UNITED STATES
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CAP ROCK ENERGY CORPORATION
(Exact name of Registrant as Specified in its Charter)
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TEXAS 4911 75-2794300
(Stare or other jurisdiction (Primary Standard Industrial (IRS Employer Identification
of incorporation) Classification Code Number) Number)
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500 West Wall Street, Suite 400
Midland, Texas 79701
(915) 683-5422
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
David W. Pruitt, President
500 West Wall Street, Suite 400
Midland, Texas 79701
(915) 683-5422
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Ronald W. Lyon, General Counsel
115 S. Travis Street
Sherman, Texas 75090
(903) 813-0377
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF
1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS
THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
Calculation of Registration Fee
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Title of Each Class Proposed Maximum Proposed Maximum
of Securities to Amount to be Offering Aggregate Amount of
be Registered Registered Price Per Unit Offering Price Registration Fee
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Common Stock, par value
$.01 per share 4,725,000 $10.00 $47,250,000 $12,615.75
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary prospectus is
not an offer to sell these securities and we are not soliciting offers to buy
these securities in any jurisdiction where the offer or sale is not permitted.
Prospectus (Subject to Completion)
Issued , 2001
Up to 4,725,000 Shares
Cap Rock Energy Corporation
Common Stock
This prospectus relates to:
o a distribution of up to 1,575,000 shares of common stock of Cap Rock Energy
Corporation to Eligible Interest Owners pursuant to the Conversion Plan;
o a rescission offer by the Cooperative to Eligible Interest Owners who,
through their previous action or inaction, elected to receive shares of our
common stock pursuant to the Conversion Plan; and
o an offering of 3,150,000 additional shares of our common stock to current
and former members of the Cooperative at an offering price of $10.00 per
share.
In this prospectus, we refer to Cap Rock Energy Corporation as the
Company, and we refer to Cap Rock Electric Cooperative, Inc. as the Cooperative.
Our reference to the Conversion Plan means the plan to convert the Cooperative
from a member owned electric cooperative to a shareholder owned business
corporation as approved by the members of the Cooperative on October 20, 1998.
Our reference to Eligible Interest Owners means the current members of the
Cooperative and the former members of the Cooperative who have equity accounts
on the books of the Cooperative, but excludes the current members and former
members who have elected (or who elect by accepting our rescission offer) to
receive payment for their interests in the Cooperative in the form of reductions
on their electric bills or in the form of cash under a Dutch Auction conducted
by the Cooperative.
Prior to implementation of the Conversion Plan and the offering of
shares of our common stock pursuant to this prospectus, there has been no public
market for our common stock. Application has been made for the quotation of our
common stock on the Nasdaq National Market under the symbol "CREC".
Per Share Total
Initial public offering price......................$10.00 $31,500,000
Underwriter commissions...................... $ $
Proceeds, before expenses, to the Company....... $ $
See "Risk Factors" beginning on page 9 to read about factors you should
consider before making a decision on the rescission offer or buying shares of
our common stock.
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is
_____, 2000.
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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any authorized information or representations. This prospectus is an
offer to sell only the shares of our common stock offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of the dates thereof.
TABLE OF CONTENTS
Prospectus
Page
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Where You Can Find More Information
Questions and Answers
Summary
Risk Factors
Business .
Conversion Plan
Comparison of Rights
Federal Income Tax Consequences
Accounting Treatment
Rescission Offer
Capitalization
Selected Consolidated Financial Data
Management's Discussion and Analysis
Market and Dividend Information
Management
Certain Transactions
Ownership of Common Stock
Description of Capital Stock
Common Stock Eligible For Future Sale
Determination of Offering Price
Legal Matters
Experts
Financial Statements
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains certain statements that are "forward-looking" within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical fact included in this prospectus, including,
without limitation, statements regarding our future operations, margins,
profitability, liquidity and capital resources are forward-looking statement. In
addition, forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," intend,"
"estimate," "anticipate," "believe," or "continue" (or the negative thereof) or
similar terminology. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we can give no assurance that these
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from our expectations ("cautionary
statements") are disclosed under "Risk Factors" and elsewhere in this
prospectus. All forward-looking statements are expressly qualified in their
entirety by the cautionary statements.
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WHERE YOU CAN FIND MORE INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, that registers the shares of common stock to
be issued by the Company. The registration statement, including the attached
exhibits and schedules, contains additional relevant information about the
Company
The Company currently is not subject to the information and reporting
requirements of the Securities Exchange Act of 1934, as amended. You may read
and copy the registration statement at any of the following locations of the
SEC:
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Public Reference Room 7 World Trade Center Citicorp Center
450 Fifth Street, N.W. Suite 1300 500 West Madison Street
Washington, D.C. 50549 New York, NY 10048 Suite 1400
Chicago, IL 60661
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You may also obtain copies of the registration statement by mail from
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. Further information on the
operations of the SEC's Public Reference Room in Washington, D.C. can be
obtained by calling the SEC at 800-SEC-0330.
The registration statement was filed with the SEC electronically via
the SEC's EDGAR system. The SEC maintains an internet world wide web site that
contains registration statements, reports and other information regarding
companies that fill materials electronically with the SEC. The address of that
site is http://www.sec.gov.
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QUESTIONS AND ANSWERS ABOUT
THE CONVERSION PLAN, THE RESCISSION OFFER, AND THE STOCK OFFERING
The following questions and answers deal with some of the material
aspects of the Conversion Plan, the rescission offer, and the offering of shares
of our common stock. You should read this entire prospectus, including "Risk
Factors" beginning on page 9, the "Conversion Plan" beginning on page 20, the
"Rescission Offer" beginning on page 28, and the "Underwriting" beginning on
page 44, for more information.
Q. IS THE CONVERSION TO AN INVESTOR OWNED ELECTRIC UTILITY DIFFERENT FROM
PURCHASING STOCK?
A. Yes. We are going to convert the Cooperative from a member owned
cooperative to a shareholder owned business corporation by completing the
Conversion Plan our members approved on October 20, 1998 through which
Eligible Interest Owners will receive up to 1,575,000 shares of our common
stock in exchange for their interest in the Cooperative. In addition to
implementing the Conversion Plan, we are offering the current and former
members of the Cooperative the right to purchase 3,150,000 shares of our
common stock at $10.00 per share. Regardless of whether any of the current
or former members of the Cooperative purchase shares of our common stock in
this offering, the Eligible Interest Owners who do not accept our
rescission offer will receive up to 1,575,000 shares of our common stock
under the Conversion Plan.
Q. IF I AM AN ELIGIBLE INTEREST OWNER, HOW MANY SHARES OF STOCK WILL I RECEIVE
UPON IMPLEMENTATION OF THE CONVERSION PLAN?
A. Under the Conversion Plan, each Eligible Interest Owner who is a current
member of the Cooperative will receive 10 shares of our common stock for
its membership interest in the Cooperative and each Eligible Interest Owner
who is either a current or former member of the Cooperative with an equity
account on the books of the Cooperative will receive one share of our
common stock for each $10.00 in its equity account. No fractional shares
will be issued and any Eligible Interest Owner who would have been entitled
to a fractional share will receive cash instead.
Q. IF I AM AN ELIGIBLE INTEREST OWNER, WHAT DO I NEED TO DO TO PARTICIPATE IN
THE COOPERATIVE'S RESCISSION OFFER?
A. An election form is being sent to you with this prospectus that indicates:
o the number of shares you are entitled to receive as a result of
implementation of the Conversion Plan;
o the amount, if any, in your equity account on the books of the Cooperative;
and
o a place for you to indicate whether or not you wish to accept our
rescission offer and, if so, which option (credit against electric bills or
participation in a Dutch Auction) you wish to take.
You need to indicate on the election form that you wish to accept our
rescission offer, stating which option you want to take, and then sign and
return the election form so that it is received by us before the close of
business on the 60th day following the date of this prospectus. If we have
not received your election form by the close of business on the 60th day
following the date of this prospectus, you will be deemed to have rejected
our rescission offer and we will cause your shares of our common stock to
be issued to you.
Q. HOW MANY SHARES OF COMMON STOCK ARE BEING OFFERED FOR SALE, AND AT WHAT
PRICE?
A. In addition to the issuance of shares of our common stock in connection
with implementation of the Conversion Plan, we are offering for sale up to
3,150,000 shares of our common stock at a price of $10.00 per share to
current and former members of the cooperative.
Q. WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER TO TAKE
SHARES OF COMMON STOCK UNDER THE CONVERSION PLAN, ACCEPT THE RESCISSION
OFFER OR PARTICIPATE IN THE STOCK OFFERING BY PURCHASING SHARES?
A. There are many important factors for you to consider before making an
investment decision. Therefore, you should read this entire prospectus
before making your investment decision.
Q. HOW DO I SELL MY SHARES OF COMMON STOCK?
A. We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "CREC". Purchases and sales of the shares of our
common stock will be effected through brokers. However, there may be a wide
spread between the bid and asked price for our stock, and we can provide no
assurance that anyone will want to buy your shares or that you will be able
to sell them. As to the shares of our common stock distributed to Eligible
Interest Owners under the Conversion Plan and that are held by those
persons until the first anniversary of the distribution of those shares, we
will purchase any of those shares offered to us at $10.00 per share during
the period commencing on the first anniversary of the distribution of the
shares and ending 60 days thereafter. See "Conversion Plan" - Purchase of
Stock Issued Pursuant to the Conversion Plan.
Q. WHEN IS THE DEADLINE TO PURCHASE SHARES OF OUR COMMON STOCK?
A. We must receive a properly signed order form with the required payment on
or before 12:00 p.m., Central Standard Time, on __________, 2001.
Q. CAN THE OFFERING BE EXTENDED?
A. Yes. If we do not receive sufficient orders, we can extend the offering
beyond ____________, 2001. No single extension can exceed 90 days, and the
extensions may not go beyond ___________, 2001.
Q. HOW DO I PURCHASE SHARES OF COMMON STOCK?
A. First, you should read this entire prospectus carefully. Then, complete and
return the enclosed stock order and certification form, together with your
payment. Orders for shares of our common stock may be delivered in person
to our office during regular office hours, or by mail in the enclosed
envelope marked STOCK ORDER RETURN.
Q. CAN I CHANGE MY MIND AFTER I PLACE AN ORDER TO PURCHASE SHARES OF COMMON
STOCK?
A. No. After we receive your order form and payment, you may not cancel or
modify your order. However, if we extend the offering beyond ____________
__, 2001, you will be able to change or cancel your order. If you cancel
your order, you will receive a prompt refund without interest.
Q. HOW CAN I PAY FOR THE SHARES OF COMMON STOCK THAT I PURCHASE?
A. You have two options: (1) pay cash if it is delivered to us in person; or
(2) send us a check or money order. Please do not send cash in the mail.
Q. WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES OF COMMON STOCK TO FILL ALL
ORDERS?
A. If there is an over subscription, then you may not receive any or all of
the shares you want to purchase.
Q. WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE OFFERING OF
SHARES OF COMMON STOCK?
A. For answers to other questions, we encourage you to read this prospectus.
Questions may also be addressed to our Stock Information Center at 500 West
Wall Street, Midland, Texas 79701, Monday through Friday, between the hours
of 9:00 a.m. and 4:00 p.m., Central Standard Time. To ensure that each
person receives a prospectus at least 48 hours prior to the expiration date
of _______ __, 2001 in accordance with federal law, no prospectus will be
mailed any later than five days prior to _________ __, 2001 or hand
delivered any later than two days prior to _________ __, ______.
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SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED IN OTHER PLACES IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD
CONSIDER BEFORE MAKING AN INVESTMENT DECISION. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION AND THE FINANCIAL
STATEMENTS AND NOTES THERETO.
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WHO WE ARE
We are the shareholder owned business corporation formed by the Cooperative
under the Conversion Plan to acquire all of the assets and liabilities of the
Cooperative. Simultaneous with the distribution of up to 1,575,00 shares of our
common stock to Eligible Interest Owners under the Conversion Plan, the
Cooperative will be liquidated and we will be the surviving entity. As the
successor to the Cooperative, we will be an electric distribution utility
operating initially in 31 counties in Texas. See "Conversion Plan" and
"Business."
WE ARE PLANNING TO ACQUIRE OTHER ELECTRIC DISTRIBUTION COMPANIES
Our strategic objective is to become a national electric distribution company
with community-focused local operating divisions. Our strategy for achieving
this objective is to expand our customer base by acquiring small to medium sized
electric distribution businesses in areas that have the potential for growth. We
have entered into agreements with Citizens Communications Company (formerly,
Citizens Utilities Company) to acquire the Arizona and Vermont electric
distribution businesses of Citizens. Those businesses meet our acquisition
criteria, but the acquisitions are on hold because intervening circumstances
have made obtaining financing and regulatory approval uncertain. We have also
entered into an agreement with Lamar County Electric Cooperative, Inc. to
consolidate into us, but this consolidation is being delayed as a result of
litigation with Lamar's current power provider. See "Business - Our Electric
Utility Business."
WE PARTICIPATE IN BUSINESSES OTHER THAN ELECTRIC UTILITIES
In the past we have invested in various non-regulated businesses, including the
oil and gas business, the real estate business and the propane, fuel and
lubricant distribution business. In addition, we are aggressively pursuing
potential investment opportunities in the telecommunications business. Although
our investment in these businesses is insignificant as compared to our electric
distribution business, they are, for the most part, complementary to that
business. See "Business - Our Non-Electric Utility Businesses."
OUR REASONS FOR THE CONVERSION
We believe that becoming a shareholder owned business corporation will permit us
to grow and diversify, improve our ability to raise capital in the future,
enable us to use stock for acquisitions if and when the opportunities arise and
permit the former members of the Cooperative who will be our shareholders to
realize the value of their interests in the Company. Our industry is changing
rapidly and we believe that we must convert from a member owned cooperative
association to a shareholder owned business corporation to be able to compete
effectively and efficiently. See "Conversion Plan - Reasons for the Conversion."
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WHAT ELIGIBLE INTEREST OWNERS WILL RECEIVE UNDER THE CONVERSION PLAN
Each Eligible Interest Owner who is a current member of the Cooperative will
receive 10 shares of our common stock in relation to its membership interest in
the Cooperative and each Eligible Interest Owner who is a current or former
member with an equity account on the books of the Cooperative will receive one
share of our common stock for each $10.00 in its equity account. See "Conversion
Plan - Consideration to be received in the Conversion."
SIGNIFICANT RISK FACTORS
Our revenues in the past have been largely dependent on the level of oil and gas
activity in West Texas and we need to diversify into other areas of the country
in order to grow. We have suffered losses in the past and, while we have
implemented changes to try to prevent those losses from continuing, we could
nevertheless suffer losses in the future. We may not be able to obtain the
necessary capital to purchase all of the shares of stock offered to us during
the "buy-back" period. See "Risk Factors."
DISSENTERS' RIGHTS
Neither current nor former members of the Cooperative are entitled to
dissenters' rights with respect to the implementation of the Conversion Plan.
See "Conversion Plan - Dissenters' Rights."
INTERESTS OF CERTAIN PERSONS UNDER THE CONVERSION PLAN
Except for the common stock allocated to members of the board of directors and
officers of the Cooperative in their capacity as Eligible Interest Holders,
neither the members of the board nor officers of the Cooperative will receive
compensation or other benefits in the connection with implementation of the
Conversion Plan. See "Conversion Plan - Reasons for the Conversion."
ACCOUNTING TREATMENT
The conversion involves a reorganization of entities under common control, and
the assets and liabilities transferred to accomplish the conversion will be
accounted at historical cost in a manner similar to that in pooling of interests
accounting. See "Accounting Treatment."
HOW ARE SHARES BEING OFFERED FOR SALE
We are offering the shares of our common stock for sale without the assistance
of an underwriter.
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RISK FACTORS
You should read this Prospectus carefully. Ownership of shares of our
common stock involves certain risks. The following factors should be considered
before making your decision whether to accept our rescission offer or to
purchase shares of our common stock in the offering.
Our revenues are currently dependent, in large part, on oil and gas related
activity.
A significant part of our revenues have come from customers who are
engaged in the oil and gas business in West Texas. Over the past several years,
the depressed prices for oil and gas and the resultant reduction in activity in
that industry in West Texas have caused our revenues to fluctuate. In addition,
the oil and gas reserves in West Texas have been depleting, causing a
potentially permanent reduction in overall activity in one of our largest
operating areas. These factors could have a negative impact on our revenues in
the long run unless we are able to supplement our current customer base in West
Texas with customers in other industries and areas of the country through
acquisitions and other growth.
We have suffered operating losses in past years and we could suffer losses in
the future.
We have suffered losses in each of the past three years. These losses
have resulted primarily from:
o Increased borrowings and higher interest rates on our debt;
o Depressed oil and gas prices in 1998 and 1999 which have, in turn,
caused a decrease in our revenues; and
o Losses incurred with respect to our investments in the oil and
gas exploration and production business (see Business- Our
Non-Electric Utility Businesses).
Although our borrowings and interest rates remain high, we are no longer
making our oil and gas exploration and production investments. Oil and gas
prices have risen in 2000 and we have seen growth in our revenues from customers
in areas other than West Texas. In addition, we have recently instituted an
interim increase in the rates that we charge our customers in our West Texas
(other than McCulloch) and our Hunt-Collin divisions, and we are in the process
of redesigning our rate structure for deregulation. Even with additional growth
and the changes that we have instituted, we could still suffer losses in the
future.
We may not be able to fulfill our obligation to purchase all of the shares
offered to us by Eligible Interest Owners.
We have committed, as part of the Conversion Plan, to purchase the
shares of Eligible Interest Holders that are offered to use at $10.00 per share
commencing on the first anniversary of the distribution of the shares and ending
60 days thereafter. See "Conversion Plan - Purchase of the Stock Issued Pursuant
to the Conversion Plan." If all of the Eligible Members offer their shares of
our common stock to us at that time, it would cost us $15,750,000 and it is very
possible that we may not be able to obtain the necessary capital to fund this
obligation.
We will face strong competition in the electric distribution business.
Irrespective of whether we operate as a cooperative or a business
corporation, we will face strong competition in providing electric distribution
services. This strong competition could have a material adverse affect on our
ability to generate the revenues necessary to be profitable. Legislation passed
in Texas in 1999 will significantly modify the industry and potentially
introduce more competition into the Texas retail market beginning January 1,
2002. See "Business - State Deregulation." Our customers may be able to purchase
electricity from others at prices that are less than we may be able to provide.
The level of competition we face is affected by several variables, including
price, cost of energy, alternative energy sources, new technologies and
governmental regulations. See "Business - Competition."
We may face intense competition for acquisitions.
The domestic power industry is undergoing consolidation. As a result,
we believe that significant acquisition opportunities will be available and that
we are likely to confront significant competition for those acquisition
opportunities. In addition, we may be unable to continue to identify attractive
acquisition opportunities at favorable prices or, to the extent that any
opportunities are identified, we may be unable to complete the acquisitions for
financial or other reasons.
We have invested in businesses other than the electric distribution business and
some of those investments have lost money.
We have made and are continuing to make investments in businesses other
than the electric distribution business. These businesses include the real
estate business, the oil and gas business, and the propane, fuel and lubricant
distribution business. In addition, we are aggressively pursuing potential
investment opportunities in the telecommunications business. In the future, the
success of our non-electric business investments will depend on our ability to
adequately analyze the risk of potential investments and to develop strategies
and practices to adequately manage those investments. See "Business - Our
Non-Electric Utility Businesses."
We have experienced mixed results from our oil and gas investments. Our
investments in the oil and gas exploration business (which has now been
discontinued) have not been successful, with losses exceeding $5.7 million due
in large part to depressed oil and gas prices in 1997 and 1998. Our investments
in mineral interests (which are all insignificant as compared to our electric
distribution business), on the other hand, have been successful to date.
Our electric utility business has grown through acquisitions and our future
acquisitions may not perform as expected.
We have achieved a significant part of our electric utility growth
through acquisitions and we anticipate that we will continue to grow, in large
part, through additional acquisitions. Each acquisition will have its own
peculiar characteristics and problems. We cannot provide you with any assurance
that we will be successful in transitioning new acquisitions to ownership by us,
that such acquisitions will perform as expected or that the returns from such
acquisitions will support the indebtedness incurred to acquire them or the
capital expenditures needed to develop them. See "Business - Business Strategy."
We may not be able to raise sufficient capital to fund future acquisitions and
projects.
Each acquisition we may seek to acquire may require substantial capital
investment. Continued access to capital with acceptable terms is necessary to
assure the success of future projects and acquisitions. We have utilized senior
mortgage notes and project financing loans to fund the capital expenditures
associated with constructing and acquiring our electric utility facilities and
related assets. Project financing borrowings generally have been recourse to us
and are usually secured by the physical assets, contracts and cash flow of the
related project. Depending on market conditions and the unique characteristics
of individual projects, such financing may not be available or our traditional
providers of project financing, particularly multinational commercial banks, may
seek higher borrowing spreads and increased equity contributions.
Our ability to arrange for financing on either a fully recourse or a
substantially non-recourse basis and the costs of such capital are dependent on
numerous factors, including general economic and capital market conditions, the
availability of bank credit, investor confidence, the continued success of
current projects and provisions of tax and securities laws which are conducive
to raising capital in this manner. Should future access to capital not be
available, we may decide not to build new plants or acquire existing facilities
or businesses. While a decision not to build new facilities or acquire existing
facilities or businesses would not affect the results of operations of our
currently operating facilities or facilities under construction, such a decision
would affect our future growth.
We have from time to time guaranteed certain obligations of our subsidiaries and
other affiliates.
Our lenders or lessors may also require us to guarantee the
indebtedness of our subsidiaries and other affiliates. This would render our
general corporate funds vulnerable in the event of a default by the subsidiary
or other affiliate. Additionally, our mortgages may restrict our ability to
guarantee future debt, which could adversely affect our ability to fund our
subsidiaries and other affiliates. Our senior mortgages do not limit the ability
of our subsidiaries and other affiliates to incur non-recourse or lease
financing for investment in new facilities.
We have outstanding letters of credit that support acquisitions that, if
presented for payment, would result in large losses.
In connection with our agreements to acquire the Arizona and Vermont
electric distribution businesses of Citizens Communications Company, we have
delivered irrevocable letters of credit in the amount of $9,550,000 and
$1,900,000, respectively. If these agreements are terminated due to our
inability to fulfill our commitments, Citizens may have the right to present the
letters of credit for full payment. In such event, we would face severe
pressures for cash and possibly incur a loss that would eliminate all of the
equity that we are receiving from the Cooperative.
We have a high degree of leverage.
As the successor to the Cooperative, we have substantial indebtedness
that may significantly limit our ability to meet our debt service obligations,
to finance the acquisition and development of additional projects, to compete
effectively or to operate successfully under adverse economic conditions. As of
September 30, 2000, our total consolidated indebtedness was approximately $192
million, our total consolidated assets were approximately $222 million and our
stockholders' equity was approximately $11 million. As of September 30, 2000, we
had a consolidated ratio of total debt (including current debt) to total book
capitalization of approximately 17 to 1.
This high level of indebtedness has important consequences, including:
o limiting our ability to borrow additional amounts for working capital,
capital expenditures, debt service requirements, execution of our growth
strategy, or other purposes;
o limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to
service the debt;
o increasing our vulnerability to general adverse economic and industry
conditions; and
o limiting our ability to capitalize on business opportunities and to react
to competitive pressures and adverse changes in government regulation.
The operating and financial restrictions and covenants in our existing
debt instruments, including the mortgages relating to our $123 million aggregate
principle amount of senior notes and our $28 million revolving credit facility,
contain restrictive covenants. Among other things, these restrictions limit or
prohibit our ability to:
o incur additional indebtedness;
o make prepayments of indebtedness in whole or in part;
o pay dividends;
o make investments;
o engage in transactions with affiliates;
o create liens;
o sell assets; and
o acquire facilities or other businesses.
As of September 30, 2000, we also had consolidated capital lease
obligations of $29 million related to our electric transmission facilities with
a net book value of $32 million. Capital lease payments are included in our
customer's power bills consistent with ratemaking authority. Capital lease
principal payments for each of the next three years are approximately $5 million
with $16 million due in 2004. The capital lease obligations are secured by the
transmission facilities. In the event we are unable to continue recovering our
capital lease payments from our customers or if we are unable to refinance the
$16 million payment due in 2004, our future financial operations may be
negatively impacted.
In July 2000, we executed a $15 million, three-year loan agreement with
a bank and simultaneously entered into a $15 million, three-year loan agreement
with a third party secured by the third party's business assets. Both loan
agreement payments are based on a 15-year amortization. In the event the third
party defaults on our loan agreement, our future financial operations may be
negatively impacted, including defaults under our senior debt instruments.
Irrespective of whether we operate as a cooperative or a business
corporation, we believe that our cash flow from operations, together with other
available sources of funds, including borrowings under our existing borrowing
arrangements, will be adequate to pay principal and interest on our senior notes
and other debt and to enable us to comply with the terms of our mortgages and
other debt agreements. If we are unable to comply with the terms of our
mortgages and other debt agreements and fail to generate sufficient cash flow
from operations in the future, we may be required to refinance all or a portion
of our senior notes and other debt or to obtain additional financing. However,
we may be unable to refinance or obtain additional financing because of our high
levels of debt and the debt incurrence restrictions under our mortgages and
other debt agreements. If cash flow is insufficient and refinancing or
additional financing is unavailable, we may be forced to default on our senior
notes and other debt obligations. In the event of a default under the terms of
any of our indebtedness, the debt holders may accelerate the maturity of our
obligations, which could cause defaults under our other obligations.
We may be unable to secure additional financing in the future.
Each of our future acquisitions is likely to require substantial
capital investment. Our ability to arrange financing and the cost of the
financing are dependent upon numerous factors. These factors include:
o general economic and capital market conditions;
o conditions in energy markets;
o regulatory developments;
o credit availability from banks or other lenders;
o investor confidence in the industry and in us;
o the continued success of our current electric utility facilities; and
o provisions of tax and securities laws that are conducive to raising
capital.
Financing may not be available to us on acceptable terms in the future.
We have financed our acquisitions and expansions using a variety of leveraged
financing structures, primarily consisting of senior secured indebtedness,
project financing and capital lease obligations. As of September 30, 2000, we
had total consolidated indebtedness of approximately $192 million, including
capital lease obligations of $29 million, short-term lines of credit of $26
million and a $14 million note payable.
Each project financing and lease obligation is structured so that it
will be fully paid out of cash flow provided by the facility or facilities. In
the event of a default under a financing agreement that we do not cure, the
lenders or capital lease provider will generally have rights to the facility and
any related assets. In the event of foreclosure after a default, we might not
retain any interest in the facility. While we intend to utilize non-recourse or
capital lease financing when appropriate, market conditions and other factors
may prevent similar financing for future facilities. We do not believe the
existence of project or capital lease financing will significantly affect our
ability to continue to borrow funds in the future in order to finance new
facilities. However, it is possible that we may be unable to obtain the
financing required to develop our electric utility facilities on terms
satisfactory to us.
We may have a low return on equity following implementation of the Conversion
Plan.
At September 30, 2000, the Cooperative's ratio of average equity to average
assets was 5%. Our equity position will be significantly increased as a result
of the Conversion Plan and the issuance of common stock pursuant to an offering
that is anticipated to occur simultaneously with the Conversion. On a pro forma
basis as of September 30, 2000, assuming all of the shares offered hereby are
sold, our ratio of equity to assets would be approximately 16%. Our ability to
deploy this new capital through investments in interest-earning assets will be
significantly affected by industry competition for such investments. We
currently anticipate that it will take time to prudently deploy such capital. As
a result, our return on equity initially is expected to be below its historical
return on equity and may be below peer group institutions after the Conversion.
Additionally, due to the implementation of stock-based benefit plans such as the
Stock Incentive Plan, our future compensation expense will be increased, thereby
adversely affecting our net income and return on equity.
Our return on capital will decrease and our expenses will increase after
implementation of the Conversion Plan.
The proceeds we receive from the sale of our common stock will increase
our equity substantially. We expect our expenses to increase because of costs
associated with our stock-based benefit plans (see "Management - Employee
Benefit Plans"), and being a public company. Because of the increases in our
equity and expense, our return on capital may decrease as compared to our
performance in previous years. A lower return on capital could hurt our stock
price. See "Capitalization."
Effect of implementation of the Conversion Plan on the voting rights of members.
Upon completion of the Conversion Plan, the Cooperative will be
liquidated and we will be the surviving entity. Exclusive voting rights with
respect to the Company will be vested in the holders of our common stock. Unless
they become shareholders of the Company, members of the Cooperative will not
have voting rights after the completion of the Conversion Plan. See "Comparison
of Rights of Members to Rights of Shareholders."
If an active or orderly trading market does not develop, you may not be able to
sell your shares promptly or at the desired price.
Before the conversion is completed, there will be no public market for
the common stock and we cannot control whether an active or orderly trading
market will develop or be sustained. We have applied to have our common stock
quoted on the Nasdaq National Market when the Conversion Plan is fully
implemented. However, we cannot predict the price at which our shares of common
stock will trade on the Nasdaq National Market. We also cannot predict whether a
trading market in our shares of common stock will develop or how active that
market might become.
If an active and orderly trading market does not develop, the trading
price of the shares of our common stock may fluctuate widely and the bid and ask
price of those shares might vary significantly. Factors such as variations in
our financial results or other developments affecting us also could cause the
market price of the shares of our common stock to fluctuate significantly. In
addition, if a number of shareholders attempt to sell their shares following
full implementation of the Conversion Plan, our share price may go down. See
"Market and Dividend Information."
In addition to implementation of the Conversion Plan, we are also
offering shares of our common stock to current and former members of the
Cooperative. However, we cannot be sure that this offering will be successful.
If the offering succeeds, sales of a substantial number of shares of our common
stock in the public market or the perception that sales might occur could
adversely affect the market price of the shares of our common stock. If the
offering does not occur, there is no assurance that an active or orderly trading
market will develop for the shares of our common stock.
We may not be able to retain personnel who are key to our business.
The success of our business is dependent, to a large extent, on our
ability to attract and retain key employees, in particular senior officers.
Competition for such persons is intense. With the exception of our senior
officers, our employees are not subject to employment contracts or non-compete
arrangements.
Possible dilutive effect of stock-based benefit plans.
When implemented, the Stock Incentive Plan will acquire a maximum of
500,000 shares of our common stock and the Employee Stock Purchase Plan will
acquire a maximum of 150,000 shares, subject to annual increases, of our common
stock, either through open market purchases or the issuance of authorized but
unissued shares of our common stock. If the stock options and the stock awards
granted under the Stock Incentive Plan and the Employee Stock Purchase Plan were
funded with authorized but unissued shares, the voting interests of existing
shareholders at that time would be diluted at that time by 13.8%.
Anti-takeover provisions could discourage takeover attempts and decrease the
value of our shares.
Our Articles of Incorporation provide that any shareholder, or affiliate of
a shareholder, as defined, holding in excess of 5% of our outstanding common
stock will have the shareholder's voting rights for the shares in excess of 5%
reduced to 1/100 per share. The effect of this provision could be to discourage
third parties from trying to acquire us and potentially depress the price of our
common stock. See "Description of Capital Stock - Common Stock."
Electric utility industry restructuring could have a material impact on us.
Texas has passed a law restructuring the electric utility industry
beginning January 1, 2002. Many other states have passed or are currently
studying a number of proposals to deregulate the electric utility industry in
their states. The effect of this restructuring may be to increase competition
and reduce profitability for electric utilities. While we believe that the
effect of the restructuring in Texas may provide us with some advantages, the
effect on us of restructuring in states other than Texas cannot be predicted,
since we only operate in Texas at the present time. However, if we subsequently
acquire electric distribution businesses outside of Texas, the effect of
restructuring in the state where the business is located could have a material,
and possibly adverse, impact on us. See"Business - State Deregulation."
We are subject to complex government regulation that could adversely affect our
operations.
Irrespective of whether we operate as a cooperative or a business
corporation, our activities will be subject to complex and stringent energy,
environmental and other governmental laws and regulations. The construction and
operation of electric utility facilities require numerous permits, approvals and
certificates from appropriate federal, state and local governmental agencies, as
well as compliance with environmental protection legislation and other
regulations. While we believe that we have obtained the requisite approvals for
our existing operations and that our business is operated in accordance with
applicable laws, we remain subject to a varied and complex body of laws and
regulations that both public officials and private individuals may seek to
enforce. Existing laws and regulations may be revised or new laws and
regulations may become applicable to us that may have a negative effect on our
business and results of operations. We may be unable to obtain all necessary
licenses, permits, approvals and certificates for proposed projects, and
completed facilities may not comply with all applicable permit conditions,
statutes or regulations. In addition, regulatory compliance for the construction
of new facilities can be costly and time-consuming process. Intricate and
changing environmental and other regulatory requirements may necessitate
substantial expenditures to obtain permits. If a project is unable to function
as planned due to changing requirements or local opposition, it may create
expensive delays or significant loss of value in a project.
Our operations in any format are potentially subject to the provisions
of various energy laws and regulations, including the Public Utility Regulatory
Policies Act of 1978, as amended ("PURPA"), the Public Utility Holding Company
Act of 1935, as amended ("PUHCA"), and state and local regulations. See
"Business - Federal Regulation."
<PAGE>
BUSINESS
Company History
Following completion of the Conversion Plan, we will be the successor
in interest to the Cooperative, which was established in 1939 to provide
electric service to rural customers throughout West Texas. Through our
predecessor, we have operated as an electric utility over the past sixty years,
and have grown from a small West Texas provider to one now servicing over 34,000
meters in 31 counties in Texas. In addition to the businesses that we own, we
manage and operate one municipal electric system in Texas. Our existing business
involves purchasing power from four separate suppliers, maintaining over 350
miles of transmission lines, and serving 25 substations.
Over the years, we have been involved in almost every facet of the
electric utility industry, including the transmission, sale and distribution of
electricity. Our current and primary focus, however, is on the distribution of
electricity to our customers. We have no intention, at the present time, of
getting into the power generation or transmission business, except to the extent
that we are already involved in such activities or such activities may be
ancillary to any future acquisition that we may make.
We are currently subject to regulation by the Texas Public Utility
Commission in the category of a cooperative. We may also continue to be
regulated in Texas as a cooperative after the Conversion Plan is implemented
(even though our ownership structure will have changed). See "Business - State
Deregulation."
Our Electric Utility Business
We are an electric distribution company. We purchase electricity under
long-term, full requirements contracts from power generators such as
Southwestern Public Service Company, Lower Colorado River Authority, Electric
Clearinghouse, Inc. and Texas New Mexico Power Company. We move the electricity
through our distribution system and deliver it to our customers at our cost,
charging for the delivery services as well as the other ancillary services that
we provide to our customers.
We currently provide electricity to our customers through approximately
24,000 meters in 17 counties in the Midland-Odessa area of West Texas. In
addition, we provide electricity to our customers through over 6,000 meters in
and around Brady, Texas, and over 4,000 meters in Hunt and Collin Counties of
North Texas, an area that is near the Dallas-Fort Worth Metroplex. We also
manage a municipal utility serving over 1,400 meters in and around Farmersville,
Texas.
We believe that we must grow in order to survive in a fully deregulated
market place and, accordingly, we have entered into agreements with Citizens
Communications Company (formerly, Citizens Utilities Company), to acquire its
electric distribution businesses in Arizona and Vermont. If these acquisitions
are completed, these businesses collectively are expected to cost us in excess
of $287 million. These acquisitions are currently on hold because intervening
circumstances have made obtaining financing and regulatory approval uncertain.
In addition, we have a pending consolidation with Lamar County Electric
Cooperative, Inc., but this consolidation is being delayed because of
litigation with Lamar's current power provider.
Our Non-Electric Utility Businesses
Through our non-regulated subsidiaries, we have invested in other
businesses, including the real estate business, the oil and gas business and the
propane, fuel and lubricant distribution business. In addition, we are
aggressively pursuing potential investment opportunities in the
telecommunications business. These businesses currently are, or have the
potential to become, successful in their own right and, for the most part, they
are complementary to our electric distribution business. We believe that this is
particularly true for the telecommunications business. See "Business - Business
Strategy."
Our investments in the oil and gas exploration and production business (in
which we are no longer engaged) have ultimately proven to have been
unsuccessful, with losses exceeding 5.7 million due in large part to depressed
oil and gas prices in 1997 and 1998. Our investments in mineral interests, on
the other hand, have been successful to date. These mineral interests are not
significant when compared to our electric distribution business, but they have
provided additional cash flow to the Company. In January 2001, our mineral
company merged with a company engaged in similar business and we believe that
this merger will enhance our ability to acquire additional mineral interests.
Our real estate investments consist primarily of our headquarters
building in Midland, Texas, as well as easements and rights-of-way for our
electric distribution and transmission facilities. See "Business - Properties".
We also provided a loan to a company engaged in the propane, fuel and lubricant
distribution business that gave us a 10% interest in that company with a right
to acquire an additional 10% interest under certain circumstances. We have also
formed a telecommunications subsidiary and we are aggressively pursuing several
potential investment opportunities in the telecommunications industry.
The Electric Market
The electric utility industry is a $210 billion per year industry
undergoing a time of severe transition. As the deregulation of this industry
continues throughout the United States, we believe that opportunities for
efficient operators and customer service oriented companies will abound.
Many electric utility companies, particularly small investor-owned and
cooperative electric utility businesses, will not have the size or expertise to
meet the demands of a newly competitive marketplace. We expect that as
competition becomes more intense and operations become more complicated, more
and more small to medium sized investor-owned and cooperative electric utility
businesses will want to divest their electric systems for some of the same
reasons that our membership voted to convert from a member owned cooperative
association to a shareholder owned business corporation.
In addition to the small to medium sized electric utility businesses that
may be looking to divest their operations, many of the larger investor owned
electric utilities have been cutting costs by closing service centers in smaller
communities and becoming more impersonal with their customers. These electric
utilities are concentrating their efforts in the large urban populations and
some are looking to divest their holdings in rural and less-populated suburban
areas.
We believe that we have the experience to consolidate these small to
medium sized electric distribution businesses and to meet the management
challenges of successfully operating these geographically diverse businesses
once they have been acquired.
Business Strategy
Our strategic objective is to become a national electric distribution
company with community-focused local operating divisions (profit centers)
throughout the United States. Our strategy for achieving this objective is to
expand our customer base by acquiring small to medium sized electric
distribution businesses in areas that have the potential for growth. We will
primarily target suburban and rural electric utilities businesses, where we
believe we have an advantage because of our experience in managing and operating
geographically separated electric distribution businesses. While we have
experience in acquiring other cooperatives and will continue to try to make
acquisitions of this type in the future, we expect that our principal focus will
be other investor-owned distribution businesses because they will give us the
best opportunity for the growth we believe will be necessary to compete
effectively in a fully deregulated marketplace.
Our strategy involves acquiring customers in various locations across
the United States, irrespective of whether those customers may be for our
electric distribution business or in other businesses, such as the
telecommunications business. Notwithstanding, our experience to date has been in
the electric distribution business and it is our desire to maintain that as our
primary business. Once deregulation comes to an area, however, we want to be in
a position to market other services to our customers. For example, we envision
being able to market electric distribution services to our telephone and
wireless service customers, and visa versa. For this reason, we believe that an
aggressive campaign of mergers and acquisition by both our electric distribution
and our telecommunications businesses will help us to grow in customers and thus
put us in a position to compete effectively in a fully deregulated marketplace.
In addition, we believe that this strategy will aid in our goal of achieving
both weather-related and economic diversity in our customer base, both of which
are problems for any electric distribution business.
One aspect of our business strategy is to take advantage of national
legislation created by the Public Utility Holding Companies Act of 1935, as
amended (PUHCA). See, "Business - Federal Regulation." PUHCA has the effect of
preventing many of the larger electric utilities that operate in a holding
company format from going across state lines and buying portions of electric
utilities that are not electrically connected to them. PUHCA may be repealed in
the future, but until that time we believe that we are one of the few companies
that can, due to the way that we are structured, take advantage of this window
of opportunity. We are not a holding company (operating instead through
divisions of the same company rather than through separate subsidiaries) and
thus we are not subject to many of the restrictions of PUHCA. As a result, we
believe that we are ideally positioned to acquire non-contiguous electric
distribution businesses across the United States. If PUHCA is eventually
repealed, we anticipate that our existing electric distribution businesses or
even the entire Company could become even more valuable to a consolidator
seeking geographically diversified electric utility holdings.
We believe that as the electric utility industry continues to consolidate,
the opportunity to acquire other investor-owned distribution businesses,
particularly small to mid-size investor-owned utilities in less-populated
suburban and rural areas, will remain below the economic threshold of many of
our competitors, yet still provide us with a significant opportunity to grow.
Competition
We face strong competition in providing electric distribution services.
Many of our competitors, like TXU Electric in our West Texas operating area, are
much larger than we are and even after the Conversion Plan is implemented, they
will have financial resources that are much greater than ours. This strong
competition could have a material adverse affect on our ability to generate the
revenues necessary to be profitable.
Legislation passed in Texas in 1999 will significantly modify the
industry and potentially introduce more competition into the Texas retail market
beginning January 1, 2002. See "Business - Texas Deregulation." Our customers
may be able to purchase electricity from others at prices that are less than we
may be able to provide. The level of competition is affected by several
variables, including price, the cost of energy, alternative energy sources, new
technologies and governmental regulations.
State Deregulation
In 1999, the Texas legislature passed and the governor signed
legislation that provided for the restructuring of the electric utility industry
in the State of Texas. The legislature found the production and sale of
electricity is not a monopoly warranting regulation of rates, operations and
services, and competitive electric markets require that, except for transmission
and distribution services and for recovery of stranded costs, electric services
and their prices should be determined by customer choice and the normal forces
of competition.
The purpose of customer choice is to create a competitive retail market
allowing each retail customer to choose the customer's provider of electricity
and encouraging full and fair competition to recover excess costs over market of
those assets and purchased power contracts. Municipally owned utilities and
electric cooperatives are treated differently from other utilities under the
statute providing for customer choice. The statute has separate, specific
provisions applicable to investor owned electric utilities, which are required
to have customer choice in their service areas beginning January 1, 2002, and
municipally owned utilities and electric cooperatives, which are able to choose
whether or not to opt into retail competition. These provisions individually
govern the transition to and establishment of a fully competitive electric power
industry for investor owned utilities, electric cooperatives and municipally
owned utilities.
On or before September 1, 2000, each investor owned electric utility
was required to separate from its regulated utility activities its customer
energy services business activities that were otherwise also already widely
available in the competitive market. Not later than January 1, 2002, the
investor owned electric utilities operating in the state of Texas must separate
their business activities from one another into a power generation company, a
retail electric provider, and/or a transmission and distribution utility. Each
investor owned electric utility was required to submit a plan segregating
businesses, which was subject to review by the Public Utility Commission. After
January 1, 2002, a transmission and distribution company may not sell
electricity or otherwise participate in the market for electricity except for
the purpose of buying electricity to serve its own customers.
The statute phases in the transition to a restructured market until
January 1, 2002. An investor owned electric utility is required to provide
retail electric service within its certificated area and in accordance with the
electric utility's retail rate base rate tariffs in effect on September 1, 1999,
including its purchased power cost recovery factor. Commencing January 1, 2002,
through January 1, 2007, any affiliated retail electric provider shall make
available to residential and small commercial customers of its affiliated
transmission and distribution utility rates that, on a bundled basis, are six
percent less than the affiliated electric utility's corresponding average
residential and small commercial rates that were in effect on January 1, 1999,
adjusted to reflect the fuel factor determined as provided by the statute, and
adjusted for any base rate reduction as stipulated to by an electric utility in
a proceeding for which a final order had not been issued by January 1, 1999, the
so-called price to beat. Once customer choice is introduced, these utilities may
not change rates for residential and small commercial customers that are
different from the price to beat until the earlier of 36 months or until 40% or
more of the electric power consumed within the affiliated transmission and
distribution utility's certificated service area before the onset of customer
choice is committed to be served by nonaffiliated retail electric providers. A
similar restriction is set for rate changes for small commercial customers.
The effect of these regulations is to freeze all investor owned
electric utility rates that were in effect on September 1, 1999, until January
1, 2002, and, upon completion of the conversion, to lower rates to residential
customers and small commercial customers by another six percent. If the price to
beat jeopardizes the financial integrity of the retail electric provider, the
commission is required to set a price that shall maintain the financial
integrity of the retail electric provider but in no event more than the level of
rates, on a bundled basis, charged by the affiliated electric utility on
September 1, 1999, adjusted for fuel. For the year-end March 31, 2000,
approximately two-thirds of the Cooperative's revenues were derived from
residential customers and small commercial customers.
Electric cooperatives are not required to participate in deregulated
markets. Under the separate provision in the statute pertaining to electric
cooperatives, the board of directors of the cooperative has the discretion to
decide if and when the electric cooperative will provide customer choice.
Electric cooperatives are not required to functionally unbundle their operating
and business activities, as investor owned utilities are required to do. If an
electric cooperative elects to participate in customer choice, after making that
election all retail customers within the certificated service area of the
cooperative shall have the right of customer choice. An electric cooperative
that does not elect to participate in a deregulated market, however, is
prohibited from selling electric energy at unregulated prices directly to retail
customers outside its certificated retail service area.
The definition of electric cooperative under the statute includes a
provision that allows the Company to be treated like an electric cooperative and
therefore be able to elect whether to participate in retail competition, and, if
so, whether to unbundle its operations. Specifically, the definition of
"electric cooperative" includes "a successor to an electric cooperative created
before June 1, 1999, in accordance with a conversion plan approved by a vote of
the members of the electric cooperative, regardless of whether the successor
later purchases, acquires, merges with or consolidates with other electric
cooperatives." We believe that the Company is the only investor owned utility
that qualifies for treatment as an electric cooperative under this provision.
Even as an investor owned utility, the Company has and will continue to have all
rights and privileges associated with being an electric cooperative under the
statute specifically because it falls within the definition of electric
cooperative established by the statute. Consequently, the Company will have more
options available to it than cooperatives and other investor owned utilities.
If an electric utility purchases, acquires, merges, or consolidates
with or acquires 50 percent or more of the stock of an electric utility or
electric cooperative, the successor utility may be subject to regulation by the
public utility commission. Specifically, the Public Utility Commission is
required to regulate the successor electric utility or electric cooperative in
the same manner that the commission would regulate the entity that was subject
to the stricter regulation before the purchase, acquisition, merger, or
consolidation. Therefore, if the Company is purchased or acquired by another
entity or merges with another entity under circumstances where the Company is
not the survivor, the purchasing or acquiring entity or the surviving entity, as
the case may be, will not be treated like an electric cooperative under the
statute.
As a result of deregulation in Texas, the Cooperative's board, and not the
Public Utility Commission, approves the rates that the Cooperative charges to
its members. After implementation of the Conversion Plan, the Company's board
will approve the rates that the Company charges to its customers.
The effect on us of deregulation in states other than Texas cannot be
predicted, since we only operate in Texas at the present time. However, if we
subsequently acquire electric distribution businesses outside of Texas, the
effect of deregulation in the state where the business is located could have a
material, and possibly adverse, impact on us.
Federal Regulation
Federal legislation, such as the public Utility Regulatory Policy Act
of 1978 ("PURPA") and, more recently, the National Energy Policy Act of 1992
("Energy Policy Act") and Texas legislation, such as the public Utility
Regulatory Act of 1995, as amended, ("PURA") have significant altered
competition in the electric utility industry. Among other things, PURPA and the
Energy Policy Act encourage wholesale competition among electric utility and
non-utility power producers. The Energy Policy Act addresses a wide range of
energy issues and is intended to increase competition in electric generation and
broaden access to electric transmission systems. At the state level, PURA
encourages greater wholesale competition, flexible retail pricing and requires
the Texas Public Utility Commission ("PUC") to report to the Texas legislature
on competition in electric markets.
The Energy Policy Act empowers the Federal Energy Regulatory Commission
("FERC") to require utilities to provide transmission facilities for the
delivery of wholesale power from other power producers to qualified resellers,
such as municipalities, cooperatives and other utilities. Our transmission
facilities are subject to FERC regulation.
In 1996, FERC issued Order No. 888 and Order No. 889. Order No. 888
provides for comparable transmission service between utilities and their
transmission customers by requiring utilities to take transmission service under
their open access tariffs for wholesale sales and purchases and by requiring
utilities to rely on the same transmission information that their transmission
customers rely on to make wholesale purchases and sales. In addition, Order No.
888 requires holding companies to offer single system transmission rates. The
Registrant's transmission rates are under the exclusive jurisdiction of the FERC
while the transmission rates of most of the transmission utilities in ERCOT the
exclusive jurisdiction of the PUC. The FERC Order No. 889 requiring transmitting
utilities to establish and operate an OASIS for the dissemination of information
regarding available transfer capability for their respective transmission
systems. The OASIS is an on-line information system that provides the same
information about the utility's transmission system to all transmission
customers. The Registrant utilizes and participates in the OASIS systems. Order
No. 889 also created standards of conduct requiring utilities to conduct any
wholesale power sales business separately from their transmission operations.
The standards of conduct are designed to ensure that utilities and their
affiliates, as seller of power, do not have preferential access to information
about wholesale transmission prices and availability.
The Public Utility Holding Company Act of 1935, as amended ("PUHCA"),
generally has been construed to limit the operations of a registered holding
company to a single integrated public utility system, plus such additional
businesses as are functionally related to such system. Among other things, PUHCA
requires holding companies to seek prior SEC approval before acquiring other
businesses or other utility assets. Failure to structure future acquisitions by
the Company so as to avoid becoming a holding company under PUHCA could impede
or delay our efforts to achieve our strategic and operating objectives.
Consequently, we continue to support efforts to repeal or modify this
legislation notwithstanding the fact that it currently gives us a competitive
advantage. See "Business - Competition."
Properties
Our electric distribution business consists of the ownership,
management, construction and maintenance of a distribution network in the areas
where we operate. Our distribution network receives electricity from the
transmission grid through power distribution substation and distributes
electricity to end users through approximately 91 distribution feeders. Our
distribution networks consist of approximately 9,797 miles of primary overhead
primary conductors and 1,952 miles of underground primary. The majority of the
distribution system operates at 14.4kV.
Our transmission lines support our retail customers to whom we provide
electric service through the distribution systems. Our principal transmission
line is a 138kV line that is 302 miles in length. This transmission line is
located in West Texas and serves customers in the Midland, Big Spring and
Colorado City areas. A 69 kV line that is approximately 18 miles in length
serves McCulloch County.
We also own a 50,000 square foot office building located at 500 West
Wall Street, Midland, Texas, that is used as our general corporate headquarters.
We occupy approximately 25% of the building and the remainder is leased to
commercial tenants. As of September 30, 2000, the net book value of the building
and related property was $1,392,000.
Employees
As of September 30, 2000, the Company employed 92 full-time and 9 part-time
employees, none of who were subject to any collective bargaining agreements. The
Company also has 20 individuals that work on a regular contract basis. As of
September 30, 2000, the Company had no employees.
Legal Proceedings
The Cooperative is involved in various litigation matters (which, as
successor to the Cooperative, we will inherit), but none of this litigation is
expected to have a material impact on the financial condition of the Cooperative
or the Company.
<PAGE>
CONVERSION PLAN
General Description
The Board of Directors of the Cooperative has unanimously approved full
implementation of the Conversion Plan that was adopted by the members of the
Cooperative at a special meeting held on October 20, 1998. The Conversion Plan
was approved by 99% of members who voted at the meeting or by proxy.
The Conversion Plan granted large discretion and flexibility to the
Cooperative's Board, including the ability to complete the Conversion Plan at
anytime within a period of ten years from its initial adoption. Implementation
of the Conversion Plan contemplates transferring all the Cooperative's assets,
subject to all of the liabilities of the Cooperative, to the Company in exchange
for shares of the common stock of the Company. The Plan then calls for the
Cooperative to be liquidated and the shares of our common stock to be
distributed to Eligible Interest Owners. Under the Conversion Plan, each
Eligible Interest Owner will receive 10 shares of our common stock in relation
to its membership interest in the Cooperative and each Eligible Interest Owner
with an equity account on the books of the Cooperative will receive on share of
our common stock for each $10.00 in its equity account. No fractional shares
will be issued and any person who would have been entitled to a fractional share
will receive cash instead. The election form sent to you with this prospectus
indicates, among other things, the amount in your equity account on the books of
the Cooperative (provided you have an equity account) and the number of the
shares you are entitled to under the Conversion Plan.
Although the Conversion Plan permits the Board of the Cooperative to
choose other options in lieu of full implementation of the Conversion Plan,
including unwinding the transaction or transferring the assets of the
Cooperative to the Company and then leasing them back from the Company, the
Board has elected to proceed with full implementation of the Conversion Plan.
Background of the Conversion Plan
As early as 1993, the Cooperative's Board of Directors, began studying
the possibility of converting the Cooperative from a member owned electric
cooperative association to a shareholder owned business corporation as a means
of enhancing the value of the investments of the Cooperative's members and
former members with equity accounts on the books of the Cooperative and to
increase the Cooperative's competitive position in the electric distribution
business. Among the things considered by the Cooperative's Board were industry
trends, rapid changes in technology, and changes in the regulatory environment
affecting the electric utility industry that the Board believes may
significantly increase competition in the markets that the Cooperative currently
serves. The Board believes that the Cooperative must retain existing customers
and increase the markets served and services offered in order to remain
competitive in light of such technology changes, increased competition and
changes in the regulatory environment. After considering various alternatives,
the Board unanimously approved full implementation of the Conversion Plan.
Reasons for the Conversion
The Cooperative's Board believes that the converting from a member
owned cooperative association to a shareholder owned business corporation is in
the best interests of the Cooperative, its current members and its former
members with equity accounts on the books of the Cooperative. As a cooperative,
few options for raising capital have been available. For many years, the
Cooperative's only material source of equity capital has been the capital
provided by its members through a mechanism that is the equivalent of retained
earnings. The Board believes that this lack of access to financial markets could
place us at a significant competitive disadvantage in the future. Implementation
of the Conversion Plan will provide us with access to public capital markets to
finance our growth and to fund currently anticipated projects. In addition, the
Board believes that being a shareholder owned business corporation will give us
greater flexibility and increased options in connection with potential
acquisitions, partnerships and alliances. The Board also believes that being a
shareholder owned business will assist us in becoming a more effective
competitor in our markets.
With the deregulation of the electric utility industry, in Texas and
elsewhere, the Cooperative's Board believes that we must obtain the flexibility
to pursue investment opportunities. Equity and debt capital must be invested
profitably to pursue these activities. Yet the Texas Electric Cooperative Act
requires that the Cooperative operate without a profit to its members.
Furthermore, that Act requires that the return of revenues to members be
restricted to cash, an abatement of current charges for electricity or in any
other manner determined by the Board, or in a general rate reduction to members.
The Board believes that these restrictions reduce larger economic benefits that
may be available to members through stock ownership, as well as limit the
Cooperative's ability to compete.
The Board of Directors also believes that full implementation of the
Conversion Plan will provide Eligible Interest Owners with an opportunity to
have an interest in a more flexible business organization and could provide them
an opportunity to realize the value of their investments in the Cooperative.
In the course of reaching its decision to recommend the Conversion Plan
to the Cooperatives' members, the Board consulted with legal counsel and
financial advisers to the Cooperative, as well as with management of the
Cooperative. Without assigning any relative or specific weights, the Board
considered numerous factors, including but not limited to the following:
o the changing nature of the electric industry generally;
o the need for the Cooperative to finance growth;
o the desirability of the Cooperative having access to public capital markets
to potentially provide additional resources to promote growth and support
operating needs;
o the changing regulatory environment surrounding the electric industry;
o the desirability of providing Eligible Interest Owners an opportunity for
liquidity (as well as an exit strategy) and the ability to recognize the
value of their investments in the Cooperative in the future;
o historical and current financial and economic conditions;
o historical market prices, reported trading volumes and dividend histories
of publicly traded companies in the Cooperative's industry; and
o limitations currently placed on members with respect to their equity
interests in the Cooperative by the Cooperative Act and the Cooperative's
articles of incorporation and bylaws.
The only potential material disadvantage of the Conversion Plan
identified by the Board was the loss of the Cooperative's tax-exempt status. The
Cooperative is exempt from federal income taxation by virtue of Section
501(c)(12) of the Internal Revenue Code, which makes the exemption available to
irrigation cooperatives, rural electric cooperatives and telephone cooperatives
that do not receive more than 15 percent of their revenues from non-member
sources. The Cooperative was able to meet this test for 1999 and prior years and
should meet it for 2000. The Board believes that diversification and broadening
of goods and services sold are essential to the ability of the Cooperative to
respond to competitive challenges and opportunities. Diversification and new
revenue sources would likely include substantial revenues from non-member
sources. The Board has, therefore, discounted the loss of tax-exempt status as a
potential disadvantage because the changes in the Cooperative's revenue sources
would likely cause the Cooperative to lose its tax-exempt status under Section
501(c)(12) of the Internal Revenue Code in the near future, regardless of
whether or not it retains its cooperative status. As a nonexempt Cooperative, it
would be entitled to a deduction for member-sourced income allocated to members.
Therefore, a nonexempt cooperative would pay tax on non-member-sourced income at
regular corporate income tax rates. As a regular business corporation, it would
pay tax on all of its income at regular corporate income tax rates. As the
Cooperative's revenues from non-member sources increase and the goods and
services offered by the Cooperative expand into various non-electric utility
related goods and services, the Board believes the amount of member sourced
income will decrease relative to total income and that any tax benefit of
remaining a nonexempt cooperative would be outweighed by increases in
administrative costs and burdens and the increased flexibility in financing
sources. The Cooperative's Board believes, therefore, that the continued shift
in the Cooperative's revenue sources would further reduce any benefits of
remaining a cooperative. The Board was unable to identify any other potential
material disadvantages of the Conversion Plan.
As of the date of this prospectus, the directors and executive officers
of the Cooperative, together with their respective affiliates and associates, as
a group, constituted less than one percent of the total number of members of the
Cooperative. These persons would be entitled to receive the same consideration
for their membership interests and equity account balances as any other current
member of the Cooperative at the effective time of implementation of the
Conversion Plan. Immediately following implementation of the Conversion Plan,
the former directors and executive officers of the Cooperative, and their
respective affiliates and associates as a group, will beneficially own less than
one percent of the shares of our common stock to be issued under the Conversion
Plan. See "Ownership of Common Stock."
The Cooperative is organized and operated as a cooperative under the
Texas Electric Cooperative Act, as amended. When the Conversion Plan is
completed, we will operate as a shareholder owned business corporation under the
Texas Business Corporation Act, as amended, rather than as a cooperative. As a
shareholder owned business corporation, the nature of the shareholders'
interests in the Company will differ significantly from the interests of members
in the Cooperative. See "Comparison of Rights of Members to Rights of
Shareholders."
Consideration to be received in the Conversion.
The Conversion Plan provides that each Eligible Interest Owner who is a
current member of the Cooperative will receive 10 validly issued, fully paid and
nonassessable shares of our common stock and each Eligible Interest Owner who is
a current member or former member of the Cooperative with an equity account on
the books of the Cooperative immediately prior to the effective time of
implementation of the Conversion Plan, receive one validly issued, fully paid
and nonassessable share of our common stock for each $10.00 in the equity
account, all subject to payment in cash for fractional shares. The current
members of the Cooperative who elected reductions on their electric bills or who
elected to participate in a Dutch Auction saw their equity accounts increased by
$100 to reflect the amount they were being paid for their membership interests.
We will not issue fractional shares of our common stock in connection with
the conversion. Eligible Interest Owners who have equity accounts on the books
of the Cooperative and who would otherwise be entitled to receive a fraction of
a share of our common stock in connection with implementation of the Conversion
Plan will receive instead an amount of cash determined by multiplying that
fraction by $10.00.
The Conversion Plan also provides, as an alternative to receiving
shares of our common stock, that each current member of the Cooperative may
choose, in lieu of receiving shares of our common stock and in exchange for its
interests in the Cooperative, to have its electric bills reduced equally over a
period of 24 months in an amount equal to the amount in his equity account on
the books of the Cooperative divided by 24. As of September 30, 2000,
approximately 15% of the members of the Cooperative had chosen this option and
$3,123,000 of interests in the Cooperative had already been eliminated through
the reduction of electric bills.
In addition, the Conversion Plan provides, as an another alternative to
receiving shares of our common stock or, if applicable, receiving a reduction on
electric bills, that each current and former member who has an equity account on
the books of the Cooperative may choose, in lieu of receiving shares of common
stock and in exchange for its interests in the Cooperative, to receive a lump
sum cash payment determined by a "Dutch Auction" process similar to the Dutch
Auctions conducted by the Cooperative in the past (i.e., a predetermined amount
of cash is set aside by the Cooperative and used to pay those current and former
members offering the greatest discounts on the dollar amounts of their interests
on the books of the Cooperative until all of the cash set aside has been
utilized in this manner). As of September 30, 2000, approximately $2,279,000 of
interests in the Cooperative had already been eliminated for $1,441,000 through
the Dutch Auction option.
If the Cooperative does not have current addresses for Eligible
Interest Owners who are former members of the Cooperative and, who also have
equity accounts, the balance in those equity accounts will be allocated into a
Cooperative Equity Suspense Account immediately prior to the Conversion. We will
attempt to locate those Eligible Interest Owners following applicable laws and
regulations, and if we are unsuccessful, amounts in the Cooperative Equity
Suspense Account would be forfeited and reallocated as additional paid-in
capital.
Purchase of the Stock Issued Pursuant to the Conversion Plan.
As to the shares of our common stock distributed to Eligible Interest
Holders under the Conversion Plan and that are held by those persons until the
first anniversary of the distribution of those shares, we will purchase all of
those shares offered to us at $10.00 per share during the period commencing on
the first anniversary of the distribution of the shares and ending 60 days
thereafter. This purchase obligation does not extend to any shares of our common
stock issued pursuant to the Conversion Plan that are beneficially owned by any
person other than the member or former member to whom they were originally
issued. In addition, the purchase obligation does not extend to any shares
offered under this prospectus that are not part of the shares issued under the
Conversion Plan.
Dissenters' Rights
Neither the current nor former members of the Cooperative were entitled
to dissenters' rights under the Texas Electric Cooperative Act in connection
with the Conversion Plan.
<PAGE>
COMPARISON OF RIGHTS OF MEMBERS TO RIGHTS OF SHAREHOLDERS
The following discussion describes certain significant differences
between the rights of member of a Texas electric cooperative as compared to the
rights of shareholders of a Texas business corporation.
Members Versus Shareholders
A Texas electric cooperative has members, whereas a business
corporation has shareholders. A member of a Texas electric cooperative has a
membership certificate or membership right and the membership interest is not
transferable. Such membership right ends when the member resigns from
membership, is expelled from membership or dies. A member of a Texas electric
cooperative has only one membership, no matter how many meters the member has,
and is entitled to only one vote on matters on which members must vote. A Texas
electric cooperative is not permitted to issue voting capital stock (as opposed
to membership interests).
The Texas Electric Cooperative Act provides that each member is
entitled to one vote on all matters submitted for member action. The Texas
Electric Cooperative Act and the Cooperative's Articles of Incorporation and
Bylaws require its members to purchase electric services from the Cooperative as
a condition of membership.
A Texas business corporation must have at least one class of voting
stock. However, it may issue shares of stock divided into different classes or
series. In general, a holder of shares of voting stock is entitled to one vote
for each share of voting stock that the holder owns. This is significantly
different from the law applicable to Texas electric cooperatives, which, as
discussed above, provides that each member may only have one vote, no matter how
many meters or how much equity the member might have. The general rule for Texas
electric cooperatives is one vote per member, whereas the general rule for a
Texas business corporation is one vote per share.
An equity account of a Texas electric cooperative is the cumulative
balance of an individual member's annual allocated portion of margin (the
equivalent of net income). There is no return on the balance of an equity
account and although it may be periodically returned to members at the
cooperative's discretion, there is no requirement that it ever be distributed to
the member except on dissolution of the cooperative to the extend funds are
available.
Transferability
A member of a Texas electric cooperative may not transfer its
membership interest. This arrangement is significantly different from the laws
applicable to Texas business corporations, which generally provide that shares
of stock in a business corporation may be freely transferred, unless the
transferor has agreed to a limitation on this right or is required by applicable
laws not to transfer the stock or to transfer it only in certain circumstances.
The Cooperative's Bylaws provide that equity accounts of members can
only be assigned pursuant to written instructions from the assignor and only to
successors in interest or successors in occupancy.
Quorum Requirements
The Texas Electric Cooperative Act provides that a quorum at a meeting
of members is a majority of the members present in person or by proxy unless the
Articles of Incorporation provide otherwise. A quorum for a meeting of the
members of the Cooperative, in accordance with its Articles of Incorporation, is
20% of the members present in person or by proxy. The quorum requirements
applicable to Texas business corporations are somewhat different. In general, a
quorum of shareholders in a Texas business corporation is present when the
holders of a majority of the shares entitled to vote at the meeting are present
in person or by proxy, although the corporation's articles of incorporation or
bylaws may specify a different percentage (so long as it is greater than
one-third of the shares entitled to vote). Texas corporate laws do not specify a
maximum percentage of shares or number of shareholders that may constitute a
quorum.
Ability to Call Special Meetings
Special meetings of the members of a Texas electric cooperative may be
called by the president, by the board of directors, by a majority of the
directors, by the members by a petition signed by at least 10% of the members,
or by an officer or other person as provided by the articles of incorporation or
bylaws. Additionally, the Cooperative's Bylaws provide that special meetings may
be called by the Chairman of the Board or by a petition signed by not less than
one-third of the total membership. Special meetings of the shareholders of a
Texas business corporation may be called by the president, the board of
directors, the holders of not less than 10% of the shares entitled to vote at
the meeting or any additional persons that are authorized in the articles of
incorporation to call special meetings.
Member or Shareholder Action Without a Meeting
The Texas Electric Cooperative Act does not provide for member action
without a meeting. Shareholders of a Texas business corporation may only take
action without a meeting upon unanimous written consent.
Dividends and Distributions
A business corporation is not required to pay dividends on shares of
its capital stock. Instead, except to the extent restricted in the corporation's
articles of incorporation or by covenants in agreements with lenders or others,
dividends and distributions are within the discretion of the corporation's board
of directors, provided that the corporation is solvent at the time of paying the
dividend and that paying the dividend would not render the corporation
insolvent. In general, dividends and distributions may be paid only out of the
corporation's unreserved and unrestricted earned surplus.
Texas law regarding electric cooperatives is much different. The Texas
Electric Cooperative Act requires that revenues be devoted first to the payment
of operating and maintenance expenses and the principal and interest on
outstanding obligations; and to the reserves prescribed by the board for
improvement, new construction, depreciation, and contingencies. To the extent
not required for these purposes, a cooperative may return revenues in cash, by
abatement of current charges for electricity or in another manner prescribed by
the board. A cooperative may also return revenues through a general rate
reduction to members. Revenues returned to members must be done in proportion to
the amount of business done with each member during the applicable period.
The Texas Electric Cooperative Act, as well as the Cooperative's
Bylaws, prohibit the payment of interest or dividends on any equity furnished by
members. The Cooperative's Bylaws, however, provide that all amounts of revenue
in excess of operating costs and expenses properly chargeable against the
furnishing of electric energy are received with the understanding that members
furnish such amounts as equity. The Cooperative's Bylaws provide that the board
of directors may retire these accounts in full or in part. We plan to issue
stock pursuant to the Conversion Plan to Eligible Interest Owners to retire the
equity accounts that have not already been retired through one of the two other
options available pursuant to the Conversion Plan. See "Conversion Plan -
Consideration to be received in the Conversion."
<PAGE>
Amendment of Governing Instruments
A Texas electric cooperative may amend its articles of incorporation or
its bylaws by a majority vote of the members voting at a meeting at which a
quorum is present (provided that the number of members actually voting on the
amendment is sufficient to constitute a quorum). However, at least 5% of the
cooperative's members must attend the meeting in person or by proxy in order for
any valid action to be taken.
With certain exceptions, an amendment to the articles of incorporation
of a Texas business corporation must first be adopted by a resolution of its
board of directors. The amendment must then be adopted by the corporation's
shareholders. The amendment is adopted upon receiving the affirmative vote of
two-thirds of the shares entitled to vote thereon, unless the articles of
incorporation specify a different percentage, but not less than a majority. If
any class of shares is entitled to vote as a class on the amendment, the
amendment is must also obtain the percentage, if the class is entitled to vote
as a class on the amendment, required in the instruments establishing the class
with each class entitled to vote as a class. As described above, the Company's
Articles of Incorporation require a two-thirds vote to amend the Articles of
Incorporation. Presently, the Company's Articles of Incorporation do not permit
the issuance of an additional class of stock without amending the Articles of
Incorporation.
A Texas business corporation's bylaws may be amended or repealed by the
board of directors, unless the corporation's articles of incorporation reserve
that power to the shareholders of the corporation. The Company's Bylaws provide
that they may be altered, amended or repealed at any regular or special meeting
of the board of directors by not less than a two-thirds vote.
Qualifications and Number of Directors
A director of a Texas business corporation is not required to be a
shareholder, unless the corporation's articles of incorporation require
otherwise. A director of a Texas electric cooperative, however, must be a member
of the cooperative. A cooperative's board of directors may not consist of less
than three directors. There generally are no minimum limits on the number of
directors of a Texas business corporation, except as the corporation may provide
in its articles of incorporation or unless the corporation has a classified
board of directors (in which case there must be at least nine directors).
Issuance of Stock in Series
A Texas electric cooperative cannot issue capital stock. A Texas
business corporation must issue one class of capital stock and may issue
different classes of stock. However, a business corporation has the additional
ability to divide any preferred or special class of stock into different series,
with different designations, preferences, limitations and relative rights among
the various series.
Mergers And Other Major Transactions
There is no provision in the Texas Electric Cooperative Act that
provides for a true merger between electric cooperatives. Texas electric
cooperatives may consolidate with other Texas electric cooperatives.
Consolidation of two electric cooperatives requires the approval of the majority
of the number present in person or by proxy.
The provisions of the Texas Business Corporation Act applicable to
mergers involving business corporations are much more complex. In general, the
principal terms of a merger must first be approved by the board of directors of
each corporation that is a party to the merger. Then the shareholders of each
corporation must approve the merger by the affirmative vote of two-thirds of the
shares entitled to vote thereon, unless the articles of incorporation or the
Texas Business Corporation Act require a different percentage which cannot be
less than a majority of the shares entitled to vote thereon. The Company's
Articles of Incorporation do not change the vote required to approve a merger.
Where any class of shares is entitled to vote as a class on the merger, then the
merger is approved by that corporation only upon receiving the affirmative vote
of the holders of a two-third of the shares of each class entitled to vote as a
class and of the total number of shares entitled to vote on the merger unless
the instrument establishing the class specifies a different voting requirement.
The Company's Articles of Incorporation do not establish a series of preferred
stock. The Company's Articles of Incorporation would, in certain instances,
reduce the vote of certain owners of common stock to 1/100 of that they would
otherwise receive. See "Description of Capital Stock - Common Stock."
Dissenters' Rights
Shareholders of a Texas business corporation have the right to dissent
from, and to receive payment for their shares in the event of, certain
transactions to which the corporation is a party, including mergers, sales of
all or substantially all of the corporation's assets outside the ordinary course
of business and certain amendments to the corporation's articles of
incorporation that adversely affect the rights of the shareholders' shares. The
right to dissent does not apply to the shareholders of a corporation surviving a
merger if the vote of the shareholders of the surviving corporation was not
required to approve the merger. Members of electric cooperatives do not have
rights to dissent from any action under Texas law.
Indemnification and Limitation of Liability
The provisions of the Texas Business Corporation Act relating to
indemnification and the law relating to an electric cooperative are identical.
The Articles of Incorporation of the Cooperative provide the following:
Directors of the Cooperative shall not be liable to the Cooperative or
its members for monetary damages for an act or omission in the Director's
capacity as a director except that this Article does not eliminate or limit the
liability of a Director for:
(1) a breach of a director's duty of loyalty to the Cooperative or its
shareholders or members;
(2) an act or omission not in good faith or that involves intentional
misconduct or a knowing violation of the law:
(3) a transaction from which a director received an improper benefit,
whether or not the benefit resulted from an action taken
with the scope of the Director's office;
(4) an act or omission for which the liability or a Director is expressly
provided for by statute; or
(5) an act related to an unlawfulstock repurchase or payment of a dividend.
The Articles of Incorporation of the Company provide the following:
Directors of the Company shall not be liable to the Company or its
shareholders for monetary damages for an act or omission in the director's
capacity as a director except that this Article does not eliminate or limit the
liability of a director to the extent the director is found liable for:
(a) a breach of a director's duty of loyalty to the Corporation or its
shareholders;
(b) an act or omission not in good faith that constitutes a breach of duty of
the director to the corporation or an act or omission that involves
intentional misconduct or a knowing violation of the law;
(c) a transaction from which a director received an improper benefit, whether
or not the benefit resulted from an action taken with the scope of the
Director's office;
(d) an act or omission for which the liability or a Director is expressly
provided for by statute.
It is intended that the Company would enter into an Indemnity Agreement
with each of its directors and executive officers effective upon implementation
of the Conversion Plan, which may provide rights additional to those that would
be provided by the Texas Business Corporation Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Cooperative and the Company pursuant to the foregoing provisions, or otherwise,
the Cooperative and the Company have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the federal income tax consequences
resulting from the Conversion Plan. We have not requested a private letter
ruling from the Internal Revenue Service as to the federal income tax
consequences of the Conversion Plan and, thus, there can be no assurance that
the transaction would constitute a tax-free exchange for federal income tax
purposes.
We believe that the Conversion Plan would constitute a reorganization
within the meaning of Section 368(a)(1)(E) of the Code. We also believe that:
(i) no gain or loss would be recognized by the Cooperative upon
consummation of the Conversion Plan and the Cooperative's
basis in its assets, holding period for its assets, annual
accounting period and accounting methods would not be affected
by the Conversion Plan;
(ii) the exchange of equity accounts for common stock issuable upon
consummation of the Conversion Plan would constitute a
reorganization within the meaning of Section 368(a)(1)(E) of
the Code. No gain or loss would be recognized by the Company
upon the exchange, no gain or loss would be recognized by the
members upon the exchange (except to the extent of cash
received in lieu of fractional shares), the basis of the
common stock issuable to the members would be the same as the
basis of member' applicable equity account balances
surrendered in the Conversion Plan;
(iii) the exchange of membership interests for common stock issuable
in the Conversion Plan would constitute a reorganization with
the meaning of Section 368(a)(1)(E) of the Code. No gain or
loss would be recognized by the Company upon the Conversion
Plan, no gain or loss would be recognized by the members upon
consummation of the Conversion Plan (except to the extent of
cash received in lieu of fractional shares), and the basis of
the common stock issuable to the members would be the same as
the basis of members membership interest.
Our conclusion is based on a review of previously issued private letter
rulings by the Internal Revenue Service and court opinions involving
transactions with similar but not identical characteristics. Because the
Internal Revenue Service has not previously ruled on a transaction involving the
conversion of a Section 501(c)(12) cooperative, there is a lack of direct
precedent for the stated tax treatment. We believe, however, that existing
precedent involving transactions with similar but not identical characteristics
would, if followed, cause the Conversion Plan to be treated as and constitute a
tax-free exchange. We have no reason to believe that the Internal Revenue
Service would not follow this precedent.
EACH CURRENT AND FORMER MEMBER OF THE COOPERATIVE SHOULD CONSULT A
PROFESSIONAL TAX ADVISER ON THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE
CONVERSION PLAN TO SUCH PERSON OR ENTITY.
ACCOUNTING TREATMENT
The Conversion Plan will be accounted for as a capital restructuring for
accounting purposes. Upon full implementation of the Conversion Plan, the value
of the Cooperative's assets and liabilities would be unchanged in the hands of
the Company and no gain or loss would be recorded by the Company as a result of
implementation of the Conversion Plan.
RESCISSION OFFER
For those current members of the Cooperative who elected, by
affirmative action or by inaction, to receive shares of our common stock
pursuant to the Conversion Plan, we are offering you the opportunity to rescind
that election and to instead receive payment for your interests in the
Cooperative by receiving:
1. A reduction of your electric bills equally over a period of 24 months in an
amount equal to $100 plus the amount, if any, in your equity account on the
books of the Cooperative (after inclusion of an additional amount for your
membership interest) divided by 24; or
2. A lump sum cash payment in an amount to be determined by your participation
in a Dutch Auction to be conducted by the Cooperative similar to the Dutch
Auctions previously conducted by the Cooperative in connection with the
Conversion Plan. See "The Conversion Plan - Consideration to be received in
the Conversion."
For those former members of the Cooperative who have an equity account
on the books of the Cooperative and who elected, by affirmative action or by
inaction, to receive shares of our common stock pursuant to the Conversion Plan,
we are offering you the opportunity to rescind that election and to instead
receive payment in full for your interests in the Cooperative by receiving a
lump sum cash payment in an amount to be determined by your participation in a
Dutch Auction to be conducted by the Cooperative.
An election form is being furnished to you with this prospectus. The
election form will set forth, among other things, the number of shares you are
entitled to receive as a result of implementation of the Conversion Plan, the
amount in your equity account on the books of the Cooperation and a place for
you to indicate whether or not you wish to accept our rescission offer. You will
have a period of 60 days from the date of the prospectus to return the election
form. If we have not received your election form by the close of business on the
60th day following the date of this prospectus, you will be deemed to have
rejected our rescission offer and we will cause your shares of our common stock
to be issued to you.
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the
Cooperative at September 30, 2000, and the pro forma capitalization of the
Company as of September 30, 2000, including the effects of the following
transactions:
(1) Conversion of the Cooperative from a member owned cooperative to a
shareholder owned business corporation and the issuance of 1,575,000 shares
of the Company's Common Stock at a tangible book value of $7.00 per share,
net of $817,000 of stock conversion cost incurred by the Cooperative.
(2) Sale by the Company of 3,150,000 shares of our common stock at a sales
price of $10.00 per share, net of the underwriters commissions of three
percent (3%) and estimated offering expenses of $945,000 and $500,000
respectively.
This table should be read in conjunction with the financial statements
including notes thereto, included on pages F-1 to F-21.
<TABLE>
<CAPTION>
September 30, 2000
(Unaudited)
(Amounts In Thousands)
----------------------
Pro Forma
-------------------------------
Actual (1) (1) and (2)
<S> <C> <C> <C>
Total Long-Term Debt $158,062 $158,062 $158,062
Current Portion of Mortgage Notes,
Capital Leases, and Other 8,619 8,619 8,619
Lines of Credit 25,742 25,742 25,742
-------- -------- --------
Total Debt 192,423 192,423 192,423
Equities and Margins 11,028 - -
Common Stock, $.01 par value; 50,000,000
shares authorized, pro forma shares issued
1,575,000 and 4,725,000, respectively - 16 47
Additional Paid In Capital - 10,195 40,219
--------- -------- --------
Total Equity 11,028 10,211 40,266
--------- -------- --------
Total Capitalization $203,451 $202,634 $232,689
======== ======= =======
</TABLE>
<PAGE>
DILUTION
The difference between the offering price per share of common stock and
the pro forma net tangible book value per share after this offering constitutes
the dilution to investors in the offering. Net tangible book value per share is
determined by dividing the net tangible book value of the Company (total
tangible assets less total liabilities) by the pro forma number of outstanding
shares of our common stock.
The assigned value per share of the ownership interests on the books of
the Cooperative of the Eligible Interest Owners is $10.00. However, on the
books of the Cooperative and according to the Cooperative's bylaws, operating
and non-operating losses are not allocated to the individual equity accounts of
the Eligible Interest Owners. The net tangible book value of the Cooperative is
determined by subtracting the accumulated losses from the total assigned value
of the Eligible Interest Owners accounts.
At September 30, 2000, the pro forma net tangible book value of the
Company (as successor to the Cooperative) was $10,211,000 or $6.48 per share,
after giving effect to the conversion of the Cooperative from a member owned
cooperative to a shareholder owned business corporation. Without taking into
account any changes in net tangible book value attributable to operations after
September 30, 2000, other than the issuance and sale by the Company of 3,150,000
shares of common stock offered hereby to the current and former members of the
Cooperative, at an offering price of $10.00 per share, the pro forma net
tangible book value of the Company as of September 30, 2000 would have been
$40,266,000 or $8.52 per share. This represents an immediate increase in net
tangible book value of $2.04 per share to the existing shareholders and an
immediate dilution of $1.48 per share to the shareholders purchasing additional
shares of our common stock. The following table illustrates this dilution, on a
per share basis (assuming implementation of the transactions described in this
prospectus):
<TABLE>
<S> <C> <C>
Initial offering price of common stock $10.00
Net tangible book value as of September 30, 2000 $6.48
Increase in net tangible book value attributable
to existing shareholders 2.04
-----
Pro forma net tangible book value after offering 8.52
----
Decrease in net tangible book value attributable
to new purchases of stock by current and former members
of the Cooperative $1.48
=====
</TABLE>
The following table summarizes, as of September 30, 2000, the total number
of shares of common stock issued by the Company, the aggregate consideration
paid and the average price per share for the existing shareholders and for the
purchases of stock by current and former members of the Cooperative:
<TABLE>
<CAPTION>
Average
Shares Issued Total Consolidation Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing Shareholders:
Assigned value 1,575,000 33% $15,750,000 26% $10.00
Unallocated losses (4,722,000) (3.00)
---------------- ------------------ -----
Tangible book value 1,575,000 33% 11,028,000 26% 7.00
Sales of stock to the current
and former members of the Cooperative 3,150,000 67% 31,500,000 74% 10.00
--------- ---- ---------- ----- -----
Total shares 4,725,000 100% $42,528,000 100% $9.00
========= ==== ========== ==== =====
</TABLE>
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 3,150,000 shares of
common stock we are offering to the current and former members of the
Cooperative at an offering price of $10.00 will be approximately $30,055,000
after deducting offering expenses.
We expect to use the net proceeds from this offering for general
corporate purposes, including working capital. We may also use a portion of the
net proceeds from this offering for acquisitions. We have not determined the
amounts we plan to spend on any of the uses described above or the timing of
these expenditures. Accordingly, our management will have considerable
discretion in the application of the net proceeds of this offering. Pending
these uses, we intend to invest the net proceeds of this offering in short-term,
interest-bearing, investment-grade securities.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands)
The following tables set forth selected consolidated financial
statement information for each of the years in the five-year period ended March
31, 2000 and the six months ended September 30, 1999 and 2000. The Consolidated
Statements of Operations, Balance Sheet and Cash Flows Data for and as of the
end of each of the years in the five-year period ended March 31, 2000 and the
six months ended September 30, 1999 and 2000 (unaudited) are derived from the
Consolidated Financial Statements of the Cooperative. The following selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements, including the notes thereto, appearing
elsewhere in the Registration Statement.
<TABLE>
<CAPTION>
March 31, September 30,
---------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1997 1998 1999 2000 1999 2000
------ ------ ------ ------ ------ ---- ----
Consolidated Statement of Operations Data: (Unaudited)
Operating revenues $52,065 $55,671 $59,686 $55,516 $57,083 $29,079 $36,535
Operating expenses 57,663 56,574 61,643 56,088 59,705 28,317 36,534
------- ------- ------- ------- ------- ------ ------
Operating income (loss) (5,598) (903) (1,957) (572) (2,622) 762 1
Nonoperating income (loss) 552 (570) (2,234) 959 (3,117) (3,275) 120
--------- --------- -------- -------- -------- ------ --------
Income (loss) before
extraordinary item and
accounting change (5,046) (1,473) (4,191) 387 (5,739) (2,513) 121
Extraordinary item -
Gain on extinguishment of debt - - - - - - 969
Cumulative effect of
accounting change (2,086) - - - - - -
------------------------------------------------- ------------------
Net income (loss) $(7,132) $(1,473) $(4,191) $ 387 $ (5,739) $(2,513) $1,090
======== ======== ======== ======== ======== ======= ======
Consolidated Balance Sheet Data:
Utility plant, net $152,613 $151,927 $153,921 $155,567 $169,537 $169,703 $170,576
Total assets 186,052 182,582 181,455 181,983 200,881 196,747 222,071
Equity and margins 25,833 23,836 18,899 19,245 12,659 15,902 11,028
Long-term debt, net 124,714 120,517 126,241 125,625 140,333 132,226 158,062
Working capital (deficit) (22,033) (26,932) (27,933) (28,344) (38,290) (38,233) (39,981)
Consolidated Cash Flows:
Net cash provided (used) by:
Operating activities $3,127 $4,737 $6,332 $8,674 $7,200 $5,721 $5,284
Investing activities (19,347) (5,284) (11,795) (10,004) (14,124) (6,060) (23,686)
Financing activities 11,022 1,913 4,922 1,382 7,065 326 17,401
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of the Cooperative's financial
condition and results of operations for the years ended March 31, 1998, 1999 and
2000 and the six months ended September 30, 1999 and 2000 (unaudited) should
read in conjunction with the Cooperative's audited consolidated financial
statements included elsewhere in this document.
OVERVIEW
The Company is presently a wholly-owned subsidiary of the Cooperative,
a member-owned, tax-exempt electric cooperative founded in 1939. On January 1,
1999, in conjunction with a corporate restructuring plan, the Company was
formed. To date, the Company has produced no net income or loss.
On the effective date of this Registration Statement, (1) substantially
all of the Cooperative's assets will be transferred in exchange for the
Company's Common Stock; (2) the Common Stock will be distributed to the
Cooperative's equity holders, (3) the Company will then become successor
corporation to the Cooperative and, (4) all subsequent utility operations will
be conducted through the Company.
The Company does not own electric generating facilities. Instead, the
Company acquires wholesale electric power through long-term electric supply
contracts with various electric suppliers. In addition to electricity sales, the
Company also provides other electric services, such as installation and repair.
Management believes that not owning electric generating facilities
creates a distinct competitive advantage for the Company to purchase the lowest
cost power available for its customers.
In addition, to a lesser extent, the Company owns certain interest in
oil and gas properties and real estate and other investments.
RESULTS OF OPERATIONS
Six Months Ended September 30, 2000 Compared to Six Months Ended
September 30, 1999
Net Income (Loss)
For the six months ended September 30, 2000 ("SM 2000"), net income was
$1,090,000 compared to net loss of $2,513,000 for the six months ended September
30, 1999 ("SM 1999"), an improvement of $3,603,000. The improvement was
primarily composed of a $3,344,000 write-off of an oil and gas investment
reported for SM 1999 and a $969,000 extraordinary gain on extinguishment of debt
offset by a $1,461,000 increase in interest costs reported for SM 2000.
Operating Revenues
Operating revenues for SM 2000 was $36,535,000 compared to $29,079,000
for SM 1999, an increase of $7,456,000 (25.6%), of which $7,883,000 (28.4%) was
attributable to the increased electric revenues. McCulloch Electric Cooperative,
Inc. ("McCulloch"), which was merger with the Cooperative on September 1, 1999,
reported operating revenues of $3,591,000 and $670,000 for SM 2000 and SM 1999,
respectively.
Average revenue/Kwh sold for SM 2000 and SM 1999, 8.77 cents and 8.33
cents, respectively, a 5.3% increase.
Other revenues for SM 2000 decreased $573,000 (47.4%) to $635,000 from
$1,208,000 for SM 1999. This decrease was primarily due to a $828,000 decrease
in unbilled revenue.
<PAGE>
Operating Expenses
Operating expenses for SM 2000 was $36,534,000 compared to $28,317,000
for SM 1999, an increase of $8,217,000(29.0%), of which $2,870,000 was related
to the operations of McCulloch.
Purchased power for SM 2000 increased by $5,476,000 (32.8%), to
$22,179,000 compared to $16,703,000 reported for SM 1999. The increase included
$1,981,000 related to McCulloch. Average cost/Kwh sold for SM 2000 and SM 1999
was approximately 5.06 cents and 4.78 cents, respectively, a 5.86% increase.
Electric operating margins (revenue less purchased power cost) for SM
2000 was $13,509,000 compared to $11,102,000 for SM 1999, an increase of
$2,407,000 (21.7%), of which $910,000 was related to McCulloch. Average
margin/Kwh sold for SM 2000 and SM 1999 was 2.27 cents and 2.43 cents,
respectively, a 6.58% decrease.
Operating and maintenance costs for SM 2000 increased $1,070,000
(38.3%), to $3,861,000 from $2,791,000 reported for SM 1999. The increase was
due to a $136,000 increase related to McCulloch, increased salaries and
compensation costs and higher maintenance costs.
Administrative and general for SM 2000 and SM 1999 was $1,505,000 and
$1,574,000, respectively.
Depreciation and amortization for SM 2000 increased $378,000 (15.1%) to
$2,875,000 compared to $2,497,000 for SM 1999. The increase included $257,000
related to McCulloch. The remaining increase is due to depreciation on utility
plant additions.
Interest expense for SM 2000 was $5,104,000 compared to $3,643,000 for
SM 1999, an increase of $1,461,000 (40.1%). The increase was due to additional
borrowings at higher interest rates. As of September 30, 2000 and 1999, the
interest rate on the Cooperative's variable rate long-term notes payable was
8.10% and 6.85% respectively, and the rate on the fixed rate long-term notes
payable was 5.99 %, respectively.
Other operating expenses for SM 2000 decreased $177,000 (37.6%) to
$294,000 from $471,000 for SM 1999. The decrease was due primarily to a $181,000
decrease in the cost to provide various electric services.
Operating Income
Operating income for SM 2000 decreased $761,000 to $1,000 as compared
to a $762,000 for SM 1999. The decrease was primarily comprised of a $2,407,000
increase in electric margins, offset by a $1,070,000 increase in operating and
maintenance cost, a $378,000 increase in depreciation and amortization costs, a
$1,461,000 increase in interest expense and a $396,000 decrease in other revenue
and expenses.
Other Nonoperating Transactions and Extraordinary Item
Nonoperating margins was comprised primarily of a loss of $3,344,000
write-off of an oil and gas investment for SM 1999 and an extraordinary gain of
$969,000 on early extinguishment of debt for SM 2000.
Year Ended March 31, 2000 Compared to Year Ended March 31, 1999
Net Income (Loss)
For the year ended March 31, 2000 ("2000") the net loss was $5,739,000
compared to net income of $387,000 for the year ended March 31, 1999 ("1999"), a
decrease in earnings of $6,126,000. The decline for 2000 was primarily
attributable to a $988,000 increase in administrative and general expenses, a
$927,000 increase in depreciation and amortization, a $1,037,000 increase in
interest costs and a $3,344,000 write-off of an oil and gas investment.
<PAGE>
Operating Revenues
Operating revenues for 2000 was $57,083,000 compared to $55,516,000 for
1999, an increase of $1,567,000 (2.8%), of which $3,150,000 was attributable to
the September 1, 1999 merger of McCulloch Electric Cooperative, Inc.
("McCulloch"). The operating revenue increase was primarily composed of a
$3,582,000 (7.0%) increase in electric sales, a $1,516,000 (77.3%) decrease in
gas sales and a $499,000 (20.5%) decrease in other revenues.
Electric sales for 2000 was $54,702,000 compared to $51,120,000 for
1999, an increased $3,582,000 (7.0%), of which $3,095,000 was related to
McCulloch electric sales for the seven months ended March 31, 2000.
Average revenue/Kwh sold for 2000 and 1999, without McCulloch was 8.33
cents and 7.74 cents, respectively, a 7.62% increase. For the seven months ended
March 31, 2000, McCulloch's average revenue/Kwh sold was 6.61 cents.
Gas sales and royalty income decreased $1,516,000 (77.3%) during 2000
from $1,961,000 reported for 1999. This decrease was due primarily to the July
1998 sale of the Company's gas gathering facilities. Gas sales and royalty
income for 2000 totaled $445,000 and was related to various oil and gas royalty
interest.
Other revenues for 2000 decreased $499,000 (20.5%) to $1,936,000 from
$2,435,000 for 1999. This decrease was due primarily to a $834,000 decline in
unbilled revenue and a $382,000 (91.8%) increase in other electric service
revenue.
Operating Expenses
Operating expenses for 2000 was $59,705,000 compared to $56,088,000 for
1999, an increase of $3,617,000 (6.4%), of which $3,113,000 was related to the
operations of McCulloch for the seven months ended March 31, 2000.
Purchased power for 2000 increased by $1,236,000 (3.9%), to $32,979,000
compared to $31,743,000 reported for 1999. The increase included $1,737,000
related to McCulloch. Power costs without McCulloch for 2000 was $31,242,000, a
decrease of $501,000 (1.6%). Average cost/Kwh sold for 2000 and 1999, without
McCulloch, was approximately 4.83 cents, for both periods. For the seven months
ended March 31, 2000, McCulloch's average cost/Kwh sold was 3.29 cents.
Electric operating margins (revenue less purchased power cost) for 2000
was $21,723,000 compared to $19,377,000 for 1999, an increase of $2,346,000
(12.1%), of which $1,358,000 was related to McCulloch. Average margin/Kwh sold
for 2000 and 1999, without McCulloch, was 2.37 cents and 2.42 cents,
respectively. For the seven months ended March 31, 2000, McCulloch's average
margin/Kwh sold was 2.62 cents.
Operating and maintenance costs for 2000 increased $671,000 (12.4%), to
$6,083,000 from $5,412,000 reported for 1999. The increase was due to a $267,765
increase related to McCulloch, increased salaries and compensation costs and
higher maintenance costs.
Gas purchases decreased 100% due to the Registrant's sale of its gas
gathering facilities in July 1998.
Administrative and general for 2000 increased $988,000 (25.1%) to
$4,925,000 from $3,937,000 reported for 1999. The increase included $431,000
related to McCulloch. The other increase in administrative and general expenses
were attributable to computer conversion costs, increased salaries and
compensation, and acquisition evaluations costs.
Depreciation and amortization for 2000 increased $927,000 (21.0%) to
$5,339,000 compared to $4,412,000 for 1999. The increase included $346,000
related to McCulloch. The remaining increase is due to depreciation on utility
plant additions.
Interest expense for 2000 was $7,932,000 compared to $6,895,000 for
1999, an increase of $1,037,000 (15.0%) of which $92,000 was related to
McCulloch. The remaining increase was due to additional borrowings at higher
interest rates. As of March 31, 2000 and 1999, the interest rate on the
Cooperative's variable rate long-term notes payable was 7.35% and 5.75%
respectively, and the rate on the fixed rate long-term notes payable was 5.99 %
for both periods.
Other operating expenses for 2000 increased $502,000 (83.1%) to
$1,106,000 from $604,000 for 1999. The increase was due primarily to $421,000
increase in cost to provide various electric services.
Operating Loss
Operating loss for 2000 increased $2,050,000 to $2,622,000 as compared
to a loss of $572,000 for 1999. The decrease was primarily attributable to a
$988,000 increase in administrative and general, a $927,000 increase in
depreciation and amortization costs and a $1,037,000 increase in interest
expense.
Nonoperating Margins
Nonoperating margins for 2000 decreased $4,076,000 to a loss of
$3,117,000 from a gain of $959,000 reported for 1999. The decrease was primarily
the result of a $3,344,000 write-off of an oil and gas investment and a $841,000
gain reported in 1999 from the sale of the Company's gas gathering facilities.
Year Ended March 31, 1999 Compared to Year Ended March 31, 1998
Net Income (Loss)
Net income for the year ended March 31, 1999 ("1999") aggregated
$387,000, an increase of $4,578,000 (109.2%) over the net loss of $4,191,000
reported for the year ended March 31, 1998 ("1998"). The improvement was
primarily attributable to a $1,818,000 increase in electric margins, an $841,000
gain on sale of gas gathering and marketing subsidiaries, and a $2,378,000
affiliate investment impairment loss reported for 1998.
Operating Revenues
Operating revenues for 1999 were $55,516,000 compared to $59,686,000
for 1998, a decline of $4,170,000 (7.0%), of which $3,401,000 was related to a
decline in gas sales resulting from the Company's sale of its gas gathering and
marketing subsidiaries in July 1998.
Electric sales for 1999 decreased $807,000 (1.6%) to $51,120,000 as
compared to $51,927,000 for 1998. The decrease was due primarily to a decline in
commercial electric sales resulting from the shutting-in of electric oilfield
production equipment due to the dramatic drop in oil prices during most of 1999.
Average revenue/Kwh sold for 1999 and 1998 was 7.74 cents and 7.89
cents, respectively, a 1.9% decline.
Gas sales for 1999 decreased $3,401,000 (63.4%) to $1,961,000 from
$5,362,000 for 1998. The decrease was due July 1998 sale of the Company's gas
gathering facilities.
Operating Expenses
Operating expenses for 1999 was $56,088,000 compared to $61,643,000 for
1998, a decline of $5,555,000 (9.0%). The decline was primarily due to a
$2,625,000 (7.6%) decline in purchased power cost and a $3,243,000 (65.1%)
decline in gas purchases result from the sale of gas gathering facilities.
Purchased power for 1999 decreased $2,625,000 million (7.6%) to
$31,743,000 compared to $34,368,000 for 1998. The decrease was due primarily to
a decline in average power cost and a 1.6% decline in sales. Average cost/Kwh
sold for 1999 and 1998 was 4.83 cent and 4.94 cents, respectively, a 2.2%
decline.
Gross operating margins (revenue less purchased power cost) for 1999
was $19,377,000 compared to $17,559,000 for 1998, an increase of $1,818,000
(10.4%). Average gross operating margin/Kwh sold for 1999 and 1998 was 2.42
cents and 2.19 cents, respectively, a 10.5% increase.
Operating and maintenance costs for 1999 were slightly higher due to
increase salaries and other maintenance costs.
Gas purchases for 1999 decreased $3,243,000 (65.1%) due to the July
1998 sale of the Company's gas gathering facilities.
Administrative and general increased $287,000 (7.9%) to $3,937,000 for
1999 compared to $3,650,000 reported for 1998 period. This increase was due
primarily to increased salaries and compensation costs.
Depreciation and amortization expense for 1999 and 1998 was relatively
unchanged at $4,412,000 and $4,394,000, respectively.
Taxes decreased $277,000 (17.0%) to $1,348,000 for 1999 from $1,625,000
for 1998. The decrease was due primarily to the sale of gas gathering facilities
during 1999.
Interest expense for 1999 increased $319,000 (4.9%) to $6,895,000
compared to $6,576,000 for 1998 and was due primarily to increased borrowings.
Other expenses decreased $508,000 (45.7%) to $604,000 for 1999 from
$1,112,000 for 1998. The decrease was due to the sale of gas gathering
facilities during 1999.
Operating Loss
Operating loss decreased by $1,385,000 (40.8%) to $572,000 for 1999
compared to a loss of $1,957,000 for 1998. The increase was primarily
attributable to a $1,818,000 increase in electric margins.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company has cash of $1,531,000, a working capital
deficit of $38,290,000 (including short-term borrowings of $26,179,000 and
$7,607,000 related to current portion of long-term obligations), and long-term
indebtedness of $140,333,000, net of current portion. At March 31 and September
30, 2000, the Company's debt to equity ratio was 14 to 1 and 17 to 1,
respectively.
The Company's primary sources of liquidity are cash flows from operations
and additional borrowings available from the National Rural Utilities
Cooperative Finance Corporation ("CFC"). These borrowings are secured by
substantially all of the Company's utility plant assets. The existing long-term
debt consists of series of loans from the CFC that impose various restrictive
covenants, including the loan provisions that prohibit the incurrence or
guaranty of other secured indebtedness and requires, among other things, the
maintenance of a 1.35 debt service coverage ratio and an equity of not less than
20% of total assets, as defined in the CFC Loan Agreements.
As discussed in note 4 to the Consolidated Financial Statements, the
Company has entered into an agreement to purchase certain utility assets of
Citizens Utility Company for a total of $248 million, subject to adjustments.
The Company has a commitment for $191 million in debt financing and it is
presently seeking additional financing to complete the purchase. There can be no
assurance that the Company will be able to successfully complete the purchase.
In the event the Cooperative is converted from a member-owned
tax-exempt cooperative to a taxable utility corporation, the CFC indebtedness
may be subject to refinancing. Such refinancing may be on less favorable terms
and conditions than the existing CFC Loan Agreements.
The Company anticipates that the cash flows from operations and the
additional borrowings from the CFC and other sources will provide sufficient
cash to enable us to meet the working capital needs, debt service requirements
and planned capital expenditures for property and equipment for the foreseeable
future.
CASH FLOW DATA
Operating Activities
During the six months ended September 30, 2000, ("SM 2000") and the six
months ended September 30, 1999 ("SM 1999"), cash provided by operating
activities was $5,284,000 and $5,721,000, respectively, and net income plus
non-cash charges provided operating cash flow of $5,130,000 and $6,903,000,
respectively. Other items that significantly affected SM 2000 and SM 1999 cash
flow were purchased power cost under billed for $1,259,000 and $976,000,
respectively, (which increased cash flow) and deferred charges and credits for
$1,504,000 (which reduced SM 2000 cash flow).
During the year ended March 31, 2000 ("2000"), cash provided operating
activities was $7,200,000. Net income plus non-cash charges provided $7,515,000
of operating cash flow for 2000. Other items that significantly affected cash
flow during the period were purchased power cost under billed for $2,189,000
(which increased cash flow) and deferred charges and credits for $1,455,000
(which reduced cash flow).
During the year ended March 31, 1999 (`1999"), cash provided operating
activities was $8,674,000. Net income plus non-cash charges provided $8,841,000
of operating cash flow during the period. Other items that significantly
affected cash flow during this period were deferred charges and credits for
$1,150,000 (which reduced cash flow), accounts receivable for $1,571,000 (which
increased cash flow), and accounts payable and accrued expenses for $1,664,000
(which reduced cash flow).
Investing Activities
During SM 2000 and SM 1999, cash used by investing activities was
$23,686,000 and $6,060,000, respectively, an increase of $17,626,000 of which
$14,917,000 was related to a pass-through loan agreement with United Fuel and
Energy Corporation ("United Fuel"). Substantially all of the utility additions
were financed with additional borrowings from CFC. The United Fuel agreement was
funded with a $15 million bank loan agreement.
During 2000, cash used by investing activities was $14,124,000,
including $2,501,000 related to the proposed Citizens' acquisition and
$10,927,000 related to capital additions. Substantially all of these additions
were financed with additional borrowings from CFC.
During 1999, cash used by investing activities was $10,004,000,
including capital additions of $11,644,000. Substantially all of these additions
were financed with additional borrowings from CFC. Included in the investing
cash flow activities were sale proceeds of $1,640,000 from the Registrant's sale
of its gas gathering facilities in 1999.
Financing Activities
During SM 2000 and SM 1999, cash provided by financing activities was
$17,401,000 and $326,000, respectively, an increase of $17,075,000 of which
$15,000,000 was related to a pass-through loan agreement with United Fuel.
During SM 2000, the Cooperative borrowed an additional $13,887,000 and repaid
debt totaling $9,177,000.
During 2000, net cash provided by financing activities was $7,065,000,
including additional borrowings of $19,749,000, and debt repayments of
$8,769,000 during the period. In addition, the Cooperative used $989,000 to
retire certain patronage capital credits and $2,926,000 for amortization of
equity redemption credits.
During 1999, net cash provided by financing activities was $1,382,000,
including additional borrowings of $7,794,000 and debt repayments of $6,371,000.
INFLATION
Due to relatively low levels of inflation experienced in the 2000 and
1999, management believes inflation did not have a material effect on the
results during these periods.
RECENT ACCOUNTING PRONOUNCEMENTS
The Cooperative has adopted the following recent accounting
pronouncements:
o Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" establishes standards for displaying comprehensive
income and its components in the Registrant's consolidated financial
statements. The adoption of this pronouncement had no material effect on
the results of operations.
o SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about
operating segments in the consolidated financial statements. The standard
also establishes requirements for related disclosure about the products and
services, geographic areas and major customers. The Cooperative operate in
two industry segments; electric sales and services and other. Information
for each of these segments is included the consolidated financial
statements. The adoption of this pronouncement had no effect on the
presentation of operating results or financial position.
o AICPA Statement of Position 98-5 ("SOP 98-5"), "Reporting on Costs of
Start-Up Activities" requires entities to expense the costs of start-up
activities as incurred. SOP 98-5 broadly defines start-up activities to
include: (i) costs that are incurred before operations have begun; (ii)
costs incurred after operations have begun but before full productive
capacity has been reached; (iii) learning costs and non- recurring
operating losses incurred before a project is fully operational; and (iv)
one-time activities related to opening a new facility, introducing a new
product or service, conducting business in a new territory or with a new
class of customer, and initiating a new process in an existing operation.
The adoption of this pronouncement had no effect on the presentation of
operating results or financial position.
In June 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 138, an amendment to SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." As amended, SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 requires that certain derivative instruments be
recorded in the balance sheet as either an asset or liability measured at fair
value and that changes in the fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The Company intends to adopt
the provisions of SFAS No. 133 on April 1, 2001. Management currently expects
the impact of adopting SFAS No. 133 will be immaterial to the Company's
financial statements. The application of SFAS No. 133 is still evolving and
further guidance from the FASB is expected. When established, this further
guidance may have additional impact on the Company's financial statements.
MARKET AND DIVIDEND INFORMATION
Market Information
No public trading market currently exists for membership interests in
the Cooperative or interests in member equity accounts.
No public trading market currently exists for shares of our common
stock. Application has been made for the quotation of the shares of our common
stock on the Nasdaq National Market under the symbol "CREC."
We cannot give you any assurance that a trading market will develop or
be maintained for the shares of our common stock or, if it did, that it would
provide our shareholders a meaningful opportunity to sell their shares.
Dividend Information
The Company has never declared or paid any cash dividends on its common
stock and we do not anticipate paying any cash dividends in the foreseeable
future. We intend to retain future earnings, if any, to finance the expansion
and development of our business.
Number of Shareholders
As of September 30, 2000, we had one shareholder of record, which was
the Cooperative.
MANAGEMENT
Directors And Executive Officers
The following table sets forth certain information regarding the
executive officers, and directors of the Company:
<TABLE>
<S> <C> <C>
Name Age Position
David W. Pruitt 54 President and Chief Executive Officer
Ulen A. North, Jr. 55 Executive Vice President
John D. Parker 45 Vice President and Chief Financial Officer
Sammy C. Prough 50 Vice President and Chief Operating Officer
Russell E. Jones (1) 55 Chairman of the Board
Alfred J. Schwartz (3) 72 Director and Secretary/Treasurer
Sammie D. Buchanan (3) 57 Director
Jerry R. Hoelscher (3) 51 Director
Floyd L. Ritchey (3) 62 Director
Michael D. Schaffner (2) 53 Director
Newell W. Tate (2) 71 Director
</TABLE>
(1) Term expires in 2001
(2) Term expires in 2002
(3) Term expires in 2003
Set forth below is a description of the backgrounds of the executive
officers and directors of the Registrant.
David W. Pruitt, President and Chief Executive Officer, joined the
Cooperative in 1985. He was named Manager in 1987 and Chief Executive Officer in
1989. Mr. Pruitt has been involved in electric cooperative utility business
since 1978. Mr. Pruitt also serves as Director of Panda Energy International.
Ulen A. North, Executive Vice President, joined the Cooperative in
1969. He was named Director of Administrative Services in 1988, Chief Operating
Officer in 1990, and Executive Vice President in 1996.
John D. Parker, Vice President and Chief Financial Officer, joined the
Cooperative in late 1990 as Director of Finance. In 1992, he was named Chief
Financial Officer. Mr. Parker is a Certified Public Accountant, with several
years of accounting experience with a national accounting firm. Prior to joining
the Cooperative, he was with one of the largest cooperatives in Alaska for eight
years.
Sam C. Prough, Vice President and Chief Operating Officer, has been
involved in all aspects of the Cooperative's business for the past 23 years. He
was named Acting System Manager in late 1996, System Manager in September 1997
and Chief Operating Officer in June 1999.
Russell E. "Rusty" Jones has served as Director since September 1979 and
has served as Chairman of the Board for the past 13 years. Mr. Jones is engaged
in various agriculture businesses.
Alfred J Schwartz has served as Director since September 1963 and has
served as Secretary/Treasurer for the past 25 years. Mr. Schwartz is engaged in
various agriculture businesses.
Sammie D. Buchanan has served as Director since September 1975 and has
served as Vice Chairman for the last 13 years. Mr. Buchanan is engaged in
various agriculture businesses.
Jerry R. Hoelscher has served as Director since February 1995. Mr.
Hoelscher is engaged in various agriculture businesses.
Floyd L. Ritchey has served as a Director since February 1998 and prior to
that was a Director of Lone Wolf Electric Cooperative, Inc. for 14 years. Mr.
Ritchey is engaged in various agriculture businesses.
Michael D. Schaffner has served as a Director on the Corporate Board since
October, 1999. He presently still serves on the McCulloch Advisory Council and
prior to that was a Director on the McCulloch Electric Cooperative, Inc. Board
for 10 years. Mr. Schaffner is 53 years old.
Newell W. Tate has served as a Director on the Corporate Board since
September, 1986. Mr. Tate is engaged in various agriculture businesses.
Composition of Board and Committees
The business of the Company will be managed under the direction of its
board of directors. It is intended that the board of directors will initially be
composed of seven directors each of whom will be independent directors. There
are no present plans to have any officer or employee of the Company or its
subsidiaries be on the board of directors of the Company. The Company will also
establish the following standing committees:
o Compensation Committee. The Compensation Committee of the Company will be
chosen by the board of directors. No member of the Compensation Committee
may be an officer of the Company. The Compensation Committee will make
recommendations to the board of directors regarding salaries and any
supplemental employee compensation of the executive officers and act upon
management's recommendations for salary and supplemental employee
compensation for all other employees. The Compensation Committee will also
act upon management's recommendations which require director action with
respect to all employee pension and welfare benefit plans.
o Audit Committee. The Audit Committee of the Company will be chosen by the
board of directors. No member of the Audit Committee may be an officer of
the Company. The Audit Committee will recommend to the board of directors
the firm of independent certified public accountants to annually audit the
books and records. The Audit Committee will review and report on the
activities of the independent certified public accountants to the board of
directors and review and advise the board of directors as to the adequacy
of our system of internal accounting controls.
Director Compensation
The compensation for our directors who are not officers or employees of
the Company will receive life insurance and health insurance coverage from us at
a cost of up to $550 per month, reimbursement for actual out-of-pocket expenses
for attending meetings of the board of directors and Stock Awards under our
Stock Incentive Plan of $10,000 in value of our common stock annually.
<PAGE>
Compensation of Named Executive Officers
The follow table describes the compensation paid to our Chief Executive
Officer and two of the most highly compensated executive officers for services
rendered during the last three fiscal year's ended March 31, 2001 (the "Named
Executive Officers")
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
--------------------------------------------------------
<S> <C> <C> <C> <C>
All Other
Name and Position Year Salary Bonus Compensation
----------------- ---- ------ ----- ------------
David W. Pruitt 2000 $165,481 $230,170 $68,988
President and Chief Executive Officer 1999 155,869 123,600 55,167
1998 145,890 116,022 64,986
Ulen A. North, Jr. 2000 99,256 155,026 52,042
Executive Vice President 1999 94,536 51,939 51,962
1998 91,180 49,641 57,608
John D. Parker 2000 93,754 134,468 50,411
Vice President and Chief Financial Officer 1999 89,936 81,101 45,539
1998 83,228 54,564 51,478
Sammy C. Prough 2000 75,264 75,731 21,738
Vice President and Chief Operating Officer 1999 67,728 18,107 22,752
1998 64,272 10,559 24,628
</TABLE>
Director and Employee Benifit Plans
Stock Incentive Plan. We have adopted a Stock Incentive Plan that
provides for the granting of options to purchase common stock ("Stock Options"),
awards of common stock, both restricted and unrestricted ("Stock Awards"), and
certain related rights to eligible officers, employees and directors of the
Company. The Stock Incentive Plan provides for a maximum of 500,000 shares of
our common stock to be used in the granting of options and Stock Awards. Shares
of common stock used to satisfy such awards will be acquired by the Plan either
through open market purchases or from authorized but unissued common stock. The
Conversion Plan provides that Stock Incentive Plan will not take effect only
upon the effective date of a private placement or initial public offering of
shares of our common stock involving the receipt by the Company of gross
proceeds of at least $5,000,000.
Employee Stock Purchase Plan. We have adopted an Employee Stock
Purchase Plan that provides for our employees with the opportunity to purchase
shares of our common stock through accumulated payroll deductions. It is our
intention to have the Employee Stock Purchase Plan qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as
amended. Each eligible employee will be granted options to purchase shares of
our common stock and the options will be exercised automatically and the maximum
number of full shares subject to the options will be purchased for the eligible
employee at the applicable purchase price with the accumulated payroll
deductions in the eligible employee's account. The Employee Stock Purchase Plan
provides for a maximum of 160,000 shares, subject to annual increase in an
amount to be determined by a set formula, to be used in connection with option
granted under the Plan.
Director Compensation Plan. We have adopted a Director Compensation
Plan that provides that each sitting director will receive life insurance and
health insurance coverage from us at a cost of up to $550 per month,
reimbursement for actual out-of-pocket expenses for attending meetings of the
board of directors and Stock Awards under our Stock Incentive Plan of $10,000 in
value of our common stock annually. The Director Compensation Plan also provides
that if a director who was formerly a director of the Cooperative resigns from
our board and becomes an advisory director, he shall be entitled to receive the
same life insurance and health insurance coverage as sitting directors for a
period of six years plus, if he resigns from the advisory board within six years
of his resignation from our board, he shall be entitled to receive stock options
to purchase 35,000 of our shares of common stock at the market value of those
shares at the time of the grant of the options. Under the Plan, if a sitting
director who was formerly a director of the Cooperative resigns from our board
and chooses not to become an advisory director, he shall be entitled to receive
a cash payment equal to the discounted value of the insurance benefits he would
have otherwise received as an advisory director plus stock options to purchase
35,000 of our shares of common stock at the market value of those shares at the
time of the grant of the options.
CERTAIN TRANSACTIONS
On February 22, 1999, a wholly-owned subsidiary of the Cooperative and its
six-member board of directors entered into a Royalty Pool Agreement whereby a
total of 15% of the subsidiary's oil and gas royalty interests were sold at cost
to the directors. Under the Agreement, unsecured, interest bearing notes were
executed by the six directors and one advisory director payable from their share
of oil and gas royalty income. As of September 30, 2000, the balance of the
notes receivable due from the subsidiary's directors was $409,000. For the years
ended March 31, 2000 and 1999, the directors' share of oil and gas royalty
income aggregated $53,000 and $34,000, respectively. Four of the subsidiary's
directors also serve as directors of the Company.
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of the effective date of this
prospectus by each of our directors and named executive officers, and by all of
our directors and executive officers as a group.
The number of shares of our common stock beneficially owned by each
directors and executive officer and all directors and executive officers as a
group is based upon the number of shares that we estimate each director and
executive officer, and persons and entities affiliated with each director and
executive officer, will receive in their capacity as Eligible Interest Owners
under the Conversion Plan. Except as otherwise indicated below, each of the
persons named in the table will have sole voting and investment power with
respect to the shares beneficially owned by such person as set forth opposite
such person's name:
<TABLE>
<CAPTION>
Number % of Total
of shares(1) Minimum (1) Maximum (2)
--------- ----------- -----------
<S> <C> <C> <C>
Directors:
S. D. Buchanan 359 0.0228% 0.0076%
Jerry Hoelscher 2,460 0.1562% 0.0521%
Russell Jones 1,727 0.1097% 0.0366%
Floyd Ritchey 83 0.0053% 0.0018%
Mike Schaffner 182 0.0116% 0.0039%
Alfred Schwartz 4,192 0.2662% 0.0887%
Newell Tate 1,605 0.1019% 0.0340%
------- ------- -------
Total Directors 10,608 0.6737% 0.2247%
------ ------- -------
Officers:
David Pruitt - President/CEO - 0.0000% 0.0000%
Ulen North - Exec. VP 70 0.0044% 0.0015%
John Parker - VP/CFO 10 0.0006% 0.0002%
Sam Prough - VP/COO - 0.0000% 0.0000%
----- ------- -------
Total Officers 80 0.0050% 0.0017%
----- ------- -------
Total of Directors and Officers 10,688 0.6787% 0.2264%
====== ======= =======
</TABLE>
(1) Assumes issuance only of shares allocated in Conversion Plan.
(2) Assumes issuance of all shares covered by this Prospectus.
We believe no persons will beneficially own more than 5% of our outstanding
shares of our common stock as of the effective date of implementation of the
Conversion Plan.
Transfer Agent and Registrar
The transfer agent and registrar for the shares of our common stock will be ___
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Common Stock
As of September 30, 2000, our authorized capital stock consisted
50,000,000 shares of common stock, $.01 Par Value. After the Conversion Plan is
fully implemented and the offering of shares of our common stock is completed,
there will be up to 4,725,000 shares of our common stock issued and outstanding.
All shares of common stock to be issued in conjunction with the Conversion Plan
and the offering of shares will be fully paid and nonassessable.
Under the terms of our Articles of Incorporation, holders of shares of
our common stock are entitled to one vote for each share held on all matter
submitted to a vote of shareholders. Holders of shares of our common stock do
not have cumulative voting rights and, accordingly, a majority of the shares of
our common stock entitled to vote in any election of directors may elect all of
the directors standing for election. Holders of shares of our common stock are
entitled to receive proportionately any such dividends declared by the our Board
of Directors, subject to certain restrictions in our loan agreements. Holders of
our shares of common stock do not have preemptive or other preferential rights.
Upon the liquidation, dissolution or winding up of the Company, the
holders of shares of our common stock are entitled to receive ratably our net
assets available after the payment of all debts and other liabilities.
Our Articles of Incorporation provide that any shareholder, or
affiliate of a shareholder, as defined, holding in excess of 5% of our
outstanding common stock will have the shareholder's voting rights for the
shares in excess of 5% reduced to 1/100 per share.
Statutory Provisions Affecting Control of the Company
The following discussion concerns the provisions of the Texas Business
Combination Act that would affect control of the Company.
o Control Share Acquisition Act. Under Sections 48-103-301 through 48-103-312
of the Texas Business Corporation Act (the "Control Share Acquisition
Act"), the "control shares" of stock acquired by an acquiring person in a
"control Share acquisition" that exceed certain thresholds of voting power
do not have voting rights unless the holders of the other voting shares
vote to grant voting rights to the acquiring person's shares. The Control
Share Acquisition Act also contains other provisions applicable to a
control share acquisition. A corporation is not subject to the Control
Share Acquisition Act unless it affirmatively elects in its charter or
bylaws to be so subject. Neither our Articles of Incorporation nor our
Bylaws of the Company elect to be subject to the Control Share Acquisition
Act. Accordingly, we are not subject to the Control Share Acquisition Act,
unless we subsequently elects to "opt in" as provided by the Texas Business
Corporation Act.
o Fair Price Act. Under Sections 48-103-201 through 48-103-209 of the Texas
Business Corporation Act (the "Fair Price Act"), a Texas "public
corporation" (such as the Company) may not engage in a "business
combination" with an "interested shareholder" unless certain conditions are
met. An "interested shareholder" is one that (i) directly or indirectly
beneficially owns 10 percent or more of the outstanding voting shares of
the corporation or (ii) is an affiliate or associate of the corporation and
at any date within the last four years was the beneficial owner, directly
or indirectly, of 10 percent or more of the corporation's voting stock.
The foregoing provisions of the Texas Business Corporation Act may have
an anti-takeover impact and may make tender offers, proxy contests and certain
other transactions more difficult to consummate.
<PAGE>
COMMON STOCK ELIGIBLE FOR FUTURE SALE
Substantially all of the estimated 1,575,000 shares of our common stock
to be distributed to Eligible Interest Owners and the 3,150,000 shares offered
to the current and former members will be eligible for immediate resale in the
public market without restriction, and those that are not the Company's
"affiliates" within the meaning of Rule 144 under the Securities Act of 1933, as
amended, will be able to resell their shares immediately in the public market
without registration or compliance with the time, volume, manner of sale and
other limitations set forth in Rule 144.
DETERMINATION OF OFFERING PRICE
Prior to the implementation of the Conversion Plan and the offering of
shares of our common stock as described in this prospectus, there was no public
market for the shares of our common stock. The initial public offering price for
the shares is the same as the deemed value of the shares of our common stock
issued in connection with implementation of the Conversion Plan.
LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be
passed upon for the Company by Ronald W. Lyon, Esq., Sherman, Texas.
EXPERTS
The financial statements included in the registration statement of
which this prospectus is a part have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA DATA - CAP ROCK ENERGY CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Statement of Operations Data
Year ended March 31, 2000 F-3
Pro Forma Consolidated Balance Sheet Data
September 30, 2000 F-4
Pro Forma Consolidated Statement of Operation Data
Six Months ended September 30, 2000 F-5
Notes to Pro Forma Consolidated Financial Data F-6
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS -
CAP ROCK ELECTRIC COOPERATIVE, INC. AND SUBSIDIARIES
Report of Independent Public Accountant F-7
Consolidated Balance Sheets
March 31, 1999 and 2000 and September 30, 2000 (Unaudited) F-8
Consolidated Statements of Operations and Equities and Margins
Years ended March 31, 1998, 1999 and 2000 and
Six Months ended September 30, 1999 and 2000 (Unaudited) F-9
Consolidated Statements of Cash Flows
Years ended March 31, 1998, 1999 and 2000 and
Six Months ended September 30, 1999 and 2000 (Unaudited) F-10
Notes to Consolidated Financial Statements F-11
F-1
<PAGE>
CAP ROCK ENERGY CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Financial Data
(Unaudited)
The unaudited pro forma consolidated statement of operations data for the year
ended March 31, 2000 and the six months ended September 30, 2000 have been
prepared based on the Cooperative's historical consolidated statements of
operations, as adjusted to reflect the August 31, 1999 acquisition of McCulloch
Electric Cooperative, Inc. and the issuance of 1,575,000 shares of common stock
in conjunction with the stock conversion as if such transactions had occurred on
April 1, 1999.
The unaudited pro forma consolidated balance sheet data as of September 30, 2000
has been prepared based on the Cooperative's historical balance sheet, as
adjusted to reflect the stock conversion of the Cooperative's equities and
margins into 1,575,000 shares of common stock.
The pro forma consolidated statements of operations data may not be indicative
of the future results of operations and what the actual results of operations
would have been had the transactions described above been effective April 1,
1999.
No adjustments have been made to the pro forma financial data to reflect the
proposed sale of 3,175,000 shares of common stock or the proposed Rescission
Offer as the likelihood of such transactions are not reasonably assured or the
financial effects are not presently determinable.
The pro forma selected financial data should be read in conjunction with the
consolidated financial statements and notes thereto included herein.
F-2
<PAGE>
CAP ROCK ENERGY CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Statements of Operations Data
Year ended March 31, 2000
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro
Historical Adjustments Forma
<S> <C> <C> <C>
OPERATING REVENUES:
Electric sales $54,702 $2,249 (A) $56,951
Gas sales and royalty income 445 - 445
Other 1,936 19 (A) 1,955
-------- --------- --------
Total operating revenues 57,083 2,268 59,351
------- ------- -------
OPERATING EXPENSES:
Purchased power 32,979 1,430 (A) 34,409
Operations 3,642 91 (A) 3,733
Maintenance 2,441 78 (A) 2,519
Administrative and general 4,925 243 (A) 5,168
Depreciation and amortization 5,339 241 (A) 5,580
Taxes 1,341 58 (A) 1,399
Interest expense, net 7,932 173 (A) 8,105
Other 1,106 1 (A) 1,107
-------- --------- --------
Total operating expenses 59,705 2,315 62,020
------- ------ -------
OPERATING INCOME (LOSS) (2,622) (47) (2,669)
-------- -------- -------
NONOPERATING MARGINS:
Interest and other income 227 2 (A) 229
Write-off of investment in affiliate (3,344) - (3,344)
-------- ---------- --------
Total nonoperating margins (3,117) 2 (3,115)
-------- --------- --------
NET INCOME (LOSS) (C) $(5,739) $ (45) $(5,784)
======= ======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING (B) 1,575
=====
EARNINGS (LOSS) PER SHARE (B and D):
BASIC AND DILUTED $(3.67)
======
</TABLE>
The accompanying notes to pro forma selected financial data are
an integral part of this financial data.
F-3
<PAGE>
CAP ROCK ENERGY CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Balance Sheet Data
September 30, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
ASSETS Pro
------
Historical Adjustments Forma
<S> <C> <C> <C>
UTILITY PLANT $170,576 $ - $170,576
NONUTILITY PROPERTY AND INVESTMENTS 30,669 - 30,669
CURRENT ASSETS:
Cash and cash equivalents 530 - 530
Accounts receivable:
Electric sales, net 6,819 - 6,819
Other 167 - 167
Other current assets 1,881 - 1,881
---------- ------------- ----------
Total current assets 9,397 - 9,397
INVESTMENT IN PROPOSED ACQUISITION 1,535 - 1,535
RESTRICTED CASH INVESTMENT 1,900 - 1,900
DEFERRED CHARGES 7,994 (817) (B) 7,177
---------- ---------- --------
$222,071 $ (817) $221,254
======== ========== ========
EQUITIES AND LIABILITIES
EQUITIES AND MARGINS $ 11,028 $(11,028)(B) $ -
STOCKHOLDERS' EQUITY:
Common stock, $.01 par. Authorized 50,000,000 shares;
pro forma shares issued 1,575,000. - 16 (B) 16
Additional paid-in capital - 10,195 (B) 10,195
------------- ------- ---------
Total stockholders' equity 11,028 10,211 10,211
------------- ------- ---------
LONG-TERM DEBT:
Mortgage notes 120,120 - 120,120
Capital lease - transmission facilities 23,947 - 23,947
Other 13,995 13,995
--------- ------------ ---------
Total long-term debt 158,062 - 158,062
CURRENT LIABILITIES:
Current portion of:
Mortgage notes 2,965 - 2,965
Capital leases and other 5,654 - 5,654
Lines of credit 25,742 - 25,742
Accounts payable:
Purchased power 3,980 - 3,980
Other 856 - 856
Equity redemption credits 3,123 - 3,123
Equity retirement payable 411 - 411
Purchased power cost subject to refund 3,805 - 3,805
Accrued and other current liabilities 2,842 - 2,842
---------- ------------ ----------
Total current liabilities 49,378 - 49,378
DEFERRED CREDITS 3,603 - 3,603
---------- ------------ ----------
$222,071 $ (817) $221,254
======== ========= ========
</TABLE>
The accompanying notes to pro forma selected financial data are
an integral part of this financial data.
F-4
<PAGE>
CAP ROCK ENERGY CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Statements of Operations
Six Months ended September 30, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Pro
Historical Adjustments Forma
<S> <C> <C> <C>
OPERATING REVENUES:
Electric sales $35,688 $ - $35,688
Gas sales and royalty income 212 - 212
Other 635 - 635
-------- -------- ---------
Total operating revenues 36,535 - 36,535
------ -------- -------
OPERATING EXPENSES:
Purchased power 22,179 - 22,179
Operations 2,350 - 2,350
Maintenance 1,511 - 1,511
Administrative and general 1,505 - 1,505
Depreciation and amortization 2,875 - 2,875
Taxes 716 - 716
Interest expense, net 5,104 - 5,104
Other 294 - 294
-------- -------- --------
Total operating expenses 36,534 - 36,534
------ -------- ------
OPERATING INCOME 1 - 1
INTEREST AND OTHER INCOME 120 - 120
------ ------- --------
INCOME BEFORE EXTRAORDINARY ITEM 121 - 121
EXTRAORDINARY ITEM -
Gain on extinguishment of debt 969 - 969
------- ------- --------
NET INCOME (C) $1,090 $ - $1,090
====== ======= ======
WEIGHTED AVERAGE SHARES OUTSTANDING (B) 1,575
=====
EARNINGS (LOSS) PER SHARE (B and D):
BASIC AND DILUTED:
Income before extraordinary item $.07
Extraordinary item .62
----
Net income $.69
====
</TABLE>
The accompanying notes to pro forma selected financial data are
an integral part of this financial data.
F-5
<PAGE>
CAP ROCK ENERGY CORPORATION AND SUBSIDIARIES
Notes to Pro Forma Consolidated Financial Data
(Unaudited)
The following are pro forma adjustments to the accompanying pro forma
consolidated financial data:
(A) To record the August 31, 1999 acquisition of McCulloch Electric
Cooperative, Inc. as of April 1, 1999.
(B) To record the stock conversion of equities and margins into 1,575,000
shares of common stock.
(C) No pro forma income tax expense adjustments have been provided due
to the lack of a favorable earnings history and utilization of net
operating loss carryforwards.
(D) Pursuant to Statement of Financial Accounting Standards No.128,
"Earnings per Share", basic earnings (loss) per share is computed
by dividing net income (loss) available to common stockholders by
the weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per share is computed by dividing
net income (loss) by the weighted average number of common and
common equivalent shares outstanding during the period, which
includes the additional dilution related to the exercise of stock
options as computed under the treasury stock method. Because there
were no common stock equivalents at March 31 and September 30, 2000,
the diluted earnings (loss) per share was equal to basic earnings
(loss) per share.
F-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Cap Rock Electric Cooperative, Inc.:
We have audited the accompanying consolidated balance sheets of Cap Rock
Electric Cooperative, Inc. and subsidiaries (the "Cooperative") as of March 31,
1999 and 2000, and the related consolidated statements of operations and
equities and margins, and cash flows for each of the three years in the period
ended March 31, 2000. These financial statements are the responsibility of the
Cooperative's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 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 that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Cooperative as of March 31,
1999 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States.
Dallas, Texas,
May 26, 2000 (except with respect to the matters discussed in Note 4, as to
which the date is December 15, 2000)
<PAGE>
CAP ROCK ELECTRIC COOPERATIVE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
ASSETS March 31, March 31, September 30,
------
1999 2000 2000
--------- ---------- ---------
(Unaudited)
<S> <C> <C> <C>
UTILITY PLANT (Note 6) $155,567 $169,537 $170,576
NONUTILITY PROPERTY AND INVESTMENTS (Note 7) 16,107 15,790 30,669
CURRENT ASSETS:
Cash and cash equivalents 1,390 1,531 530
Accounts receivable:
Electric sales, net 3,808 3,495 6,819
Other 169 523 167
Other current assets 392 453 1,881
---------- ---------- ----------
Total current assets 5,759 6,002 9,397
INVESTMENT IN PROPOSED ACQUISITION (Note 4) - 601 1,535
RESTRICTED CASH INVESTMENT (Note 20) - 1,900 1,900
DEFERRED CHARGES (Note 8) 4,550 7,051 7,994
---------- ---------- ----------
$181,983 $200,881 $222,071
======== ======== ========
EQUITIES AND LIABILITIES
EQUITIES AND MARGINS $ 19,245 $ 12,659 $ 11,028
LONG-TERM DEBT:
Mortgage notes (Note 9) 93,398 113,970 120,120
Capital lease - transmission facilities (Note 10) 32,102 26,256 23,947
Other 125 107 13,995
---------- ---------- ----------
Total long-term debt 125,625 140,333 158,062
COMMITMENTS AND CONTINGENCIES (Note 20)
CURRENT LIABILITIES:
Current portion of:
Mortgage notes 1,965 3,059 2,965
Capital leases and other 4,955 4,548 5,654
Lines of credit (Note 11) 21,774 26,179 25,742
Accounts payable:
Purchased power 2,332 2,815 3,980
Other 942 338 856
Equity redemption credits (Note 2) - 2,685 3,123
Equity retirement payable (Note 2) - - 411
Purchased power cost subject to refund 357 2,546 3,805
Accrued and other current liabilities (Note 12) 1,778 2,122 2,842
---------- ---------- ----------
Total current liabilities 34,103 44,292 49,378
DEFERRED CREDITS (Note 14) 3,010 3,597 3,603
---------- ---------- ----------
$181,983 $200,881 $222,071
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
CAP ROCK ELECTRIC COOPERATIVE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Equities and Margins
(In thousands)
<TABLE>
<CAPTION>
Six months ended
Years ended March 31, September 30,
------------------------- ---------------
1998 1999 2000 1999 2000
------ ---- ---- ---- ----
OPERATING REVENUES: (Unaudited)
<S> <C> <C> <C> <C> <C>
Electric sales $51,927 $51,120 $54,702 $27,805 $35,688
Gas sales and royalty income 5,362 1,961 445 66 212
Other 2,397 2,435 1,936 1,208 635
-------- -------- -------- -------- ---------
Total operating revenues 59,686 55,516 57,083 29,079 36,535
------- ------- ------- ------- -------
OPERATING EXPENSES:
Purchased power 34,368 31,743 32,979 16,703 22,179
Operations 2,978 3,081 3,642 1,600 2,350
Maintenance 1,960 2,331 2,441 1,191 1,511
Gas purchases 4,980 1,737 - - -
Administrative and general 3,650 3,937 4,925 1,574 1,505
Depreciation and amortization 4,394 4,412 5,339 2,497 2,875
Taxes 1,625 1,348 1,341 638 716
Interest expense, net 6,576 6,895 7,932 3,643 5,104
Other 1,112 604 1,106 471 294
-------- --------- -------- -------- ---------
Total operating expenses 61,643 56,088 59,705 28,317 36,534
------- ------- ------- ------ -------
OPERATING INCOME (LOSS) (1,957) (572) (2,622) 762 1
-------- --------- -------- -------- ----------
NONOPERATING MARGINS:
Interest and other income 144 959 227 69 120
Equity loss and write-off of investment in affiliate (2,378) - (3,344) (3,344) -
-------- ------------ -------- -------- --------
Total nonoperating margins (2,234) 959 (3,117) (3,275) 120
--------- --------- -------- -------- ------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (4,191) 387 (5,739) (2,513) 121
EXTRAORDINARY ITEM -
Gain on extinguishment of debt - - - - 969
--------- ---------- --------- --------- -------
NET INCOME (LOSS) (4,191) 387 (5,739) (2,513) 1,090
EQUITIES AND MARGINS:
Beginning balance 23,836 18,899 19,245 19,245 12,659
Acquisition equity (Note 3) - - 5,753 5,753 -
Equity redemption credits (Note 2) - - (5,611) (5,579) (2,329)
Retirement of patronage capital (746) (41) (989) (1,004) (392)
--------- ---------- --------- -------- ------------
Ending balance $18,899 $19,245 $12,659 $15,902 $11,028
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
CAP ROCK ELECTRIC COOPERATIVE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Six months ended
Years ended March 31, September 30,
------------------------- ---------------
1998 1999 2000 1999 2000
------ ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,191) $ 387 $(5,739) $(2,513) $1,090
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 7,956 9,273 9,910 6,072 5,009
Gain on sale of nonutility investment - (819) - - -
Equity loss and write-off of investment in affiliate 2,378 - 3,344 3,344 -
Gain on extinguishment of debt - - - - (969)
Change in:
Deferred charges/credits (327) (1,150) (1,455) (1,504) 6
Accounts receivable 190 1,571 422 (610) (2,968)
Purchased power cost subject to refund 1,572 922 2,189 976 1,259
Other current assets 42 44 37 (168) (428)
Accounts payable and accrued expenses (1,288) (1,664) (722) 498 2,403
Other - 110 (786) (374) (118)
---------- --------- -------- -------- --------
Net cash provided by operating activities 6,332 8,674 7,200 5,721 5,284
------- -------- ------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant, net (9,950) (10,540) (8,954) (5,440) (5,986)
Additions to nonutility investments (1,845) (1,104) (1,973) (620) (756)
Investment in proposed acquisition - - (601) - (934)
Issuance of notes receivable, net - - - - (14,917)
Restricted cash investment - - (1,900) - -
Other - - (696) - (1,093)
Proceeds from sale of nonutility investment - 1,640 - - -
----------- ------------------- ----------------------
Net cash used in investing activities (11,795) (10,004) (14,124) (6,060) (23,686)
------- ------- ------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under lines of credit 947 1,577 2,005 2,372 (437)
Proceeds from mortgage notes 15,000 6,217 17,744 5,432 13,887
Proceeds from note payable - - - - 15,000
Payments on mortgage notes (1,579) (1,703) (2,467) (1,095) (6,862)
Payments on other long-term debt (4,450) (96) (38) (26) (108)
Payments on capital lease obligations (4,250) (4,572) (6,264) (4,131) (2,207)
Amortization of equity redemption credits - - (2,926) (1,222) (1,891)
Equity retirement payable - - - - 411
Retirement of patronage capital (746) (41) (989) (1,004) (392)
-------- --------- -------- ------ ---------
Net cash provided by financing activities 4,922 1,382 7,065 326 17,401
--------- ------- ------- ------- ------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (541) 52 141 (13) (1,001)
CASH AND CASH EQUIVALENTS:
Beginning of year 1,879 1,338 1,390 1,390 1,531
------- ------- ------- ------ ------
End of year $1,338 $1,390 $1,531 $1,377 $ 530
====== ====== ====== ====== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest $6,492 $7,057 $7,842 $3,475 $5,416
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
CAP ROCK ELECTRIC COOPERATIVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998, 1999 and 2000
(Information as of September 30, 1999 and 2000 is unaudited)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Cap Rock Electric Cooperative, Inc. (the "Cooperative") is a transmission and
distribution cooperative organized in September 1939 to provide electric power
to its members. The Cooperative's subsidiaries are engaged in providing various
electric services, oil and gas activities and miscellaneous investments.
System of Accounts
The Cooperative's accounting records are maintained in accordance with the
Uniform System of Accounts as prescribed by the Federal Energy Regulatory
Commission ("FERC") for Class A and B electric utilities.
The Cooperative's accounting policies conform to generally accepted accounting
principles as applied in the case of regulated public utilities in the United
States and are in accordance with the accounting requirements and ratemaking
practices of FERC.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Cooperative, Cap Rock Energy Corporation ("Energy"), CapStar Communications,
Inc. ("CapStar"), New West Resources, Inc. ("New West"), and New Corp Resources
Electric Cooperative, Inc. ("New Corp"), all wholly owned subsidiaries.
Effective September 1, 1999, McCulloch Electric Cooperative, Inc. ("McCulloch")
merged into and became an operating division of the Cooperative (See Note 3).
McCulloch's operations subsequent to the merger are included the consolidated
financial statements.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of the Cooperative's consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts in the consolidated financial statements. Actual results could differ
from those estimates.
Utility Plant
Utility plant is stated at the original cost of construction, including the cost
of contracted services, direct labor, materials, and similar overhead items.
Maintenance and repairs and the replacement and renewal of items determined to
be less than units of property are charged to operations as incurred.
For replacements or removals, the original cost plus removal cost less salvage
value is charged to accumulated depreciation. The cost of replacements and
renewals is added to utility plant.
Contributions in aid of construction are credited to the applicable utility
plant accounts.
The Cooperative has capitalized, as a part of utility plant, the cost of
borrowed funds used for financing construction. Capitalized interest for the
years ended March 31, 1998, 1999 and 2000 and the six months ended September 30,
1999 and 2000 was $343,000, $130,000, $89,000, $22,000 and $88,000,
respectively. The rate used for interest charged to construction is a variable
rate equal to the rate on the short-term line of credit with National Rural
Utilities Cooperative Finance Corporation ("CFC").
<PAGE>
Depreciation
Depreciation is computed on a straight-line basis at annual composite rates as
follows:
Transmission plant 3.0 - 10.0%
Distribution plant 3.1%
General plant:
Structure and improvements 2.5%
Transportation 12.0 - 17.0%
Computer equipment 14.3 - 20.0%
Other 4.8 - 6.0%
Nonutility plant 6.7 - 14.3%
Materials and Supplies
The Cooperative maintains substantially all of its materials and supplies
pursuant to an inventory outsourcing arrangement. As of March 31, 1999 and 2000
and September 30, 2000, the Cooperative maintained only a minimal amount of
materials and supplies that are utilized for routine maintenance.
Nonutility Property and Investments
Investments in patronage capital credits of associated organizations are
accounted for under the cost method. Patronage capital from associated
organizations is recorded when allocated at the stated amount of the
certificate. For the years ended March 31, 1998, 1999 and 2000 and the six
months ended September 30, 1999 and 2000, patronage capital from associated
organizations was $590,000, $713,000 $692,000, $689,000 and $814,000,
respectively, and is included in other operating revenues.
Prior to September 30, 1997, New West owned a 32.45% common stock investment in
an affiliate. Effective September 30, 1997, the affiliate merged with another
entity and New West's ownership was diluted to 18.6%. Prior to September 30,
1997, the Cooperative utilized the equity method of accounting to record its
proportionate share of the affiliate's results of operations and recorded a loss
of $2,378,000 for the year ended March 31, 1998. Subsequent to September 30,
1997, the Cooperative utilized the cost method to account for its investment in
affiliate. Effective August 19, 1999, the affiliate merged again with another
entity and the affiliate common stock was effectively canceled. As a result of
the common stock cancellation, the Cooperative wrote-off the $3,344,000
investment in affiliate for the year ended March 31, 2000.
Cash and Cash Equivalents
The Cooperative considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Allowance for Doubtful Accounts
The Cooperative provides allowances for doubtful accounts receivable that are
estimated to be uncollectible. As of March 31, 1999 and 2000 and September 30,
2000, the allowance for doubtful accounts was $200,000, $202,000 and $125,000,
respectively. Bad debt expense for the years ended March 31, 1998, 1999 and 2000
and the six months ended September 30, 1999 and 2000 was $115,000, $243,000,
$247,000, $52,000 and $72,000, respectively.
Deferred Charges
Deferred charges are primarily assets that are expected to benefit future
periods and certain costs that, for ratemaking purposes, are recorded as
deferred charges and amortized over periods allowed by regulatory authorities.
For the years ended March 31, 1998, 1999 and 2000 and the six months ended
September 30, 1999 and 2000, amortization expense related to these assets was
approximately $359,000, $300,000 $300,000, $150,000 and $150,000, respectively.
<PAGE>
Equities and Margins
The Cooperative's nonoperating margins are not allocated. Operating gains
increase patronage capital and losses are charged to available unallocated
nonoperating margins.
For the years ended March 31, 1999 and 2000 and the six months ended September
30, 2000, in accordance with the Cooperative's Conversion Plan, the Cooperative
repurchased certain members' patronage capital credit balances aggregating
approximately $70,000 $1,590,000, $619,000, respectively, at a discounted cash
price of $41,000, $989,000 and $411,000, respectively. The difference was
credited to the Cooperative's equity accounts. As of September 30, 2000, the
Cooperative's equity retirement payable balance was $411,000.
For the year ended March 31, 2000 and the six months ended September 30, 2000,
in accordance with the Cooperative's Conversion Plan, the Cooperative
repurchased certain members' patronage capital credit balances aggregating
$5,611,000 and $2,329,000, respectively, by issuing electric credits of
$5,611,000 and $2,329,000, respectively, to be ratably applied to the members'
electric bills over a 24-month period. As of March 31, 2000 and September 30,
2000, the balance of the equity redemption credits was $2,685,000 and
$3,123,000, respectively, and will be substantially amortized over next twelve
months.
Accounting for the Effects of Regulations
The rates charged by the Cooperative are regulated by its Board of Directors.
The Cooperative prepares its financial statements in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 71,
"Accounting for the Effects of Certain Types of Regulations". SFAS No. 71
requires a cost based, rate-regulated enterprise to reflect the impact of
regulatory decisions in its financial statements. In certain circumstances, SFAS
No. 71 requires that certain costs and/or obligations be reflected in a deferral
account on the balance sheet and not reflected in the statement of income or
loss until matching revenues are recognized. It is the Cooperative's policy to
assess the recoverability of costs recognized as regulatory assets and the
Cooperative's ability to continue to account for its activities in accordance
with SFAS No. 71, based on each regulatory action and the criteria set forth in
SFAS No. 71.
Electric Revenues
The Cooperative records electric revenues based on billing cycles which may not
correspond with month-end. As of March 31, 1998, 1999 and 2000 and September 30,
1999 and 2000, the estimated unbilled electric revenues were approximately
$1,486,000, $1,295,000 $1,329,000, $1,368,000 and $1,985,000, respectively.
Purchased Power Costs Subject to Refund
The Cooperative's tariffs for electric service include power cost recovery
clauses under which electric rates charged to customers are adjusted to reflect
actual power costs incurred. As of March 31, 1999 and 2000 and September 30,
2000, the Cooperative had purchased power cost subject to refund of $357,000,
$2,546,000 and $3,805,000, respectively.
Income Taxes
The Cooperative and New Corp are tax-exempt organizations under Internal Revenue
Code Section 501(c)(12).
Energy, CapStar, and New West are taxable organizations for Internal Revenue
purposes and file separate federal income tax returns. For the three years ended
March 31, 2000, Energy, CapStar and New West have incurred no tax liability.
At March 31, 2000, New West had an estimated $17,400,000 net operating loss
carryforward and a $4,000,000 capital loss carryover that can be used in future
years to reduce taxable income. However, as a result of unfavorable earnings
history, the benefit of these net operating losses has not been recognized.
2. CORPORATE RESTRUCTURING
On October 20, 1998, the Cooperative's members adopted a Conversion Plan to
reorganize the Cooperative from a member-owned electric cooperative to a
shareholder-owned electric utility. The Conversion Plan granted broad powers to
the Cooperative's Board of Directors, without further action of the membership,
to engage in all transactions necessary to implement the Conversion Plan. Such
powers include, among other things, the ability to form and capitalize new
entities, transfer and/or sell assets, and purchase interests of the members and
holders of Cooperative's equity accounts.
In connection with the Conversion Plan, effective January 1, 1999, Energy was
formed as a subsidiary of the Cooperative and substantially all of the
Cooperative's operational activities were transferred to Energy. Under the
Conversion Plan, the Cooperative was to continue in existence and was to
continue to provide electricity to its members until such time as the Board of
Directors, at its option and without further approval or action of its members,
elected to take one of the following actions:
o Dissolve and liquidate the Cooperative and distribute the Energy common
stock to the Cooperative's members and holders of equity accounts, pursuant
to a formula, and become a shareholder-owned electric utility;
o Unwind the transaction by reacquiring the Cooperative's assets from Energy
and return the Energy common stock and remain a member-owned electric
cooperative; or
o Retain the share of Energy common stock and operate in a parent-subsidiary
relationship indefinitely.
Energy is in the process of registering shares of its common stock with the U.S.
Securities and Exchange Commission so that they may be distributed to the
Cooperative's members and holders of equity accounts.
Energy's Articles of Incorporation provide that any shareholder or affiliate of
a shareholder holding in excess of 5% of Energy's outstanding common stock will
have its voting rights for the shares in excess of 5% reduced to 1/100 per
share.
In conjunction with the Conversion Plan, during the year ended March 31, 2000
and the six months ended September 30, 2000, the Cooperative retired equity
accounts aggregating $7,196,000 and $2,948,000, respectively, at a discounted
cash price of $1,070,000 and $411,000, respectively, and by issuing equity
redemption electric credits of $5,611,000 and $2,329,000, respectively, to be
ratably applied to members' electric bills applied over a 24-month period. As of
September 30, 2000, the Cooperative's equity retirement payable account balance
was $411,000 and, as of March 31, 2000 and September 30, 2000, the unamortized
balance of equity redemption credits was $2,685,000 and $3,123,000,
respectively.
3. ACQUISITION
On August 16, 1999, the members of McCulloch, located in Brady, Texas, approved
a resolution to merge with and become an operating division of the Cooperative
effective September 1, 1999. The merger was accounted for utilizing the purchase
method of accounting. As of March 31 and September 30, 2000, the McCulloch
acquisition cost was $367,000 and $373,000, respectively.
The following is unaudited financial information for McCulloch as of August 31,
1999 and the results of its operations for the seven months ended March 31, 2000
(in thousands):
Net utility plant $14,606
Total assets 15,498
Equity and margins 5,753
Operating revenue 3,150
Operating income 38
Net income 127
4. PROPOSED CITIZENS ACQUISITIONS
On February 11, 2000, the Cooperative, the Company and Citizens Communications
Company, formerly Citizens Utilities Company ("Citizens"), a publicly-owned
utility corporation, entered into Purchase and Sale Agreements (the
"Agreements") for Citizens' electric utility businesses in Arizona and Vermont
for $210 million and $38 million, respectively. The Agreements provide for
adjustments to the purchase prices for certain activities occurring after
September 30, 1999, and these adjustments are anticipated to add approximately
$35 million and $4 million to the purchase price for the Arizona and Vermont
businesses, respectively, through December 31, 2000.
The Company has delivered to Citizens irrevocable letters of credit as earnest
money deposits under the Arizona and Vermont Agreements in the amount of
$9,550,000 and $1,900,000, respectively. These letters of credit are not
reflected on the accompanying consolidated balance sheets as of March 31 and
September 30, 2000 as no amounts have yet been drawn down under the terms of the
letters of credit.
As of March 31 and September 30, 2000, the Cooperative has incurred Citizens
acquisition costs of $601,000 and $1,535,000, respectively, primarily related to
legal and administrative costs. These costs have been recorded on the balance
sheet as investment in proposed acquisition. Management estimates that the total
legal and administrative costs for the Citizens acquisitions will be
approximately $3 million.
In the event the Agreements are terminated due to the Company's inability to
fulfill its commitments under the Agreements, Citizens has the right to present
the letters of credit for full payment. In such an event, the related Citizens
acquisition costs and the unrefunded earnest money deposits would be immediately
charged against future operations.
The Company has obtained a commitment from the National Cooperative Services
Corporation ("NCSC") to provide debt financing in the amount of $191 million
(plus an addition $37 million for subsequent plant additions) for the
acquisition of the Arizona business. Management is currently engaged in
discussions with Citizens regarding financing for the remainder of the purchase
price. These discussions are currently ongoing and there can be no assurance
that the Company will be successful in obtaining the required financing on terms
suitable to the Company.
To date, no financing commitment has been obtained for the acquisition of the
Vermont business. The Vermont Agreement provides that Citizens may terminate the
Agreement if the Company does not obtain a financing commitment by May 15, 2000.
Citizens, pursuant to the specific terms of the Vermont Agreement, extended this
deadline to August 14, 2000, but it has not formally extended the deadline
beyond that date. It has, however, indicated verbally to the Company that it
will not exercise its right to terminate the Vermont Agreement so long as it
believes that the Company is working in good faith to close the Arizona
Agreement.
The Company has encountered difficulties in obtaining additional financing
commitments for the acquisition of the Arizona business. One reason for this has
been the rise in the level of interest rates since the Arizona Agreement was
signed. Another has been the change in the conditions of the wholesale power
market for the southwestern United States that began in the summer of 2000.
Citizens has experienced an unexpected and unprecedented increase in the price
of the wholesale power it purchases in Arizona. This increase was in excess of
$50 million in 2000 and Citizens has not been allowed to recover these increased
costs to date. Citizens has requested approval from the Arizona regulatory
authorities of a plan to recover these cost increases over a period of three
years. There is no assurance, however, that the Arizona regulatory authorities
will approve Citizens' proposal or that, if approved, the proposal will in fact
eliminate the problem for the future if the current conditions in the wholesale
power market continue.
Citizens' plan to recover the excess power costs from 2000 over future periods
may effectively preclude the Company's ability to raise rates to Arizona
customers in the early years after the acquisition of the Arizona business is
consummated. Due to the uncertainties involving current and future wholesale
power costs and the achievability of future rate increases, no potential
financing source contacted by the Company to date has been willing to provide a
commitment letter without assurances that these issues have been favorably
resolved.
Under the terms of the Arizona Agreement, closing on the acquisition of the
Arizona business is coupled with closing on the acquisition of the Vermont
business. As a result, due to the uncertainties in Arizona, no potential
financing source has been willing to provide a commitment for Vermont until the
problems in Arizona are resolved.
The Company believes that it has sufficient defenses under the Arizona Agreement
(including the fact that the under recovered power cost problem is a "material
adverse circumstance" under the Agreement) to prevent Citizens from taking its
deposit in the event that the Arizona Agreement is terminated. However, the
Company would nevertheless like to find a way to complete the acquisition and is
currently working diligently to find an acceptable solution to the impediments
to closing. Citizens has also indicated to the Company that it wants the Company
to focus on closing the acquisition of the Arizona business and that it will
work with the Company to find an acceptable way to close the acquisition of the
Vermont business once the problems have been resolved with respect to the
Arizona business.
Both the closings of the Arizona and Vermont businesses are subject to
regulatory approval. No filing to date has been made with the Vermont regulatory
authorities because no financing commitment is in place. The Company and
Citizens initiated the regulatory approval process in Arizona but the proceeding
has been delayed pending completion of a comprehensive financing for the Arizona
business. The closings under the Agreements will not occur until all state and
federal regulatory approvals have been obtained, which could take as much as 12
months from the time the filing with the regulatory authorities are made. When
approved, the transactions will be accounted for utilizing the purchase method
of accounting.
Since the Citizens' acquisitions have not been consummated, none of Citizens'
operations are included in the accompanying consolidated financial statements.
The following is unaudited financial information for the Citizens' acquisitions
as of and for the year ended December 31, 1999 (in thousands):
Arizona Vermont
Net utility plant $173,005 $39,889
Operating revenue 98,841 26,574
Operating income (loss) 10,837 (808)
Net income 7,056 125
5. OTHER PROPOSED ACQUISITIONS
Lamar County Electric Cooperative, Inc.
On December 14, 1999, the members of Lamar County Electric Cooperative, Inc.
("Lamar"), located in Paris, Texas, approved a resolution to merge with and
become an operating division of the Cooperative. The Lamar merger is presently
suspended pending the resolution of certain legal challenges. The merger will be
accounted for utilizing the purchase method of accounting. As of March 31 and
September 30, 2000, the Lamar deferred acquisition costs were $30,000 and
$278,000, respectively. As the Lamar merger has not been finalized, none of
Lamar's operations are included in the accompanying consolidated financial
statements.
The following is unaudited financial information for Lamar as of and for
the year ended December 31, 1999 (in thousands):
Net utility plant $29,980
Total assets 33,398
Equity and margins 11,518
Operating revenue 9,751
Operating income (loss) (225)
Net income (loss) (581)
<PAGE>
Multimedia Development Corporation
On February 7, 2000, New West executed an agreement to acquire all of the stock
of Multimedia Development Corporation ("MDC"), a wireless telecommunication
entity with operations in New Mexico, for $12,500,000, subject to certain
working capital adjustments. The acquisition will be financed through additional
long-term borrowings that the Cooperative is presently attempting to secure. As
of March 31 and September 30, 2000, the MDC acquisition cost was $725,000 and
$993,000, respectively, associated with the MDC acquisitions. As the closing
date for the MDC acquisition has not been finalized, none of MDC operations are
included in the accompanying consolidated financial statements.
The following is unaudited financial information for MDC as of and for the year
ended December 31, 1999 (in thousands):
Net plant assets $6,023
Total assets 6,764
Stockholders' deficit (6,218)
Operating revenue 3,510
Operating income (loss) (2,234)
Net income (loss) (1,393)
6. UTILITY PLANT
Utility plant as of March 31, 1999 and 2000 and September 30, 2000 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1999 2000 2000
--------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
Transmission facilities $ 59,143 $ 59,824 $ 59,824
Distribution facilities 138,390 163,048 168,574
General facilities 11,038 12,370 12,407
--------- --------- ----------
208,571 235,242 240,805
Less accumulated depreciation 54,859 68,539 73,113
--------- --------- ----------
Total utility plant in service, net 153,712 166,703 167,692
Construction work in progress 1,855 2,834 2,884
---------- ---------- ----------
$155,567 $169,537 $170,576
======== ======== ========
</TABLE>
All utility plant assets are pledged to secure debt and capital lease
obligations.
<PAGE>
7. NONUTILITY PROPERTY AND INVESTMENTS
Nonutility property and investments as of March 31, 2000 and 1999 and September
30, 2000 consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1999 2000 2000
------- ------- -------
(Unaudited)
<S> <C> <C> <C>
Nonutility property:
Real estate $ 2,039 $ 2,255 $ 2,242
Oil and gas interests 2,365 3,405 3,605
Telecommunications interest - 725 993
Furniture, fixtures, and other 10 10 10
--------- -------- --------
4,414 6,395 6,850
Less accumulated depreciation and depletion 757 823 854
-------- -------- --------
Total nonutility property 3,657 5,572 5,996
------- ------- -------
Investments in associated organizations:
CFC capital term certificates 5,981 6,274 6,375
CFC patronage capital 2,147 2,201 2,293
Texas Electric Cooperatives, Inc.
patronage capital and bonds 602 846 828
Other 50 133 128
-------- -------- --------
Total investments in associated organizations 8,780 9,454 9,624
-------- -------- --------
Investment in affiliate 3,344 - -
Investment in United Fuel and Energy Corporation - - 300
Notes receivable - United Fuels and Energy Corporation - - 13,917
Other investments 326 764 832
------- ------- -------
$16,107 $15,790 $30,669
======= ======= =======
</TABLE>
8. DEFERRED CHARGES
Deferred charges as of March 31, 1999 and 2000 and September 30, 2000 consisted
of the following (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1999 2000 2000
------ ------ -------
(Unaudited)
<S> <C> <C> <C>
Capital lease sinking fund $2,386 4,025 $4,703
Capital lease acquisition cost, net of amortization 1,860 1,560 1,375
Deferred acquisition costs - 398 651
Stock conversion costs 220 559 817
Other 84 509 448
-------- ------- -------
$4,550 $7,051 $7,994
====== ====== ======
</TABLE>
<PAGE>
9. MORTGAGE NOTES
Long-term debt as of March 31, 1999 and 2000 and September 30, 2000 consisted
of the following (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1999 2000 2000
-------- --------- ---------
<S> <C> <C> <C>
CFC notes: (Unaudited)
Variable rate $53,764 $ 69,783 $ 82,533
Fixed rate notes 41,599 40,975 40,552
-------- -------- ---------
95,363 110,758 123,085
Other variable rate notes - 6,271 -
------------ --------- -------------
95,363 117,029 123,085
Less current maturities 1,965 3,059 2,965
-------- --------- ---------
$93,398 $113,970 $120,120
======= ======== ========
</TABLE>
The CFC notes have been issued in conjunction with a Second Restated Mortgage
and Security Agreement, dated October 24, 1995 ("Loan Agreement"). The Loan
Agreement contains certain provisions prohibiting the incurrence or guaranty of
other secured indebtedness. Under the Loan Agreement, the Cooperative may elect
to pay interest on a fixed or variable interest rate basis, as defined. As of
March 31 and September 30, 2000, the Cooperative was in compliance with the Loan
Agreement.
On June 23, 2000, the Cooperative increased its long-term borrowing capacity
under the Loan Agreement by $21 millions, of which $6 million was used to
refinance certain McCulloch long-term debt, as discussed below.
As of March 31, 1999 and 2000 and September 30, 2000, the interest rate on the
CFC variable rate notes was 5.75%, 7.35% and 8.10%, respectively, and the
weighted average interest rate on the CFC fixed rate notes was 5.99%.
Substantially all of the CFC fixed rate notes are subject to interest rate
repricing at the end of various periods not to exceed four years.
In the event the Cooperative is converted from a member-owned tax exempt
cooperative to a taxable utility corporation, the CFC notes may be subject to
refinancing. Such refinancing may be on less favorable terms and conditions than
the existing CFC Loan Agreement.
Other variable rate notes pertain to McCulloch and bear interest ranging from
2%-7.55%. As of March 31, 2000, the weighted average interest rate on the
McCulloch long-term debt was 4.24%. On May 16, 2000, substantially all of
McCulloch's long-term debt was refinanced resulting in a gain from early
extinguishment of debt of approximately $950,000 which will be reported as an
extraordinary item in fiscal 2001. The loans were paid-off from proceeds
received from a 6-month, $6 million revolving line of credit agreement with CFC,
dated May 16, 2000, with interest payable at CFC prime rate plus 1%.
Annual maturities of long-term debt as of March 31, 2000 are as follows (in
thousands):
2001 $ 3,059
2002 3,030
2003 3,144
2004 3,264
2005 3,394
Thereafter 101,138
--------
$117,029
Substantially all of the Cooperative's long-term notes have maturity dates
between 2020 and 2033.
As discussed in Notes 4 and 5, the Cooperative is attempting to secure
additional long-term financing in conjunction with the proposed $248 million
acquisition of certain electric utility assets of Citizens and the proposed
$12.5 million acquisition of MDC.
10. CAPITAL LEASE OBLIGATIONS
In connection with the financing, construction, and utilization of its
transmission line, the Cooperative has entered into agreements with Southwestern
Public Service Company ("SPS"), Metropolitan Life Insurance Company ("Met
Life"), and John Hancock Leasing Corporation ("John Hancock"). The John Hancock
lease was paid in full during the year ended March 31, 2000.
The substance of the remaining agreements includes financing arrangements with
Met Life and a power transmission arrangement with SPS. These agreements qualify
as capital leases, and as a result, the transmission line and substation assets
and associated capital lease obligations are reflected in the Cooperative's
consolidated financial statements.
The costs related to the transmission line and substation assets are being
recovered from members through power cost billings over a ten-year period.
Consistent with this ratemaking treatment, the transmission line and substation
assets are being amortized over ten years. Principal payments on capital lease
obligation for the years ended March 31, 1998, 1999 and 2000 was approximately
$4,173,000, $4,571,000 and $4,553,000, respectively. The corresponding
amortization of capital lease obligations was credited to accumulated
depreciation and amortization accounts for the transmission facilities
consistent with ratemaking treatment.
Interest on the capital lease obligations for the years ended March 31, 1998,
1999 and 2000 and the six months ended September 30, 1999 and 2000 was
approximately $3,200,000, $2,837,000, $2,400,000, $1,276,000 and $1,049,000,
respectively, and is classified as purchased power cost consistent with
ratemaking treatment.
Required principal payments for capital lease obligations are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended Transmission
March 31, Facilities Other Total
----------- ------------ ------- -------
<S> <C> <C> <C> <C>
2001 $ 4,490 $ 58 $ 4,548
2002 4,800 66 4,866
2003 5,132 28 5,160
2004 16,324 10 16,334
2005 - 3 3
------- ----- ----------
$30,746 $165 $30,911
======= ==== =======
</TABLE>
11. LINES OF CREDIT
As of March 31, 2000, the Cooperative has secured revolving lines of credit with
CFC aggregating $28 million, with interest payable at CFC prime rate plus 1% and
secured by utility plant assets. As of March 31, 1999 and 2000 and September 30,
2000, the outstanding balance of the lines of credit was approximately
$21,774,000, $26,179,000 and $25,742,000, respectively, with interest rates of
5.90%, 7.55% and 8.30%, respectively. The lines of credit are renewable
annually.
For the years ended March 31, 1998, 1999 and 2000 and the six months ended
September 30, 1999 and 2000, the weighted average interest rate on short-term
borrowings computed on a daily basis was 6.70%, 6.41%, 6.71%, 6.25% and 8.05%,
respectively, and interest expense on short-term borrowings was $1,348,000,
$1,425,000, $1,620,000, $715,000 and $1,092,000, respectively.
Subsequent to March 31, 2000, the Cooperative executed a 6-month, $6 million
revolving line of credit agreement with CFC, dated May 16, 2000, with interest
payable at CFC prime rate plus 1%. The proceeds were used to pay-off existing
McCulloch long-term debt.
In the event the Cooperative is converted from a member-owned tax exempt
cooperative to a taxable utility corporation, the Cooperative's lines of credit
may be subject to refinancing. Such refinancing may be on less favorable terms
and conditions than the existing CFC Line of Credit Agreements.
12. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities at March 31, 1999 and 2000 and September
30, 2000 consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1999 2000 2000
------ ------ ------
(Unaudited)
<S> <C> <C> <C>
Accrued taxes $291 $326 $1,000
Accrued interest 449 622 731
Accrued payroll and benefits 600 579 702
Accrued insurance claims - 203 -
Accrued other 100 58 -
Accrued retirement benefits 174 62 62
Customer deposits and prepayments 164 272 347
------- ------- -------
$1,778 $2,122 $2,842
====== ====== ======
</TABLE>
13. PENSION PLAN AND BENEFITS TO RETIREES
Pension Plan
The Cooperative has a defined contribution plan available to substantially all
employees who have completed one year of service and attained age 21. The cost
to provide the benefit for the years ended March 31, 1998, 1999 and 2000 and the
six months ended September 30, 1999 and 2000 totaled approximately $358,000,
$374,000, $385,000, $182,000 and $200,000, respectively.
The Cooperative provides continued major medical and life insurance coverage to
retired employees and their dependents. The cost to maintain such benefits for
the years ended March 31, 1998, 1999 and 2000 and the six months ended September
30, 1999 and 2000, totaled $168,000, $160,000, $167,000, $79,000 and $100,000,
respectively.
Postretirement Benefits Other Than Pensions
The funded status of the plan and the amounts recognized on the balance sheet as
of March 31, 1999 and 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 2000
------ ------
<S> <C> <C>
Accumulated Postretirement Benefit Obligation (APBO)-
Actives not yet eligible $1,366 $1,280
Actives fully eligible 216 181
Retirees and dependents 1,864 1,430
------- -------
Total APBO 3,446 2,891
Plan assets at fair value - -
--------- ----------
Accrued postretirement benefit liability 3,446 2,891
Unrecognized loss from past experience different
from that assumed and from changes in assumptions (997) (352)
------- -------
Accrued postretirement benefit cost $2,449 $2,539
====== ======
</TABLE>
Accrued postretirement benefit cost as of September 30, 2000 was estimated to be
approximately $2,584,000.
<PAGE>
Net periodic postretirement benefit costs for the years ended March 31, 1998,
1999 and 2000 are as follows (in thousands):
<TABLE>
<S> <C> <C> <C>
1998 1999 2000
----- ----- ---------
Service Cost $ 77 $105 $114
Interest Cost 208 217 216
---- ---- ----
$285 $322 $330
==== ==== ====
</TABLE>
The assumption used in the calculation of the costs presented above were as
follows:
Discount rate 7.0% 6.5% 7.75%
==== ==== =====
Health Care Cost Trend Rates:
Medical and dental - 7.5% in 1998, grading
down 0.5% per year to an ultimate rate of 5% for
all years beginning after 2003
Increasing the assumed healthcare cost trend rates by one percentage point in
1998, 1999 and 2000 would increase the APBO $418,000, $499,000, and $384,000,
respectively, and the aggregate of the service and interest cost components by
$43,000, $51,000 and $47,000, respectively.
No return on plan assets was assumed in the calculation as the Cooperative holds
no specified plan assets.
14. DEFERRED CREDITS
Deferred credits at March 31, 1999 and 2000 and September 30, 2000 consisted of
the following (in thousands):
<TABLE>
<S> <C> <C> <C>
March 31, September 30,
1999 2000 2000
------ ------ ------
(Unaudited)
Accrued retirement benefits $2,449 $2,539 $2,584
Deferred rent income 207 132 94
Deferred executive compensation 108 649 666
Unclaimed capital credits 199 150 159
Other 47 127 100
------- ------- --------
$3,010 $3,597 $3,603
====== ====== ======
</TABLE>
15. SALE OF GAS GATHERING INVESTMENTS
Effective July 31, 1998, New West sold its gas gathering subsidiaries for cash
aggregating $1,640,000 and recognized a gain on the sale of $819,000 for the
year ended March 31, 1999.
The following is condensed information for the years ended March 31, 1998 and
1999 relating to the sold subsidiaries (in thousands):
1998 1999
------- -------
Operating revenue $5,418 $1,912
Net income (loss) (137) (283)
16. MAJOR CUSTOMERS
For the years ended March 31, 1998, 1999 and 2000 and the six months ended
September 30, 1999 and 2000, the Cooperative and its subsidiaries had no
customer that accounted for more than 10% of operating revenues.
17. REGULATORY MATTERS
Under the Public Regulatory Act of 1995 (the "Act"), the Cooperative has elected
not to operate under the regulatory authority of the Public Utility Commission
of Texas. In accordance with the Act, any changes in the Cooperative's electric
rates must be approved by its Board of Directors.
18. ELECTRIC DEREGULATION
On May 27, 1999, the Texas legislature passed a bill relating to the
restructuring of the electric utility industry in Texas. The bill, among other
things, freezes rates for most of the investor-owned utilities until retail
competition begins on January 1, 2002, then mandates a 6% rate decrease for
residential and small commercial customers. Rates will be capped for five years.
Municipally owned utilities and cooperatives may elect, but are not required, to
offer retail customer choice on or after January 1, 2002.
Under the new law, electric cooperatives electing to participate in customer
choice shall have the right to offer electric energy and related services at
unregulated prices directly to retail customers who have customer choice without
regard to geographical location. Electric cooperatives electing not to
participate in customer choice will not be permitted to offer electric energy at
unregulated prices directly to retail customers outside its certified retail
service area.
At the present time, management has made no decision as to whether the
Cooperative will offer customer choice to its retail members and has not
completed its assessment of the financial impact of the new legislation on the
Cooperative's future operations.
19. RELATED PARTY ACTIVITY
On February 22, 1999, New West and its seven-member board of directors entered
into a Royalty Pool Agreement whereby a total of 15% of New West's oil and gas
royalty interests were sold at cost to the directors. Under the Agreement,
unsecured, interest bearing notes were executed by the seven directors payable
from their share of oil and gas royalty income. As of March 31 and September 30,
2000, the balance of the notes receivable due from New West directors was
$379,000 and $409,000. For the years ended March 31, 1999 and 2000 and the six
months ended September 30, 2000, the directors' share of oil and gas royalty
income aggregated $2,000, $51,000 and $38,000, respectively. Four of New West
directors also serve as directors for the Cooperative.
In June 1999, the Cooperative entered into a Achievement Based Compensation
Contract (the "ABC Contract") with its executive officers, directors and
advisory directors, a total of 16 individuals. In accordance with the ABC
Contract, the participants are eligible to participate in a compensation plan
equal to 1.5% of the total assets added to the Cooperative or Energy by merger
or acquisition since 1990. The ABC Contract expires in 2009. During the year
ended March 31, 2000, the total compensation paid to the ABC Contract
participants was $513,000, including $382,000 of deferred compensation.
20. COMMITMENTS AND CONTINGENCIES
The Cooperative purchases all of its electric power pursuant to various long and
short-term wholesale electric power contracts. Management believes that in the
event such contracts are not renewed, the Cooperative's operations will not be
severely affected as new contracts can be secured at competitive rates with
other electric power providers.
The Cooperative is involved in various litigation matters, none of which is
expected to have a material impact on the financial condition of the
Cooperative.
As of March 31, 2000, New West agreed to make loans totaling $15 million to two
fuel and lubricant subsidiaries of United Fuel and Energy Corporation
("United"), subject to securing adequate funding for the $15 million loan. On
July 12, 2000, New West entered into and the Cooperative guaranteed, with CFC
permission, a $15 million, three-year loan agreement with a bank. The bank loan
agreement is payable monthly based on a fifteen-year amortization with interest
a Wall Street Journal ("WSJ") prime rate plus 1%. Simultaneously, New West
loaned $15 million to United with terms and conditions substantially identical
to the bank loan agreement, interest at WSJ prime rate plus 1.25%, and secured
by United's stock. At closing, New West acquired a 10% interest in United for
$300,000 and may acquire an additional 10% for $300,000 based on certain terms
and conditions.
As discussed in Note 4, as of March 31 and September 30, 2000, in connection
with the proposed Citizens acquisition, the Cooperative has outstanding
irrevocable letters of credit issued by the National Cooperative Services
Corporation ("NCSC"), an affiliate of CFC, and the Bank of America ("BA"). The
NCSC letter of credit is in the amount of $9,550,000, expires on April 30, 2001,
and is secured by the Cooperative's utility plant. The BA letter of credit is in
the amount of $1,900,000, expires on November 15, 2001, and is secured by a
$1,900,000 restricted cash investment, a certificate of deposit that matures on
November 15, 2001. Both letters of credit are payable to Citizens, subject to
the terms and conditions set forth in the Purchase and Sale Agreement.
In addition, the Cooperative is attempting to secure financing for the Citizens
and MDC acquisitions of $248 million and $12.5 million, respectively.
21. SEGMENT INFORMATION
The Cooperative has adopted FASB Statement No. 131, "Disclosures about
Segments of a Business Enterprise and Related Information". Substantially all of
the Cooperative's operations are conducted primarily in Texas and involve the
following business segments:
Utility - electric sales and various electric services; Other - oil and gas,
real estate and other investments; and,
Corporate - general corporate activities including cash and temporary cash
investments, various notes receivable, miscellaneous investments and
interest expense.
Business segment information as of and for the years ended March 31, 1998, 1999
and 2000 and for the six months ended September 30, 1999 and 2000 (unaudited)
follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
Utility Other Corporate Total
------- ----- --------- -----
Operating revenues
March 31, 1998 $53,402 $5,694 $590 $59,686
March 31, 1999 52,500 2,303 713 55,516
March 31, 2000 55,737 653 693 57,083
September 30, 1999 28,134 256 689 29,079
September 30, 2000 35,296 425 814 36,535
Net income (loss)
March 31, 1998 4,738 (3,086) (5,843) (4,191)
March 31, 1999 6,247 183 (6,043) 387
March 31, 2000 4,860 (3,585) (7,014) (5,739)
September 30, 1999 3,874 (3,501) (2,886) (2,513)
September 30, 2000 4,304 (12) (3,202) 1,090
Identifiable assets
March 31, 1998 171,659 7,646 2,150 181,455
March 31, 1999 172,643 6,995 2,345 181,983
March 31, 2000 189,732 5,569 5,580 200,881
September 30, 1999 189,680 4,239 2,828 196,747
September 30, 2000 184,387 6,292 31,342 222,071
Capital expenditures
March 31, 1998 9,950 1,845 - 11,795
March 31, 1999 10,540 1,104 - 11,644
March 31, 2000 8,954 1,973 - 10,927
September 30, 1999 5,440 620 - 6,060
September 30, 2000 5,986 756 - 6,742
Utility Other Corporate Total
------- ----- --------- -----
Depreciation and amortization
March 31, 1998 7,731 225 - 7,956
March 31, 1999 9,136 137 - 9,273
March 31, 2000 9,846 64 - 9,910
September 30, 1999 6,039 33 - 6,072
September 30, 2000 4,977 32 - 5,009
Interest expense, net
March 31, 1998 - - 6,576 6,576
March 31, 1999 - - 6,895 6,895
March 31, 2000 - - 7,932 7,932
September 30, 1999 - - 3,643 3,643
September 30, 2000 - - 5,104 5,104
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Estimated expenses in connection with the implementation of the
Conversion Plan and the public offering by the Company of the securities offered
hereunder are as follows:
Securities and Exchange Commission Filing Fee $ 12,615
NASD Filing Fee* 5,000
Blue Sky Fees and expenses 10,000
Nasdaq Application and Listing Fee* 55,000
Accounting Fees and Expenses* 50,000
Legal Fees and Expenses* 250,000
Printing* 250,000
Fees of Transfer Agents and Registrar* 5,000
Miscellaneous* 150,000
-------
Total $937,615
========
------------
*Estimated
Item 14. Indemnification of Officers and Directors
Section 2.02-1 of the Texas Business Corporation Act provides generally
and in pertinent part that a Texas corporation may indemnify its directors and
officers against expenses (if the person is found liable to the corporation or
on the basis that improper benefit was improperly received by the person) or
against expenses, judgments, fines and settlements (in all other cases) actually
and reasonably incurred by them in connection with any action, suit or
proceeding if, in connection with the matters in issue, they acted in good faith
and in a manner they reasonably believed to be in, or not opposed to, the best
interests of the corporation and k, in connection with any criminal suit or
proceeding, if in connection with the matters in issue, they had no reasonable
cause to believe their conduct was unlawful. Section 2.02-1 does not permit
indemnification when the person is found liable for willful or intentional
misconduct in the performance of his duty to the Corporation. Section 2.02-1
further permits a Texas corporation to grant to its directors and officers
additional rights of indemnification not inconsistent with the Texas Business
Corporation Act through bylaw provisions, agreements, votes of shareholders or
interested directors or otherwise, to purchase indemnity insurance on behalf of
such indemnifiable persons and to advance to such indemnifiable persons expenses
incurred in defending a suit or proceeding upon receipt of certain undertakings.
Article Nine of the Company's Articles of Incorporation provides that,
subject to certain exceptions, the Company shall indemnify, to the fullest
extent permitted by law, any person who is or was a director or executive
officer of the Company or any subsidiary, and may indemnify, subject to certain
exceptions and to the extent that the Board of Directors deems appropriate and
as set forth in the Bylaws or a resolution, any person who is or was a
non-executive officer, or employee or agent of the Company or any subsidiary or
who is or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including an employee benefit plan) against any and all
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement incurred by such person in connection with any civil, criminal,
administrative or investigative action, suit, proceeding or claim (including any
action by or in the right of the Company or a subsidiary) by reason of the fact
that such person is or was serving in such capacity. In addition, Article Nine
authorizes the Company to purchase insurance for itself or any person to whom
indemnification is or may be available against any liability asserted against
such person in, or arising out of, such person's status as director, officer,
employee or agent of the Company, any of its subsidiaries or another
corporation, partnership, joint venture, trust or other enterprise (including an
employee benefit plan) which such person is serving at the request of the
Company. Article Nine also authorizes the Company, to the extent that the Board
of Directors deems appropriate, to make advances of expenses to an indemnifiable
person upon the receipt by the Company of a written undertaking by such person
to repay any amounts advanced in the event that it is ultimately determined that
such person is not entitled to such indemnification.
The Bylaws of the Registrant provide that the Registrant shall indemnify its
directors and officers against expenses, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding
arising by reason of such person being or having been a director or officer
expenses incurred in defending any such proceeding to the fullest extent
permissible under California law. The Bylaws also provide that the Registrant
may indemnify its employees and agents for such expenses by resolution of the
Board of Directors.
Item 15. Recent Sales of Unregistered Securities
None
Item 16. Exhibits
<TABLE>
<S> <C>
Exhibit No. Item
Exhibit 3.1 Articles of Incorporation (2)
Exhibit 3.2 Bylaws (2)
Exhibit 5.1 Opinion of Ronald W. Lyon (2)
Exhibit 10.1 Second Amendment to Transaction Documents dated November 9, 1994, between Southwestern Public Service
Company, the Cooperative, et. al. (2)
Exhibit 10.2 Restated Mortgage and Security Agreement dated September 21, 1988, made by and between the Cooperative and
National Rural Utilities Cooperative Finance Corporation (2)
Exhibit 10.3 Second Restated Mortgage and Security Agreement dated October 24, 1995, made by and between the
Cooperative and National Rural Utilities Cooperative Finance Corporation (2)
Exhibit 10.4 Loan Agreement dated October, 1995, between the Cooperative and National Rural Utilities Cooperative
Finance Corporation (1)
Exhibit 10.5 First Amendment to Loan Agreement dated as of October 28, 1997, between the Cooperative and National Rural
Utilities Cooperative Finance Corporation (1)
Exhibit 10.6 Loan Agreement dated as of June 23, 2000, between the Cooperative and National Rural
Utilities Cooperative Finance Corporation and amendment. (1)
Exhibit 10.7 Loan Agreement dated December 13, 1994, between the Cooperative and National Rural Utilities Cooperative
Finance Corporation (1)
Exhibit 10.8 Loan Agreement dated March 30, 1993 between the Cooperative and National Rural Utilities Cooperative
Finance Corporation (1)
Exhibit 10.9 Loan Agreement dated March 10, 1992 between the Cooperative and National Rural Utilities Cooperative
Finance Corporation (2)
Exhibit 10.10 Loan Agreement dated May 17, 1990, between the Cooperative and National Rural Utilities Cooperative
Finance Corporation (2)
Exhibit 10.11 Loan Agreement dated March 22, 1990 between the Cooperative and National Rural Utilities Cooperative
Finance Corporation (2)
Exhibit 10.12 Notice of Meeting Proxy Statement dated September 21, 1998 (2)
Exhibit 10.13 Irrevocable Letter of Credit dated April 30, 2001, in the amount of $9,550,000 for the benefit Citizens
Utilities Company (1)
Exhibit 10.14 Irrevocable Letter of Credit dated April 30, 2001, in the amount of $________ for the benefit Citizens
Utilities Company (2)
Exhibit 10.15 Purchase and Sale Agreement dated as of February 11, 2000 between the Company, the Cooperative and
Citizens Utilities Company regarding Arizona Electric. (2)
Exhibit 10.16 Purchase and Sale Agreement dated as of February 11, 2000 between the Company, the Cooperative and
Citizens Utilities Company regarding Vermont Electric. (2)
Exhibit 10.17 Power Sale Agreement dated June 7, 1999, between the Cooperative and Electric Clearinghouse, Inc. (1)
Exhibit 10.18 Wholesale Power Supply and Services Contract dated April 16, 1997 Between Texas New Mexico Power Company
and the Cooperative (2)
Exhibit 10.19 Southwestern Public Service Company Wholesale Full Requirements Service Rate Schedule with the Cooperative
(2)
Exhibit 10.20 Ordinance of the City of Greenville, Texas Granting to the Cooperative a franchise for the transmission
and distribution of electricity (2)
Exhibit 10.21 Ordinance of the City of Midland, Texas Granting to the Cooperative a franchise for the transmission and
distribution of electricity (2)
Exhibit 10.22 Ordinance of the City of Stanton, Texas Granting to the Cooperative a franchise for the transmission and
distribution of electricity (1)
Exhibit 10.23 Employment Contract between the Cooperative and David W. Pruitt (2)
Exhibit 10.24 Employment Contract between the Cooperative and John Parker (2)
Exhibit 10.25 Achievement Based Compensation Agreement dated August 28, 1994, between the Cooperative and the directors
(1)
Exhibit 10.26 Achievement Based Compensation Agreement dated October 27, 1992, between the Cooperative and the directors
(1)
Exhibit 10.27 The Cooperatives Supplemental Executive Deferred Compensation Retirement Plan (2)
Exhibit 10.28 Cap Rock Energy Corporation 2001 Stock Incentive Plan (2)
Exhibit 10.29 Cap Rock Energy Corporation 2001 Employee Stock Purchase Plan (2)
Exhibit 10.30 Equity & Membership Redemption Options (2)
Exhibit 10.31 Equity Redemption Options (2)
Exhibit 10.32 Employment Contract between the Cooperative and Ulen North (2)
Exhibit 10.33 Notice of Special meeting snd related Proxy Statement (2)
Exhibit 10.34 Loan Agreement dated March 30, 1993 between Cap Rock Electic Cooerative, Inc. and National Rural
Utilities Cooperative Finance Corporation, refinancing previous rates. (2)
Exhibit 10.35 Integrated Supply Agreement between Cap Rock Electric Cooperative, Inc. and Temple, Inc. (2)
Exhibit 23.1 Consent of Arthur Andersen LLP (1)
Exhibit 23.2 Consent of Ronald W. Lyon is contained in his opinion filed as Exhibit 5.1 to this registration statement.
Exhibit 27.1 Financial Data Schedule (1)
------------
(1) Filed herewith
(2) To be filed by amendment
</TABLE>
Item 28. Undertakings
The undersigned registrant hereby undertakes as follows:
(1) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
shares of the securities being registered, the small business issuer
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(2) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission declared it
effective.
(3) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-1 and authorizes this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Midland, Texas on December ___, 2000.
Cap Rock Energy Corporation
By: /s/ David W. Pruitt
--------------------------
David W. Pruitt, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David W. Pruitt and John D. Parker, and each for
them, his true and lawful attorney's-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (until revoked in writing), to sign any and all further
amendments to this Registration Statement (including post-effective amendments
or registration statements filed pursuant to Rule 462(b) relating to this
Registration Statement), and to file same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto such attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person thereby ratifying and confirming all
that said attorneys-in-fact and agents, and each of them, or their substitutes
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Signature Title Date
/s/ David W. Pruitt Chief Executive Officer December , 2000
--------------------------- -------------------
David W. Pruitt
/s/ John D. Parker Principal Accounting and December , 2000
--------------------------- -------------------
John D. Parker Financial Officer
/s/ Russell E. Jones Director December , 2000
--------------------------- -------------------
Russell E. Jones
/s/ Alfred J. Schwartz Director December , 2000
--------------------------- -------------------
Alfred J. Schwartz
/s/ Sammie D. Buchanan Director December , 2000
--------------------------- -------------------
Sammie D. Buchanan
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Jerry R. Hoelscher Director December , 2000
-------------------------- -------------------
Jerry R. Hoelscher
/s/ Floyd L. Ritchey Director December , 2000
--------------------------- -------------------
Floyd L. Ritchey
/s/ Michael D. Schaffner Director December , 2000
-------------------------- -------------------
Michael D. Schaffner
/s/ Newell W. Tate Director December , 2000
-------------------------- -------------------
Newell W. Tate
</TABLE>
