<PAGE>
FILED PURSUANT TO RULE NO. 424(B)(4)
REGISTRATION NO. 333-85719
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PROSPECTUS
September 28, 1999
[Independent Energy Logo]
10,440,000 American Depositary Shares
Representing 10,440,000 Ordinary Shares
- -------------------------------------------------------------------------------
The Company: The Offering:
. We are the largest . Each ADS represents one of
independent marketer of our ordinary shares.
electricity in the United
Kingdom--a company not a . There is an existing trading
part of the government-owned market for the ADSs. The
electricity industry at the last reported sale price on
time of its privatization in Nasdaq on September 28, 1999
1990. was $16 3/8 per ADS.
. Independent Energy Holdings . We are offering 8,625,000
PLC ADSs and selling
Radcliffe House shareholders are offering
Blenheim Court 1,815,000 ADSs for resale.
Solihull, West Midlands You may also purchase
United Kingdom B91 2AA ordinary shares in lieu of
44-121-705-1111 ADSs at a price of 960p per
share, the last reported bid
Nasdaq Symbol: price on AIM on September
28, 1999.
. INDYY
. We will not receive any
proceeds from the sale of
ADSs by the selling
shareholders.
. We have granted the
underwriters an option to
purchase an additional
1,566,000 ADSs to cover
over-allotments.
. We plan to use the proceeds
from this offering for
general corporate purposes,
including working capital,
the expansion of our
operations and sales and
marketing capabilities,
investment in risk
management assets, and
possible acquisition of
other complementary
businesses.
. Closing: October 4, 1999.
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
Per ADS(1) Total(1)
--------------------------------------------------------------
<S> <C> <C>
Public offering price: $16.375 $170,955,000
Underwriting fees: 0.840 8,769,600
Proceeds to Independent Energy: 15.535 133,989,375
Proceeds to selling shareholders: 15.535 28,196,025
--------------------------------------------------------------
</TABLE>
(1) Assumes all ordinary shares are sold in the form of ADSs.
This investment involves risk. See "Risk Factors" beginning on page 6.
- -------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether
this prospectus is truthful or complete. Nor have they made, nor will they
make, any determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- -------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Prudential Securities
Johnson Rice & Company L.L.C.
<PAGE>
Description of Inside Front Cover
[LOGO OF INDEPENDENT ENERGY]
INDEPENDENT ENERGY
[MONTAGE OF PHOTOGRAPHS INCLUDING A CONTROL PANEL OPERATING GAS PRODUCTION
EQUIPMENT, GAS WELLHEADS, ELECTRICITY GENERATORS, CONTROL EQUIPMENT USED TO
OPERATE GENERATORS AND ELECTRICITY CONSUMERS.]
THE POWER TO CHOOSE
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Service of Process and Enforcement of Liabilities.......................... i
Where You Can Find More Information........................................ i
Forward-Looking Statements................................................. ii
Presentation of Information................................................ iii
Prospectus Summary......................................................... 1
Risk Factors............................................................... 6
Use of Proceeds............................................................ 14
Exchange Rates............................................................. 15
Nature of Trading Market and Market Information............................ 16
Dividend Policy............................................................ 17
Capitalization............................................................. 17
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business and Properties................................................... 26
Management................................................................ 37
Principal and Selling Shareholders........................................ 39
Description of Share Capital.............................................. 40
Description of American Depositary Receipts............................... 45
Taxation.................................................................. 54
Underwriting.............................................................. 59
Legal Matters............................................................. 62
Experts................................................................... 62
</TABLE>
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
We are registered and exist under the laws of England and Wales. All but two
of our directors and certain of our named experts are residents of the United
Kingdom or otherwise reside outside the United States. In addition, all or a
substantial portion of our directors' and experts' assets and all or
substantially all of our assets are located outside the U.S.
We have appointed an agent for service of process in the U.S., 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. Moreover, it may be
difficult to enforce against our directors, officers and experts judgments of
U.S. courts predicated upon our or their civil liability under the U.S. federal
securities laws. Our English solicitors, Masons, have advised us that there is
doubt as to the enforceability in England, whether by means of original action
or an action for the enforcement of a U.S. court's judgment, of civil
liabilities based upon U.S. federal securities laws.
We have appointed CT Corporation System, 1633 Broadway, New York, New York
10019, as our 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 us in a U.S. court arising
out of or related to or concerning the offering of ADSs or ordinary shares
under this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We file reports and other information with the Securities and Exchange
Commission. These reports and other information about us and our business can
be read and copied at the SEC's public reference room located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the SEC: 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. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Our filings are also
available to the public over the Internet at the SEC's web site at
http://www.sec.gov.
i
<PAGE>
We can "incorporate by reference" the information we file with the SEC,
which means that we can disclose important information to you by referring you
to those documents. The information incorporated by reference is considered to
be part of this prospectus. We are incorporating by reference our Annual Report
on Form 20-F for the fiscal year ended June 30, 1998 (File No. 0-23451) that
was filed with the SEC pursuant to the Securities Exchange Act of 1934.
In addition, we are also incorporating by reference any reports on Form
20-F, including any amendments thereto, that will be filed with the SEC and
certain reports that we designate on any Form 6-K that may be furnished to the
SEC prior to the completion of this offering. Any such reports will be
considered part of this prospectus and will automatically update and supersede
the information contained herein.
You may request a copy of any document incorporated by reference, at no
cost, by writing or telephoning us at Independent Energy Holding plc, Radcliffe
House, Blenheim Court, Solihull, West Midlands, United Kingdom B91 2AA,
011-44-121-705-1111.
In addition, we will furnish annual reports to The Bank of New York, a New
York banking corporation which has its principal office located in New York,
New York, as depositary for the ADRs. These annual reports will contain:
. a review of operations;
. annual audited consolidated financial statements;
. our independent chartered accountants' opinion about those statements;
and
. a reconciliation of net income (loss) and shareholders' equity to
earnings per ordinary share.
We will also furnish the depositary with quarterly reports for the first
three quarters of each fiscal year. These quarterly reports will include
unaudited interim consolidated financial information. The depositary will
arrange for the mailing of all reports to all record holders of ADSs. We will
also furnish to the depositary copies of all notices of shareholders' meetings
and other reports and communications that are distributed generally to our
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" beginning on page 45.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements regarding our 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 our expectations.
ii
<PAGE>
PRESENTATION OF INFORMATION
Our audited consolidated financial information as of June 30, 1998 and 1999
and for the fiscal years ended June 30, 1997, 1998 and 1999 contained elsewhere
in this prospectus is presented in conformity with generally accepted
accounting principles in the U.K., or U.K. GAAP, together with a reconciliation
of net income (loss) and shareholders' equity to generally accepted accounting
principles in the U.S., or U.S. GAAP.
We publish our financial statements in British pounds sterling ("(Pounds)"
or "pound"). One pound consists of one hundred pence (100p). In this
prospectus, we express currency amounts in pounds or in U.S. dollars ("$"). For
your convenience, we have included translations of certain pound amounts into
dollars. These translations are not 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 indicated, all
translations have been made at the rate of $1.58 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 on June 30, 1999. The Noon
Buying Rate on September 28, 1999 was $1.65 per (Pounds)l. See "Exchange Rates"
on page 15.
In this prospectus, "Independent Energy," "we," "us" and "our" refer to
Independent Energy Holdings plc, a corporation organized and existing under the
laws of England and Wales, and our consolidated subsidiaries, unless the
context indicates otherwise.
In connection with this offering, Donaldson, Lufkin & Jenrette Securities
Corporation in New York, in the case of ADSs, and Donaldson, Lufkin & Jenrette
International Securities in London, in the case of ordinary shares, may over-
allot or effect transactions on Nasdaq, in the case of ADSs, and the London
Stock Exchange, in the case of the ordinary shares, which stabilize or maintain
the market price of the ADSs and the ordinary shares at a level which might not
otherwise prevail on those exchanges. Such stabilizing, if commenced, may be
discontinued at any time.
iii
<PAGE>
PROSPECTUS SUMMARY
This summary highlights certain information from this prospectus and may
not contain all of the information that is important to you. You should read
carefully this entire prospectus and the documents to which we refer you.
The Company
Independent Energy is the largest independent marketer of electricity in
the United Kingdom-- a company not a part of the government-owned electricity
industry at the time of its privatization in 1990. We were founded to
capitalize on the market opportunities created by the deregulation of the
United Kingdom energy markets and have assembled a core management team with
extensive industry experience from a number of leading U.K. energy firms.
Since commencing electricity sales in April 1996, we have established
Independent Energy as a reputable, reliable alternative provider of
electricity. In February 1999, we also began marketing natural gas in the
U.K., primarily to our target market of light industrial, commercial and
public sector customers, many of which currently purchase our electricity. In
addition, we are evaluating opportunities created by the deregulation of
continental European energy markets in which we believe we can replicate our
business model.
We have experienced rapid growth over the past year in revenue, sales
volumes and customers:
. Our revenue increased by over 300% to (Pounds)246.9 million ($390.0
million) for the fiscal year ended June 30, 1999 from (Pounds)58.0
million ($91.6 million) for the fiscal year ended June 30, 1998.
. Our sales volumes also increased by over 300% from 1,410 GWh in fiscal
1998 to 5,940 GWh in fiscal 1999.
. As of June 30, 1999, we had over 83,400 electricity customers and 130
natural gas customers, compared to approximately 1,350 electricity
customers as of June 30, 1998. As of September 1, 1999, we had over
140,000 electricity customers and 180 natural gas customers.
. At September 1, 1999, we had annualized sales contracts in place for the
sale of electricity of approximately (Pounds)767 million ($1.2 billion)
up from approximately (Pounds)170 million ($268 million) at August of
last year. The amount of annualized sales contracts is based on our
estimate of annual revenue from our sales contracts in place at September
1, 1999, without regard to the renewal dates of these contracts.
. In fiscal 1999, only our third full year of marketing electricity, we
reported net income of (Pounds)4.0 million ($6.3 million), compared to a
net loss of (Pounds)185,000 ($292,300) for fiscal 1998.
U.K. Energy Market
The structure of the U.K. energy industry has undergone a period of rapid
and dramatic change over the past decade. The U.K. government began
deregulating the U.K. energy markets to introduce competition into the
generation and supply of electricity and the supply of natural gas. This
deregulation was carried out in phases with the final phase of electricity
deregulation being completed in May 1999 resulting in full competition in the
retail supply of electricity. Since May 1998, the natural gas supply market
has been fully deregulated. As a result, all consumers are able to
<PAGE>
choose their electricity and natural gas suppliers. As a licensed supplier of
both electricity and natural gas, we are able to supply electricity and natural
gas to industrial, commercial, public sector and domestic, or residential,
customers in direct competition with other energy suppliers.
According to industry publications, the U.K. electricity market consists of
approximately 2.2 million commercial and industrial consumers and 24.0 million
residential consumers with aggregate annual expenditures of approximately
(Pounds)15.6 billion ($24.6 billion). The U.K. natural gas market is comprised
of approximately 900,000 industrial and commercial users and 19.0 million
residential consumers with aggregate annual expenditures of approximately
(Pounds)7.2 billion ($11.4 billion), according to industry publications. We
principally target small to mid-sized commercial and light industrial consumers
with predictable usage patterns. We also target selected residential customers.
We estimate that consumers in our target U.K. electricity market and U.K.
natural gas market have aggregate annual expenditures of approximately
(Pounds)7.9 billion ($12.5 billion) and approximately (Pounds)3.5 billion ($5.5
billion), respectively.
Business Strategy
Our objectives are to expand our revenue base and to increase our operating
margins. We are pursuing these objectives through a business strategy comprised
of the following elements:
Expand Presence in U.K. We intend to further increase our presence in the
U.K. energy market by (1) selectively targeting new electricity and natural gas
customers and (2) cross-selling natural gas to our existing customer base.
. Electricity. We intend to continue to expand our customer base through
increased penetration of our targeted markets where we believe that we
can effectively compete on the basis of price and quality of service. We
have established Independent Energy as a reliable provider of electricity
in the U.K. and estimate that we currently have approximately 4.9% of
this market (based on revenues estimated from our annualized sales
contracts (as defined above) as a percentage of the total estimated U.K.
electricity market).
We intend to continue to capitalize on the relationships and marketing
channels of our strategic marketing partners to offer electricity as
part of a jointly packaged range of products, including the marketing of
electricity with natural gas from established natural gas suppliers--a
"dual fuel" product. Through focused marketing efforts, including direct
selling, targeted mailing and e-commerce, we expect to continue to
increase our customer base. We added new electricity customers at the
weekly average rate of over 7,000 new customers during the period June
1, 1999 to September 1, 1999.
. Natural Gas and Utility or Other Complementary Services. We believe that
significant opportunities exist to cost-effectively market additional
energy products and utility or complementary services to our electricity
customer base. To that end, we began sales of natural gas to our existing
customer base in February 1999, although such sales do not currently
constitute a significant portion of our total sales. We also believe that
there are additional opportunities to capitalize on the Independent
Energy brand name by offering utility or complementary services to
customers seeking to outsource their energy-related
2
<PAGE>
facilities management or other utility or complementary services. We may
pursue these objectives through acquisitions, joint ventures or other
such alliances.
Maintain Prudent Risk Management Practices. We generally enter into fixed
price sales contracts with customers for a stated period, typically one or two
years. However, most of our energy requirements are purchased on the spot
market at fluctuating prices. Therefore, we employ several mechanisms to reduce
our overall risk associated with fluctuating energy prices. Our risk management
practices include: (1) selectively targeting customers with relatively
predictable usage profiles; (2) entering into financial hedges, such as
contracts for differences, to effectively fix the cost of a significant portion
of our energy requirements; (3) self-generating a portion of electricity
requirements; (4) securing natural gas reserves; and (5) acquiring interests in
large generation facilities. By utilizing such risk management practices, we
believe we can balance our objective of profit maximization with acceptable
levels of risk.
As described above, our risk management practices include the internal
generation of a portion of our electricity requirements, either through
ownership of a series of small embedded generating plants, or through
investment in larger scale assets. We currently operate eight small embedded
generating plants with a capacity of 62 MW, with a further 45 MW currently
under construction. Our objective is to install generating facilities with
approximately 10 MW to 20 MW of aggregate capacity in each of the twelve local
distribution areas in England and Wales. By owning generating plants each with
less than 10 MW of capacity and selling the output directly to consumers within
the local distribution areas, we obtain certain cost advantages, including
avoidance of some Electricity Pool expenses, grid transportation charges and
distribution and transmission power losses. In addition, we intend to make
investments in some larger scale gas and/or generation facilities as part of an
enhanced risk management program.
Replicate Business Model in Selected Continental European Markets. The
European Union has required that each of its member countries deregulate its
electricity and natural gas markets. As of January 1999, each member country
had legislation in place to enable deregulation, as required by the European
Union. Only a few member countries, however, are actively implementing plans to
deregulate their energy markets. Our business model is based upon operational
flexibility, which includes outsourcing a substantial amount of our sales and
transaction processing functions. We believe that we can replicate our business
model in selected deregulated European markets.
We are currently considering opportunities to compete in Spain and Holland,
as these countries are expected to be the first to deregulate in continental
Europe in a similar manner to the U.K. The first phase of deregulation of the
Spanish electricity market commenced in January 1999, and allowed certain large
industrial consumers to select their electricity supplier. The next phase of
the Spanish electricity market's deregulation is expected to commence in
October 1999, and will open up to competition approximately 40% of the total
Spanish electricity market.
Leverage Management Expertise. We have built a management team with
extensive experience in the U.K. energy industry. Prior to joining Independent
Energy, Mr. John L. Sulley, Chief Executive of Independent Energy, held senior
management positions with National Power where he established its electricity
marketing and co-generation sales operations. Mr. Sulley also worked for
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, Midlands Electricity, BP Amoco and Total.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
The Offering:
By Independent Energy... 8,625,000 ADSs or ordinary shares
By the selling
shareholders........... 1,815,000 ADSs or ordinary shares
Ordinary shares to be
outstanding after this
offering................. 35,142,427(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" on page 49.
Use of Proceeds........... We will use the net proceeds from the offering for
general corporate purposes, including working
capital, expansion of our operations and sales and
marketing capabilities, investment in risk
management assets and possible acquisitions of
complementary businesses. We will not receive any
proceeds from the sales of the ADSs by the selling
shareholders. See "Use of Proceeds" on page 14.
Delivery of ADSs or
ordinary shares.......... A purchaser can take delivery of one ordinary
share in lieu of each ADS by notification to the
underwriters at the time of sale. See
"Underwriting" on page 59 and "Description of
American Depositary Receipt" on page 45. Delivery
of ordinary shares in lieu of ADSs is expected to
be made in book-entry form through Lloyds Bank
Registrars or in the United Kingdom on or about
October 4, 1999. Purchasers who choose to receive
ordinary shares in lieu of ADSs should consult
with their United Kingdom broker, selling agent or
counsel prior to undertaking any transaction to
dispose of ordinary shares prior to delivery of
such ordinary shares. See "Description of Share
Capital" on page 40 and "Taxation" on page 54.
Listing of ADSs........... The ADSs are listed on the Nasdaq National Market.
Nasdaq National Market
Symbol................... INDYY
</TABLE>
- --------------------
(1) Assumes no exercise of the underwriters' over-allotment option.
(2) Excludes 3,831,000 ordinary shares issuable pursuant to outstanding options
on June 30, 1999 that will not be exercised in connection with this
offering, and 10,000 ordinary shares issuable pursuant to outstanding
warrants on June 30, 1999. Also excludes up to 500,000 ordinary shares
issuable pursuant to options that the Board of Directors intends to grant
to senior management on or about the date of the offering. These options
will be exercisable at the offering price.
4
<PAGE>
Summary Consolidated Financial and Operating Data
The summary historical consolidated financial data for the three fiscal
years ended and as of June 30, 1999 are derived from our audited consolidated
financial statements included elsewhere in this prospectus. Our accountants
have audited these historical consolidated financial statements in accordance
with U.K. GAAP. U.K. GAAP differs in significant respects from U.S. GAAP. Notes
26 and 27 to our consolidated financial statements describe the principal
differences between U.K. GAAP and U.S. GAAP as they relate to us and provide a
reconciliation to U.S. GAAP of net income (loss) and total shareholders'
equity. The as adjusted balance sheet data have been adjusted to reflect our
sale of 8,625,000 ordinary shares in the form of ADSs at $16.375 per share and
the application of the estimated net proceeds of this offering. You should read
the summary financial data in conjunction with "Selected Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and notes appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------------------
1997 1998 1999 1999(1)
(in thousands, except per share and
operating data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
U.K. GAAP
Revenue................. (Pounds) 11,127 (Pounds) 57,989 (Pounds) 246,856 $ 390,032
Cost of sales........... 10,872 55,457 234,387 370,331
Administrative expenses. 1,363 1,696 4,530 7,157
Depreciation and
amortization........... 142 626 1,650 2,607
--------------- --------------- ---------------- ---------
Operating income (loss). (1,250) 210 6,289 9,937
Interest income
(expense), net......... (69) (395) (1,353) (2,138)
Income tax expense...... -- -- 929 1,468
--------------- --------------- ---------------- ---------
Net income (loss)....... (1,182) (185) 4,007 6,331
Income (loss) per
share--Basic........... (9.0)p (1.1)p 15.7p $ 0.25
- --Diluted............... (7.4)p (1.0)p 14.2p $ 0.22
Weighted average shares
outstanding--Basic..... 13,130 17,191 25,465 25,465
- --Diluted............... 15,908 19,318 28,255 28,255
U.S. GAAP
Revenue................. (Pounds) 11,127 (Pounds) 57,989 (Pounds) 246,856 $ 390,032
Net income (loss)....... (1,370) (321) 3,933 6,214
Income (loss) per
share--Basic........... (10.4)p (1.9)p 15.4p $ 0.24
- --Diluted............... (8.6)p (1.7)p 13.9p $ 0.22
Weighted average shares
outstanding--Basic..... 13,130 17,191 25,465 25,465
- --Diluted............... 15,908 19,318 28,255 28,255
Operating Data:
Electricity and natural
gas sales (GWh)........ 256 1,410 6,117 6,117
Customer sites (at end
of period)............. 324 1,350 83,630 83,630
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------------
Actual Actual(1) As Adjusted(2) As Adjusted(1)(2)
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
U.K. GAAP
Working capital......... (Pounds) 23,186 $ 36,634 (Pounds)106,664 $ 168,529
Total assets............ 137,541 217,315 198,981 314,390
Long-term liabilities... 19,220 30,368 19,220 30,368
Shareholders' equity.... 48,879 77,229 132,357 209,124
U.S. GAAP
Working capital......... (Pounds) 23,186 $ 36,634 (Pounds)106,664 $ 168,529
Total assets............ 137,943 217,950 199,383 315,025
Long-term liabilities... 20,056 31,688 20,056 31,688
Shareholders' equity.... 48,445 76,543 131,923 208,438
</TABLE>
- --------------------
(1) Translations into dollars in this table are solely for convenience and are
computed at the Noon Buying Rate on June 30, 1999 of $1.58 per (Pounds)l.
(2) Assumes all of the ordinary shares are sold in the form of ADSs.
5
<PAGE>
RISK FACTORS
You should carefully read this entire prospectus and, in particular, the
information in this section. Certain factors may negatively affect our plans or
projected results. Such factors are:
. success in implementing our business strategy;
. increases in our costs of energy;
. nature and extent of new competition; and
. changes in conditions in which we compete.
Many of such factors are beyond our control and our management.
We have a limited history of operating in the U.K. electricity and natural gas
supply markets and may not be successful in these markets.
We have a limited operating history in the U.K. supply market, having
commenced sales of electricity in April 1996 and natural gas sales in February
1999. Sales of natural gas do not currently comprise a material portion of our
revenue. Although initial consumer acceptance of our services has been
encouraging, we are unable to predict with certainty how consumer demand for
our services may develop over time.
Our future profitability depends on several factors:
. consumer acceptance of Independent Energy as an alternative supplier of
electricity and natural gas;
. our ability to supply electricity and natural gas at a reasonable cost;
. our ability to price our services competitively; and
. our ability to achieve necessary profit margins.
We may not be able to compete effectively because most of our competitors are
larger, well-capitalized and have better brand name recognition than
Independent Energy.
Our current competition in the electricity supply market consists of twelve
U.K. regional electricity companies, two Scottish integrated electricity
companies, three electricity generating companies, Centrica plc and a number of
independent suppliers. Many of these competitors have more experience, greater
financial and management resources and better name recognition than we do.
Centrica, a successor to a portion of the business formerly operated by BG plc,
has entered the electricity market in the past year. By taking advantage of its
relationship with its natural gas customers and the trade name British Gas,
Centrica has been able to acquire a sizable residential electricity customer
base and will continue to be a formidable competitor in the electricity market.
Our current competition in the natural gas supply market is comprised of
Centrica and a number of independent natural gas suppliers. Centrica currently
has approximately 39% of the industrial and commercial natural gas supply
market and approximately 77% of the residential natural gas supply market and
will likely continue to have significant market share for the foreseeable
future. All of our
6
<PAGE>
competitors have more experience, greater financial and management resources
and better name recognition in the natural gas market than we do.
We expect competition in the continental European markets that we plan to
enter to be strong. Consumers in these markets have not previously had a choice
in electricity or natural gas providers and may not be interested in changing
suppliers. We will face competition from large well-capitalized utilities and
energy companies, a number of which (1) have supplied these markets for
decades, (2) have established brand name recognition and (3) know the market
well. We also may face prejudices being a foreign competitor in these markets.
Furthermore, the number of suppliers in the markets in which we compete is
expected to increase. We cannot predict the extent to which new participants
will enter the markets in which we compete. Our business, financial condition
and results of operations could be materially and adversely affected if
additional competitors with greater resources than we have enter the industry.
Our operations are subject to government regulation which may adversely affect
us.
Our activities are subject to extensive laws and regulations regarding the
generation and supply of electricity and the supply of natural gas in the U.K.,
primarily by the U.K. Office of Gas and Electricity Markets, or OFGEM. These
laws and regulations and their interpretation and enforcement are subject to
change. Any change in the laws or regulations governing our business could
adversely affect our operations and profitability.
Since we own generating facilities, we are subject to OFGEM's regulations
affecting generating facilities. OFGEM requires that all facilities that exceed
100 MW sell their output to the Electricity Pool of England and Wales, or the
Electricity Pool, thereby reducing some of the cost efficiencies associated
with self-generation. If OFGEM were to extend that requirement to smaller
generating facilities such as ours, our operations and financial condition
could be adversely affected. Additionally, no new gas-fired generating plants
with capacities exceeding 10 MW may be constructed and operated in the U.K.,
absent special governmental approval. Our existing generating plants could face
additional or more stringent requirements in the future. If we fail to comply
with such laws and regulations, we could incur fines, or lose required permits.
Any such event could have a material adverse effect on us.
We cannot predict the effect of the proposed elimination of the Electricity
Pool on our business.
Proposed changes to the wholesale trading mechanisms for electricity in
England and Wales are scheduled to be implemented in 2000, subject to the
relevant changes in statutory legislation being made in Parliament. When
implemented, the changes will replace the Electricity Pool with a direct market
whereby suppliers will be required to contract directly with generators for
their required physical electricity volumes. The proposal also includes a
forward market and a short term/day ahead exchange (both of which are expected
to evolve based on the activity of current players and traders in the market).
The New Electricity Trading Arrangements, or NETA, will include the development
of a balancing market (where the long and short position of generators,
suppliers and traders will be closed out) and the system operator for this
balancing market will be the National Grid Company, which will retain its
obligation to ensure supply security standards are met. Settlement will also be
carried out based on the average bid or offer prices received by the system
operator for each (half
7
<PAGE>
hour) trading period for short, or long, volumes as appropriate. The "gate
closure" for the balancing market will initially be four hours ahead, but this
is anticipated to reduce over time as the system becomes more efficient.
We cannot presently predict with any certainty what effect the
implementation of a firm contracts market will have on our business.
Contracting directly with generators under long-term agreements will impose
additional risks. The inability of a generator to fulfill its obligations
timely, or at all, under a contract could affect the cost of meeting customer
demand. In a contracts market, we will generally be required to fix the price
at which we purchase energy from generators for the period of the contract.
Depending upon current market conditions, the fixed purchase price may exceed
the price at which we can resell electricity to our customers. Moreover, in a
firm contracts market, we would be required to contract directly with a number
of generating facilities, some of which are affiliated with electricity
suppliers with whom we directly compete.
We may not be able to successfully manage our growth.
Since we commenced electricity sales in April 1996, we have experienced
rapid revenue growth. We expect to continue to rapidly grow and develop in a
relatively short period of time. The development of our operations will depend
on, among other things, our ability to expand our customer base in the U.K.
electricity and natural gas markets and to enter new continental European
deregulated markets in a timely manner at reasonable costs. In addition, we
anticipate that our staff will grow to accommodate our increased customer base.
Increased staff may require continued development of our operating and
financial controls and may place additional stress on our management and
operational resources. If we are unable to manage this expected rapid growth
and development successfully, our operating results and financial condition
could be materially adversely affected. In order to handle this expected growth
in customers, we have outsourced a number of important functions, including
much of our billing processing and marketing efforts. We cannot be sure that we
will be able to control the quality and cost-efficiency of these services.
We may not be able to sustain our rapid growth rate.
Over the three years since we commenced sales of electricity, we have
experienced rapid growth in revenue and sales volumes. Although we are
expanding our product offerings and continue to increase our customer base, we
may not be able to increase our revenue and sales volumes at rates comparable
to the rates of growth that we experienced over the last three years.
Commodity price fluctuations may adversely affect our profitability.
Our business, generally, involves entering into fixed price contracts to
supply electricity and, to a lesser extent, natural gas to customers. We obtain
the electricity and natural gas to satisfy our obligations under such contracts
primarily by purchases from the U.K. spot market for these commodities. The
price of electricity and natural gas that we purchase can be volatile.
Accordingly, we are exposed to risk arising from differences between the fixed
price at which we sell electricity and natural gas to our customers and the
fluctuating prices at which we purchase these commodities.
8
<PAGE>
In order to mitigate this risk, we must effectively hedge such exposure. Our
ability to manage this risk at acceptable levels will depend, in part, on:
. targeting customers with predictable usage patterns and volumes;
. implementing and managing an appropriate financial hedging strategy; and
. physically hedging our energy requirements by controlling gas reserves
and generating a portion of the electricity we market.
Because our sales have been growing rapidly, a significant portion of our
sales contracts at any one time may not be protected by hedging contracts. Our
policy is to hedge a significant portion of our forecasted energy requirements.
Since the market for hedging instruments is currently not well-developed and is
relatively inefficient, hedging is very expensive. Further, during the warmer
months (May to September), prices of electricity and natural gas decrease and
are less volatile than in the colder months (October to April). As a result,
for the period from April to September 1999, our Board of Directors agreed to
relax our normal hedging policy during the warmer months when we believe we are
less exposed to increases in energy prices. We intend to reinstate our hedging
policy and thereby hedge a significant portion of our electricity costs
beginning October 1999 through the remainder of the fiscal year. If the spot
market prices of electricity or natural gas rises significantly, we could
sustain significant losses and our financial condition could be materially
adversely affected.
We recognize revenue from the sale of electricity and natural gas on a
monthly basis based on the volumes consumed by our customers and the contract
prices associated with such volumes. Customers are billed monthly, generally at
a fixed price for usage. Because the cost of electricity or natural gas
purchased from the spot market or third parties fluctuates throughout the term
of our sales contracts, we recognize gross profit related to sales on a pro
rata basis throughout the term of sales contracts based on our estimate of
gross profit margin for all sales contracts. The difference between the cash
cost of the electricity and natural gas and the estimated cost of sales is
accounted for as either an accrual for, or a deferral of, the cost of
electricity or natural gas and recorded on the balance sheet within current
assets or current liabilities, as the case may be. We review this estimate of
gross profit on a quarterly basis. Accordingly, to the extent we have not
adequately hedged our electricity or natural gas purchase requirements, such
reviews could reveal an operating loss that could have a material adverse
effect on our results of operations or financial condition.
Our proposed continental European operations may be expensive and unsuccessful.
As part of our business strategy, we intend to enter deregulated continental
European markets, such as Spain and Holland. We have no experience competing in
these markets as they are currently in the process of being deregulated.
Development of the skills necessary to compete in these markets may be more
difficult or take longer than we anticipate, especially due to language
barriers, currency exchange risks and the fact that the deregulation process
and infrastructure needed to deregulate energy markets is undeveloped. We will
also need to devote significant existing management resources to our
international expansion which could harm our operations in the U.K. Although we
outsource a number of our operating functions, we nevertheless expect to expend
a substantial amount of capital to open international offices and hire
international management, sales, marketing and support personnel. Accordingly,
if we are not successful in these markets, our operations and financial
condition could be adversely affected.
Moreover, international operations are subject to a variety of additional
risks that could harm our financial condition and operating results. These
risks include the following:
9
<PAGE>
. the inability of continental European countries to successfully
deregulate their energy markets;
. the impact of adverse economic conditions in European Union countries;
. fluctuations in currency exchange rates; and
. substantial regulation of these markets by the European Union, its member
countries and local authorities, even in a competitive deregulated
environment.
Potential future acquisitions could be difficult to integrate, disrupt our
business, dilute shareholder value and adversely affect our operating results.
We may acquire other businesses in the future, which may complicate our
management tasks. These acquisitions may be in utility services or other
business areas that, although complementary to our business, may be in areas in
which we currently do not compete and may not have prior management or
operating experience. We may need to integrate entirely new operations and
distinct corporate cultures. Such integration efforts may not succeed or may
distract our management from operating our existing business. Our failure to
manage future acquisitions successfully could seriously harm our operating
results. Further, our shareholders would be diluted if we finance the
acquisitions by issuing equity securities.
We will likely have significant additional financing requirements.
To date, we have financed our operations through (1) sales of equity
securities, (2) capital lease financing and (3) bank financing. Because we plan
to expand our U.K. market presence and to enter new markets in continental
Europe, we will likely require significant additional capital to expand our
marketing organization, increase our marketing efforts and install additional
electricity generating plants. We are not sure whether we can obtain those
funds on acceptable terms. Our inability to raise such funds would have an
adverse effect on our operations. If capital for planned expansion is not
available, we will have to reduce or eliminate our planned expansion. We may
also undertake additional equity offerings which could result in your ownership
in Independent Energy being diluted and a decrease in the value of your ADSs.
In July 1999, we entered into a new (Pounds)80 million one-year credit
facility with a syndicate of banks led by Barclays Bank PLC. However, we have
not satisfied all conditions precedent to borrowing under this facility. These
conditions precedent consist principally of restructuring our corporate
organization and transferring certain of our generation and resource assets and
liabilities to newly-formed wholly-owned subsidiaries. In the meantime,
Barclays Bank is underwriting our borrowings on an ad hoc basis. Although we
anticipate satisfying these conditions in September 1999, we cannot provide
assurance that we will meet this schedule or that the new credit facility will
become effective. If we are not able to obtain sufficient credit to finance our
working capital needs, our financial condition and operations would be
adversely affected.
We depend on our and third-party computer systems to process transactions with
our customers.
Operating in the energy supply business requires sophisticated computer
systems that can manage, control and transmit vast quantities of electronic
data in a cost-effective and reliable manner. Substantially all of our internal
computer systems are located at a single leased facility in Solihull, West
Midlands. Our systems and operations are vulnerable to damage and interruption
from fire,
10
<PAGE>
flood, power loss, telecommunications failure, vandalism, physical or
electronic break-ins, computer viruses, year 2000 issues or other disruptions
that could lead to delays in billing, loss of data or other events that could
harm our business and adversely affect our financial condition. In addition,
our systems are relatively new and may not be able to efficiently or
effectively handle our needs if our business continues to grow at a high rate.
For the small business and residential markets, we outsource to a third-
party service provider functions such as (1) handling customer inquiries and
other communications, (2) billing, (3) payment collection, (4) debt management
and (5) related operations. The systems of our service provider are subject to
all of the risks to our internal systems as described above. In addition, these
systems are largely outside our control.
In fiscal 1999, we experienced delays in registering new small business,
public authority, and residential customers and billing our existing small
business, public authority, and residential customers, in part due to third-
party computer software problems. The problem related to registering new
customers has been corrected. A plan has been put in place to address the
billing problem, through which we believe the billing problem is in the process
of being corrected. However, we cannot be sure that additional computer system
problems will not resurface. As a result of this billing problem, our cash flow
did not reflect approximately (Pounds)20 million of revenue that we recognized
for the fiscal year ended June 30, 1999. Any such problems could have a
material adverse effect on our operations or financial condition.
Our business could be affected by Year 2000 issues.
Year 2000 issues may adversely affect our business. Many currently installed
computer systems and software products are coded to accept only two-digit year
entries in the date code field.
Consequently, on or about January 1, 2000, many of these systems could fail
or malfunction because they may not be able to distinguish 21st century dates
from 20th century dates. As a result, computer systems and software used by
many companies, including us, our customers, our third-party service providers
and other participants in the energy markets that provide the infrastructure
required to deliver energy to consumers, may need to be upgraded to comply with
such Year 2000 requirements. Any failure on the part of our principal internal
systems or the systems on which we rely could seriously harm our business,
financial condition and operating results. For a more detailed description of
our Year 2000 assessment, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Readiness" on page 24.
We depend on key personnel that we may not be able to replace if they leave our
company.
Our continued success is highly dependent on the personal efforts and
abilities of our executive officers. We have entered into an employment
agreement with each of our executive officers and have obtained key man life
insurance for Messrs. Sulley, Keenan and Jones. Our operations and financial
condition could be adversely affected if any of our executive officers become
unable to continue in or devote adequate time to their present roles, or if we
are unable to attract and retain other skilled management personnel.
We are subject to significant environmental regulation that may adversely
affect our operations.
Our operations are subject to regulatory requirements relating to
environmental matters and health and safety. U.K. legislation and policy
regarding environmental matters and health and safety
11
<PAGE>
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 compliance associated with changes in environmental and health
and safety laws and regulations could require significant expenditures.
Breaches of such laws and regulations may result in the imposition of fines and
penalties, which may be material or result in our operations halting. In
addition, environmental and health and safety laws and regulations can increase
the cost of planning, designing, installing and operating generating plants. We
cannot be sure that these costs or the costs of complying with environmental
and health and safety laws and regulations will not have a materially adverse
effect on our financial condition or results of operations in the future or
will not exceed the amount of our investment in any joint ventures.
Operating generating plants involves many risks.
Our operation of generating plants involves many risks, including the
breakdown or failure of (1) power generation equipment, (2) pipelines, (3)
transmission lines or (4) other equipment or processes, fuel interruption and
performance below expected levels of output or efficiency. For the fiscal year
ended June 30, 1999, our generating plants produced 152 GWh, only 60% of our
budgeted output for the year. This shortfall was attributable in part to
mechanical failures of our generating equipment.
There are many risks associated with exploring for and producing natural gas.
Our natural gas operations are subject to all of the risks generally
relating to the exploration for and production of natural gas. These risks
include blowouts, fires and equipment failure. In addition, there are related
risks which can result in personal injuries, loss of life and property and
environmental damage.
We believe that we maintain adequate insurance with respect to our natural
gas operations in accordance with industry practice. However, in certain
circumstances, our insurance may not cover or be adequate to cover the
consequences of some events. The occurrence of an event that is not fully
covered by insurance could have a material adverse effect on our financial
position and results of operations. Moreover, we cannot be sure that we will be
able to maintain adequate insurance in the future at reasonable rates.
Exchange rate fluctuations and limited market liquidity could adversely affect
the price of your ADSs.
Fluctuations in the exchange rate between the pound and the dollar are
likely to affect the market price of your ADSs. Such fluctuations will also
affect the dollar conversion value of any cash dividends paid in pounds to the
depositary.
You should note that past performance of the market price of the ADSs is not
an indication of how the market price for the ADSs will perform in the future.
Furthermore, the market price of the ADSs could be subject to significant
fluctuations in response to various factors and events, including, among other
things, (1) the depth and liquidity of the trading market, (2) variations in
our operating results and (3) the difference between actual results and the
results expected by investors and
12
<PAGE>
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 in the future.
Future preemptive rights may not be available to ADS holders.
The United Kingdom Companies Act 1985, or Companies Act 1985, requires us,
whenever we issue new ordinary shares for cash, subject to limited exceptions,
to grant preemptive rights to all of our shareholders. These rights give our
shareholders the right to purchase a sufficient number of ordinary shares to
maintain their existing ownership percentage. Pursuant to shareholder approval,
any ordinary shares that we issue up to July 1, 2003, however, will not have
any preemptive rights attached to them.
In any event, we may not be able to offer preemptive rights to you if you
are a U.S. resident unless we file a registration statement under the
Securities Act registering the rights and underlying ordinary shares, or we can
rely on an exemption from the registration requirements of the Securities Act.
At the time of any rights offering, we will evaluate the costs and potential
liabilities associated with such registration statement. We will also consider
the indirect benefits of enabling you if you are a U.S. resident to exercise
any preemptive rights you may have. Prior to making the decision of whether to
file a registration statement, we will consider any other appropriate factor.
We cannot be sure that (1) we will file any registration statement, (2) the SEC
will declare such registration statement effective or (3) we will have an
exemption from registration.
To the extent you are unable to exercise such rights, the depositary will
attempt to sell your preemptive rights and distribute the net proceeds of the
sale to you. We cannot be sure that a secondary market for such rights will
exist or that the depositary can sell your rights at a net profit. A secondary
market for the sale of preemptive rights may develop if the subscription price
of the ordinary shares upon exercise of the rights is below the prevailing
market price of the ordinary shares. However, there can be no assurance both
that a secondary market in preemptive rights will develop in connection with
any future issuance of ordinary shares or, if such market does develop, a
premium will be recognized on such sale. If your rights cannot be sold, your
rights will expire and you will not realize any value from the grant of such
preemptive rights. In either case, your equity interests would be diluted
proportionately.
Shares becoming available for sale could adversely affect our stock price.
Sales of substantial amounts of ADSs or ordinary 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 this
offering, 35,142,427 ordinary shares will be outstanding and 3,831,000 will be
issuable pursuant to the exercise of outstanding options and warrants.
Moreover, we may issue additional shares and options and warrants to purchase
additional shares up to our maximum authorized capital of 50,000,000 ordinary
shares. Subject to an agreement that restricts the sale of ordinary shares by
our directors and the selling shareholders without the prior approval of
Donaldson, Lufkin & Jenrette Securities Corporation for 120 days following the
date of this Prospectus, all of the outstanding ordinary shares will be
eligible for public sale. Moreover, our Board of Directors has authority to
issue additional options to purchase ordinary shares without shareholder
approval.
13
<PAGE>
USE OF PROCEEDS
Assuming all of the ordinary shares are sold in the form of ADSs, we
estimate the net proceeds to Independent Energy from the offering will be
$131.9 million ($156.2 million if the underwriters' over-allotment option is
exercised in full), after deducting underwriting discounts and commissions as
well as other fees and expenses of the offering. We will use the net proceeds
from the offering for general corporate purposes, including working capital,
expansion of our operations and sales and marketing capabilities, investment in
risk management assets and possible acquisitions of complementary businesses.
We will not receive any proceeds from the sale of ADSs by the selling
shareholders.
We intend to use approximately (Pounds)22.0 million ($34.8 million) of the
net proceeds to repay a portion of the outstanding borrowings under our
revolving credit facility, which we use to fund our working capital
requirements. Borrowings under our revolving credit facility currently accrue
interest at LIBOR plus 1.2% (6.3% at August 18, 1999) and are due on demand.
We will maintain the remainder of the net proceeds in interest-bearing bank
accounts or invest the proceeds in short-term, investment grade securities
until we use them as described.
14
<PAGE>
EXCHANGE RATES
Our 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 ordinary shares traded on the U.K.
Alternative Investment Market, or AIM. Such fluctuations are likely to affect
the U.S. market price of the ADSs. Although we do not intend to pay cash
dividends in the foreseeable future, fluctuations in the exchange rate between
the pound and the dollar will also affect the dollar amounts you receive on the
depositary's conversion of cash dividends paid in pounds on the ordinary shares
represented by the ADSs. See "Description of American Depositary Receipts" on
page 45.
We have included, solely for your benefit, translations of certain pound
amounts into dollars at specified rates, or, if unspecified, at the Noon Buying
Rate in New York City for cable transfers on June 30, 1999 of $1.58 to
(Pounds)1. However, we are not representing that the pound amounts could have
been or could be converted into dollars at the indicated rate. On September 28,
1999, the Noon Buying Rate was $1.65 per (Pounds)1.
There are currently no U.K. foreign exchange control restrictions on the
payment of dividends on the ordinary 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. We did not use these rates in the preparation
of our consolidated financial statements and notes 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......................................... 1.66 1.66 1.71 1.61
1999 (through June 30)....................... 1.58 1.62 1.66 1.57
</TABLE>
- ---------------------
(1) The average of the Noon Buying Rates on the last business day of each full
month during the relevant period.
15
<PAGE>
NATURE OF TRADING MARKET AND MARKET INFORMATION
We completed our initial public offering in the U.S. of ADSs in July 1998.
Since July 24, 1998, the ADSs have been traded on the Nasdaq National Market.
Our ordinary shares began trading on the U.K. Alternative Investment Market, or
AIM, on May 31, 1996 and continue to trade on AIM currently. 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. We intend to seek
listing of our ordinary shares on the Official List of the London Stock
Exchange in the near future, although there can be no assurance that such
application for listing will be accepted.
The following table reflects the high and low sales price per ordinary
share, as reported on AIM from May 31, 1996 to July 23, 1998, and high and low
sales price per ADS as reported on the Nasdaq National Market since July 24,
1998.
<TABLE>
<CAPTION>
British U.S.
Pence Dollars(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............................... 508.8 282.6 8.31 4.75
Fourth quarter.............................. 612.3 278.0 10.25 4.75
1999
First quarter............................... 756.2 534.2 12.38 8.81
Second quarter.............................. 374.3 558.7 13.75 9.00
Third quarter (through September 28)........ 1049.1 824.2 17.31 13.25
</TABLE>
- ---------------------
(1) The reported high and low prices for the ordinary shares on AIM expressed
in pence have been translated into dollars for the period from May 31, 1996
to July 23, 1998 by converting that amount at the Noon Buying Rate on the
dates of such respective high and low prices. The reported high and low
prices for the ADSs on Nasdaq expressed in dollars have been translated
into pence for the period since July 24, 1998 by converting that amount at
the Noon Buying Rate on the dates of such respective high and low prices.
As of June 30, 1999, there were approximately 242 record holders of ordinary
shares. Persons with United States and Canadian addresses held of record 74.0%
of the outstanding ordinary shares.
On September 28, 1999, the last reported sales price on Nasdaq for the ADSs
was $16 3/8 per ADS and the AIM last reported bid price for the ordinary shares
was 960.0p per share.
The average daily trading volume for the ordinary shares for the years ended
December 31, 1996, 1997 and 1998 and for the six months ended June 30, 1999 was
14,959, 18,872, 70,071 and 38,802 respectively.
16
<PAGE>
DIVIDEND POLICY
We have never declared or paid any dividends on the ordinary shares.
Currently, we plan to retain all future earnings to finance future operations.
Moreover, under the Companies Act 1985, dividends may only be paid out of our
profits legally available for distribution. See "Description of Share Capital"
beginning on page 40.
CAPITALIZATION
The following table sets forth as of June 30, 1999 (1) the actual
consolidated capitalization of Independent Energy and (2) the consolidated
capitalization of Independent Energy as adjusted to give effect to the offering
and the application of estimated net proceeds of $131.9 million ((Pounds)83.5
million), assuming all of the ordinary shares are sold in the form of ADSs. You
should read this table 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 and notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
----------------------------------------------
(in thousands)
As
Actual As Adjusted(1) Adjusted(1)(2)
<S> <C> <C> <C>
Cash and cash equivalents(3).... (Pounds) 7,316 (Pounds) 68,756 $108,634
=============== =============== ========
Long-term debt (including
current portion):
Revolving credit facility(4).. (Pounds) 22,038 (Pounds) -- $ --
Construction facility......... 8,672 8,672 13,702
Capital leases................ 13,108 13,108 20,711
--------------- --------------- --------
Total long-term debt........ 43,818 21,780 34,413
Shareholders' equity(5)
Ordinary shares, nominal value
1p per share, 50,000,000
shares authorized, 26,273,027
shares issued and
outstanding.................. 263 349 551
Additional paid-in capital.... 46,030 129,422 204,487
Retained earnings............. 2,586 2,586 4,086
--------------- --------------- --------
Total shareholders' equity...... (Pounds) 48,879 (Pounds)132,357 $209,124
--------------- --------------- --------
Total capitalization............ (Pounds) 92,697 (Pounds)154,137 $243,537
=============== =============== ========
</TABLE>
- ---------------------
(1) Assumes all of the ordinary shares are sold in the form of ADSs.
(2) Translations into dollars in this table are solely for convenience and are
computed at the Noon Buying Rate on June 30, 1999 of $1.58 per (Pounds)l.
The Noon Buying Rate on September 29, 1999 was $1.65 per (Pounds)l.
(3) Includes (Pounds)6.7 million ($10.6 million) of restricted cash used to
secure a bank guarantee issued for our benefit. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" beginning on page 21.
(4) As of September 3, 1999, total borrowings under the revolving credit
facility were approximately (Pounds)32 million ($58.5 million). This
increase is the result of additional working capital requirements due to
the computer system problems affecting billing. See "Risk Factors--We
depend on our and third-party computer systems to process transactions with
our customers" on page 10.
(5) Excludes 4,075,400 ordinary shares issuable pursuant to outstanding options
as of June 30, 1999 and 10,000 ordinary shares issuable pursuant to
outstanding warrants on June 30, 1999. Also excludes up to 500,000 ordinary
shares issuable pursuant to options that the Board of Directors intends to
grant to senior management on or about the date of the offering. These
options will be exercisable at the offering price.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist you in understanding our
financial position as of June 30, 1999 and for the three fiscal years in the
period ended June 30, 1999. You should refer to our consolidated financial
statements and notes included elsewhere in this prospectus which contain
additional information to be read in conjunction with this discussion.
Our financial statements have been prepared in accordance with U.K. GAAP,
which differs in certain significant respects from U.S. GAAP. Notes 26 and 27
to the consolidated financial statements provide a description of the principal
differences between U.K. GAAP and U.S. GAAP as they relate to Independent
Energy, 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 as measured by volume of electricity sold and revenues. Since
commencing electricity sales in April 1996, we have established Independent
Energy as a reputable, reliable alternative provider of electricity. By
increasing our marketing efforts, we were able to substantially increase our
revenue and customer base. We increased our revenue from (Pounds)58.0 million
($91.6 million) for the fiscal year ended June 30, 1998 to (Pounds)246.9
million ($390.0 million) for the fiscal year ended June 30, 1999.
The final phase of deregulation of the supply segment of the U.K.
electricity market was completed in May 1999. Due primarily to delays in the
ability of the regional electricity companies to process the registration of
consumers that contracted to switch suppliers, we were not able to bring on
stream a substantial portion of the small business and residential customers
that contracted for our electricity as early in the fiscal year as planned. The
intervention of the U.K. regulatory authority, OFFER, the predecessor of OFGEM,
was necessary to resolve the problem and to get this market fully open by June
1999. Accordingly, only approximately 8% of our revenue for the fiscal year
ended June 30, 1999 consisted of electricity sales to small business and
residential customers, although we expect this segment of our target market to
grow as a percentage of total revenue.
In February 1999, we also began sales of natural gas to customers. For the
year ended June 30, 1999, however, sales of natural gas constituted less than
1% of our revenue. We expect natural gas sales to constitute a greater portion
of our revenue in the future.
We recognize revenue from the sale of electricity and natural gas on a
monthly basis based on the volume of electricity consumed by our 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 and natural gas purchased from the spot
market fluctuates throughout the term of sales contracts, we recognize gross
profit related to electricity and natural gas 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 is based on an estimate of the cost of
sales, which includes (1) the estimated cost of electricity and natural gas,
(2) the effects of hedging contracts designed to mitigate energy cost
fluctuations, (3) transmission and distribution costs, (4) commissions and (5)
all other costs of sales in supplying the energy. The difference between the
cash cost of the energy and
18
<PAGE>
the estimated cost of sales is accounted for as either an accrual for, or a
deferral of, the cost of energy and recorded on the balance sheet within
current assets or current liabilities, as the case may be. We reconcile the
difference between actual gross profit and estimated gross profit on a
quarterly basis. See "--Liquidity and Capital Resources" beginning on page 20,
and "Risk Factors-- Commodity price fluctuations may adversely affect our
profitability" beginning on page 8."
Because we generally sell electricity and natural gas at fixed prices and
purchase most of our energy at fluctuating prices, we are exposed to risk
arising from the difference between these prices. Our risk management practices
are comprised of three material elements:
. targeting customers that have relatively predictable demand and pattern
usage profiles;
. entering into contracts for differences to effectively fix the price of a
significant portion of our energy requirements purchased on the spot
market; and
. owning gas reserves and generating a portion of the electricity that we
supply to customers.
See "--Risk Management Activities" on page 20 and "Risk Factors--Commodity
price fluctuations may adversely affect our profitability" beginning on page 8
and "--We cannot predict the effect of the proposed elimination of the
Electricity Pool on our business" on page 7.
Results of Operations
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998
Revenue. Revenue for the fiscal year ended June 30, 1999 increased
(Pounds)188.9 million, or 325%, to (Pounds)246.9 million from (Pounds)58.0
million for the fiscal year ended June 30, 1998. This increase reflected a
substantial increase in the Company's sales volume of energy to 5,940 GWh in
fiscal 1999 from 1,410 GWh in fiscal 1998, a 321% increase, primarily as a
result of our increased marketing efforts.
Gross profit. Gross profit for the fiscal year ended June 30, 1999 increased
(Pounds)10.0 million, or 400%, to (Pounds)12.5 million from (Pounds)2.5 million
for the fiscal year ended June 30, 1998. As a percentage of revenue, gross
profit for fiscal 1999 was 5% compared to 4% for the fiscal 1998. This increase
was primarily due to our realizing higher gross margins because our cost of
electricity decreased by 4%.
Administrative expenses. Administrative expenses for the fiscal year ended
June 30, 1999 increased (Pounds)2.8 million, or 164%, to (Pounds)4.5 million
from (Pounds)1.7 million for the fiscal year ended June 30, 1998. However, as a
percentage of revenue, administrative expenses for fiscal 1999 were 2% compared
to 3% in fiscal 1998. This decrease resulted as our increase in revenue
substantially exceeded the increase in our administrative costs because we
outsource a substantial portion of our sales efforts and transaction
processing.
Depreciation and amortization. Depreciation and amortization for the fiscal
year ended June 30, 1999 increased (Pounds)1.0 million, or 160%, to (Pounds)1.6
million from (Pounds)626,000 for the fiscal year ended June 30, 1998. The
increase was attributable to depreciation related to five new generating plants
that were put into service in fiscal 1999.
Operating profit. Operating profit for the fiscal year ended June 30, 1999
increased (Pounds)6.1 million, to (Pounds)6.3 million compared to
(Pounds)210,000 for the fiscal year ended June 30, 1998. The increase was due
to increased sales volumes, increased gross profit and reduced administrative
expenses as a percentage of revenue as described above.
19
<PAGE>
Interest expense, net. Net interest expense was (Pounds)1.4 million for the
fiscal year ended June 30, 1999 compared to (Pounds)395,000 for the fiscal year
ended June 30, 1998. The increase in net interest expense for fiscal 1999 was
primarily attributable to increased interest expense associated with the
financing of new generating plants and increased interest expense associated
with having higher outstanding balances under our working capital facility as a
result of increased sales.
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997
Revenue. Revenue for the fiscal year ended June 30, 1998 increased
(Pounds)46.9 million, or 423%, to (Pounds)58.0 million from (Pounds)11.1
million for the fiscal year ended June 30, 1997. The increase reflected a
substantial increase in our sales volume of electricity to 1,410 GWh in fiscal
1998 from 257 GWh in fiscal 1997, a 449% increase, primarily as a result of
increased marketing efforts.
Gross profit. Gross profit for the fiscal year ended June 30, 1998 increased
(Pounds)2.3 million to (Pounds)2.5 million from (Pounds)255,000 for the fiscal
year ended June 30, 1997. As a percentage of revenue, gross profit for fiscal
1998 was 4% compared to 2% in fiscal 1997. This increase was primarily due to
the increase in electricity sales derived from our generated electricity, which
generally have higher margins. In fiscal 1998, we generated 58.5 GWh of
electricity compared to 7.1 GWh in fiscal 1997. In addition, the additional
electricity we generated in fiscal 1998 was from new larger plants at Trumfleet
and Caythorpe that produce electricity at lower costs, thereby further
increasing margins.
Administrative expenses. Administrative expenses for the fiscal year ended
June 30, 1998 increased (Pounds)300,000, or 24%, to (Pounds)1.7 million from
(Pounds)1.4 million for the fiscal year ended June 30, 1997. As a percentage of
revenue, administrative expenses for fiscal 1998 were 3% compared to 12% in
fiscal 1997 as our administrative expenses in fiscal 1997 reflected primarily
fixed costs which did not increase materially in fiscal 1998.
Depreciation and amortization. Depreciation and amortization expense for the
fiscal year ended June 30, 1998 was (Pounds)626,000 compared to (Pounds)142,000
for the fiscal year ended June 30, 1997. The increase was primarily the result
of depreciation related to two new generation plants that commenced operations
in fiscal 1998, one in December 1997 and one in March 1998.
Operating profit (loss). The operating profit for the fiscal year ended June
30, 1998 was (Pounds)210,000 compared to an operating loss of (Pounds)1.3
million for the fiscal year ended June 30, 1997. The reduction in the loss for
fiscal 1998 was due to increased sales volumes, increased gross profit and
reduced operating expenses as a percentage of revenue as described above.
Interest income (expense). The Company had net interest expense of
(Pounds)395,000 for the fiscal year ended June 30, 1998 compared to net
interest income of (Pounds)69,000 for the fiscal year ended June 30, 1997. The
change was primarily due to increased interest expense associated with debt
financing used for two new generating plants in fiscal 1998.
Liquidity and Capital Resources
Our principal uses of funds have been to:
. fund operating losses associated with being a development stage company;
20
<PAGE>
. fund working capital requirements; and
. fund capital expenditures, primarily the acquisition and installation of
gas-fired generating plants.
For the fiscal years 1997, 1998 and 1999, these activities utilized funds of
(Pounds)6.0 million, (Pounds)11.8 million and (Pounds)48.3 million,
respectively.
We have financed our funding requirements through a combination of equity
issuances, capital lease financings and bank borrowings. In July 1998, we
raised (Pounds)35.0 million in net proceeds in our initial public offering of
ADSs in the U.S.
In July 1999, we entered into a new one-year credit facility with a
syndicate of banks led by Barclays Bank PLC, which provides for aggregate
borrowings and letters of credit of (Pounds)80.0 million. However, we have not
satisfied all conditions precedent to borrowing under this facility. These
conditions precedent consist principally of restructuring our corporate
organization and transferring certain of our generation and resource assets and
liabilities to newly-formed wholly-owned subsidiaries. In the meantime,
Barclays Bank is underwriting our borrowings on an ad hoc basis. Although we
anticipate satisfying these conditions in September 1999, we cannot provide
assurance that we will meet this schedule or that the new credit facility will
become effective. This credit facility provides for:
. (Pounds)45.0 million in the aggregate comprised of (a) a revolving credit
facility that bears interest at a base rate or LIBOR plus 1.2% (6.3% at
June 30, 1999), and (b) letters of credit to secure obligations under
contracts for differences; and
. (Pounds)35.0 million in the form of letters of credit to secure energy
purchase obligations.
In addition, we have a (Pounds)9.5 million construction facility with
Barclays Bank that is payable in quarterly installments of (Pounds)250,000 plus
interest at LIBOR plus 2.5% (7.5% at June 30, 1999) over five years starting in
1997. Barclays Bank also provides us with an additional (Pounds)2.0 million for
miscellaneous letters of credit that we may require and has issued a bank
guarantee, currently in the amount of (Pounds)6.5 million, to secure our
obligations under a contract with a third-party service provider. We are
required to provide, and have provided, full cash collateral to secure this
bank guarantee.
As of June 30, 1999, our outstanding borrowings were (Pounds)22.0 million
under the revolving credit facility (and were approximately (Pounds)32 million
as of September 3, 1999) and (Pounds)8.7 million under the construction
facility. We had also utilized commitments to issue letters of credit in the
aggregate amount of (Pounds)21.2 million.
During our three years of supplying electricity in the medium-sized business
(over 100 kW) market, which represented 92% of our revenue in fiscal 1999, we
have established a solid track record with respect to timely billing of
customers and collection of customer accounts. However, in fiscal 1999, we
experienced delays billing our existing small business, public authority, and
residential customers, in part due to third-party computer software problems. A
plan has been put in place to address this billing problem, through which we
believe the problem is in the process of being corrected. However, we cannot be
sure that additional computer system problems will not resurface. As a result
of this billing problem, our cash flow did not reflect approximately (Pounds)20
million of revenue that we recognized for the fiscal year ended June 30, 1999.
Any further problems of this nature could have a material adverse effect on our
operations or financial condition.
21
<PAGE>
We have financed our generating plants primarily through capital leases. As
of June 30, 1999, our obligations under capital leases related to our
generating assets totaled (Pounds)13.1 million, of which (Pounds)1.6 million is
payable within one year and (Pounds)7.5 million comes due between one and five
years after June 30, 1999. These capital leases are secured by the assets
comprising the associated generating facility.
We estimate that we will need approximately (Pounds)40.0 million to fund the
acquisition or installation of generating plants currently under construction
or planned through March 2000. Equity financing represents approximately only
7% to 10% of our aggregate financing requirements for such generating plants.
In addition, we will continue to assess other opportunities to acquire or build
additional generating facilities.
We currently purchase substantially all of our electricity from the
Electricity Pool. The Electricity Pool requires that we pay them 28 days from
purchase. We bill our customers monthly, however, and receive payments on
average approximately 25 days later. As a result of these timing differences,
we must have significant working capital available. Unlike the current
electricity market, gas purchases (and transportation) are not settled on a
daily, but rather, monthly basis. Payment terms for purchases are generally
reflected in the gas supply agreements and therefore working capital
requirements for this sector are less onerous, being mainly affected by
customers' payment records rather than contract obligation.
In addition, during the colder months in the U.K. (October through April),
our energy prices are generally higher than the average annual prices. As a
result, during these months, our working capital needs increase to cover the
increased cost of energy. We have taken a number of measures to reduce our
working capital need during this time, including (1) encouraging customers to
adopt shorter billing and collection cycles and (2) utilizing direct debit as a
means of payment. As we expand our base of operations, we expect our working
capital needs to increase significantly.
We believe that the net proceeds from this offering, our credit facilities,
capital leases and debt financings of generating plants and cash generated from
our operations will be adequate to fund capital expenditure requirements and
working capital needs related to the expansion of our operations through at
least June 30, 2000.
Risk Management Activities
We are exposed to two principal risks associated with customer contracts:
. ""load shape" risk--the risk associated with a shift in the customer's
usage pattern, including absolute amounts demanded and the timing of
amounts demanded; and
. ""purchase'' price risk--the cost of purchased energy relative to the
price received from the supply customer.
Generally, load shape risk is managed by targeting customers with
predictable usage patterns, and the risk decreases as our portfolio of supply
customers in the supply market increases. We manage the energy price risk by
employing a variety of risk management tools, including (1) entering into
hedging instruments and (2) operating generating plants to produce a portion of
our required supply of electricity.
22
<PAGE>
As part of our risk management strategy, we enter into hedging instruments
primarily, contracts for differences. These are contracts between generators or
traders and suppliers that have the effect of fixing the price of electricity
or natural gas for a contracted quantity of energy over a specific time period.
Differences between the actual prices on the spot market and the agreed prices
give rise to payments between the parties to the particular contract for
differences. Our ability to manage purchase price risk depends, in part, on the
future availability of properly priced risk management mechanisms, such as
contracts for differences.
As of June 30, 1999 (assuming no renewal of contracts that will expire
during the period), we had sales contracts in place to supply an estimated
7,943 GWh of electricity through June 30, 2000 and we had contracts for
differences in place for the purchase of 2,679 GWh. Our aggregate commitment
under contracts for differences was (Pounds)68.6 million. As of September 1,
1999, we had sales contracts in place for 11,360 GWh of electricity through
June 30, 2000, and we had contracts for differences in place for the purchase
of 3,597 GWh for the period of September 1, 1999 to June 30, 2000. Our
aggregate commitment under such contracts for differences was (Pounds)108.6
million, and represented 32% of our estimated energy requirements through
fiscal 2000.
We have a normal policy of hedging a significant proportion of our total
sales, based on our estimate of electricity volumes from actual sales contracts
then in place. For the period from April to September 1999, our Board or
Directors agreed to relax this hedging policy in order to take advantage of the
traditionally lower, less volatile, energy prices during the summer months. We
intend to hedge a significant portion of our electricity costs by reinitiating
our normal policy with respect to hedging for the period beginning October 1999
through the remainder of the fiscal year.
Our generation of electricity also provides a hedge against electricity
price fluctuations since we are able to anticipate the cost of our self-
produced electricity and its cost has historically been less than our sales
prices. We estimate that our eight existing generating plants, and the three
plants under construction expected to be operating by the end of 1999, will
provide us with the capacity to produce up to 720 GWh of electricity for the
fiscal year ending June 30, 2000.
Reconciliation of U.K. GAAP to U.S. GAAP
Our 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
Independent Energy occurs with respect to accounting for variable employee
share options under our option program. Although we do not have a formal option
plan, we have granted options to acquire ordinary shares to substantially all
of our employees. Under U.K. GAAP, we do not recognize compensation cost
related to the option program as described below.
Under Accounting Principles Board ("APB") No. 25, compensation for services
received as consideration for Ordinary shares issued pursuant to the exercise
of options are recognized as the difference between the quoted market price of
the number of ordinary shares issuable pursuant to options at the measurement
date less the aggregate exercise price for ordinary shares issuable pursuant to
such options. Compensation cost related to the option program as determined
under U.S. GAAP would have been (Pounds)188,000, (Pounds)136,000 and
(Pounds)74,000 for the fiscal years ended June 30, 1997, 1998 and 1999,
respectively.
23
<PAGE>
Our net profit (losses) for the fiscal years ended 1997, 1998 and 1999 under
U.K. GAAP were (Pounds)(1.2 million), (Pounds)(185,000) and (Pounds)4.0
million, respectively. Under U.S. GAAP, we would have reported net losses of
(Pounds)l.4 million and (Pounds)321,000 for fiscal 1997 and 1998, respectively,
and net income of (Pounds)3.9 million for fiscal 1999.
You should read Notes 26 and 27 to the consolidated financial statements for
a description of these and other differences between U.K. GAAP and U.S. GAAP.
The Financial Accounting Standards Board periodically issues statements of
financial accounting standards. In August 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, which applies to all entities, requires derivative instruments to be
measured at fair value and recognized as either assets or liabilities on the
balance sheet. The statement, as amended by SFAS No. 137 is effective for
fiscal years beginning after June 15, 2000 with earlier application encouraged
but permitted only as of the beginning of any fiscal quarter beginning after
June 1998. Retroactive application is prohibited. We do not believe this
statement will have a material effect on our financial condition or results of
operations.
In April 1998, The Accounting Standards Executive Committee issued Statement
of Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities" which
requires all start-up and organizational costs to be expensed as incurred. It
also requires all remaining historically capitalized amounts to these costs
existing at the date of adoption to be expensed and reported as the cumulative
effect of a change in accounting principles. SOP 98-5 is effective for all
fiscal years beginning after December 31, 1998. The Company believes that the
adoption of SOP 98-5 for U.S. GAAP reporting purposes will not have a material
effect on its financial statements.
Year 2000 Readiness
Potential computer problems associated with the Year 2000 date change are an
issue for users of computer systems throughout the world, including systems
with embedded chips. We are dependent on our own systems and on those of our
key suppliers and customers. We do not believe that we face greater risks from
Year 2000 issues than other utility companies in the U.K.
We established a Year 2000 program in 1997 to manage the effects that Year
2000 issues may have on our operations. In addition to purchasing certain
diagnostic software, we hired an external computer consulting group to aid us
in the compliance process. The scope of our program covers all aspects of our
business.
Our approach concentrates on the following three main areas:
. working on and testing our internal systems through gathering inventory,
assessing criticality, prioritization and planning, testing and
remediation;
. understanding the Year 2000 readiness of our key suppliers and major
customers; and
24
<PAGE>
. modifying and developing contingency processes to reduce residual risk.
Our program focuses on IT systems, both corporate and desktop, non-IT
systems (embedded chip systems) including process monitoring and control,
business processes and business partners. We believe that we have identified
all hardware and software that is not Year 2000 compliant, and that we have
replaced all non-compliant hardware. We are currently reviewing contingency
plans, operational procedures, staffing issues and "worst case" scenarios. We
are currently finalizing compliance work on our systems, and this work is
planned to be completed well in advance of the end of 1999.
Our systems and operations are also dependent on products and services
provided by others. Our interdependence with other utilities are being reviewed
through the U.K. Y2K Utilities Forum and other forums and one-to-one meetings.
All other suppliers are being treated in accordance to our reliance on them.
Where appropriate, alternative suppliers may be appointed.
Our Year 2000 program has been carried out using our internal resources
where possible, supplier resources where appropriate and specialist contractors
where considered necessary. As of June 30, 1999, we had spent approximately
(Pounds)75,000 on our Year 2000 program. We estimate that the total cost of our
Year 2000 program will be approximately (Pounds)100,000.
We believe that our work on our own systems and equipment and review of our
critical suppliers means that we are taking all reasonable steps to minimize
the risks associated with Year 2000 issues. Based on our current knowledge, we
believe that, because of the anticipated short-term nature of any potential
interruptions, it is unlikely that Year 2000 issues will have a material impact
on our financial condition or operations. We cannot, however, be sure that (1)
the steps that we have taken will successfully minimize vulnerabilities of our
software and systems, or those of our suppliers, to the problems associated
with the transition to the Year 2000, (2) that disruptions to our business will
not occur or (3) that the costs associated with the advent of the Year 2000
will not be greater than anticipated.
25
<PAGE>
BUSINESS AND PROPERTIES
Overview
Independent Energy is the largest independent marketer of electricity in
the United Kingdom -- a company not a part of the government-owned electricity
industry at the time of its privatization in 1990. We were founded to
capitalize on the market opportunities created by the deregulation of the
United Kingdom energy markets and have assembled a core management team with
extensive industry experience from a number of leading U.K. energy firms.
Since commencing electricity sales in April 1996, we have established
Independent Energy as a reputable, reliable alternative provider of
electricity. In February 1999, we also began marketing natural gas in the
U.K., primarily to our target market of light industrial, commercial and
public sector customers, many of which currently purchase our electricity. In
addition, we are evaluating opportunities created by the deregulation of
continental European energy markets in which we believe our business model may
be replicated.
We have experienced rapid growth over the past year in revenue, sales
volumes and customers:
. Our revenue increased by over 300% to (Pounds)246.9 million ($390.0
million) for the fiscal year ended June 30, 1999 from (Pounds)58.0
million ($91.6 million) for the fiscal year ended June 30, 1998.
. Our sales volumes also increased by over 300% from 1,410 GWh in fiscal
1998 to 5,940 GWh in fiscal 1999.
. As of June 30, 1999, we had over 83,400 electricity customers and 130
natural gas customers, compared to approximately 1,350 electricity
customers as of June 30, 1998. As of September 1, 1999, we had over
140,000 electricity customers and 180 natural gas customers.
. At September 1, 1999, we had annualized sales contracts in place for the
sale of electricity of approximately (Pounds)767 million ($1.2 billion)
up from approximately (Pounds)170 million ($268 million) at August of
last year. The value of annualized sales contracts is based on our
estimate of annual revenue from our sales contracts in place at September
1, 1999, without regard to the renewal dates of these contracts.
. In fiscal 1999, only our third full year of marketing electricity, we
reported net income of (Pounds)4.0 million ($6.3 million), compared to
net loss of (Pounds)185,000 ($292,300) for fiscal 1998.
U.K. Energy Market
The structure of the U.K. energy industry has undergone a period of rapid
and dramatic change over the past decade. The U.K. Government began
deregulating the U.K. energy markets to introduce competition into the
generation and supply of electricity and the supply of natural gas. This
deregulation was carried out in phases with the final phase of electricity
deregulation being completed in May 1999 resulting in full competition in the
retail supply of electricity. Since May 1998, the natural gas supply market
has been fully deregulated. As a result, all industrial, commercial and
residential consumers are able to choose their electricity and natural gas
suppliers. As a licensed supplier of both electricity and natural gas, we are
able to supply electricity and natural gas to industrial, commercial, public
sector and domestic, or residential, customers in direct competition with
other energy suppliers.
26
<PAGE>
According to industry publications, the U.K. electricity market consists of
approximately 2.2 million commercial, industrial and public sector consumers
and 24.0 million residential consumers with aggregate annual expenditures of
approximately (Pounds)15.6 billion ($24.6 billion). The U.K. natural gas market
is comprised of approximately 900,000 industrial and commercial users and 19.0
million residential consumers with aggregate annual expenditures of
approximately (Pounds)7.2 billion ($11.4 billion), according to industry
publications. We principally target small to mid-sized commercial and light
industrial consumers with predictable usage patterns. We also target selected
residential customers. We estimate that consumers in our target U.K.
electricity market and U.K. natural gas market have aggregate annual
electricity expenditures of approximately (Pounds)7.9 billion ($12.5 billion)
and approximately (Pounds)3.5 billion ($5.5 billion), respectively.
The U.K. Electricity Market
The U.K. electricity market is comprised of approximately 2.2 million
commercial, industrial and public sector consumers and 24.0 million residential
consumers, with aggregate annual expenditures of approximately (Pounds)15.6
billion ($24.6 billion). 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
Consumers Volumes (pounds in
Consumer Size (peak usage) (in thousands)(1) (in TWh)(1) billions)(2)
<S> <C> <C> <C>
>1 MW(3)............................. 5 86.9 (Pounds) 2.68
100 kW-1 MW(3)....................... 55 57.9 2.29
20-100 kW............................ 1,247 37.7 1.74
10-20 kW(4).......................... 901 6.6 0.41
Residential(5)....................... 23,935 100.5 8.46
------ ----- -------------
Totals............................. 26,143 289.7 (Pounds)15.58
====== ===== =============
</TABLE>
- ---------------------
Source: U.K. Office of Gas and Electricity Markets' Supply Price Review, June
1999, and MarketLine International ("MarketLine"), Industrial Electricity 1998.
(1) Figures obtained from either OFGEM or MarketLine as detailed below.
(2) Figures obtained by multiplying annual electricity volumes (in
terawatthours) by average nominal cost of electricity (in pence per kWh)
for 1995/1996. These figures are estimates only. Actual annual expenditures
may vary depending on the average nominal cost of electricity.
(3) Marketline UK Industrial Electricity 1998.
(4) Marketline UK Electricity Domestic and Commercial 1996.
(5) OFGEM Review & Domestic and Small Business Electricity Supply Price
Regulation June 1999, Table 1.
Within the U.K. electricity market, we target consumers at the lower end of
the >1 MW range and all of the 100 kW-1 MW range. We also selectively target
approximately 400,000 commercial consumers with peak demand usage of 20 kW to
100 kW and approximately 16.5 million residential and commercial consumers with
peak demand usage of less than 20 kW. We estimate that these markets have
aggregate annual electricity expenditures of approximately (Pounds)7.9 billion
($12.5 billion).
27
<PAGE>
The U.K. Natural Gas Market
The U.K. natural gas market is comprised of approximately 900,000 industrial
and commercial consumers and 19.0 million residential consumers, representing
711,300 GWh of annual consumption, and aggregate annual expenditures of
approximately (Pounds)7.2 billion ($11.4 billion). The following table sets
forth a breakdown of the U.K. natural gas market by consumer category and size,
annual consumption and annual expenditures.
U.K. NATURAL GAS MARKET
<TABLE>
<CAPTION>
Estimated
Annual
Number of Total Expenditures
Consumers Consumption (pounds in
Consumer Size (peak usage) (in thousands) (in TWh) billions)(1)
<S> <C> <C> <C>
Business ( 732 MWh)...................... 46 285.5 (Pounds)1.76
Small Business (73.2--732 MWh)........... 349 65.5 0.69
Residential and Very Small Business (
73.2 MWh)............................... 19,705 360.3 4.79
------ ----- ------------
Totals................................. 20,100 711.3 (Pounds)7.24
====== ===== ============
</TABLE>
- ---------------------
Source: Marketline International, UK Domestic and Commercial Gas Market Survey,
1999, and UK Domestic Gas Market Survey, 1999.
(1) Figures obtained from Marketline UK Industrial and Commercial Gas Report,
1999, and UK Domestic Gas Report, 1999.
(2) Figures obtained by multiplying annual gas volumes (in TWh) by average
nominal cost of natural gas (in pence per kWh). For domestic and very small
business consumers, 1999 prices determined from Marketline UK Domestic Gas
Report, 1999, average of Normal Pay and Direct Debit prices charged by
independent suppliers. For business consumers, October 1997 prices
determined from OFGAS Competitive Market Review, May 1998.
We specifically target natural gas consumers at the lower end of the 732
MWh range and all of the 73.2-732 MWh range. We estimate this market includes
approximately 850,000 non-residential consumers. We also intend to selectively
target approximately 13.5 million residential consumers with usage of 73.2
MWh. We estimate that these markets have aggregate annual natural gas
expenditures of approximately (Pounds)3.5 billion ($5.5 billion).
Continental European Energy Markets
We believe that significant opportunities exist to market and supply
electricity and natural gas in continental Europe. The European Union has
required each of its member countries to deregulate its proposed electricity
and natural gas markets. As of January 1999, each member country had
legislation in place to enable deregulation, as required by the European Union.
Only a few member countries, however, are actively implementing a plan to
deregulate their energy markets. Of such countries, Spain and Holland are
rapidly moving toward full deregulation in a similar manner to the U.K. and we
intend to compete in those markets.
In January 1999, the Spanish government commenced deregulation of the
Spanish electricity and natural gas supply markets, permitting certain large
industrial consumers to select their electricity supplier. The next phase of
deregulation is expected to commence in October 1999, and will allow consumers
with annual consumption in excess of 1.0 GWh to choose their electricity
supplier.
28
<PAGE>
These two initial categories of electricity consumers represents over 40% of
the market, with annual consumption of approximately 74 GWh and aggregate
annual expenditures of approximately (Pounds)2.5 billion ($4.0 billion). All
remaining electricity consumers will be able to choose their supplier by
January 1, 2007. Likewise, the Spanish government is in the process of
deregulating Spain's natural gas market. This deregulation will be completed
over a ten-year period based on the consumption level of the consumer, with
full competition in place by January 1, 2008. It is our belief that by entering
the Spanish market we will be well placed to take advantage of the emerging gas
market based on our dual fuel experience in the U.K.
Electricity and Natural Gas Supply and Sales
Generally, we sell electricity and natural gas at fixed prices pursuant to
contracts with a stated term, typically one or two years. Neither we nor our
customers may terminate these contracts during their term absent extraordinary
circumstances, such as our losing a supply license. However, we may renegotiate
the pricing terms of contracts if a customer's demand and pattern usage changes
significantly during the term of a contract. We may, under these contracts,
pass through to customers increases in transportation and metering costs. Sales
of electricity constituted substantially all of our energy sales for fiscal
year 1999, as we only began sales of natural gas in February 1999.
We have two main sources of electricity: (1) the U.K. Electricity Pool and
(2) our own generating plants. In the fiscal year ended June 30, 1999, we
purchased approximately 97% of our electricity from the Electricity Pool. We
purchase electricity from the Electricity Pool at fluctuating market prices.
Electricity Pool electricity is priced in half-hour increments. Generally,
Electricity Pool prices are higher during the daytime than at night and are
higher in winter months than in summer months.
The Electricity Pool purchases electricity from generators at a certain
price and resells electricity at a higher price. The differential is to cover
transmission losses, standby purchases of electricity, and other ancillary
services. Accordingly, our internally generated electricity provides a number
of cost advantages in that we avoid the Electricity Pool price as well as
certain transportation costs. In addition, the Electricity Pool credits us for
supplying electricity to customers within a local distribution area and for
reductions in power losses on the local network.
The Electricity Pool maintains a settlement system that monitors usage by
all consumers. Customers in the >100 kW market have meters that measure usage
by the half-hour. For those other customers whose usage is measured by a meter,
such meter is read on a monthly, quarterly or annual basis. Each sub 100 kW
consumer has an assigned usage profile which estimates their pattern of use
throughout each day over a month. The Electricity Pool requires all suppliers
to pay for all electricity consumed by their customers 28 days following the
date of purchase. However, we bill our customers monthly and receive payments
on average approximately 25 days later. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" on page 20.
Proposed changes to the wholesale trading mechanisms for electricity in
England and Wales are scheduled to be implemented in 2000, subject to the
relevant changes in statutory legislation being made in Parliament. When
implemented, the changes will replace the Electricity Pool with a direct market
whereby suppliers will be required to contract directly with generators for
their required physical electricity volumes. The proposal also includes a
forward market and a short term/day ahead
29
<PAGE>
exchange (both of which are expected to evolve based on the activity of current
players and traders in the market). The New Electricity Trading Arrangements,
or NETA, will include the development of a balancing market (where the long and
short position of generators, suppliers and traders will be closed out) and the
system operator for this balancing market will be the National Grid Company,
which will retain its obligation to ensure supply security standards are met.
We cannot presently predict with any certainty what effect the
implementation of a firm contracts market will have on our business.
Contracting directly with generators under long-term agreements will impose
additional risks. The inability of a generator to fulfill its obligations
timely, or at all, under a contract could affect the cost of meeting our
customer demand. In a contracts market, we will generally be required to fix
the price at which we purchase energy from generators for the period of the
contract. Depending upon current market conditions, the fixed purchase price
may exceed the price at which we can resell electricity to our customers.
Moreover, in a firm contracts market, we would be required to contract directly
with a number of generating facilities, some of which are affiliated with
electricity suppliers with whom we directly compete.
While this will be a new electricity wholesale trading environment for
Independent Energy to operate within, we believe there are significant
parallels with the current UK gas trading market. This market operates with the
purchase of physical gas on a forwards and futures market, with daily "tuning"
of purchase volumes to sales volumes. Also, while currently there are
relatively few players offering the contracts for differences and other hedging
mechanisms which we apply to avoid the volatility of the Electricity Pool, the
NETA structure is being specifically designed to facilitate competition and the
new entry of traders who will take contractual positions without the need for
owning or operating generating plant.
We believe that these changes will result in increased liquidity and
transparency in the market and thereby give greater opportunity to develop
innovative and attractive supply terms to more customers. Much has been done to
facilitate demand side participation in the new market, rather than the current
arrangements, which are generator dominated. We believe our experiences in
trading in the gas market will provide a sound footing for the new electricity
arrangements.
With respect to our natural gas supply, since we use our existing natural
gas reserves in electricity generation, we must purchase all of the natural gas
that we supply to our customers. To meet our contractual obligations, we
purchase natural gas either directly from producers or on the spot market.
We have adopted a number of risk management practices to reduce the risk of
fluctuating electricity and natural gas prices incurred in connection with our
customer contracts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Management Activities."
Marketing and Customers
We have established Independent Energy as a reputable, reliable alternative
provider of electricity in the U.K. market. Recently, we entered the U.K.
natural gas supply market with the goal of achieving a similar status in the
natural gas market. We believe we can offer consumers better pricing and
service than they would receive from their regional electricity companies or
other suppliers.
30
<PAGE>
We intend to continue to capitalize on the relationships and marketing
channels of our strategic marketing partners to offer electricity as part of a
jointly packaged range of products, including the marketing of electricity with
natural gas from established natural gas suppliers--a "dual fuel" product. In
addition, we utilize focused marketing efforts which include direct selling,
targeted mailing and e-commerce.
Currently, we utilize sales agencies whose agents personally call on
prospective customers. We have identified these target customers based on their
usage profiles and creditworthiness. Currently, we have engaged approximately
500 independent agents to market electricity, natural gas and a "dual fuel"
product.
We pay the sales agencies a commission based on the estimated sales volume
for the customer over the life of the contract. We pay fifty percent of the
commission upon the execution of the sales contract and the balance following
the expiration of the applicable sales contract. In addition to independent
sales agents, we also utilize the services of telemarketers who solicit
prospective customers.
To support these sales activities, we use radio and newspaper advertising.
We also conduct press relations to create awareness for the Independent Energy
brand name as well as to educate consumers about the deregulated electricity
and natural gas markets. We also utilize direct mail to target prospective
customers in advance of direct sales calls and telemarketing efforts.
Administrative Operations
We employ information systems and computerized links to the Electricity
Pool's settlement system. All of our current above 100kW customers have meters
which measure usage on a half-hourly basis. This information is electronically
communicated from the Electricity Pool's system to us each day. We maintain our
own billing system and bill our customers monthly. We also maintain our own
call center to handle inquiries and other communications with our customers.
In connection with the completion of the electricity industry's deregulation
and our entry into the natural gas market, we have taken steps to increase our
ability to handle inquiries from customers, and to upgrade our billing, payment
collection and debt management systems. In addition, the OFGEM requires
separate Codes of Conduct and Codes of Practice to protect residential and very
small business electricity and natural gas customers. These regulations are
wide-ranging and include provisions governing payment arrangements, debt
collection and marketing practices.
Operating in this consumer market requires sophisticated systems that can
manage, control and transmit vast quantities of electronic data in a cost-
effective manner. We decided to outsource such functions for customers in the
small business and residential, or sub 100 kW, market. We outsource such
services as (1) handling customer inquiries and other communications, (2)
billing, (3) payment collection, (4) debt management and (5) related
operations. Accordingly, in August 1998, we entered into a five-year contract
with a third-party service provider, Vertex Data Science Limited, to provide
all of these services as they relate to such customers. Pursuant to the terms
of this contract, we obtained a bank guarantee, currently (Pounds)6.5 million,
to secure our obligations to Vertex. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" on page 20.
31
<PAGE>
Electricity Generation
As of June 30, 1999, we were operating eight generating plants, which
generated approximately 3% of our electricity requirements for the fiscal year
ended June 30, 1999. We currently have 62MW of generating plant capacity, with
an additional 45MW under construction and 28MW planned for completion by March
2000. We estimate that our total capital expenditure requirements for the
plants under construction or planned are (Pounds)40.0 million. Our goal is to
install between 10 MW and 20 MW of generating plants in each of the twelve
local distribution systems in England and Wales.
Our electricity generation plants are comprised predominately of 3,000 to
4,000 horsepower natural gas-fired internal combustion engines turning
generators. Electricity connections are made with the local distribution
network providing a source of distribution to our customers. Since the plants
are reasonably transportable, we can relocate them at the time of economic
depletion of natural gas reserves at the generation site. In some cases, we can
operate plants in the proximity to the regional natural gas network utilizing
purchased natural gas.
The table below sets forth our existing and certain proposed generating
facilities.
PROJECTS IN OPERATION
<TABLE>
<CAPTION>
Facility
Acquisition/Start Net Ownership
Plant Date Fuel Source Capacity Location Interest
<S> <C> <C> <C> <C> <C>
Elswick................. June 1996 Independent Energy 1MW Elwick, Lancashire 100%
natural gas
Caythorpe............... December 1997 Independent Energy 9MW Caythorpe, Yorkshire 100%
natural gas
Trumfleet............... February 1998 Independent Energy 8MW Trumfleet, Yorkshire 100%
natural gas
Knypersley.............. October 1998 Independent Energy and 8MW Knypersley, Staffordshire 100%
third-party natural gas
Steetley................ February 1999 Third-party natural gas 6MW Steetley, Nottinghamshire 100%
Holditch................ March 1999 Third-party natural gas 10.5MW Newcastle Under Lyme, 100%
Staffordshire
Milford Haven........... March 1999 Third-party natural gas 10.5MW Dyfed, Pembrokeshire 50%
Pye Bridge.............. June 1999 Third-party natural gas 9MW Pye Bridge, Derbyshire 100%
------
Total capacity................................................ 62MW
======
</TABLE>
PROJECTS UNDER CONSTRUCTION
<TABLE>
<CAPTION>
Projected Facility
Operations Net Ownership
Plant Date Fuel Source Capacity Location Interest
<S> <C> <C> <C> <C> <C>
Chelwood Brick.......... August 1999 Third-party natural gas 1.6MW Chelwood Brick, Surrey 100%
Wight Salads
Phase I................ September 1999 Third-party natural gas 16MW(1) Wight Salads, Isle of Wight 100%
Shirebrook.............. November 1999 Third-party natural gas 10MW Shirebrook, Nottinghamshire 100%
Wight Salads
Phase II............... January 2000 Third-party natural gas 18MW(1) Wight Salads, Isle of Wight 100%
------
Total capacity............................................. 44.6MW
======
- ---------------------
(1) Comprised of multiple inter-connected sub 10MW sites.
</TABLE>
32
<PAGE>
<TABLE>
PLANNED PROJECTS
<CAPTION>
Projected Facility
Operations Net Ownership
Plant Date Fuel Source Capacity Location Interest
<S> <C> <C> <C> <C> <C>
Valley Grown Salads..... February 2000 Third-party natural gas 10MW Valley Grown Salads, Hertfordshire 100%
Coronation Nursery...... February 2000 Third-party natural gas 5.4MW Coronation Nursery, Essex 100%
Merthyr Tydfil.......... April 2000 Third-party natural gas 6MW Merthyr Tydfil, Mid Glamorgan 100%
Undetermined Site....... March 2000 Undetermined 6MW Undetermined 100%
------
Total capacity............................................ 27.4MW
======
</TABLE>
Self-generation is an important component of our overall strategy. There are
several advantages to owning generating plants which are embedded in the local
distribution networks, such as:
. fixing a portion of the cost of our electricity needs;
. lowering our cost of service by avoiding
. Electricity Pool expenses
. National Grid Company transportation tariffs; and
. transmission power losses.
In addition, the National Grid Company offsets the amount that we owe for
electricity against the amount of self-generated electricity that we supplied
directly to our customers within local distribution areas (because such
electricity does not enter the national grid). An additional benefit to our
self-generation is that it results in reductions in power losses on the local
distribution networks.
In most of our plants, we further reduce our cost of service by either
owning the natural gas reserves which fire the plants or by obtaining access to
natural gas which is not generally of a commercial grade and is thus less
expensive than natural gas purchased from the national gas supply system.
In our Wight Salads project, we are developing 34MW of generating capacity
which will both generate electricity and use waste heat and carbon dioxide for
use by salad growers on the Isle of Wight. This innovative cogeneration project
has created the opportunity for a similar project at Valley Grown Salads
expected to be completed in February 2000.
Natural Gas Reserves
Supply
Currently, we use all of our natural gas production in our electricity
generation plants. As a result, we must purchase all of the natural gas that we
supply to our customers. We purchase natural gas on the spot market or directly
from producers.
Estimated Proved Reserves and Future Net Cash Flows
As of June 30, 1999, the Company's net proved reserves of natural gas were
approximately 5.4 billion cubic feet ("Bcf"), of which 1.8 Bcf were proved
developed reserves and 3.6 Bcf were proved undeveloped reserves. Gaffney, Cline
& Associates Ltd., an independent petroleum engineering firm, prepared such
estimates. All of our proved reserves are attributable to our onshore
properties in the U.K.
33
<PAGE>
The present value, discounted at 10% per annum, of estimated future net cash
flows from such proved reserves as of June 30, 1999 was (Pounds)3.4 million
($5.4 million) before applicable U.K. income taxes. The estimated proved
reserves and future net cash flows have been calculated in accordance with
Commission definitions.
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 natural gas that cannot be measured in an exact way.
The accuracy of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretations and judgment. As a
result, estimates of different engineers often vary.
In addition, results of drilling, testing and production subsequent to the
date of an estimate may justify revision of such estimates. Accordingly,
reserve estimates at a specific time are often different from the quantities of
oil and natural gas that are ultimately recovered. Predictions about future
prices, costs and production levels of oil and natural 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 reserve value estimate reflects the present value, discounted at 10% per
annum, of estimated future net cash flows from the production and sale of our
estimated proved reserves. 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.
Gaffney, Cline & Associates Ltd. used a price to calculate the present value
of estimated future net cash flows from the Company's estimated net proved
reserves based on the Electricity Pool price of electricity at June 30, 1999
after giving effect to the location of our reserves and our increased operating
margins in generating our own electricity. As an example, based on applicable
Electricity Pool prices, the realized power price for the Caythorpe project
equates to an equivalent natural gas price of (Pounds)3.12 per thousand cubic
feet ("Mcf") ($4.93 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 SEC 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
Currently, we hold 16 licenses covering an aggregate 887,000 net acres (net
to our interest) for the exploration and development of oil and natural gas
properties onshore U.K. All of our licenses are located in the U.K. Landward
Areas. Fourteen of our licenses are Petroleum Exploration and
34
<PAGE>
Development Licenses ("PEDLs") 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.
We, however, determine 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 U.K. Government conveys to
the licensee the exclusive right to explore for, to appraise, to develop, and
to produce petroleum. The produced petroleum belongs to the licensee.
Drilling Program
In January 1999, we entered into a farm-out arrangement with Archean Energy
(U.K.) Limited, ISO (U.K.) Limited and Vulcan Energy Limited pursuant to which
they agreed to fund a drilling program in exchange for working interests in our
exploration properties. We have retained a 42% working interest in these
properties. Pursuant to this arrangement, this drilling program is being
conducted at no cost to Independent Energy. As of June 30, 1999, two wells had
been drilled, however, no commercially available reserves were discovered.
Competition
Independent Energy is the largest independent marketer of electricity in the
United Kingdom--a company not a part of the government-owned electricity
industry at the time of its privatization in 1990. Since commencing electricity
sales in April 1996, we have experienced rapid growth and currently have
annualized sales contracts in place of approximately (Pounds)767 million ($1.2
billion), representing approximately 4.9% of the total estimated U.K.
electricity market. We added new electricity customers at an average weekly
rate of over 7,000 for the period June 1, 1999 to September 1, 1999. As a
result of our competitive pricing, customer service and marketing efforts, we
have been able to establish Independent Energy as a reputable, reliable
provider of electricity in the U.K. market.
Our competition in the U.K. electricity market consists primarily of the
twelve regional electricity companies, the Scottish integrated companies,
Scottish Power and Scottish Hydro, and the national generators, National Power,
PowerGen, British Energy and Centrica.
We are a new entrant in the U.K. natural gas supply market, having began
marketing natural gas in February 1999. Our current competition in the natural
gas supply market is comprised of Centrica and a number of independent natural
gas suppliers. Centrica currently has approximately 39% of the industrial and
commercial natural gas supply market and approximately 77% of the residential
natural gas supply market and will likely continue to have significant market
share for the foreseeable future.
We compete on the basis of service and price, and, as a result, typically
win contracts based on competitive bids. Our competitors may be able to
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and devote substantially more resources to markets than us. We cannot
be sure that we will be able to compete successfully against current or future
competitors.
35
<PAGE>
Environmental Regulation
Our operations are subject to regulatory requirements relating to
environmental matters and health and safety. U.K. legislation and policy
regarding environmental matters and health and safety 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 compliance associated with changes in environmental and health
and safety laws and regulations could require significant expenditures.
Breaches of such laws and regulations may result in the imposition of fines and
penalties, which may be material or result in our operations halting. In
addition, environmental and health and safety laws and regulations can increase
the cost of planning, designing, installing and operating generating plants. We
cannot be sure that these costs or the costs of complying with environmental
and health and safety laws and regulations will not have a materially adverse
effect on our financial condition or results of operations in the future.
To date, the costs of complying with environmental and health and safety
laws and regulations have not had a material adverse effect on our operations.
However, we are aware of some contamination resulting from the activities of
past owners or past uses of the properties that we, or any of the joint
ventures in which we have an ownership interest, currently or may in the future
own, occupy or use for the purposes of gas exploration and development and/or
electricity generation. Although we are not aware of any current requirement to
clean up such properties, we cannot be sure that we, as current owner, occupier
or user of such properties, or such joint venture 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 our financial condition or results of
operations or will not exceed the amount of our investment in any such joint
venture.
Litigation
We are not a party to any pending litigation, the result of which would have
a material adverse effect on us or our operations.
Facilities
Our headquarters are located in Solihull, West Midlands where we lease
20,600 square feet of office space for approximately (Pounds)44,184 per month.
This lease expires in December 2008. We also lease 1,750 square feet of office
space in Maidenhead for our resource offices for (Pounds)26,250 annually. This
lease will remain in effect until April 2001. Both of these leases may be
extended at our option. For a description of our generating plants, see
"--Electricity Generation."
Employees
As of June 30, 1999, we had approximately 80 employees and consultants and
utilized the services of approximately 500 independent commission-based sales
agents. None of our employees are represented by unions or subject to
collective bargaining agreements. We consider our relations with our employees
to be satisfactory.
36
<PAGE>
MANAGEMENT
Executive Officers and Directors
Certain information concerning the executive officers and directors of
Independent Energy is set forth below.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Burt H. Keenan................... 60 Chairman
John L. Sulley................... 48 Chief Executive Officer and Director
Ian Stewart...................... 47 Executive Director--Finance
William E. Evans................. 63 Executive Director--Resources
Robert E. Jones.................. 53 Executive Director--Operations
Roy W. Deakin.................... 67 Non-Executive Director
Jerry W. Jarrell................. 57 Non-Executive Director
David O. May..................... 63 Non-Executive Director
Herbert L. Oakes................. 53 Non-Executive Director
</TABLE>
Burt H. Keenan served as Executive Chairman from Independent Energy's
inception in April 1991 to August 1999. Since August 1999, he has served as
non-executive Chairman of the Board of Directors. 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 joined Independent Energy in October 1995 and served as
Managing Director until August 1999. In August 1999, he became Chief Executive
Officer and Director of Independent Energy. Mr. Sulley has over 30 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 and co-generation 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 Independent Energy 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.
37
<PAGE>
William E. Evans, Executive Director--Resources, joined Independent Energy
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 E. Jones joined Independent Energy 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.
Roy W. Deakin has been a non-executive director of Independent Energy 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 the non-
executive Chairman of Blackland Oil plc. Mr. Deakin is a member of the Audit
and Remuneration Committees of the Board of Directors.
Jerry W. Jarrell became a non-executive director of Independent Energy in
May 1998. From April 1991 to May 1998, he served as Executive Director--Finance
of Independent Energy. He is also a private consultant to several public and
private companies. 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.
David O. 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.
Herbert L. Oakes became a non-executive Director in January 1999. He is a
director of Oakes Fitzwilliam & Co. Limited, a position he has held for more
than 20 years. Mr. Oakes also serves as a director for 27 other companies,
including some in the energy and utility industries. Oakes, Fitzwilliam & Co.
provides financial advisory services to Independent Energy from time to time.
38
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information concerning beneficial ownership
of ordinary shares as of June 30, 1999 by: (1) 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; (2) each selling shareholder;
(3) each director of the Company; (4) each executive officer; and (5) 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>
Number of
Beneficial Percent Shares to Beneficial Percent
Ownership Owned be Sold Ownership Owned
Prior to Prior to in the After After
Offering(1) Offering Offering Offering(1) Offering
<S> <C> <C> <C> <C> <C>
Burt H. Keenan(2).......... 2,364,125 8.9% 1,200,000 1,164,125 3.3%
Putnam Investment
Management, Inc.(3)....... 2,058,700 7.8 -- 2,058,700 5.9
John L. Sulley (4)......... 420,000 1.6 -- 420,000 1.2
Ian Stewart................ 1,000 * -- 1,000 *
William E. Evans(5)........ 450,800 1.7 250,000 200,800 *
Robert E. Jones(6)......... 364,200 1.4 -- 364,200 1.0
Roy W. Deakin(7)........... 50,000 * -- 50,000 *
Jerry W. Jarrell(8)........ 360,100 1.4 125,000 235,100 *
David O. May(9)............ 130,000 * -- 130,000 *
Herbert L. Oakes........... -- * -- -- *
Kristen Cook Keenan Trust,
Jerry W. Jarrell,
Trustee (10).............. 180,000 * 80,000 100,000 *
Lucille Baker Keenan Trust,
Jerry W. Jarrell,
Trustee (10).............. 180,000 * 80,000 100,000 *
Michael Crawford Keenan
Trust, Jerry W. Jarrell,
Trustee (10).............. 180,000 * 80,000 100,000 *
All officers and directors
as a group (9
persons)(11).............. 4,140,225 14.8 1,575,000 2,565,225 7.0
</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 245,400 shares issuable upon exercise of options held by Mr.
Keenan. Mr. Keenan's address is 17571 Red Oak Drive, Houston, Texas 77090.
(3) The address of Putnam Investment Management, Inc. is One Post Office
Square, Boston, Massachusetts 02109. Putnam Investment Management, Inc.
holds the ADSs on behalf of certain of its clients.
(4) Includes 360,000 shares issuable upon exercise of options held by Mr.
Sulley.
(5) Includes 445,200 shares (before this offering) and 195,800 shares (after
this offering) issuable upon exercise of options held by Mr. Evans.
(6) Includes 300,000 shares issuable upon exercise of options held by Dr.
Jones.
(7) Includes 50,000 shares issuable upon exercise of options held by Mr.
Deakin.
(8) Includes 222,800 shares issuable upon exercise of options held by Mr.
Jarrell.
(9) Includes 50,000 shares issuable upon exercise of options held by Mr. May
and 30,000 shares held in a self-administered pension fund trust in which
Mr. May has a potential interest.
(10) Includes 100,000 shares issuable upon exercise of options held by this
shareholder. Such options were originally issued to Mr. Burt H. Keenan and
subsequently assigned to this shareholder.
(11) Includes 1,673,400 shares (before this offering) and 1,424,000 shares
(after this offering) issuable upon exercise of options held by the named
executive officers and directors.
39
<PAGE>
DESCRIPTION OF SHARE CAPITAL
The following contains summary information concerning Independent Energy's
capital structure and related summary information concerning certain provisions
of our Memorandum and Articles of Association (Charter) and applicable English
law.
General
Our authorized share capital is (Pounds)500,000 divided into 50,000,000
ordinary shares of 1p nominal value each, of which 26,273,027 ordinary shares
were issued and outstanding as of June 30, 1999. In addition, as of June 30,
1999, there were 4,075,400 ordinary shares issuable pursuant to outstanding
options and 10,000 ordinary shares issuable pursuant to outstanding warrants.
From time to time, the Board of Directors may issue additional options to
purchase ordinary shares by resolution. The Board of Directors intends to issue
options to purchase up to 500,000 ordinary shares to members of senior
management on or about the date of this offering. Such options will be
exercisable at the offering price to investors.
Independent Energy's share capital may be increased, consolidated and
divided into shares of larger amounts than the ordinary shares, subdivided 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.
The share capital may be reduced by special resolution of shareholders in a
general meeting and confirmation by the English courts. We may, with the prior
approval of an ordinary resolution of shareholders at a general meeting,
purchase our 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 and declared by Independent Energy in a
general meeting. Independent Energy may declare a dividend smaller than the
dividend recommended by the Board of Directors, but, may not declare a dividend
larger than the dividend recommended by the Board of Directors. Subject to the
provisions of the Companies Act 1985, the Directors of Independent Energy may
pay interim dividends if it appears to them that they are justified based on
the profits of Independent Energy available for distribution. The Directors of
Independent Energy have the power, based on a prior ordinary resolution of
shareholders, to offer to the holders of ordinary shares the option to receive
new ordinary shares credited as fully paid or to invest the net cash amount due
to them in subscribing for ordinary shares payable in full or by installments.
If dividends are returned to Independent Energy uncashed on two consecutive
occasions, Independent Energy will not be obliged to send further payments in
respect of such ordinary shares until the relevant shareholder has notified
Independent Energy of an address for this purpose.
40
<PAGE>
Independent Energy or the Board of Directors may fix a date, whether or not
it is before or after the date on which the declaration is made, as the record
date by reference to which a dividend on the ordinary shares will be declared
or paid. Any dividend on the ordinary shares unclaimed for a period of twelve
years from its date of payment shall be forfeited and shall revert to
Independent Energy. No dividend on an ordinary shares 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 Independent Energy, after all
our debts and liabilities 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 Ordinary Shares
Section 198 of the Companies Act 1985 obliges any person (subject to
exception but including a company and other legal entities) who acquires an
interest of 3% or more of any class of shares (including through ADRs) that
comprise part of Independent Energy's "relevant share capital" (i.e. its issued
share capital carrying the right to vote in all circumstances at a general
meeting) to notify Independent Energy of his interest within two business days
following the day on which the obligation to notify arises. Once someone
acquires 3% or more of the ordinary shares, he must give us notice of any whole
percentage increases or decreases, rounded down to the next whole number, in
his ownership. 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
. in which his spouse or his child or stepchild, is interested,
. in which a corporate body is interested where either that corporate body
or its directors are accustomed to act in accordance with that person's
directions or instructions, or that person controls one third or more of
the voting power of that corporation body, or
. 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 restriction s 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 us, by notice in
writing, to require a person whom we know is or have 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.
41
<PAGE>
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, our
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 transferability.
A person who fails to fulfill the obligations imposed by Sections 198 and
212 of the Companies Act 1985 described above is subject to criminal penalties.
Shareholders Meetings and Voting Rights
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 the final dividend are dealt with. Any
other general meeting is known as an extraordinary general meeting.
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 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.
A holder of shares may not be entitled (save as a proxy for another member)
to be present or vote at any general meeting:
42
<PAGE>
. 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 he
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
. 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 shares 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.
Pursuant to the Articles, the Board of Directors may also decline to
register a transfer of ordinary shares if a restriction notice has been served
on the shareholder, subject to certain exceptions.
Subject to the above restrictions, the Articles of Association contain
restrictions on the registration of transfers of fully paid shares provided
that all payable stamp duty 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, to no more than
four such joint holders and, if applicable, are in accordance with the
regulations relating to CREST. 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. Independent Energy has resolved that title to any ordinary
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 and on such terms as
they deem appropriate.
43
<PAGE>
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 on 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
authorized but unissued share capital, for a period of five years.
If ordinary 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 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.
Shareholders Resident Outside the United Kingdom
There are no restrictions under our 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 Independent Energy an address within
the United Kingdom to which such notices shall be served.
44
<PAGE>
DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
The following is a summary of the material provisions of the deposit
agreement among Independent Energy, the depositary and all persons in whose
name an American Depositary Receipt is registered on the books of the
depositary 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 from time to time
of the ADRs issued thereunder. Copies of the deposit agreement are available
for inspection at the principal office of the depositary in New York, which is
presently located at 101 Barclay Street, New York, New York 10286.
ADSs evidenced by ADRs are issuable by the depositary pursuant to the terms
of the deposit agreement. Each ADS represents, as of the date of this
prospectus, the right to receive one ordinary share deposited under the Deposit
Agreement (together with any additional shares deposited hereunder and all
other securities, property and cash received and held thereunder at any time in
respect of or in lieu of such deposited ordinary shares, the "Depositary
Securities") with the custodian, currently the London office of The Bank of New
York. An ADR may evidence any number of ADSs. We and the depositary will only
treat those persons in whose names ADRs are registered on the books of the
depositary as owners.
Deposit, Transfer and Withdrawal
In connection with the deposit of ordinary shares under the deposit
agreement, the depositary or the custodian may require the following in form
satisfactory to it:
. 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
ordinary shares;
. proper endorsements or duly executed instruments of transfer in respect
of such deposited ordinary shares;
. instruments assigning to the custodian or its nominee any distribution on
or in respect of such deposited ordinary shares or indemnity therefor;
and,
. proxies entitling the custodian to vote such deposited ordinary shares
until the shares are registered in the name of the custodian or its
nominee.
As soon as practicable after the custodian receives the ordinary shares
pursuant to any such deposit or pursuant to the form of ADR, the custodian
shall present the ordinary shares 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. The ordinary shares, and any
property or cash received in lieu of shares, must 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.
45
<PAGE>
After any such deposit of ordinary shares, the custodian must notify the
depositary of the 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 issue ADRs for delivery at the transfer office only against deposit with
the custodian of (A) ordinary shares in form satisfactory to the custodian; (B)
rights to receive ordinary shares from Independent Energy or any registrar,
transfer agent, clearing agent or other entity recording share ownership or
transactions; or, (C) other rights to receive ordinary shares (until such
ordinary shares are actually deposited pursuant to (A) or (B) 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 Prereleased ADRs agrees in writing with the
depositary that such recipient (1) owns such ordinary shares, (2) assigns all
beneficial right, title and interest therein to the depositary, (3) holds such
ordinary shares for the account of the depositary and (4) will deliver such
ordinary 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 ordinary 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 ordinary shares under the Deposit Agreement
represents and warrants that such ordinary 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 ordinary 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 its office the owner 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, 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 on
the record date set by the depositary 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:
46
<PAGE>
. 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, on an averaged or other practicable basis, subject to
appropriate adjustments for taxes withheld and deduction of the
depositary's expenses in
. 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,
. 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,
. 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
. making any sale by public or private means in any commercially
reasonable manner;
. Ordinary shares. Additional ADRs evidencing whole ADSs representing any
ordinary shares available to the depositary resulting from a dividend or
free distribution on Deposited Securities consisting of ordinary shares
(a "Share Distribution") and dollars available to it resulting from the
net proceeds of sales of ordinary shares received in a Share
Distribution, which ordinary shares would give rise to fractional ADSs if
additional ADRs were issued therefor, as in the case of cash;
. Rights. (1) 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 ordinary shares
or rights of any nature available to the depositary as a result of a
distribution on Deposited Securities ("Rights"), to the extent that
Independent Energy timely furnishes to the depositary evidence
satisfactory to the depositary that the depositary may lawfully
distribute same (Independent Energy has no obligation to so furnish such
evidence), or (2) to the extent Independent Energy does not so furnish
such evidence and sales of Rights are practicable any dollars available
to the depositary from the net proceeds of sales of Rights as in the case
of cash, or (3) to the extent Independent Energy 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. (1) 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 (2) 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).
47
<PAGE>
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, ordinary 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 ordinary 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 of our instructions
in respect thereof, and, in the deposit agreement, the depositary has agreed to
use reasonable efforts to comply with such instructions.
Notwithstanding any provision of the deposit agreement, by being an owner of
an ADR, each such owner agrees to provide such information as Independent
Energy may request in 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, or the Articles of Association of
Independent Energy. 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 ordinary 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 1985 and the Articles of
Association which currently include, the withdrawal of the voting rights of
such ordinary shares and the imposition of restrictions on the rights to
receive dividends on and to transfer such ordinary shares. In addition, in the
deposit agreement each owner agrees to comply with the provisions of the
Companies Act 1985 with regard to the notification to Independent Energy of
interests in ordinary 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 ordinary 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 us as required by the Companies Act 1985.
Record Dates
The depositary may fix a record date which shall be as near as practicable
to any corresponding record date set by Independent Energy 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.
48
<PAGE>
Voting of Deposited Securities
As soon as practicable after receipt from Independent Energy of notice of
any meeting or solicitation of consents or proxies of owners of ordinary shares
or other Deposited Securities, the depositary shall mail to owners a notice
stating:
. such information as is contained in such notice and any solicitation
materials;
. 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
. 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 Independent Energy
to vote) the Deposited Securities represented by the ADSs evidenced by such
owner's ADRs in accordance with such instructions. The depositary 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 Independent Energy for the purpose of communication with owners
in the interest our business of 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 us which are both received by the
depositary as the holder of the Deposited Securities and) made generally
available to the holders of such Deposited Securities by Independent Energy.
The depositary shall also send to the owners copies of such reports when
furnished by Independent Energy. We must furnish any such reports and
communications to the depositary in English.
On or before the first date on which Independent Energy 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 ordinary
shares or other Deposited Securities. The depositary will, at our 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, we and the depositary shall each
furnish to the other and to the SEC or any successor governmental agency such
information as shall be required to make such filings or comply with such
undertakings.
49
<PAGE>
We have delivered to the depositary, the custodian and any transfer office,
a copy of all provisions of or governing the ordinary shares and any other
Deposited Securities issued by Independent Energy or any affiliate of
Independent Energy and, promptly upon any change thereto, we will 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 our
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 any Deposited
Securities to any person and to sell by public or private sale any property
received in connection with) any recapitalization, reorganization, merger,
consolidation, liquidation, receivership, bankruptcy or sale of all or
substantially all of our assets, 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
We and the depositary may amend the ADRs and the deposit agreement, 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 hereby, except in order to
comply with mandatory provisions of applicable law.
The depositary may, and shall at our written direction, 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
50
<PAGE>
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, we will be discharged from all obligations under the deposit
agreement except for our obligations to the depositary and its agents.
Charges of Depositary
The depositary may charge each person to whom ADRs are issued against
deposits of Ordinary 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 ADS (or portion thereof) for any cash distribution made pursuant to
the deposit agreement. We 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 us and the depositary, except:
. stock transfer or other taxes and other governmental charges (which are
payable by owners or persons depositing ordinary shares),
. cable, telex and facsimile transmission and delivery charges incurred at
the request of persons depositing, or owners delivering, ordinary shares,
ADRs or Deposited Securities (which are payable by such persons or
owners),
. 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 ordinary shares or owners withdrawing Deposited
Securities; there are no such fees in respect of the ordinary shares as
of the date of the deposit agreement) and
. expenses of the depositary in connection with the conversion of foreign
currency into dollars (which are paid out of such foreign currency).
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 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 so 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 any party or all of such Deposited
Securities (after attempting by reasonable means to notify the owner 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 remaining liable
for any deficiency, and shall reduce the number of ADSs evidenced by the ADR to
reflect any such sales of Deposited Securities. In connection with any
distribution to owners, we will remit to the appropriate governmental authority
or agency all amounts (if any) required to be
51
<PAGE>
withheld and owing to such author to or agency by us; 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 ordinary 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, Independent Energy, their agents and
each of them will: (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 ordinary
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
Independent Energy 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 Independent Energy
and its affiliates and in ADRs. Independent Energy has agreed to indemnify the
depositary and its agents under certain circumstances and the depositary has
agreed to indemnify Independent Energy against losses incurred by Independent
Energy 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, Independent Energy, 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 ordinary
shares or other Deposited Securities upon any applicable register, and (c) any
applicable charges as provided in the deposit agreement; (ii) the production of
proof satisfactory to it of (a) the identity and genuineness of any signature
and (b) such other information, including without limitation, information as to
citizenship, residence, exchange control approval, beneficial ownership
52
<PAGE>
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 ordinary 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 Independent Energy.
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.
53
<PAGE>
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, ordinary 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"). 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 (possibly retroactively) 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 or ordinary shares 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 Independent Energy'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 ordinary 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 OR ORDINARY SHARES 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) OR ORDINARY SHARES 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 of ADSs will be treated as the
owners of the ordinary shares represented by ADSs evidenced by ADRs.
54
<PAGE>
Taxation of Dividends
Under current U.K. law, Independent Energy is not required to withhold tax
when paying a dividend in respect of the ordinary shares. Dividends paid on or
after April 6, 1999, will carry an associated tax credit of one-ninth of the
cash dividend or 10% of the aggregate of the cash dividend and the associated
tax credit. Individual shareholders resident in the U.K. receiving such
dividends will be liable to income tax (if at all) on the aggregate of the
dividend and the tax credit at the Schedule F ordinary rate (10%) or the
Schedule F upper rate (32.5%). Individuals who are only taxable at either the
basic or lower rate will have no further income tax liability. Individuals who
are subject to higher rate income tax will be liable to pay additional tax on
the gross income at the reduced rate of 32.5%. Individuals who do not pay
income tax or whose tax liability is less than the attached tax credit are no
longer entitled to reclaim the tax credit.
Since April 6, 1999, U.K. resident trustees of discretionary trusts liable
to income account for tax at the rate applicable to trusts, being 34% on the
trust's income but at a special Schedule F trust rate of 25% on dividends from
companies.
A U.K. resident corporate shareholder would generally not be liable for U.K.
corporation tax on any dividend received from Independent Energy.
Under current UK law, an Eligible U.S. Holder (as defined below) who
receives as beneficial owner a dividend from Independent Energy will not be
entitled under the Income Tax Convention between the United States and the
United Kingdom (the "Income Tax Convention") to receive any payment or refund
from Inland Revenue in addition to the base dividend. An Eligible U.S. Holder
that received a dividend payment of $90 from Independent Energy would be
entitled to a tax credit amount of $10 reduced by the tax credit amount (i.e.,
$10) (the "U.K. Tax Credit Amount") resulting in a total receipt (before
applicable U.S. taxes) of $90 (i.e., the base dividend).
Under the United States federal income tax laws, Eligible U.S. Holders will
include in gross income the gross amount of any dividend paid (before reduction
for the U.K. Tax Credit Amount) by Independent Energy out of its current or
accumulated earnings and profits (as determined for United States federal
income tax purposes) as ordinary income when the dividend is actually or
constructively received by the Eligible U.S. Holder. No dividends received
deduction will be allowed with respect to dividends paid by Independent Energy.
Distributions in excess of current and accumulated earnings and profits, as
determined for U.S. federal income tax purposes, will be treated as a return of
capital to the extent of the Eligible U.S. Holder's basis in the ADSs or
ordinary shares, and thereafter as capital gain.
Subject to certain limitations and restrictions, the U.K. Tax Credit Amount
(which, pursuant to the Income Tax Convention, is treated as a U.K. income tax
imposed on the Eligible U.S. Holder) may be eligible for credit against the
Eligible U.S. Holder's U.S. federal income tax. For foreign tax credit
limitation purposes, dividends distributed by Independent Energy will generally
constitute "passive income" or, in the case of certain Eligible U.S. Holders,
"financial services income." Prospective investors should consult their tax
advisors to determine whether and to what extent a credit would be available.
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 or ordinary share and
of the cash dividend paid thereon and that satisfies the following conditions:
the U.S. Holder (i) is an individual or a corporation
55
<PAGE>
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 Independent Energy.
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 or ordinary shares 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 or ordinary shares 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 or an ordinary share , 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 or
ordinary shares. Except as described below under "Passive Foreign Investment
Company Status," such gain or loss will be capital gain or loss if the U.S.
Holder holds its ADS or ordinary share 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
shares income for certain taxpayers who are individuals) and losses (the
deductibility of which is subject to limitations).
A U.S. Holder that is liable for both U.K. and U.S. tax on a gain on the
disposal of the ADSs or the ordinary shares 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 the ordinary shares 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 foreign
corporation 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
56
<PAGE>
which the foreign corporation 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 Independent Energy 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 its
business, it is possible that Independent Energy may be or could become a PFIC
in any year. Although Independent Energy will attempt to conduct its business
so as to avoid PFIC status, Independent Energy 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 Independent Energy 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 or ordinary shares, and any
"excess distribution" by Independent Energy to the U.S. Holder with respect to
ADSs or ordinary shares 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 or ordinary shares, (ii) the amount
allocated to the current taxable year would be treated as ordinary shares
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 or ordinary shares as
security for a loan will be treated as having disposed of such ADSs or ordinary
shares.
For tax years beginning after 1997, a U.S. Holder of stock 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 shares income the excess, if any, of the fair
market value of the stock at the end of the taxable year over their adjusted
basis and will be permitted an ordinary shares loss in respect of the excess,
if any, of the adjusted basis of the ADSs or the ordinary shares 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 stock will be adjusted to
reflect any such income or loss amounts. Pursuant to the Proposed Treasury
Regulations (the "Proposed Regulations"), the ADSs or the ordinary shares would
be treated as "marketable stock," but there is no assurance that the Proposed
Regulations will be finalized as proposed. Shareholders of a PFIC can elect to
apply the Proposed Regulations to any taxable year beginning after December 31,
1997 for stock in a PFIC which has a taxable year ending with or within the
shareholder's taxable year.
If Independent Energy is a PFIC in any year, a U.S. Holder who beneficially
owns ADSs or the ordinary shares during such year must file an annual return on
IRS Form 8621 that describes its
57
<PAGE>
interest in Independent Energy, the distributions received from Independent
Energy and any gain realized on the disposition of ADSs or ordinary shares.
U.K. Stamp Duty and U.K. Stamp Duty Reserve Tax
The Stamp Duty Reserve Tax ("SDRT"), at the then applicable rate, arises
upon the issue to and deposit with the depositary of the ordinary shares. The
current rate of the SDRT on the issue and deposit of the ordinary shares is
1.5%. Although not contemplated, if a Stamp Duty 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 Stamp Duty paid in connection with the
same transaction. The SDRT will be payable by the depositary in the first
instance, and reimbursed by Independent Energy or the selling shareholders, as
the case may be. Persons to whom ADSs/ADRs are issued upon subsequent deposits
of shares will be responsible for payment of the SDRT, currently at the rate of
1.5%.
The Stamp Duty 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). The 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".
Depending upon the relevant transfer of ordinary shares by the depository or
its nominee to the relevant ADR holder, Stamp Duty at the rate of (Pounds)0.50
per transfer or at the rate of (Pounds)l.50 per (Pounds)100 (or part thereof)
may be imposed.
Except in the case of certain transfers (for example, by way of gift),
transfers of ordinary shares will normally give rise to a Stamp Duty at the
rate of (Pounds)0.50 per (Pounds)100 (or part thereof) on the price payable or
value of the ordinary shares, depending upon the circumstances then prevailing.
The Stamp Duty is usually the liability of the purchaser.
58
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
September 28, 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Prudential Securities
Incorporated and Johnson Rice & Company L.L.C., have severally agreed to
purchase an aggregate of 8,625,000 ADSs from us and an aggregate of 1,815,000
ADSs from the selling shareholders. The respective 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............ 4,176,000
Prudential Securities Incorporated............................. 4,176,000
Johnson Rice & Company L.L.C................................... 2,088,000
----------
Total........................................................ 10,440,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the ADSs included in this
offering are subject to approval of certain legal matters by their counsel and
to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the ADSs (other than those ADSs covered by the over-
allotment option described below) if they purchase any of the ADSs.
The underwriters initially propose to offer some of the ADSs directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the ADSs to certain dealers at the public offering price
less a concession not in excess of $0.50 per share. The underwriters may allow,
and such dealers may re-allow, a concession not in excess of $0.10 per share on
sales to certain other dealers. After the initial offering of the ADSs to the
public, the representatives may change the public offering price and such
concessions at any time without notice.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase, from time to time, in whole or in
part, up to 1,566,000 additional ADSs at the public offering price less the
underwriting fees. The underwriters may exercise such option solely to cover
over-allotments, if any, made in connection with this offering. To the extent
that the underwriters exercise such option, each underwriter will become
obligated, subject to certain conditions, to purchase a number of additional
ADSs approximately proportionate to such underwriter's initial purchase
commitment.
The following table shows the underwriting fees to be paid to the
underwriters by us and the selling shareholders in connection with this
offering. These amounts are shown assuming both no exercise and full exercise
of the underwriters' option to purchase additional ADSs.
<TABLE>
<CAPTION>
Paid by Paid by
Independent Energy Selling Shareholders
------------------------- -------------------------
No Exercise Full Exercise No Exercise Full Exercise
<S> <C> <C> <C> <C>
Per ADS..................... $ 0.84 $ 0.84 $ 0.84 $ 0.84
Total....................... $7,245,000 $8,560,440 $1,524,600 $1,524,600
</TABLE>
59
<PAGE>
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments that the underwriters may be required to make in respect
of any of those liabilities.
We, our executive officers and directors and the selling shareholders have
agreed that, for a period of 120 days from the date of this prospectus, they
will not, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation: (1) 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 ordinary shares or ADSs or any securities
convertible into or exercisable or exchangeable for ordinary shares or ADSs; or
(2) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any ordinary shares
or ADSs (regardless of whether any of the transactions described in clause (1)
or (2) is to be settled by the delivery of ordinary shares or ADSs, or such
other securities, in cash or otherwise). In addition, during such period, we
have also agreed not to file any registration statement with respect to, and
each of our executive officers, directors and the selling shareholders has
agreed not to make any demand for, or exercise any right with respect to, the
registration of any ordinary shares or ADSs or any securities convertible into
or exercisable or exchangeable for ordinary shares or ADSs without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
The ADSs are listed on the Nasdaq National Market under the symbol "INDYY."
Other than in the United States, no action has been taken by us, the selling
shareholders or the underwriters that would permit a public offering of the
ADSs included in this offering in any jurisdiction where action for that
purpose is required. The shares included in this offering 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
shares 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 who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
the offering and the distribution of this prospectus. This prospectus is not an
offer to sell or a solicitation of an offer to buy any ADSs included in this
offering in any jurisdiction where that would not be permitted or legal.
In order to facilitate the offering of the ADSs, certain underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price
of the ADSs. Specifically, the underwriters may overallot in connection with
this offering, creating a syndicate short position in the ADSs for their own
account. In addition, 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. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the ADSs in the
offering, if the syndicate repurchases previously distributed ADSs in
transactions to cover syndicate short positions, in stabilization transactions
or otherwise. Any of 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.
Under the SEC's rules, market makers in the ADSs who are also underwriters
or prospective underwriters in this offering may, subject to certain
limitations, make bids for purchases of ADSs as
60
<PAGE>
a "passive market maker" during the period when Rule 101 of Regulation M would
otherwise prohibit such activity. Passive marker making activity may take place
so long as no stabilizing bid for ADSs is in effect and the following
conditions are met:
. The passive market marker's net daily purchases of the ADSs may not
exceed the greater of (a) 30% of its average daily trading volume in the
ADSs for the two full consecutive calendar months immediately preceding
the filing date of the registration statement relating to this offering,
which was August 20, 1999, or (b) 200 shares;
. The passive market maker may not effect transactions in, or display bids
for, the ADSs at a price that exceeds the highest independent bid for the
ADSs by persons who are not passive market makers; and
. The passive market maker must identify its bid as a passive market making
bid and the bid must not exceed the amount the passive market maker could
buy under the limitations described above.
Each underwriter has undertaken to us 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 Advertisement)(Exemptions) Order 1996
or is a person to whom the document may otherwise lawfully be issued or passed
on.
Donaldson, Lufkin & Jenrette International, an affiliate of Donaldson,
Lufkin & Jenrette Securities Corporation, acts as financial advisor to
Independent Energy from time to time.
61
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the offering are being passed upon
for Independent Energy by Akin, Gump, Strauss, Hauer & Feld, L.L.P., our
special U.S. counsel, and Masons, our English counsel. Certain legal matters in
connection with this offering are being passed upon for the underwriters by
Davis Polk & Wardwell, 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.
EXPERTS
The financial statements as of June 30, 1998 and 1999 and for each of the
three fiscal years in the period ended June 30, 1999 have been included in this
prospectus in reliance upon the audit report of Pannell Kerr Forster, chartered
accountants, given on the authority of such firm as experts in accounting and
auditing.
The estimates of net proved reserves of natural gas of Independent Energy as
of June 30, 1999 included in this prospectus have been included in reliance on
the report of Gaffney, Cline & Associates Ltd., an independent petroleum
engineering firm, given on the authority of such firm as experts in estimating
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 June 30, 1999,
1998 and 1997............................................................ F-4
Consolidated Balance Sheet as of June 30 1999 and 1998.................... F-5
Consolidated Cash Flow Statements for the years ended June 30, 1999, 1998
and 1997................................................................. F-6
Notes to 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 its subsidiary 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 subsidiary 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 Shareholders
of Independent Energy Holdings PLC:
We have audited the consolidated balance sheets of Independent Energy
Holdings PLC and subsidiary, as of 30 June 1999 and 1998, and the related
consolidated statements of operations and cash flows for the years ended 30
June 1999, 1998 and 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United Kingdom, which are substantially the same as auditing
standards generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Independent Energy Holdings PLC
and subsidiaries as of 30 June 1999 and 1998, and the years ended 30 June 1999,
1998 and 1997 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 years ended 30 June
1999,1998 and 1997 to the extent summarized in Notes 26 and 27 to the
consolidated financial statements.
Nottingham, England Pannell Kerr Forster
19th August 1999 Chartered Accountants and Registered Auditors
F-3
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts stated in thousands of pounds sterling, except per share data)
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
Note 1999 1998 1997
<S> <C> <C> <C> <C>
Turnover (revenue)...... 3(f) (Pounds) 246,856 (Pounds) 57,989 (Pounds)11,127
Cost of sales........... (234,387) (55,457) (10,872)
---------------- --------------- --------------
Gross profit............ 12,469 2,532 255
Depreciation and
amortisation........... (1,650) (626) (142)
Administrative expenses. (4,530) (1,696) (1,363)
---------------- --------------- --------------
Operating profit/(loss). 6,289 210 (1,250)
Interest receivable and
similar income......... 6(a) 838 105 189
Interest payable and
similar charges........ 6(b) (2,191) (500) (120)
---------------- --------------- --------------
Profit/(loss) on
ordinary activities
before taxation........ 7 4,936 (185) (1,181)
Taxation................ 9 (929) -- --
---------------- --------------- --------------
Retained profit/(loss)
for the year........... 20 (Pounds)4,007 (Pounds)(185) (Pounds)(1,181)
---------------- --------------- --------------
Basic earnings/(losses)
per share.............. 8 15.7p (1.1)p (9.0)p
Diluted
earnings/(losses) per
share.................. 8 14.2p (1.0)p (7.4)p
</TABLE>
Movements on reserves are set out in note 20.
There are no material differences between results calculated on an
historical cost basis and those reported above.
The results for each year reflect all recognised gains and losses.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
CONSOLIDATED BALANCE SHEETS
(All amounts stated in thousands of pounds sterling)
<TABLE>
<CAPTION>
June 30,
----------------------------
Note 1999 1998
<S> <C> <C> <C>
Fixed assets
Intangible assets........................... 10 (Pounds)9,316 (Pounds)6,221
Tangible assets............................. 11 33,750 18,531
Investments................................. 12 2,776 --
------------- -------------
45,842 24,752
Current assets
Debtors..................................... 13 84,383 15,340
Cash at bank and in hand.................... 578 621
Security deposits........................... 6,738 --
------------- -------------
91,699 15,961
Creditors
Amounts falling due within one year......... 14 (68,513) (20,589)
------------- -------------
Net current assets/(liabilities)............ 23,186 (4,628)
Total assets less current liabilities....... 69,028 20,124
Creditors
Amounts falling due after more than one
year....................................... 14 (19,220) (10,671)
Provisions for liabilities and charges...... 15 (929) --
------------- -------------
Net assets.................................. 48,879 9,453
------------- -------------
Capital and reserves
Called up share capital..................... 19 263 179
Share premium account....................... 20 46,030 10,695
Profit and loss account..................... 20 2,586 (1,421)
------------- -------------
Shareholders' funds......................... 21 48,879 9,453
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
CONSOLIDATED CASH FLOW STATEMENTS
(All amounts stated in thousands of pounds sterling)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
Note 1999 1998 1997
<S> <C> <C> <C> <C>
Reconciliation of
operating profit to net
cash (outflow) from
operating activities
Operating
profit/(loss)........ (Pounds) 6,289 (Pounds) 210 (Pounds) (1,250)
Depreciation and
amortisation......... 1,650 626 142
Increase in debtors... (69,043) (10,459) (3,926)
Increase in creditors. 29,377 7,484 2,695
--------------- -------------- ---------------
Net cash (outflow) from
operating activities... (31,727) (2,139) (2,339)
Returns on investments
and servicing of
finance
Interest received..... 827 105 189
Interest element of
finance lease
payments............. (762) (426) --
Interest paid......... (1,836) (648) (81)
--------------- -------------- ---------------
(1,771) (969) 108
Capital expenditure and
financial investment
Payments to acquire
investments.......... (2,715) (6,775) --
Payments to acquire
tangible fixed
assets............... (8,566) (1,930) (3,760)
Payments to acquire
intangible fixed
assets............... (3,564) -- --
--------------- -------------- ---------------
(14,845) (8,705) (3,760)
Management of liquid
resources
Sale of commercial
paper................ -- -- 4,300
--------------- -------------- ---------------
-- -- 4,300
Financing
Proceeds from
exercised share
warrants............. 43 54 --
Proceeds from
exercised share
options.............. 280 199 --
Issue of ordinary
share capital........ 36,359 2,500 1,352
Share issue costs..... (1,263) (73) --
--------------- -------------- ---------------
35,419 2,680 1,352
Issue of loan notes... -- -- 1,400
New loans due within
one year............. -- 5,000 --
New loans due in over
one year............. 5,172 4,000 --
Loan repayments....... (6,400) (500) --
Capital element of
finance lease
repayments........... (1,189) (694) (440)
--------------- -------------- ---------------
(2,417) 7,806 960
Net financing
proceeds............. 33,002 10,486 2,312
Net cash
(decrease)/increase.... (15,341) (1,327) 621
Net effect of exchange
rate movements....... 20 3 (39)
--------------- -------------- ---------------
(Decrease)/increase in
cash................... 22 & 23 (Pounds)(15,321) (Pounds)(1,324) (Pounds) 582
--------------- -------------- ---------------
</TABLE>
The accompanying notes are an internal part of these financial statements.
F-6
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND ORGANISATION
Independent Energy Holdings PLC (the "Company"), together with its
subsidiary undertakings (the "Group") generates and markets electricity,
currently only operating in the United Kingdom.
2. BASIS OF PRESENTATION
The consolidated financial statements include Independent Energy Holdings
PLC and its wholly-owned subsidiary, Independent Energy UK Limited.
All amounts throughout this document are stated in thousands pounds
sterling, unless otherwise stated.
3. ACCOUNTING POLICIES
These financial statements are prepared under the historical cost convention
and in accordance with applicable accounting standards and generally accepted
accounting principles in the United Kingdom ("UK GAAP"). A summary of the more
important accounting policies, which have been applied consistently, is set out
below.
The most significant differences between the accounting principles followed
by the Company and generally accepted accounting principles in the United
States ("US GAAP") are described in notes 26 and 27.
a) Basis of Consolidation
The financial statements consolidate the accounts of Independent Energy
Holdings PLC and its subsidiary undertakings and the acquisition method of
accounting has been adopted. Under this method, the results of subsidiary
undertakings acquired in the year are included in the consolidated profit and
loss account from the date of acquisition.
Undertakings, other than subsidiary undertakings, in which the Group has an
interest comprising not less than 20% of the voting capital and over which it
exerts significant influence are treated as joint ventures. The consolidated
profit and loss account includes the appropriate share of these undertakings'
profits less losses.
In accordance with Section 230 (4) of the Companies Act 1985, Independent
Energy Holdings PLC is exempt from the requirement to present its own profit
and loss account. The amount of the loss for the year dealt with in the
financial statements of Independent Energy Holdings PLC is (Pounds)1,000 (1998:
profit (Pounds)1,000).
b) Development
Expenditure on development of production facilities is capitalised to be
matched against 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.
F-7
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. ACCOUNTING POLICIES (Continued)
The Company follows the full cost method of accounting for gas properties.
Accordingly, all costs associated with the acquisition, exploration, and
development of gas reserves, including directly related overhead costs, are
capitalised. All capitalised costs of gas properties are amortised on the unit-
of-production method using estimates of proven reserves. Investments in
unproven properties and major development projects are not amortised until
proven 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
capitalised cost to be amortised. In addition, the capitalised 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 proven reserves, based on current economic and
operating conditions, plus the lower of cost or fair market value of unproven
properties.
Sales of proven and unproven gas properties are accounted for as adjustments
of capitalised costs with no gain or loss recognised, unless such adjustments
would significantly alter the relationship between capitalised costs and proven
reserves in gas, in which case the gain or loss is recognised in income.
Abandonments of properties are accounted for as adjustments of capitalised
costs with no loss recognised.
The Company capitalises interest on expenditures made in connection with
exploration and development projects not subject to current amortisation.
Interest is capitalised only for the period that activities are in progress to
bring these projects to their intended use.
c) Depreciation and Amortisation
Tangible fixed assets are written off over their estimated useful lives on a
straight line basis at the following annual rates:
<TABLE>
<S> <C>
Plant and machinery.............. 5% on cost
Office equipment................. 33% on cost
</TABLE>
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.
Development of natural gas fields are amortised on a unit-of-production
basis using estimates based on proven reserves.
Customer service agreement costs are released to the profit and loss account
in proportion to the average number of customers in each period over the life
of the contract.
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.
F-8
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. ACCOUNTING POLICIES (Continued)
d) Market Entry Costs
Entry costs in the newly deregulated electricity market have been
capitalised within prepayments and accrued income and will be released to the
profit and loss account in proportion to the average number of customers in
each period over four years.
e) Leasing
Assets acquired under finance leases are capitalised and depreciated over
their estimated useful lives. The interest element of finance lease rental
payments is charged to the profit and loss account over the life of the lease,
in proportion to the capital balance outstanding.
Rentals payable under operating leases are charged to the profit and loss
account as incurred.
f) Turnover
Turnover from the sale of electricity is recognized by the Company on a
monthly basis exclusive of Value Added Tax and is attributable to one class of
business. Sales for each monthly period for over 100kW customers can be
accurately determined as meters are read by telementry every half an hour. For
the under 100kW customers meters are read monthly or quarterly. Consequently,
sales in this market for the period are determined by utilizing information
from actual sales billed and a calculation of the unbilled element of sales to
the period end. The unbilled calculation is derived from known invoiced Pool
consumption, plus an estimation of the consumption still to be invoiced by the
Pool.
g) Financial Instruments
The Company uses Contracts for Differences (CfDs) to minimise exposure to
Pool price variations. The cost or the income attributable to CfDs is recorded
in the accounting records when settlement is made. Where delivery under the
CfD has taken place prior to each month end, adjustments are made to account
for the known differences between the contract strike price and the Pool price
on the date of delivery.
h) Prepaid Energy Cost
The cost of electricity purchased from the Pool fluctuates throughout the
term of sales contracts. The Company recognises 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
F-9
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. ACCOUNTING POLICIES (Continued)
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. The Company reviews the difference between actual gross profit and
estimated gross profit on a quarterly basis.
i) 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 realised. 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.
j) 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 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.
k) Pensions
The Company does not have a company pension scheme but pays contributions to
individual pension plans for all full time permanent staff. Costs are therefore
expensed in the year incurred.
4. DIRECTORS
Directors' Remuneration
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1999 1998 1997
(amounts in thousands)
<S> <C> <C> <C>
Salaries, fees and consultancy services..... (Pounds)349 (Pounds)265 (Pounds)258
Benefits.................................... 32 20 18
Pension contributions....................... 31 20 19
----------- ----------- -----------
(Pounds)412 (Pounds)305 (Pounds)295
----------- ----------- -----------
Highest paid director....................... (Pounds)103 (Pounds) 82 (Pounds) 82
----------- ----------- -----------
</TABLE>
No directors were members of a company pension scheme (1998: nil).
F-10
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. DIRECTORS (Continued)
Directors' Interests in Share Options
The directors' interests in share options as of 30th June 1999 are as
follows:
<TABLE>
<CAPTION>
Number of Shares
----------------- Exercise
Founders Staff Price Exercisable Dates
<S> <C> <C> <C> <C> <C> <C>
B H Keenan........ 45,400 31.25p 1st Jan 1997 to 1st Jan 2001
200,000 100.00p 21st Oct 1997 to 28th April 2003
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
J L Sulley........ 60,000 50.00p 1st Jan 1997 to 1st Jan 2001
300,000 100.00p 1st Jan 1999 to 1st Jan 2001
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
I Stewart......... 170,000 122.50p 5th Nov 2000 to 5th Nov 2002
W E Evans......... 295,200 1.00p 28th May 1996 to 1st Jan 2001
150,000 100.00p 1st Jan 1999 to 1st Jan 2001
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
R E Jones......... 300,000 100.00p 1st Jan 1999 to 1st Jan 2001
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
J W Jarrell....... 22,800 31.25p 1st Jan 1997 to 1st Jan 2001
100,000 100.00p 21st Oct 1997 to 28th April 2003
100,000 100.00p 1st Jan 1999 to 1st Jan 2001
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
D O May........... 50,000 100.00p 1st Jan 1997 to 1st Jan 2001
15,000 122.50p 5th Nov 2000 to 5th Nov 2002
R W. Deakin....... 50,000 100.00p 1st Jan 1997 to 1st Jan 2001
H L Oakes......... 70,000 597.50p 20th Jan 2002 to 20th Jan 2004
--------- -------
Total............. 1,673,400 505,000
========= =======
</TABLE>
No granted options have been exercised nor have any expired.
The market price of the shares at 30th June 1999 was 845.0p (Nasdaq $13.625)
and the range during 1998-99 was 287.5p to 845.0p (Nasdaq $4.75 to $13.75).
5. EMPLOYEES
a) Employment costs (including executive directors) consist of:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1999 1998 1997
(amounts in thousands)
<S> <C> <C> <C>
Salaries and wages................... (Pounds)1,749 (Pounds) 859 (Pounds)503
Social security costs................ 175 80 50
Other pension costs.................. 215 105 66
------------- ------------- -----------
(Pounds)2,139 (Pounds)1,044 (Pounds)619
------------- ------------- -----------
</TABLE>
F-11
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except employee data)
5. EMPLOYEES (Continued)
b) The average number employed during the year was:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1999 1998 1997
<S> <C> <C> <C>
Sales and Marketing.................................. 34 12 7
Operations and Development........................... 16 7 3
Management, Finance and Administration............... 16 6 5
------ ------ ------
66 25 15
------ ------ ------
</TABLE>
6. INTEREST RECEIVABLE AND PAYABLE AND SIMILAR INCOME AND EXPENSE
a) Interest Receivable and Similar Income:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest receivable.................... (Pounds)838 (Pounds) 98 (Pounds)186
Gain on currency conversion............ -- 4 --
Other.................................. -- 3 3
----------- ----------- -----------
(Pounds)838 (Pounds)105 (Pounds)189
----------- ----------- -----------
</TABLE>
b) Interest Payable and Similar Expense:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest payable--bank borrowing.. (Pounds)1,533 (Pounds)716 (Pounds) 34
--finance leases............ 687 426 70
Letters of credit................. 250 43 --
Other interest charges............ 86 17 10
Loss on currency conversion....... 11 -- 40
------------- ----------- -----------
2,567 1,202 154
------------- ----------- -----------
Less: interest capitalised (notes
10, 11 & 12)..................... (376) (702) (34)
------------- ----------- -----------
(Pounds)2,191 (Pounds)500 (Pounds)120
------------- ----------- -----------
</TABLE>
7. PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION IS STATED AFTER
CHARGING:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1999 1998 1997
<S> <C> <C> <C>
Amortisation............................ (Pounds)447 (Pounds)276 (Pounds)38
Release of deferred costs............... 44 -- --
Depreciation--owned..................... 712 167 33
--held under finance leases........ 447 183 71
Auditors' remuneration--audit fee ...... 36 18 11
--other........................ 41 11 4
Operating lease rentals--land and
buildings.............................. 252 78 52
--plant and machinery.......... 175 61 57
</TABLE>
F-12
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
8. EARNINGS/(LOSSES) PER SHARE
Earnings/(losses) per share have been calculated in accordance with FRS 14
"Earnings per share" for both years by dividing the profit/(loss) for the
financial year by the weighted average number of ordinary shares in issue
during the financial year, based on the following information.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Profit/(loss) for the
financial year............. (Pounds) 4,007 (Pounds) (185) (Pounds) (1,181)
Basic weighted average share
capital (number of shares). 25,465 17,191 13,130
Diluted weighted average
share capital
(number of shares)......... 28,255 19,318 15,908
</TABLE>
The difference between the basic and the diluted weighted average share
capital is mainly attributable to unexercised share options.
9. TAXATION
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------
1999 1998 1997
<S> <C> <C> <C>
Corporation tax at 30% (1998: 31%)..................... -- -- --
Deferred taxation...................................... (Pounds)929 -- --
----------- --- ---
Tax charge............................................ (Pounds)929 -- --
----------- --- ---
</TABLE>
No charge for corporation tax arises due to the availability of capital
allowances. The tax charge for the year is (Pounds)552 lower than might be
expected as a result of reducing the current year profit by the net operating
losses brought forward.
10. FIXED ASSETS INTANGIBLE
Intangible fixed assets consists of:
a) The expenditures related to the acquisition and development of
natural gas fields including the applicable interest and overhead costs.
The gas produced is used to fuel the generation plants producing
electricity and not sold as natural gas. The cost is amortised over the
estimated productive life of the producing property based on proven
reserves.
F-13
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
10. FIXED ASSETS INTANGIBLE (Continued)
b) Advance costs to service customers in the newly deregulated
electricity market. These costs will be released to the profit and loss
account in proportion to the average number of customers in each period
over the life of the contract.
<TABLE>
<CAPTION>
Customer
Natural Gas Service
Group Cost Fields Agreement Total
<S> <C> <C> <C>
At 1st July 1998................. (Pounds)3,535 (Pounds)3,000 (Pounds)6,535
Additions........................ 1,451 2,135 3,586
------------- ------------- --------------
At 30th June 1999................ 4,986 5,135 10,121
------------- ------------- --------------
Accumulated amortisation
At 1st July 1998................. 314 -- 314
Charge for the year.............. 447 -- 447
Release of deferred cost......... -- 44 44
------------- ------------- --------------
At 30th June 1999................ (Pounds) 761 (Pounds) 44 (Pounds) 805
------------- ------------- --------------
Net book value
30th June 1998................... (Pounds)3,221 (Pounds)3,000 (Pounds) 6,221
------------- ------------- --------------
30th June 1999................... (Pounds)4,225 (Pounds)5,091 (Pounds) 9,316
------------- ------------- --------------
</TABLE>
Interest capitalised during the years ended 30th June 1999 and 1998 was
(Pounds)22 and (Pounds)nil respectively.
11. FIXED ASSETS TANGIBLE
<TABLE>
<CAPTION>
Assets in the
Office Course of Plant and
Group Cost Equipment Construction Equipment Total
<S> <C> <C> <C> <C>
At 1st July 1998........ (Pounds) 354 (Pounds) 5,384 (Pounds)13,254 (Pounds)18,992
Additions in the year... 1,304 14,970 104 16,378
Transferred in the year. -- (13,778) 13,778 --
------------- --------------- -------------- --------------
At 30th June 1999....... (Pounds)1,658 (Pounds) 6,576 (Pounds)27,136 (Pounds)35,370
------------- --------------- -------------- --------------
Accumulated depreciation
At 1st July 1998........ (Pounds) 96 -- (Pounds) 365 (Pounds) 461
Charge for the year..... 194 -- 965 1,159
------------- --------------- -------------- --------------
At 30th June 1999....... (Pounds) 290 -- (Pounds) 1,330 (Pounds) 1,620
------------- --------------- -------------- --------------
Net book value
At 30th June 1998....... (Pounds) 258 (Pounds) 5,384 (Pounds)12,889 (Pounds)18,531
------------- --------------- -------------- --------------
At 30th June 1999....... (Pounds)1,368 (Pounds) 6,576 (Pounds)25,806 (Pounds)33,750
------------- --------------- -------------- --------------
</TABLE>
Interest capitalised during the years ended 30th June 1999 and 1998 was
(Pounds)293 and (Pounds)702 respectively.
F-14
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
11. FIXED ASSETS TANGIBLE (Continued)
The net book value of the assets held under finance leases included above
were:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
<S> <C> <C>
Assets in the course of construction........... (Pounds) -- (Pounds)3,518
Plant and equipment............................ 14,820 4,476
-------------- -------------
(Pounds)14,820 (Pounds)7,994
-------------- -------------
</TABLE>
Capital commitments
The Group has capital commitments of:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
<S> <C> <C>
Authorised but not contracted.................. (Pounds) 8,000 (Pounds)6,100
-------------- -------------
Contracted but not provided.................... (Pounds)20,600 (Pounds)4,407
-------------- -------------
</TABLE>
12. FIXED ASSETS INVESTMENTS
<TABLE>
<CAPTION>
Group Joint
Venture
<S> <C>
At 1st July 1998............................................... --
Additions in the year.......................................... (Pounds)2,776
-------------
At 30th June 1999.............................................. (Pounds)2,776
-------------
</TABLE>
On 31st December 1998, the Group acquired a 50% holding in the ordinary
issued share capital of Petroplus Energy Park Milford Haven Limited, a company
incorporated in England on 22nd July 1998 and whose accounting reference date
is 31st December.
The principal activity of the joint venture is to generate and supply
electricity.
As at the date of these financial statements, the joint venture has not
traded whilst commissioning of the plant is being completed. These
commissioning costs are being incurred entirely by the other joint venture
partner, Petroplus International NV. Consequently the first results to be
recognised by the Group under FRS9, Associates and Joint Ventures, will be for
the year ending 30th June 2000. The cost of acquisition includes capitalised
interest of (Pounds)61.
F-15
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
12. FIXED ASSETS INVESTMENTS (Continued)
The subsidiary undertakings of the Company, all of which have an accounting
reference date of 30th June, are as follows:
<TABLE>
<CAPTION>
Country of Percentage
Incorporation Shareholdings
<S> <C> <C>
OPERATING
Independent Energy UK Limited............. England Ordinary Shares 100%
DORMANT
I E (Caythorpe) Limited................... England Ordinary Shares 100%
Independent Energy Generation Limited..... England Ordinary Shares 100%
Independent Services Limited.............. England Ordinary Shares 100%
Independent Energy Limited................ England Ordinary Shares 100%
Independent Energy Resources Limited...... England Ordinary Shares 100%
</TABLE>
13. DEBTORS
<TABLE>
<CAPTION>
June 30
-----------------------------
1999 1998
<S> <C> <C>
Trade debtors................................. (Pounds)57,663 (Pounds)10,905
Sundry debtors................................ 3,393 866
Other taxation and social security............ 400 781
Prepayments and accrued income................ 22,927 2,788
Amounts owed by subsidiary undertaking........ -- --
-------------- --------------
(Pounds)84,383 (Pounds)15,340
-------------- --------------
</TABLE>
Included within prepayments and accrued income are costs of (Pounds)6,787
which will be released to the profit and loss account after more than one year.
14. CREDITORS:
AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
<S> <C> <C>
Trade creditors................................ (Pounds)12,650 (Pounds)6,455
Bank loan...................................... -- 4,000
Bank loan construction facility................ 1,000 1,000
Bank overdraft................................. 22,038 22
Other taxation and social security............. 73 39
Corporation tax................................ -- --
Obligations under finance lease contracts...... 1,560 1,052
Accruals and deferred income................... 31,192 8,021
-------------- --------------
(Pounds)68,513 (Pounds)20,589
</TABLE>
The bank overdraft is secured by a debenture on all the Group assets other
than assets subject to other security arrangements.
F-16
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
14. CREDITORS: (Continued)
AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
<S> <C> <C>
Bank loan construction facility................ (Pounds) 7,672 (Pounds) 3,500
Unsecured loan notes........................... -- 1,400
Obligations under finance lease contracts...... 11,548 5,771
-------------- --------------
(Pounds)19,220 (Pounds)10,671
-------------- --------------
</TABLE>
Bank loan
The bank loan, which is part of a revolving construction facility of
(Pounds)9.5m (1998: (Pounds)8.0m), is secured by a debenture on all the Group
assets other than assets subject to other security arrangements. The loan bears
interest based on London inter bank rates (LIBOR), and is repayable as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------
1999 1998
<S> <C> <C>
Within one year................................. (Pounds)1,000 (Pounds)1,000
Between one and two years....................... 1,000 1,000
Between two and five years...................... 6,672 2,500
------------- -------------
(Pounds)8,672 (Pounds)4,500
------------- -------------
</TABLE>
Finance leases
Obligations under finance leases fall due as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
<S> <C> <C>
Within one year................................. (Pounds) 1,560 (Pounds)1,052
Between one and five years...................... 7,500 4,728
Over five years................................. 4,048 1,043
-------------- -------------
(Pounds)13,108 (Pounds)6,823
-------------- -------------
</TABLE>
The finance leases are secured on the assets concerned.
15. PROVISIONS FOR LIABILITIES AND CHARGES
Deferred taxation
Group
<TABLE>
<S> <C>
At 1st July 1998................................................. --
Charged to profit and loss....................................... (Pounds)929
-----------
At 30th June 1999................................................ (Pounds)929
-----------
</TABLE>
F-17
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
15. PROVISIONS FOR LIABILITIES AND CHARGES (Continued)
Deferred tax is analysed as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------
1999 1998
<S> <C> <C>
Capital allowances.................................. (Pounds)929 (Pounds)850
Losses offset....................................... -- (850)
----------- -----------
(Pounds)929 --
----------- -----------
</TABLE>
There are no unprovided amounts.
16. COMMITMENTS
The Company has entered into a five year Service Agreement with a leading
business operations outsourcing company, Vertex, for the provision of call
centre facilities, billing and transactional processing, to support
participation in the sub 100 kW electricity supply market.
A key component of this outsourcing arrangement is the provision of a
scalable system. Under the terms of the agreement there are obligations and
penalties for non performance on the parties.
17. OBLIGATIONS UNDER OPERATING LEASES
Annual commitments under operating leases fall due as follows:
<TABLE>
<CAPTION>
June 30,
----------------------
1999 1998
<S> <C> <C>
Expiring within one year--land and buildings......... (Pounds)41 --
--plant and machinery................................ 18 --
Expiring within two to five years--land and
buildings........................................... 42 (Pounds)203
--plant and machinery................................ 157 67
Expiring in more than five years--land and buildings. 169 --
--plant and machinery................................ -- --
</TABLE>
18. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Group's financial instruments comprise borrowings including lease
financing, equity shares, cash and liquid resources, and trade debtors and
trade creditors, that arise directly from its operations. The main purpose of
these financial instruments is to raise finance for the Group's operations.
Details of equity shares issued in the year are contained in note 19. These
included the issue of 8 million ordinary shares which on 29th July 1998 were
sold in the form of American Depository Shares at US$ 8.00 per share to raise
US$ 64 million before expenses. These shares commenced trading on the United
States Nasdaq Stock Market in July 1998.
F-18
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
The main risks arising from the Group's financial instruments are Pool price
risk and interest rate risk. The Board reviews and agrees policies for managing
each of these risks and they are summarised below. These policies have remained
unchanged throughout the year. The Group does not believe that it has a
significant exchange rate risk arising from its transactions in US Dollars.
a) Pool price risk
(i) Managing Price Risk for Electricity and Gas
The Company is primarily involved in retailing both electricity and gas to
business and domestic users. These sales are typically made under fixed price
contracts for durations of one or two years. The Company purchases both
electricity and gas from the wholesale markets in the UK and manages the price
risks between its purchase costs and its sales revenues by a number of
activities and mechanisms. These hedging activities involve the development of
the Company's own generating facilities, Contracts for Differences (CfDs)
purchased from third parties, the purchase of physical gas from the UK
wholesale market and, in the future, production of gas from the Company's
fields. The hedging instruments with third parties are typically established to
run for no more than one or two years to be consistent with the exposure
created by its sales contracts.
The electricity to supply 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 contract: "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 maximise 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.
(ii) Contracts for Differences (CfDs)
CfDs are contracts generally 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.
Given the variability of Pool prices, the Company's policy is to enter into
CfDs, which effectively fix the cost of most of the electricity that it sells
to its numerous customers. The Company
F-19
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
18. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
procures these CfDs from a broad range of market participants to avoid
concentration of purchasing. It also strives to achieve a mix of types of
hedging instrument which, in aggregate, match the majority of its contracted
electricity sales volumes at different times during the year.
(iii) Potential Liabilities
As at 30th June 1999 the Company has in place CfDs with third parties
covering the period from 30th June 1999 to 3rd October 2000 for 2,679 GWhs of
electricity that have a value of (Pounds)68.6 m. The CfDs are settled either
monthly or daily in accordance with the contracts.
As at 1st July 1999 the Company has no energy purchase contracts or CfDs
with third parties that extend beyond the summer of the year 2001. As all of
these contracts are more than covered by suitably priced sales commitments, and
are also at prices similar to current market values, the Company does not feel
the need to make any adjustments to the accounts in relation to these future
commitments.
b) Interest rate risk
The Company's exposure to interest rate fluctuations on its borrowings
including lease financing is managed by a combination of fixed or floating rate
facilities. Certain floating rate facilities can be converted to fixed rate at
short notice.
c) Financial Instruments
(i) Analyses by instrument
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
<S> <C> <C>
Bank overdraft................................. (Pounds)22,038 (Pounds) 22
Bank loan...................................... -- 4,000
Construction loan.............................. 8,672 4,500
Unsecured loan notes........................... -- 1,400
Finance leases................................. 13,108 6,823
-------------- --------------
(Pounds)43,818 (Pounds)16,745
-------------- --------------
</TABLE>
All amounts are payable in sterling except for one finance lease which is
payable in US dollars. The sterling equivalent amount outstanding on this lease
is (Pounds)640 (1998: (Pounds)696).
F-20
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
18. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
(ii) Maturity analyses
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
<S> <C> <C>
Repayments fall due as follows:
Within one year.............................. (Pounds)24,598 (Pounds) 6,074
After more than one year..................... 19,220 10,671
-------------- --------------
43,818 16,745
-------------- --------------
Repayments after more than one year are as
follows:
Between one and two years.................... 2,560 3,452
Between two and five years................... 8,940 6,176
More than five years......................... 7,720 1,043
-------------- --------------
(Pounds)19,220 (Pounds)10,671
-------------- --------------
</TABLE>
(iii) Interest Rate analyses
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
<S> <C> <C>
Fixed rate borrowings.......................... (Pounds) 5,802 (Pounds) 8,223
Floating rate borrowings....................... 38,016 8,522
-------------- --------------
(Pounds)43,818 (Pounds)16,745
-------------- --------------
</TABLE>
The weighted average interest rate for the fixed rate liabilities was 9.58%,
with a weighted average period of 5.1 years for which the rate is fixed.
Floating rate borrowings bear interest rates based on LIBOR.
(iv) Borrowing facilities
The Group has the following undrawn committed borrowing facilities at 30th
June 1999 in respect of which all conditions precedent had been met:
<TABLE>
<CAPTION>
Fixed rate Floating rate
1999 1999 Total 1999 Total 1998
<S> <C> <C> <C> <C>
Expiring within one
year................... (Pounds)3,758 (Pounds)13,171 (Pounds)16,929 (Pounds)5,978
Expiring after more than
one year............... -- 827 827 3,500
------------- -------------- -------------- -------------
(Pounds)3,758 (Pounds)13,998 (Pounds)17,756 (Pounds)9,478
------------- -------------- -------------- -------------
</TABLE>
The fair value of all financial assets and liabilities are equal to their
carrying values.
As permitted by FRS 13, the analyses of financial instruments in this note
do not include short-term debtors and creditors.
F-21
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. SHARE CAPITAL
<TABLE>
<CAPTION>
June 30,
-----------------------
1999 1998
<S> <C> <C>
Authorised:
50,000,000 ordinary shares of 1p each (1998:
28,000,000)........................................ (Pounds)500 (Pounds)280
----------- -----------
On 2nd July 1998, the number of authorised shares
were increased from 28,000,000 to 50,000,000.......
Issued and fully paid ordinary shares of 1p each At
1st July 1998...................................... 179 150
Issued in the year.................................. 84 29
----------- -----------
At 30th June 1999................................... (Pounds)263 (Pounds)179
----------- -----------
</TABLE>
The Company issued 8,000,000 ordinary shares and on 29th July 1998 concluded
the sale of these in the form of American Depository Shares at US $8.00 per
share to raise US $64 million before expenses. These shares were traded on the
United States Nasdaq Stock Market. The proceeds were used to fund the
acquisition and installation of additional generating plants, repay certain
outstanding indebtedness and provide working capital for the expansion of the
Company's operations.
Other issues were the exercise of:
<TABLE>
<CAPTION>
Exercise
Price Number
<S> <C> <C>
Share options........................................... (Pounds)1.00 280,000
Share warrants.......................................... (Pounds)0.75 57,500
</TABLE>
Share option plan
The Company has a share option plan which provides for grants of options to
its employees to acquire the Company's shares. As at 30th June 1999 there are
outstanding options for the issue of 4,075,400 ordinary shares of 1p each.
A summary of the share options granted and the changes during the periods is
presented below. The share options granted include 250,000 share options in
aggregate to the Company's nominated broker and financial advisor granted on
31st May 1996, of which 180,000 share options were exercised in 1997/98, the
remainder of which were exercised in August and November 1998 at an exercise
price of 100 pence.
F-22
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. SHARE CAPITAL (Continued)
During the year 250,000 share options were granted to the Company's
Investment Bankers in lieu of fees.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1999 1998
------------------ ------------------
Weighted Weighted
Average Average
Exercise Number of Exercise Number of
Price Shares Price Shares
<S> <C> <C> <C> <C>
At beginning of the year............. 93p 3,463,400 82p 2,778,400
Granted in the year.................. 568p 912,000 122.5p 925,000
Cancelled in the year................ 360p (20,000) -- --
Exercised in the year................ 100p (280,000) 83p (240,000)
--------- ---------
At end of the year................... 197p 4,075,400 93p 3,463,400
========= =========
</TABLE>
The following table summarises information regarding share options at 30th
June 1999:
<TABLE>
<CAPTION>
Weighted
Average
Years
Remaining
Effective Grant Number Contract Number
Exercise Price Date Outstanding life Exercisable
<S> <C> <C> <C> <C>
1p....................... 28th May 1996 295,200 1.50 295,200
31.25p................... 28th May 1996 193,200 1.50 193,200
50p...................... 28th May 1996 60,000 1.50 60,000
100p..................... 28th May 1996 1,710,000 2.29 1,710,000
122.5p................... 5th November 1997 915,000 3.35 --
402.5p................... 3rd November 1998 45,000 4.34 --
450p..................... 20th August 1998 127,000 4.14 --
576p..................... 20th January 1999 250,000 6.55 250,000
597p..................... 20th January 1999 385,000 4.55 --
652.5p................... 4th May 1999 70,000 4.83 --
667.5p................... 3rd March 1999 25,000 4.67 --
--------- ---- ---------
4,075,400 3.04 2,508,400
--------- ---- ---------
</TABLE>
The option price range at each year end was as follows:
<TABLE>
<S> <C>
30th June 1999.................................................. 1p to 667.5p
30th June 1998.................................................. 1p to 122.5p
30th June 1997.................................................. 1p to 100.0p
</TABLE>
Details of the directors' options which are included in the above figures
are shown in note 4 to the financial statements.
F-23
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except per share data)
19. SHARE CAPITAL (Continued)
Share warrants
On 30th June 1997 share warrants for 140,000 ordinary shares were granted in
association with the issue of Loan Notes of (Pounds)1,400; the warrants are
exercisable at a price of 75p at anytime until their expiration on 31st March
2002. During the year 1998/99 a further 57,500 of the share warrants were
exercised, leaving 10,000 unexercised.
20. RESERVES AND OTHER SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
Share Premium Profit and
Account Loss Account
<S> <C> <C>
At 1st July 1998............................ (Pounds)10,695 (Pounds)(1,421)
Share premium arising on offering........... 36,278 --
Expenses arising on offering................ (1,263) --
Share premium arising on exercise of stock
options and warrants....................... 320 --
Retained profit/(loss) for the year......... -- 4,007
-------------- --------------
At 30th June 1999........................... (Pounds)46,030 (Pounds) 2,586
-------------- --------------
</TABLE>
21. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
June 30,
--------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Ordinary shares issued........ (Pounds) 263 (Pounds) 179 (Pounds) 150
Share premium on offering..... 45,710 10,445 8,044
Share premium on exercise of
stock options and warrants... 320 250 --
Profit/(Loss) for year........ 4,007 (185) (1,181)
Loss at start of year......... (1,421) (1,236) (56)
-------------- ------------- -------------
Balance at end of year........ (Pounds)48,879 (Pounds)9,453 (Pounds)6,957
-------------- ------------- -------------
</TABLE>
F-24
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
22. ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
At Beginning of
Year Cash Flows Other Changes At End of Year
<S> <C> <C> <C> <C>
Year Ended 30th June
1999
Cash at bank and in
hand................... (Pounds) 621 (Pounds) (43) -- (Pounds) 578
Security deposits....... -- 6,738 -- 6,738
Bank overdraft.......... (22) (22,016) -- (22,038)
--------------- --------------- -------------- ---------------
599 (15,321) -- (14,722)
Leases due within one
year................... (1,052) 1,189 (Pounds)(1,697) (1,560)
Leases due after more
than one year.......... (5,771) -- (5,777) (11,548)
--------------- --------------- -------------- ---------------
(6,823) 1,189 (7,474) (13,108)
Loans due within one
year................... (5,000) 4,000 -- (1,000)
Loans due after more
than one year.......... (4,900) (2,772) -- (7,672)
--------------- --------------- -------------- ---------------
(9,900) 1,228 -- (8,672)
--------------- --------------- -------------- ---------------
Total................... (Pounds)(16,124) (Pounds)(12,904) (Pounds)(7,474) (Pounds)(36,502)
--------------- --------------- -------------- ---------------
</TABLE>
23. RECONCILIATION OF NET CASH FLOWS TO MOVEMENT IN NET DEBT
<TABLE>
<S> <C> <C>
Year Ended 30th June 1999
Decrease in cash in the year.............. (Pounds)(15,321)
Cash outflow from decrease in loan
financing................................ 1,228
Cash outflow from decrease in lease
financing................................ 1,189
New finance leases........................ (7,474)
---------------
Movement in net debt...................... (Pounds)(20,378)
Net debt at 30th June 1998................ (16,124)
---------------
Net debt at 30th June 1999................ (Pounds)(36,502)
---------------
</TABLE>
24. MAJOR NON-CASH TRANSACTIONS
During the years ended 30 June 1999, 1998 and 1997, the Company entered into
finance leases in respect of assets with a total capital value at the inception
of the lease of (Pounds)7,474, (Pounds)2,666 and (Pounds)4,383, respectively.
25. POST BALANCE SHEET EVENT
On 8th July 1999, the Group was granted a twelve month (Pounds)80m Revolving
Credit and Letters of Credit facility by a syndicate of six banks led by
Barclays Bank PLC. The facility is secured on Group receivables.
F-25
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
26. 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 contingent 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 realisability, useful lives
of assets and income taxes. Actual results could differ from those estimates.
The principle differences between UK GAAP and US GAAP are disclosed below:
a) Statement of Operation Differences
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
Note 1999 1998 1997
<S> <C> <C> <C> <C>
Profit/(loss) on ordinary
activities after taxation
under UK GAAP............. (Pounds)4,007 (Pounds)(185) (Pounds)(1,181)
US GAAP adjustments:
Stock based compensation--
Employee Share Option
Scheme.................... (c) (74) (136) (188)
------------- ------------ --------------
Total US GAAP adjustments.. (74) (136) (188)
Net effect of US GAAP
adjustments............... (74) (136) (188)
------------- ------------ --------------
Net profit/(loss) under US
GAAP...................... 3,933 (321) (1,369)
============= ============ ==============
Primary earnings/(loss) per
ordinary share under US
GAAP...................... 15.4p (1.9)p (10.4)p
Diluted earnings/(loss) per
ordinary share under US
GAAP...................... 13.9p
</TABLE>
b) Equity Reconciliation
<TABLE>
<CAPTION>
Note 1999 1998 1997
<S> <C> <C> <C> <C>
Equity under UK GAAP..... (Pounds)48,879 (Pounds)9,453 (Pounds)6,958
Stock based compensation. (c) (434) (397) (299)
Net effect of US GAAP
adjustments............. (434) (397) (299)
-------------- ------------- -------------
Equity under US GAAP..... (d) (Pounds)48,445 (Pounds)9,056 (Pounds)6,659
-------------- ------------- -------------
</TABLE>
The diluted earnings per share for the years ended 30 June 1998 and 1997 are
not disclosed as the effect of the employee share options is anti-dilutive.
F-26
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
26. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) (Continued)
c) Employee Share Option Scheme
Under UK GAAP no compensation cost is recognised 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
recognised 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 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-Scholes
option pricing model, the pro forma effect would have been:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1999 1998 1997
(amounts in thousands)
<S> <C> <C> <C>
Net profit/(loss) applicable to
ordinary shares as reported..... (Pounds)3,933 (Pounds)(321) (Pounds)(1,369)
Net profit/(loss) applicable to
ordinary shares pro forma....... 1,998 (428) (1,461)
Primary net earnings/(loss) per
ordinary share as reported...... 15.4p (1.9)p (10.4)p
Primary net earnings/(loss) per
ordinary share pro forma........ 7.8p (2.5)p (11.1)p
</TABLE>
The company has issued a range of options from commencement of trade to the
year ended 30th June 1999. A summary of the options granted and weighted
average assumptions used in the calculation of Black-Scholes are as follows:
<TABLE>
<CAPTION>
Expected Interest
Date of Grants life rate Volatility
<S> <C> <C> <C>
28th May 1996................................... 3.42 6.00% 10.58%
11 November 1997................................ 2.0 6.70% 22.38%
20th August 1998................................ 2.0 6.87% 186.03%
3rd November 1998............................... 2.0 6.65% 163.85%
20th January 1999 (a)........................... 2.0 6.49% 140.59%
20th January 1999 (b)........................... 6.0 5.97% 140.59%
3rd March 1999.................................. 2.0 6.60% 138.22%
4th May 1999.................................... 2.0 6.64% 124.09%
</TABLE>
The options granted on 20th January 1999 denoted (b) were issued at a
discount of 21.5p from market price.
All other options granted in the current year were issued at market price.
The weighted average fair values at date of grant during 1999 and 1998
respectively were (Pounds)4.50 and (Pounds)0.23.
F-27
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
26. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) (Continued)
d) US GAAP Equity Roll Forward
Shareholders equity roll forward in accordance with US GAAP:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of year...... (Pounds) 9,056 (Pounds)6,659 (Pounds) 6,676
Other gains....................... 35,456 2,718 1,352
Net profit/(loss)................. 3,933 (321) (1,369)
-------------- ------------- --------------
Balance at end of year............ (Pounds)48,445 (Pounds)9,056 (Pounds) 6,659
-------------- ------------- --------------
</TABLE>
27. ADDITIONAL US GAAP DISCLOSURE REQUIREMENTS
a) Cash flow information
The consolidated cash flow statements are prepared in conformity with UK
GAAP. The principal differences between these statements and cash flow
statements prepared under US GAAP are as follows:
(i) Under UK GAAP, net cash flow from operating activities is determined
before considering cash flows from returns on investments and servicing
of finance and taxes paid. Under US GAAP, net cash flow from operating
activities is determined after these items.
A summary of the Company's operating, investing and financial activities
classified in accordance with US GAAP is presented below. For purposes
of this summary, cash and cash equivalents consist of cash deposits with
banks and security deposits.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Cash (used in) operating
activities................. (Pounds) (33,498) (Pounds) (3,108) (Pounds)(2,231)
Cash provided by financing
activities................. 33,022 10,489 2,273
Cash provided by (used in)
by investing activities.... (14,845) (8,705) 540
---------------- --------------- --------------
Net (decrease) in cash and
deposits with banks........ (15,321) (1,324) 1,923
Balance at beginning of
year....................... 599 1,923 --
---------------- --------------- --------------
Balance at end of year...... (Pounds)(14,722) (Pounds) 599 (Pounds) 1,923
---------------- --------------- --------------
</TABLE>
(ii) The amount of taxes and interest paid, net of capitalised interest,
during the year is:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Interest, net of capitalisation.......... (Pounds)2,598 (Pounds)1,074 (Pounds)81
Stamp duty reserve tax................... 579 -- --
------------- ------------- ----------
</TABLE>
F-28
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
27. ADDITIONAL US GAAP DISCLOSURE REQUIREMENTS (Continued)
b) Other disclosures
Total liabilities and stockholders' equity and, Total assets, in accordance
with UK GAAP were as follows:
<TABLE>
<S> <C>
30th June 1999............................................... (Pounds)137,541
30th June 1998............................................... 40,712
</TABLE>
Total assets prepared in accordance with US GAAP were as follows:
<TABLE>
<S> <C>
30th June 1999....................................................... 137,943
30th June 1998....................................................... 41,105
</TABLE>
Long term liabilities prepared in accordance with US GAAP were as follows:
<TABLE>
<S> <C>
30th June 1999........................................................ 20,056
30th June 1998........................................................ 11,461
</TABLE>
c) Commitments under operating leases
The Group's future minimum payments under operating leases as at 30th June
1999 are as follows:
<TABLE>
<S> <C>
Years ending 30th June
2000........................................................... (Pounds) 725
2001........................................................... 740
2002........................................................... 624
2003........................................................... 546
2004........................................................... 516
Thereafter..................................................... 3,079
-------------
(Pounds)6,230
-------------
</TABLE>
d) Reconciliation of tax charge to statutory rate on losses
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Profit/(loss) on ordinary
activities before taxation...... (Pounds)4,936 (Pounds) (185) (Pounds)(1,181)
------------- ------------- --------------
Expected tax charge at the
statutory rate.................. 1,518 (57) (367)
Increase in deferred tax
liability....................... (929) (390) (394)
------------- ------------- --------------
Difference to reconcile.......... 589 (447) (761)
------------- ------------- --------------
Deferred tax not recognised...... 317 (802) (958)
Intangible asset tax allowances.. 460 457 212
Inadmissible expenditure......... (188) (102) (15)
------------- ------------- --------------
589 (447) (761)
------------- ------------- --------------
</TABLE>
F-29
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
27. ADDITIONAL US GAAP DISCLOSURE REQUIREMENTS (Continued)
The Group has accumulated losses and capital allowances to be carried
forward and relieved in the future at the following year end of:
<TABLE>
<S> <C>
30th June 1999................................................. (Pounds)7,788
30th June 1998................................................. 7,710
30th June 1997................................................. 5,100
</TABLE>
The Financial Accounting Standards Board periodically issues statements of
financial accounting standards. In August 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, which applies to all entities, requires derivative instruments to be
measured at fair value and recognized as either assets or liabilities on the
balance sheet. The statement, as amended by SFAS No. 137 is effective for
fiscal years beginning after June 15, 2000 with earlier application encouraged
but permitted only as of the beginning of any fiscal quarter beginning after
June 1998. Retroactive application is prohibited. We do not believe this
statement will have a material effect on our financial condition or results of
operations.
In April 1998, The Accounting Standards Executive Committee issued Statement
of Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities" which
requires all start-up and organizational costs to be expensed as incurred. It
also requires all remaining historically capitalized amounts to these costs
existing at the date of adoption to be expensed and reported as the cumulative
effect of a change in accounting principles. SOP 98-5 is effective for all
fiscal years beginning after December 31, 1998. The Company believes that the
adoption of SOP 98-5 for U.S. GAAP reporting purposes will not have a material
effect on its financial statements.
F-30
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
September 28, 1999
[Independent Energy Logo]
10,440,000 American Depositary Shares
Representing 10,440,000 Ordinary Shares
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette
Prudential Securities
Johnson Rice & Company L.L.C.
- -------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than the offering memorandum or to make
representations as to matters not stated in this offering memorandum. You must
not rely on unauthorized information. This offering memorandum is not an offer
to sell these securities or our solicitation of your offer to buy the
securities in any jurisdiction where that would not be permitted or legal.
Neither the delivery of this offering memorandum nor any sales made hereunder
after date of this offering memorandum shall create an implication that the
information contained herein or the affairs of the company have not changed
since the date hereof.
- -------------------------------------------------------------------------------
