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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ........... to .............
COMMISSION FILE NUMBER 1-9891
HADSON CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 31-0679954
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2777 STEMMONS FREEWAY, SUITE 700, DALLAS, TEXAS 75207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 640-6800
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Junior Exercisable Automatically Convertible
Preferred Stock, Series B, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
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Aggregate market value of the voting stock held by non-affiliates of
the registrant based on closing prices as reported on the New York Stock
Exchange on March 10, 1995 was approximately: $20,344,514
25,710,483 shares of Common Stock, par value $.01 per share, were
outstanding as of March 10, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference.
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TABLE OF CONTENTS
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PART I
Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Financial Information about Industry Segments . . . . . . . . . . . . . . . . . . . . . . . . 3
Energy Products and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Operations of Unconsolidated Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Number of Persons Employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Natural Gas Gathering Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Transmission Facilities and Related Property . . . . . . . . . . . . . . . . . . . . . . . . . 13
Natural Gas Liquids Facilities and Related Property . . . . . . . . . . . . . . . . . . . . . 13
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Fixed Price Contract Dispute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Personal Injury Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Joint Venture Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Class Action Complaint.......................................................................... 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . 15
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . 24
Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Compliance with Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . 26
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Option Grants Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Options Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Employment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . 29
Security Ownership of Certain Beneficial Owners. . . . . . . . . . . . . . . . . . . . . . . . 29
Security Ownership of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Change in Control of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 31
Gas Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Voting Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Indemnification and Directors' and Officers' Insurance . . . . . . . . . . . . . . . . . . . 33
Company Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Parent Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Agreement with Elliot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
PART IV
Item 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL
STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 35
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PART I
ITEM 1. BUSINESS
GENERAL
Hadson Corporation, a Delaware corporation (the "Company"), is
engaged, through its consolidated subsidiaries, in the purchasing, marketing,
gathering, processing, storing and transporting of natural gas and natural gas
liquids ("NGLs"), as well as the marketing of related services.
The Company was incorporated in Ohio in 1964 as Hadson Ohio Oil
Company. In 1980, it effected a change of domicile to the state of Delaware,
and in 1986 its name was changed to Hadson Corporation. The Company's
corporate headquarters are located at 2777 Stemmons Freeway, Suite 700, Dallas,
Texas 75207, and the Company's telephone number is (214) 640-6800.
RECENT DEVELOPMENTS
Purchase of Joint Venture Interests
Pursuant to Purchase and Sale Agreements, dated as of December 9,
1994, the Company, through subsidiaries, purchased Merchant Gas Partners'
interest in four joint ventures for $3,450,000 in cash. As a result of this
transaction, the Company, through its subsidiaries, now owns 100% of a 74-mile
natural gas transmission system located in Texas plus other minor facilities.
Sale of Interest in Processing Plant
The Company, through a subsidiary, entered into an Agreement for
Purchase and Sale, dated as of December 17, 1993, with Parker & Parsley
Gathering & Processing Co. ("Parker & Parsley") whereby the Company assigned a
30% interest in a processing plant and related facilities located in Texas to
Parker & Parsley. In exchange for the interest in the plant and related
facilities, the Company received (i) $2,500,000 in cash; (ii) ownership of a
gathering system located in New Mexico, along with production dedicated to that
system; and (iii) dedication of additional production to the plant and related
facilities. The transaction closed in February 1994, but was effective as of
December 31, 1993.
Sale of Interest in Midwest Energy Companies, Inc.
The Company entered into a Stock Purchase Agreement, dated as of
December 30, 1993, with Midwest Energy Companies, Inc. ("Midwest") whereby
Midwest purchased the Company's 17% equity interest in Midwest. Midwest
executed a promissory note in favor of the Company in the principal amount of
$325,000 in exchange for the Company's 10,235,885 shares of common stock of
Midwest.
Merger of Adobe Gas Pipeline Company with and into the Company
On December 14, 1993, the stockholders of the Company approved and
adopted an Agreement of Merger, dated July 28, 1993, as amended (the "Adobe
Merger Agreement"), among the Company, Santa Fe Energy Resources, Inc. ("Santa
Fe") and Adobe Gas Pipeline Company ("AGPC"), then an indirect, wholly-owned
subsidiary of Santa Fe. Pursuant to the Adobe Merger Agreement, AGPC was
merged (the "Adobe Merger") with and into the Company (which was the surviving
corporation in the Adobe Merger). In addition to effecting the acquisition by
the Company of AGPC, the Adobe Merger also effected a restructuring of the
Company's debt and equity capitalization (including an approximate one-for-15
reverse split of the Company's Common Stock). Pursuant to the Adobe Merger
Agreement, among other things:
(i) all of the outstanding common stock of AGPC (which was owned by a
wholly-owned subsidiary of Santa Fe) was converted into (A) 2,080,000 shares of
Senior Cumulative Preferred Stock, Series A, par value $.01 per share, of the
Company ("Series A Preferred") and (B) 10,395,665 shares of new Common Stock,
par value $.01 per share, of the Company ("Company Common Stock"), which was
equal to approximately 40% of the outstanding Company Common Stock, giving
effect to the issuance and deposit by the Company to the "H/P Trust", described
below, of 4,983,180 shares of Company Common Stock;
(ii) each outstanding share of the Company's 8% Junior Cumulative
Convertible Preferred Stock, Series B, par value $.01 per share, was converted
into (A) 1.50733 shares of Company Common Stock (5,723,652 shares in the
aggregate) and (B) 1.09667 shares of new Junior Exercisable Automatically
Convertible Preferred Stock, Series B, par value $.01 per share, of the Company
("Series B Preferred") (4,163,852 shares in the aggregate), each share of which
entitles the holder to purchase from the Company, upon surrender of such share
and payment of the exercise price, one share of Company Common Stock (an
aggregate of 4,983,180 shares, including the shares issuable upon the exercise
of the additional shares of Series B Preferred described in clause (iii) below)
at an exercise price of $3.225 per share of Company Common Stock (in each case
subject to adjustment) at any time prior to the automatic conversion of such
share of Series B Preferred into .001 of a share of Company Common Stock, which
will occur on the second anniversary of the Adobe Merger (or earlier under
certain circumstances);
(iii) each outstanding share of the existing Common Stock, par value
$.01 per share, of the Comapny was converted into (A) .06667 (approximately
1/15th) of a share of Company Common Stock (3,277,488 shares in the aggregate)
and (B) approximately .01667 of a share of Series B Preferred (819,328 shares in
the aggregate);
(iv) all of the outstanding shares of the Company's Class B Common
Stock, par value $.01 per share, all of which were held by The Prudential
Insurance Company of America ("Prudential Insurance"), Pruco Life Insurance
Company ("Pruco"), and PruSupply, Inc. (collectively, "Prudential"), were
converted into the right to receive a portion of the "P Interest" in the H/P
Trust, described below, which interest (in its entirety) initially represented a
beneficial trust interest in 4,983,180 shares of Company Common Stock deposited
by the Company to the H/P Trust (the "Trust Shares");
(v) each outstanding share of the Company's Class C Common Stock, par
value $.01 per share, all of which were held by Prudential, was converted into
.06667 (approximately 1/15th) of a share of Company Common Stock (approximately
756,104 shares in the aggregate); and
(vi) all of the outstanding shares of the Company's 7% Senior
Cumulative Preferred Stock, Series A, par value $.01 per share, which had an
aggregate liquidation preference of $49.5 million and were held by Prudential,
were converted into (A) an aggregate of approximately 553,658 shares of Company
Common Stock, (B) the right to receive the remainder of the "P Interest" in the
H/P Trust and (C) the right to receive $33 million aggregate principal amount of
new 8% Senior Secured Notes due 2003 (the "8% Senior Secured Notes") of the
Company.
The H/P Trust was established by the Company in connection with the
Adobe Merger. The Company issued the Trust Shares to the H/P Trust immediately
following the Merger. See "Item 13. Certain Relationships and Related
Transactions -- Trust Agreement."
Concurrently with the Merger, the Company and Prudential entered into a
securities purchase agreement pursuant to which the Company issued, subject to
cerain conditions, an additional $23.4 million of 8% Senior Secured Notes in
exchange for $23.4 million of 6.20% Senior Secured Notes due 2000 (the "6.20%
Senior Secured Notes") of the Company held by Prudential prior to the Adobe
Merger.
Prudential and Santa Fe entered into a voting agreement (the "Voting
Agreement") in connection with the Adobe Merger. See "Item 13. Certain
Relationships and Related Transactions -- Voting Agreement."
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Financial Reorganization
In December 1992, the Company completed a restructuring of its
long-term debt through a "pre-packaged" bankruptcy proceeding (the "1992
Restructuring"). On October 15, 1992, the Company filed its Chapter 11
bankruptcy petition as well as its plan of reorganization (the "Plan") in the
Western District of Oklahoma. The bankruptcy court confirmed the Plan on
November 30, 1992, and the Plan was consummated on December 16, 1992. Pursuant
to the Plan, approximately $131,900,000 of long-term debt with the related
accrued interest and certain other obligations were converted into $56,400,000
of the 6.20% Senior Secured Notes and into 49,500 shares of 7% Senior Cumulative
Preferred Stock, Series A, par value $.01 per share, 3,600,000 shares of 8%
Junior Cumulative Convertible Preferred Stock, Series B, par value $.01 per
share, 72,704,000 shares of Class B Common Stock, 11,341,000 shares of Class C
Common Stock, and 300,000 shares of Common Stock, all of which were in
existence prior to the Adobe Merger and which were subsequently restructured
through the Adobe Merger.
SUBSEQUENT EVENTS
Sale of United LP Gas Corporation
The Company entered into a Stock Purchase Agreement, dated as of
December 21, 1994, by and among the Company, United LP Gas Corporation
("United") and United Acquisition Corp. ("United Acquisition") whereby the
Company sold all of the 500 issued and outstanding shares of United to United
Acquisition in exchange for the purchase price of $3,100,000, plus the excess
of United's current assets over its current liabilities as of December 31,
1994. The aggregate purchase price paid by United Acquisition at the closing
consisted of (i) cash of $1,200,000, plus the value of United's inventory,
which was approximately $1,900,000; (ii) a subordinated promissory note issued
in favor of the Company in the amount of $1,000,000 (the "Note"); and (iii)
90,000 shares of United's Series A Redeemable Preferred Stock, par value $10.00
per share. The Note is secured by a first lien on all assets of United not
otherwise encumbered and by a second lien on all other assets of United. In
addition to the purchase price received at the closing of the sale, the Company
is to receive an amount equal to the excess of United's current assets, other
than inventory, over current liabilities as such amounts are realized by
United, which amount is expected to be approximately $1,500,000. The sale of
United was completed on January 31, 1995 and effective as of January 1, 1995.
Acquisition of the Company by LG&E Energy Corp.
On February 10, 1995, the Company, LG&E Energy Corp., a Kentucky
corporation ("Parent"), and Carousel Acquisition Corporation ("Merger Sub"), a
Delaware corporation and an indirect wholly-owned subsidiary of Parent, entered
into an Agreement and Plan of Merger (the "Merger Agreement") which sets forth
the terms of a proposed merger of Merger Sub with and into the Company (the
"Merger"). The Merger will be consummated on the terms and subject to the
conditions set forth in the Merger Agreement, as a result of which (a) the
Company will become a subsidiary of Parent and will be wholly-owned with the
exception of the outstanding shares of Series B Preferred not owned by Parent
subsequent to the Merger and (b) each share of Company Common Stock then
outstanding (other than shares of Company Common Stock (i) held in the
Company's treasury, (ii) held by any holder who shall have properly exercised,
and not withdrawn or lost, appraisal rights under the Delaware General
Corporation Law (the "DGCL") and (iii) beneficially owned by Parent or its
subsidiaries, including, without limitation, shares of Company Common Stock held
in the H/P Trust, described below) will be converted into the right to receive
$2.75 in cash, without any interest thereon.
Each share of Series A Preferred and each share of Series B Preferred
issued and outstanding immediately prior to the effective time (the "Effective
Time") of the Merger shall remain unchanged and outstanding and shall represent
one share of Series A Preferred or Series B Preferred, as the case may be, of
the Company, which will be the surviving corporation in the Merger. In
accordance with its existing terms, on December 14, 1995, each share of Series B
Preferred will be converted automatically into the right to receive $0.00275 in
cash, without any interest thereon, based upon the existing conversion rate of
one-one thousandth of a share of Company Common Stock for each share of Series B
Preferred and the amount payable per share of Company Common Stock as a result
of the Merger.
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Concurrently with the execution and delivery of the Merger Agreement,
Parent and Merger Sub entered into Securities Purchase Agreements (the
"Securities Purchase Agreements") with Prudential and Santa Fe. Pursuant to
the Securities Purchase Agreement with Prudential, as amended (the "Prudential
Securities Purchase Agreement"), and subject to the terms and conditions set
forth therein, immediately prior to the Effective Time, Parent and Merger Sub
will acquire from Prudential Insurance and Pruco the following securities
(collectively, the "Prudential Securities"): (i) 1,329,771 shares of Company
Common Stock, (ii) beneficial ownership pursuant to the H/P Trust (which was
established by the Company in connection with the Adobe Merger) of 4,983,180
shares of Company Common Stock, (iii) 5,010 shares of Series B Preferred and
(iv) $52,900,000 aggregate principal amount of 8% Senior Secured Notes. The
purchase price for the Prudential Securities is $63,000,000 plus accrued
interest, if any, on the 8% Senior Secured Notes from the last interest payment
date on which interest was paid in full to, but not including, the day on which
the closing of the purchase of the Prudential Securities occurs. Pursuant to
the Securities Purchase Agreement with Santa Fe (the "Santa Fe Securities
Purchase Agreement") and subject to the terms and conditions set forth therein,
immediately prior to the Effective Time, Parent and Merger Sub will acquire
from Santa Fe the following securities (collectively, the "Santa Fe
Securities"): (i) 10,395,665 shares of Company Common Stock, (ii) 2,335,907
shares of Series A Preferred, and (iii) $2,350,000 in aggregate principal
amount of 9% Junior Notes (the "9% Junior Notes") of the Company. The purchase
price for the Santa Fe Securities is $55,250,000. The parties to the Securities
Purchase Agreements did not allocate among the securities to be acquired
thereunder the purchase price to be paid therefor; however, if such purchase
price were first allocated to the principal amount or liquidation preference of
the securities other than Company Common Stock or rights and benefits under the
H/P Trust in Company Common Stock, the remainder of the purchase price under
the Securities Purchase Agreements allocated to Company Common Stock and rights
and benefits under the H/P Trust in Company Common Stock would result in a
price for Company Common Stock of substantially less than the $2.75 per share
to be paid in the Merger in respect of each share of Company Common Stock
(other than the shares held by Santa Fe and Prudential).
The Merger Agreement and the Merger have each been approved by the
Board of Directors of the Company and the special committee (the "Special
Committee") of the Board of Directors formed to consider proposals received by
the Company. Under Delaware law, the affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock is required to
approve the Merger. Prudential and Santa Fe in the aggregate own 16,708,616
shares of Company Common Stock (excluding shares of the Company Common Stock
for which Prudential has the right to acquire upon exercise of the Series B
Preferred) representing approximately 65% of the Company Common Stock
outstanding on March 24, 1995. Prudential and Santa Fe have agreed to vote all
shares of Company Common Stock owned by them in favor of the Merger Agreement
and the Merger and have each granted Parent a proxy to vote such shares in
favor of the Merger and the Merger Agreement should either of them fail or
refuse to vote such shares in favor of such proposal. Prudential and Santa Fe
collectively own a sufficient number of shares of Company Common Stock to
approve and adopt the Merger Agreement and the Merger without the vote of any
other stockholder.
Under applicable federal securities laws, the Merger cannot be
effected until at least twenty calendar days after an Information Statement has
been sent or given to the Company's stockholders. Accordingly, the Company
expects that the Merger will be consummated during the second quarter of 1995,
assuming that the conditions to the Merger set forth in the Merger Agreement
have been satisfied.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For financial information about industry segments, see Note 1 of the
Notes to Consolidated Financial Statements appearing elsewhere herein.
ENERGY PRODUCTS AND SERVICES
General
The Company's energy products and services business is concentrated
primarily in three areas: (1) natural gas marketing operations and related
energy services, (2) natural gas facilities operations, which include
gathering, transportation, processing, treatment and storage operations, and
(3) through 1994, natural gas liquids transportation and marketing operations.
For the year ended December 31, 1994, these activities accounted for 100% of
the consolidated revenues of the Company. Such activities are conducted
through the primary operating subsidiaries of the Company which are Hadson Gas
Systems, Inc. ("Gas Systems"), Llano, Inc. ("Llano"), Hadson Gas Gathering &
Processing Co. (formerly known as Minerals, Inc.), United, Western Natural
Gas and Transmission Corporation ("Western"), Hadson Gas Co., Hadson Gas
Marketing Co., Hadson Gas Transmission Co., and Hadson Industrial Sales
Corporation. On September 30, 1994, Hadson Gas Gathering & Processing Co.,
a direct
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subsidiary of the Company, was merged with and into Minerals, Inc.
("Minerals"), a direct subsidiary of the Company, with Minerals being the
surviving corporation. Concurrently, the name of Minerals was changed to Hadson
Gas Gathering & Processing Co. ("HGG&P").
The energy products and services business is seasonal and affected by
weather patterns in the market areas served by the Company. West Coast,
Southwest and Southeast markets typically have higher demand for the Company's
products in the summer months, while the Northeast and Midwest market demand is
generally greater in the winter.
Natural Gas Marketing Operations
The majority of the Company's natural gas marketing operations are
conducted through Gas Systems and Western. As part of the services it offers
customers, the Company aggregates supplies of natural gas from gas producers
and processors, uses its knowledge of federal, state and local regulations and
the natural gas industry to contract for transportation services, arranges for
transportation of gas over the most expeditious and economical pipeline routes
and assists its customers in complying with regulatory filings and other
matters relating to the requirements of the Federal Energy Regulatory
Commission (the "FERC"). The Company believes that the growth of its gas
marketing business depends primarily upon its ability to provide quality
services in response to evolving customer needs and market conditions.
The volume of gas transported and marketed by the Company has
increased from an average of approximately 83,000 million British thermal units
("MMBtu") per day in 1985 to average daily volumes of approximately 920,000
MMBtu in 1994. As of December 31, 1994, the Company had approximately 745
direct gas sales contracts with industrial firms, local gas distribution
companies, electric utilities, large commercial entities and institutions such
as hospitals, military bases and universities. The Company maintains a diverse
customer base in order to limit its reliance on any one industry or region.
During 1994, no customer accounted for 10% or more of the Company's total gas
sales. The Company competes with other gas marketers primarily on the basis of
market-responsive pricing, reliability of performance and customer service.
In connection with its gas marketing operations, the Company purchases
and takes title to gas at the wellhead, processing plants or other points of
delivery primarily from independent producers and major integrated oil
companies and sells such gas to industrial and institutional users, local gas
distribution companies and electric utilities across the United States. It is
the Company's general practice to contract for a diverse supply of gas from
various geographic locations and producers to minimize its reliance on any
single source or region and to maximize its ability to deliver gas to its
customers by the most advantageous route. The Company believes that it has
retained and increased its sources of supply because of its demonstrated
ability to market and transport the quantities of gas purchased. Gas is
transported under two types of service, interruptible or firm. Interruptible
transportation is subject to interrruption at the option of the pipeline, and
firm transportation is the highest quality transmission service and anticipates
no interrruption. When interruptible transportation is used, the Company,
through its subsidiaries, generally arranges for the transportation of gas from
the point of purchase to the customer's delivery point. If firm transportation
is used, generally this transportation is contracted for by the customer,
although the Company, through its subsidiaries, has executed a limited number
of firm transportation agreements.
The Company, through its subsidiaries, purchases and sells gas under
long-term contracts, as well as in the "spot" market for contract terms of
generally 30 days, or less. In response to changes currently taking place in
the gas industry, the Company has been de-emphasizing its short-term markets,
and an increasing proportion of its revenues are earned pursuant to long-term
sales contracts, value-added services and other energy management services
described below. However, short-term or "spot" sales of natural gas comprised
50% of the Company's sales of natural gas in 1994. These activities will
continue to play a critical role in the Company's overall strategy because they
provide an important source of market intelligence, while serving a portfolio
balancing function. Because most of the Company's gas purchase and sales
contracts contain market-sensitive pricing mechanisms and because of the
Company's risk management efforts, the Company is essentially insensitive to
changes in natural gas prices.
Some of the Company's gas purchase and sales contracts are terminable
by either the Company or its customers upon relatively short notice (generally
30 to 90 days). This contract structure is designed to maintain the Company's
flexibility to respond to changes in customer needs, market conditions and
regulations.
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Recent regulatory changes, specifically FERC Order No. 636, have
mandated that gas distribution companies and electric utilities purchase gas
supplies from merchants other than their traditional suppliers, which were
interstate pipelines. As a result of such regulatory changes, utilities and
end-users holding supply contracts with interstate pipelines are now able to
convert those contracts to firm pipeline transportation capacity and thereby
assure delivery of their new supply sources. During 1994, the Company
delivered approximately 289,000 MMBtu of gas per day under term sales
contracts with gas distribution companies and electric utilities.
The Company, through its subsidiaries, offers end-users contracted
management services to reduce or eliminate administrative expense associated
with energy procurement and assists natural gas producers in managing the
delivery of their product to market through gas volume accounting,
transportation and related services. Customers for the Company's energy
management services are typically larger industrial, commercial and
governmental consumers that operate multiple facilities in various geographic
areas or producers that desire to avoid the administrative complexity and costs
of natural gas marketing and transportation regulatory requirements. These
value-added energy service contracts are generally long-term (three to five
years). The Company believes that its value-added service approach enhances
its ability to respond to evolving customer and producer requirements in the
changing natural gas industry.
Natural gas prices have become extremely volatile over the past two
years. Mid-month price volatility has increased from typically five to ten
cents per MMBtu during 1992 to as much as 80 cents per MMBtu during 1994. The
Company has begun to assist customers and producers in managing the risk
associated with such changes in natural gas prices. This is accomplished by
utilizing various financial instruments such as natural gas futures contracts,
options and swap arrangements. In addition, the Company may provide such
services via fixed-price sales or supply contracts which are then coupled with
these financial instruments to hedge price risk exposure to the Company. Such
hedging strategies are subject to inefficiencies in the financial instruments
utilized, as well as management's judgment in the design and execution of the
strategies. Another tool which the Company utilizes in its gas sales and
purchase contracts to combat price volatility is market-sensitive pricing which
reflects monthly and/or daily commodity pricing.
In connection with the Adobe Merger, AGPC, Santa Fe and Santa Fe
Energy Operating Partners, L.P. ("SFEOP") entered into a Master Gas Purchase
Contract (the "Gas Contract"). Following the Adobe Merger, the Company, which
succeeded to the rights and obligations of AGPC under the Gas Contract,
assigned its interest in the Gas Contract to a subsidiary, and, effective
December 31, 1994, SFEOP was merged with and into Santa Fe. The Gas Contract
has a term of approximately seven years and provides for the purchase by the
Company of essentially all of Santa Fe's existing domestic natural gas
production as well as certain natural gas production that Santa Fe has the
right to market. In addition, the Company has the right to purchase new
production from certain development properties of Santa Fe. The price to be
paid by the Company for natural gas purchases under the Gas Contract is based
on generally recognized published price indices. The Gas Contract provides,
among other things, terms (i) for the release of gas dedicated under the Gas
Contract, (ii) for payment by the Company and (iii) for termination of the Gas
Contract under certain conditions. See "Item 13. Certain Relationships and
Related Transactions."
Natural Gas Facilities Operations
The Company's natural gas facilities operations include natural gas
gathering, treatment, processing, underground storage, intrastate transmission
and contract production operations, as well as field and technical services,
and are conducted through the Company's subsidiaries. These operations are
concentrated in southeastern New Mexico, the Louisiana Gulf Coast and the
Permian Basin of West Texas. Assets employed to conduct these operations
include Llano's 90-mile intrastate pipeline in southeastern New Mexico (the
"Llano Pipeline"), 12 separate gathering systems consisting of 1,144 miles of
pipeline, 5 gas processing facilities, an underground gas storage facility with
a current working capacity of approximately 6 billion cubic feet ("BCF") of
gas, and one 74-mile gas transmission system located in Texas (the "Power-Tex
System").
The Llano Pipeline, which has a design capacity of approximately
180,000 MMBtu of gas per day, is capable of delivering gas to four different
interstate pipelines and directly to three end-users, as well as receiving gas
from three interstate pipelines. In 1994, Llano transferred to HGG&P
approximately 573 miles of gathering lines and related facilities. The
Company, through its various subsidiaries, purchases gas from over 55 producers
connected, via
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<PAGE> 9
the HGG&P gathering system, to the Llano Pipeline and sells the gas directly to
end-user customers or delivers the gas into one of the interstate pipelines for
sale by the Company. The Company, through its various subsidiaries, also
transports natural gas through the Llano Pipeline for third parties and is paid
a transportation fee for such services. In connection with gas moved through
the Llano Pipeline, the Company, through its various subsidiaries, also
provides gas treatment and contract operation services. During 1994, an
average of approximately 102,000 MMBtu of natural gas per day moved through the
Llano Pipeline, as compared to approximately 114,000 MMBtu of natural gas per
day in 1993 and approximately 124,000 MMBtu of natural gas per day in 1992.
The 12 gas gathering systems gathered approximately 111,000 MMBtu of
natural gas per day during 1994. The Power-Tex System, which the Company
acquired through the Adobe Merger, transported approximately 30,000 MMBtu of
natural gas per day during 1994 (net to the Company's interest). During 1993,
the Power-Tex System transported approximately 24,000 MMBtu of gas per day (net
to AGPC's interest). In certain circumstances, these pipeline systems are used
to transport or gather natural gas for others in return for a transportation
fee.
Connected to the Llano Pipeline are three natural gas processing
facilities capable of processing approximately 85,000 MMBtu of natural gas per
day. However, one of these facilities has been inactive for approximately seven
years because it was designed to serve one particular market which was
subsequently lost. These facilities extract NGLs, including propane, ethane,
butanes and natural gasoline, from the natural gas stream, at which point the
mixed stream of liquids is sold to United. During 1994, approximately 44 million
gallons of NGLs were extracted and sold from these facilities, and approximately
the same volumes were extracted and sold from these facilities during 1993.
These volumes remained fairly constant from 1993 to 1994 primarily because of
the fact that, in April 1994, one of the Company's gas processing plants
sustained damage as a result of a fire. The plant was non-operational until
October 1994 when repairs were completed. The damage to the plant was fully
covered by insurance, except for a small deductible amount.
In addition, the Company has interests in two gas processing
facilities which were acquired through the Adobe Merger and which are not
connected to the Llano Pipeline; however, one of these facilities was not in
operation during 1994 because the facility's gas supply contract was terminated.
The Company is in search of new gas supply for the facility, but, in the event
such supply is not obtained, the plant can be relocated and put into operation
elsewhere. These facilities produced approximately 24 million gallons of NGLs
(net to AGPC's interest) during 1993, and the one operational facility produced
approximately 11 million gallons of NGLs (net to the Company's interest) during
1994.
Connected to the Llano Pipeline is a natural gas storage facility.
This facility has current working capacity of approximately 6 BCF. This
capacity could be increased to approximately 9 BCF by decreasing mechanical
limits on withdrawals from and injections into the facility. The Company,
through its subsidiary, offers this storage capacity to third parties on a fee
basis. During 1994, storage capacity of approximately 5.5 BCF was leased to
other parties.
NGL Marketing and Transportation
Through December 31, 1994, the Company, through United, engaged in NGL
purchasing, transporting, marketing and trading, primarily in Oklahoma, Texas
and Louisiana. United generally purchases NGLs from "landlocked" gas
processing plants and transports the liquids through its fleet of 31 trucks to
injection points on common carrier and private pipelines. Five of these
injection facilities are owned and operated by United. The liquids are then
transported via the pipelines to fractionation plants, at which point the
liquids are normally sold. United also markets NGLs which are not transported
by its own trucks. Because the NGLs transported by United are highly volatile,
the Company has carried insurance, in amounts it believes are in line with
industry practice, against risks involved in transporting these liquids.
During 1994, United transported approximately 129 million gallons of NGLs and
marketed approximately 382 million gallons of NGLs.
In December 1992, United entered into a three-year contract to market
all NGLs produced by a large independent oil and gas producer. This
transaction involves marketing approximately 4 million gallons per month on
behalf of this particular producer.
The Company sold United effective January 1, 1995. See "-- Subsequent
Events -- Sale of United LP Gas Corporation" above.
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Competition
The Company, through its various subsidiaries, is a national marketer
and competes with all gas pipelines, producers and other gas marketers
primarily on the basis of market-responsive pricing, reliability of
performance, and customer service. The Company believes that its ownership and
control of gathering and transmission facilities, its detailed knowledge of
market and regulatory factors affecting the industry and its ability to respond
quickly and flexibly to changes in market conditions, governmental regulations
and customer needs have been important factors in its success to date. The
Company devotes significant management time and resources to monitoring closely
federal and local gas regulation developments and, where appropriate, seeking
regulatory enforcement or other appropriate action.
The Company faces intense competition in marketing gas to end-user
customers and local distribution companies. Its competitors include the major
integrated oil companies, pipeline-affiliated marketing companies, and regional
gas gatherers, brokers and marketers of widely varying sizes, financial
resources and experience. Some of these competitors, such as the major
integrated companies, have capital resources many times greater than the
Company's and control substantially greater supplies of natural gas. In some
cases, local utilities and gas distribution companies (some of which are
customers of the Company) also engage, directly and through affiliates, in
marketing activities that compete with the Company's subsidiaries.
Environmental Matters
Except as noted in the paragraphs below, the Company believes that it
is in substantial compliance with the provisions of applicable environmental
regulations. The construction and operation of pipelines, plants and other
facilities for transporting, gathering, processing, treating or storing natural
gas and other products are subject to federal, state and local environmental
laws and regulations, including those that can impose obligations to clean up
hazardous substances at the locations at which the Company operates or to which
it sends waste for disposal. In most instances, the applicable regulatory
requirements relate to water and air pollution control or solid waste management
measures. Appropriate governmental authorities may enforce these laws and
regulations with a variety of civil and criminal enforcement measures, including
monetary penalties, assessment and remediation requirements and injunctions as
to future compliance. The Company and certain of its subsidiaries dispose of
hazardous materials subject to the requirements of the federal Resource
Conservation and Recovery Act and the Clean Water Act and comparable state
statutes; prepare and file reports and docuemnts pursuant to the toxic Substance
Control Act (the "TSCA") and the Emergency Planning and Community Right to Know
Act; and obtain permits pursuant to the federal Clean Air Act and comparable
state air statues. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as "Superfund," imposes liability, without
regard to the fault for or legality of the original act, for release of a
"hazardous substance" into the environment.
Environmental regulation can increase the cost of planning, design,
initial installation and operation of the Company's facilities.
Historically, the Company's expenditures for environmental control facilities
and for remediation have not been significant in relation to its results of
operations. The Company believes, however, that it is reasonably likely that
the trend in environmental legislation and regulations will continue to be
towards stricter standards. The Company is not aware of any future
environmental standards that it believes are reasonably likely to be adopted
that will have a material adverse effect on the Company's results of
operations, but cannot rule out that possibility. It is not anticipated that
the Company will be required in the near future to expend amounts that are
material in relation to its total capital expenditures program by reason of
environmental laws and regulations, but inasmuch as such laws and regulations
are frequently changed, the Company is unable to predict the ultimate cost of
compliance.
Pursuant to regulations of the United States Environmental Protection
Agency (the "EPA") based on Section 8(a) of the TSCA, certain persons who
manufactured for commercial purposes specified quantities of a chemical
substance during 1986 and 1990 were required to submit chemical inventory update
documents to the EPA. The EPA has taken the position that gas processors are
entities which must make such reports for the raw natural gas liquid and residue
streams which are produced at gas processing plants. The natural gas processing
industry has historically taken the position that it is not required to make
such reports.
In order to assist gas processing companies in complying with the EPA's
interpretation of its rules, the Gas Processors Association negotiated certain
"Generic Settlement Terms" for such companies that failed to submit TSCA
Inventory Update Rule Reports in 1986 and/or 1990. HGG&P elected to participate
in such settlement process, and, accordingly, in the first quarter of 1995
entered into a Registration Agreement for TSCA Section 8(a) Inventory Update
Rule Records Search (the "TSCA Agreement") with the EPA. Pursuant to the TSCA
Agreement, HGG&P has agreed to pay a stipulated penalty which it projects will
be $18,000. Additionally, while HGG&P will be required to admit that they did
not file Inventory Update Reports for 1986 and 1990, it denies that such failure
constitutes a violation of TSCA. The Company anticipates that a consent
agreement between HGG&P and the EPA will be completed during the first half of
1995.
Governmental Regulation
The production, transportation and certain sales of natural gas are
subject to federal, state or local regulations which have a significant impact
upon the Company's energy products and services business. Regulation at the
federal level of domestically produced or transported natural gas is
administered primarily by the FERC pursuant to the Natural Gas Act (the "NGA")
and the Natural Gas Policy Act of 1978 (the "NGPA"). Maximum selling prices of
certain categories of gas, whether sold in interstate or intrastate commerce,
previously were regulated pursuant to NGPA. The NGPA established various
categories of gas and provided for graduated deregulation of price controls of
several categories of gas and the deregulation of sales of certain categories
of gas. All price deregulation contemplated under the NGPA has already taken
place. Subsequently, the Natural Gas Wellhead Decontrol Act of 1989 terminated
all NGA and NGPA regulation of "first sales" of domestic natural gas on January
1, 1993. The sale for resale of certain natural gas in interstate commerce is
regulated, in part, pursuant to the NGA, which requires certificate and
abandonment authority to initiate and terminate such sales. In addition,
natural gas marketed by the Company is usually transported by interstate
pipeline companies that are subject to the jurisdiction of the FERC. See "--
Order No. 636" below. Similarly, some of the transportation and storage
services provided by Llano are subject to FERC regulation under section 311 of
the NGPA. These services are frequently sold to gas distribution companies
that contract with interstate pipeline companies for transportation from the
Llano facility to their respective service areas. Section 311 permits
intrastate pipelines under certain circumstances to sell gas to, transport gas
for, or have gas
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<PAGE> 11
transported by, interstate pipeline companies, and assign contract rights to
purchase surplus gas from producers to interstate pipeline companies without
being regulated as interstate pipelines under the NGA.
Llano and HGG&P. In 1994, Llano transferred to HGG&P approximately 573
miles of gathering lines and related facilities in Lea and Eddy Counties, New
Mexico. Following this transfer, Llano holds approximately 90 miles of
pipeline and related underground storage facilities that are used (a) to supply
gas in intrastate commerce to certain electric generating facilities owned by
non-affiliated entities; and (b) to provide interstate transportation and
storage services under section 311 of the NGPA.
(a) The HGG&P Petition for Declaratory Order. In 1994, HGG&P
petitioned the FERC for a declaratory order that the facilities it obtained from
Llano met the FERC's test for "gathering" facilities and were therefore not
subject to the FERC's regulation under the NGA. This petition for declaratory
order was granted on November 14, 1994 and is final and non-appealable. The
effect of the declaratory order is to make it clear that the subject HGG&P
facilities are not subject to regulation by the FERC under the NGA and are thus
only subject to appropriate state authorities.
(b) The Llano Rate Filing. In addition to Llano's intrastate sales
for power generation, Llano provides interstate storage and transportation
services under section 311 of the NGPA. These services are subject to rate
regulation by the FERC, which has established regulations governing the rates,
construction of facilities and conditions of service applicable to section 311
service performed by intrastate pipelines. Pursuant to these rules and related
FERC orders, Llano is currently required to obtain approval of its rates at
least once every three years. Llano's current section 311 rates were approved
by an order issued August 13, 1991, which also required Llano to seek new rate
approval no later than July 3, 1993.
After the July 3, 1993 date, Llano has met informally with the FERC
staff to inform them that Llano was preparing to restructure ownership of its
facilities by transferring the gathering facilities to HGG&P and that HGG&P
would be petitioning for a declaratory order of the non-jurisdictional character
of the transferred facilities. Llano informed the FERC staff that it intended
to seek new, market-based rates to govern services on the truncated system, once
the transfer filing was made.
In September 1994, after completion of certain related market studies,
Llano filed its petition requesting the FERC to approve market-based rates for
NGPA section 311 services, both storage and transportation. After notice of
the application was published, several non-customer parties intervened in
opposition, claiming that the economic analysis submitted in the filing was not
adequate to justify market-based rates for section 311 service (particularly
for the transportation as opposed to the storage service). None of Llano's
storage or transportation customers expressed any objection to the filing,
however, and the matter is presently the subject of informal settlement
discussions among the parties and the FERC staff. The Company continues to
believe, given the tenor of the Company's informal discussions with the FERC
staff and the past action taken by the FERC in similar circumstances, that
Llano will not be assessed any material penalty due to the failure to submit
the rate filing prior to July 3, 1993.
The Company anticipates that the rate filing will ultimately be
resolved through a negotiated settlement. With regard to possible refunds, it
may be noted that, as part of the 1994 filing, Llano agreed that its rates
charged during the period after July 3, 1993 are subject to refund in the event
the FERC finds in the subsequent rate proceeding that such rates were excessive.
As noted by Llano in its rate filing, however, Llano has been providing storage
and associated transportation services at negotiated rates significantly lower
than the maximum rates approved by the FERC in 1991. Accordingly, the Company
does not believe that Llano will be required to make any material rate refunds.
In early 1995, the FERC issued a call for comments in a generic policy
proceeding to examine the circumstances under which it may appropriately rely
upon competitive market forces to establish rates for various pipeline
services. The FERC's request for comments did not propose any specific rule
changes, however, and it is not anticipated that this proceeding will have any
adverse impact on Llano, the rates that it may charge or the extent of refunds,
if any.
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In 1990, the FERC's broad interpretation of the scope of NGPA section
311 transportation authority was reversed by an appellate court. The FERC has
since issued a new rule (Order 537) interpreting the "on-behalf-of" test found
in section 311. The revised rule requires the on-behalf-of entity to either
have physical custody of and transport the natural gas at some point during the
transaction or hold title to the natural gas for a purpose related to its status
as an intrastate pipeline, local distribution company or interstate pipeline, as
applicable. While the new rules narrowed the scope of transactions that can be
performed under section 311, the Company has not found that this has adversely
affected the Llano Pipeline or the availability of transportation for gas sold
by the Company's subsidiaries.
Except as discussed in the foregoing paragraphs, regulation of natural
gas gathering (other than gathering by interstate pipelines) and intrastate
transportation activities is primarily a matter of state oversight. Regulation
of gathering and transportation activities in New Mexico, as in most other
states, includes various safety, environmental and non-discriminatory purchase
requirements. While some states provide for the rate regulation of pipelines
engaged in the intrastate transportation of natural gas, such regulation has
not generally been applied against gatherers of natural gas. However, Oklahoma
has recently enacted legislation that prohibits the imposition of unjustly or
unlawfully discriminatory gathering rates. The Company's gathering systems
could be adversely affected should they be subjected in the future to the
application of such state or federal regulation.
Order Nos. 436 and 500. Under the rules promulgated by the FERC
beginning in 1985 (the "Order 436/500 Rules"), transportation service by
interstate pipelines must be provided on an open access, nondiscriminatory
basis. The effect of the Order 436/500 Rules has been to enable the Company,
through its subsidiaries, to market natural gas as well as other services to a
broad array of customers via the national network of natural gas transportation
and distribution facilities. The opportunity to compete directly with other
users for firm or interruptible interstate transportation services at
nondiscriminatory rates and terms has substantially increased the Company's
access to such services and its ability to arrange for transportation of its
gas to customers, a significant factor in the growth of the Company's gas
marketing operations.
The Order 436/500 Rules were challenged in the United States Court of
Appeals. After a number of changes were made by the FERC in response to
several rulings by such Court from 1987 to 1990 (none of which altered the
basic open access requirement of the rules), the substantive provisions of the
Order 436/500 Rules have been upheld by the courts and become final.
Order No. 636. In the summer of 1991, the FERC initiated further
rulemaking proceedings for the purpose of modifying the terms and conditions
under which open access transportation is provided in order to ensure that
"unbundled" transportation service (i.e., transportation service not sold as an
integral part of a sale of natural gas supplies) is provided on an open access
basis "comparable" to the transportation services that the pipelines "bundle"
with their own, regulated sales. These proceedings became generally known in
the industry as the "Mega-NOPR" (for "Mega Notice of Proposed Rulemaking")
proceedings. The FERC stated that its goal, recognizing that pipelines have
become predominantly transporters, not sellers, of gas, was to "create a
regulatory framework that will accommodate the meeting of as many gas sellers
and gas buyers as possible," and to thereby further enhance competition in the
domestic natural gas markets.
Beginning in April 1992, the FERC adopted final rules in this
proceeding which were designated as Order No. 636 (the "Order 636 Rules"). The
Order 636 Rules are currently in effect but are subject to pending requests for
judicial review and possible modification or reversal as a result.
The Order 636 Rules reaffirm the basic open access transportation
regime of the Order 436/500 Rules and extend that regulatory approach in several
ways:
(i) Equality of service -- the equal access rules. The
Order 636 Rules required interstate pipelines to provide a level of
transmission and storage service that is equal for all shippers
regardless of whether the gas commodity is sold by the interstate
pipeline or by a competing gas merchant. In particular, the rules
required interstate pipelines to provide equal access in a number of
specified areas, including: equal access to transmission facilities;
equal access to most storage facilities; equal and timely access to
information relevant to the availability of the open access
transmission services; equal access to a new flexible delivery
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<PAGE> 13
service; and equal access to a pipeline's contract rights to receive
certain transmission services from upstream pipelines.
(ii) Flexibility of service. The Order 636 Rules expanded
shippers' ability to use all receipt and delivery points on a pipeline
on a more flexible basis than in the past, such that, subject to
reasonable pipeline operating requirements, shippers are able to
receive natural gas from any person at any point on the pipeline
facilities and deliver gas to any person at any point as long as the
receipt and delivery points are within the path of the firm
transportation capacity to which the shipper is entitled and for which
it pays. The rules also prohibited pipeline tariff provisions that
inhibit the development of "market centers" (areas where gas may be
delivered into multiple pipeline interconnects). Defining the scope
and operation of this requirement has been left to case-by-case
implementation procedures.
(iii) Mandatory "unbundling" of pipeline system sales. The
Order 636 Rules found that the traditional interstate pipeline
practice of making "bundled," city-gate firm gas sales causes
considerable competitive harm to all segments of the natural gas
industry and constitutes an unlawful restraint of trade which is not
balanced by the "no-notice" aspect of the service. This "bundled"
sales service is the traditional pipeline sales service in which the
interstate pipeline sells the gas commodity to retail local
distribution companies ("LDCs") on a delivered basis at the point of
interconnection between the physical facilities of the LDC and the
interstate pipeline.
As a remedy to this finding of unlawful restraint of trade,
the FERC under Order 636 ordered all interstate pipelines to
"unbundle" their gas sales from the transmission, storage and related
services and make any sales at aggregation points in or near gas
production areas.
Pipelines have been allowed to make such unbundled sales
pursuant to new "blanket" certificate authorizations under which the
FERC intends to provide great pricing and operational flexibility
("light-handed regulation" of unbundled pipeline sales). This
light-handed regulation has generally allowed market-based pricing of
gas sales by the unbundled pipeline merchant. The Order 636 Rules
contemplate that all gas merchants (unbundled pipelines, producers and
marketers) will be able to contract for or manage the various
unbundled component services in order to offer a "repackaged"
delivered service to LDCs and others.
To ensure that the pipeline's unbundled gas merchant service
does not gain an improper competitive advantage from its association
with the pipeline-as-transporter, the Order 636 Rules forbade the
pipeline-as-transporter from giving any preference to shippers of gas
sold by the pipeline over shippers of gas sold by any other merchant
in matters relating to open access transportation. To implement this
prohibition, the Order 636 Rules require the operating employees of
merchant and transportation departments of all interstate pipelines to
"function independently" of each other "to the maximum extent
practicable" and to adopt various record-keeping and reporting
requirements regarding dealings between the pipeline-transporter and
the pipeline-merchant.
(iv) Customer option to terminate supply contracts with
pipelines. The Order 636 Rules allowed LDCs to reduce or even
terminate their existing contracts to purchase gas from the
pipeline-as-merchant. The purpose of this requirement was to enable
those customers to freely negotiate to purchase gas from the pipeline
under its new market-based sales service or to purchase gas from other
gas suppliers. This restructuring of contract entitlements was
completed in the individual pipeline restructuring proceedings.
(v) Capacity assignment and "release" programs. The
Order 636 Rules adopted certain capacity reallocation or "release"
mechanisms, the stated purpose of which was to allow LDCs and other
firm shippers the ability to better access supplies on pipeline
systems to which they are not directly interconnected and to
indirectly make available to others the firm capacity that the shipper
holds but is not using. The intent of these provisions is to
facilitate the development of a secondary transportation market while
eliminating the potential for firm shippers to unduly discriminate in
the assignment of capacity rights. The release program has enabled
the Company to mitigate costs of certain pipeline transmission
contracts and to acquire capacity at lower costs than previously to
serve some markets.
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(vi) Pregranted abandonment. The Order 636 Rules adopted
several procedures governing a pipeline's ability under the NGA to
terminate service at the expiration of the contract term. In general,
these provisions allow a pipeline to terminate transmission service at
the end of the contract term for (A) all contracts for interruptible
transmission services and (B) short-term contracts for firm
transmission contracts (i.e., contracts of one year or less). For
longer-term contracts for firm transmission service, the Order 636
Rules adopt a "right of first refusal" mechanism which allows the firm
shipper a federal right to extend its service under specified
circumstances. Finally, the Order 636 Rules allow the termination of
a pipeline's sales obligation at the expiration of the contract for
the unbundled sales service.
(vii) Policy favoring "straight fixed-variable" rates. As
a general matter, the FERC has required pipeline transportation rates
to be set so as to recover all fixed costs (including the pipeline's
return on equity and associated income taxes) through fixed monthly
demand charges. This shift has tended to increase the price of
reserving firm capacity while lowering the price of actually using an
incremental unit of the reserved firm capacity.
(viii) Transition costs. The Order 636 Rules adopted major
changes in how pipelines recover costs associated with certain
take-or-pay contracts, upstream transmission contracts and certain
other costs of the transition to operations in the Order 636 Rules.
These changes essentially allow all such costs which are prudently
incurred to be passed on by the pipeline to its firm open-access
transportation customers. This aspect of the Order 636 Rules
therefore tends to increase costs of transportation on affected
pipelines, although, due to the pricing structure of most of its
purchase, sales and transportation transactions, the Company does not
believe that this has an adverse effect on its operations.
(ix) Implementation and effectiveness. The Order 636
Rules are subject to pending court review. A briefing schedule has
been established which will extend through the fourth quarter of 1994,
making it unlikely that any decision will be reached until at least
the first quarter of 1996. Hence, it is not certain to what extent
the Order 636 Rules will be affirmed following completion of judicial
review. The Order 636 Rules are effective during this process,
however, and following case by case rulings by the FERC during 1992
and 1993 are currently in place. Many of these individual rulings are
also the subject of court challenges. The court where most of the
cases were filed has indicated that it will not proceed with review
until after review of Order 636 is complete.
While the first phase of implementation of the Order 636 Rules is now
largely completed, many of the operational and other implementation issues are
expected to continue to evolve in the next 12 to 18 months. The Company
anticipates that these regulatory developments will generally present
additional opportunities to the Company and its subsidiaries in providing gas
sales and/or energy and capacity management services while creating certain
risks associated with potential penalties for shippers exceeding allowed
tolerance levels.
Other Regulations. In October 1992, the Energy Policy Act of 1992 was
enacted. This Act streamlined the permitting process necessary to import
Canadian gas and altered the treatment of such gas under the NGPA, eliminating
the FERC's jurisdiction over the price of non-pipeline sales of gas imported
from Canada. Canadian gas imports still require import authorizations from the
Department of Energy's Office of Fossil Energy under section 3 of the NGA and
construction and siting authorizations, where applicable, from the FERC. These
changes could enhance the ability of Canadian producers to export gas to the
United States and increase competition in the domestic natural gas market.
In December 1992, the FERC issued Order No. 547, governing the
issuance of blanket marketer sales certificates to all gas sellers other than
interstate pipelines. The order eliminates the need for gas producers and
marketers to seek specific authorization under section 7 of the NGA from the
FERC to make certain sales of natural gas, such as imported gas and gas
purchased from interstate pipelines. Instead, effective January 7, 1993, these
gas sellers, by operation of the order, have been issued blanket certificates
of public convenience and necessity allowing them to make jurisdictional gas
sales for resale at negotiated rates without seeking specific FERC
authorization. The FERC intends Order No. 547, in tandem with Order No. 636,
to foster a competitive market for natural gas by giving gas purchasers access
to multiple supply sources at market-driven prices. Order No. 547 may also
increase
11
<PAGE> 15
competition in the natural gas market while presenting opportunities for the
offering of supply and capacity management services.
Prior to July 1994, many of the Company's sales were "first sales"
under the NGPA (and therefore not subject to the FERC's NGA regulation even
when sold for resale in interstate commerce), while certain of the Company's
sales were authorized under a blanket certificate issued by the FERC under the
NGA that allow fully market-based pricing without any further certificate,
abandonment, filing or reporting obligations.
In July 1994, the FERC (without prior opportunity for public comment)
repealed a number of its regulations that had applied to the regulation of
"first sales" of natural gas under the NGPA prior to the complete deregulation
of such sales on January 1, 1993 under the Natural Gas Wellhead Decontrol Act
of 1989. Included in these repealed regulations was a provision that defined
the term "first sale". The effect of the repeal is that all of the Company's
interstate gas wholesales are now authorized under a blanket certificate
pursuant to Order No. 547. The FERC has stated that it believes the Order 547
certificates allow holders to operate exactly as if they were
non-jurisdictional companies. The Company believes the "first sale" repeal is
inconsistent with the applicable law, including the procedural requirements of
the NGPA and has therefore sought judicial review of the FERC's action.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by the United States Congress, the
FERC, state public utility regulatory bodies and the courts. The Company cannot
predict when or whether any such proposals or proceedings may become effective,
or their effect, if any, on the Company's operations. In addition, the natural
gas industry historically has been very heavily regulated; therefore, there can
be no assurance that the light-handed regulatory approach currently pursued by
the FERC and Congress will continue indefinitely into the future.
Certain pipeline systems which the Company acquired as a result of the
Adobe Merger are subject to the jurisdiction of the Railroad Commission of
Texas (the "RRC"). The RRC has the authority, under the Texas Gas Utility
Regulatory Act and other statutes, to regulate the rates, services and
operations of gas utilities in Texas. The Company believes that its activities
subject to such regulation materially comply with all applicable laws and
regulations of the RRC.
OPERATIONS OF UNCONSOLIDATED SUBSIDIARIES
The Company owned an approximate 17% interest in Midwest prior to
December 30, 1993. Midwest's activities center around production from its
existing domestic wells, as well as exploration in the Paris and Aquitaine
Basins of France, where Midwest owns various interests in six oil and gas
exploration permits granted by the French government. On December 30, 1993,
Midwest purchased the Company's 17% interest for $325,000. The Company's
interest in Midwest was reported in its financial statements under the cost
method of accounting.
Prior to November 1994, the Company owned a 40% interest in Beck &
Root Fuel Company ("Beck & Root"), a retail propane sales and distribution
company located in Oklahoma. On November 29, 1994, the Company transferred its
interest in Beck & Root to Independent Gas Company Holdings, Inc.
("Independent") in exchange for $750,000 in cash and a certain number of shares
of Series B Cumulative Redeemable Convertible Preferred Stock of Independent
having a liquidity preference of $1,250,000. The Company's interest in Beck &
Root was reported in its financial statements under the equity method of
accounting.
NUMBER OF PERSONS EMPLOYED
As of December 31, 1994, there were 230 people employed by the Company
and its consolidated subsidiaries.
12
<PAGE> 16
ITEM 2. PROPERTIES
NATURAL GAS GATHERING FACILITIES
The Company, through certain subsidiaries, owns, or has an interest
in, 12 natural gas gathering systems. The Company owns a 100% interest in five
of these systems, a 50% interest in two of the systems and 94%, 24.4%, 15%,
14.2% and 11.5% interests in the five remaining systems, respectively. These
systems are located in Texas, New Mexico, Louisiana, Montana and Oklahoma.
TRANSMISSION FACILITIES AND RELATED PROPERTY
The Company, through a subsidiary, owns the Llano Pipeline, a 90-mile
intrastate gas pipeline system in southeastern New Mexico with a throughput
capacity of 180,000 MMBtu of gas per day. The Company, through subsidiaries,
owns the Power-Tex System, a 74-mile gas transmission system located in Texas.
This system has a design capacity of 80,000 MMBtu of gas per day. The Company,
through certain subsidiaries, also owns, or has interests in, and operates five
natural gas processing plants located in southeastern New Mexico and western
Texas with a total design capacity of 125,000 MMBtu of gas per day. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation." The Company owns 100% of two of these plants and 94%, 90% and
57.25% of the three remaining plants, respectively. The Company, through a
subsidiary, owns and operates an underground natural gas storage facility
adjacent to the Llano Pipeline in southeastern New Mexico with a current
working capacity of approximately 6 BCF of natural gas.
NATURAL GAS LIQUIDS FACILITIES AND RELATED PROPERTY
During 1994, the Company, through United, operated 31 tractors (6
owned and 25 leased) and 31 NGL trailers (28 owned and 3 leased), primarily in
Oklahoma and Texas. The Company owned and operated five proprietary pipeline
injection points and was a joint owner in a sixth facility, each of which
included storage facilities. Additionally, the Company had exclusive injection
rights at four facilities owned by others. The Company sold United effective
January 1, 1995. See "Item 1. Business -- Subsequent Events -- Sale of United
LP Gas Corporation."
OTHER
The Company is currently headquartered in Dallas, Texas, where it
leases approximately 40,000 square feet of office space. Various subsidiaries
of the Company lease office space in Washington, D.C.; Denver, Colorado; and
Chicago, Illinois. Additionally, the Company owns real estate in Hobbs, New
Mexico, where Llano maintains offices and service facilities.
ITEM 3. LEGAL PROCEEDINGS
FIXED PRICE CONTRACT DISPUTE
On July 16, 1991, Western and PDH Energy Partnership, Ltd. ("PDH")
entered into a Gas Purchase and Sale Contract (the "PDH Contract") obligating
Western to deliver to PDH, subject to certain conditions, through 2007, all of
PDH's requirements for natural gas up to a maximum of 2,000 MMBtu per day. The
price to be paid by PDH for gas delivered under the PDH Contract was $1.50 per
MMBtu during the first year of the contract with provisions for escalation of 4%
per year during each of the first 10 years of the contract, and 6% per year
thereafter. By letter dated September 15, 1993, Western notified PDH that
Western was exercising its right to terminate the PDH Contract. The PDH
Contract contained a provision permitting Western to terminate the PDH Contract
in the event of any acts by governmental authorities which, in Western's sole
judgment, are unduly burdensome or unacceptable. Western advised PDH that
Western's further performance under the PDH Contract had been rendered unduly
burdensome and unacceptable by reason of the adoption of FERC Order No. 636 and
related subsequent orders which substantially restructured the natural gas
industry. See "Item 1. Business -- Government Regulation -- Order No. 636." PDH
has disputed Western's ability to terminate the PDH Contract, and attempts to
settle the dispute have proven unsuccessful to date. PDH has threatened to sue
Western for breach of contract. In addition, PDH's project lender has threatened
suit against Western based on a consent to assignment of the PDH Contract
executed by Western. If either or both of such suits should be filed, Western
intends to dispute such claims (to both of which, based upon advice from outside
counsel, it believes that it has meritorious defenses), but there can be no
assurance that Western will prevail in either matter. While, to the knowledge
of the Company, no specific damage claims have been made to date, should either
PDH or the project lender, or both, prevail, the resulting judgment(s) could
have a material adverse effect on the Company and its results of operations.
13
<PAGE> 17
PERSONAL INJURY CASE
On October 6, 1992, United was named as a defendant, along with several
other companies, in a lawsuit involving a propane explosion in which two
individuals were severely burned. One of the individuals died 13 days after
the accident. The case, Annie Moore, et al. v. A-1 Propane, et al., was filed
in the District Court of Harris County, Texas, 113th Judicial District. The
plaintiffs alleged that United was the supplier of the propane which exploded
and that United, along with the other defendants in the case, were grossly
negligent, inter alia, in their failure to insure that the propane was
adequately odorized. The plaintiffs requested punitive damages equal to four
times the amount of actual damages. United had primary insurance coverage for
up to $1,000,000. Based upon instructions to its insurance broker,
Meyers-Reynolds & Associates, Inc. ("Meyers-Reynolds"), United believed it had
purchased excess coverage insurance policies sufficient to provide coverages
for risks such as those raised by the plaintiffs' claims; however, the
insurance carriers denied coverage.
On April 27, 1994, the parties entered into a Settlement Agreement
under the terms of which United's primary insurance policy limits of $1,000,000
were paid to the plaintiffs, and United agreed to assign to the plaintiffs and
to Texas Eastern Products Pipeline Company ("TEPPCO"), with whom it had agreed
to maintain certain insurance coverages for the protection of United and TEPPCO,
any claims it might have with respect to the failure of Meyers-Reynolds or
excess insurance carriers to have excess insurance coverage in place to protect
United from claims asserted in the lawsuit. In exchange, the plaintiffs agreed
to limit execution on any judgment against United to United's claims against
Meyers-Reynolds and such excess insurance carriers, thus limiting United's
exposure to its primary insurance policy limits. Under the terms of an
Assignment and Covenant to Limit Execution entered into by the parties in May
1994, United assigned to the plaintiffs and TEPPCO its claims against
Meyers-Reynolds and the excess insurance carriers.
JOINT VENTURE CASE
In December 1990, West Texas Transmission Corp. and Brent Jordan filed
a lawsuit in the District Court of Harris County, Texas, 190th Judicial
District, against a number of defendants, including AGPC, Adobe Gas Co. and
Adobe Gas Marketing Co. As a result of the Adobe Merger, Adobe Gas Co. (now
known as Hadson Gas Co.) and Adobe Gas Marketing Co. (now known as Hadson Gas
Marketing Co.) are subsidiaries of the Company. This lawsuit arose out of the
purchase, in 1987, by Adobe Gas Co. of the plaintiffs' joint venture interests
in the Power-Tex joint venture. Plaintiffs alleged, inter alia, that Adobe Gas
Co., as the operator of the Power-Tex joint venture, failed to disclose certain
material information which affected the value of the joint venture interests
sold to Adobe Gas Co. The plaintiffs alleged causes of action for breach of
fiduciary duty, breach of the duty of good faith and fair dealing, fraud and
conspiracy, as well as other allegations.
On November 18, 1994, the parties entered into a Settlement Agreement
and Release (the "Settlement Agreement"), and an agreed Final Take Nothing
Judgment was entered by the Court. Under the terms of the Settlement Agreement,
the Company was obligated to pay to the plaintiffs the sum of $2,350,000. The
Company's share of the settlement amount was funded by Santa Fe under a 10-year
subordinated balloon note (the "Santa Fe Note") bearing a nine percent interest
rate. Under the terms of the Santa Fe Note, interest is payable annually, and
the principal amount is due at the expiration of the 10-year period. In
consideration for the Company's participation in the settlement, Santa Fe also
agreed to pay to the Company the amount of $117,500 per year for six years. In
connection with the Merger, Parent will purchase the Santa Fe Note, and the
yearly payments of $117,500 will cease. See "Item 1. Business -- Subsequent
Events -- Acquisition of the Company by LG&E Energy Corp."
CLASS ACTION COMPLAINT
On December 21, 1994, Ernest Engel, a stockholder of the Company
("Engel"), filed a purported class action lawsuit styled as Engel v. Hadson
Corporation, et al., Civil Action No. 13934 (the "Lawsuit"), pending in the
Court of Chancery (the "Court") for the State of Delaware in New Castle County.
In his complaint, Engel alleged that an offer made by El Paso Natural Gas Co.
to acquire the Company was grossly unfair and that the Board of Directors had
breached its fiduciary obligations to the Company's stockholders by failing to
obtain the maximum value per share that could be received in an unfettered
market for control. On February 10, 1995, prior to the execution of the
Securities Purchase Agreements and the Merger Agreement, an agreement (the
"Memorandum of Understanding")
14
<PAGE> 18
was reached among all the parties to such litigation to settle all litigation
which was brought in the Court. The Memorandum of Understanding provides,
among other things, that the Special Committee agreed to inform the Board of
Directors of Engel's views regarding the Merger, that the Company will pay not
more than $185,000 for Engel's legal fees and expenses and that the Company
will bear the cost of notice to the class members in connection with the
settlement of the Lawsuit. The Memorandum of Understanding is subject to court
approval and consummation of the Merger.
In addition to the matters mentioned above, the Company is from time to
time involved as a defendant in litigation incidental to its business. The
Company does not believe that any such other lawsuits in which the Company is
currently involved will have a material adverse effect on the Company's
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The Company Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "HAD." As of December 31, 1994, the Company did not
meet certain of the NYSE's continued listing criteria as a result of the
Company's recent financial results, and the NYSE has advised the Company that
careful consideration will continue to be given to the appropriateness of
continued listing of the Company's securities. Accordingly, there can be no
assurance that the NYSE will not delist Company Common Stock in the future if
the Company continues not to meet the NYSE's requirements for continued
listing. If the Merger is consummated, it is anticipated that Company Common
Stock will be delisted.
The following table sets forth, for the periods indicated, the high
and low sales prices per share of Company Common Stock, as reported on the NYSE
Composite Tape. The 1993 prices have been adjusted to give effect to the
approximate one-for-15 reverse split of Company Common Stock which occurred
December 14, 1993 through the Adobe Merger.
<TABLE>
<CAPTION>
High Low
------------ -------------
<S> <C> <C>
Year ended December 31, 1993
First quarter $ 4-7/32 $ 2-7/64
Second quarter 4-11/16 2-13/16
Third quarter 4-11/16 3-3/36
Fourth quarter (1) 2-5/8 2-7/64
Year ended December 31, 1994
First quarter 3-3/4 2-5/8
Second quarter 3 2-3/8
Third quarter 2-5/8 2
Fourth quarter 2-1/2 1-7/8
</TABLE>
(1) The Adobe Merger, which effected a restructuring of the Company's debt
and equity capitalization (including an approximate one-for-15 reverse
split of Company Common Stock), was consummated on December 14, 1993.
See "Item 1. Business -- Recent Developments -- Merger of Adobe Gas
Pipeline Company with and into the Company."
15
<PAGE> 19
On March 10, 1995, the closing price per share of Company Common Stock
on the NYSE was $2.625. On March 10, 1995, there were 25,710,483 shares of
Company Common Stock outstanding and approximately 3,948 holders of record of
Company Common Stock.
DIVIDENDS
The Company has never paid a cash dividend on the Company Common Stock
and will not do so in the foreseeable future. The Company's ability to pay
cash dividends on Company Common Stock is dependent upon its financial
condition. The Company is currently prohibited from paying cash dividends on
its capital stock under that certain securities purchase agreement entered into
by the Company and Prudential in connection with the Adobe Merger. In
addition, the Company's current bank loan agreement restricts the Company's
ability to pay dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below is certain selected historical consolidated financial
information of the Company as of December 31, 1990, 1991, 1992, 1993 and 1994
and for each of the five years in the period ended December 31, 1994. The
selected historical consolidated financial information as of December 31, 1993
and 1994 and for each of the three years in the period ended December 31, 1994
has been derived from the Company's audited consolidated financial statements
appearing elsewhere herein. The selected historical consolidated financial
information as of December 31, 1990, 1991 and 1992, and for each of the two
years in the period ended December 31, 1991, has been derived from audited
historical consolidated financial statements previously filed with the
Commission but not contained or incorporated herein. The following information
should be read in conjunction with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and related notes appearing elsewhere herein.
16
<PAGE> 20
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1990(1) 1991 1992 1993 1994
----------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales $ 446,296 439,396 427,781 522,661 752,470
Interest and other income 783 687 478 495 1,568
Interest on tax refund - 1,766 - - -
Gain on sale of assets 2,407 703 - 6,355 -
Gain on restructuring - - 925 - -
Equity in earnings (loss) of unconsolidated
affiliates 2,897 (987) 1,716 629 -
----------- ------- ------- ------- -------
452,383 441,565 430,900 530,140 754,038
----------- ------- ------- ------- -------
Expenses:
Cost of sales and services 417,446 414,220 410,960 514,117 723,546
Depreciation, depletion and amortization 7,358 6,733 6,111 6,280 10,957
Write-off of goodwill - - - 3,077 -
Selling, general and administrative 20,470 16,743 15,593 16,407 16,888
Interest (2) 5,544 10,822 13,441 2,648 5,154
Write down of NGL inventory - 2,500 - 1,002 -
Settlement of litigation - - 1,000 475 -
Reorganization and other - - - 2,704 530
Income taxes (benefit) (300) (304) (1,139) (694) (2,004)
----------- ------- ------- ------- -------
$ 450,518 450,714 445,966 546,016 755,071
----------- ------- ------- ------- -------
Earnings (loss) from continuing operations $ 1,865 (9,149) (15,066) (15,876) (1,033)
Preferred stock dividend requirements - - 61 293 5,772
----------- ------- ------- ------- -------
Earnings (loss) from continuing operations
attributable to common stock $ 1,865 (9,149) (15,127) (16,169) (6,805)
=========== ======= ======= ======= =======
Earnings (loss) from continuing operations per
and common equivalent share (4) $ .75 (3.64) (5.35) (1.93) (.26)
Dividends per common share $ - - - - -
Shares used to compute earnings (loss) per
common share from continuing operations (4) 2,497 2,517 2,826 8,383 25,690
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1990 (1) 1991 1992 1993 1994
----------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Total assets $ 224,874 172,623 154,850 210,273 205,405
Net working capital, excluding current
maturities of long-term debt $ 15,538 10,251 1,540 5,134 (2,583)
Long-term debt $ 144,183 116,357 56,400 55,800 57,372
Stockholders' equity (deficit) (3) $ (18,735) (22,353) 19,081 39,473 38,436
</TABLE>
(1) In February 1990, Hadson Energy Resources Corporation ("HERC"), a
newly formed subsidiary to which the Company had transferred substantially all
of its oil and gas exploration, development and production activities, sold
approximately 51% of its common stock in a public offering. Accordingly,
subsequent to that date the Company's 49% investment in HERC was accounted for
using the equity method until the remaining 49% investment in HERC was sold in
July 1993.
(2) Interest expense related to continuing operations was higher in 1991
as compared to 1990 as a result of a change in the estimated amount of interest
expense on long-term debt attributable to discontinued operations.
(3) The defense systems and power systems operations have been accounted
for as discontinued operations and,
17
<PAGE> 21
therefore, are not included in the above Statement of Operations Data, which is
presented on the basis of continuing operations. Losses attributable to the
defense systems operations for each of the years in the two-year period ended
December 31, 1991 were $2,033,000 and $0, respectively. The year ended December
31, 1990 also included a loss of $142,529,000 from the sale of the defense
systems operations. Earnings attributable to the power systems operations for
each of the years in the two-year period ended December 31, 1991 were $288,000
and $0, respectively. The years ended December 31, 1991 and 1992 included a gain
of $4,829,000 and a loss of $8,103,000, respectively, from the sale of Hadson
Power Systems, Inc. The year ended December 31, 1993 included a gain of
$5,553,000 related to a contract settlement from defense systems.
(4) The Adobe Merger, which was consummated December 14, 1993, effected an
approximate one-for-15 reverse split of the Company Common Stock. Share and per
share amounts presented were computed after giving effect to the reverse split
for all periods. Subsequent to the Adobe Merger there were 25,689,147 shares of
Company Common Stock outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The ability of the Company to maintain and grow its level of business
is dependent in large part upon its ability to secure supplies of natural gas
for resale. The ability to secure these supplies is in turn dependent upon the
availability of trade credit, or the willingness of suppliers to sell to the
Company. In evaluating the creditworthiness of the Company, suppliers evaluate
the perceived as well as the actual financial stability of the Company, recent
operating results, levels of potential exposure to the Company, the supplier's
experience with the Company, as well as various other factors. To the extent
that suppliers are unwilling to grant open lines of credit, the Company may
utilize its revolving credit facility to issue stand-by letters of credit in
order to secure all or a portion of the purchases from a supplier. The level
of purchases which can be secured by letters of credit is dependent on the size
of the Company's revolving credit facility, the price of natural gas, and the
portion of the credit facility which is utilized for other purposes. The
primary use of the revolving credit facility, other than securing purchases of
natural gas as discussed above, is to provide security in the form of letters of
credit to the Company's counter-parties in various transactions involving
natural gas futures and related derivative transactions.
During the course of 1994 and through November, the Company saw its
natural gas marketing volumes increase on a regular basis. This increase was
made possible by increases in the revolving credit agreement, lower natural gas
prices, which expanded the effective capacity of the credit facility, and to
some extent expanded open credit lines from certain producers, especially in
the first half of 1994. The decline in natural gas prices, while expanding the
Company's ability to acquire natural gas supplies, increased the margin
requirements to financial instrument counter-parties and therefore caused the
Company to utilize more of its credit capacity for this purpose. As the
Company purchased more supplies from particular companies, and the amount of
that company's exposure to the Company increased, the Company's
creditworthiness came under increased scrutiny from those companies.
Throughout this time, the issue of creditworthiness for business partners
continued to be a primary focus within the industry in general. If the
acquisition of the Company by Parent is consummated, management expects that
much of the Company's problems with respect to its creditworthiness will be
alleviated based upon Parent's strong reputation in the energy services
industry, as well as its solid balance sheet. See "Item 1. Business --
Subsequent Events -- Acquisition of the Company by LG&E Energy Corp."
The Company's liquidity position is affected primarily by the timing of
receipts for natural gas sales as compared to disbursements for natural gas
purchases. Throughout 1994, the Company began to experience demands from some
suppliers for payment earlier than had been demanded in the past, thereby
placing increased demands on its liquidity.
Recognizing the increased liquidity requirements of the business, as
well as increasing credit demands, the Company began to undertake steps to
increase both its liquidity and its credit capacity. Negotiations were begun
with the Company's bank lenders for an expansion of the revolving credit
agreement and with Santa Fe for an extension of payment terms under the Gas
Contract, and the Company sought to sell United. It was believed that the sale
of
18
<PAGE> 22
United, in addition to providing some liquidity from the proceeds of the
transaction, would provide the Company with the working capital and credit
capacity that was utilized by that operation. Management believes that the
Company's liquidity problems will be alleviated in the event that the Merger is
completed.
In November 1994, Sunrise Energy Company, a natural gas marketing
company based in Dallas, filed bankruptcy. This event had an immediate effect
within the industry. The creditworthiness of independent gas marketers similar
to the Company began to come under even greater scrutiny. This situation was
exacerbated by the Company's recent payment delays to certain suppliers. In
December 1994, an industry trade publication ran an article that speculated that
the Company might merge or be acquired by another entity and that the impetus
for such a transaction was the Company's financial position. This article had a
very dramatic effect on many suppliers' perception of the Company's
creditworthiness and the willingness of those suppliers to grant open trade
credit. As a result of these events, the Company saw demands for letters of
credit increase. With the new level of letter of credit demands, the Company
has been unable to acquire sufficient supplies of natural gas to maintain
natural gas marketing volumes at levels which had been experienced through
November 1994; accordingly, volumes in December 1994 and January 1995 have been
below those seen earlier in 1994.
In December 1994, Santa Fe agreed to allow the Company to defer up to
$5,000,000 otherwise due to Santa Fe for natural gas purchases for a period of
30 days. This deferral has the effect of providing the Company with an
additional $5,000,000 of liquidity. The agreement with Santa Fe provides for
this deferral to continue through the end of June 1995 if the Merger has not
been completed before then. Effective December 31, 1994, the Company and its
bank group amended the Company's revolving credit agreement. The amended
agreement provides for total capacity of $75,000,000, subject to a borrowing
base formula, with a $15,000,000 sub-limit for direct borrowings. Previously,
the facility had provided for total capacity of $60,000,000, with $10,000,000
available for direct borrowings. Borrowings under this facility bear interest
at the prime rate of interest plus 1% (9.5% at December 31, 1994). The increase
in the direct borrowing sub-limit to $15,000,000 from $10,000,000 is contingent
upon and is coterminous with the $5,000,000 payment deferral arrangement with
Santa Fe. As of February 28, 1995, total credit capacity under the borrowing
base formula amounted to approximately $67,000,000 of which $15,000,000 was
utilized for direct borrowings and $52,000,000 was utilized for letters of
credit, and, therefore, there was no unused capacity under this facility as of
that date. The term of this revolving credit agreement expires December 31,
1995, and any amounts outstanding are due at that time. Pursuant to the Merger,
it is anticipated that amounts outstanding under this revolving credit facility
will be repaid with funds made available from Parent. Should the Merger not
take place, the Company would anticipate extending the maturity of the facility
prior to its expiration.
The sale of United was completed on January 31, 1995 (effective January
1, 1995). At the closing of such sale, the Company received cash of
approximately $3,000,000, a five-year note in the amount of $1,000,000, and
redeemable preferred stock of United with a liquidation preference of $900,000.
In addition, the Company expects to receive additional cash payments of
approximately $1,500,000 over a sixty day period, which amount represents the
excess of United's accounts receivable over accounts payable as of the
effective date of the sale. The sale of United had no immediate effect on the
Company's credit capacity as the contribution of United to the borrowing base
under the revolving credit agreement was approximately equal to credit capacity
utilized by United for letters of credit.
In order for the Company to return gas marketing volumes to levels seen
during 1994, it must reestablish significant open lines of trade credit, and,
to increase volumes beyond 1994 levels, even more credit capacity must be
established either in the form of open trade lines or additional capacity under
credit agreements pursuant to which letters of credit could be issued to
suppliers. While the recently expanded revolving credit agreement and adequate
financial performance may allow the Company to return volumes to 1994 levels,
management believes that the underlying financial stability required to grow
volumes beyond 1994 levels will only come from a significant restructuring and
improvement in the Company's capital structure. Management anticipates that,
as a result of the consummation of the Merger, this restructuring and
improvement in the Company's capital structure will be accomplished in the
remainder of 1995.
Cash flow provided by operations amounted to approximately $3,600,000
and $3,600,000 and $3,500,000 for the years ended December 31, 1992 and 1994,
respectively. During 1993, cash flow used by operations amounted to
approximately $4,200,000. Cash flows provided by operating activities during
1992 were affected by certain non-cash items which include a net gain of
$925,000 related to the 1992 Restructing, interest expense recognized in 1992
which was settled in the 1992 Restructuring in the amount of $12,941,000 and
the Company's equity in earnings of an unconsolidated affiliate which were not
remitted to the Company. For the year ended December 31, 1993, such adjustments
consisted of (i) the gain on sale of the Company's remaining interest in Hadson
Energy Resources Corporation ("HERC") in the amount of $6,355,000 which is a
non-operating item, (ii) the write-off of goodwill in the amount of $3,077,000
and write down of NGL inventory of $1,002,000 which were non-cash charges, and
(iii) reorganization costs of $1,372,000 which were incurred but not paid in
1993. For the year ended December 31, 1994, cash flows from operating
activities were reduced by a gain of $1,257,000 related to an insurance
recovery related to the fire at the Hobbs plant which was recognized in 1994.
For each of three years in the period ended December 31, 1994, cash flows from
operating activities were adjusted to reflect non-cash items such as
depreciation and amortization and deferred income taxes, as well as
miscellaneous other items which are not individually or collectively material.
Accurals of operating cash receipts and payments resulting from changes in
trade receivables and current liabilities during each of the three years ended
December 31, 1994 result from changes in the level of the Company's business
activities, the 1994 reclassification of the current assets and liabilities of
United as assets held for sale, and the timing of collections of accounts
receivable and payment of accounts payable. During 1992, cash was provided by
a decrease in inventories, primarily NGL inventories. In 1993 and 1994,
natural gas imbalance inventories increased, utilizing cash in each period.
Capital expenditures for 1994 amounted to approximately $14,300,000. Of this
amount, approximately $3,000,000 relates to replacing portions of the Hobbs
processing plant that were destroyed by a fire in April, and which was covered
by insurance proceeds. Also included in 1994 capital expenditures is
approximately $3,450,000 related to the acquisition of additional interests in
four joint ventures, giving the Company, through its subsidiaries, 100%
19
<PAGE> 23
ownership of the Power-Tex System plus other minor facilities. Of this amount,
$2,700,000 was financed with project debt which is recourse only to the
additional interest acquired. An additional $520,000 included in 1994 capital
expenditures is a portion of an adjustment to the purchase price of the
Company's December 1993 acquisition of gas gathering, transmission and
processing assets from Santa Fe. This adjustment resulted from the settlement
of litigation involving the Power-Tex System. In connection with this
settlement, the Company also assumed a liability of $2,350,000. This liability
has been financed with a ten-year, subordinated note to Santa Fe. The note
bears interest at 9%, which is payable annually, and has no principal
amortization required before maturity. The note is to be acquired by Parent in
connection with the Merger.
The balance of capital expenditures in 1994 and all such amounts in
1992 and 1993 relate primarily to additions and expansions of the Company's
natural gas gathering, processing, transmission and storage facilities. During
the year ended December 31, 1994, cash flows from investing activities include
approximately $2,500,000 related to the disposition of an undivided interest in
a natural gas gathering and processing facility and approximately $3,400,000
from insurance proceeds related to the Hobbs processing plant. During 1992, the
Company sold its remaining interest in HERC for proceeds of $44,000,000.
During each of the three years ended December 31, 1994, proceeds from
borrowings relate to borrowings under bank credit agreements. Net repayments of
borrowings for these periods relate to reductions in long-term debt and in 1993
reflect the repayment of such long-term debt with a portion of the proceeds from
the sale of HERC. Also, during each of these three years, the item "Transaction
Costs Related to Restructurings" reflects legal and other costs actually paid
that relate to the 1992 Restructuring and the Adobe Merger.
During 1995, the Company has no required principal reduction of its 8%
Senior Secured Notes which are held by Prudential. Mandatory principal
reductions of these notes begins in 1996 and continues through 2004. In
addition, dividends on the Company's Series A Preferred, which is held by Santa
Fe, are payable in additional shares of preferred stock through 1995 with such
dividends payable in cash thereafter. However, under terms of the 8% Senior
Secured Notes, payment of cash dividends is prohibited unless the principal
balance of the 8% Senior Secured Notes has been reduced to specific levels.
Under current circumstances, the Company does not anticipate being able to
reduce the principal balance of the 8% Senior Secured Notes to such required
levels and, therefore, does not anticipate being able to pay cash dividends on
the Series A Preferred. In connection with the Merger, Parent is to acquire
the 8% Senior Secured Notes from Prudential. Should the Merger not be
completed, management believes that the Company will be forced to seek
alternative restructurings in order to meet the terms of the 8% Senior Secured
Notes and the Series A Preferred.
At December 31, 1994, working capital was a deficit of approximately
$13,200,000 as compared to a surplus of approximately $4,100,000 at December
31, 1993. This difference relates primarily to the adjustment during 1994 of
certain assets and liabilities relating to natural gas imbalances. At December
31, 1993, these amounts were recorded as current assets and other long-term
liabilities. These adjustments had no material effect on the Company's results
of operations nor on the Company's near-term liquidity needs. In addition, at
December 31, 1993, borrowings outstanding under the Company's bank credit
agreement of $2,900,000, which were due after one year, were classified as
long-term debt, whereas, at December 31, 1994, such amounts are due within one
year and, therefore, are classified as a current liability.
RESULTS OF OPERATIONS
Discontinued Operations
The loss of approximately $8,100,000 in 1992 related primarily to
discontinued operations resulting from the adjustment of amounts expected to be
realized from certain contingent payments from the December 1991 sale of Hadson
Power Systems, Inc. and from a note received in the sale of a waste-wood
processing facility. The gain of approximately $5,600,000 in 1993 resulted
from the settlement of a contract dispute between a subsidiary of the Company
and the United States Army. See Note 3 of the Notes to the Consolidated
Financial Statements of the Company appearing elsewhere herein.
Earnings from HERC
During 1992 and 1993, the Company recognized approximately $1,700,000
and $600,000, respectively, relating to the equity interest in earnings of its
unconsolidated affiliate, HERC. In 1993, the Company sold its interest in HERC
and recorded a gain of approximately $6,400,000. See Note 4 of the Notes to the
Consolidated Financial Statements of the Company included elsewhere herein.
Energy Products and Services
The Company's ongoing operations include natural gas purchasing,
gathering, processing, storage, transportation and marketing operations. As an
aid in understanding the Company's operating results, the following table shows
operating profit by line of business for the periods indicated. Operating
profit is defined as sales of energy products and services, less the costs of
such sales and services, which include operating expenses.
20
<PAGE> 24
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993 1994
--------- ----- ------
(in thousands)
<S> <C> <C> <C>
Operating profit:
Natural gas marketing $ 8,895 3,245 17,712
Gas gathering, processing and transmission 6,549 4,312 8,925
NGL marketing 1,377 987 2,287
--------- ----- ------
$ 16,821 8,544 28,924
========= ===== ======
</TABLE>
Natural Gas Marketing
Average daily volumes and gross profit margins related to the marketing
of natural gas are provided below.
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Natural gas marketing:
Sales volumes (MMBtu/day) 473 508 920
Average gross margin ($/MMBtu) .052 .018 .053
</TABLE>
Sales volumes for natural gas marketing increased in 1994 as compared
to 1993 and 1992. The increase in 1994 sales volumes results primarily from the
effects of the Adobe Merger, which was completed in December 1993, and the
resulting increased access to natural gas supplies. These additional supplies
arose from (i) production purchased from Santa Fe pursuant to the Gas Contract
acquired as a part of the Adobe Merger, (ii) additional letter of credit
capacity to secure gas purchases, (iii) greater availability of open credit from
suppliers and (iv) lower prices in 1994 that allowed the Company to acquire more
units of gas with its existing credit capacity. However, as discussed above,
the Company saw its access to open credit from suppliers decline in late 1994.
Accordingly, natural gas marketing volumes in December 1994 declined to
approximately 800,000 MMBtu per day. The volumes in 1992 were negatively
impacted by the 1992 Restructuring as the Company curtailed certain business
activities during that period. In 1993, the Company began resuming normal
operations and, correspondingly, sales volumes increased. During 1993, a
decrease in gas volumes sold under "spot" contracts partially offset an increase
in volumes sold under term contracts, primarily with local distribution
companies. The Company has continued to emphasize longer term contracts and has
consistently been increasing the number of such contracts.
Since 1992, the Company and the natural gas industry in general have
experienced generally tighter margins due to competitive pressures. The
Company expects these pressures to further restrict margins beyond 1994.
Margins for natural gas sales during 1992 and 1993 were negatively affected by
certain sales to small industrial end-users. These sales were made through
Western pursuant to long-term contracts, many of which have fixed-prices which
are redetermined on a periodic (quarterly or annual) basis. During the fall
and winter of 1992 and continuing into early 1993, natural gas prices increased
dramatically, particularly in the Permian Basin and Rocky Mountain areas of the
country. As a result, the cost of acquiring gas supplies exceeded the sales
price on many of these contracts. This situation was exacerbated by the fact
that the relationship, or "basis differential," between Permian Basin and Rocky
Mountain prices and the prices reflected by natural gas futures contracts
changed from what had been experienced in the past. This caused certain of the
Company's hedging transactions related to those fixed-price contracts to be
21
<PAGE> 25
ineffective. These circumstances concerning Western resulted in a decline in
gross profit of $2,900,000 in 1992 and of approximately $3,800,000 in 1993.
During 1993, the Company renegotiated substantially all of these contracts such
that Western returned to profitable operations in the fourth quarter of 1993.
Margins from natural gas sales were also negatively affected in 1993 by
dramatic price changes which occurred in May and to a lesser extent December.
During these months, natural gas prices dropped significantly from first of the
month prices. These large price changes caused certain customers to change
supply sources from the Company during the month to take advantage of the
relatively inexpensive mid-month prices. The Company had committed for
supplies to serve these markets at the higher price levels; therefore, the
Company found itself with relatively expensive supplies which it was forced to
dispose of at a loss in some cases. Subsequent to that time, the Company has
renegotiated the pricing provisions of substantially all of these sales
contracts to provide for pricing mechanisms that reflect what has become highly
volatile intra-month pricing of natural gas. In addition, 1993 gross profits
were reduced by charges of approximately $2,300,000 related to the revaluation
of certain imbalance and transportation liabilities.
During 1994, the Company substantially increased the use of futures
contracts and swap agreements in order to hedge the price risks of natural gas
associated with firm commitments. These derivative transactions act to
minimize the risks from changes in gas prices, and, accordingly, the Company
does not believe that its profit margins would be materially affected by
changes in natural gas prices.
In August 1994, the Company entered into gas storage transactions with
forward gas purchase and sale contracts. These contracts were supplemented
with the physical purchase of natural gas, which was injected into storage and
will be sold based on the underlying forward sales contracts. The profit
margin of $502,000 was reflected as an increase to inventory and as a reduction
in cost of sales and services. The remaining amount in inventory was $136,000
at December 31, 1994.
Gas Gathering, Processing and Transmission
The Company's net share of average daily gas throughput through its
gathering and transmission facilities and average daily NGL production from its
processing plants, as well as average NGL prices, are summarized in the
following table:
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Gas gathering and transmission systems:
Throughput (MMBtu/day) 83 77 124
Processing Plants:
NGL production (Mgal/day) 107 120 139
NGL sales price ($/gal) .291 .282 .226
</TABLE>
Increases in throughput volumes for the Company's gathering and
transmission facilities relate primarily to the effect of the facilities added
pursuant to the Adobe Merger.
Volumes of NGLs produced increased in 1993 from 1992 levels due to
certain plant enhancements and modifications which were completed in the first
quarter of 1993. Beginning in 1993, significant incremental volumes of natural
gas have been purchased under reserve dedication contracts which contemplate
that such volumes will be processed by the Company and that proceeds from the
sale of extracted NGLs and processed gas will be shared between the Company and
the producer. Due to delays in adding additional processing capacity such
additional gas volumes were not being processed until late in 1993.
22
<PAGE> 26
The increase in NGL production in 1994 resulted mainly from the
processing plants acquired in the Adobe Merger. This increase was offset,
however, by the loss of production from one of the Company's processing plants
which was damaged by a fire in April 1994. The damage to the plant was fully
covered by insurance, except for a small deductible amount. The accompanying
statement of operations reflects a $1,257,000 gain that resulted from the
receipt of insurance proceeds in excess of the net book value of damaged
property plus actual and estimated expenses to be incurred by the plant during
its non-operational period. Substantially all of the proceeds were reinvested
as capital expenditures to the plant. The Company completed repairs and
resumed operations at the facility in October 1994.
NGL Marketing
Average daily volumes and gross profit margins relating to NGL
marketing are provided below.
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993 1994
---- ----- -----
(in thousands)
<S> <C> <C> <C>
NGLs:
Sales volumes (MGal/day) 978 1,062 1,046
Margins ($/Gal) .004 .001 .005
</TABLE>
Sales volumes of NGLs remained relatively consistent during 1992, 1993
and 1994. Average gross margins on sales of NGL in 1993 decreased from 1992
primarily because of continually increasing competition, which led to
compressed margins. In the fourth quarter of 1993, the Company liquidated
certain inventory positions at losses and lowered the carrying value of its
remaining inventory at December 31, 1993 by $1,002,000 to reflect the net
realizable value of such inventory.
Selling, General and Administrative
Selling, general and administrative expenses increased slightly in 1993
as compared to 1992. This increase was due primarily to additional bad debt
expense recognized in the fourth quarter of 1993. The additional bad debt
expense recognized in 1993 amounted to approximately $600,000 and resulted from
a review and assessment of customer accounts and changes in the financial
condition of certain customers. Selling, general and administrative expenses
remained relatively stable from 1993 to 1994.
Interest Expense
Interest expense was lower for 1993 than 1992. This decrease was due
to a combination of lower debt balances and lower interest rates in 1993
compared to 1992. The lower debt balances and lower interest rates are
attributable to the 1992 Restructuring of the Company's debt and equity
capitalization which was completed in December of 1992. Interest expense for
1994 was higher than for 1993 primarily as a result of higher interest rates
associated with the debt issued pursuant to the Adobe Merger.
Other
Results for 1992 include a gain of $925,000 related to the 1992
Restructuring which represents the difference between the carrying value of the
Company's 7.75% Convertible Subordinated Debentures and the liquidation
preference of the Company's 8% Junior Cumulative Convertible Preferred Stock,
Series B, par value $.01 per share, into which it was converted, less costs and
expenses of the 1992 Restructuring.
In the fourth quarter of 1993, the Company wrote off all remaining
goodwill related to United and Western, totalling approximately $3,000,000.
Due to the recent financial results of these entities, management did not feel
that these operations continued to support such goodwill. Also in the fourth
quarter of 1993, the Company recorded a
23
<PAGE> 27
charge of approximately $2,700,000 related to the moving of its corporate
office from Oklahoma City to Dallas and the consolidation of certain other
functions, including those related to the Adobe Merger.
Depreciation and amortization expense increased in 1994 as compared to
1993 as a result of a full year of depreciation on the assets acquired in the
Adobe Merger.
No recently issued accounting standards are expected to have a
material effect on the Company's financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to Item 8 is submitted in a separate section of this
report. See the Consolidated Financial Statements and Schedules of Hadson
Corporation and Subsidiaries attached hereto and listed in Item 14 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The Board of Directors currently consists of eight persons. Under the
Company's Restated Certificate of Incorporation, the Board of Directors is
divided into three classes. Each director serves for a term expiring at the
third annual meeting of stockholders following the annual meeting at which the
director was elected, except that the term of the directors who were first
elected to Class II will expire at the 1995 Annual Meeting of Stockholders and
the terms of the directors who were first elected to Class III will expire at
the 1996 Annual Meeting of Stockholders.
MEMBERS OF BOARD OF DIRECTORS - CLASS I
<TABLE>
<CAPTION>
Name and Age, Principal Occupation Director
and Other Information Since
---------------------------------- --------
<S> <C>
JAMES A. BITZER (31) has served since October 1994 as Vice President of Prudential 1993
Investment Company, which is involved in money management. From 1991 to October 1994, Mr.
Bitzer served as Second Vice President of Prudential Insurance, which is an institutional
investor and an insurance company, and from January 1993 to October 1994, as Vice President of
the Prudential Capital Group of Prudential Insurance, which is involved in merchant banking
activities on behalf of such entity. From 1991 to 1992, Mr. Bitzer served as Vice President of
the Southwestern/Energy Group of Prudential Capital Corporation, which was also in such
merchant banking activities. From 1987 to 1991, Mr. Bitzer held various positions with
Prudential in the investment area. Mr. Bitzer resigned from the Company's Board of Directors
effective October 11, 1994. Mr. Bitzer was considered to be a designee of Prudential pursuant
to the "Voting Agreement".
J. FRANK HAASBEEK (60) serves as President and Chief Executive Officer and a director of 1993
International Transquip Industries, Inc. (a manufacturer of air brake systems for heavy
</TABLE>
24
<PAGE> 28
<TABLE>
<S> <C>
trucks, buses and trailers), positions he has held since August 1991. From September 1990 to
August 1991, Mr. Haasbeek was Senior Vice President of GrandWest & Associates (a business
consulting firm); and from November 1989 to September 1990, Mr. Haasbeek was a private business
consultant. Mr. Haasbeek is a citizen of Canada. Mr. Haasbeek is considered to be a designee
of Santa Fe pursuant to the Voting Agreement.
MICHAEL J. ROSINSKI (50) serves as Senior Vice President of Administration of Santa Fe. 1993
From September 1992 to January 1995, Mr. Rosinski served as Vice President and Chief Financial
Officer of Santa Fe. Prior to joining Santa Fe in 1992, Mr. Rosinski was employed in various
capacities by Tenneco Inc. ("Tenneco") and its subsidiaries for 24 years. From 1990 until
August 1992, he was Executive Director of Investor Relations for Tenneco. Mr. Rosinski is
considered to be a designee of Santa Fe pursuant to the Voting Agreement.
R. A. WALKER (38) Since January 1990, Mr. Walker has served as Vice President of 1994
Prudential Insurance and as Managing Director of the Prudential Capital Group. Mr. Walker was
elected to the Company's Board of Directors effective October 11, 1994. Mr. Walker also serves
as a director of Maxus Energy Company, an international exploration and production company.
Mr. Walker is considered to be a designee of Prudential pursuant to the Voting Agreement.
</TABLE>
MEMBERS OF BOARD OF DIRECTORS - CLASS II
<TABLE>
<CAPTION>
Name and Age, Principal Occupation Director
and Other Information Since
---------------------------------- --------
<S> <C>
GREG G. JENKINS (37) serves as President of the Company, a position he has held since 1993
December 17, 1993, and Chief Executive Officer of the Company, a position he has held since
March 21, 1994. Mr. Jenkins became employed by the Company on October 1, 1993 and served as
Chief Operating Officer of the Company from December 17, 1993 until he was elected as Chief
Executive Officer. Prior to joining the Company, he served as Corporate Manager, Special
Projects for Santa Fe from March 1993 through September 1993. From July 1991 until March 1993,
Mr. Jenkins was General Manager -- Argentina of Santa Fe and President of Petrolera Santa Fe
S.A., a wholly-owned subsidiary of Santa Fe. Mr. Jenkins served as Manager, Business
Development for Santa Fe from April 1989 to July 1991.
JAMES L. PAYNE (58) is Chairman of the Board, President and Chief Executive Officer of 1993
Santa Fe, positions he has held since June 1990. Mr. Payne was President of Santa Fe Energy
Company, a predecessor in interest of Santa Fe, from January 1986 to January 1990 when he
became President of Santa Fe. Mr. Payne also serves as a director of Santa Fe and as a
director of Pool Energy Services Co. Mr. Payne is considered to be a designee of Santa Fe
pursuant to the Voting Agreement.
B. M. THOMPSON (62) is a private investor and was employed in various capacities by 1993
Phillips Petroleum Company ("Phillips") and its subsidiaries from 1954 to 1992. He served on
the Phillips' board of directors for four years, and retired in 1992 as Chairman of the Board
and Chief Executive Officer of GPM Gas Corporation, a subsidiary of Phillips that gathers,
processes and markets natural gas. Mr. Thompson also serves as a director of Noble Drilling
Co. Mr. Thompson is considered to be a designee of Santa Fe pursuant to the Voting Agreement.
</TABLE>
25
<PAGE> 29
MEMBERS OF BOARD OF DIRECTORS - CLASS III
<TABLE>
<CAPTION>
Name and Age, Principal Occupation Director
and Other Information Since
---------------------------------- --------
<S> <C>
J. MICHAEL ADCOCK (46) currently practices law in Shawnee, Oklahoma. He served as 1981
President and Chief Operating Officer of the Company from March 9, 1990 to December 15, 1993
and Chief Executive Officer from September 8, 1992 to December 15, 1993. Mr. Adcock served as
the Company's General Counsel from 1983 to 1990 and as its Secretary from 1980 to 1990. Mr.
Adcock is considered to be a joint designee of Santa Fe and Prudential pursuant to the Voting
Agreement. While Mr. Adcock was serving as President and Chief Operating Officer of the Company,
the Company underwent the 1992 Restructuring. See "Item 1. Business -- Recent Developments --
Financial Reorganization."
J.E. "BUCK" CANNON (61) has served as Chairman of the Board and as a director of the 1994
Company since March 21, 1994. Mr. Cannon was an independent energy consultant from January
1991 until March 1994. From January 1987 through December 1990, Mr. Cannon served as Executive
Vice President for all operating subsidiaries of American Oil and Gas Corporation. Mr. Cannon
served as a director of American Oil and Gas Corporation from June 1987 through December 1990.
</TABLE>
EXECUTIVE OFFICERS
The following sets forth certain information regarding the business
experience of the Company's executive officers.
J. E. "BUCK" CANNON was elected to the office of Chairman of the Board
of the Company on March 21, 1994. See "Members of Board of Directors - Class
III."
GREG G. JENKINS serves as President of the Company, a position he has
held since December 17, 1993, and Chief Executive Officer of the Company, a
position he has held since March 21, 1994. See "Members of the Board of
Directors - Class II."
ROBERT P. CAPPS (41) serves as Executive Vice President, Chief
Financial Officer and Treasurer of the Company, positions he has held since
January 1993, June 1991 and June 1990, respectively. Mr. Capps also served as
Senior Vice President, Finance of the Company from June 1990 to January 1993,
after serving as Vice President and Controller from June 1988 to June 1990.
While Mr. Capps was serving as Senior Vice President, Finance, Chief Financial
Officer and Treasurer of the Company, the Company underwent the 1992
Restructuring. See "Item 1. Business -- Recent Developments -- Financial
Reorganization."
KATHLEEN M. EISBRENNER (34) was elected Vice President of the Company
on November 10, 1994. From 1991 until November 1994, Ms. Eisbrenner served as
Director, Natural Gas Marketing, for the Company. Ms. Eisbrenner was Manager,
Natural Gas Marketing for the Company from 1989 to 1991.
THOMAS W. POUNDS (54) was elected Vice President, Legal Affairs and
General Counsel of the Company on July 18, 1994. From June 1, 1986 until July
15, 1994, Mr. Pounds served as Senior Vice President, General Counsel and
Secretary of American Oil and Gas Corporation, which was involved in natural
gas gathering, processing and marketing.
RICHARD N. COFFMAN (53) became employed by the Company on August 1,
1994 and was elected to the office of Controller on November 10, 1994. From
1987 to 1994, Mr. Coffman served as Vice President and Controller of GPM Gas
Corporation, a subsidiary of Phillips that gathers, processes and markets
natural gas.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
To the Company's knowledge, based solely on a review of the copies of
reports furnished to the Company and written representations of all directors
and executive officers that no other reports were required with respect to
their beneficial ownership of Company Common Stock during 1994, the Company's
directors and executive officers and all
26
<PAGE> 30
beneficial owners of more than 10% of the Company's equity securities complied
with all applicable filing requirements under Section 16(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), with respect to their
beneficial ownership of Company Common Stock during 1994, with the exception of
Messrs. Goodell, Cannon, Haasbeek and Rosinski who each filed one Form 4 late
reporting one transaction each. As indicated in the table under "--Security
Ownership of Certain Beneficial Owners" above, the H/P Trust may be deemed to be
the beneficial owner of the shares of Company Common Stock indicated in such
table. The H/P Trust has not made any filing under Section 16 (a) of the
Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation for the years ended
December 31, 1994, December 31, 1993 and December 31, 1992 earned in connection
with services rendered to the Company and its subsidiaries by (i) the Company's
Chief Executive Officer and (ii) each of the four most highly compensated
executive officers of the Company, other than the Company's Chief Executive
Officer, whose total annual salary and bonus for 1994 exceeded $100,000 (the
"Named Executive Officers").
<TABLE>
<CAPTION>
Long-term
Compensation
Awards
------------
Annual Compensation Securities
Name of Individual and ------------------------------------------------- Underlying All Other
Principal Positions Year Salary($) Bonus($) Other ($) Options(#) Compensation($)
- ----------------------------- ---- --------- -------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
J. E. Cannon 1994 112,500 - - 150,000 4,391 (1)
Chairman of the Board 1993 - - - - -
1992 - - - - -
Greg G. Jenkins 1994 170,000 13,733 (2) - 200,000 7,857 (3)
President, Chief Executive 1993 42,500 - - - -
Officer and Director 1992 - - - - -
Robert P. Capps 1994 163,800 - - 85,000 45,243 (4)
Executive Vice President, Chief 1993 163,800 35,000 (5) - - 8,584
Financial Officer and Treasurer 1992 156,000 685 198 26,667 8,338
Kathleen M. Eisbrenner (6) 1994 112,500 - - 35,000 25,779 (7)
Vice President 1993 - - - - -
1992 - - - - -
C. Jeff Goodell (8) 1994 163,422 (9) - - 30,000 10,167 (10)
Executive Vice President - 1993 154,791 - - - 8,513
Natural Gas Liquids Operations 1992 147,420 625 864 26,667 8,114
</TABLE>
(1) Includes $2,812 in matching contributions to the Hadson Corporation
Employee 401(k) Savings Plan (the "401(k) Plan") and $1,579 for life
insurance premiums paid by the Company for the benefit of employee.
(2) Mr. Jenkins received a sign-on bonus at the time of his employment by
the Company. The bonus was paid in January 1994.
(3) Includes $4,210 in matching contributions to the 401(k) Plan, $198 for
life insurance premiums paid by the Company for the benefit of
employee and $3,449 in moving expenses.
(4) Includes $7,465 matching contributions to the 401(k) Plan, $306 for
life insurance premiums paid by the Company for the benefit of
employee, $9,000 as a relocation payment and $28,469 in moving
expenses.
(5) In connection with the Adobe Merger, the Company paid to Mr. Capps a
cash bonus of $35,000 in recognition of his efforts on behalf of the
Company since 1991.
27
<PAGE> 31
(6) Ms. Eisbrenner was elected to the office of Vice President on November
10, 1994 after being employed by the Company since 1989. Compensation
is shown only for the year in which she was an executive officer of
the Company.
(7) Includes $25,638 in moving expenses and $141 for life insurance
premiums paid by the Company for the benefit of employee.
(8) Mr. Goodell resigned from the office of Executive Vice President -
Natural Gas Liquids of the Company effective December 17, 1993. Until
June 16, 1994, Mr. Goodell served as Chief Operating Officer of a
subsidiary of the Company.
(9) This amount includes accrued vacation pay of $8,631.
(10) Includes $8,817 in matching contributions to the 401(k) Plan and
$1,350 for life insurance premiums paid by the Company for the
benefit of the employee.
OPTION GRANTS TABLE
The following table sets forth all stock options awarded by the Company
to the Named Executive Officers during the fiscal year ended December 31, 1994.
<TABLE>
<CAPTION>
% of Total Potential Realizable
Securities Options Exercise Value of Assumed
Underlying Granted to Price Expiration Stock Appreciation
Name Options (#) Employees ($/Sh) Date 5% 10%
------------------------ ----------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
J. E. Cannon 150,000 (1) 11.5 2.63 3/31/04 $248,099 628,731
Greg G. Jenkins 200,000 (2) 15.3 2.75 6/23/04 346,000 876,000
Robert P. Capps 85,000 (2) 6.5 2.75 6/23/04 147,050 372,300
Kathleen M. Eisbrenner 35,000 (2) 2.7 2.75 6/23/04 60,550 153,300
C. Jeff Goodell 30,000 (2) 2.3 2.75 6/23/04 51,900 131,400
</TABLE>
(1) The option was immediately exercisable upon grant as to 25% of the
total shares subject thereto. The remaining shares subject thereto
shall become exercisable in 25% increments on each of March 31, 1996,
March 31, 1997 and March 31, 1998.
(2) The option was immediately exercisable upon grant as to 25% of the
total shares subject thereto. The remaining shares subject thereto
shall become exercisable in 25% increments on each of June 23, 1996,
June 23, 1997 and June 23, 1998.
OPTIONS EXERCISED TABLE
No stock options were exercised during 1994 by any of the executive
officers named in the Summary Compensation Table set forth above. The following
table sets forth the number of securities underlying the unexercised options at
December 31, 1994.
<TABLE>
<CAPTION>
Securities Underlying Value of Unexercised
Unexercised Options in-the-Money Options
(#) ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
<S> <C> <C>
J. E. Cannon 37,500/112,500 -
Greg G. Jenkins 50,000/150,000 -
Robert P. Capps 47,917/63,750 -
Kathleen M. Eisbrenner 9,194/26,694 -
C. Jeff Goodell 34,167/22,500 -
</TABLE>
EMPLOYMENT AGREEMENTS
In 1994, the Company entered into employment agreements with Messrs.
Cannon, Jenkins, Capps, Pounds and Coffman and Ms. Eisbrenner and amendments to
the employment agreements with Messrs. Cannon, Jenkins, Capps, Pounds and
Coffman. These agreements and amendments thereto (together, the "Employment
Agreements") provide (i) for a term of employment of two years, renewable
automatically for successive one-year periods unless either party gives notice
to the other party that no such renewal shall occur, (ii) a severance payment
equivalent to two times the total of (a) the amount of the employee's highest
annual base salary plus (b) the amount of the annual bonus for which the
employee would be eligible assuming 100% of the bonus had been earned for the
year in which such termination occurred if the employee's employment is
terminated by the Company in breach of such agreement or by the employee under
specified circumstances, (iii) that each agreement covering an award pursuant
to the Company 1992 Equity Incentive Plan, as amended and restated as of March
9, 1994 ("Equity Incentive Plan") will provide that all stock options will
become exercisable, and all restrictions on all restricted stock awards will
lapse, immediately upon the occurrence of the events described in the preceding
clause (ii) and (iv) that, during the 24-month period (and in the case of Mr.
Cannon and Mr. Cannon's medical and dental insurance benefits, the 36-month
period) following the date of termination, the Company shall maintain in effect
for the employee and the employee's eligible dependents life, medical and
dental insurance benefits available to the employee and the employee's eligible
dependents immediately prior to such termination. Any payments made pursuant
to the Employment Agreements are limited so
28
<PAGE> 32
that such payment will not result in the imposition of an excise tax on
so-called "golden parachute payments" under Section 280G(b)(2) of the Internal
Revenue Code of 1986.
COMPENSATION OF DIRECTORS
During 1994, nonemployee directors (with the exception of Messrs.
Bitzer and Walker who waived all payments in accordance with the internal
policies of Prudential, their employer) received an annual fee of $20,000 each
which was paid 50% in cash and 50% in Company Common Stock, plus $1,000 for each
Board of Directors' meeting and $500 for each committee meeting. In addition,
the chairman of each committee received a stipend of $2,000 which was paid 50%
in cash and 50% in Company Common Stock. Each director who served on the
Special Committee received a fee of $15,000.
Additionally, nonemployee directors receive automatic,
non-discretionary grants of options to purchase shares of Company Common Stock
pursuant to the Equity Incentive Plan. Pursuant to such plan, at the time of
their re-election as directors, each of Messrs. Rosinski and Haasbeek received
an automatic grant of options to purchase 666 shares of Company Common Stock at
an exercise price of $2.63 per share. Mr. Bitzer, who was also re-elected in
1994, had previously waived all future grants of awards under such plan in
accordance with the internal policies of Prudential, his employer. Similarly,
Mr. Walker, who was elected to the Board of Directors in October 1994, waived
all grants of awards under the Equity Incentive Plan in accordance with the
internal policies of Prudential, his employer.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information, as of December 31, 1994,
with respect to any person (including any "group" as that term is used in
Section 13(d)(3) of the Exchange Act), who is known to the Company to be the
beneficial owner of more than 5% of Company Common Stock, the only class of
voting securities of the Company.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Ownership
of Common Stock
---------------------------------
Name and Address Number of Percent of
of Beneficial Owner Shares Class
--------------------------------------- --------- ----------
<S> <C> <C>
The Prudential Insurance Company of
America (1) 6,312,951 24.55%
Prudential Plaza
Newark, NJ 07102-3777
Elliot Associates, L.P. (2) 2,147,463 8.35%
712 Fifth Avenue, 36th Floor
New York, NY 10019
Santa Fe Energy Resources, Inc. (3) 10,395,665 40.43%
1616 South Voss Road, Suite 1000
Houston, TX 77057
The H/P Trust (4) 4,983,180 19.38%
c/o Liberty Bank and Trust Company of
Oklahoma City, N.A., as Trustee
P. O. Box 25848
Oklahoma City, OK 73125-9969
</TABLE>
- -------------------
29
<PAGE> 33
(1) Based on information obtained by the Company from Prudential on March
2, 1995. Includes 1,329,771 shares of Company Common Stock directly
owned by Prudential and 4,983,180 shares of Company Common Stock held
by the H/P Trust over which shares Prudential has voting control and
therefore may be deemed to have beneficial ownership, but which number
may decline from time to time. See footnote (4) below.
(2) Based on Amendment No. 3 to Schedule 13D dated March 24, 1994 and
filed with the Securities and Exchange Commission (the "Commission").
Includes 1,251,576 shares of Company Common Stock which Elliot
Associates, L.P. owns directly and 895,887 shares of Company Common
Stock which Elliot Associates, L.P. has the right to acquire upon the
exercise of the shares of the Series B Preferred, which it owns.
(3) Based on Amendment No. 2 to Schedule 13D dated February 28, 1995 and
filed with the Commission.
(4) Represents 4,983,180 shares in the H/P Trust over which the H/P Trust
may be deemed to have beneficial ownership, although, pursuant to the
H/P Trust Agreement, Prudential has the right to direct the voting of
such shares. See footnote (1) above.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of December 31, 1994 (other than
Company Common Stock held under the 401(k) Plan, which information is as
of November 30, 1994) with respect to the beneficial ownership of Company
Common Stock and the Series B Preferred by (i) each director of the Company,
(ii) the Named Executive Officers, and (iii) all directors and Named Executive
Officers of the Company as a group. None of such persons beneficially owns any
shares of Series A Preferred, the only other class of equity securities of the
Company.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership
-----------------------------------------------------------
Junior Exercisable
Automatically Convertible
Common Stock Preferred Stock, Series B
------------------------- -------------------------
Number of Percent of Number of Percent of
Name of Beneficial Owner Shares Class Shares Class
----------------------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
J. Michael Adcock (1) 38,678 * 1,500 *
B. M. Thompson (2) 14,667 * - *
James L. Payne (3) 11,111 * - *
Michael J. Rosinski (4) 16,333 * - *
J. Frank Haasbeek (5) 11,777 * - *
James A. Bitzer (6) - * - *
R. A. Walker (7) - * - *
J. E. Cannon (8) 37,500 * - *
Greg G. Jenkins (8) 50,000 * - *
Robert P. Capps (8) 47,917 * - *
C. Jeff Goodell (9) 42,947 * - *
Kathleen M. Eisbrenner (10) 15,547 * - *
All executive officers and
directors as a group (12) 286,477 1.1% 1,500 *
persons
</TABLE>
- ---------------
* Less than 1%
(1) The number of shares of Company Common Stock beneficially owned
includes: 4,850 shares owned directly; 101 shares issuable upon the
exercise of shares of Series B Preferred owned directly; 3,520 shares
held for his account under the 401(k) Plan; 2,141 shares held by Mr.
Adcock's wife; 1,399 shares issuable upon the exercise of shares of
Series B Preferred held by Mr. Adcock's wife; and 26,667 shares
subject to stock options granted under the Equity Incentive Plan. The
number of shares of Series B Preferred beneficially owned includes 101
shares held directly; and 1,399 shares held by Mr. Adcock's wife.
30
<PAGE> 34
(2) The number of shares of Company Common Stock beneficially owned
includes: 8,000 shares owned directly and 6,667 shares subject to
stock options granted under the Equity Incentive Plan.
(3) The number of shares of Company Common Stock beneficially owned
includes: 4,444 shares owned directly and 6,667 shares subject to
stock options granted under the Equity Incentive Plan.
(4) The number of shares of Company Common Stock beneficially owned
includes: 9,000 shares owned directly and 7,333 shares subject to
stock options granted under the Equity Incentive Plan.
(5) The number of shares of Company Common Stock beneficially owned
includes: 4,444 shares owned directly and 7,333 shares subject to
stock options granted under the Equity Incentive Plan.
(6) Mr. Bitzer was automatically granted stock options as a nonemployee
director pursuant to the Equity Incentive Plan. Mr. Bitzer
immediately forfeited such options and waived all future grants of
awards under such plan (in accordance with the internal policies of
Prudential, his employer). Mr. Bitzer resigned from the Board of
Directors of the Company effective October 11, 1994.
(7) Mr. Walker was elected to the Board of Directors effective October 11,
1994. Mr. Walker waived all grants of awards under the Equity
Incentive Plan (in accordance with the internal policies of
Prudential, his employer).
(8) Subject to stock options granted under the Equity Incentive Plan.
(9) The number of shares of Company Common Stock beneficially owned
includes: 8,780 shares held for his account under the 401(k) Plan and
34,167 shares subject to options granted under the Equity Incentive
Plan. Mr. Goodell resigned from the office of Executive Vice
President - Natural Gas Liquids of the Company effective December 17,
1993. Mr. Goodell served as the Chief Operating Officer of a
subsidiary of the Company until June 16, 1994.
(10) The number of shares of Company Common Stock beneficially owned
includes: 151 shares held for her account under the 401(k) Plan; 52
shares held for her husband's account under the 401(k) Plan; 10,038
shares subject to options granted under the Equity Incentive Plan; and
5,306 shares subject to options granted under the Equity Incentive
Plan and held by Ms. Eisbrenner's husband.
CHANGE IN CONTROL OF THE COMPANY
The completion of the Merger will result in a change in control of the
Company. See "Item 1. Business -- Subsequent Events -- Acquisition of the
Company by LG&E Energy Corp."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GAS CONTRACT
Santa Fe and the Company (through a wholly-owned subsidiary) are
parties to the Gas Contract, which was entered into in December 1993 at the
time of the Adobe Merger. See "Item 1. Business -- Energy Products and
Services -- Natural Gas Marketing Operations." The Gas Contract provides for
the dedication by Santa Fe to the Company of all of its domestic natural gas
production from specified existing wells, which consist of essentially all of
such entity's domestic natural gas production, except to the extent such
production is dedicated under pre-existing contracts. Upon the expiration of
any such pre-existing contracts, that production shall also be dedicated to the
Company. The dedication of production will include natural gas attributable to
the interests of third parties in such wells to the extent Santa Fe, has the
right to market such production.
In addition to production from existing wells, the Gas Contract
provides for the dedication by Santa Fe to the Company of gas production from
certain domestic development wells of such entities, as defined, and
exploration wells, as defined, to the extent that Santa Fe accepts proposals
from the Company to gather and market production from such exploration wells.
Under other provisions of the Gas Contract, the Company is obligated to analyze
and provide to Santa Fe its recommendation regarding the method of gathering
and transporting production from exploration wells, whether by Santa Fe, the
Company or third parties. Production from gas wells acquired by Santa Fe,
pursuant to an acquisition of producing oil and gas properties is not dedicated
under the Gas Contract but may be dedicated by the mutual agreement of Santa Fe
and the Company.
31
<PAGE> 35
The Company is required to release gas production dedicated under the
Gas Contract under certain circumstances. In addition, the Company is required
to release specified quantities of production for use in enhanced oil recovery
operations by Santa Fe; provided, that the Company is paid a monthly handling
fee related to such production. Santa Fe may also have gas released from the
Gas Contract if the Company's financial condition changes materially and
adversely and the Company does not provide financial assurances (such as
letters of credit) for the value of such gas acceptable to Santa Fe. To date,
Santa Fe has not elected to request any such financial assurances.
Pursuant to the Gas Contract, the Company is required to pay Santa Fe,
for all production delivered, the fair market price for such gas. The Company
is obligated to use its best efforts to receive gas from Santa Fe at delivery
points so as to maximize the set price received by Santa Fe for such
production. Payment for purchases by the Company are made in immediately
available funds no later than the last working day of the month following the
month of production, and Santa Fe has the right to immediately terminate, or to
suspend performance under, the contract if any such payment is overdue by more
than three working days. On December 13, 1994, Santa Fe agreed that, with
respect to payments due on the last day of November 1994 and the last day of
each month thereafter through and including May 1995, the Company may defer up
to $5,000,000 of amounts due under the Gas Contract for 30 days; provided, that
the amounts deferred bear interest at the annual rate of the prime rate of
Texas Commerce Bank National Association plus 1% from the date of deferral
until payment. This deferral could expire earlier if the Merger is consummated
prior to April 30, 1995; however, Santa Fe has indicated that if the Merger is
not consummated prior to that time and the Merger Agreement has not been
terminated, it will extend such deferral until June 30, 1995.
The term of the Gas Contract runs until March 31, 2001. However,
either the Company or Santa Fe has the right to terminate the contract upon a
material breach of the contract or the occurrence of certain governmental
actions. In addition, Santa Fe has the right to terminate the contract upon
(i) the failure of the Company to purchase specified percentages of available
production from Santa Fe (other than as a result of force majeure), including
the failure to purchase at least 90% of available gas in any period of six
consecutive months, (ii) the occurrence of an event of default under any debt
or credit agreement of the Company for borrowed money if such event results in
the acceleration of any obligation in excess of $10,000,000 and (iii) certain
bankruptcy, insolvency and similar events.
During 1994, the Company purchased 53,977,229 MMBtu of gas from Santa
Fe under the Gas Contract and paid Santa Fe a total of $99,248,000 for said gas.
TRUST AGREEMENT
In connection with the Adobe Merger, the Company, Prudential and the
Trustee of the H/P Trust entered into the H/P Trust Agreement, pursuant to
which the H/P Trust was created for the benefit of the Company and Prudential.
The general purpose of the H/P Trust was to provide a mechanism whereby, upon
the exercise of conversion rights by holders of shares of Series B Preferred,
the proceeds of the exercise of such conversion rights ("Conversion Proceeds')
would be paid to Prudential in place of its interest in a specified number of
shares of Company Common Stock.
The Company funded the H/P Trust with the Trust Shares, all of which
were initially allocated to Prudential's beneficial interest. Under the terms
of the H/P Trust Agreement, the Company was required to instruct the transfer
agent for its Series B Preferred to deliver the Conversion Proceeds to the
Trustee of the H/P Trust. The Conversion Proceeds were to be allocated to
Prudential's beneficial interest and remitted to Prudential on a quarterly
basis (provided that an adequate number of Series B Preferred shares had been
converted during the quarter, as determined under a formula specified in the
H/P Trust Agreement). Simultaneously, a prescribed number of Trust Shares were
to be reallocated from Prudential's beneficial interest to the Company's
beneficial interest.
The H/P Trust was to terminate seven months after its creation or on
the earliest date when no shares of Series B Preferred remained outstanding,
whichever occurs later. Upon termination, Prudential was to receive all Trust
Shares that remained allocated to its beneficial interest and the Company was
to receive the balance of the Trust Shares and all other assets held in the H/P
Trust. Until termination, the trust shares were to be voted as directed by
Prudential, and Prudential was to receive any dividends or other distributions
with respect to Trust Shares allocated to its beneficial interest. The Company
was responsible for all expenses of the H/P Trust, including all costs and
compensation of the Trustee. Prudential has agreed to vote the Trust Shares in
favor of the Merger and the Merger Agreement.
32
<PAGE> 36
To date, 1,470 shares of Series B Preferred have been converted into
Company Common Stock since the creation of the H/P Trust. Accordingly, the H/P
Trust holds 4,983,180 Trust Shares and approximately $4,740 in Conversion
Proceeds. All of the Trust Shares remain allocated to Prudential's beneficial
interest because, in accordance with the terms of the H/P Trust Agreement, the
Conversion Proceeds associated with the conversion of the 1,470 shares of
Series B Preferred have not been remitted to Prudential.
As part of the Merger, the Company, Prudential and the Trustee will
consent to an amendment of the H/P Trust Agreement specifically authorizing the
assignment by Prudential of its beneficial interest in the H/P Trust, and
Prudential will assign its interest to Parent. In anticipation of the Merger,
the Company and Parent filed a request for a no-action letter or exemptive
order from the Securities and Exchange Commission to confirm that, upon
consummation of the Merger and the conversion of the Series B Preferred into
the right to receive $0.00275 per share in cash, the Company will no longer be
required to prepare and file periodic reports pursuant to the Exchange Act.
VOTING AGREEMENT
Pursuant to the Voting Agreement entered into between Santa Fe and
Prudential in connection with the Adobe Merger, each such entity agreed to vote
the shares of Company Common Stock beneficially owned by them in favor of (i)
the persons designated from time to time by Santa Fe for election as directors
of the Company, provided that the number of directors of the Company holding
office at any time (assuming the election of such designees) who have been
designated by Santa Fe shall not be greater than 50% of the total number of
directors of the Company, (ii) any one person designated from time to time by
Prudential for election as a Class I director of the Company, and (iii) any one
person jointly designated from time to time by Santa Fe and Prudential for
election as a Class III director of the Company. The Voting Agreement also
provides that each of Santa Fe and Prudential will vote all shares of Company
Common Stock beneficially owned by it against (i) any amendment to a provision
of the Company's bylaws relating to the filling of vacancies on the Board of
Directors and (ii) any amendment to a provision of the Company's Restated
Certificate of Incorporation, that will prohibit the amendment of such bylaw
provision unless any such amendment is approved by the holders of the Company
Common Stock. The Voting Agreement terminates upon the earlier to occur of (i)
December 14, 2003 or (ii) such time as Prudential no longer beneficially owns
at least 756,100 shares of Company Common Stock.
REGISTRATION RIGHTS AGREEMENT
In connection with the Adobe Merger, the Company entered into the
Registration Rights Agreement with Santa Fe and Prudential pursuant to which
each of Santa Fe and Prudential are entitled to certain demand and "piggyback"
registration rights with respect to the shares of capital stock of the Company
issued to it in connection with the Adobe Merger and, with respect to
Prudential, any shares of Company Common Stock received by Prudential upon the
termination of the H/P Trust.
INDEMNIFICATION AND DIRECTORS' AND OFFICERS' INSURANCE
Parent has agreed in the Merger Agreement to cause the Company to
indemnify each of the present and former officers, directors and agents of the
Company and its subsidiaries with respect to his or her service prior to the
Effective Time to the full extent permitted by the DGCL, the Company's or
subsidiaries' certificate of incorporation, bylaws or indemnification
agreements in each case as in effect as of the date of the Merger Agreement.
Additionally, Parent has agreed in the Merger Agreement to use its best efforts
to cause to be maintained for six years from the later of the Effective Time or
the expiration of the current policy, the current policies of directors' and
officers' liability insurance, with respect to all matters, including the
transactions contemplated by the Merger Agreement, occurring prior to the
Effective Time; provided, the Company, as the survivor of the Merger, may
substitute policies of at least the same coverage containing terms and
conditions which are no less advantageous to the insured so long as no lapse in
coverage occurs as a result of such substitution; and, provided further, that
effective on and after the third anniversary of the Effective Time, the Company
may substitute for the insurance policies an indemnity from Parent providing
coverage no less advantageous to the insured so long as no lapse in coverage
occurs as a result of such substitution. See "Item 1. Business -- Subsequent
Events -- Acquisition of the Company by LG&E Energy Corp."
33
<PAGE> 37
COMPANY OPTIONS
The Merger Agreement also provides that the Company shall use all
reasonable efforts to provide that, immediately prior to the Effective Time,
each outstanding option to purchase shares of Company Common Stock, each stock
appreciation right and each limited stock appreciation right or other similar
right (collectively, the "Company Options") granted under the Equity Incentive
Plan, the Nonstatutory Stock Option Agreement dated December 13, 1993 and the
Nonstatutory Stock Option Agreement dated December 14, 1993, whether or not
exercisable, shall be cancelled and holders of the Company Options shall be
entitled to receive an amount in respect thereof equal to the product of (x)
the excess, if any, of $2.75 over the respective exercise price thereof and (y)
the number of shares of the Company Common Stock subject thereto. . See "Item
1. Business -- Subsequent Events -- Acquisition of the Company by LG&E Energy
Corp."
PARENT CONTRACTS
The Company (through two of its wholly-owned subsidiaries) entered
into a Gas Purchase and Sale Contract, dated February 24, 1995 (the "Carousel
Gas Contract") and a Gas Storage Contract, dated February 24, 1995 (the
"Storage Contract") each with Carousel Holding Corporation, a wholly-owned
subsidiary of Parent ("Carousel"). Pursuant to the Carousel Gas Contract,
Carousel purchased 1,200,000 MMBtu of natural gas from the Company in February
for a price of $1.19 per MMBtu. The Carousel Gas Contract then requires
Carousel to sell to the Company 600,000 MMBtu of gas on each of August 1, 1995
and September 1, 1995 at a price of $1.38 per MMBtu. These prices are
competitive with current market prices for natural gas to be purchased and sold
at such times.
Under the terms of the Storage Contract, Carousel will store the
entire quantity of gas purchased under the Carousel Gas Contract at the
Company's storage facility from February 1995 through September 1995. The
monthly storage fee is $.005 per MMBtu of gas. However, pursuant to the terms
of the Storage Contract, the total storage fee of $42,000.00 was paid on
February 24, 1995.
The terms of the Carousel Gas Contract and Storage Contract are from
February 24, 1995 through September 30, 1995.
AGREEMENT WITH ELLIOT
The Company has entered into an agreement with Elliot Associates, L.P.
("Elliot"), which is the beneficial owner of 1,251,576 shares of Company Common
Stock and 895,887 shares of Series B Preferred. Pursuant to the terms of the
agreement, the Company has agreed to pay Elliot not more than $75,000 in
consideration for Elliot advising the Company with respect to the Merger and
for assisting the Company in obtaining any stockholder approvals required for
the Merger. . See "Item 1. Business -- Subsequent Events -- Acquisition of the
Company by LG&E Energy Corp."
34
<PAGE> 38
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS ANNUAL REPORT ON
FORM 10-K:
(1) Financial Statements: The consolidated financial statements
of the Company filed as part of this report are listed in the
"Index to Financial Statements and Financial Statement
Schedules" on Page F-1 hereof.
(2) Financial Statement Schedules: The financial statement
schedules of the Company filed as part of this report are
listed in the "Index to Financial Statements and Financial
Statement Schedules" on Page F-1 hereof.
(3) Exhibits: (Asterisk (*) indicates exhibits incorporated
herein by reference.)
(**) Previously filed with Form 10-K dated March 30, 1995
*2.01 - Agreement of Merger, dated as of July 28, 1993, by
and among Santa Fe, AGPC and the Company (filed as
exhibit (c)(i) to the Company's Schedule 13E-3, File
No. 5-14102, as amended, and incorporated herein by
reference)
*2.02 - Amendment No. 1 to Agreement of Merger, dated as of
November 9, 1993, by and among Santa Fe, AGPC and the
Company (filed as exhibit (c)(iv) to the Company's
Schedule 13E-3, File No. 5-14102, as amended, and
incorporated herein by reference)
**2.03 - Agreement and Plan of Merger, dated as of February
10, 1995, by and among Company, Parent and Merger Sub
*3.01 - Restated Certificate of Incorporation of the Company
(filed as exhibit 4.01 to the Company's Registration
Statement on Form S-3, File No. 33-51373, and
incorporated herein by reference)
*3.02 - Amended and Restated Bylaws of the Company (filed as
exhibit 4.2 to the Company's Registration Statement
on Form S-3, File No. 33-51373, and incorporated
herein by reference)
**3.03 - Certificate of Amendment to Restated Certificate of
Incorporation of the Company dated November 21, 1994
*4.01 - Specimen certificate of the Common Stock of the
Company (filed as exhibit 4.3 to the Company's
Registration Statement on Form S-3, File No.
33-51373, and incorporated herein by reference)
*4.02 - Specimen certificate of Senior Cumulative Preferred
Stock, Series A, of the Company (filed as exhibit
4.01 to the Company's Registration Statement on Form
S-4, File No. 33-68224, and incorporated herein by
reference)
*4.03 - Specimen certificate of Junior Exercisable Preferred
Stock, Series B, of the Company (filed as exhibit
4.02 to the Company's Registration Statement on Form
S-4, File No. 33-68224, and incorporated herein by
reference)
*4.04 - Securities Purchase Agreement, dated as of December
14, 1993, between the Company and Prudential (filed
as exhibit 4.2 to the Company's Current Report on
Form 8-K dated December 14, 1993 and incorporated
herein by reference)
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<PAGE> 39
*4.05 - Restated Securities Purchase Agreement, dated as of
December 16, 1992, by and between the Company and
Prudential (filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K dated October 15, 1992 and
incorporated herein by reference)
*4.06 - Trust Agreement, dated as of December 14, 1993, among
the Company, Prudential and Liberty Bank and Trust
Company of Oklahoma City, N.A. as Trustee (filed as
exhibit 4.3 to the Company's Current Report on Form
8-K dated December 14, 1993 and incorporated herein
by reference)
*9 - Voting Agreement, dated December 14, 1993, between
Prudential and Santa Fe (filed as exhibit 9 to the
Company's Registration Statement on Form S-4, File
No. 33-68224, and incorporated herein by reference)
*10.01 - Form of Indemnity Agreement between the Company and
its directors (filed as exhibit 10.02 to the
Company's Registration Statement on Form S-2, File
No. 33-12577 and incorporated herein by reference)
*10.02 - Form of Employment Agreement, dated as of March 31,
1994, between the Company and J. E. Cannon (filed
as exhibit 10.02 to the Company's Form 10-K for the
year ended December 31, 1993 and incorporated herein
by reference)
*10.03 - Form of Employment Agreement, dated as of March 31,
1994, between the Company and Greg G. Jenkins (filed
as exhibit 10.03 to the Company's Form 10-K for the
year ended December 31, 1993 and incorporated herein
by reference)
*10.04 - Form of Amended and Restated Employment Agreement,
dated as of March 31, 1994, between the Company and
Robert P. Capps (filed as exhibit 10.07 to the
Company's Form 10-K for the year ended December 31,
1993 and incorporated herein by reference)
**10.05 - Amendment to Employment Agreement, dated as of
November 10, 1994, between the Company and J. E.
Cannon.
**10.06 - Amendment to Employment Agreement, dated as of
November 10, 1994, between the Company and Greg G.
Jenkins
**10.07 - Amendment to Amended and Restated Employment
Agreement, dated as of November 10, 1994, between the
Company and Robert P. Capps
**10.08 - Employment Agreement, dated as of July 18, 1994,
between the Company and Thomas W. Pounds
**10.09 - Amendment to Employment Agreement, dated as of
November 10, 1994, between the Company and Thomas W.
Pounds
**10.10 - Employment Agreement, dated as of August 1, 1994,
between the Company and Richard N. Coffman
**10.11 - Amendment to Employment Agreement, dated as of
November 10, 1994, between the Company and Richard N.
Coffman
**10.12 - Employment Agreement, dated as of November 10, 1994,
between the Company and Kathleen M. Eisbrenner
36
<PAGE> 40
**10.13 - Indemnification Agreement, dated as of December 20,
1994, between Company and J. Michael Adcock
**10.14 - Indemnification Agreement, dated as of December 20,
1994, between Company and B. M. Thompson
**10.15 - Indemnification Agreement, dated as of December 20,
1994, between Company and James L. Payne
**10.16 - Indemnification Agreement, dated as of December 20,
1994, between Company and Michael J. Rosinski
**10.17 - Indemnification Agreement, dated as of December 20,
1994, between Company and J. Frank Haasbeek
**10.18 - Indemnification Agreement, dated as of December 20,
1994, between Company and R. A. Walker
**10.19 - Indemnification Agreement, dated as of December 20,
1994, between Company and J. E. Cannon
**10.20 - Indemnification Agreement, dated as of December 20,
1994, between Company and Greg G. Jenkins
**10.21 - Indemnity Agreement, dated as of November 10, 1988,
between Company and Robert P. Capps
**10.22 - Indemnification Agreement, dated as of December 20,
1994, between Company and Kathleen M. Eisbrenner
**10.23 - Indemnification Agreement, dated as of December 20,
1994, between Company and Thomas W. Pounds
**10.24 - Indemnification Agreement, dated as of December 20,
1994, between Company and Richard N. Coffman
*10.25 - Hadson Corporation Employee 401(k) Savings Plan as
Amended and Restated Effective January 1, 1992 (filed
as exhibit 10.16 to the Company's Form 10-K for the
year ended December 31, 1991 and incorporated herein
by reference)
*10.26 - Credit Agreement, dated as of December 16, 1992,
among the Company and Prudential (filed as exhibit
10.2 to the Company's Current Report on Form 8-K
dated October 15, 1992 and incorporated herein by
reference)
*10.27 - Credit Agreement dated as of December 14, 1993 among
the Company, Gas Systems, United, Western and BMO,
individually and as Agent for the other Banks which
may become a party thereto (filed as exhibit 10.2 to
the Company's Current Report on Form 8-K dated
December 14, 1993 and incorporated herein by
reference)
*10.28 - Cash Collateral Agreement, dated as of July 15, 1993,
by and between the Company and Prudential (filed as
exhibit 10.21 to the Company's Registration Statement
on Form S-4, File No. 33-68224, and incorporated
herein by reference)
37
<PAGE> 41
*10.29 - Amendment No. 1 to Cash Collateral Agreement, dated
as of August 31, 1993, by and among the Company and
Prudential (filed as exhibit 10.27 to the Company's
Registration Statement on Form S-4, File No.
33-68224, and incorporated herein by reference)
*10.30 - Registration Rights Agreement dated as of December
14, 1993 among the Company, Santa Fe and Prudential
(filed as exhibit 10.2 to the Company's Current
Report on Form 8-K dated December 14, 1993 and
incorporated herein by reference)
*10.31 - Form of Hadson Corporation 1992 Equity Incentive Plan
as amended and restated as of November 5, 1993
(included as Appendix V to the Proxy Statement
Prospectus dated April 22, 1994)
*10.32 - Hadson Corporation 1992 Equity Incentive Plan, as
amended and restated as of March 9, 1994 (filed as
exhibit 10.20 to the Company's Form 10-K for the year
ended December 31, 1993 and incorporated herein by
reference)
*10.33 - Form of Master Gas Purchase Agreement dated December
14, 1993 among Santa Fe, SFEOP and AGPC (filed as
exhibit 10.23 to the Company's Registration Statement
on Form S-4, File No. 33-68224, and incorporated
herein by reference)
*10.34 - Form of Nonstatutory Stock Option Agreement dated
December 13, 1993 that was entered between the
Company with each of Harry G. Hadler, S. D. Wilks,
C.D., and Walter C. Wilson (filed as exhibit 10.28 to
the Company's Registration Statement on Form S-4,
File No. 33-68224, and incorporated herein by
reference)
*10.35 - Form of Nonstatutory Stock Option Agreement dated
December 14, 1993 that was entered into by and
between the Company and each of Messrs. Payne,
Haasbeek, Thompson and Rosinski (filed as exhibit
10.23 to the Company's Form 10-K for the year ended
December 31, 1993 and incorporated herein by
reference)
**10.36 - First Amendment to Credit Agreement, dated as of
December 30, 1994, by and among the Company, Gas
Systems, United, Western and BMO, individually and as
Agent for the other Banks party to the Credit
Agreement
**10.37 - Letter Agreement, dated as of December 15, 1994,
between the Company and Santa Fe amending the Gas
Contract
11 - Computation of per share earnings
**22 - List of subsidiaries of the Company
23 - Consent of independent public accountants
**24 - Powers of Attorney
27 - Financial Data Schedule
(B) REPORTS ON FORM 8-K.
No Reports on Form 8-K were filed during the quarter ended December 31,
1994.
(C) SEE SUBITEM (a)(3) ABOVE.
(D) SEE SUBITEM (a)(2) ABOVE.
38
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
HADSON CORPORATION
DATE: April 14, 1995 By: /s/ GREG G. JENKINS
Greg G. Jenkins,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ GREG G. JENKINS President, Chief Executive March 29, 1995
Greg G. Jenkins Officer and Director
(Principal Executive Officer)
/s/ ROBERT P. CAPPS Executive Vice President, Chief March 29, 1995
Robert P. Capps Financial Officer and Treasurer
(Principal Financial Officer)
/s/ RICHARD N. COFFMAN Controller March 29, 1995
Richard N. Coffman (Principal Accounting Officer)
/s/ J. E. CANNON Chairman of the Board of Directors March 29, 1995
J. E. Cannon
/s/ J. MICHAEL ADCOCK * Director March 29, 1995
J. Michael Adcock
/s/ J. FRANK HAASBEEK * Director March 29, 1995
J. Frank Haasbeek
/s/ JAMES L. PAYNE * Director March 29, 1995
James L. Payne
</TABLE>
39
<PAGE> 43
<TABLE>
<S> <C> <C>
/s/ MICHAEL J. ROSINSKI * Director March 29, 1995
Michael J. Rosinski
/s/ B. M. THOMPSON * Director March 29, 1995
B. M. Thompson
/s/ R. A. WALKER * Director March 29, 1995
R. A. Walker
* By:/s/ ROBERT P. CAPPS
Robert P. Capps
(Attorney-in-fact for persons indicated)
</TABLE>
40
<PAGE> 44
HADSON CORPORATION AND SUBSIDIARIES
Index to Financial Statements
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS Page
----
<S> <C>
Report of Independent Accountants . . . . . . . . . . . F-2
Consolidated Balance Sheets
December 31, 1993 and 1994 . . . . . . . . . . . . F-3
Consolidated Statements of Operations
Years Ended December 31, 1992, 1993 and 1994 . . . F-4
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1992, 1993 and 1994 . . . F-5
Consolidated Statements of Cash Flows
Years Ended December 31, 1992, 1993 and 1994 . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . F-8
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
VIII. Consolidated Valuation and Qualifying Accounts
Three Years Ended December 31, 1994 . . . . . . . F-26
</TABLE>
<PAGE> 45
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Hadson Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Hadson Corporation and its subsidiaries (the "Company") at December
1993 and 1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, the Company
and certain of its debt and equity holders entered into a definitive agreement
with LG&E Energy Corp. ("LG&E") whereby LG&E will acquire all of the Company's
common stock, senior preferred stock and certain debt.
PRICE WATERHOUSE LLP
Oklahoma City, Oklahoma
March 3, 1995
F-2
<PAGE> 46
HADSON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
<TABLE>
<CAPTION>
December 31,
-------------------
1993 1994
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,466 3,109
Accounts receivable, net of allowance for doubtful
accounts of $888 and $1,287, respectively (includes
amounts from related parties of $328 and $1,604, respectively) 85,097 76,045
Inventories 4,386 4,858
Assets held for sale - 4,635
Prepaid expenses and other current assets 9,363 5,427
----------- -----------
Total current assets 101,312 94,074
----------- -----------
Property, equipment and improvements at cost, net of accumulated depreciation
and amortization of $32,135 and $36,094, respectively 99,431 101,169
Gas supply contract 6,798 5,827
Assets held for sale - 1,900
Other assets 2,732 2,435
----------- -----------
$ 210,273 205,405
LIABILITIES AND SHAREHOLDERS' EQUITY =========== ===========
Current liabilities:
Bank borrowings and current long-term debt $ 1,000 10,578
Accounts payable (includes amounts from related parties
of $18,796 and $13,633, respectively) 87,504 86,944
Accrued liabilities 6,137 5,861
Deferred revenue 2,537 3,852
----------- -----------
Total current liabilities 97,178 107,235
----------- -----------
Long-term debt 55,800 57,372
Other long-term liabilities 15,123 1,579
Deferred income taxes 2,699 783
Commitments and contingencies (Note 12)
Shareholders' equity:
Preferred stock, par value $.01 per share
Authorized, 25,000,000 shares -
Senior Cumulative, Series A; issued 2,080,000 and 2,335,907
shares, at aggregate carrying value 49,000 55,029
Junior Exercisable Automatically Convertible, Series B;
issued 4,983,180 and 4,981,691 shares, at par value 50 50
Common stock, par value $.01 per share
Authorized 35,000,000 and 50,000,000 shares
issued 25,689,147 and 25,690,640 shares 257 257
Additional paid-in capital 196,625 196,621
Accumulated deficit (206,459) (213,521)
----------- -----------
Total shareholders' equity 39,473 38,436
----------- -----------
$ 210,273 205,405
============= ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE> 47
HADSON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Sales (includes amounts from related parties of
$0, $489 and $18,566, respectively) $ 427,781 522,661 752,470
Interest and other income 478 495 311
Gain on sale of assets - 6,355 -
Gain on insurance recovery - - 1,257
Net gain on 1992 Restructuring and settlements 925 - -
Equity in earnings of unconsolidated affiliate 1,716 629 -
------------ ----------- -----------
430,900 530,140 754,038
------------ ----------- -----------
Expenses:
Cost of sales and services (includes amounts from related
parties of $948, $29,649 and $99,248, respectively) 410,960 514,117 723,546
Depreciation and amortization 6,111 6,280 10,957
Write-off of goodwill - 3,077 -
Selling, general and administrative 15,593 16,407 16,888
Interest 13,441 2,648 5,154
Write down of NGL inventory - 1,002 -
Settlement of litigation 1,000 475 -
Reorganization and other - 2,704 530
------------ ----------- -----------
447,105 546,710 757,075
------------ ----------- -----------
Loss from continuing operations before income taxes (16,205) (16,570) (3,037)
Income tax benefit (1,139) (694) (2,004)
------------ ----------- -----------
Loss from continuing operations (15,066) (15,876) (1,033)
Earnings (loss) from discontinued operations, net of income
tax benefit of $78 in 1993 (8,103) 5,553 -
------------ ----------- -----------
Net loss (23,169) (10,323) (1,033)
Preferred stock dividend requirements 61 293 5,772
------------ ----------- -----------
Net loss attributable to common stock $ (23,230) (10,616) (6,805)
Income (loss) per common and common equivalent share:
Continuing operations $ (5.35) (1.93) (.26)
Discontinued operations (2.87) .66 -
------------ ----------- -----------
Net loss $ (8.22) (1.27) (.26)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 48
HADSON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1992, 1993 and 1994
(In Thousands)
<TABLE>
<CAPTION>
7% Senior Senior 8% Junior
Common Stock Preferred Stock Preferred Stock Preferred Stock
Common Stock Class B and C Series A Series A Series B
----------------- ----------------- ---------- ------------- ----------
Liqui-
Par Par Carrying Carrying dation
Shares Value Shares Value Shares Value Shares Value Shares Value
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 2,517 3,776 - - - - - - - -
Issuance of common stock 68 102 - - - - - - - -
Adjust par value to $.01 - (3,490) - - - - - - - -
Restructuring of debt and equity - -
capitalization 20 3 84,045 840 49 42,543 - - 4,065 20,325
Net loss for the year ended - -
December 31, 1992 - - - - - - - - - -
--- --- ---- ---- ---- ---- ---- --- --- ---
Balance at December 31, 1992 2,605 391 84,045 840 49 42,543 - - 4,065 20,325
Issuance of common stock 13 2 - - - - - - - -
Issuance of 8% Junior
Preferred stock - - - - - - - - 30 150
Conversion of 8% Junior Preferred
stock 659 99 - - - - - - (455) (2,273)
Dividend on 8% Junior Preferred
stock - - - - - - - - 156 781
Issuance of stock pursuant
to Merger 10,396 104 - - - - 2,080 49,000 - -
Issuance and conversion of stock
pursuant to recapitalization 12,016 (339) (84,045) (840) (49) (42,543) - - (3,796) (18,983)
Net loss for the year ended - -
December 31, 1993 - - - - - - - - - -
--- --- ---- ---- ---- ---- --- --- ---- ----
Balance at December 31, 1993 25,689 257 - - - - 2,080 49,000 - -
Conversion of Junior Preferred
stock 1 - - - - - - - -
Dividend on Senior Preferred
stock - - - - - - 256 6,029 - -
Issuance of cash for partial
shares - - - - - - - - - -
Net loss for the year ended - -
December 31, 1994 - - - - - - - - - -
--- --- ---- ---- ---- ---- ---- ---- ---- ----
Balance at December 31, 1994 25,690 257 - - - - 2,336 55,029 - -
====== ======= ==== ==== ==== ==== ======= ======= ==== ====
</TABLE>
<TABLE>
<CAPTION>
Junior
Preferred Stock
Series B
----------
Additional Accumu- Total
Par Paid-in lated Shareholders'
Shares Value Capital Deficit Equity
------ ------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991 - - 146,057 (172,186) (22,353)
Issuance of common stock - - 790 - 892
Adjust par value to $.01 - - 3,490 - -
Restructuring of debt and equity
capitalization - - - - 63,711
Net loss for the year ended
December 31, 1992 - - - (23,169) (23,169)
---- --- ---- ------- -------
Balance at December 31, 1992 - - 150,337 (195,355) 19,081
Issuance of common stock - - - - 2
Issuance of 8% Junior
Preferred stock - - - - 150
Conversion of 8% Junior Preferred
stock - - 2,174 - -
Dividend on 8% Junior Preferred
stock - - - (781) -
Issuance of stock pursuant
to Merger - - 16,292 - 65,396
Issuance and conversion of stock
pursuant to recapitalization 4,983 50 27,822 - (34,833)
Net loss for the year ended
December 31, 1993 - - - (10,323) (10,323)
---- --- ---- ------- -------
Balance at December 31, 1993 4,983 50 196,625 (206,459) 39,473
Conversion of Junior Preferred
stock (1) - - - -
Dividend on Senior Preferred
stock - - - (6,029) -
Issuance of cash for partial
shares - - (4) - (4)
Net loss for the year ended
December 31, 1994 - - - (1,033) (1,033)
---- ---- --- ------- -------
Balance at December 31, 1994 4,982 50 196,621 (213,521) 38,436
====== === ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 49
HADSON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1992 1993 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (15,066) (15,876) (1,033)
Items not affecting cash flow:
Depreciation and amortization 6,111 6,280 10,957
Gain on insurance recovery - - (1,257)
Deferred income taxes (338) (609) (2,086)
Gain on sale of assets - (6,355) -
Write-off of goodwill - 3,077 -
Write down of NGL inventory - 1,002 -
Reorganization costs - 1,372 -
Net gain on 1992 Restructuring and settlements (925) - -
Interest settled in 1992 Restructuring 12,941 -
Equity in (earnings) loss of unconsolidated
affiliate and other (1,282) 2,203 738
Accruals of operating cash receipts and payments, net of
effects of acquired or sold companies:
Change in trade receivables (includes amounts from related
parties of $0, $(328) and $(1,276), respectively) 5,392 (24,371) (10,133)
Change in inventories 7,659 (2,231) (2,377)
Change in prepaid expenses and other current assets (956) (6,056) 468
Change in current liabilities (includes amounts from related
parties of $-0-, $18,796 and $(5,163), respectively) (9,415) 37,332 8,206
Loan origination and amendment fees (537) - -
---------- ---------- ----------
Cash flows provided (used) by operating activities 3,584 (4,232) 3,483
---------- ---------- ----------
Cash flows from investing activities:
Additions to property, equipment and improvements (3,384) (4,482) (14,268)
Dispositions of properties 257 261 3,123
Proceeds from insurance recovery - - 3,403
Net proceeds from sale of equity investments - 44,000 750
Cash proceeds (requirements) related to discontinued
operations (3,548) 7,339 -
Other (276) 143 (570)
---------- ---------- ----------
Cash flows provided (used) by investing activities (6,951) 47,261 (7,562)
---------- ---------- ----------
</TABLE>
F-6
<PAGE> 50
HADSON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1992 1993 1994
---- ---- -----
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from borrowings $ 7,970 200 9,800
Net repayments of borrowings (1,000) (39,774) (1,000)
Transaction costs related to restructurings (4,491) (4,434) (4,078)
Issuance of common stock 892 - -
----------- ----------- -----------
Cash flows provided (used) by financing activities 3,371 (44,008) 4,722
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents $ 4 (979) 643
Cash and cash equivalents at beginning of period 3,441 3,445 2,466
----------- ----------- -----------
Cash and cash equivalents at end of period $ 3,445 2,466 3,109
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest (net of amounts capitalized) $ 830 2,975 3,833
Income taxes (net of refunds) (2) 102 (185)
----------- ----------- -----------
$ 828 3,077 3,648
=========== =========== ===========
Supplemental disclosures of non-cash activities:
Issuance of 6.2% Senior Secured Notes $ 56,400 33,000 -
Issuance of Santa Fe 9% subordinated note - - 2,350
Retirement of debt in 1992 Restructuring:
Convertible Subordinated Debentures (27,528) -
11.2% Senior Notes (13,973) - -
12.9% Senior Subordinated Notes (75,000) - -
Issuance (Retirement) of 7% Senior Preferred Stock 42,543 (42,543) -
Issuance (Retirement) of 8% Junior Preferred Stock 20,325 (20,325) -
Issuance (Retirement) of Class B and C Common Stock 843 (843) -
Additions to property, equipment and improvements - 65,000 2,520
Issuance of Senior Preferred Stock - 49,000 6,029
Issuance of Common Stock 46,154 -
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 51
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Hadson Corporation (the "Company") and its subsidiaries are engaged in
the purchasing, gathering, processing, storing, transporting and marketing of
natural gas and natural gas liquids ("NGL").
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned and majority- owned subsidiaries. Material
intercompany balances and transactions have been eliminated. The Company's
proportionate share of assets, liabilities, revenues and expenses of various
energy related partnerships and joint ventures is included in the consolidated
financial statements in accordance with industry practice.
Business Segment Information
The Company's operations consist of only one segment; therefore, no
segment information is presented for the three years ending December 31, 1994.
During 1992, 1993 and 1994, no one customer accounted for more than 10% of
total revenues from operations.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and funds
invested in highly liquid instruments which are available on short notice,
generally overnight, and with original maturities of three months or less.
Concentration of Credit Risk
The Company's accounts receivable relate primarily to sales of energy
products and services in the United States to end-user and utility markets.
Receivables which are considered a credit risk are backed by letters of credit.
Credit terms, typical of industry standards, are of a short-term nature.
Natural Gas Imbalances
In the course of buying and selling natural gas, the Company may
receive or deliver volumes that are different than the amount nominated. Such
variances arise due to the nature of the gas commodity and the industry itself.
These transactions result in volumetric receivable and payable balances which
are recovered or repaid through the receipt or delivery of gas in the future,
or settled in cash. Natural gas imbalances are valued at the market price at
the time the imbalance was created with valuation adjustments provided for any
lower net realizable values. Natural gas imbalances expected to be settled
within one year are classified as current assets or current liabilities, with
the remaining net imbalance position reflected in other long-term liabilities
on the accompanying consolidated balance sheets.
F-8
<PAGE> 52
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Amounts classified as inventories consist of natural gas contained in
a gas storage facility that is expected to be withdrawn and sold within one
year, NGL held in storage facilities, natural gas imbalances due from others
that result from the current year's transactions, and NGL exchange balances.
Generally, gas held in storage and NGL are valued as of year end at the lower
of net realizable value or cost on an average cost basis. Gas held in storage
that is supported by speculative futures, swaps or options is valued at the
underlying forward sales contracts. There were no required mark-to-market
adjustments at December 31, 1993, and the amount of such mark-to-market
adjustments that remained in inventory at December 31, 1994 was immaterial.
The accompanying statements of operations for each of the three years ended
December 31, 1992, 1993 and 1994, reflect adjustments to NGL inventory to
estimated realizable values of $-0-, $1,000,000 and $-0-, respectively.
The major classes of inventory at December 31, 1993 and 1994 are as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1993 1994
---- ----
(In Thousands)
<S> <C> <C>
Inventory:
Natural gas in storage $ 260 779
NGL 1,442 -
Exchange balances:
NGL (29) -
Natural gas imbalances 2,713 4,079
-------------- ----------
$ 4,386 4,858
============== ==========
</TABLE>
Derivative Transactions
The Company enters into hedging activities including futures contracts
and swap agreements primarily for the purpose of hedging price risks of natural
gas associated with certain firm purchase and sales commitments. Gains and
losses on hedges of existing assets or liabilities are included in the carrying
amounts of those assets or liabilities and are ultimately recognized in income
as part of those carrying amounts. Gains and losses related to qualifying
hedges of firm commitments or anticipated transactions are also deferred and
are recognized in income or as adjustments of carrying amounts when the hedged
transaction occurs. The amounts of any speculative futures gains and losses
are immaterial in the periods presented in the accompanying consolidated
statements of operations.
Property, Equipment and Improvements
Natural gas gathering and transportation facilities are depreciated
using the straight-line method over the expected life of the underlying natural
gas reserves, which range from three to 20 years. Depreciation of other
property and equipment is provided using the straight-line method over
estimated useful lives of three to 10 years. Interest costs capitalized for
each of the years ended December 31, 1992, 1993 and 1994 were $278,000,
$320,000 and $180,000, respectively.
F-9
<PAGE> 53
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible Assets
The gas supply contract acquired pursuant to the December 14, 1993
merger of Adobe Gas Pipeline Company ("AGPC") with and into the Company (the
"Merger") is being amortized on a straight-line basis over its seven-year term
(see Note 2).
Stock Options
No accounting is made with respect to stock options until they are
exercised as all options have been granted at a price equal to or greater than
fair value at date of grant. Upon exercise, the excess of the proceeds over
the par value of the shares issued is credited to additional paid-in capital.
Income Taxes
The Company has provided deferred taxes for the difference in the tax
and financial reporting bases of assets and liabilities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes. Investment and energy tax credits, when available, are accounted
for under the flow-through method.
Net Earnings Per Common Share
For each of the three years ended December 31, 1992, 1993 and 1994,
net loss per common share was based upon the weighted average shares of common
stock outstanding of 2,826,000, 8,383,000 and 25,690,000, respectively, as the
inclusion of any common stock equivalents would be anti-dilutive. The weighted
average shares of Common Stock are computed after giving effect to the
approximate one-for-15 reverse split (the "Reverse Stock Split") of the Common
Stock effected by the Merger in December 1993 and described in Note 2. Fully
diluted earnings per common share assume the conversion of convertible debt
securities and common stock equivalents which would arise from the exercise of
stock options, unless such items would be anti-dilutive. As of December 31,
1994, there were 25,690,640 shares of Common Stock outstanding.
Basis of Presentation
Certain reclassifications have been made in the consolidated financial
statements for the years ended December 31, 1992 and 1993 to conform to the
presentation used for the December 31, 1994 financial statements.
(2) MERGER AND RECAPITALIZATION OF DEBT AND EQUITY
In December 1992, the Company's then-existing debt and equity
capitalization was restructured (the "1992 Restructuring") pursuant to a
"prepackaged" plan of reorganization filed by the Company in connection with
its October 1992 filing of a voluntary proceeding for reorganization under
Chapter 11 of the United States Bankruptcy Code. The Company recognized a net
gain on the 1992 Restructuring of $925,000.
The Merger was consummated on December 14, 1993. Prior to the Merger,
AGPC was an indirect wholly owned subsidiary of Santa Fe Energy Resources, Inc.
("Santa Fe") and engaged, through its wholly owned subsidiaries, in the
gathering, processing, transmission and marketing of natural gas, with
interests in 10 natural gas pipeline systems located in Texas, New Mexico,
Oklahoma and Montana (of which six were operated by AGPC) and three natural gas
processing plants (collectively, and including the various contracts
associated with such facilities, the "AGPC Assets").
F-10
<PAGE> 54
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) MERGER AND RECAPITALIZATION OF DEBT AND EQUITY (Continued)
In addition to effecting the acquisition by the Company of AGPC, the Merger
also effected a restructuring of the Company's debt and equity capitalization
(including the Reverse Stock Split).
Prior to the Merger, AGPC entered into a gas contract (the "Gas
Contract") with Santa Fe and Santa Fe Energy Operating Partners, L.P.
("SFEOP"). As a result of the Merger, the Company succeeded to the rights and
obligations of AGPC under the Gas Contract. Following the Merger, the Company
assigned such contract to Hadson Gas Systems, Inc., a wholly owned subsidiary
of the Company through which the majority of the Company's natural gas
marketing operations are conducted. Effective December 31, 1994, SFEOP was
merged with and into Santa Fe. The Gas Contract has a term of approximately
seven years and provides for the purchase by the Company of essentially all of
Santa Fe's and SFEOP's existing domestic natural gas production as well as
natural gas production that either Santa Fe or SFEOP has the right to market.
Pursuant to the Merger, the Company issued to Santa Fe, in exchange
for the stock of AGPC, 2,080,000 shares of Senior Cumulative Preferred Stock,
Series A, ("Senior Preferred Stock") having an aggregate liquidation preference
of $52,000,000 and 10,395,665 shares of post reverse-split Common Stock
representing approximately 40% of the total number of shares of Common Stock
outstanding immediately after the Merger.
The combination of AGPC and its subsidiaries and the Company has been
accounted for using the purchase method of accounting. The value of the net
assets acquired by the Company in the Merger was more readily determinable than
the value of the total consideration issued by the Company and, therefore, net
assets were used in determining the fair value of such consideration. The
value of the AGPC Assets was determined primarily based on a multiple of
expected cash flow from those assets. The value of the Gas Contract was
determined by evaluating estimated savings in gas purchase costs over
historical gas purchase costs expected to be afforded the Company over the term
of the Gas Contract discounted to net present value at 12%. The value of the
Senior Preferred Stock was determined based on the yield of the Senior
Preferred Stock as compared to the yield of other securities deemed to be
comparable. A summary of the purchase price and consideration follows:
<TABLE>
<CAPTION>
(In Thousands)
---------------
<S> <C>
Determination of purchase price:
AGPC Assets $ 67,873
Gas Contract 6,798
Deferred tax liability (2,957)
Current liabilities (598)
Long-term liabilities (3,837)
---------------
$ 67,279
Consideration: ===============
Senior Preferred Stock $ 49,000
Common Stock 16,396
Costs of acquisition of AGPC Assets and Gas Contract 1,883
---------------
$ 67,279
===============
</TABLE>
Components of the restructuring of the Company's debt and equity
recapitalization which were effected by the Merger are described below.
Transaction costs associated with the recapitalization were approximately
$1,800,000.
All of the shares of the Company's Class B Common Stock, Class C
Common Stock, 7% Senior Cumulative Preferred Stock, Series A ("Old Senior
Preferred Stock"), all of which were held by The Prudential Insurance Company
of America and certain of its affiliates (collectively, "Prudential"), and
$23,400,000 in 6.2% Senior Secured Notes Due
F-11
<PAGE> 55
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) MERGER AND RECAPITALIZATION OF DEBT AND EQUITY (Continued)
2000 ("Old Senior Secured Notes") due to Prudential were exchanged for or
converted, pursuant to the Merger, into, in the aggregate, $56,400,000 of 8%
Senior Secured Notes due 2003 ("New Senior Secured Notes"), 1,309,762 shares of
Common Stock, and the "P Interest" in a trust formed in connection with the
Merger (the "H/P Trust") (see Note 6), which interest represented a beneficial
trust interest in 4,983,180 shares of Common Stock which were deposited by the
Company to the H/P Trust (the "Trust Shares") and could result in the payment
to Prudential of an amount equal to the amount of all proceeds payable upon the
exercise of New Junior Exercisable Automatically Convertible Preferred Stock,
Series B ("New Junior Preferred Stock") (See Note 6). Such amount could total
approximately $16,000,000. The shares of Common Stock issued to the H/P Trust
are treated as outstanding by the Company.
The 3,796,814 shares of 8% Junior Cumulative Convertible Preferred
Stock, Series B ("Old Junior Preferred Stock") outstanding at the time of the
Merger were converted into 5,723,052 shares of Common Stock and 4,163,852
shares of New Junior Preferred Stock.
To effect the Reverse Stock Split, the 49,159,867 shares of common
stock outstanding at the time of the Merger were converted into 3,277,488
shares of Common Stock and 819,328 shares of New Junior Preferred Stock.
The following represents the unaudited pro forma results of operations
as if the sale of the common stock of Hadson Energy Resources Corporation
("HERC") (see Note 4) and the Merger and the recapitalization of debt and
equity had occurred on January 1, 1993:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1993
---------------
(In Thousands,
except per share
data)
<S> <C>
Net sales $ 700,254
Loss from continuing operations (18,939)
Loss attributable to common stock (24,789)
Loss per share from continuing operations (.96)
</TABLE>
The pro forma financial information does not purport to be indicative
of the results of operations that would have occurred had the transactions
taken place at the beginning of the period presented or of future results of
operations.
On February 10, 1995, the Company and its two largest debt and equity
holders, Santa Fe and Prudential, executed definitive agreements with LG&E
Energy Corp. ("LG&E Energy") of Louisville, Kentucky, whereby LG&E Energy will
acquire all of the Company's Common Stock, Senior Preferred Stock, New Senior
Secured Notes, and Santa Fe 9% subordinated note for an aggregate consideration
of $143,000,000. Pursuant to the agreements, the Company's public shareholders
will receive $2.75 in cash for each share of the Company's Common Stock. The
completion of these transactions, which is subject to certain regulatory
filings and approvals, the vote of the Company's shareholders as well as
certain other conditions, is expected in the second quarter of 1995. Santa Fe
and Prudential, who combined have voting control of approximately 65% of the
Company's Common Stock, have agreed to vote their common shares in favor of the
transactions, which will result in the Company becoming a wholly owned
subsidiary of LG&E Energy.
F-12
<PAGE> 56
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) DISCONTINUED OPERATIONS
The power systems group ("Power Systems"), excluding certain assets,
was sold in December 1991. The proceeds from the transaction were subject to
certain adjustments and had additional amounts payable under certain
circumstances. The adjustments to proceeds included a purchase price
adjustment; the amount of which was the subject of a dispute between the
Company and the purchaser.
Of the $50,500,000 purchase price, the purchaser retained $2,500,000
as a "hold-back" to secure certain of the Company's indemnification obligations
related to the sale. In 1992, the Company and the purchaser reached agreement
regarding the settlement of certain matters relating to this sale, including
the purchase price adjustment, certain indemnity claims and the manner and time
period for resolving other indemnity claims. Pursuant to such settlement
agreement, the purchaser paid the Company $400,000 and continues to hold
$2,200,000 as security for certain indemnity claims that may arise. The
purchaser has also agreed that other indemnity claims against the Company
cannot exceed $500,000. If, however, within the time limits set forth in the
settlement agreement, the claims are less than the $2,200,000 held by the
purchaser, then the balance of the hold-back will be returned to the Company.
In connection with the settlement agreement, the Company charged $4,200,000 to
loss on discontinued operations in 1992 as the Company believed that it was
unlikely to receive any significant additional amounts.
The assets of Power Systems retained by the Company after the 1991
sale related to subsidiaries of the Company having investments in joint
ventures which own six cogeneration projects and one waste-wood processing
facility. In 1992, the Company disposed of four of its subsidiaries having
investments in cogeneration projects and the one having the investment in the
waste-wood processing facility. The Company recognized a loss of $3,900,000 in
connection with these dispositions.
In September 1993, the Company reached a settlement with the United
States Army regarding various claims relating to a contract between a defense
subsidiary of the Company and the Army. As a part of this settlement, the Army
released to the Company amounts due to the subsidiary pursuant to certain other
government contracts which totalled approximately $1,800,000 and made a cash
payment to the Company of $7,000,000. After payment of litigation costs of
approximately $1,700,000, the net cash proceeds to the Company from this
settlement were approximately $7,100,000. Of the proceeds, $1,500,000 was
applied as a principal prepayment of the New Senior Secured Notes issued
pursuant to the Merger, and the rest was retained by the Company to pay
transaction costs related to the Merger and related transactions and for
general corporate purposes. The accompanying consolidated statement of
operations for the year ended December 31, 1993 reflects a gain of $5,600,000
related to the settlement.
(4) SALE OF ASSETS
In July 1993, the Company completed the sale of its approximate 49%
interest in the outstanding common stock of HERC. The equity method was
utilized in accounting for the investment.
Total proceeds from the sale of $45,000,000 were applied as follows:
(i) $33,000,000 principal prepayment of the Company's Old Senior Secured Notes,
(ii) approximately $1,300,000 to pay accrued interest on the Old Senior Secured
Notes and fees due Prudential, (iii) approximately $2,200,000 in repayment of
all borrowings and accrued interest under an interim financing facility with
Prudential described in Note 5, (iv) $1,000,000 in repayment of the New Senior
Secured Notes, and (v) the remainder was retained by the Company for costs and
expenses related to the sale and other corporate purposes. A gain of
approximately $6,400,000 was recognized on the sale.
F-13
<PAGE> 57
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) SALE OF ASSETS (Continued)
In February 1994, the Company assigned a 30% interest in a gathering
system and processing plant to a joint owner in return for (i) the dedication
of additional production to the system, (ii) the assignment of a gathering
system in New Mexico along with its dedicated production, and (iii) $2,500,000
in cash. Due to the recent valuation of the gathering system and processing
plant in the Merger, no gain or loss was recognized on the sale. The
accompanying consolidated balance sheet includes $2,500,000 in current assets
at December 31, 1993, related to the assets that were sold.
In November 1994, the Company sold its 40% interest in Beck & Root
Fuel Company ("Beck & Root") in exchange for $750,000 in cash and $1,250,000 in
Independent Gas Company Holdings, Inc., Series B Cumulative Redeemable
Convertible Preferred Stock. The loss on the sale of the Company's interest
was not material. The accompanying consolidated balance sheet includes
$1,250,000 in other assets at December 31, 1994, related to the preferred stock
held by the Company.
Effective January 1, 1995, the Company sold its United LP Gas
Corporation ("United") subsidiary for a total sales price of $3,100,000 that
consisted of a $1,200,000 cash payment, a $1,000,000 note receivable, and
$900,000 in preferred stock of the acquiring company. In addition to the
$3,100,000 sales price, the Company will receive additional proceeds of
$3,435,000 that represent the excess of United's current assets over current
liabilities at December 31, 1994. At the January 31, 1995 closing, the Company
received $1,889,000 relating to these net assets in addition to the $1,200,000
sales proceeds payment. A charge of $205,000 was recognized in the Company's
results of operations for the year ended December 31, 1994 to adjust the
carrying value of these net assets to net realizable value. The accompanying
consolidated balance sheet includes $4,635,000 in current assets and $1,900,000
in noncurrent assets at December 31, 1994, related to the assets that were sold
and the net assets that will be remitted to the Company as collected. United
contributed approximately $120,069,000, $129,454,000 and $117,448,000 to
consolidated revenue for each of the years ended December 31, 1992, 1993 and
1994, respectively. Pre-tax income or loss for each of these years was not
material.
(5) LONG-TERM DEBT AND BANK BORROWINGS
<TABLE>
<CAPTION>
December 31,
----------------------
1993 1994
---- ----
(In Thousands)
<S> <C> <C>
8% senior secured notes, due 2001 (A) $ 53,900 52,900
Bank Credit Agreement (B) 2,900 10,000
Limited Recourse Credit Agreement (C) - 2,700
Santa Fe 9% subordinated note,
due 2004 (D) - 2,350
-------------- -------------
56,800 67,950
Current portion (1,000) (10,578)
-------------- -------------
$ 55,800 57,372
============== =============
</TABLE>
(A) In December 1993, in connection with the debt and equity
recapitalization effected by the Merger, the Company entered into a
Securities Purchase Agreement (the "Securities Purchase Agreement")
with Prudential. See Note 2. The agreement provided that all
outstanding Old Senior Secured Notes be cancelled. Pursuant to the
Securities Purchase Agreement, the Company issued $56,400,000 of New
Senior Secured Notes. Upon completion of the Merger, the Company paid
$2,500,000 to Prudential in partial repayment of the notes.
F-14
<PAGE> 58
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) LONG-TERM DEBT AND BANK BORROWINGS (Continued)
The New Senior Secured Notes bear interest at the rate of 8%
per annum and mature on December 31, 2003. Such notes are prepayable
in whole or in part (in minimum increments of $500,000) without
premium or penalty. Remaining required principal prepayments are as
follows: (i) $2,500,000 by December 31, 1996, (ii) an additional
$5,900,000 by December 31, 1997, and (iii) an additional $8,000,000 by
December 31 of each year thereafter through 2002 with a final payment
of $4,500,000 due by December 31, 2003. The Company is also required
to prepay the New Senior Secured Notes in an amount equal to proceeds
of asset sales over certain amounts. The New Senior Secured Notes are
secured by the first priority lien on all the stock of certain of the
Company's subsidiaries and on the accounts receivable and other
personal property of the Company (but not of its operating
subsidiaries). Such lien has been granted to a collateral agent for
the benefit of Prudential and Bank of Montreal ("BMO"), as more fully
discussed below.
The Securities Purchase Agreement restricts the payment of
dividends, including the payment of dividends on the Senior Preferred
Stock (other than those dividends payable in additional shares of
Senior Preferred Stock). In addition, the outstanding principal
balance of the New Senior Secured Notes must be reduced to certain
specified levels before any cash dividends may be paid on the Senior
Preferred Stock. See Note 6. Other provisions of the Securities
Purchase Agreement include restrictions on the incurrence of
additional debt, the creation of liens, investments, issuance of
capital stock by subsidiaries and dispositions of assets and
subsidiaries.
(B) Upon consummation of the Merger, the Company entered into a
new credit agreement with a group of banks ("Bank Credit Agreement")
which replaced its existing bank credit agreement. The Company and
certain of its marketing subsidiaries are obligors under the Bank
Credit Agreement.
As of December 31, 1994, the Bank Credit Agreement was amended
to provide for total credit of $75,000,000 primarily to support trade
obligations, all on a revolving basis and subject to availability
under a "borrowing base" formula. Of the total $75,000,000 facility,
the total amount is available for letters of credit while borrowings
are subject to a $15,000,000 sub-limit. Under the facility, the
borrowing base at any time will be equal to the sum of approximately
80% of the aggregate dollar amount of eligible accounts receivable of
certain of the Company's subsidiaries in which the banks have a
security interest plus the full amount of the Company's cash and
certain short-term investments in which the banks have a security
interest. At February 28, 1995, the borrowing base, and therefore
total credit available under the facility amounted to $67,045,000.
Borrowings outstanding under the Bank Credit Agreement bear
interest, payable quarterly, at the base rate announced from time to
time by the Banks plus 1% per annum. At December 31, 1994, this rate
was 9.5%. In addition, the Company is required to pay a letter of
credit fee of 1.875% per annum, payable quarterly, on the amount of
any outstanding letters of credit, a commitment fee of .5% per annum,
payable quarterly, on the unused portion of the facility and a
facility fee of .125% per annum, payable quarterly, on the maximum
amount of the facility. In addition, during each of the four quarters
of 1994, the Company was required to reduce the outstanding amount of
borrowings under the facility to no more than $5,000,000 and, during
each fiscal quarter thereafter, the Company is required to reduce such
borrowings to zero, in each case for not less than 10 consecutive
business days. Also, the Company is required to reduce the
outstanding amount of borrowings to $10,000,000 for not less than
five consecutive business days during each month beginning in
January 1995. Amounts outstanding under the facility will be due and
payable upon the termination of the facility on December 14, 1995,
provided that the facility may be extended for an additional year by
the mutual consent of the Company and all of the Banks then parties to
such facility, subject to the payment of a fee and certain customary
conditions.
F-15
<PAGE> 59
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) LONG-TERM DEBT AND BANK BORROWINGS (Continued)
During 1994, the average amount of borrowings outstanding
under the Bank Credit Agreement was $9,119,000. At December 31, 1994,
letters of credit amounting to $54,635,000 were outstanding under the
Bank Credit Agreement. Of this amount, $40,473,000 relates to standby
letters of credit which support trade accounts payable included in the
accompanying December 31, 1994 consolidated balance sheet.
The Company's obligations under the Bank Credit Agreement are
secured by a first priority lien, granted in favor of a collateral
agent for the benefit of the banks and Prudential, on the outstanding
capital stock of certain of the Company's subsidiaries, on the
accounts receivable and other personal property of the Company and on
certain other miscellaneous collateral, and by a first priority lien
granted in favor of the banks on the accounts receivable and other
personal property of the Company's subsidiaries that are obligors
under the Bank Credit Agreement. Pursuant to certain intercreditor
arrangements entered into by the banks and Prudential, the proceeds of
any sale by the collateral agent, following an event of default of any
collateral that is subject to such intercreditor arrangements, will be
applied first to the payment of amounts due under the Bank Credit
Agreement and second to payment of the New Senior Secured Notes.
Debt issuance costs are included in current assets on the
accompanying consolidated balance sheets and are amortized on a
straight-line basis over the term of the Bank Credit Agreement. The
Bank Credit Agreement contains restrictions on, among other things,
the incurrence of additional debt, payments of dividends, investments,
issuance of capital stock by subsidiaries, and dispositions of assets
and subsidiaries. In addition, it calls for the Company to maintain
minimum levels of working capital, liquidity and net worth.
(C) In November 1994, a subsidiary of the Company entered into an
agreement to purchase additional interests in existing natural gas
production facilities. This purchase was funded by a term credit
agreement with a bank. Borrowings under the facility are recourse
only to the assets acquired with the proceeds.
Borrowings under the agreement amounted to $2,700,000 and bear
interest, payable monthly, at prime plus 1.75%. At December 31, 1994,
this rate was 10.25%. Principal payments are required at the end of
each month beginning December 31, 1994, in the amount of $37,500. In
addition, beginning with the quarter ending March 31, 1995, and
continuing until the end of the term of the agreement in November
1999, the subsidiary is required to pay quarterly, as a prepayment of
principal, an amount equal to 100% of the excess cash flow of the
purchased facilities as defined in the agreement. Such payments may
not exceed a quarterly payment threshold initially set at $22,500, and
in the event that the excess cash flow is less than the quarterly
payment threshold, the shortfall will be added to subsequent quarters'
quarterly payment threshold until such time as all shortfalls are
paid. Obligations under the agreement are secured by a financing
statement covering the acquired interests in the facilities.
(D) In November 1994, certain of the Company's subsidiaries and
Santa Fe settled a lawsuit with third parties. See Note 12. Santa Fe
funded the Company's $2,350,000 share of the settlement with a
10-year, 9% fixed rate balloon note with interest payable annually.
This note is subordinate to the Company's other lenders. The
settlement was accounted for as an adjustment to the price of the AGPC
Assets purchased from Santa Fe.
F-16
<PAGE> 60
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) LONG-TERM DEBT AND BANK BORROWINGS (Continued)
As of December 31, 1993, annual maturities of long-term debt and bank
borrowings for each of the next five years are as follows:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
1995 $ 10,578
1996 3,040
1997 6,440
1998 8,540
1999 8,502
Thereafter 30,850
------------
$ 67,950
============
</TABLE>
(6) CAPITAL STOCK
Senior Cumulative Preferred Stock, Series A ("Senior Preferred Stock")
On December 14, 1993, 2,080,000 shares of Senior Preferred Stock were
issued to Santa Fe pursuant to the Merger. The shares have a par value of
$.01, have an aggregate liquidation preference of $52,000,000, or $25 per
share, and are senior in liquidation preference to all other classes of equity
securities of the Company. At December 31, 1994, 2,335,907 shares of Senior
Preferred Stock were outstanding. Dividends accumulate at a rate of 11.25% per
annum of the liquidation preference ($2.81 per share per year) from December
14, 1993 through December 31, 1995 and 10.70% per annum ($2.67 per share per
year) commencing January 1, 1996. Dividends are cumulative and are payable
quarterly in arrears. Through December 31, 1995, dividends are payable only in
shares of Senior Preferred Stock having a liquidation preference equal to the
dividend payable. Beginning January 1, 1996, dividends are payable only in
cash.
Beginning January 1, 1999, the Senior Preferred Stock is redeemable
for cash at the option of the Company, in whole or in part, at per share
redemption prices which begin at $26.25 for 1999 and decrease to $25.00 for
2004 and thereafter. The Securities Purchase Agreement and the Bank Credit
Agreement limit such redemption.
Holders of Senior Preferred Stock have class voting rights in
connection with certain fundamental corporate transactions, including
amendments to the Company's certificate of incorporation that would alter or
change the powers, preferences or special rights of such stock so as to affect
them adversely, certain mergers and consolidations involving the Company that
may have a material adverse effect on such powers, preferences or special
rights and the creation of senior or pari passu securities. In addition, if at
any time regular dividends are in an amount equal to six full quarterly regular
dividend payments in arrears and unpaid, then until all such regular dividend
payments shall be paid in full, the holders of the Senior Preferred Stock,
voting separately as a class, will be entitled to elect two directors of the
Company.
Junior Exercisable Automatically Convertible Preferred Stock, Series B ("New
Junior Preferred Stock")
On December 14, 1993, 4,983,180 shares of New Junior Preferred Stock
were issued through the Merger to the holders of the 8% Junior Preferred Stock
and the holders of the common stock pursuant to the conversion of such stock in
the Merger. Each share of New Junior Preferred Stock has a par value of $.01
and a liquidation preference of $.75. No dividends are payable on the New
Junior Preferred Stock. At December 31, 1994, 4,981,691 shares of New Junior
Preferred Stock were outstanding. Each share of New Junior Preferred Stock
entitles the holder to purchase one share of
F-17
<PAGE> 61
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) CAPITAL STOCK (Continued)
Common Stock (an aggregate of 4,983,180 shares) upon surrender of such share of
New Junior Preferred Stock and payment of the exercise price of $3.225 per
share of Common Stock (in each case subject to adjustment under certain
circumstances) until the date of automatic conversion described below.
Pursuant to the trust agreement governing the H/P Trust, the Company is
required to deposit all proceeds from such exercise to the H/P Trust as
described below.
The H/P Trust was established by the Company in connection with the
Merger. As a result of the Merger, Prudential received the "P Interest" in the
H/P Trust, which initially represented beneficial ownership of all of the Trust
Shares. As holders of New Junior Preferred Stock exercise their right to
purchase shares of Common Stock, the Company will periodically deposit to the
H/P Trust all proceeds of such exercises. At the end of each calendar quarter
and upon termination of the H/P Trust, if the dollar amount of exercise
proceeds held in the H/P Trust has reached certain levels, the trustee will pay
such proceeds to Prudential and will distribute a corresponding number of Trust
Shares to the Company. Upon termination of the H/P Trust, all remaining Trust
Shares, if any, will be distributed to Prudential.
Each outstanding share of New Junior Preferred Stock will
automatically convert into .001 of a share of Common Stock on the earlier of
(i) the date that is 30 days after the first date (the "Trigger Date") on which
the closing price per share of the Common Stock on each of the immediately
preceding 40 consecutive trading days shall have exceeded 200% of the exercise
price of the New Junior Preferred Stock in effect on such trading day (the
Company will be required to mail a notice of such automatic conversion to each
holder of shares of New Junior Preferred Stock within 10 days following the
Trigger Date) or (ii) December 14, 1995.
(7) INCOME TAXES
The significant components of income tax (benefit) are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1992 1993 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ (1,180) (145) 6
State 379 60 76
------------- ------------- ------------
(801) (85) 82
------------- ------------- ------------
Deferred:
Federal (438) (204) (1,213)
State 100 (405) (873)
------------- ------------- ------------
(338) (609) (2,086)
------------- ------------- ------------
Total income tax (benefit) $ (1,139) (694) (2,004)
============= ============= ============
Relates to:
Continuing operations $ (1,139) (616) (2,004)
Discontinued operations - (78) -
------------- ------------- ------------
$ (1,139) (694) (2,004)
============= ============= ============
</TABLE>
F-18
<PAGE> 62
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) INCOME TAXES (Continued)
Reconciliations from the expected statutory income tax (benefit) to
the income tax (benefit) are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1992 1993 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Expected statutory income tax (benefit) $ (8,265) (3,746) (1,033)
Increases (reductions) in taxes resulting from:
Capital loss (utilization) carryover (215) (8,491) 77
State taxes, net of federal benefit 19 (151) (594)
Amortization of goodwill 115 1,160 -
Gain or loss on disposition of affiliates 3,741 5,412 -
Equity in earnings of unconsolidated
affiliate 1,420 (47) (77)
Net operating loss carryover 3,761 6,707 527
Other (1,715) (1,538) (904)
----------- ----------- -----------
Income tax (benefit) $ (1,139) (694) (2,004)
=========== =========== ===========
</TABLE>
Temporary differences between the financial statement carrying amounts
and the tax bases of assets and liabilities that give rise to significant
portions of the deferred tax liabilities at December 31, 1992, 1993 and 1994
relate to the following:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1992 1993 1994
---- ---- -----
(In Thousands)
<S> <C> <C> <C>
Property, equipment and improvements and
related depreciation, depletion and
amortization $ 3,044 13,005 12,313
Investment in unconsolidated affiliates 870 - -
Other - 1,263 -
----------- ----------- -----------
Gross deferred tax liabilities 3,914 14,268 12,313
----------- ----------- -----------
Investment in unconsolidated affiliates - (10) (84)
Accounts receivable (70) (275) (338)
Accrued liabilities (417) (1,132) (537)
Net operating loss carryover (19,826) (17,585) (19,089)
Capital loss carryover (15,561) (6,306) (94)
General business credit carryover (8,431) (7,887) (7,723)
Depletion carryover (702) (1,021) (1,021)
(16) - (374)
----------- ----------- -----------
Gross deferred tax assets (45,023) (34,216) (29,260)
Deferred tax assets valuation allowance 41,629 22,647 17,730
----------- ----------- -----------
$ 520 2,699 783
=========== =========== ===========
</TABLE>
F-19
<PAGE> 63
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) INCOME TAXES (Continued)
The net change in the valuation allowance for deferred tax assets was
a decrease of $8,561,000 in 1992, a decrease of $18,982,000 in 1993, and a
decrease of $4,917,000 in 1994. The decrease in 1992 was primarily attributable
to the anticipated $28,479,000 reduction of the net operating loss which would
have been required had the Company made a certain election under the Internal
Revenue Code of 1986, as amended. The net decrease in 1993 was primarily
attributable to additional expected utilization of net operating loss
carryovers against the future realization of the taxable temporary differences
created as a result of the Merger. The net decrease in 1994 was primarily
attributable to the expiration of capital loss carryovers for which a valuation
allowance had been provided.
At December 31, 1994, the Company has carryovers of tax benefits as
follows:
<TABLE>
<CAPTION>
Tax
--------------
(In Thousands)
<S> <C>
Net operating losses $ 121,798
Alternative minimum tax net operating losses $ 109,016
General business credits $ 7,723
Minimum tax credit $ 561
Depletion $ 3,003
</TABLE>
The depletion carryover is not subject to expiration. All other
carryovers expire principally between 1998 and 2009.
All of the carryovers of tax benefits generated prior to the December
16, 1992 effective date of the Company's plan of reorganization under Chapter
11 of the Bankruptcy Code (see Note 2) are, due to the greater than 50% change
of ownership effected by such plan, subject to an annual limitation of
$4,451,000 under sections 382 and 383 of the Code. Such annual limitation may
be increased by any realized built-in gains and unused annual limitation from a
prior year. Accordingly, the portion of the carryovers above not limited under
section 382 consist of the $11,132,000 regular net operating loss and
$10,696,000 alternative minimum tax net operating loss generated during the
period from December 17, 1992 to December 31, 1994.
(8) DERIVATIVE TRANSACTIONS
The Company uses commodity-based derivative instruments to hedge
exposure to price fluctuations related to the purchase or sale of natural gas
for future periods generally not in excess of four years. These derivative
instruments include exchange-traded futures contracts and commodity swap
agreements that are settled in cash.
At December 31, 1994, the Company had exchange-traded futures
contracts with maturities through March 1996, covering 13,240,000 MMBtu of
natural gas. These futures contracts permit settlement by delivery of natural
gas and, therefore, are not financial instruments as defined by SFAS No. 119,
Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments.
The commodity swap agreements consist of fixed price swap agreements
and basis swap agreements. Under these agreements, the Company receives or
makes payments based on the differential between a specified price and an
agreed upon price based on the actual price of natural gas. The basis swap
agreements are used to supplement the futures contracts or the fixed price swap
agreements.
F-20
<PAGE> 64
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) DERIVATIVE TRANSACTIONS (Continued)
During the four year period ending December 31, 1998, the Company will
pay either variable or fixed prices averaging $2.14 per MMBtu and receive
variable or fixed prices averaging $1.74 per MMBtu on notional quantities
amounting to 31,312,000 MMBtu of natural gas, for fixed price swap agreements.
Under the basis swap agreements, during this same four year period, the Company
will pay prices averaging $1.56 per MMBtu and receive prices averaging $1.54
per MMBtu on notional quantities amounting to 39,926,000 MMBtu of natural gas.
Expected profits on anticipated sales relating to these agreements will exceed
the unrealized losses on all swap agreements.
The Company remains at risk for possible changes in the market value
of hedging instruments; however, such risk should be mitigated by price changes
in the underlying hedged item. The Company is also exposed to credit-related
losses in the event of nonperformance by counterparties to the commodity swap
agreements. The credit worthiness of counterparties is subject to continuing
review, and full performance is anticipated.
Deferred realized losses related to closed swap agreements that are
hedging future firm sale commitments amounted to $894,000 at December 31, 1994.
These deferred losses will be recognized in operations in 1995 when the
corresponding sales transaction is completed.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of
the Company's financial instruments at December 31, 1993 and 1994. SFAS No.
107, Disclosures about Fair Value of Financial Instruments, defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
<TABLE>
<CAPTION>
1993 1994
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C>
Non-derivatives:
Assets
Cash and cash equivalents $ 2,466 2,466 3,109 3,109
Accounts receivable 85,097 85,097 76,045 76,045
Other assets - - 1,250 1,250
Liabilities
Bank borrowings and current
long-term debt 2,900 2,900 10,578 10,578
Long-term debt 53,900 53,900 57,372 57,372
Derivatives:
Assets - - 894 894
Liabilities - - - 13,055
</TABLE>
F-21
<PAGE> 65
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts in the table are included in the accompanying
consolidated balance sheets under the indicated captions.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Non-derivatives
Cash and cash equivalents and Accounts receivable: The carrying
amount approximates fair value because of the short maturity of those
instruments.
Other assets: The carrying amount of the $1,250,000 in Independent
Gas Holdings, Inc., Series B Cumulative Redeemable Convertible
Preferred Stock approximates fair value because the securities were
issued late in 1994 and were priced to approximate a market yield for
similar securities.
Bank borrowings: The carrying amount of the Bank Credit Agreement
approximates fair value because the credit facility is priced at an
interest rate that corresponds with a market rate.
Current and Long-term debt: The carrying amount of the 8% senior
secured notes approximates fair value because those instruments were
priced to approximate a market yield for similar securities, and there
has been no significant change in the market yield since their
issuance in 1993. The carrying amount of the Limited Recourse Credit
Agreement approximates fair value because the agreement is priced at
an interest rate that corresponds with a market rate. The carrying
amount of the Santa Fe 9% subordinated note approximates fair value
because the note was issued late in 1994 and was priced to approximate
a market yield for similar securities.
Derivatives
The fair value generally reflects the estimated amounts that the
Company would receive or pay to terminate swap agreements at the
reporting date, thereby taking into account the current unrealized
losses of open swap agreements. Dealer quotes are available for most
of the Company's swap agreements.
(10) EMPLOYEE BENEFIT PLANS
Effective January 1, 1992, the Hadson Employee Stock Ownership/401(k)
Savings Plan (the "Old Employee Plan"), which was organized into two parts, the
Profit Sharing Portion and the ESOP Portion, was amended and restated as the
Hadson Corporation Employee 401(k) Savings Plan (the "Employee Plan"). Under
the Employee Plan, the ESOP Portion of the Old Employee Plan was eliminated.
Additionally, the Employee Plan provides for the Company matching of a
participant's contribution, which can range from 3% to 8% based upon length of
service. Employees vest immediately in their contribution. The Company's
contribution vests over a four-year period of service. The Company's
contribution to the Employee Plan for each of the years ended December 31,
1992, 1993 and 1994 was $347,000, $351,000 and $411,000, respectively.
The Company also has various incentive compensation plans for officers
and employees. Amounts available for incentive compensation are based on
various financial and operational results. For each of the years ended
December 31, 1992, 1993 and 1994, such incentive compensation amounted to
$121,000, $62,000 and $-0-, respectively.
F-22
<PAGE> 66
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(10) EMPLOYEE BENEFIT PLANS (Continued)
In connection with the 1992 Restructuring, all existing stock options
and warrants were cancelled and the Company implemented a new Stock Option Plan
(the "Stock Plan") for the benefit of employees and non-employee directors.
The maximum number of shares of Common Stock issuable under the Stock Plan was
300,000 at December 31, 1992, 633,365 at December 31, 1993, and 3,900,000 at
December 31, 1994. The exercise price of options granted under the Stock Plan,
other than incentive stock options, must be equal to the market value of the
Common Stock at the date of grant. Options are exercisable in whole or in part
over a 10-year period from the date of grant.
Information as to common shares subject to options is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1993 1994
---- ----
<S> <C> <C>
Shares outstanding at beginning of year 173,533 178,916
Changes in shares issuable:
Cancelled (72,950) (152,763)
Issued 78,333 1,308,832
---------- ----------
Shares outstanding at end of year 178,916 1,334,985
========== ==========
Shares available for grant under option plans at end of year 454,449 2,565,015
========== ==========
Price range of options outstanding $ 2.34 2.13
to to
4.20 4.20
Options exercisable 129,500 810,929
========== ==========
</TABLE>
(11) RELATED PARTY TRANSACTIONS
The Company and certain of its subsidiaries purchase natural gas from
and sell natural gas to Santa Fe and certain of its subsidiaries. For the
years ended December 31, 1993 and 1994, purchases from Santa Fe totalled
approximately $29,649,000 and $99,248,000, respectively, while sales to Santa
Fe totalled approximately $489,000 and $18,566,000, respectively. Trade
payables to Santa Fe at December 31, 1993 and 1994, were $18,796,000 and
$13,633,000, respectively, while trade receivables from Santa Fe were $328,000
and $1,604,000, respectively.
(12) COMMITMENTS AND CONTINGENCIES
The Company leases equipment and office facilities under
non-cancellable operating leases which expire from 1994 through 2004. The
leases require annual rentals of the following:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
1995 $ 1,538
1996 936
1997 623
1998 519
1999 489
Thereafter 2,892
------------
$ 6,997
============
</TABLE>
F-23
<PAGE> 67
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(12) COMMITMENTS AND CONTINGENCIES (Continued)
Rent expense for each of the years ended December 31, 1992, 1993 and
1994 was $2,157,000, $2,611,000, and $3,824,000, respectively.
In November 1994, Santa Fe and certain of the Company's subsidiaries
settled a lawsuit with third parties related to certain of the assets sold to
the Company pursuant to the Merger in December 1993. The settlement totalled
$5,700,000 with the Company's share of $2,350,000 being funded by Santa Fe with
a ten-year note (see Note 5).
The Company is subject to other various legal proceedings and claims
which arise in the normal course of business. In the opinion of management,
based in part on consultation with counsel, the amount of ultimate liability
with respect to those actions will not have a material effect on the Company's
consolidated financial statements.
F-24
<PAGE> 68
HADSON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly results of operations for the years ended December 31, 1993
and 1994 are as follows:
1993:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
------- -------- ------- -------- -------
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total revenue from continuing operations $ 132,385 121,407 123,319 146,674 523,785
========== ========== ========== ========== ==========
Gross profit (loss) from continuing
operations $ 2,479 2,099 236 (5,627) (813)
========== ========== ========== ========== ==========
Loss from continuing operations $ (1,793) (2,494) (939) (10,650) (15,876)
========== ========== ========== ========== ==========
Net earnings (loss) $ (1,793) (2,494) 4,742 (10,778) (10,323)
========== ========== ========== ========== ==========
Net earnings (loss) attributable to
common stock $ (1,793) (2,494) 4,742 (11,071) (10,616)
========== ========== ========== ========== ==========
Loss per share from continuing
operations $ (.22) (.29) (.15) (1.31) (1.93)
========== ========== ========== ========== ==========
Earnings (loss) per share $ (.22) (.29) .54 (1.37) (1.27)
========== ========== ========== ========== ==========
Weighted average number of shares 8,261 8,485 8,727 8,059 8,383
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1994:
FIRST SECOND THIRD FOURTH TOTAL
------- -------- ------- -------- -------
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total revenue from continuing operations $ 193,164 177,279 191,925 190,413 752,781
=========== ========== ========== ========== ==========
Gross profit from continuing
operations $ 5,068 4,766 3,799 4,334 17,967
=========== ========== ========== ========== ==========
Earnings (loss) from continuing
operations $ 352 512 (1,020) (877) (1,033)
=========== ========== ========== ========== ==========
Net earnings (loss) $ 352 512 (1,020) (877) (1,033)
=========== ========== ========== ========== ==========
Net loss attributable to
common stock $ (1,007) (908) (2,496) (2,394) (6,805)
=========== ========== ========== ========== ==========
Loss per share from continuing
operations $ (.04) (.04) (.09) (.09) (.26)
=========== ========== ========== ========== ==========
Loss per share $ (.04) (.04) (.09) (.09) (.26)
=========== ========== ========== ========== ==========
Weighted average number of shares 25,690 25,691 25,691 25,691 25,690
=========== ========== ========== ========== ==========
</TABLE>
F-25
<PAGE> 69
Schedule II
HADSON CORPORATION AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 1994
(In Thousands)
<TABLE>
<CAPTION>
Balance at Additions
beginning of charged to Balance at
year expenses Deductions end of year
------------- ------------ ------------ ------------
1992:
-----
<S> <C> <C> <C> <C>
Reserves deducted from assets
to which they apply:
Allowance for doubtful accounts $ 419 360 494(a) 285
============= ============ ============ ============
Deferred tax assets valuation
allowance $ 50,190 - 8,561 41,629
============= ============ ============ ============
1993
----
Reserves deducted from assets
to which they apply:
Allowance for doubtful accounts $ 285 925 322(a) 888
============= ============ ============ ============
Deferred tax assets valuation
allowance $ 41,629 319 19,301 22,647
============= ============ ============ ============
1994
----
Reserves deducted from assets
to which they apply:
Allowance for doubtful accounts $ 888 489 90 (a) 1,287
============= ============ ============ ============
Deferred tax assets valuation
allowance $ 22,647 1,459 6,376 17,730
============= ============ ============ ============
</TABLE>
(a) Receivable write-offs, net of recoveries.
F-26
<PAGE> 70
INDEX TO EXHIBITS
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS ANNUAL REPORT ON
FORM 10-K:
(1) Financial Statements: The consolidated financial statements
of the Company filed as part of this report are listed in the
"Index to Financial Statements and Financial Statement
Schedules" on Page F-1 hereof.
(2) Financial Statement Schedules: The financial statement
schedules of the Company filed as part of this report are
listed in the "Index to Financial Statements and Financial
Statement Schedules" on Page F-1 hereof.
(3) Exhibits: (Asterisk (*) indicates exhibits incorporated
herein by reference.)
(**) Previous filed with Form 10-K dated March 30, 1995
*2.01 - Agreement of Merger, dated as of July 28, 1993, by
and among Santa Fe, AGPC and the Company (filed as
exhibit (c)(i) to the Company's Schedule 13E-3, File
No. 5-14102, as amended, and incorporated herein by
reference)
*2.02 - Amendment No. 1 to Agreement of Merger, dated as of
November 9, 1993, by and among Santa Fe, AGPC and the
Company (filed as exhibit (c)(iv) to the Company's
Schedule 13E-3, File No. 5-14102, as amended, and
incorporated herein by reference)
**2.03 - Agreement and Plan of Merger, dated as of February
10, 1995, by and among Company, Parent and Merger Sub
*3.01 - Restated Certificate of Incorporation of the Company
(filed as exhibit 4.01 to the Company's Registration
Statement on Form S-3, File No. 33-51373, and
incorporated herein by reference)
*3.02 - Amended and Restated Bylaws of the Company (filed as
exhibit 4.2 to the Company's Registration Statement
on Form S-3, File No. 33-51373, and incorporated
herein by reference)
**3.03 - Certificate of Amendment to Restated Certificate of
Incorporation of the Company dated November 21, 1994
*4.01 - Specimen certificate of the Common Stock of the
Company (filed as exhibit 4.3 to the Company's
Registration Statement on Form S-3, File No.
33-51373, and incorporated herein by reference)
*4.02 - Specimen certificate of Senior Cumulative Preferred
Stock, Series A, of the Company (filed as exhibit
4.01 to the Company's Registration Statement on Form
S-4, File No. 33-68224, and incorporated herein by
reference)
*4.03 - Specimen certificate of Junior Exercisable Preferred
Stock, Series B, of the Company (filed as exhibit
4.02 to the Company's Registration Statement on Form
S-4, File No. 33-68224, and incorporated herein by
reference)
*4.04 - Securities Purchase Agreement, dated as of December
14, 1993, between the Company and Prudential (filed
as exhibit 4.2 to the Company's Current Report on
Form 8-K dated December 14, 1993 and incorporated
herein by reference)
<PAGE> 71
*4.05 - Restated Securities Purchase Agreement, dated as of
December 16, 1992, by and between the Company and
Prudential (filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K dated October 15, 1992 and
incorporated herein by reference)
*4.06 - Trust Agreement, dated as of December 14, 1993, among
the Company, Prudential and Liberty Bank and Trust
Company of Oklahoma City, N.A. as Trustee (filed as
exhibit 4.3 to the Company's Current Report on Form
8-K dated December 14, 1993 and incorporated herein
by reference)
*9 - Voting Agreement, dated December 14, 1993, between
Prudential and Santa Fe (filed as exhibit 9 to the
Company's Registration Statement on Form S-4, File
No. 33-68224, and incorporated herein by reference)
*10.01 - Form of Indemnity Agreement between the Company and
its directors (filed as exhibit 10.02 to the
Company's Registration Statement on Form S-2, File
No. 33-12577 and incorporated herein by reference)
*10.02 - Form of Employment Agreement, dated as of March 31,
1994, between the Company and J. E. Cannon (filed
as exhibit 10.02 to the Company's Form 10-K for the
year ended December 31, 1993 and incorporated herein
by reference)
*10.03 - Form of Employment Agreement, dated as of March 31,
1994, between the Company and Greg G. Jenkins (filed
as exhibit 10.03 to the Company's Form 10-K for the
year ended December 31, 1993 and incorporated herein
by reference)
*10.04 - Form of Amended and Restated Employment Agreement,
dated as of March 31, 1994, between the Company and
Robert P. Capps (filed as exhibit 10.07 to the
Company's Form 10-K for the year ended December 31,
1993 and incorporated herein by reference)
**10.05 - Amendment to Employment Agreement, dated as of
November 10, 1994, between the Company and J. E.
Cannon.
**10.06 - Amendment to Employment Agreement, dated as of
November 10, 1994, between the Company and Greg G.
Jenkins
**10.07 - Amendment to Amended and Restated Employment
Agreement, dated as of November 10, 1994, between the
Company and Robert P. Capps
**10.08 - Employment Agreement, dated as of July 18, 1994,
between the Company and Thomas W. Pounds
**10.09 - Amendment to Employment Agreement, dated as of
November 10, 1994, between the Company and Thomas W.
Pounds
**10.10 - Employment Agreement, dated as of August 1, 1994,
between the Company and Richard N. Coffman
**10.11 - Amendment to Employment Agreement, dated as of
November 10, 1994, between the Company and Richard N.
Coffman
**10.12 - Employment Agreement, dated as of November 10, 1994,
between the Company and Kathleen M. Eisbrenner
<PAGE> 72
**10.13 - Indemnification Agreement, dated as of December 20,
1994, between Company and J. Michael Adcock
**10.14 - Indemnification Agreement, dated as of December 20,
1994, between Company and B. M. Thompson
**10.15 - Indemnification Agreement, dated as of December 20,
1994, between Company and James L. Payne
**10.16 - Indemnification Agreement, dated as of December 20,
1994, between Company and Michael J. Rosinski
**10.17 - Indemnification Agreement, dated as of December 20,
1994, between Company and J. Frank Haasbeek
**10.18 - Indemnification Agreement, dated as of December 20,
1994, between Company and R. A. Walker
**10.19 - Indemnification Agreement, dated as of December 20,
1994, between Company and J. E. Cannon
**10.20 - Indemnification Agreement, dated as of December 20,
1994, between Company and Greg G. Jenkins
**10.21 - Indemnity Agreement, dated as of November 10, 1988,
between Company and Robert P. Capps
**10.22 - Indemnification Agreement, dated as of December 20,
1994, between Company and Kathleen M. Eisbrenner
**10.23 - Indemnification Agreement, dated as of December 20,
1994, between Company and Thomas W. Pounds
**10.24 - Indemnification Agreement, dated as of December 20,
1994, between Company and Richard N. Coffman
*10.25 - Hadson Corporation Employee 401(k) Savings Plan as
Amended and Restated Effective January 1, 1992 (filed
as exhibit 10.16 to the Company's Form 10-K for the
year ended December 31, 1991 and incorporated herein
by reference)
*10.26 - Credit Agreement, dated as of December 16, 1992,
among the Company and Prudential (filed as exhibit
10.2 to the Company's Current Report on Form 8-K
dated October 15, 1992 and incorporated herein by
reference)
*10.27 - Credit Agreement dated as of December 14, 1993 among
the Company, Gas Systems, United, Western and BMO,
individually and as Agent for the other Banks which
may become a party thereto (filed as exhibit 10.2 to
the Company's Current Report on Form 8-K dated
December 14, 1993 and incorporated herein by
reference)
*10.28 - Cash Collateral Agreement, dated as of July 15, 1993,
by and between the Company and Prudential (filed as
exhibit 10.21 to the Company's Registration Statement
on Form S-4, File No. 33-68224, and incorporated
herein by reference)
<PAGE> 73
*10.29 - Amendment No. 1 to Cash Collateral Agreement, dated
as of August 31, 1993, by and among the Company and
Prudential (filed as exhibit 10.27 to the Company's
Registration Statement on Form S-4, File No.
33-68224, and incorporated herein by reference)
*10.30 - Registration Rights Agreement dated as of December
14, 1993 among the Company, Santa Fe and Prudential
(filed as exhibit 10.2 to the Company's Current
Report on Form 8-K dated December 14, 1993 and
incorporated herein by reference)
*10.31 - Form of Hadson Corporation 1992 Equity Incentive Plan
as amended and restated as of November 5, 1993
(included as Appendix V to the Proxy Statement
Prospectus dated April 22, 1994)
*10.32 - Hadson Corporation 1992 Equity Incentive Plan, as
amended and restated as of March 9, 1994 (filed as
exhibit 10.20 to the Company's Form 10-K for the year
ended December 31, 1993 and incorporated herein by
reference)
*10.33 - Form of Master Gas Purchase Agreement dated December
14, 1993 among Santa Fe, SFEOP and AGPC (filed as
exhibit 10.23 to the Company's Registration Statement
on Form S-4, File No. 33-68224, and incorporated
herein by reference)
*10.34 - Form of Nonstatutory Stock Option Agreement dated
December 13, 1993 that was entered between the
Company with each of Harry G. Hadler, S. D. Wilks,
C.D., and Walter C. Wilson (filed as exhibit 10.28 to
the Company's Registration Statement on Form S-4,
File No. 33-68224, and incorporated herein by
reference)
*10.35 - Form of Nonstatutory Stock Option Agreement dated
December 14, 1993 that was entered into by and
between the Company and each of Messrs. Payne,
Haasbeek, Thompson and Rosinski (filed as exhibit
10.23 to the Company's Form 10-K for the year ended
December 31, 1993 and incorporated herein by
reference)
**10.36 - First Amendment to Credit Agreement, dated as of
December 30, 1994, by and among the Company, Gas
Systems, United, Western and BMO, individually and as
Agent for the other Banks party to the Credit
Agreement
**10.37 - Letter Agreement, dated as of December 15, 1994,
between the Company and Santa Fe amending the Gas
Contract
11 - Computation of per share earnings
**22 - List of subsidiaries of the Company
23 - Consent of independent public accountants
**24 - Powers of Attorney
27 - Financial Data Schedule
(B) REPORTS ON FORM 8-K.
No Reports on Form 8-K were filed during the quarter ended December 31,
1994.
(C) SEE SUBITEM (a)(3) ABOVE.
(D) SEE SUBITEM (a)(2) ABOVE.
<PAGE> 1
Exhibit 11
COMPUTATION OF FULLY DILUTED EARNINGS/LOSS
PER SHARE (1)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Net loss from continuing operations
as reported $ (15,066) (15,876) (1,033)
Preferred stock dividend requirements (61) (293) (5,772)
Expenses related to 7-3/4% convertible
subordinated debentures 1,978 - -
------------ ------------ ------------
Fully diluted net loss from continuing operations
available to common stock $ (13,149) (16,169) (6,805)
============ ============ ============
Earnings (loss) from discontinued operations,
as reported and fully diluted $ (8,103) 5,553 -
============ ============ ============
Average number of common shares as
reported (primary) 2,826 8,383 25,690
Additional shares assumed issued:
Options - 13 -
7-3/4% convertible subordinated debentures 306 - -
8% Junior Preferred Stock 258 - -
------------ ------------ ------------
Average number of common shares -
fully diluted 3,390 8,396 25,690
============ ============ ============
Fully diluted net loss from continuing operations
per common and common equivalent share $ (3.88) (1.93) (.26)
============ ============ ============
Fully diluted net earnings (loss) from discontinued
operations per common and common equivalent
share $ (2.39) .66 -
============ ============ ============
</TABLE>
(1) This computation is submitted in accordance with Regulation S-K, Item
601(b)(11) although it is contrary to paragraph 10 of APB Opinion No.
15 because it produces an anti-dilutive result.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-51373) and
Forms S-8 (No. 33-26666, 33-68820 and 33-56725) of Hadson Corporation of our
report dated March 3, 1995, appearing on page F-2 of this Form 10-K.
PRICE WATERHOUSE LLP
Oklahoma City, Oklahoma
April 14, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1994, the Consolidated Statement of
Operations for the year ended December 31, 1994, and the Computation of Fully
Diluted Earnings/Loss Per Share for the year ended December 31, 1994, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 3,109
<SECURITIES> 0
<RECEIVABLES> 77,332
<ALLOWANCES> 1,287
<INVENTORY> 4,858
<CURRENT-ASSETS> 94,074
<PP&E> 137,263
<DEPRECIATION> 36,094
<TOTAL-ASSETS> 205,405
<CURRENT-LIABILITIES> 107,235
<BONDS> 57,372
<COMMON> 257
0
55,079
<OTHER-SE> (16,900)
<TOTAL-LIABILITY-AND-EQUITY> 205,405
<SALES> 752,470
<TOTAL-REVENUES> 754,038
<CGS> 723,546
<TOTAL-COSTS> 723,546
<OTHER-EXPENSES> 28,375
<LOSS-PROVISION> 489
<INTEREST-EXPENSE> 5,154
<INCOME-PRETAX> (3,037)
<INCOME-TAX> (2,004)
<INCOME-CONTINUING> (1,033)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,033)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
