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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-32336
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PROSPECTUS
MARCH 28, 2000
[LOGO]
4,070,000 AMERICAN DEPOSITARY SHARES
REPRESENTING 4,070,000 ORDINARY SHARES
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THE COMPANY:
- - We are an independent marketer of electricity, natural gas and other
complementary services in the United Kingdom.
- - Independent Energy Holdings PLC
Radcliffe House
Blenheim Court
Solihull, West Midlands B91 2AA
United Kingdom
011-44-121-705-1111
NASDAQ NATIONAL MARKET SYMBOL:
- - INDYY
LONDON STOCK EXCHANGE SYMBOL:
- - IEH
THE OFFERING:
- - Each ADS represents one of our ordinary shares. There is an existing trading
market for the ADSs. The last reported sale price on Nasdaq on March 28, 2000
was $49.25 per ADS.
- - You may also purchase ordinary shares in lieu of ADSs. The last reported sale
price on the London Stock Exchange on March 28, 2000 was L32.90 per share.
- - We are offering 3,200,000 ADSs and selling shareholders are offering 870,000
ADSs for resale. We will not receive any proceeds from the sale of ADSs by the
selling shareholders.
- - We and one of the selling shareholders have granted the underwriters an option
to purchase an additional 610,500 ADSs to cover over-allotments.
- - We plan to use the proceeds from this offering for general corporate purposes,
including working capital.
- - Closing: March 31, 2000.
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Per ADS Total
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Public offering price: $49.25 $200,447,500
Underwriting fees: 2.21 8,994,700
Proceeds to Independent Energy: 47.04 150,528,000
Proceeds to selling shareholders: 47.04 40,924,800
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THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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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.
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DONALDSON, LUFKIN & JENRETTE
PRUDENTIAL SECURITIES
JOHNSON RICE & COMPANY L.L.C.
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TABLE OF CONTENTS
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PAGE
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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....................... 16
Capitalization........................ 17
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PAGE
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Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business and Properties............... 25
Management............................ 36
Principal and Selling Shareholders.... 38
Description of Share Capital.......... 39
Description of American Depositary
Receipts............................ 43
Taxation.............................. 50
Underwriting.......................... 54
Legal Matters......................... 56
Experts............................... 56
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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 some 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 Securities and
Exchange 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 SEC. 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.
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, 1999 (File No. 0-23451) that was
filed with the SEC pursuant to the Securities Exchange Act of 1934.
i
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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 Holdings PLC, Radcliffe
House, Blenheim Court, Solihull, West Midlands B91 2AA, United Kingdom,
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 between U.K. GAAP and U.S. GAAP 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."
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 Exchange Act.
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.
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PRESENTATION OF INFORMATION
Our audited consolidated financial information as of June 30, 1998 and 1999
and as of December 31, 1999 and for the fiscal years ended June 30, 1997, 1998
and 1999 and the six months ended December 31, 1999 and our unaudited
consolidated financial information for the six months ended December 31, 1998
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 ("L" 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 $1.62 per L1, 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 December 31, 1999. The Noon Buying Rate
on March 28, 2000 was $1.59 per Ll. See "Exchange Rates."
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 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.
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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.
INDEPENDENT ENERGY
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 also
purchase our electricity. In January 2000, through a joint marketing
arrangement, we also began offering telecommunications services to our business
customers. 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 282% to L337.7 million ($546.2 million) for
the six months ended December 31, 1999 from L88.2 million ($142.9
million) for the six months ended December 31, 1998.
- Our sales volumes also increased by over 290% to 8,200 GWh in the six
months ended December 31, 1999 from 2,100 GWh in the six months ended
December 31, 1998.
- At December 31, 1999, we had over 259,000 electricity customers and
63,000 natural gas customers compared to approximately 83,400 electricity
customers and 130 natural gas customers at June 30, 1999 and 1,350
electricity customers at June 30, 1998.
- At February 16, 2000, we had annualized sales contracts in place for the
sale of electricity and natural gas of approximately L1.0 billion ($1.60
billion) up from approximately L767 million ($1.20 billion) at September
1, 1999. The amount of annualized sales contracts is based on our
estimate of annual revenue from our sales contracts in place at February
16, 2000, without regard to the renewal dates of these contracts.
Substantially all of the annualized sales contracts represented
electricity sales.
- In the six months ended December 31, 1999, we reported net income of L8.4
million ($13.7 million), compared to L707,000 ($1.1 million) for the six
months ended December 31, 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 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.
1
<PAGE> 6
Based on industry publications, we believe that 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 L15.6 billion ($25.3 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 L7.2 billion ($11.7 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 L7.9
billion ($12.8 billion) and approximately L3.5 billion ($5.7 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 and telecommunications services 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 6.2% 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 6,100 new customers during the period
September 1, 1999 to February 29, 2000.
- NATURAL GAS, TELECOMMUNICATIONS AND OTHER COMPLEMENTARY SERVICES. We
believe that significant opportunities exist to cost-effectively market
additional energy products and telecommunications or other complementary
services to our electricity customer base. To that end, we began sales of
natural gas to our existing customer base and to new customers in
February 1999. In October 1999, we acquired York Gas Limited, an
independent natural gas supplier in the U.K., from Kelda Group PLC. The
acquisition enhanced our position as the largest independent provider of
both natural gas and electricity in the U.K.
In December 1999, we entered into an agreement with Future Integrated
Telephony PLC, or FIT, allowing us to market telecommunications services
along with our gas and electricity packages to our business customers.
Under the terms of this agreement, we cross-sell FIT's telecommunications
services of both mobile and fixed telephone supply. In return, FIT acts as
our sales agent and markets our gas and electricity packages to its
customers. This arrangement is a significant development for us in
diversifying from the energy supply business, which we believe represents
a first step towards becoming a multi-utility supplier.
Although we believe there is significant potential for growth, sales of
natural gas and telecommunications services do not currently comprise a
material portion of our revenue. We also believe that there are additional
opportunities to capitalize on the Independent Energy brand name by
offering other complementary services to customers seeking to outsource
their energy-related facilities management or other complementary
services.
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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 our electricity
requirements; (4) securing natural gas reserves; and (5) acquiring interests in
large generation facilities. By utilizing 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 11 small embedded generating plants
with a capacity of 90 MW, with an additional 28 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 12 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
electricity 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 operating
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 the
Netherlands, as these countries are the first to commence deregulation in
continental Europe in a similar manner to the U.K. Spain and the Netherlands
have commenced deregulation of their electricity and natural gas markets, and
currently allow large and medium size industrial and business consumers to
select their electricity and natural gas suppliers. We have formed a Spanish
subsidiary to provide a platform from which to enter the Spanish market and are
engaged in the process of obtaining a license to sell electricity. We are also
in the process of negotiating marketing agreements with established sales
channels in the Spanish market and formulating risk management arrangements to
cover the purchase of electricity. In addition, we have begun discussions with
potential Dutch partners to facilitate our entry into the electricity and gas
markets in the Netherlands.
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THE OFFERING
THE OFFERING:
BY INDEPENDENT ENERGY............. 3,200,000 ADSs or ordinary shares
BY THE SELLING SHAREHOLDERS....... 870,000 ADSs or ordinary shares
ORDINARY SHARES TO BE OUTSTANDING
AFTER THIS
OFFERING.......................... 40,683,327(1)(2)
VOTING RIGHTS....................... The holders of ADRs, acting through the
depositary, are entitled to the same
voting rights as holders of ordinary
shares. See "Description of American
Depositary Receipts -- Voting of
Deposited Securities."
USE OF PROCEEDS..................... We plan to use the net proceeds from
the offering as follows:
- to cash collateralize our obligation
under the required letter of credit
to the Electricity Pool;
- to repay outstanding borrowings under
our revolving credit facility; and
- for general corporate purposes,
including working capital.
We will not receive any proceeds from
the sales of the ADSs by the selling
shareholders. See "Use of Proceeds."
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" and
"Description of American Depositary
Receipts." Delivery of ordinary shares
in lieu of ADSs is expected to be made
in book-entry form through Lloyds Bank
Registrars in the United Kingdom on or
about March 31, 2000. Purchasers who
choose to receive ordinary shares in
lieu of ADSs should consult with their
selling agent and counsel prior to
undertaking any transaction to dispose
of ordinary shares prior to delivery of
such ordinary shares. See "Description
of Share Capital" and "Taxation."
LISTING OF ADSS AND ORDINARY
SHARES.............................. The ADSs are listed on the Nasdaq
National Market and the ordinary shares
are listed on the London Stock
Exchange.
NASDAQ NATIONAL MARKET SYMBOL....... INDYY
LONDON STOCK EXCHANGE SYMBOL........ IEH
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(1) Assumes no exercise of the underwriters' over-allotment option.
(2) Excludes 3,969,200 ordinary shares issuable pursuant to outstanding options,
and 5,000 ordinary shares issuable pursuant to outstanding warrants on March
9, 2000.
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary historical consolidated financial data for each of the three
fiscal years in the period ended June 30, 1999 and for the six months ended
December 31, 1999 and as of December 31, 1999 are derived from our audited
consolidated financial statements included elsewhere in this prospectus. The
historical financial information for the six months ended December 31, 1998 was
derived from our unaudited 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 3,200,000 ordinary shares in the form
of ADSs at $49.25 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.
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SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------- -----------------------------------
1997 1998 1999 1998 1999 1999(1)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
U.K. GAAP
Revenue........................................ L 11,127 L 57,989 L 246,856 L 88,218 L 337,692 $ 547,061
Cost of sales.................................. (10,872) (55,457) (234,387) (85,297) (313,219) (507,415)
Administrative expenses........................ (1,363) (1,696) (4,530) (1,584) (8,393) (13,596)
Depreciation and amortization.................. (142) (626) (1,650) (702) (1,405) (2,276)
-------- -------- --------- -------- --------- ---------
Operating income (loss)........................ (1,250) 210 6,289 635 14,675 23,774
Interest income (expense), net................. 69 (395) (1,353) 72 (2,609) (4,227)
Income tax expense............................. -- -- (929) 0 (3,620) (5,864)
-------- -------- --------- -------- --------- ---------
Net income (loss).............................. (1,182) (185) 4,007 707 8,446 13,683
Income (loss) per share -- Basic............... (9.0)p (1.1)p 15.7p 2.9p 26.7p $ 0.43
-- Diluted................ (7.4)p (1.0)p 14.2p 2.6p 24.1p $ 0.39
Weighted average shares outstanding -- Basic... 13,130 17,191 25,465 24,752 31,664 31,664
-- Diluted...... 15,908 19,318 28,255 28,310 35,949 35,949
U.S. GAAP
Revenue........................................ L 11,127 L 57,989 L 246,856 L 88,218 L 337,692 $ 547,061
Net income (loss).............................. (1,370) (321) 3,933 687 8,446 13,683
Income (loss) per share -- Basic............... (10.4)p (1.9)p 15.4p 2.8p 26.7p $ 0.43
-- Diluted................ (8.6)p (1.7)p 13.9p 2.5p 24.1p $ 0.39
Weighted average shares outstanding -- Basic... 13,130 17,191 25,465 24,752 31,664 31,664
-- Diluted...... 15,908 19,318 28,255 28,310 35,949 35,949
OPERATING DATA:
Electricity and natural gas sales (GWh)........ 256 1,410 6,117 2,178 8,199 8,199
Customer sites (at end of period).............. 324 1,350 83,630 2,505 322,000 322,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
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ACTUAL ACTUAL(1) AS ADJUSTED AS ADJUSTED(1)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
U.K. GAAP
Working capital............................................. L110,054 $178,287 L199,954(2) $323,925(2)
Total assets................................................ 341,488 553,210 396,388 642,149
Long-term liabilities....................................... 20,423 33,084 20,423 33,084
Shareholders' equity........................................ 150,445 243,720 240,345 389,359
U.S. GAAP
Working capital............................................. L110,054 $178,287 L199,954(2) $323,925(2)
Total assets................................................ 341,607 553,403 396,507 642,341
Long-term liabilities....................................... 20,932 33,910 20,932 33,910
Shareholders' equity........................................ 150,011 243,018 239,911 388,656
</TABLE>
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(1) Translations into dollars in this table are solely for convenience and are
computed at the Noon Buying Rate on December 31, 1999 of $1.62 per Ll.
(2) Includes L50.0 million ($81.0 million) of restricted cash expected to be
used to collateralize our obligation under the required letter of credit to
the Electricity Pool. We received a letter dated March 2, 2000 from Duff &
Phelps Credit Rating Co. notifying us that Duff & Phelps intends to assign
our company an investment grade rating upon consummation of this offering
and the obtaining of a three-year L200.0 million or greater working capital
facility. Currently, we are negotiating with various banks to obtain the new
working capital facility. We cannot offer any assurances, however, that we
will be able to obtain such a facility or that such rating will be granted.
Upon receipt of this rating, we would no longer be required under the
Pooling and Settlement Agreement of England and Wales to post a letter of
credit to the Electricity Pool. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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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. These factors include:
- success in implementing our business strategy;
- increases in our costs of energy;
- nature and extent of new competition;
- our ability to develop or obtain the necessary business administration
systems required by an expanded level of operations; and
- changes in the conditions in which we compete.
Many of these factors are beyond our control and our management.
OUR INABILITY TO BILL MANY OF OUR CUSTOMERS ON A TIMELY BASIS MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS.
We have experienced delays in billing our small business and residential
electricity customers (sub 100 kW customers). The sub 100 kW customers
represented approximately 40% of our annualized sales contracts in place for the
sale of electricity through February 2000. Electricity consumption is calculated
from meter readings. These readings (which may be actual readings or estimated
readings) are contained within the data we receive from the regional electricity
companies, or RECs. RECs are responsible for providing us with meter technical
details and meter readings for all customers within their franchise area -- this
includes customers of our competitors (other RECs and independent suppliers) and
also the supply business of the REC itself. The delays in billing have been
caused by the quality and timing of data provided by the regional electricity
companies, or RECs, on the details of the meter installed at the customers
premises and the opening readings of the meters. The problem has manifested
itself in the form of missing information, the provision of the information in
an untimely fashion, as well as multiple and different versions of each of the
pieces of information and inconsistent forms of information among the RECs. We
have modified the software provided by a third-party vendor in a manner that we
believe now enables us to identify and correct faulty data and thereby bill our
sub 100 kW customers in a timely and accurate manner. However, we are still
experiencing delays in billing a portion of our customers.
We generally send bills to our customers in the sub 100 kW market on a
monthly or quarterly basis (depending on the size of the customer) within 12
days after the end of the period to which the bill relates. Customers generally
have 14 or 21 days (depending on the size of the customer) to pay bills from the
date of invoice. We receive customer payments of invoices on average 25 days
following the end of the billing period. From the inception of our marketing to
the sub 100 kW market in March 1999 through December 31, 1999, we had billed
less than 30% of revenue due for billing in the sub 100 kW market. At the end of
January 2000 we implemented procedures to improve our billing practices in the
sub 100 kW market. From March 1999 through February 27, 2000, we had billed
approximately L89.9 million of the L163.5 million of revenue due for billing in
the sub 100 kW market, which represents approximately 55%. The inability to bill
and collect revenues that have currently been recognized but not yet billed
would have a material adverse impact on our financial condition and results of
operations.
The delays in billing customers in the sub 100 kW market have significantly
impacted our liquidity. Under the Pooling and Settlement Agreement of England
and Wales, we are required to post a letter of credit to cover our electricity
purchases for a 28-day forward period. Due in part to our billing problem as
well as the growth in our business, it was recently necessary to increase the
size of our bank facility to L182.0 million, including a 90-day L60.0 million
letter of credit to support our obligations to the Electricity Pool. In
connection with the issuance of this letter of credit, we and Barclays Bank PLC
entered into agreements with an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation, which agreed to
6
<PAGE> 11
reimburse Barclays Bank for amounts drawn down under the letter of credit. If
the billing problem persists, we may not be able to generate a sufficient amount
of funds from operations to finance our electricity purchases from the
Electricity Pool. Under these circumstances, we may not be able to obtain
financing on acceptable terms or at all to fund our working capital needs. The
failure to fund our working capital needs would have a material adverse effect
on our financial condition and results of operations.
WE WILL HAVE SIGNIFICANT ADDITIONAL FINANCING REQUIREMENTS UPON COMPLETION OF
THIS OFFERING WHICH COULD DECREASE THE VALUE OF YOUR ADSS OR ORDINARY SHARES.
To date, we have financed our operations through (1) sales of equity
securities, (2) capital lease financing and (3) bank financing. Because we
continue to expand our U.K. market presence and plan to enter new markets in
continental Europe, we will require significant additional capital to fund our
current operations, expand our marketing organization, increase our marketing
efforts and acquire additional risk management assets, such as additional
electricity generating plants and natural gas assets. If we continue to
experience billing problems, we may not generate sufficient funds from our
operations to fund our expected growth, which will further increase our need for
additional financings.
Under the terms of our working capital facility with Barclays Bank, we are
required to use the proceeds from this offering to cash collateralize the
undrawn portion of the letter of credit securing our obligations to the
Electricity Pool as well as to pay down a portion of the amount outstanding
under the facility. Our current L182.0 million working capital facility will
accordingly be reduced to a committed facility of L82.0 million following the
completion of this offering. Accordingly, we are not sure whether we can obtain
additional funds to fund our business on acceptable terms. Our inability to
raise such funds may have a material 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 need to undertake additional equity
offerings to fund our continued growth. Any such additional offerings could
result in your ownership in Independent Energy being diluted and a decrease in
the value of your ADSs. If we are not able to obtain credit on acceptable terms
or at all to finance our substantial working capital needs, our financial
condition and operations would be materially adversely affected.
WE HAVE A LIMITED HISTORY OF OPERATING IN THE U.K. BELOW 100 KW ELECTRICITY,
NATURAL GAS AND TELECOMMUNICATIONS MARKETS AND MAY NOT BE SUCCESSFUL IN THESE
MARKETS.
We have been operating in the above 100 kW electricity supply market in the
U.K. since April 1996 and this currently contributes around 60% of our
electricity sales revenue. However, we have a limited operating history in the
remainder of the U.K. energy supply market. We commenced sales of electricity to
below 100 kW customers and natural gas sales to commercial and industrial
customers in March 1999 and to domestic customers in June 1999. In January 2000,
we began to offer telecommunications services to our business customers through
a cross-marketing arrangement. 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, natural gas and telecommunications services;
- our ability to supply electricity, natural gas and telecommunication
services at a reasonable cost;
- our ability to price our services competitively; and
- our ability to develop or obtain the necessary business administration
systems required by an expanded level of operations.
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 12
U.K. regional electricity companies, two Scottish integrated electricity
companies, three electricity generating companies, Centrica PLC and a number of
independent suppliers, of which we are the largest based on sales volume. Many
of these competitors have more experience, greater financial and management
resources and better
7
<PAGE> 12
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 18
months. 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 75% of the residential natural gas supply market and will
likely continue to have significant market share for the foreseeable future. All
of our competitors have more experience, greater financial and management
resources and better name recognition in the natural gas market than we do.
The business telecommunications market has been deregulated for many years
in the U.K. However, British Telecom, or BT, has retained a total market share
of around 80%. We have entered into a marketing agreement with one of several
resellers, FIT, who does not compete directly with BT or the other major
carriers such as AT&T and Cable and Wireless for the large-user market. However,
competition in the small business market remains strong and there are
competitors with significantly more experience, greater financial and management
resources than FIT or Independent Energy.
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.
WE DEPEND ON INTERNAL AND THIRD-PARTY COMPUTER SYSTEMS TO PROCESS TRANSACTIONS
WITH OUR CUSTOMERS.
Our operations require 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, flood, power
loss, telecommunications failure, vandalism, physical or electronic break-ins,
computer viruses, 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,
including the ability to accommodate substantial increases in our customer base.
As a result of the limited resources and capacities of many third-party
providers, we may be unable to establish or maintain relationships with third
parties having sufficient resources to provide the necessary services to support
our needs. If these resources are unavailable, we may be required to provide
these services internally, which may significantly limit our ability to meet our
customers' needs. In addition, we may not be able to control the level and
quality of services provided by third parties.
We have experienced delays in billing our small business and residential
electricity customers (sub 100 kW customers). See "-- Our inability to bill many
of our customers on a timely basis may have a material adverse effect on our
financial condition and results of operations." We have modified the software
provided by a third party vendor in a manner that we believe now enables us to
bill new customers in a timely and accurate manner. However, we have only
recently implemented these changes to our software and there can be no
assurances that the delays in billing that we have experienced with our
8
<PAGE> 13
customers to date will not continue to impact our new customers. If we are
unable to bill on a timely and accurate basis a substantial number of new
customers, we could experience:
- an inability to generate sufficient cash from operations to continue to
grow our business;
- decreased customer service and satisfaction which could result in a loss
of customers and therefore decreased revenues; and
- the incurrence of a substantial increase in our operating costs in order
to improve our billing functionality.
If any of the above occurs, it could have a material adverse effect on our
financial condition or results of operations.
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, 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, 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 at the end of October 2000.
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, are expected to 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 hour) trading period for short, or long, volumes as
appropriate. The "gate closure" for the balancing market will initially be three
and one-half 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 on a timely
basis, or at all, under a contract could affect the cost of meeting that portion
of customer demand not covered by purchase contracts. 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.
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<PAGE> 14
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 have experienced delays in billing our small business and residential
electricity customers (sub 100 kW customers). If we are unable to correct our
billing problems with our existing customers and if we continue to experience
billing problems with our new customers, we will significantly limit our ability
to grow our customer base. See " -- Our inability to bill many of our customers
on a timely basis may have a material adverse effect on our financial condition
and results of operations" and " -- We depend on third-party computer systems to
process transactions with our customers."
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.
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 electricity and gas costs for
contracted demand, within a target range of 75% to 120% of contracted demand.
Daily decisions determining our hedge position within the target range are
influenced by market conditions and value-at-risk estimates using simulation
models. If the spot market prices of electricity or natural gas rises
significantly, we could sustain significant losses on the unhedged portion and
our financial condition could be materially adversely affected.
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<PAGE> 15
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 and quarterly,
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:
- 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' holdings would be diluted if we finance the acquisitions by
issuing equity securities.
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 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.
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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 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.
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 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
12
<PAGE> 17
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, 40,683,327 ordinary shares will be outstanding and 3,974,200 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, officers and the selling shareholders without the prior approval
of Donaldson, Lufkin & Jenrette Securities Corporation for 90 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.
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<PAGE> 18
USE OF PROCEEDS
We estimate the net proceeds to Independent Energy from the offering will
be $145.2 million ($170.4 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 plan to use the net proceeds
from the offering as follows:
- approximately $81.0 million (L50.0 million) to cash collateralize (or to
reimburse any amounts drawn thereunder) our obligation under the required
letter of credit to the Electricity Pool;
- approximately $61.6 million (L38.0 million) to repay a portion of the
outstanding borrowings under our revolving credit facility; and
- the remainder for general corporate purposes, including working capital.
We received a letter dated March 2, 2000 from Duff & Phelps Credit Rating
Co. notifying us that Duff & Phelps intends to assign our company an investment
grade rating upon consummation of this offering and the obtaining of a three
year L200.0 million or greater working capital facility. Currently, we are
negotiating with various banks to obtain the new working capital facility. We
cannot offer any assurances, however, that we will be able to obtain such a
facility or that such rating will be granted. Upon receipt of this rating, we
would no longer be required under the Pooling and Settlement Agreement of
England and Wales to post a letter of credit to the Electricity Pool. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Borrowings under our revolving credit facility currently accrue interest at
LIBOR plus 1.2% (7.3% at February 29, 2000) and are due in June 2000.
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.
We will not receive any proceeds from the sale of ADSs or ordinary shares
by the selling shareholders.
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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 Official
List of the London Stock Exchange. 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."
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 December 31, 1999 of $1.62 to L1.
However, we are not representing that the pound amounts could have been or could
be converted into dollars at the indicated rate. On March 28, 2000, the Noon
Buying Rate was $1.59 per L1.
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.................................................. 1.62 1.61 1.67 1.55
2000 (through March 28)............................... 1.59 1.61 1.65 1.57
</TABLE>
- ------------------------------
(1) The average of the Noon Buying Rates on the last business day of each full
month during the relevant period.
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<PAGE> 20
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. On November 15, 1999, our ordinary shares began trading on
the Official List of the London Stock Exchange.
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 PENCE U.S. 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.................................. 874.3 558.7 13.75 9.00
Third quarter................................... 1,165.8 797.9 19.19 12.88
Fourth quarter.................................. 2,076.2 1,158.7 33.56 19.13
2000
First quarter (through March 28)................ 3,570.5 1,904.0 56.25 31.25
</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 February 29, 2000, there were approximately 1,046 record holders of
ordinary shares. Persons with United States and Canadian addresses held of
record 56% of the outstanding ordinary shares.
On March 28, 2000, the last reported sales price on Nasdaq for the ADSs was
$49.25 per ADS and the last reported sale price on the London Stock Exchange for
the ordinary shares was L32.90 per share.
The average daily trading volume for the ordinary shares for the years
ended December 31, 1997, 1998 and 1999 was 18,872, 70,071 and 88,848,
respectively.
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."
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<PAGE> 21
CAPITALIZATION
The following table sets forth as of December 31, 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 $163.2 million (L100.7 million)
of which approximately $81.0 million (L50.0 million) will be used to cash
collateralize (or to reimburse any amounts drawn thereunder) our obligation
under the letter of credit to the Electricity Pool and $61.6 million (L38.0
million) will be used to repay outstanding borrowings under our working
facility. 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>
DECEMBER 31, 1999
-----------------------------------
(IN THOUSANDS)
AS AS
ACTUAL ADJUSTED ADJUSTED(1)
<S> <C> <C> <C>
Cash and cash equivalents(2)....................... L 5,434 L 60,344(3) $ 97,741(3)
======== ======== ========
Long-term debt (including current portion):
Working capital facility(4)...................... L 35,000 -- --
Construction facilities.......................... 20,909 L 20,909 $ 33,873
Capital leases................................... 12,993 12,993 21,048
-------- -------- --------
Total long-term debt..................... 68,902 33,902 54,921
Shareholders' equity(5)
Ordinary shares, nominal value 1p per share,
50,000,000 shares authorized, 36,714,027
shares
Issued and outstanding........................ 367 399 646
Additional paid-in capital....................... 139,046 228,914 370,841
Retained earnings................................ 11,032 11,032 17,872
-------- -------- --------
Total shareholders' equity......................... L150,445 L240,345 $389,359
-------- -------- --------
Total capitalization............................... L219,347 L274,247 $444,280
======== ======== ========
</TABLE>
- ------------------------------
(1) Translations into dollars in this table are solely for convenience and are
computed at the Noon Buying Rate on December 31, 1999 of $1.62 per Ll. The
Noon Buying Rate on March 28, 2000 was $1.59 per Ll.
(2) Includes $6.5 million (L4.0 million) of restricted cash used to secure
certain trade obligations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
(3) Includes $81.0 million (L50.0 million) of restricted cash expected to be
used to collateralize our obligation under the required letter of credit to
the Electricity Pool. We received a letter dated March 2, 2000 from Duff &
Phelps Credit Rating Co. notifying us that Duff & Phelps intends to assign
our company an investment grade rating upon consummation of this offering
and the obtaining of a three-year L200.0 million or greater working capital
facility. Currently, we are negotiating with various banks to obtain the new
working capital facility. We cannot offer any assurances, however, that we
will be able to obtain such a facility or that such rating will be granted.
Upon receipt of this rating, we would no longer be required under the
Pooling and Settlement Agreement of England and Wales to post a letter of
credit to the Electricity Pool. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
(4) As of March 28, 2000, total borrowings under our working capital facility
were approximately $175.0 million (L108.0 million).
(5) Excludes 4,627,400 ordinary shares issuable pursuant to outstanding options
as of December 31, 1999 and 10,000 ordinary shares issuable pursuant to
outstanding warrants on December 31, 1999.
17
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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.
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 L58.0 million ($91.6
million) for the fiscal year ended June 30, 1998 to L246.9 million ($390.0
million) for the fiscal year ended June 30, 1999, to L337.6 million ($546.2
million) for the six months to December 1999.
In February 1999, we also began sales of natural gas to customers. Although
for the year ended June 30, 1999, sales of natural gas constituted less than 1%
of our revenue, sales of natural gas increased to 2% of our revenue for the six
months ended December 31, 1999. We expect natural gas sales will constitute a
greater portion of our revenue in the future. In January 2000, we began
marketing telecommunications services to our business customers pursuant to a
cross-marketing agreement with Future Integrated Telephony PLC, or FIT.
We recognize revenue from the sale of electricity and natural gas on a
monthly basis based on the volume of electricity and natural gas consumed by our
customers. Customers are billed monthly or quarterly, 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 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", and "Risk
Factors -- Commodity price fluctuations may adversely affect our profitability."
We have experienced delays in billing our small business and residential
electricity customers (sub 100 kW customers). The sub 100kW customers
represented approximately 40% of our annualized sales contracts in place for the
sale of electricity through February 2000. We send bills to our customers in the
sub 100 kW market on a monthly or quarterly basis (depending on the size of the
customer) within 12 days after the end of the period to which the bill relates.
Customers generally have 14 or 21 days (depending on the size of the customer)
to pay bills from the date of invoice. We receive customer payments of invoices
on average 25 days following the end of the billing period. The delays in
billing have been caused by the quality and timing of data provided by the
regional electricity companies, or RECs, on the details of the meter installed
at the customers premises and the opening readings of the meters. The problem
has manifested itself in the form of missing information, the provision of the
information in an untimely fashion, as well as multiple and different versions
of each of the pieces of information and inconsistent forms of information among
the RECs. We have modified the software provided by a third-party vendor in a
manner that we believe now enables us to identify and correct faulty data and
thereby
18
<PAGE> 23
bill our sub 100 kW customers in a timely and accurate manner. However, we are
still experiencing delays in billing a portion of our customers.
From the inception of our marketing to the sub 100 kW market in March 1999
through December 31, 1999, we had billed less than 30% of revenue due for
billing in the sub 100 kW market. In January 2000 we implemented procedures to
improve our billing practices in the sub 100 kW market. From March 1999 through
February 27, 2000, we had billed approximately L89.9 million of the L163.5 of
revenue due for billing in the sub 100 kW market, which represents approximately
55%. The inability to bill and collect revenues that have currently been
recognized but not yet billed would have a material adverse impact on our
financial condition and results of operations.
The delays in billing customers in the sub 100 kW market have significantly
impacted our liquidity. See "-- Liquidity and Capital Resources."
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;
- buying gas in the forwards market to lock in firm costs;
- entering into contracts for differences to effectively fix the price of a
significant portion of our electricity requirements purchased from the
Pool; and
- owning gas reserves and generating a portion of the electricity that we
supply to customers.
See "-- Risk Management Activities" and "Risk Factors -- Commodity price
fluctuations may adversely affect our profitability" and "-- We cannot predict
the effect of the proposed elimination of the Electricity Pool on our business."
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1998
Revenue. Revenue for the six months ended December 31, 1999 increased
L249.4 million, or 282%, to L337.6 million from L88.2 million for the six months
ended December 31, 1998. This increase reflected a substantial increase in the
Company's sales volume of energy to 8,200 GWh in the six months ended December
31, 1999 from 2,100 GWh in the six months ended December 31, 1998, a 276%
increase, primarily as a result of our increased marketing efforts and, to a
lesser extent, the commencement of natural gas marketing.
Gross profit. Gross profit for the six months ended December 31, 1999
increased L21.5 million, or 738%, to L24.4 million from L2.9 million for the six
months ended December 31, 1998. As a percentage of revenue, gross profit for six
months ended December 31, 1999 was 7.2% compared to 3.3% for the six months
ended December 31, 1998. This increase was primarily due to our realizing higher
gross margins resulting from a different mix of customers.
Administrative expenses. Administrative expenses for the six months ended
December 31, 1999 increased L6.8 million, or 429%, to L8.3 million from L1.5
million for the six months ended December 31, 1998. The increase resulted from
the increase in our sales volumes. As a percentage of revenue, administrative
expenses for the six months ended December 31, 1999 were 2% compared to 2% in
the six months ended December 31, 1998.
Depreciation and amortization. Depreciation and amortization for the six
months ended December 31, 1999 increased L703,000, or 100%, to L1.4 million from
L702,000 or the six months ended December 31, 1998. The increase was
attributable to depreciation related to seven new generating plants that were
put into service.
19
<PAGE> 24
Operating profit. Operating profit for the six months ended December 31,
1999 increased L14.0 million, to L14.7 million compared to L635,000 for the six
months ended December 31, 1998. The increase was due to increased sales volumes
and increased gross profit.
Interest expense, net. Net interest expense was L2.6 million for the six
months ended December 31, 1999 compared to L72,000 net interest income for the
six months ended December 31, 1998. The increase in net interest expense for the
six months ended December 31, 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, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
Revenue. Revenue for the fiscal year ended June 30, 1999 increased L188.9
million, or 325%, to L246.9 million from L58.0 million for the fiscal year ended
June 30, 1998. This increase reflected a substantial increase in our sales
volume of electricity 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 L10.0 million, or 400%, to L12.5 million from L2.5 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 L2.8 million, or 164%, to L4.5 million from L1.7 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 L1.0 million, or 160%, to L1.6 million from
L626,000 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 L6.1 million, to L6.3 million compared to L210,000 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.
Interest expense, net. Net interest expense was L1.4 million for the fiscal
year ended June 30, 1999 compared to L395,000 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 L46.9
million, or 423%, to L58.0 million from L11.1 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 L2.3 million to L2.5 million from L255,000 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
20
<PAGE> 25
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 L300,000, or 24%, to L1.7 million from L1.4 million for
the fiscal year ended June 30, 1997. The increase resulted from the increase in
our sales volume. 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 L626,000 compared to L142,000 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 L210,000 compared to an operating loss of L1.3 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 L395,000
for the fiscal year ended June 30, 1998 compared to net interest income of
L69,000 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;
- 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 L6.0 million, L11.8 million and L48.3 million, respectively. For the six
months ended December 31, 1999, these activities utilized funds of L130.0
million.
We have financed our funding requirements through a combination of equity
issuances, capital lease financings and bank borrowings. In July 1998, we raised
L35.0 million in net proceeds in our initial public offering of ADSs. In October
1999, we raised an additional L93.0 million in net proceeds from another public
offering of ADSs and ordinary shares.
In July 1999, we entered into a new one-year working capital facility with
a syndicate of banks led by Barclays Bank PLC, which on March 6, 2000 was
amended to provide for aggregate borrowings and letters of credit of up to
L182.0 million. This facility provides for:
- an aggregate of L110.0 million of available borrowings under revolving
credit facilities that bear interest at a base rate or LIBOR plus 1.2%
(7.3% at February 29, 2000); these facilities are comprised of a L70.0
million base facility and a L40.0 million overdraft facility;
- an aggregate of L12.0 million in the form of letters of credit to secure
energy purchase and certain other types of obligations; and
- an aggregate of L60.0 million in the form of a 90-day letter of credit to
the Electricity Pool.
We are required under the terms of our credit facility to repay outstanding
amounts under the overdraft facility and to cash collateralize the undrawn
portion of the letter of credit or to reimburse amounts paid thereunder with a
portion of the proceeds of this offering. Amounts outstanding under the
overdraft facility aggregated L38.0 million as of March 28, 2000. Accordingly,
upon completion of the offering, total commitments under our working capital
facility will be reduced to L82.0 million. We will require additional sources of
financing upon the completion of this offering in order to continue to grow our
business. However, there can be no assurances that such sources of financing
will be available in
21
<PAGE> 26
acceptable terms or at all. See "Risk Factors -- We will have significant
additional financing requirements upon completion of this offering which could
decrease the value of your ADSs or ordinary shares."
In connection with the recent increase in the letter of credit to the
Electricity Pool to L60.0 million, we and an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation entered into an agreement dated as of March 6,
2000 with Barclays Bank PLC in which the DLJ affiliate committed to reimburse
Barclays Bank for any amounts drawn down under such letter of credit. As part of
this commitment, if this offering is not completed by April 30, 2000, the DLJ
affiliate may require us to issue other equity securities, subject to a maximum
of L75.0 million, to it or to third parties to satisfy its reimbursement
obligations under the letter of credit to the Electricity Pool. In addition, we
agreed to issue to the DLJ affiliate on or after April 30, 2000 warrants to
purchase 5,000,000 of our ordinary shares at an exercise price of 1p per share.
These warrants are not issuable in the event that we complete this offering (or
such other equity offering as may be required by the DLJ affiliate) by April 30,
2000. If issued, the warrants are exercisable thereafter only under certain
circumstances, including our failure to pay amounts ultimately owed to the DLJ
affiliate.
In addition, we have a L8.0 million construction facility with Barclays
Bank that is payable in semi-annual installments of L1.3 million plus interest
at LIBOR plus 2.5% (8.6% at February 29, 2000) over three years starting in
1997.
As of March 28, 2000, our outstanding borrowings were L108.0 million under
the working capital facility. We had also utilized commitments to issue letters
of credit in the aggregate amount of L70.0 million.
The delays in billing customers in the sub 100 kW market have significantly
impacted our liquidity. Under the Pooling and Settlement Agreement of England
and Wales, we are required to post a letter of credit to cover our electricity
purchases for a 28-day forward period. Due in part to our billing problem as
well as the growth in our business, it was recently necessary to increase the
size of our bank facility to L182.0 million, including a 90-day L60.0 million
letter of credit to support our obligations to the Electricity Pool. In
connection with the issuance of this letter of credit, we and Barclays Bank
entered into agreements with an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation which agreed to reimburse Barclays Bank for amounts drawn
down under the letter of credit. If the billing problem persists, we may not be
able to generate a sufficient amount of funds from operations to finance our
electricity purchases from the Electricity Pool. Under these circumstances, we
may not be able to obtain financing on acceptable terms or at all to fund our
working capital needs. The failure to fund our working capital needs would have
a material adverse effect on our financial condition and results of operations.
We have financed our generating plants primarily through capital leases. As
of February 29, 2000, our obligations under capital leases related to our
generating assets totaled L13.0 million, of which L1.5 million is payable within
one year and L7.9 million comes due between one and five years after December
31, 1999. These capital leases are secured by the assets comprising the
associated generating facility.
We have also financed a portion of the construction of generating plants
with interim construction bank financing. As of February 29, 2000, our
obligations under this type of financing aggregated L13.0 million. We are in the
process of negotiating permanent financing for these projects.
We estimate that we will need approximately L35.0 million to fund the
acquisition or installation of generating plants currently under construction or
planned through 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 daily, 28 days
following 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. Also, whereas the
security requirements of gas purchase contracts are based on fixed volumes
22
<PAGE> 27
and price, the Electricity Pool calculates the security requirements on the
prevailing volumes and prices over the preceding period (of between 28 and 32
days) and demands immediate security (in the form of cash or letter of credit).
Hence, an unpredicted price rise in the Pool price for a short period will lead
to a demand for collateral which would, without sales growth, be unnecessarily
high after the 28/32 day period.
On March 2, 2000, Duff & Phelps Credit Rating Co. notified us that it
intends to assign our company an investment grade rating, subject to two
conditions. This rating is conditioned on (1) the successful completion of an
equity offering of at least L60.0 million and (2) obtaining a three-year working
capital facility providing for at least L200.0 to L250.0 million of borrowing
availability. Upon completion of this offering, we will satisfy the first
requirement. Currently, we are negotiating with various banks to obtain the new
working capital facility. We cannot offer any assurances, however, that we will
be able to obtain such a facility or that such rating will be granted. Upon
assignment of an investment grade rating, we would no longer be required to post
a letter of credit to the Electricity Pool under the Pooling and Settlement
Agreement of England and Wales.
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 collection. 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 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.
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
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 March 3, 2000 (assuming no renewal of contracts that will expire
during the period), we had sales contracts in place for 7,281 GWh of electricity
through June 30, 2000, and we had contracts for differences in place for the
purchase of 4,245 GWh for the period of March 3, 2000 to June 30, 2000. Our
aggregate commitment under such contracts for differences was L94.4 million, and
represented 58% of our estimated energy requirements through fiscal 2000.
Including our own generation, our hedged position as of March 3, 2000 was 62%.
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<PAGE> 28
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. Our hedging policy is to hedge a significant portion of our
electricity costs throughout the fiscal year, within the target range of 75% to
120% of contracted demand. We continuously monitor and review this position. We
intend to enter into additional hedging contracts to replace some of the
existing hedging contracts and increase the overall level of hedging contracts.
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 eleven existing generating plants, will provide us with the
capacity to produce up to 740 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 L188,000, L136,000 and L74,000 for the fiscal years
ended June 30, 1997, 1998 and 1999, respectively, and L20,000 and none for the
six months ended December 31, 1998 and 1999, respectively.
Our net profit (losses) for the fiscal years ended 1997, 1998 and 1999 and
for the six months ended December 31, 1999 under U.K. GAAP were L(1.2 million),
L(185,000), L4.0 million and L707.0 million, respectively. Under U.S. GAAP, we
would have reported net losses of Ll.4 million and L321,000 for fiscal 1997 and
1998, respectively, and net income of L3.9 million for fiscal 1999 and L8.4
million for the six months ended December 31, 1999, respectively.
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.
24
<PAGE> 29
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 also
purchase our electricity. In January 2000, through a joint marketing
arrangement, we began offering telecommunications services to our business
customers. 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 282% to L337.7 million ($546.2 million) for
the six months ended December 31, 1999 from L88.2 million ($142.9
million) for the six months ended December 31, 1998.
- Our sales volumes also increased by over 290% to 8,200 GWh in the six
months ended December 31, 1999 from 2,100 GWh in the six months ended
December 31, 1998.
- At 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. At September 1, 1999, we had over 140,000
electricity customers and 180 natural gas customers.
- At February 16, 2000, we had annualized sales contracts in place for the
sale of electricity and natural gas of L1.0 billion ($1.60 billion) up
from approximately L767 million ($1.20 billion) at September 1, 1999. The
value of annualized sales contracts is based on our estimate of annual
revenue from our sales contracts in place at February 16, 2000, without
regard to the renewal dates of these contracts. Substantially all of the
annualized sales contracts represented electricity sales.
- In the six months ended December 31, 1999, we reported net income of L8.4
million ($13.7 million), compared to L707,000 ($1.1 million) for the six
months ended December 31, 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.
25
<PAGE> 30
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 L15.6 billion
($25.3 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
(IN THOUSANDS)(1) (IN TWH)(1) BILLIONS)(2)
<S> <C> <C> <C>
CONSUMER SIZE (PEAK USAGE)
>1 MW(3)............................................ 5 86.9 L 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 L15.58
====== ===== ======
</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 L7.9 billion ($12.8
billion).
26
<PAGE> 31
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 L7.2 billion ($11.7 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
(IN THOUSANDS) (IN TWH) BILLIONS)(1)
<S> <C> <C> <C>
CONSUMER SIZE (PEAK USAGE)
Business (> 732 MWh)................................... 46 285.5 L1.76
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 L7.24
====== ===== =====
</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 L3.5 billion ($5.7 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 the Netherlands 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 commenced in October 1999, and allowed consumers with annual
consumption in excess of 1.0 GWh to choose their electricity supplier. 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 L2.5 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.
27
<PAGE> 32
In February 2000 our Spanish subsidiary, Energia Privada Iberica, was
formed to be our platform for market entry. Discussions have commenced with the
Spanish energy regulator, and with sales agencies, with a view to establishing a
supply license and sales agency agreements. We are also in the process of
negotiating marketing agreements with established sales channels in the Spanish
market and formulating risk management arrangements to cover the purchase of
electricity. In addition, we have begun discussions with potential Dutch
partners to facilitate our entry into the electricity and gas markets in the
Netherlands.
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.
As part of expanding our natural gas supply business, we acquired York Gas
Limited, an independent natural gas supplier in the U.K., from Kelda Group PLC
in October 1999. Since the acquisition, we have integrated the operations of
York Gas with our own, strengthening our gas supply business and enhancing our
position as the largest independent provider of both gas and electricity in the
U.K.
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 and in the
six months ended December 31, 1999, we purchased approximately 97% and 98%,
respectively, 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 above 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 below
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 on a daily basis 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."
Proposed changes to the wholesale trading mechanisms for electricity in
England and Wales are scheduled to be implemented on October 31, 2000. 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.
28
<PAGE> 33
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 that portion of our
customer demand which is not covered by purchase contracts. 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.
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.
In December 1999, we entered into a cross-marketing agreement with FIT
pursuant to which we market mobile and fixed telephone services along with our
electricity and natural gas supply to our business customers. In exchange, FIT,
through its subsidiary Future Network Services Limited, agreed to market our
electricity and natural gas supply services to its customers. We will receive a
commission from FIT based on the number of customers whom we sign up and a
percentage of such customer's usage. Our commissions will be paid in the form of
cash and FIT shares. This relationship is part of our efforts to provide a
broader spectrum of utility services.
To date, FIT has captured the majority of its business from BT and has had
some success in obtaining business from the less efficient resellers. We believe
FIT's strategy of providing fixed and mobile
29
<PAGE> 34
phone services with a single invoice covering all applications positions it
competitively in the small business market.
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 and FIT a commission based on the estimated sales
volume for the customer over the life of the contract. We pay between fifty and
seventy-five 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. Insurance bonds of a total of
L4.0 million are in place to secure our obligations to Vertex. In addition, we
recently arranged with Synstar to provide back-up facilities in the event of a
disaster or other calamity in order to continue business functions, such as
billing of our above 100kW customers.
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 11 plants with 89.6 MW of aggregate
generating plant capacity, with an additional 28 MW under construction and 50 MW
planned for completion by January 2001. We estimate that our total capital
expenditure requirements for the plants under construction or planned are L35.0
million. Our goal is to install between 10 MW and 20 MW of generating plants in
each of the 12 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
30
<PAGE> 35
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 1 MW Elwick, Lancashire 100%
natural gas
Caythorpe............... December 1997 Independent Energy 9 MW Caythorpe, Yorkshire 100%
natural gas
Trumfleet............... February 1998 Independent Energy 8 MW Trumfleet, Yorkshire 100%
natural gas
Knypersley.............. October 1998 Independent Energy and 8 MW Knypersley, Staffordshire 100%
Third-party natural
gas
Third-party natural
Steetley................ February 1999 gas 6 MW Steetley, Nottinghamshire 100%
Third-party natural
Holditch................ March 1999 gas 10.5 MW Newcastle Under Lyme, 100%
Staffordshire
Third-party natural
Milford Haven........... March 1999 gas 10.5 MW Dyfed, Pembrokeshire 50%
Third-party natural
Pye Bridge.............. June 1999 gas 9 MW Pye Bridge, Derbyshire 100%
Third-party natural
Chelwood Brick.......... September 1999 gas 1.6 MW Chelwood Brick, Surrey 100%
Third-party natural
Wight Salads Phase I.... October 1999 gas 16 MW(1) Wight Salads, Isle of Wight 100%
Third-party natural
Shirebrook.............. December 1999 gas 10 MW Shirebrook, Nottinghamshire 100%
-------
Total capacity.............................................. 89.6 MW
=======
</TABLE>
PROJECTS UNDER CONSTRUCTION
<TABLE>
<CAPTION>
PROJECTED FACILITY
OPERATIONS FUEL NET OWNERSHIP
PLANT DATE SOURCE CAPACITY LOCATION INTEREST
<S> <C> <C> <C> <C> <C>
Wight Salads
Phase II............. June 2000 Third-party natural gas 18 MW(1) Wight Salads, Isle of Wight 100%
Lee Valley
Phase I.............. August 2000 Third-party natural gas 10 MW Valley Grown Salads, Hertfordshire 100%
-----
Total capacity........................................ 28 MW
=====
</TABLE>
- ------------------------------
(1) Comprised of multiple inter-connected sub 10 MW sites.
PLANNED PROJECTS
<TABLE>
<CAPTION>
PROJECTED FACILITY
OPERATIONS NET OWNERSHIP
PLANT DATE FUEL SOURCE CAPACITY LOCATION INTEREST
<S> <C> <C> <C> <C> <C>
Lee Valley Phase
II................. October 2000 Third-party natural gas 10 MW Coronation Nursery, Hertfordshire 100%
Bentink.............. August 2000 Third-party natural gas 10 MW Bentinck, Nottinghamshire 100%
Guardian Business
Park............... November 2000 Third-party natural gas 10 MW Tunbridge Wells, Kent 100%
Parcelforce.......... January 2001 Third-party natural gas 10 MW Coventry Airport, Warwickshire 100%
Unnamed Site......... December 2000 Third-party natural gas 10 MW Unnamed location 100%
-----
Total capacity........................................ 50 MW
=====
</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
31
<PAGE> 36
- 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 34 MW 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 in the Lee Valley,
Hertfordshire where construction has already started on this 20 MW multiple site
scheme. Completion is anticipated in October 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.
The present value, discounted at 10% per annum, of estimated future net
cash flows from such proved reserves as of June 30, 1999 was L3.4 million ($5.5
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 economic treatment of the reserve volumes reported here reflect the
pre-tax 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
32
<PAGE> 37
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 L3.12 per thousand cubic feet
("Mcf") ($5.05 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 785,282 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 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 December 31, 1999, four wells
had been drilled. A discovery of gas has been confirmed at Cowden and oil at
Lingfield. Further testing is required before establishing the magnitude and
commercial viability of the discoveries. Two further wells are planned for
drilling during the summer of 2000. The final well is awaiting planning consent
before drilling can be scheduled.
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 energy sales contracts in place of approximately L1.0 billion ($1.6
billion), representing approximately 6.2% of the total estimated U.K.
electricity market. We added new electricity customers at an average weekly rate
of over 6,100 for the period September 1, 1999 to February 29, 2000. 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.
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<PAGE> 38
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 relatively 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 75% 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.
The business telecommunications market has been deregulated for many years
in the UK although British Telecom, or BT, has retained a market share of around
80% with gross margins for re-sellers at between 20% to 30%. We have entered
into a marketing agreement with one of several resellers, FIT, which does not
compete directly with BT, or the other major carriers such as AT&T and Cable and
Wireless, for the large-user market.
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 L44,184 per month. This
lease expires in December 2008. We also lease
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<PAGE> 39
1,750 square feet of office space in Maidenhead for our resource offices for
L26,250 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 February 29, 2000, we had approximately 140 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.
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<PAGE> 40
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>
John L. Sulley............................ 49 Chief Executive Officer and Director
Ian Stewart............................... 48 Executive Director -- Finance
Robert E. Jones........................... 54 Executive Director -- Operations
Herbert L. Oakes, Jr...................... 53 Non-Executive Chairman
Jerry W. Jarrell.......................... 58 Non-Executive Director
Burt H. Keenan............................ 60 Non-Executive Director
David O. May.............................. 65 Non-Executive Director
</TABLE>
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.
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.
Herbert L. Oakes, Jr. became a non-executive director in January 1999 and
since November 1999 has served as our non-executive Chairman. He is Chairman of
Oakes Fitzwilliam & Co. Limited, a London based investment bank, a position he
has held for more than 14 years. Mr. Oakes also serves as a director of New
World Power Corporation and a number of private companies, including some in the
energy and utility industries. Oakes, Fitzwilliam & Co. provides financial
advisory services to Independent Energy from time to time.
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
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<PAGE> 41
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.
Burt H. Keenan, a non-executive director of Independent Energy, served as
Executive Chairman from Independent Energy's inception in April 1991 to August
1999. From August 1999 to November 1999, he 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.
Mr. Keenan holds bachelors and masters degrees in business administration from
Tulane University.
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.
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<PAGE> 42
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information concerning beneficial ownership
of ordinary shares as of March 9, 2000 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
PERCENT SHARES
BENEFICIAL OWNED TO BE BENEFICIAL PERCENT
OWNERSHIP PRIOR SOLD OWNERSHIP OWNED
PRIOR TO TO IN THE AFTER AFTER
OFFERING(1) OFFERING OFFERING OFFERING(1) OFFERING
<S> <C> <C> <C> <C> <C>
Putnam Investment Management, Inc.(2)......... 4,287,900 11.4% -- 4,287,900 10.5%
Burt H. Keenan(3)............................. 1,164,125 3.1 500,000 664,125 1.6
Donaldson, Lufkin & Jenrette International.... 250,000 * 250,000 -- *
John L. Sulley(4)............................. 420,000 1.1 60,000 360,000 *
Ian Stewart................................... 1,000 * -- 1,000 *
Robert E. Jones(5)............................ 364,200 * 60,000(6) 304,200 *
Jerry W. Jarrell(7)........................... 235,100 * 235,100 *
David O. May(8)............................... 130,000 * -- 130,000 *
Herbert L. Oakes.............................. -- * -- --
All officers and directors as a group (7
persons)(9)................................. 2,314,425 6.0 620,000 1,694,425 4.0
</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) 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.
(3) Includes 245,400 shares issuable upon exercise of options held by Mr.
Keenan.
(4) Includes 360,000 shares issuable upon exercise of options held by Mr.
Sulley.
(5) Includes 300,000 shares issuable upon exercise of options held by Dr. Jones
and 19,800 shares held by Dr. Jones's spouse.
(6) Includes 18,000 shares held by Dr. Jones's spouse.
(7) Includes 222,800 shares issuable upon exercise of options held by Mr.
Jarrell. Mr. Jarrell has agreed to sell up to 75,000 shares in connection
with the exercise by the underwriters' overallotment option.
(8) 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.
(9) Includes 1,208,200 shares issuable upon exercise of options held by the
named executive officers and directors.
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<PAGE> 43
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 L500,000 divided into 50,000,000 ordinary
shares of 1p nominal value each, of which 37,483,327 ordinary shares were issued
and outstanding as of March 9, 2000. In addition, as of March 9, 2000, there
were 3,969,200 ordinary shares issuable pursuant to outstanding options and
5,000 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.
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.
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.
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<PAGE> 44
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 restrictions on any one or more of the parties as to the use,
retention or disposal of such interests.
In addition, Section 212 of the Companies Act 1985 enables 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.
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.
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<PAGE> 45
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:
- 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 shall be 14 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
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<PAGE> 46
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.
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 L320,644.73, 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 L320,644.73, 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 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.
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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.
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,
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(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:
- 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
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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).
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,
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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.
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
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any successor governmental agency such information as shall be required to make
such filings or comply with such undertakings.
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 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.
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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 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
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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 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.
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TAXATION
The following generally summarizes the principal U.S. federal and U.K. tax
consequences of the purchase, ownership and disposition of ADSs evidenced by
ADRs and, except as provided explicitly below, 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.
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 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.
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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 U.S. federal income tax laws (in particular, Rev. Proc. 2000-13),
Eligible U.S. Holders may elect to include the U.K. Tax Credit Amount as
additional distribution made by Independent Energy without affirmatively making
a claim to the U.K. Inland Revenue. Such electing Eligible U.S. Holders
("Electing Eligible U.S. Holders") will include the gross amount of distribution
(the sum of the actual distribution by Independent Energy and the U.K. Tax
Credit) as ordinary income to the extent of Independent Energy's current or
accumulated earnings and profits (as determined for United States federal income
tax purposes) when such distribution is actually or constructively received by
the Eligible U.S. Holders. 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
Electing Eligible U.S. Holder's U.S. federal income tax. Pursuant to Rev. Proc.
2000-13, Electing Eligible U.S. Holders is not required to obtain a receipt or
other evidence from U.K. to verify the deemed payment of U.K. tax (i.e., the
U.K. Credit Amount), but may use secondary evidence to substantiate the amount
of tax treated as paid to U.K. Inland Revenue. 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 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
51
<PAGE> 56
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 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
52
<PAGE> 57
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.
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 Treasury Regulations finalized on January 25, 2000, the ADSs or the ordinary
shares would be treated as "marketable stock," and if Independent Energy were to
become a PFIC, its U.S. shareholders would be eligible to make the
"mark-to-market" election.
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 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 L1.50 per L100 (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 L0.50 per
transfer or at the rate of Ll.50 per L100 (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 L0.50 per L100 (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.
53
<PAGE> 58
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
March 28, 2000, 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
3,200,000 ADSs from us and an aggregate of 870,000 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......... 2,238,500
Prudential Securities Incorporated.......................... 1,017,500
Johnson Rice & Company L.L.C. .............................. 814,000
----------
Total............................................. 4,070,000
==========
</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 $1.32 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 and a selling shareholder 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 535,500 and 75,000 additional ADSs,
respectively, 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............................. $ 2.21 $ 2.21 $ 2.21 $ 2.21
Total............................... $7,072,000 $8,255,455 $1,922,700 $2,088,450
</TABLE>
We and the selling shareholders 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 90 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
54
<PAGE> 59
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."
The Ordinary Shares are listed on the Official List of the London Stock Exchange
under the symbol "IEH."
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 a "passive market maker" during
the period when Rule 101 of Regulation M would otherwise prohibit such activity.
Passive market 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 maker'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 March 13, 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 will not offer or sell any ADSs to persons in the U.K. prior to the
admission of the ADSs to listing in accordance with Part IV of the Financial
Services Act 1986 except to persons whose ordinary activities involve them in
acquiring,
55
<PAGE> 60
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 U.K. within the meaning of the Public
Offers of Securities Regulations 1995 or the Financial Services Act 1986; (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 in, from or otherwise involving the U.K.; and (iii) it has only issued
or passed on and will only issue or pass on to any person in the U.K. any
document received by it in connection with the offering, other than any document
which consists of or any part of listing particulars, supplementary listing
particulars or any other document required or permitted to be published by
listing rules under Part IV of the Financial Services Act 1986, if that person
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. The affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation recently entered into an agreement to reimburse
Barclays Bank PLC for amounts drawn down under the letter of credit supporting
our obligations to the Electricity Pool. Under the terms of the agreement, an
affiliate of Donaldson, Lufkin & Jenrette Securities Corporation was paid L1.8
million ($2.9 million) of customary fees and reimbursed for its expenses in
connection with this transaction.
One of the underwriters, Prudential Securities Incorporated, allows certain
of its clients to view a prospectus on-line, and to place orders with its
financial advisors. Other than the prospectus in electronic format, the
information available on-line relating to this offering is not a part of this
prospectus and has not been approved and/or endorsed by us or any underwriter,
and should not be relied on by prospective investors.
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 December 31, 1999
and for each of the three fiscal years in the period ended June 30, 1999 and for
the six months ended December 31, 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.
56
<PAGE> 61
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 and for the six months ended
December 31, 1999 and 1998 (unaudited).................... F-4
Consolidated Balance Sheets as of June 30, 1999 and 1998 and
as of December 31, 1999................................... F-5
Consolidated Cash Flow Statements for the years ended June
30, 1999, 1998 and 1997 and for the six months ended
December 31, 1999 and 1998 (unaudited).................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 62
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 subsidiaries as at the end of the fiscal period
and of the profit or loss and cash flows for that period.
The Directors confirm that suitable accounting policies have been used and
applied consistently, and that reasonable and prudent judgments and estimates
have been made in the preparation of the financial statements. The Directors
also confirm that applicable accounting standards have been followed and that
the financial statements have been prepared on a going concern basis.
The Directors are responsible for keeping proper accounting records, for
safeguarding the assets of the Company and subsidiaries and hence for taking
reasonable steps for the prevention and detection of fraud and other
irregularities.
F-2
<PAGE> 63
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 subsidiaries, as of 31 December 1999, 30 June 1999 and 1998,
and the related consolidated statements of operations and cash flows for the six
months ended 31 December 1999 and 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 31 December 1999, 30 June 1999 and 1998, and the six
months ended 31 December 1999, 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 six months ended 31
December 1999 and the years ended 30 June 1999, 1998 and 1997 to the extent
summarized in Notes 26 and 27 to the consolidated financial statements.
PANNELL KERR FORSTER
Chartered Accountants and Registered
Auditors
Nottingham, England
13 March 2000
F-3
<PAGE> 64
INDEPENDENT ENERGY HOLDINGS PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS STATED IN THOUSANDS OF POUNDS STERLING, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------- -----------------------
NOTE 1999 1998 1997 1999 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
TURNOVER (REVENUE)................................. 3(f) L 246,856 L 57,989 L 11,127 L 337,692 L 88,218
Cost of sales...................................... (234,387) (55,457) (10,872) (313,219) (85,297)
--------- -------- -------- --------- --------
GROSS PROFIT....................................... 12,469 2,532 255 24,473 2,921
Depreciation and amortisation...................... (1,650) (626) (142) (1,405) (702)
Administrative expenses............................ (4,530) (1,696) (1,363) (8,393) (1,584)
--------- -------- -------- --------- --------
OPERATING PROFIT/(LOSS)............................ 6,289 210 (1,250) 14,675 635
Interest receivable and similar income............. 6(a) 838 105 189 583 642
Interest payable and similar charges............... 6(b) (2,191) (500) (120) (3,192) (570)
--------- -------- -------- --------- --------
PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE
TAXATION......................................... 7 4,936 (185) (1,181) 12,066 707
TAXATION........................................... 9 (929) -- -- (3,620) --
--------- -------- -------- --------- --------
RETAINED PROFIT/(LOSS) FOR THE YEAR................ 20 L 4,007 L (185) L (1,181) L 8,446 L 707
========= ======== ======== ========= ========
BASIC EARNINGS/(LOSSES) PER SHARE.................. 8 15.7p (1.1)p (9.0)p 26.7p 2.9p
DILUTED EARNINGS/(LOSSES) PER SHARE................ 8 14.2p (1.0)p (7.4)p 23.5p 2.6p
</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> 65
INDEPENDENT ENERGY HOLDINGS PLC
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS STATED IN THOUSANDS OF POUNDS STERLING)
<TABLE>
<CAPTION>
JUNE 30,
------------------- DECEMBER 31,
NOTE 1999 1998 1999
<S> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets.................................... 10 L 9,316 L 6,221 L 14,284
Tangible assets...................................... 11 33,750 18,531 46,573
Investments.......................................... 12 2,776 -- 3,527
-------- -------- ---------
45,842 24,752 64,384
CURRENT ASSETS
Debtors.............................................. 13 84,383 15,340 271,670
Cash at bank and in hand............................. 578 621 1,405
Security deposits.................................... 6,738 -- 4,029
-------- -------- ---------
91,699 15,961 277,104
CREDITORS
Amounts falling due within one year.................. 14 (68,513) (20,589) (167,050)
-------- -------- ---------
Net current assets/(liabilities)..................... 23,186 (4,628) 110,054
Total assets less current liabilities................ 69,028 20,124 174,438
CREDITORS
Amounts falling due after more than one year......... 14 (19,220) (10,671) (20,423)
Provisions for liabilities and charges............... 15 (929) -- (3,570)
-------- -------- ---------
Net assets........................................... L 48,879 L 9,453 L 150,445
======== ======== =========
CAPITAL AND RESERVES
Called up share capital.............................. 19 L 263 L 179 L 367
Share premium account................................ 20 46,030 10,695 139,046
Profit and loss account.............................. 20 2,586 (1,421) 11,032
-------- -------- ---------
Shareholders' funds.................................. 21 L 48,879 L 9,453 L 150,445
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 66
INDEPENDENT ENERGY HOLDINGS PLC
CONSOLIDATED CASH FLOW STATEMENTS
(ALL AMOUNTS STATED IN THOUSANDS OF POUNDS STERLING)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------- -----------------------
NOTE 1999 1998 1997 1999 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
RECONCILIATION OF OPERATING PROFIT TO NET
CASH (OUTFLOW) FROM OPERATING ACTIVITIES
Operating profit/(loss).................... L 6,289 L 210 L(1,250) L 14,675 L 635
Depreciation and amortisation.............. 1,650 626 142 1,405 702
Increase in debtors........................ (69,043) (10,459) (3,926) (187,287) (35,138)
Increase in creditors...................... 29,377 7,484 2,695 70,712 19,428
-------- -------- ------- --------- --------
NET CASH (OUTFLOW) FROM OPERATING
ACTIVITIES................................. (31,727) (2,139) (2,339) (100,495) (14,373)
RETURNS ON INVESTMENTS AND SERVICING OF
FINANCE
Interest received.......................... 827 105 189 583 643
Interest element of finance lease
payments................................. (762) (426) -- (828) (250)
Interest paid.............................. (1,836) (648) (81) (2,496) (388)
-------- -------- ------- --------- --------
(1,771) (969) 108 (2,741) 5
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Payments to acquire investments............ (2,715) (6,775) -- (4,422) --
Payments to acquire tangible fixed
assets................................... (8,566) (1,930) (3,760) (8,453) (2,938)
Payments to acquire intangible fixed
assets................................... (3,564) -- -- (234) (4,242)
-------- -------- ------- --------- --------
(14,845) (8,705) (3,760) (13,109) (7,180)
MANAGEMENT OF LIQUID RESOURCES
Sale of commercial paper................... -- -- 4,300 -- --
-------- -------- ------- --------- --------
-- -- 4,300 --
FINANCING
Proceeds from exercised share warrants..... 43 54 -- -- 43
Proceeds from exercised share options...... 280 199 -- 3 70
Issue of ordinary share capital............ 36,359 2,500 1,352 99,671 36,359
Share issue costs.......................... (1,263) (73) -- (6,554) (1,263)
-------- -------- ------- --------- --------
35,419 2,680 1,352 93,120 35,209
Issue of loan notes........................ -- -- 1,400 -- --
New loans due within one year.............. -- 5,000 -- 39,000 --
New loans due in over one year............. 5,172 4,000 -- -- 2,674
Loan repayments............................ (6,400) (500) -- (672) (5,900)
Capital element of finance lease
repayments............................... (1,189) (694) (440) (814) (582)
-------- -------- ------- --------- --------
(2,417) 7,806 960 37,514 (3,808)
Net financing proceeds..................... 33,002 10,486 2,312 130,634 31,401
NET CASH (DECREASE)/INCREASE................. (15,341) (1,327) 621 14,289 9,853
Net effect of exchange rate movements...... 20 3 (39) 37 (1)
-------- -------- ------- --------- --------
(DECREASE)/INCREASE IN CASH.................. 22 & 23 L(15,321) L (1,324) L 582 L 14,326 L 9,852
======== ======== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 67
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 and
natural gas, currently only operating in the United Kingdom.
2. BASIS OF PRESENTATION
The consolidated financial statements include Independent Energy Holdings
PLC and its wholly-owned subsidiaries, Independent Energy UK Limited,
Independent Energy Generation Limited, Independent Energy Resources Limited,
Independent Energy (Pye Bridge) Limited and York Gas 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 profit for the six months to December 1999 dealt
with in the financial statements of Independent Energy Holdings PLC is L260,000
(1999 year: loss L(1,000); 1998 year: profit L1,000).
F-7
<PAGE> 68
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTING POLICIES -- (CONTINUED)
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.
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.
F-8
<PAGE> 69
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTING POLICIES -- (CONTINUED)
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.
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 telemetry every half an hour. For
the under 100kW customers meters are read or estimated 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.
F-9
<PAGE> 70
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTING POLICIES -- (CONTINUED)
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 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.
F-10
<PAGE> 71
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. DIRECTORS
DIRECTORS' REMUNERATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
--------------------- DECEMBER 31,
1999 1998 1997 1999
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries, fees and consultancy services................. L349 L265 L258 L272
Benefits................................................ 32 20 18 13
Pension contributions................................... 31 20 19 18
---- ---- ---- ----
L412 L305 L295 L303
==== ==== ==== ====
Highest paid director................................... L103 L 82 L 82 L102
</TABLE>
No directors were members of a company pension scheme.
DIRECTORS' INTERESTS IN SHARE OPTIONS
The directors' interests in share options as of 31st December 1999 are as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------- EXERCISE
FOUNDERS STAFF PRICE EXERCISABLE DATES
<S> <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
188,000 960.00p 28th Sept 2002 to 28th Sept 2004
I Stewart............ 170,000 122.50p 5th Nov 2000 to 5th Nov 2002
52,000 960.00p 28th Sept 2002 to 28th Sept 2004
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
52,000 960.00p 28th Sept 2002 to 28th Sept 2004
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
H L Oakes............ 70,000 597.50p 20th Jan 2002 to 20th Jan 2004
200,000 1,990.00p 30th Dec 2002 to 30th Dec 2004
--------- -------
Total...... 1,178,200 947,000
========= =======
</TABLE>
No granted options have been exercised nor have any expired.
The market price of the shares at 31st December 1999 was 1990.0p (Nasdaq
$33.56) and the range during the six months to 31 December 1999 was 797.9p to
2076.2p (Nasdaq $12.88 to $33.56).
F-11
<PAGE> 72
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT EMPLOYEE DATA)
5. EMPLOYEES
a) EMPLOYMENT COSTS (INCLUDING EXECUTIVE DIRECTORS) CONSIST OF:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
-------------------------- DECEMBER 31,
1999 1998 1997 1999
<S> <C> <C> <C> <C>
Salaries and wages...................... L1,749 L 859 L 503 L1,846
Social security costs................... 175 80 50 191
Other pension costs 215 105 66 188
------ ------ ------ ------
L2,139 L1,044 L 619 L2,225
====== ====== ====== ======
</TABLE>
b) THE AVERAGE NUMBER EMPLOYED DURING THE PERIOD WAS:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
--------------------- DECEMBER 31,
1999 1998 1997 1999
<S> <C> <C> <C> <C>
Sales and Marketing............................... 34 12 7 43
Operations and Development........................ 16 7 3 21
Management, Finance and Administration............ 16 6 5 50
-- -- -- ---
66 25 15 114
== == == ===
</TABLE>
6. INTEREST RECEIVABLE AND PAYABLE AND SIMILAR INCOME AND EXPENSE
a) INTEREST RECEIVABLE AND SIMILAR INCOME:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------- ------------------
1999 1998 1997 1999 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest receivable.................... L838 L 98 L186 L583 L642
Gain on currency conversion............ -- 4 -- -- --
Other.................................. -- 3 3 -- --
---- ---- ---- ---- ----
L838 L105 L189 L583 L642
==== ==== ==== ==== ====
</TABLE>
b) INTEREST PAYABLE AND SIMILAR EXPENSE:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
-------------------------- --------------------
1999 1998 1997 1999 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest payable -- bank borrowing...... L1,533 L 716 L 34 L1,815 L260
-- finance leases...... 687 426 70 883 250
Letters of credit & bank fees........... 250 43 -- 539 71
Other interest charges.................. 86 17 10 124 --
Loss on currency conversion............. 11 -- 40 -- --
------ ------ ---- ------ ----
2,567 1,202 154 3,361 581
------ ------ ---- ------ ----
Less: interest capitalised (notes 10, 11
& 12)................................. (376) (702) (34) (169) (11)
------ ------ ---- ------ ----
L2,191 L 500 L120 L3,192 L570
====== ====== ==== ====== ====
</TABLE>
F-12
<PAGE> 73
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
7. PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION IS STATED AFTER
CHARGING:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
--------------------- ----------------------
1999 1998 1997 1999 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Amortisation........................................ L447 L276 L38 L210 L271
Release of deferred cost............................ 44 -- -- 270 --
Depreciation -- owned............................... 712 167 33 539 290
-- held under finance leases.......... 447 183 71 386 141
Auditors' remuneration -- audit fee................. 36 18 11 24 14
-- other................... 41 11 4 88 10
Operating lease rentals -- land and buildings...... 252 78 52 192 76
-- plant and machinery..... 175 61 57 103 76
</TABLE>
8. EARNINGS/(LOSSES) PER SHARE
Earnings/(losses) per share have been calculated in accordance with FRS 14
"Earnings per share" for the periods by dividing the profit/(loss) for the
financial period by the weighted average number of ordinary shares in issue
during the financial period, based on the following information.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED
--------------------------- DECEMBER 31,
1999 1998 1997 1999
<S> <C> <C> <C> <C>
Profit/(loss) for the financial period...................... L 4,007 L (185) L(1,181) L 8,446
Basic weighted average share capital (number of shares)..... 25,465 17,191 13,130 31,664
Diluted weighted average share capital (number of shares)... 28,255 19,318 15,908 35,949
</TABLE>
The difference between the basic and the diluted weighted average share
capital is mainly attributable to unexercised share options.
9. TAXATION
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED
--------------------- DECEMBER 31,
1999 1998 1997 1999
<S> <C> <C> <C> <C>
Corporation tax at 30% (1998: 31%).................. -- -- -- L 979
Deferred taxation................................... L929 -- -- 2,641
---- ---- ---- -------
Tax charge........................................ L929 -- -- L 3,620
==== ==== ==== =======
</TABLE>
F-13
<PAGE> 74
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
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.
b) Goodwill on acquisitions of subsidiary undertakings in the period.
Goodwill comprises the excess of purchase consideration over the value of
net assets acquired. The cost is amortized over 20 years.
c) 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>
NATURAL CUSTOMER
GAS SERVICE
GROUP COST GOODWILL FIELDS AGREEMENT TOTAL
<S> <C> <C> <C> <C>
At 1st July 1998....................................... -- 3,535 3,000 6,535
Additions.............................................. -- 1,451 2,135 3,586
------ ------ ------ -------
At 30th June 1999...................................... -- 4,986 5,135 10,121
Additions.............................................. 4,202 1,110 136 5,448
------ ------ ------ -------
At 31st December 1999.................................. 4,202 6,096 5,271 15,569
------ ------ ------ -------
ACCUMULATED AMORTISATION
At 1st July 1998....................................... -- 314 -- 314
Charge for the year.................................... -- 447 -- 447
Release of deferred cost............................... -- -- 44 44
------ ------ ------ -------
At 30th June 1999...................................... -- 761 44 805
Charge for the period.................................. 34 176 -- 210
Release of deferred cost............................... -- -- 270 270
------ ------ ------ -------
At 31st December 1999.................................. 34 937 314 1,285
------ ------ ------ -------
NET BOOK VALUE
30th June 1998......................................... L -- L3,221 L3,000 L 6,221
30th June 1999......................................... L -- L4,225 L5,091 L 9,316
31st December 1999..................................... L4,168 L5,159 L4,957 L14,284
</TABLE>
Interest capitalised during the years ended 30th June 1999 and 1998 was L22
and Lnil respectively, and during the six months ended 31st December 1999 was
Lnil.
F-14
<PAGE> 75
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
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.................................. L 354 L 5,384 L13,254 L18,992
Additions......................................... 1,304 14,970 104 16,378
Transferred....................................... -- (13,778) 13,778 --
------ ------- ------- -------
At 30th June 1999................................. 1,658 6,576 27,136 35,370
Additions......................................... 659 13,056 33 13,748
Transferred....................................... -- (8,788) 8,788 --
------ ------- ------- -------
At 31st December 1999............................. L2,317 L10,844 L35,957 L49,118
====== ======= ======= =======
ACCUMULATED DEPRECIATION
At 1st July 1998.................................. L 96 -- L 365 L 461
Charge for the year............................... 194 -- 965 1,159
------ ------- ------- -------
At 30th June 1999................................. 290 -- 1,330 1,620
Charge for the period............................. 293 -- 632 925
------ ------- ------- -------
At 31st December 1999............................. L 583 -- L 1,962 L 2,545
====== ======= ======= =======
NET BOOK VALUE
30th June 1998.................................... L 258 L 5,384 L12,889 L18,531
------ ------- ------- -------
30th June 1999.................................... L1,368 L 6,576 L25,806 L33,750
------ ------- ------- -------
31st December 1999................................ L1,734 L10,844 L33,995 L46,573
------ ------- ------- -------
</TABLE>
Interest capitalised during the years ended 30th June 1999 and 1998 was
L293 and L702 respectively, and during the six months ended 31st December 1999
was L124.
The net book value of the assets held under finance leases included above
were:
<TABLE>
<CAPTION>
JUNE 30,
---------------- DECEMBER 31,
1999 1998 1999
<S> <C> <C> <C>
Assets in the course of construction.................. L -- L3,518 L --
Plant and equipment................................... 14,820 4,476 14,434
------- ------ -------
L14,820 L7,994 L14,434
======= ====== =======
</TABLE>
CAPITAL COMMITMENTS
The Group has capital commitments of:
<TABLE>
<CAPTION>
JUNE 30,
---------------- DECEMBER 31,
1999 1998 1999
<S> <C> <C> <C>
Contracted but not provided........................... L20,600 L4,407 L3,000
</TABLE>
F-15
<PAGE> 76
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
12. FIXED ASSETS INVESTMENTS
<TABLE>
<CAPTION>
GROUP
JOINT
VENTURE
<S> <C>
At 1st July 1999............................................ L2,776
Additions................................................... 751
------
At 31st December 1999....................................... L3,527
======
</TABLE>
On 31st December 1998, the Group acquired a 50% holding in the ordinary
issued share capital of Haven Energy Ltd (formerly 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.
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
York Gas Limited.................................... England Ordinary Shares 100%
Independent Energy UK Limited....................... England Ordinary Shares 100%
Independent Energy (Pye Bridge) Limited............. England Ordinary Shares 100%
Independent Energy Generation Limited............... England Ordinary Shares 100%
Independent Energy Resources Limited................ England Ordinary Shares 100%
DORMANT
Independent Services Limited........................ England Ordinary Shares 100%
Independent Energy Limited.......................... England Ordinary Shares 100%
</TABLE>
13. DEBTORS
<TABLE>
<CAPTION>
JUNE 30
----------------- DECEMBER 31,
1999 1998 1999
<S> <C> <C> <C>
Trade debtors......................................... L57,663 L10,905 L203,476
Sundry debtors........................................ 3,393 866 669
Other taxation and social security.................... 400 781 7,218
Prepayments and accrued income........................ 22,927 2,788 60,307
------- ------- --------
L84,383 L15,340 L271,670
======= ======= ========
</TABLE>
Included within prepayments and accrued income are costs of L15,936 at 31st
December 1999, (L6,787 at 30th June 1999) which will be released to the profit
and loss account after more than one year.
F-16
<PAGE> 77
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
14. CREDITORS
AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
JUNE 30,
----------------- DECEMBER 31,
1999 1998 1999
<S> <C> <C> <C>
Trade creditors...................................... L12,650 L 6,455 L 13,628
Bank loan............................................ -- 4,000 35,000
Bank loan construction facilities.................... 1,000 1,000 11,938
Bank overdraft....................................... 22,038 22 5,829
Other taxation and social security................... 73 39 938
Corporation tax...................................... -- -- 979
Obligations under finance lease contracts............ 1,560 1,052 1,541
Accruals and deferred income......................... 31,192 8,021 97,197
------- ------- --------
L68,513 L20,589 L167,050
======= ======= ========
</TABLE>
The bank overdraft is secured by a debenture on all the Group assets other
than assets subject to other security arrangements.
AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
JUNE 30,
----------------- DECEMBER 31,
1999 1998 1999
<S> <C> <C> <C>
Bank loan construction facilities..................... L 7,672 L 3,500 L 8,971
Unsecured loan notes.................................. -- 1,400 --
Obligations under finance lease contracts............. 11,548 5,771 11,452
------- ------- -------
L19,220 L10,671 L20,423
======= ======= =======
</TABLE>
BANK LOAN
The bank loans, which are part of a number of revolving construction
facilities of L24.0m (June 1999: L9.5m; June 1998: L8.0m), are secured by a
debenture on all the Group assets other than assets subject to other security
arrangements. The loans bear interest based on London inter bank rates (LIBOR),
and are repayable as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------- DECEMBER 31,
1999 1998 1999
<S> <C> <C> <C>
Within one year......................................... L1,000 L1,000 L11,938
Between one and two years............................... 1,000 1,000 2,980
Between two and five years.............................. 6,672 2,500 5,991
------ ------ -------
L8,672 L4,500 L20,909
====== ====== =======
</TABLE>
FINANCE LEASES
Obligations under finance leases fall due as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------- DECEMBER 31,
1999 1998 1999
<S> <C> <C> <C>
Within one year........................................ L 1,560 L1,052 L 1,541
Between one and five years............................. 7,500 4,728 7,913
Over five years........................................ 4,048 1,043 3,539
------- ------ -------
L13,108 L6,823 L12,993
======= ====== =======
</TABLE>
The finance leases are secured on the assets concerned.
F-17
<PAGE> 78
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
15. PROVISIONS FOR LIABILITIES AND CHARGES
DEFERRED TAXATION
GROUP
<TABLE>
<S> <C>
At 1st July 1998............................................ --
Charged to profit and loss year ended 30 June 1999.......... L 929
Charged to profit and loss for six months ended 31 December
1999...................................................... L2,641
------
At 31st December 1999....................................... L3,570
======
</TABLE>
Deferred tax is analysed as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------- DECEMBER 31,
1999 1998 1999
<S> <C> <C> <C>
Capital allowances........................................ L929 L850 L3,570
Losses offset........................................... -- (850) --
---- ---- ------
L929 -- L3,570
==== ==== ======
</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,
----------- DECEMBER 31,
1999 1998 1999
<S> <C> <C> <C>
Expiring within one year -- land and buildings.............. L41 -- 8
-- plant and machinery............ 18 -- 7
Expiring within two to five years -- land and buildings..... 42 L203 69
-- plant and machinery... 157 67 204
Expiring in more than five years -- land and buildings...... 169 -- 337
-- plant and machinery.... -- -- 0
</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 are contained in note 19.
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 summarized 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.
F-18
<PAGE> 79
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
18. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT -- (CONTINUED)
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 maximize its
return consistent with an acceptable level of risk.
Generally, load shape risk decreases as the Company's portfolio of supply
customers in the supply market increases. The Company hedges purchase price risk
by employing a variety of risk management tools, including entering into hedging
instruments, known as contracts for differences (CfDs), management of its supply
contract portfolio, and through the ownership of generating facilities to
produce a portion of its required supply of electricity.
(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 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 31st December 1999 the Company has in place CfDs with third parties
covering the period from 31st December 1999 to 3rd October 2000 for 4,577 GWhs
of electricity that have a value of L138.8 m. The CfDs are settled either
monthly or daily in accordance with the contracts.
As at 1st January 2000 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.
F-19
<PAGE> 80
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
18. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT -- (CONTINUED)
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,
------------------ DECEMBER 31,
1999 1998 1999
<S> <C> <C> <C>
Bank overdraft..................................... L22,038 L 22 L 5,829
Bank loan.......................................... -- 4,000 35,000
Construction loans................................. 8,672 4,500 20,909
Unsecured loan notes............................... -- 1,400 --
Finance leases..................................... 13,108 6,823 12,993
------- ------- -------
L43,818 L16,745 L74,731
======= ======= =======
</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
at 31 December 1999 is L359 (June 1999: L640; June 1998: L696).
(ii) Maturity analyses
<TABLE>
<CAPTION>
JUNE 30,
------------------ DECEMBER 31,
1999 1998 1999
<S> <C> <C> <C>
Repayments fall due as follows:
Within one year.................................... L24,598 L 6,074 L54,308
After more than one year........................... 19,220 10,671 20,423
------- ------- -------
L43,818 L16,745 L74,731
======= ======= =======
Repayments after more than one year are as follows:
Between one and two years.......................... 2,560 3,452 5,072
Between two and five years......................... 8,940 6,176 11,812
More than five years............................... 7,720 1,043 3,539
------- ------- -------
L19,220 L10,671 L20,423
======= ======= =======
</TABLE>
(iii) Interest Rate analyses
<TABLE>
<CAPTION>
JUNE 30,
------------------ DECEMBER 31,
1999 1998 1999
<S> <C> <C> <C>
Fixed rate borrowings.............................. L 5,802 L 8,223 L40,868
Floating rate borrowings........................... 38,016 8,522 33,863
------- ------- -------
L43,818 L16,745 L74,731
======= ======= =======
</TABLE>
The weighted average interest rate for the fixed rate liabilities was
8.98%, with a weighted average period of 5.1 years for which the rate is fixed.
Floating rate borrowings bear interest rates based on LIBOR.
F-20
<PAGE> 81
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT -- (CONTINUED)
(iv) Borrowing facilities
The Group has the following undrawn committed borrowing facilities at 31st
December 1999 in respect of which all conditions precedent had been met:
<TABLE>
<CAPTION>
FIXED FLOATING
RATE RATE TOTAL
1999 1999 1999
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Expiring within one year................................. L3,000 L 3,000 L 6,000
</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.
19. SHARE CAPITAL
<TABLE>
<CAPTION>
JUNE 30,
------------ DECEMBER 31,
1999 1998 1999
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Authorised:
50,000,000 ordinary shares of 1p each (1998:
28,000,000)............................................ L500 L280 L500
---- ---- ----
On 2nd July 1998, the number of authorised shares was
increased from 28,000,000 to 50,000,000.................
Issued and fully paid ordinary shares of 1p each:
At 1st July 1998.......................................... 179
Issued in the year........................................ 84
----
At 30th June 1999......................................... L263
----
Issued in the six months to 31st December 1999............ 104
----
At 31st December 1999..................................... L367
----
</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.
The Company issued 10,191,000 ordinary shares and on October 4th 1999
concluded the sale of 3,611,800 of these at L9.60 per share raising L34.7
million before expenses, and 6,579,200 in the form of American Depository Shares
at $16.375 per share raising $107.7 million before expenses.
Other issues were the exercise of:
<TABLE>
<CAPTION>
EXERCISE
PRICE NUMBER
<S> <C> <C>
Year Ended 30th June 1999
Share options............................................... L1.00 280,000
Share warrants.............................................. L0.75 57,500
Six Months Ended 31st December 1999
Share options............................................... L0.01 250,000
</TABLE>
F-21
<PAGE> 82
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SHARE CAPITAL -- (CONTINUED)
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 31st December 1999 there
are outstanding options for the issue of 4,627,400 ordinary shares of 1p each.
A summary of the share options granted and the changes during the periods
is presented below.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------- SIX MONTHS ENDED
1999 1998 DECEMBER 31, 1999
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER EXERCISE NUMBER EXERCISE NUMBER
PRICE OF SHARES PRICE OF SHARES PRICE OF SHARES
<S> <C> <C> <C> <C> <C> <C>
At beginning of the
year.................... 93p 3,463,400 82p 2,778,400 197p 4,075,400
Granted in the year....... 568p 912,000 122.5p 925,000 1,222p 802,000
Cancelled in the year..... 360p (20,000) -- -- -- --
Exercised in the year..... 100p (280,000) 83p (240,000) 1p (250,000)
--------- --------- ---------
At end of the year........ 197p 4,075,400 93p 3,463,400 385p 4,627,400
========= ========= ====== =========
</TABLE>
The following table summarises information regarding share options at 31st
December 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
YEARS
REMAINING
NUMBER CONTRACT NUMBER
EXERCISE PRICE EFFECTIVE GRANT DATE OUTSTANDING LIFE EXERCISABLE
<S> <C> <C> <C> <C>
1p.......................... 28th May 1996 45,200 1.00 45,200
31.25p...................... 28th May 1996 193,200 1.00 193,200
50p......................... 28th May 1996 60,000 1.00 60,000
100p........................ 28th May 1996 1,710,000 1.79 1,710,000
122.5p...................... 5th November 1997 915,000 2.85 --
402.5p...................... 3rd November 1998 45,000 3.84 --
450p........................ 20th August 1998 127,000 3.64 --
576p........................ 20th January 1999 250,000 6.05 250,000
597p........................ 20th January 1999 385,000 4.05 --
652.5p...................... 4th May 1999 70,000 4.33 --
667.5p...................... 3rd March 1999 25,000 4.17 --
890p........................ 11th August 1999 74,000 4.67
960p........................ 28th September 1999 500,000 4.75
1,300p...................... 20th October 1999 28,000 4.83
1,990p...................... 30th December 1999 200,000 5.00
--------- ---- ---------
4,627,400 3.01 2,258,400
========= ==== =========
</TABLE>
The option price range at each year end was as follows:
<TABLE>
<S> <C>
31st December 1999..................................... 1p to 1,990p
30th June 1999......................................... 1p to 667.5p
30th June 1998......................................... 1p to 122.5p
30th June 1997......................................... 1p to 100.0p
</TABLE>
F-22
<PAGE> 83
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
19. SHARE CAPITAL -- (CONTINUED)
Details of the directors' options which are included in the above figures
are shown in note 4 to the financial statements.
SHARE WARRANTS
On 30th June 1997 share warrants for 140,000 ordinary shares were granted
in association with the issue of Loan Notes of L1,400; 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 PROFIT
PREMIUM AND LOSS
ACCOUNT ACCOUNT
<S> <C> <C>
At 1st July 1998............................................ L 10,695 L(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........................................... L 46,030 L 2,586
Share premium arising on offering........................... 99,671 --
Expenses arising on offering................................ (6,655) --
Retained profits for the six months......................... -- 8,446
-------- -------
At 31st December 1999....................................... L139,046 L11,032
======== =======
</TABLE>
21. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------- DECEMBER 31,
1999 1998 1997 1999
<S> <C> <C> <C> <C>
Ordinary shares issued...................... L 263 L 179 L 150 L 367
Share premium on offerings.................. 45,710 10,445 8,044 139,046
Share premium on exercise of stock options
and warrants.............................. 320 250 -- --
Profit/(Loss) for period.................... 4,007 (185) (1,181) 8,446
Profit/(Loss) at start of period............ (1,421) (1,236) (56) 2,586
------- ------- ------- --------
Balance at end of period.................... L48,879 L 9,453 L 6,957 L150,445
======= ======= ======= ========
</TABLE>
F-23
<PAGE> 84
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
22. ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
AT
BEGINNING CASH OTHER AT END
OF YEAR FLOWS CHANGES OF YEAR
<S> <C> <C> <C> <C>
YEAR ENDED 30TH JUNE 1999
Cash at bank and in hand........................... L 621 L (43) -- L 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 L (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.................................... L(16,124) L(12,904) L (7,474) L(36,502)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT BEGINNING OTHER AT THE END
OF YEAR CASH FLOWS CHANGES OF THE PERIOD
<S> <C> <C> <C> <C>
SIX MONTHS ENDED 31ST DECEMBER 1999
Cash at Bank and in Hand....................... L 578 L 826 -- L 1,404
Security Deposits.............................. 6,738 (2,709) -- 4,029
Bank Overdraft................................. (22,038) 16,209 -- (5,829)
-------- -------- -------- --------
(14,722) 14,326 -- (396)
Lease due within one year...................... (1,560) 814 L (795) (1,541)
Lease due after more than one year............. (11,548) -- 97 (11,451)
-------- -------- -------- --------
(13,108) 814 (698) (12,992)
Loans due within one year...................... (1,000) -- (45,938) (46,938)
Loans due after more than one year............. (7,672) 672 (1,971) (8,971)
-------- -------- -------- --------
(8,672) 672 (47,909) (55,909)
-------- -------- -------- --------
Total................................ L(36,502) L 15,812 L(48,607) L(69,297)
======== ======== ======== ========
</TABLE>
F-24
<PAGE> 85
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
23. RECONCILIATION OF NET CASH FLOWS TO MOVEMENT IN NET DEBT
<TABLE>
<S> <C>
YEAR ENDED 30TH JUNE 1999
Decrease in cash in the year................................ L(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........................................ L(20,378)
Net debt at 30th June 1998.................................. (16,124)
--------
Net debt at 30th June 1999.................................. L(36,502)
--------
SIX MONTHS ENDED 31ST DECEMBER 1999
Increase in cash in the period.............................. L 14,326
Cash outflow from decrease in loan financing................ 672
Cash outflow from decrease in lease financing............... 814
New loans................................................... (47,909)
New finance leases.......................................... (698)
--------
L(32,795)
Net Debt at 30th June 1999.................................. (36,502)
--------
L(69,297)
========
</TABLE>
24. MAJOR NON-CASH TRANSACTIONS
There were no major non-cash transactions during the six months ended 31st
December 1999. 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 L7,474, L2,666 and L4,383, respectively.
25. POST BALANCE SHEET EVENT
On 8th July 1999 the Group was granted a twelve month L80 million Revolving
Credit and Letters of Credit facility by a syndicate of six banks led by
Barclays Bank PLC; Barclays Bank PLC also provided an Ancillary Facility of L2
million. On 6th March 2000, this Ancillary Facility was increased to L102
million until 6th June 2000. The facilities are secured on Group receivables and
are on normal commercial terms.
F-25
<PAGE> 86
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>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
-------------------------- --------------------
NOTE 1999 1998 1997 1999 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Profit/(loss) on ordinary activities after
taxation under UK GAAP......................... L4,007 L(185) L(1,181) 8,446 707
US GAAP adjustments:
Stock based compensation -- Employee Share
Option Scheme.................................. (c) (74) (136) (188) -- (20)
-- ------ ----- ------- ----- ---
Total US GAAP adjustments........................ (74) (136) (188) -- (20)
Net effect of US GAAP adjustments................ (74) (136) (188) -- (20)
-- ------ ----- ------- ----- ---
Net profit/(loss) under US GAAP.................. 3,933 (321) (1,369) 8,446 687
====== ===== ======= ===== ===
Primary earnings/(loss) per ordinary share under
US GAAP........................................ 15.4p (1.9)p (10.4)p 26.7p 7.8p
Diluted earnings/(loss) per ordinary share under
US GAAP........................................ 13.9p 23.5p 2.5p
</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.
b) EQUITY RECONCILIATION
<TABLE>
<CAPTION>
JUNE 30,
--------------------------- DECEMBER 31,
NOTE 1999 1998 1997 1999
<S> <C> <C> <C> <C> <C>
Equity under UK GAAP................. L48,879 L 9,453 L6,958 L150,445
Stock based compensation........... (c) (434) (397) (299) (434)
Net effect of US GAAP
adjustments..................... (434) (397) (299) (434)
------- -------- ------ ----------
Equity under US GAAP............... (d) L48,445 L 9,056 L6,659 L150,011
======= ======== ====== ==========
</TABLE>
F-26
<PAGE> 87
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>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------ --------------------
1999 1998 1997 1999 1998
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net profit/(loss) applicable to ordinary shares as
reported.............................................. L3,933 L(321) L(1,369) L8,446 L 687
Net profit/(loss) applicable to ordinary shares pro
forma................................................. 1,998 (428) (1,461) L7,530 525
Primary net earnings/(loss) per ordinary share as
reported.............................................. 15.4p (1.9)p (10.4)p 26.7p 2.8p
Primary net earnings/(loss) per ordinary share pro
forma................................................. 7.8p (2.5)p (11.1)p 23.8p 2.1p
</TABLE>
The company has issued a range of options from commencement of trade to the
period ended 31st December 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%
11th 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%
11th August 1999.......................................... 2.0 6.80% 173.41%
20th September 1999....................................... 2.0 6.86% 177.63%
20th October 1999......................................... 2.0 6.87% 207.81%
30th December 1999........................................ 2.0 6.31% 421.86%
</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.
F-27
<PAGE> 88
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)
The weighted average fair values at the date of grant were as follows:
<TABLE>
<S> <C> <C>
Six Months Ended....................................... 31st December 1999 L10.82
Six Months Ended....................................... 31st December 1998 L3.55
Year Ended............................................. 30th June 1999 L4.50
Year Ended............................................. 30th June 1998 L0.23
</TABLE>
d) US GAAP EQUITY ROLL FORWARD
Shareholders equity roll forward in accordance with US GAAP:
<TABLE>
<CAPTION>
JUNE 30,
------------------------- DECEMBER 31,
1999 1998 1997 1999
<S> <C> <C> <C> <C>
Balance at beginning of period................ L9,056 L6,659 L6,676 L48,445
Other gains................................... 35,456 2,718 1,352 93,120
Net profit/(loss)............................. 3,933 (321) (1,369) 8,446
------- ------ ------ --------
Balance at end of period...................... L48,445 L9,056 L6,659 L150,011
======= ====== ====== ========
</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>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------- -----------------------
1999 1998 1997 1999 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash (used in) operating activities...... L(33,498) L(3,108) L(2,271) L(103,241) L(14,368)
Cash provided by financing activities.... 33,022 10,489 2,312 130,670 31,400
Cash provided by (used in) investing
activities............................. (14,845) (8,705) 541 (13,109) (7,180)
-------- ------- ------- --------- --------
Net (decrease) in cash and deposits with
banks.................................. (15,321) (1,324) 582 14,320 9,852
Balance at beginning of period........... 599 1,923 1,341 (14,722) 599
-------- ------- ------- --------- --------
Balance at end of period................. L(14,722) L 599 L 1,923 L (402) L 10,451
======== ======= ======= ========= ========
</TABLE>
F-28
<PAGE> 89
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
27. ADDITIONAL US GAAP DISCLOSURE REQUIREMENTS -- (CONTINUED)
(ii) The amount of taxes and interest paid, net of capitalised interest,
during the period is:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------- --------------------
1999 1998 1997 1999 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest, net of capitalisation.................. L2,598 L1,074 L81 L3,324 L638
Stamp duty reserve tax........................... 579 -- -- 947 579
</TABLE>
b) OTHER DISCLOSURES
Total liabilities and stockholders' equity and, Total assets, in accordance
with UK GAAP were as follows:
<TABLE>
<S> <C>
31st December 1999........................................ L341,488
30th June 1999............................................ 137,541
30th June 1998............................................ 40,712
</TABLE>
Total assets prepared in accordance with US GAAP were as follows:
<TABLE>
<S> <C>
31st December 1999........................................ L341,607
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>
31st December 1999......................................... L20,932
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 31st
December 1999 are as follows:
<TABLE>
<S> <C>
Year ended 31st December
2000........................................................ L 608
2001........................................................ 557
2002........................................................ 456
2003........................................................ 388
2004........................................................ 388
Thereafter.................................................. 1,980
------
L4,377
======
</TABLE>
F-29
<PAGE> 90
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
d) RECONCILIATION OF TAX CHARGE TO STATUTORY RATE ON LOSSES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------ ---------------
1999 1998 1997 1999 1998
<S> <C> <C> <C> <C> <C>
Profit/(loss) on ordinary activities before
taxation....................................... L4,936 L(185) L(1,181) L12,066 L 707
Expected tax charge at the statutory rate........ 1,518 (57) (367) 3,620 212
Current tax...................................... -- -- -- (1,066) --
Decrease/(Increase) in deferred tax liability.... (929) (390) (394) (2,619) 315
------ ----- ------- ------- -----
Difference to reconcile.......................... 589 (447) (761) (65) 527
------ ----- ------- ------- -----
Deferred tax not recognised...................... 317 (802) (958) -- 604
Intangible asset tax allowances.................. 460 457 212 197 42
Inadmissible expenditure......................... (188) (102) (15) (262) (119)
------ ----- ------- ------- -----
L 589 L(447) L (761) L (65) L 527
====== ===== ======= ======= =====
</TABLE>
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>
31st December 1999............................ No Losses/All Utilized
31 December 1998.............................. L1,020
30th June 1999................................ 7,788
30th June 1998................................ 7,710
30th June 1997................................ 5,100
</TABLE>
E) 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.
F) 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> 91
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARCH 28, 2000
[LOGO]
4,070,000 AMERICAN DEPOSITARY SHARES
REPRESENTING 4,070,000 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.
- --------------------------------------------------------------------------------
