,946 (124,984)
========== ======== ==========
Share premium arising on share exchange for
the acquisition of IEUK.................... 2,066,523 -- --
Share premium arising on private US place-
ment....................................... 2,946,858 -- --
Share premium arising on the Alternative
Investment Market listing.................. 1,697,620 -- --
Retained loss for the period................ -- -- (55,234)*
---------- -------- ----------
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.................................... 168,300 -- --
Retained loss for the period................ -- -- (426,105)
---------- -------- ----------
AT MARCH 31, 1998........................... 10,613,508 -- (1,662,932)
========== ======== ==========
</TABLE>
- --------
* This amount represents the loss from the date of acquisition of June 1,
1996, due to application of acquisition accounting.
20. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, --------------------- MARCH 31,
1995 1996 1997 1998
------------ --------- ---------- ---------
<S> <C> <C> <C> <C>
New share capital subscribed for
by private placement (net of
issue costs)................... 1,906,621 2,964,584 1,352,147 2,427,042
Conversion of debt to equity.... 636,520 -- -- --
IPSCo share warrants............ 32,101 -- -- --
Exercise of stock options....... -- -- -- 170,000
New share capital subscribed for
by listing on the Alternative
Investment Market.............. -- 1,729,896 -- --
--------- --------- ---------- ---------
Other (losses)/gains............ 2,575,242 4,694,480 1,352,147 2,597,042
Profit/(loss) on ordinary activ-
ities after tax................ (59,467) (891,193) (1,181,593) (426,105)
Shareholders' funds at beginning
of period 467,953 2,983,728 6,787,015 6,957,569
--------- --------- ---------- ---------
Shareholders' funds at end of
period......................... 2,983,728 6,787,015 6,957,569 9,128,506
========= ========= ========== =========
</TABLE>
F-20
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. 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 3,533,400
ordinary shares of 1p each.
IEUK established a share option plan in April 1995. The options granted
under this plan were surrendered on May 31, 1996 when the Company became a
wholly owned subsidiary of IEH. IEH granted fresh options in their unapproved
option scheme on the basis of 200 ordinary shares of 1p each for every
(Pounds)1 ordinary share in IEUK.
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 170,000 share options were exercised in January to
March 1998 at an exercise price of 100 pence.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER OF
EXERCISE PRICE SHARES
-------------- ---------
<S> <C> <C>
At January 1, 1995.................................... -- --
Granted--April 1995................................... (Pounds)117.61 6,042
-------------- ---------
At December 31, 1995.................................. (Pounds)117.61 6,042
Granted--May 1996..................................... (Pounds)200.00 7,850
-------------- ---------
(Pounds)164.17 13,892
Surrendered May 31, 1996.............................. -- (13,892)
-------------- ---------
Granted May 31, 1996.................................. 82p 2,778,400
-------------- ---------
At June 30, 1996 and June 30, 1997.................... 82p 2,778,400
Granted--November 5, 1997............................. 122.5p 925,000
Exercised in the period............................... 100.0p (170,000)
-------------- ---------
AT MARCH 31, 1998..................................... 92p 3,533,400
============== =========
</TABLE>
The following table summarizes information regarding share options at March
31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT
EXERCISE PRICE MARCH 31, 1998 CONTRACT LIFE MARCH 31, 1998
-------------- -------------- ------------- --------------
<S> <C> <C> <C>
1p.............................. 295,200 2.75 295,200
31.25p.............................. 253,200 2.75 253,200
50p.............................. 60,000 2.75 60,000
100p.............................. 2,000,000 3.55 820,000
122.5p.............................. 925,000 4.72 --
--------- ---- ---------
3,533,400 3.72 1,428,400
========= ==== =========
</TABLE>
The option price range at each period end was as follows:
<TABLE>
<S> <C>
December 31, 1994....................................... --
December 31, 1995....................................... (Pounds) to (Pounds)200
June 30, 1996........................................... 1p to 100p
June 30, 1997........................................... 1p to 100p
March 31, 1998.......................................... 1p to 122.5p
</TABLE>
F-21
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Details of the director's options which are included in the above figures
are shown in Note 5 to the financial statements.
STOCK WARRANTS
On June 30, 1997 stock warrants for 140,000 ordinary shares were granted in
association with the issue of Loan Notes of (Pounds)1,400,000; the warrants
are exercisable at a price of 75p at anytime until their expiration on March
31, 2002.
During 1995 stock warrants for 2,500 shares issued in 1992 to the founders
and original directors of IPSCo were exercised at a price of US $20.00 per
share ((Pounds)12.84) or total of (Pounds)32,101.
22. 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.
23. COMPANY UNDERTAKINGS
Principal Operating Subsidiary at March 31, 1998 is:
<TABLE>
<CAPTION>
COUNTRY OF PERCENTAGE
NAME INCORPORATION SHAREHOLDINGS
---- ------------- --------------------
<S> <C> <C>
Independent Energy UK Limited................ England Ordinary shares 100%
</TABLE>
The following subsidiaries do not conduct any operations:
<TABLE>
<CAPTION>
COUNTRY OF PERCENTAGE
NAME INCORPORATION 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>
24. OBLIGATIONS UNDER OPERATING LEASES
The Company has operating lease rental commitments for agreements that
expire between two and five years, for which:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Amount due within 1 year--Land & Buildings.......... 31,331 54,542 187,837
--Other.................................. -- 50,642 61,561
</TABLE>
There were no operating lease rental commitments for the year ended December
31, 1995.
F-22
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
25. 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 March 31, 1998
the CFD in place covers the period from March 31, 1998, to October 25, 1998.
The CFD has a notional value at March 31, 1998 of (Pounds)13,430,000 for the
remaining volume covered by the contract. The CFD is settled monthly.
F-23
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
26. 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 December 31, 1995
Cash at bank and in hand..... 88,301 1,544,882 -- 1,633,183
Loan due within one year..... (586,026) (50,494) 636,520 --
---------- ---------- ---------- -----------
Net Debt..................... (497,725) 1,494,388 636,520 1,633,183
========== ========== ========== ===========
Six Months Ended June 30,
1996
Cash at bank and in hand..... 1,633,183 (291,979) -- 1,341,204
Leases due within one year... -- 37,349 (115,888) (78,539)
Leases due after more than
one year.................... -- (946,100) 115,888 (830,212)
Current asset investment..... -- 4,300,154 -- 4,300,154
---------- ---------- ---------- -----------
Net debt..................... 1,633,183 3,099,424 -- 4,732,607
========== ========== ========== ===========
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)
========== ========== ========== ===========
Nine Months Ended March 31,
1998
Cash at bank and in hand..... 1,923,005 (930,761) -- 992,244
Bank overdraft............... -- (1,286,781) -- (1,286,781)
---------- ---------- ---------- -----------
1,923,005 (2,217,542) -- (294,537)
Leases due within one year... (313,767) -- (950,963) (1,264,730)
Leases due after more than
one year.................... (4,537,925) 242,470 (1,710,248) (6,005,703)
Loans due within one year.... -- (1,000,000) -- (1,000,000)
Loans due after more than one
year........................ (1,400,000) (3,750,000) -- (5,150,000)
---------- ---------- ---------- -----------
Net debt..................... (4,328,687) (6,725,072) (2,661,211) (13,714,970)
========== ========== ========== ===========
</TABLE>
F-24
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
27. RECONCILIATION OF NET CASH FLOWS TO MOVEMENT IN NET DEBT
<TABLE>
<S> <C> <C>
Year Ended December 31, 1995
Increase in cash in the period...................................... 1,544,882
Cash inflow from increase in debt and lease financing............... (50,494)
Debt capitalized as shares.......................................... 636,520
----------
Movement in net debt................................................ 2,130,908
Net debt at December 31, 1994....................................... (497,725)
-----------
Net debt at December 31, 1995....................................... 1,633,183
===========
Six Months Ended June 30, 1996
Decrease in cash in the period...................................... (291,979)
Cash inflow from increase in debt and lease financing............... (908,751)
Cash outflow from increase in liquid resources...................... 4,300,154
----------
Movement in net debt................................................ 3,099,424
Net debt at December 31, 1995....................................... 1,633,183
-----------
Net debt at June 30, 1996........................................... 4,732,607
===========
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)
===========
Nine Months Ended March 31, 1998
Decrease in cash in the period...................................... (2,217,542)
Cash inflow from increase in loan financing......................... (4,750,000)
Cash inflow from net increase in lease financing.................... (2,418,741)
----------
Movement in net debt................................................ (9,386,283)
Net debt at June 30, 1997........................................... (4,328,687)
-----------
Net debt at March 31, 1998.......................................... (13,714,970)
===========
</TABLE>
28. MAJOR NON-CASH TRANSACTIONS
Detailed below are the major non-cash transactions.
YEAR ENDED DECEMBER 31, 1995
There were no major non-cash transactions in this year, other than reported
elsewhere herein.
SIX MONTHS ENDED JUNE 30, 1996
During the period the Company entered into finance lease arrangements in
respect of assets with a total capital value at the inception of the lease of
(Pounds)946,100.
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
(Pounds)4,383,327.
F-25
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED MARCH 31, 1998
During the period the Company entered into finance lease arrangements in
respect of assets with a total capital value at the inception of the lease of
(Pounds)2,665,500.
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 ENDED SIX MONTHS NINE MONTHS ENDED
DECEMBER 31, ENDED YEAR ENDED MARCH 31,
---------------- JUNE 30, JUNE 30, ----------------------
NOTE 1994 1995 1996 1997 1997 1998
---- ------ ------- ---------- ---------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(Loss)/Profit on
ordinary activities
after taxation under UK
GAAP................... 58,687 (59,467) (891,193) (1,181,593) (959,560) (426,105)
US GAAP Adjustments:
Stock based
compensation--Employee
Share Option Scheme (i) -- -- (110,715) (188,095) (141,070) (95,604)
------ ------- ---------- ---------- ---------- --------
Total US GAAP
Adjustments............ -- -- (110,715) (188,095) (141,070) (95,604)
Deferred income taxes (ii) -- -- -- -- -- --
------ ------- ---------- ---------- ---------- --------
Net effect of US GAAP
adjustments............ -- -- (110,715) (188,095) (141,070) (95,604)
------ ------- ---------- ---------- ---------- --------
Net (loss)/profit under
US GAAP................ 58,687 (59,467) (1,001,908) (1,369,688) (1,100,630) (521,709)
====== ======= ========== ========== ========== ========
Primary (loss) earnings
per ordinary share un-
der US GAAP (iii) 187.4 p (176.8)p (11.1)p (10.4)p (8.4)p (3.1)p
====== ======= ========== ========== ========== ========
</TABLE>
(b) Equity Reconciliation
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -------------------- MARCH 31,
NOTE 1995 1996 1997 1998
---- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Equity under UK GAAP........ 2,983,728 6,787,015 6,957,569 9,128,506
Stock based deferred compen-
sations (i) -- (110,715) (298,810) (394,414)
Deferred income taxes (ii) -- -- -- --
Acquisition Accounting (iv) -- -- -- --
--------- --------- --------- ---------
Net effect of US GAAP ad-
justments.................. -- (110,715) (298,810) (394,414)
--------- --------- --------- ---------
Equity under US GAAP (v) 2,983,728 6,676,300 6,658,795 8,734,092
========= ========= ========= =========
</TABLE>
F-26
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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, MARCH
1996 1997 31, 1998
---------- ---------- --------
<S> <C> <C> <C>
Net loss applicable to ordinary shares--as
reported................................. (1,001,908) (1,369,688) (521,709)
Net loss applicable to ordinary shares--
pro forma................................ (1,207,270) (1,460,869) (621,663)
Primary net loss per ordinary share--as
reported................................. (11.1)p (10.4)p (3.1)p
Primary net loss per ordinary share--pro
forma.................................... (13.4)p (11.1)p (3.7)p
</TABLE>
The fair value of each option grant is calculated using the following
weighted average assumptions.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1996
----------
<S> <C>
Expected life (years)................................................ 3.42
Interest rate........................................................ 6.00%
Volatility........................................................... 10.58%
Dividend yield....................................................... 0.00%
</TABLE>
(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.
The Company has significant losses amounting to approximately
(Pounds)8,300,000 at March 31, 1998, available to relieve future tax on
profits. There is no time limitation on using these losses for UK tax
purposes.
F-27
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
(Pounds)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 (Pounds)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:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ---------------------- MARCH 31,
NOTE 1995 1996 1997 1998
---- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period................... 467,953 2,983,728 6,676,300 6,658,759
Other (losses)/gains...... 20 2,575,242 4,694,480 1,352,147 2,597,042
Net (loss)................ (59,467) (1,001,908) (1,369,688) (521,709)
--------- ---------- ---------- ---------
Balance at end of period.. 2,983,728 6,676,300 6,658,759 8,734,092
========= ========== ========== =========
</TABLE>
30. ADDITIONAL US GAAP DISCLOSURE REQUIREMENTS
(a) Cash Flow Information
The consolidated cash flow statements are prepared in conformity with UK
GAAP areas set out on page F-6. The principal differences between these
statements and cash flow statements prepare under US GAAP are as follows:
F-28
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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>
YEAR ENDED SIX MONTHS NINE MONTHS ENDED
DECEMBER 31, ENDED YEAR ENDED MARCH 31,
------------------- JUNE 30, JUNE 30, -----------------------
1994 1995 1996 1997 1997 1998
-------- --------- ---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash (used in) operating
activities............. (33,817) (71,391) (442,757) (2,270,614) (2,693,271) (2,020,922)
Cash (used in)/provided
by financing activi-
ties................... 252,174 1,989,216 4,657,131 2,311,761 (56,779) 7,104,572
Cash (used in)/provided
by investing activi-
ties................... (166,850) (372,943) (4,506,353) 540,654 (2,005,612) (7,301,192)
-------- --------- ---------- ---------- ---------- ----------
Net increase/(decrease)
in cash and deposits
with banks............. 51,507 1,544,882 (291,979) 581,801 (4,755,662) (2,217,542)
Balance at beginning of
period................. 36,794 88,301 1,633,183 1,341,204 5,641,358 1,923,005
-------- --------- ---------- ---------- ---------- ----------
Balance at end of peri-
od..................... 88,301 1,633,183 1,341,204 1,923,005 885,696 (294,537)
======== ========= ========== ========== ========== ==========
</TABLE>
The effect of exchange rate change on cash balances held in foreign
currencies during the periods ended March 31, 1998, June 30, 1997 and 1996 and
December 31, 1995 and 1994 amounted to (Pounds)4,673, (Pounds)39,027,
(Pounds)(10,142), (Pounds)(2,143) and nil respectively.
(ii) The amount of taxes and interest paid, net of capitalized interest,
during the periods is:
<TABLE>
<CAPTION>
YEAR ENDED SIX
DECEMBER MONTHS YEAR NINE MONTHS ENDED
31, ENDED ENDED MARCH 31,
---------- JUNE 30, JUNE 30, -------------------
1994 1995 1996 1997 1997 1998
---- ----- -------- -------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Interest, net of capitaliza-
tion......................... 806 -- -- 80,862 70,968 158,975
Income taxes.................. -- 3,424 -- -- -- --
</TABLE>
F-29
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) Deferred Taxation
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -------------------- MARCH 31,
1995 1996 1997 1998
------------ -------- ---------- ----------
<S> <C> <C> <C> <C>
DEFERRED TAX LIABILITY
Non current
Fixed assets.................... -- 65,490 459,718 955,279
Current
Other........................... -- -- (5,003)
-------- -------- ---------- ----------
Total deferred tax liabilities.. -- 65,490 459,718 950,276
-------- -------- ---------- ----------
DEFERRED TAX ASSETS
Non current
Fixed asset..................... 1,045 -- -- --
Current
Losses.......................... 194,027 632,646 1,590,849 2,575,955
-------- -------- ---------- ----------
Total deferred tax assets....... 195,072 632,646 1,590,849 2,575,955
-------- -------- ---------- ----------
VALUATION ALLOWANCE............. (195,072) (567,156) (1,131,131) (1,625,679)
Net deferred tax asset Provided
under UK GAAP.................. -- -- -- --
-------- -------- ---------- ----------
US GAAP adjustment asset........ -- -- -- --
======== ======== ========== ==========
</TABLE>
(c) Other disclosures
Total liabilities, stockholders' equity and total assets were as follows:
<TABLE>
<S> <C>
December 31, 1995.................................................... 3,053,064
June 30, 1996........................................................ 7,995,040
June 30, 1997........................................................ 16,851,935
March 31, 1998....................................................... 31,145,922
</TABLE>
Total assets prepared in accordance with US GAAP were as follows:
<TABLE>
<S> <C>
December 31, 1995.................................................... 3,143,144
June 30, 1996........................................................ 8,333,378
June 30, 1997........................................................ 17,226,966
March 31, 1998....................................................... 31,536,121
</TABLE>
Long term liabilities prepared in accordance with US GAAP were as follows:
<TABLE>
<S> <C>
December 31, 1995.................................................... 90,080
June 30, 1996........................................................ 1,279,265
June 30, 1997........................................................ 6,611,766
March 31, 1998....................................................... 11,940,316
</TABLE>
F-30
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(d) Commitments Under Operating Leases
The Company's commitments under operating leases as at March 31, 1998 are as
follows:
<TABLE>
<S> <C>
Operating leases which expire:
1998.................................................................. 103,801
1999.................................................................. 77,049
2000.................................................................. 61,992
2001.................................................................. 58,892
2002.................................................................. 50,580
-------
352,314
=======
</TABLE>
Included in the above are subleases of (Pounds)5,250 for the years ending
March 31, 1999 to March 31, 2001 inclusive and (Pounds)1,750 for the year
ended March 31, 2002.
(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 March 31, 1998 is
(Pounds)13.4 million based on volume remaining under the CFD contract.
(f) Reconciliation of tax charge to statutory rate on losses
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -------------------- MARCH
1995 1996 1997 31, 1998
------------ -------- ---------- --------
<S> <C> <C> <C> <C>
(Loss) on ordinary activities be-
fore taxation.................... (65,043) (891,193) (1,181,593) (426,105)
======== ======== ========== ========
Expected tax (credit) charge at
the statutory rate............... (23,791) (293,131) (366,294) (132,093)
Increase in deferred tax liabili-
ty............................... (2,327) (65,490) (394,228) (490,558)
Actual tax charge on continuing
activities....................... -- -- -- --
-------- -------- ---------- --------
Difference to reconcile........... (23,791) (358,621) (760,522) (622,651)
======== ======== ========== ========
Deferred tax asset not recognized. (128,269) (437,574) (958,203) (985,107)
Intangible asset tax allowances... 104,478 79,011 212,411 416,115
Inadmissible expenditure.......... -- (58) (14,730) (53,659)
-------- -------- ---------- --------
(23,791) (358,621) (760,522) (622,651)
======== ======== ========== ========
</TABLE>
A reconciliation has not been provided for the year ended December 31, 1994
as all operations have subsequently been discontinued.
The Company has accumulated losses to be carried forward and relieved in the
future at the following period ends of:
<TABLE>
<S> <C>
March 31, 1998........................................................ 8,300,000
June 30, 1997......................................................... 5,100,000
June 30, 1996......................................................... 750,000
December 31, 1995..................................................... 149,000
</TABLE>
F-31
<PAGE>
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.
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).
G-1
<PAGE>
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
G-2
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFERING MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY INDEPENDENT ENERGY, THE UNDERWRITERS, OR ANY
OTHER PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HERE-
UNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF INDEPENDENT ENERGY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION OF AN OFFER TO BUY
ANY SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITA-
TION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITA-
TION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHO IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Service of Process and Enforcement of Liabilities......................... 3
Available Information..................................................... 4
Presentation of Certain Financial Information............................. 5
Prospectus Summary........................................................ 6
Risk Factors.............................................................. 11
Company Background and History............................................ 16
Use of Proceeds........................................................... 16
Exchange Rates............................................................ 17
Nature of Trading Market and Market Information........................... 18
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Dilution.................................................................. 21
Selected Consolidated Financial Data...................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Business and Properties................................................... 29
The Structure of the United Kingdom Electricity Industry.................. 37
Management................................................................ 40
Certain Relationships and Related Transactions............................ 42
Principal Shareholders.................................................... 43
Description of Share Capital.............................................. 44
Description of American Depositary Receipts............................... 48
Taxation.................................................................. 55
Underwriting.............................................................. 60
Legal Matters............................................................. 62
Experts................................................................... 62
Index to Consolidated Financial Statements................................ F-1
Glossary.................................................................. G-1
</TABLE>
------------
UNTIL AUGUST 17, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE ADSS, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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LOGO
[LOGO OF INDEPENDENT ENERGY HOLDINGS PLC]
8,000,000 AMERICAN DEPOSITARY SHARES
REPRESENTING 8,000,000
ORDINARY SHARES
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
JOHNSON RICE & COMPANY L.L.C.
SOUTHCOAST CAPITAL L.L.C.
JULY 23, 1998
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