<PAGE> 1
SCHEDULE 14C
(RULE 14C-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
Check the appropriate box:
/ / Preliminary Information Statement / / Confidential, for Use of
the Commission Only (as
permitted by Rule
14c-5(d)(2))
/X/ Definitive Information Statement
Hadson Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Payment of filing fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14c-5(g).
/ / Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.01 per share
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions applies:
25,690,890
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rules 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined): $2.75. The per unit price
is based on the price per share to be received by holders of common stock.
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$70,649,947.50
- --------------------------------------------------------------------------------
(5) Total fee paid:
$14,130.00
- --------------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$14,130.00
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Schedule 14C
- --------------------------------------------------------------------------------
(3) Filing Party:
Hadson Corporation
- --------------------------------------------------------------------------------
(4) Date Filed:
March 8, 1995
- --------------------------------------------------------------------------------
<PAGE> 2
HADSON CORPORATION
2777 STEMMONS FREEWAY
SUITE 700
DALLAS, TEXAS 75207
---------------------
INFORMATION STATEMENT
---------------------
This Information Statement relates to the proposed merger (the
"Merger") of Carousel Acquisition Corporation ("Merger Sub"), a Delaware
corporation and an indirect wholly-owned subsidiary of LG&E Energy Corp., a
Kentucky corporation ("Parent"), with and into Hadson Corporation, a Delaware
corporation (the "Company"), pursuant to the Agreement and Plan of Merger,
dated as of February 10, 1995, by and among Parent, Merger Sub and the Company
(the "Merger Agreement"). 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 Junior Exercisable
Automatically Convertible Preferred Stock, Series B, par value $.01 per share
(the "Series B Preferred"), not owned by Parent subsequent to the Merger and
(b) each share of common stock of the Company, par value $.01 per share (the
"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 trust (the "H/P Trust") under the Trust Agreement (the
"H/P Trust Agreement") dated as of December 14, 1993 among the Company, The
Prudential Insurance Company of America, a New Jersey corporation ("Prudential
Insurance"), Pruco Life Insurance Company, a New Jersey corporation ("Pruco"),
and PruSupply, Inc., an Arizona corporation ("PruSupply") (collectively, the
"Prudential Group") and certain other parties (the "Excluded Shares") will be
converted into the right to receive $2.75 in cash, without any interest
thereon. See "THE MERGER -- Conflict of Interest/Interests of Certain Persons
in the Transaction -- Trust Agreement" and "-- The Merger Agreement." The
consideration per share of Company Common Stock to be received by the holders
of Company Common Stock as a result of the Merger is hereinafter sometimes
referred to as the "Purchase Price."
Each share of Senior Cumulative Preferred Stock, Series A of the Company, par
value $.01 per share (the "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 the existing terms of the Series B Preferred, after
the Merger and until December 14, 1995, a holder of Series B Preferred can
receive $2.75 per share by paying $3.225 to the Company, and 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, being one-one
thousandth of the consideration payable in the Merger to the holders of the
Company Common Stock. At the Effective Time, Parent will deposit into an
irrevocable trust account an amount of cash sufficient to pay each outstanding
share of Series B Preferred $0.00275 on December 14, 1995.
Concurrently with the execution and delivery of the Merger Agreement,
Parent and Merger Sub entered into Securities Purchase Agreements (the
"Securities Purchase Agreements") with the Prudential Group and Santa Fe Energy
Resources, Inc., a Delaware corporation ("Santa Fe"). Pursuant to the
Securities Purchase Agreement with the Prudential Group, 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 (jointly,
"Prudential") the following securities (collectively, the "Prudential
Securities"): (i) 1,329,771 shares of Company Common Stock, (ii) the rights and
<PAGE> 3
benefits under the H/P Trust in 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 due 2003 (the "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) 2,400,704
shares of Series A Preferred having an aggregate liquidation value of
$60,017,600, and (iii) $2.35 million in aggregate original 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
Excluded Shares).
The Merger Agreement and the Merger have each been approved by the
Board of Directors of the Company (the "Board" or the "Board of Directors") and
the special committee (the "Special Committee") of the Board formed to consider
proposals received by the Company. See "THE MERGER--Background of the
Transaction." 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 Company Common Stock for
which Prudential has the right to acquire upon exercise of the Series B
Preferred) representing approximately 65.04% of the Company Common Stock
outstanding on March 24, 1995 (the "Record Date"). Under the Securities
Purchase Agreements, Prudential and Santa Fe 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 (collectively, the "Proxies") 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 and on Prudential and Santa Fe have
executed a written consent approving the Merger and the Merger Agreement
effective May 15, 1995. ACCORDINGLY, STOCKHOLDERS OF THE COMPANY ARE NOT BEING
ASKED FOR, AND ARE REQUESTED NOT TO SEND, PROXIES AND FOR THAT REASON NO PROXY
CARD HAS BEEN ENCLOSED FOR STOCKHOLDERS. NO MEETING OF STOCKHOLDERS WILL BE
HELD TO CONSIDER APPROVAL OF THE MERGER AND THE MERGER AGREEMENT. Under
applicable federal securities laws, the Merger cannot be effected until at
least twenty calendar days after this Information Statement has been sent or
given to the Company's stockholders. Accordingly, the Company expects that the
Merger will be consummated on May 15, 1995 or as promptly as practicable
thereafter, assuming that the conditions to the Merger set forth in the Merger
Agreement have been satisfied. See "THE MERGER--The Merger
Agreement--Conditions." ANY STOCKHOLDER WHO WISHES TO DISSENT FROM THE MERGER
AND DEMAND APPRAISAL RIGHTS UNDER DELAWARE LAW SHOULD READ "THE
MERGER--APPRAISAL RIGHTS." ONLY HOLDERS OF SHARES OF COMPANY COMMON STOCK ARE
ENTITLED TO ASSERT APPRAISAL RIGHTS WITH RESPECT TO THOSE SHARES. HOLDERS OF
SHARES OF SERIES B PREFERRED ARE NOT ENTITLED TO ASSERT APPRAISAL RIGHTS WITH
RESPECT TO THOSE SHARES.
(ii)
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This Information Statement is being furnished by the Company and was
first mailed on or about April 24, 1995 to holders of record of Company
Common Stock , Series A Preferred and Series B Preferred as of the close of
business on the Record Date.
THE TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF THE TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE DATE OF THIS INFORMATION STATEMENT IS APRIL 24, 1995.
(iii)
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Information Concerning the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Information Concerning Merger Sub and Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Background of the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Recommendation of the Special Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Reasons for the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Recommendation of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Conflicts of Interest/Interests of Certain Persons in the Transaction . . . . . . . . . . . . . . . . 17
The Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Securities Purchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Status of Lawsuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Certain Federal Income Tax Consequences of the Merger . . . . . . . . . . . . . . . . . . . . . . . . 26
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Accounting Treatment of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Certain Effects of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Financial Information About Industry Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Energy Products and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Operations of Unconsolidated Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Number of Persons Employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Natural Gas Gathering Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Transmission Facilities and Related Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Natural Gas Liquids Facilities and Related Property . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Fixed Price Contract Dispute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Personal Injury Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Joint Venture Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Class Action Complaint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
MARKET PRICES AND DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Market Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
</TABLE>
(iv)
<PAGE> 6
<TABLE>
<S> <C>
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
BENEFICIAL OWNERSHIP OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Security Ownership of Certain Beneficial Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Security Ownership of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Exhibit A - Agreement and Plan of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Exhibit B - Opinion of Dillon, Read & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Exhibit C - Section 262 of the Delaware General Corporation Law . . . . . . . . . . . . . . . . . . . . . . . . C-1
Exhibit D - Glossary of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
</TABLE>
(v)
<PAGE> 7
INTRODUCTION
INFORMATION CONCERNING THE COMPANY
The Company is engaged, through its consolidated subsidiaries, in
providing energy products and services, consisting of the purchasing,
gathering, processing, storing and transporting of natural gas, 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
principal executive offices are located at 2777 Stemmons Freeway, Suite 700,
Dallas, Texas 75207, and its telephone number is (214) 640-6800.
For additional information concerning the Company and its subsidiaries
see "BUSINESS" and "AVAILABLE INFORMATION."
INFORMATION CONCERNING MERGER SUB AND PARENT
Merger Sub is a Delaware corporation with its principal executive
offices located at 220 West Main Street, Louisville, Kentucky 40232 (telephone
number (502) 627-2000). It was organized in connection with the Merger and is
an indirect wholly-owned subsidiary of Parent. As of the date of this
Information Statement, Parent, through another of its wholly-owned
subsidiaries, owns all of the issued and outstanding shares of Merger Sub
common stock. The directors and the sole stockholder of Merger Sub have
approved the Merger. Merger Sub has not engaged in any activities other than
in connection with the Merger and the Merger Agreement. Until the consummation
of the Merger, it is not anticipated that Merger Sub will have any significant
assets or liabilities (other than those arising under the Merger Agreement or
in connection with the Merger and the transactions contemplated thereby) or
engage in any activities other than those incident to its formation, the Merger
and the financing of the Merger.
Parent is an energy services corporation with its principal executive
offices located at 220 West Main Street, Louisville, Kentucky 40232 (telephone
number (502) 627-2000). Louisville Gas and Electric Company, a wholly-owned
subsidiary of Parent, is a regulated public utility that supplies natural gas
to approximately 258,000 customers and electricity to approximately 336,000
customers in Louisville and adjacent areas in Kentucky. Its service territory
covers approximately 700 square miles in 17 counties. LG&E Power Inc.,
Parent's independent power subsidiary, develops, designs, engineers, builds,
finances, operates and maintains independent power plants throughout the United
States. Also, LG&E Power Inc. is involved in the development of international
power projects. Through its Energy Services business unit, Parent directs a
marketing and brokering sales effort that sells electricity to customers
nationwide.
1
<PAGE> 8
THE MERGER
BACKGROUND OF THE TRANSACTION
During the first three quarters of 1994, the Company's earnings
increased significantly from the same period in 1993. This increase resulted
from improvements in the Company's operations following the acquisition of
Adobe Gas Pipeline Company ("AGPC") from Santa Fe (the "Adobe Merger") which
was completed in December 1993. In addition to the cash flow provided from the
gas gathering, transmission and processing facilities that were acquired in
this transaction, the Company significantly increased its natural gas marketing
volume. This increase was due largely to expanded capacity to acquire supplies
of natural gas.
The Company's ability to purchase natural gas is dependent in large
part on its access to trade credit from suppliers of natural gas and its
capacity to augment this open trade credit with standby letters of credit. The
Company's improved financial condition and operating results during the first
three quarters of 1994 enhanced its ability to gain more favorable trade credit
terms. However, during the course of the year these improvements were offset
to a large degree by continually increasing concern within the natural gas
industry over credit exposure as a result of failures of several gas marketing
companies. This concern led many producers to limit trade credit and require
increasing credit support, often in the form of additional letters of credit
requirements. In addition, the Company's rapid growth, as discussed above,
placed increased demands on its existing credit and working capital capacities.
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
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. During August, 1994, the
Company began negotiations with the Company's bank lenders for an expansion to
the revolving credit agreement and with Santa Fe for an extension of payment
terms under the gas purchase contract with Santa Fe, and the Company sought to
sell one of its subsidiaries. It was believed that the sale of the subsidiary,
in addition to providing some liquidity from the proceeds of the transaction,
would provide the Company with additional working capital and credit capacity
which was utilized by the subsidiary.
Despite the expected effects of the steps described above, during
August, 1994, the Company's management and Board of Directors concluded that
the existing limitations on the Company's access to credit and capital and the
Company's increased liquidity requirements would become an increasing
impediment to continued growth and even to the maintenance of the business at
then existing levels. Accordingly, the Company undertook, both on its own and
with the assistance of a financial advisor, S.G. Warburg & Co., Inc. ("S.G.
Warburg"), to explore options available to it for addressing these credit
restraints.
At a meeting on August 9, 1994, the Board considered, with the advice
of the Company's management and representatives of S.G. Warburg, whether the
Company should continue to implement its business plan as an independent
company or seek strategic alternatives including a possible sale of the
Company. On September 14, 1994, the Company engaged S.G. Warburg as its
exclusive financial advisor with respect to a potential transaction or
transactions involving (i) a significant gas supply transaction in exchange for
equity of the Company, (ii) a significant purchase, sale or exchange
transaction involving assets or equity of the Company and assets, equity or a
gas supply agreement of another party, (iii) a corporate purchase, sale or
merger transaction involving all or substantially all of the Company's assets
or capital stock or (iv) a restructuring of the Company's equity or debt. The
objectives in considering a possible transaction included: (i) solving the
Company's capital and credit capacity constraints, (ii) identifying a
transaction
2
<PAGE> 9
immediately accretive to earnings, (iii) enhancing the Company's cash flow over
time, (iv) continuing the growth of the Company, (v) providing a complementary
asset and marketing base, and (vi) reducing the impact of fixed obligations.
During the period from March 1994 through October 1994, the Company's
management and/or S.G. Warburg discussed a possible transaction concerning the
Company with approximately 30 companies. As a result of these preliminary
discussions, seven of the companies initially contacted entered into
confidentiality agreements with the Company so that more detailed discussions
could be held. From September 1994 through December 1994, S.G. Warburg
provided information and the Company's management made presentations concerning
the Company to these interested parties. In addition, S.G. Warburg made
numerous contacts with the interested parties to discuss a possible transaction
with the Company.
During the course of these investigations and discussions, it became
evident that in order to meet the objectives for a transaction, any such
transaction would have to include a significant increase in the Company's
equity. Furthermore, all parties who expressed serious interest in entering
into a transaction with the Company indicated that they would seek to gain
substantial, if not complete, control of the Company in any such transaction.
Of the seven interested parties, five made preliminary proposals to
purchase the Company. Of these offers, the one providing the highest price,
and therefore the most attractive proposal, was received from El Paso Natural
Gas Company ("El Paso"). Two of the proposals provided for a swap of equity
interests of the acquiror for the Company's securities, and two other proposals
provided for the purchase of some or all of the Company's securities and/or the
merger of the Company with and into another company for consideration less than
the proposal by El Paso. Price was the primary factor considered by the
Company in determining which proposal to pursue. Because the proposal from El
Paso provided the highest price and was all cash, structural issues, including
whether to accept another interested party's, securities, were not decisive in
determining which offer to pursue. Prior to receiving El Paso's offer, S.G.
Warburg and management had met or held discussions with El Paso on October 5,
15, 18, and 27, 1994; November 16, 1994; and December 5, 1994.
During the period of discussion with El Paso, S.G. Warburg held
negotiations with El Paso, Prudential and Santa Fe. Negotiations with El Paso
centered around the total value of the Company, primarily as determined by
projected cash flow. Following these negotiations, El Paso offered an
aggregate value for the Company of approximately $132.5 million, S.G. Warburg
then negotiated separately with Prudential and Santa Fe in order to ascertain
whether a transaction might be feasible at this valuation, maintaining
throughout the discussions that the Public Stockholders must receive a premium
to the then current market value of the stock ($2.125 as of December 5, 1995).
Based on El Paso's valuation of the Company and the original valuations of
Santa Fe and Prudential as to their respective securities in the Company, the
implied price for all holders of the Company Common Stock would have been in a
range between $.70 and $1.50 per share. Following negotiations between the
parties, Prudential and Santa Fe agreed to lower their respective valuations of
their Company securities to permit the Public Stockholders to receive a premium
price of $2.25 per share in a transaction with El Paso.
On December 6, 1994, El Paso submitted a formal proposal to acquire
the Company, which proposal was described in a press release issued by the
Company on December 15, 1994. Pursuant to the El Paso proposal, the holders of
the Company's publicly traded Company Common Stock would have received $2.25
per share, Prudential would have received $59.2 million for the Prudential
Securities and Santa Fe would have received $53 million for the Santa Fe
Securities. In addition, El Paso would have paid approximately $4 million to
Santa Fe in return for certain amendments to Santa Fe's existing gas supply
contract with the Company. On December 6, 1994, the date El Paso submitted its
proposal to acquire the Company, the high and low sales prices per share of
Company Common Stock were $2-1/8 and $2, respectively. Counsel for El Paso
prepared and distributed drafts of documents with respect to the proposed
transaction. In formulating its proposal, El Paso had held meetings with
representatives of the Company, Prudential and Santa Fe.
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<PAGE> 10
In anticipation of El Paso's proposal and the possible receipt of
other proposals to acquire the Company, on December 5, 1994 the Board of
Directors of the Company formed the Special Committee to represent the
interests of the Company and the stockholders of the Company other than Santa
Fe and Prudential (the "Public Stockholders") in evaluating and responding to
such proposals. The Board of Directors, among other things, authorized and
empowered the Special Committee to (i) evaluate any acquisition proposals
received by the Company, (ii) implement such procedures and to take such acts,
including the solicitation of acquisition proposals, as the members of the
Special Committee, in the exercise of their business judgment, deemed necessary
or advisable to accomplish their purposes, (iii) negotiate, on behalf of the
Company and its stockholders, the terms and conditions of, determine the
advisability of, and make recommendations to the Board of Directors concerning
the authorization and approval of, any agreements relating to or to be entered
into in connection with an acquisition, and (iv) select and retain legal
counsel and a financial advisor.
The Special Committee consists of J. Michael Adcock, the former
President and Chief Executive Officer of the Company and currently an attorney
in private practice, J. Frank Haasbeek, President and Chief Executive Officer
of International Transquip Industries, Inc. (a manufacturer of air brake
systems for heavy trucks, buses and trailers), and B.M. Thompson, a private
investor who was formerly the Chairman of the Board and Chief Executive Officer
of GPM Gas Corporation, a subsidiary of Phillips Petroleum Company. The three
members of the Special Committee are not employees of the Company or, except
for their positions as directors of the Company, otherwise affiliated with the
Company, Santa Fe or Prudential. Mr. Adcock was elected Chairman of the
Special Committee.
The Special Committee retained the law firm of Vinson & Elkins L.L.P.
to act as special counsel to the Special Committee and to advise it with
respect to legal matters relating to the Special Committee's activities, and
retained the investment banking firm of Dillon, Read & Co. Inc. ("Dillon Read")
to act as financial advisor to the Special Committee with respect to financial
matters and with respect to the fairness, from a financial point of view, of
the consideration to be received by the Public Stockholders pursuant to any
proposed transaction. Initially, the Special Committee requested Dillon Read
to evaluate the Company's existing financial situation and strategic
opportunities, to review the results of the solicitation process to sell the
Company conducted by S.G. Warburg that led to El Paso's proposal, and to
provide an opinion on the fairness, from a financial point of view, of the
$2.25 per share price proposed to be paid by El Paso to the Public
Stockholders.
Soon after its formation, the Special Committee and its advisors
requested and received certain information from the Company and S.G. Warburg,
including projections prepared by management of the Company with respect to the
financial condition, results of operations and cash flows of the Company and
documentation and financial analysis relating to the El Paso proposal and the
efforts of S.G. Warburg to find a strategic partner or buyer for the Company.
After reviewing this information and discussing it with its advisors, the
Special Committee requested that a presentation be made by the Company's
management and S.G. Warburg as soon as possible, such presentation to consist
of at least the following: (i) a discussion of the Company's business plan,
(ii) up- to-date information on the Company's liquidity/credit availability
problems, (iii) a discussion of the terms of El Paso's proposal, (iv) a history
of the process that management and S.G. Warburg undertook in their efforts to
find a strategic partner for or sell the Company, including detail on
discussions with potential buyers other than El Paso, and (v) a history of the
discussions with El Paso.
On December 14, 1994, management of the Company and representatives
of S.G. Warburg made a presentation to the Special Committee and its advisors.
At this presentation, members of the Company's management reviewed the
Company's five-year business plan and reported to the Special Committee on the
Company's existing financial situation, focusing on its liquidity/credit
availability position and the remedial effect that a business combination such
as that proposed by El Paso would have thereon. The Special
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<PAGE> 11
Committee also received a detailed presentation from S.G. Warburg, which
included (i) an analysis of why the Company was seeking a strategic partner or
buyer, (ii) a discussion of the efforts of S.G. Warburg to locate a strategic
partner or buyer for the Company, (iii) a history of the negotiations with El
Paso, and (iv) S.G. Warburg's analysis of the financial terms of El Paso's
proposal.
In its presentation to the Special Committee, S.G. Warburg described a
broader strategic review conducted by it and management during the summer of
1994. Discussion items included the competitive landscape, market trends,
optimal business mix, various strategic alternatives available to the Company
(including maintenance of the status quo, various restructurings, asset
acquisitions or sales, gas for equity transactions, joint ventures and sale or
merger of the Company) and potential implementation processes. The goals of
the review were to identify opportunities for enhancing shareholder value and
to compare those options to the Company's projected performance, to relieve
capital constraints, to increase gas supply and to align the Company's overhead
with its business level. Based in part upon the difficult market environment
of contracting gas marketing margins and rapidly increasing credit constraints,
the Board of Directors authorized S.G. Warburg to approach a set of potential
partners, while taking care not to unduly disrupt the Company's operations or
reputation in the marketplace or to otherwise jeopardize the ability of the
Company to attempt to fulfill its strategic plan in the event that no suitable
alternative could be identified.
S.G. Warburg described its efforts to find a strategic partner or
buyer for the Company to the Special Committee. In describing these efforts,
S.G. Warburg listed fourteen natural gas producers, ten pipeline companies and
natural gas distributors and seven gas gathering, transmission and marketing
companies with which it had conducted detailed discussions and/or meetings,
noting the persons contacted and the level of interest expressed by each party.
S.G. Warburg then presented its detailed estimates of the terms available for
each of the five companies which had expressed an interest in an acquisition of
or partnership with the Company, concluding that the El Paso proposal presented
superior value to other identified alternatives, including maintenance of the
status quo. S.G. Warburg also presented a valuation of the Company based upon
discounted cash flow methodology, comparable trading analysis and comparable
transaction analysis which indicated a range of enterprise values of $118-$150
million.
At the conclusion of this presentation, the Special Committee
requested that management of the Company seek approval from El Paso to publicly
announce the existence of El Paso's proposal. The Special Committee informed
management that it believed such an announcement would accomplish three
objectives: (i) inform the market that the Company was for sale, thus
providing potential buyers with the opportunity to make proposals, (ii)
satisfy any disclosure obligations the Company might have under the Securities
Exchange Act of 1934 and (iii) mitigate the negative impact rumors were having
on the Company's liquidity/credit availability situation. The Company was
rumored to be withholding payments to its creditors and possibly contemplating
filing bankruptcy. Such rumors resulted in less trade credit being made
available to the Company. On December 15, 1994, the Company publicly
announced that it had entered into negotiations to become a wholly owned
subsidiary of El Paso in a merger transaction pursuant to which the Public
Stockholders would receive $2.25 per share of Company Common Stock. At this
time, the Special Committee also informed El Paso that it would not be prepared
to negotiate with El Paso concerning its proposal until December 21, 1994,
since its financial and legal advisors needed such time to inform themselves
fully as to the Company's current financial situation, prospects and strategic
opportunities, and to analyze El Paso's proposal.
On December 20, 1994, the Special Committee met with its financial and
legal advisors to review the progress to date and to discuss several
unsolicited indications of interest in acquiring the Company recently received
by Company management or the Special Committee. The Special Committee was
provided a status report summarizing Dillon Read's due diligence investigations
since being retained and outlining the analysis required. Dillon Read advised
the Special Committee it had not reached any conclusions about the Company's
value or the adequacy of El Paso's proposal, and presented no opinion thereon.
The Special Committee
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<PAGE> 12
reviewed the valuation techniques which Dillon Read intended to employ,
including the key assumptions inherent in each. The Special Committee also
discussed the nature and extent of S.G. Warburg's search for a strategic
partner or buyer for the Company. The Special Committee authorized further
inquiries of possible bidders for the Company (the "Market Check") to confirm
the value of the Company in the marketplace. The Special Committee requested
Dillon Read to contact the companies that submitted firm proposals in response
to S.G. Warburg's efforts and to explore such companies' continued level of
interest and whether any of them might be willing to increase their prior
proposals. The Special Committee also established procedures for dealing with
companies that showed interest in acquiring the Company on an unsolicited
basis, including Parent which had contacted the Special Committee on December
19, 1994. Additionally, Dillon Read was requested to contact one company that
Dillon Read believed to have an interest in acquiring the Company based on its
experiences unrelated to its representation of the Special Committee. During
the final ten days of 1994, Dillon Read contacted each of these companies.
Each of the companies contacted by Dillon Read was given access to the same
information about the Company that was made available by S.G. Warburg in its
earlier search.
On December 20, 1994, El Paso, Santa Fe and Prudential were informed
of the Special Committee's decision to conduct the Market Check. At this time,
the Special Committee also informed El Paso that it would not be able to
respond to what it understood to be El Paso's proposal until El Paso submitted
a proposal to the Special Committee in writing. On December 21, 1994, El Paso
delivered a written proposal to the Special Committee. This written proposal
reaffirmed the financial terms previously orally communicated to the Special
Committee; however, in it El Paso stated that it would withdraw its proposal
(i) if the Company or the Special Committee or any employee or representative
thereof initiated, solicited or encouraged any proposal to acquire the Company
or (ii) if definitive documentation for an acquisition of the Company by El
Paso was not negotiated, executed and delivered on or prior to 5:00 p.m.
Central Standard Time ("CST") on December 30, 1994. By return letter dated
December 22, 1994, the Special Committee informed El Paso that it could not
accept the restrictions on its activities suggested in El Paso's written
proposal. However, El Paso did not withdraw its proposal.
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 El Paso's offer 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. See "THE MERGER --
Status of Lawsuit."
On December 30, 1994, the Special Committee received a report from
Dillon Read on the El Paso proposal and the status of Dillon Read's discussions
with other potential purchasers of the Company. Dillon Read reviewed with the
Special Committee the nature and extent of its due diligence and discussed its
valuation methodology and underlying assumptions. Dillon Read also reviewed
with the Special Committee the status of the contacts with potential bidders
the Special Committee had requested it make, and reported that Parent had
indicated that it might be interested in purchasing the Company at an aggregate
price higher than that proposed by El Paso, but would need to conduct due
diligence before making a firm proposal. Dillon Read reported further that all
the other parties contacted had declined to bid, declined to increase the value
of their prior proposals or indicated an interest in purchasing the Company's
outstanding securities at an aggregate purchase price below that contained in
the proposal made by Parent. In light of (i) the limited nature and extent of
Dillon Read's due diligence as of the date of this meeting with the Special
Committee and (ii) Parent's indication of interest at an aggregate price higher
than that proposed by El Paso, which price could result in a price to the
Public Stockholders in excess of $2.25 per share of Company Common Stock,
Dillon Read reported to the Special Committee that it was not prepared at that
time to give an opinion to the Special Committee that El Paso's proposal, with
a price of $2.25 per share to the Public Stockholders, was fair, from a
financial point of view, to the Public Stockholders.
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<PAGE> 13
Also on December 30, 1994, the Special Committee requested that
Parent send representatives to Dallas to conduct due diligence and that it be
prepared to make a firm proposal to acquire the Company as soon as possible.
At the same time, each of El Paso, Santa Fe and Prudential were informed that
Dillon Read was not prepared at that time to opine to the Special Committee
that the $2.25 per share to be paid to the Public Stockholders under El Paso's
proposal was fair to the Public Stockholders from a financial point of view,
that the price to the Public Stockholders would need to be increased and that
the Special Committee was indifferent whether such increase came from an
increase in the aggregate purchase price under El Paso's proposal or an
increase in the Public Stockholders' allocation thereof. In response, El Paso
stated that the aggregate purchase price under its proposal would not be
increased and that Santa Fe and Prudential had declined to give the Public
Stockholders any portion of the proposed purchase price previously allocated to
them; however, El Paso reaffirmed its interest in pursuing a transaction
consistent with its proposal.
During late December and early January, John Zimms, First Capital
Alliance and Elliot Associates L.P. ("Elliot"), each a stockholder of the
Company, contacted the Special Committee to express their displeasure with the
announced price to the public of $2.25 per share of Company Common Stock in El
Paso's proposal. The Special Committee invited these stockholders to submit
written materials to or meet with the Special Committee to express their views
regarding El Paso's proposal, the value of the Company and any related matters.
With the exception of Elliot, none of the stockholders responded to invitations
offered by the Special Committee. In mid-January, William Strong, a
stockholder of the Company, contacted the Special Committee voicing similar
displeasure with the El Paso Proposal. On January 11, 1995, Mr. Adcock met
with Mr. Jon Pollock of Elliot to receive Elliot's views concerning these
issues. Elliot confirmed its perception previously communicated to the Special
Committee that $2.25 per share for the Public Stockholders was inadequate and
indicated Elliot's concern that the interests of the Public Stockholders were
not fully represented in the negotiations leading to El Paso's proposal.
During this meeting, Mr. Pollock and Mr. Adcock agreed that Elliot's advice to
the Special Committee was helpful to the Special Committee and its objectives,
and Mr. Adcock informed Mr. Pollock that the Special Committee might seek
further advice and assistance from Elliot in the future. The Company was not
aware as to whether such stockholders were acting on behalf of or in the best
interests of the other unaffiliated stockholders.
During the first two weeks of January 1995, Parent conducted due
diligence on the Company and met with the Special Committee on several
occasions to assure the Special Committee of its commitment to make a firm
proposal to purchase the Company. During this time, the Special Committee
continued to negotiate with El Paso, Santa Fe and Prudential, seeking an
increase in the price per share to be paid to the Public Stockholders under El
Paso's proposal either through an increase of the aggregate purchase price
proposed by El Paso or a reallocation thereof to increase the price proposed to
be paid to the Public Stockholders; and El Paso continued to refuse to raise
the aggregate purchase price and Santa Fe and Prudential continued to decline
to give the Public Stockholders any portion of the proposed purchase price
previously allocated to them.
On January 18, 1995, the Special Committee met to discuss the lack of
progress in the negotiations with El Paso, Santa Fe and Prudential and
considered, among other things, the following: (i) the status of the Parent due
diligence and the pendency of a proposal therefrom, (ii) the likely range
within which Parent had indicated it would make a proposal and what per share
price might be available for the Public Stockholders if such a proposal was
made, and (iii) the financial material previously delivered to the Special
Committee by management of the Company and Dillon Read. After such
consideration, the Special Committee decided not to recommend El Paso's
proposal to the Board of Directors with an allocation to the Public
Stockholders of $2.25 per share in order to obtain the concessions from El
Paso, Santa Fe and Prudential, either individually or collectively, necessary
to increase the price offered to the Public Stockholders under El Paso's
proposal. At the conclusion of the meeting, the Special Committee informed El
Paso, Santa Fe and Prudential that it would not recommend El Paso's proposal to
the Board of Directors with an allocation to the Public Stockholders of $2.25
per share.
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<PAGE> 14
On January 24, 1995, based on certain concessions from Prudential and
Santa Fe, El Paso submitted to the Special Committee a revised proposal (the
"New El Paso Proposal") for the acquisition of the Company. Under the New El
Paso Proposal, the aggregate purchase price of $132.5 million offered for the
Company remained unchanged from its previous proposal (the "Old El Paso
Proposal") but because of concessions from Prudential and Santa Fe the price
provided to the Public Stockholders was increased from $2.25 per share to
$2.375 per share; however, the New El Paso Proposal was conditioned on the
acceptance of the price to be paid to the Public Stockholders by Elliot and
settlement of the stockholder litigation described below. The New El Paso
Proposal also stated that it would be withdrawn if not recommended by the
Special Committee and approved by the Board of Directors by 5:00 p.m. CST on
January 26, 1995.
Also on January 24, 1995, Parent submitted a proposal (the "Parent
Proposal") to acquire the Company. The Parent Proposal contained an aggregate
purchase price of $143 million but did not specify a price to be offered to the
Public Stockholders, leaving allocation of the aggregate purchase price to be
negotiated among Parent, Santa Fe, Prudential and the Special Committee. The
Parent Proposal also suggested that Parent would expect the Company and the
Special Committee not to solicit or encourage or engage in discussions
concerning any other acquisition proposals during negotiations with Parent.
On January 25, 1995, the Special Committee met to discuss the
indication of interest of El Paso in acquiring the Company as originally made
in the Old El Paso Proposal, as modified by the New El Paso Proposal and as set
forth in the Parent Proposal. The members of the Special Committee considered
in detail the provisions of the New El Paso Proposal, focusing in particular on
the differences in the New El Paso Proposal from the Old El Paso Proposal. The
Special Committee considered the following issues, among others:
(i) whether the fact that the El Paso proposal spoke in
terms of an "indication of interest" rather than a "proposal to
acquire" as used in the Old El Paso Proposal indicated that El Paso
had become less serious in its desire to acquire the Company;
(ii) that the price allocated to the Public Stockholders
increased from $2.25 per share in the Old El Paso Proposal to $2.375
per share in the New El Paso Proposal by reallocating amounts away
from Prudential and Santa Fe and not because of an increase in the
aggregate purchase price offered by El Paso;
(iii) that the New El Paso Proposal required the execution
of a memorandum of understanding relating to certain stockholder
litigation as a condition to El Paso's revision of its indication of
interest, while the Old El Paso Proposal did not require any such
memorandum of understanding;
(iv) that the New El Paso Proposal required the approval
of Elliot as a condition to El Paso's revision of its indication of
interest, while the Old El Paso Proposal did not require any such
approval; and
(v) that the New El Paso Proposal required the settlement
of certain stockholder litigation as a condition to closing a merger,
while the Old El Paso Proposal did not require any such settlement.
The Special Committee also considered the fact that despite repeated
efforts, El Paso had consistently refused to raise the aggregate purchase price
under its proposal and that numerous efforts by the Special Committee had
resulted in the reallocation of only an additional $0.125 per share to the
Public Stockholders under the New El Paso Proposal. After considering these
facts, it was the Special Committee's business judgment that the price to the
Public Stockholders of $2.375 per share under the New El Paso Proposal was
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<PAGE> 15
unlikely to improve and that at that price to the Public Stockholders it would
not be likely that the new conditions set forth in the New El Paso Proposal
could be satisfied, particularly in light of the discussions Mr. Adcock had
with Elliot described above.
The Special Committee next considered the Parent Proposal and sought
and received clarification from Parent concerning several topics described in
the letter from Parent to the Special Committee dated January 24 conveying the
Parent Proposal. The Special Committee considered Parent's responses to its
questions and what they indicated about Parent's commitment to a transaction.
The members of the Special Committee also considered the difference in the
aggregate purchase prices of the New El Paso Proposal and the Parent Proposal,
with the Special Committee noting that the aggregate purchase price under the
Parent Proposal exceeded that under the New El Paso Proposal and the impact
this difference would likely have on the per share price Public Stockholders
would receive. In addition, the Special Committee considered the clause in the
Parent Proposal limiting discussions with other parties seeking to acquire the
Company. The Special Committee decided that it should continue to be available
to discuss the Company's options with any and all interested parties, even if
negotiations with Parent were initiated. The members of the Special Committee
agreed that if they decided to begin negotiations with Parent, they would do so
on a non-exclusive basis.
At the conclusion of the January 25 meeting, the members of the
Special Committee unanimously agreed that the Parent Proposal should be pursued
on a non-exclusive basis, and that the Special Committee should continue to
seek an increase in the aggregate purchase price under the New El Paso Proposal
and an extension of the deadline for the New El Paso Proposal so that its terms
could be discussed with Elliot. On the afternoon of January 25, the Special
Committee invited Parent's representatives to Dallas to negotiate definitive
agreements on a non-exclusive basis. At this time, the Special Committee also
communicated to El Paso the Special Committee's continued desire for an
increase in the aggregate purchase price offered by El Paso and for an
extension of the deadline to give the Special Committee time to discuss the New
El Paso Proposal with Elliot.
Simultaneous with its decision to proceed with Parent, the Special
Committee decided to inform Prudential and Santa Fe that, subject to receipt of
a fairness opinion from Dillon Read, the Special Committee was prepared to
recommend the Parent Proposal to the Board of Directors based on an allocation
proposed by the Special Committee of the aggregate consideration contained in
the Parent Proposal and that it was not willing to recommend the New El Paso
Proposal.
The allocation proposed by the Special Committee was determined by the
Special Committee to promote a negotiated allocation of the aggregate purchase
price resulting in the highest available price to the Public Stockholders.
Factors the Special Committee considered in determining the proposed allocation
included (i) the financial condition of the Company, (ii) the views of the
Public Stockholders (including Elliot) who had communicated with the Special
Committee and (iii) the relative strengths of the various parties' bargaining
positions and underlying claims on the Company.
The Special Committee requested that Prudential and Santa Fe send
representatives to Dallas to negotiate with the Special Committee and Parent on
January 26, 1995. When so informed of such decision on the afternoon of
January 25, Santa Fe and Prudential expressed concern as to the commitment of
Parent to a transaction and objected to the proposed allocation. Both stated
a desire to proceed with the New El Paso Proposal and indicated that they felt
the Special Committee should act on the New El Paso Proposal before it was
withdrawn. The Special Committee informed Santa Fe and Prudential that it had
previously held similar concerns about Parent's commitment but had worked hard
to confirm Parent's seriousness and was now satisfied as to Parent's intent.
Prudential then informed the Special Committee that it could not accept the
proposed allocation and would not participate in discussions with Parent and
the Special Committee if there were a predetermination as to the allocation of
the proposed purchase price to the Public Stockholders. Santa Fe, however,
indicated that it would cooperate with the Special Committee and send
representatives to
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<PAGE> 16
a January 26 meeting to negotiate definitive agreements with Parent but that it
also could not accept the proposed allocation.
On January 26 and 27, the Special Committee and Santa Fe negotiated
with Parent concerning the content of the Securities Purchase Agreements and
the Merger Agreement. During this time, the Special Committee continued to
have discussions with El Paso, encouraging it to increase its aggregate
purchase price for the Company and to extend the deadline on the New El Paso
Proposal to permit the Special Committee to discuss its terms with Elliot. On
January 26, El Paso extended the deadline on the New El Paso Proposal to 5:00
p.m. CST on January 27; however, it stated that it would only extend the
deadline beyond that time if the Special Committee agreed to negotiate with El
Paso on an exclusive basis. On January 27, after considering the progress
being made towards definitive documentation on the higher priced Parent
Proposal, the Special Committee informed El Paso that it would like to continue
to discuss a possible transaction with El Paso but that it would not do so on
an exclusive basis.
From January 27 through January 30, the Special Committee and Santa Fe
continued to negotiate with Parent concerning the Merger and the Special
Committee continued to negotiate with Santa Fe and Prudential regarding the
allocation of the aggregate purchase price under the Parent Proposal. The
negotiations of the Special Committee and Santa Fe with Parent after January
25, 1995 concerned each of the terms and conditions of the Merger Agreement and
the Securities Purchase Agreements. The terms agreed upon are reflected in the
executed Merger Agreement and Securities Purchase Agreements. See "The Merger
Agreement" and "Securities Purchase Agreements." The negotiations among
Prudential, Santa Fe and the Special Committee after such date involved
primarily the allocation of the aggregate purchase price under the Parent
Proposal, which allocation is discussed below. Under the original El Paso
Proposal, the Public Stockholders were to receive $2.25 per share of Company
Common Stock, Prudential was to receive $59.2 million for the Prudential
Securities and Santa Fe was to receive $53 million for the Sante Fe Securities.
In the negotiations with respect to the allocation of the aggregate Purchase
Price under the Parent Proposal, each of the Special Committee, Sante Fe and
Prudential presented its position concerning the allocation of the aggregate
Purchase Price, with each of the parties ultimately compromising. On January
30, a tentative allocation was agreed upon among Prudential, Santa Fe, and,
subject to the receipt of a fairness opinion from Dillon Read with respect to
the Public Stockholders and the approval of Elliot, the Special Committee. The
allocation provides $2.75 per share of Company Common Stock to the Public
Stockholders, $63 million for the Prudential Securities and $55.25 million for
the Sante Fe Securities. On January 31, 1995, Mr. Adcock met with Mr. Jon
Pollock of Elliot to seek Elliot's advice concerning the terms of the Parent
Proposal and the price to the Public Stockholders of $2.75 per share. Mr.
Pollock informed Mr. Adcock that Elliot would advise the Special Committee to
recommend to the Board of Directors the Parent Proposal with that allocation
and that Elliot would support such a recommendation. From February 1 through
February 8, the Special Committee, Prudential, Santa Fe and Parent continued to
negotiate the final documentation for the securities purchases and the Merger.
On February 9, 1995, the Special Committee met to consider the Parent
Proposal as represented in the definitive Securities Purchase Agreements and
the Merger Agreement. At the meeting, counsel to the Special Committee
presented a detailed summary of the contents of these documents and Dillon Read
presented its report on its valuation of the Company and the fairness of the
Parent Proposal to the Public Stockholders. Dillon Read reported on the
qualitative considerations considered when analyzing the Company's enterprise
value, including, without limitation, (i) the strength of the Company's
management, (ii) the condition of the gas marketing industry as a whole and the
Company's competitive position therein, and (iii) the Company's business plans
and opportunities and the financial and operational constraints thereon. The
report also included the principal quantitative valuation methodologies applied
by Dillon Read to the Company. These include a discounted cash flow analysis,
a comparable publicly-traded company analysis, a comparable company acquisition
analysis and an analysis of purchase prices in non-control position buyouts.
Dillon Read concluded by informing the members of the Special Committee that
Dillon Read's Fairness Opinion Committee had deliberated on the Parent Proposal
and was of the opinion that the proposed consideration to be received in the
Parent Proposal by the Public Stockholders of $2.75 per share of Company Common
Stock is fair to the Public Stockholders from a financial point of view as of
the date of the meeting. See "Opinion of Financial Advisor." At the
conclusion of the meeting, the Special Committee decided that the Parent
Proposal, with an allocation to the Public Stockholders of $2.75 per share,
provided the best value reasonably
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<PAGE> 17
available to the Public Stockholders and should be recommended by the Special
Committee to the Board of Directors for approval thereby.
RECOMMENDATION OF THE SPECIAL COMMITTEE
On February 10, 1995, the Board of Directors met to consider the
Merger Agreement and the Merger. At the meeting, the Special Committee
reported to the Board of Directors that it had found and determined that (i)
the acquisition contemplated by the Merger Agreement, the Prudential Securities
Purchase Agreement and the Santa Fe Securities Purchase Agreement is in the
best interests of the Company and the Public Stockholders, (ii) such
acquisition provides the best value to the Public Stockholders that is
reasonably available, (iii) the allocation of the consideration to be paid by
Parent pursuant to the Merger Agreement, the Prudential Securities Purchase
Agreement and the Santa Fe Securities Purchase Agreement among Prudential,
Santa Fe and the Public Stockholders is fair and reasonable to the Public
Stockholders, (iv) the Board of Directors should authorize and approve the
execution, delivery and performance by the Company of the Merger Agreement and
(v), in connection with the authorization and approval contemplated by clause
(iv) hereof, the Board of Directors should authorize and approve the
transactions contemplated by the Merger Agreement, the Prudential Securities
Purchase Agreement and the Santa Fe Securities Purchase Agreement as necessary
to fulfill the requirements of Section 203(a)(1) of the DGCL; provided,
however, that such authorization and approval shall become void and from the
outset be of no force or effect if the Merger contemplated by the Merger
Agreement is not consummated in accordance with its terms as such terms may be
amended from time to time in accordance with the Merger Agreement and with the
approval of the Special Committee. Section 203(a)(1) of the General
Corporation Law of the State of Delaware prohibits a corporation from engaging
in a business combination, including the Merger, with any interested
stockholder (which would include Parent and Merger Sub as a result of entering
into the Securities Purchase Agreements ) within three years following the date
such stockholder became interested, unless, among other things, prior to such
date the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder.
In making the determinations and recommendations set forth above, the
Special Committee considered the following factors:
(i) the financial condition of the Company, in particular the
existing limitations on the Company's access to credit and
capital and the impact of such limitations on its increased
liquidity requirements;
(ii) the reports from Dillon Read analyzing the Company's
enterprise value, which reports considered the strength of the
Company's management, the condition of the gas-marketing
industry as a whole and the Company's competitive position
therein, and the Company's business plans and opportunities
and the financial and operational constraints thereon;
(iii) the opinions concerning valuation assigned by certain of the
Public Stockholders who contacted the Special Committee,
including Elliot, a long-time investor of the Company, that
supported the Parent Proposal and the price to the Public
Stockholders of $2.75 per share;
(iv) the reports from S.G. Warburg and management of the Company on
the procedures followed by them in, and the result of, their
search for a strategic partner or buyer for the Company
conducted prior to the formation of the Special Committee;
(v) its familiarity with the efforts of Dillon Read in respect of
certain potential buyers for the Company undertaken subsequent
to the formation of the Special Committee, which efforts
resulted in no proposal as favorable as the Parent Proposal;
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<PAGE> 18
(vi) the fact that the New El Paso Proposal of $2.25 per share
resulted from over six months of effort by management of the
Company and S.G. Warburg seeking a strategic partner or buyer
for the Company and over two months of effort by the Special
Committee and Dillon Read with respect to the New El Paso
Proposal and the Parent Proposal seeking the best value
available for the Public Stockholders;
(vii) the fact that the negotiations between the Company and El Paso
(i.e., that the Company was for sale) had been publicly
announced December 15, 1994 and the only serious proposal
received by the Special Committee with an aggregate purchase
price in excess of that under the New El Paso Proposal
thereafter was the Parent Proposal;
(viii) its belief that El Paso was not prepared to improve the
aggregate purchase price under the New El Paso Proposal and
that Prudential and Santa Fe would not agree to an increase of
the allocation thereunder to the Public Stockholders;
(ix) the fact that the aggregate value of the Parent Proposal and
the amount available for the Public Stockholders thereunder
were significantly greater than the corresponding aggregate
value and amount available under the New El Paso Proposal; and
(x) the delivery by Dillon Read of its opinion that the
consideration to be received by the Public Stockholders of
$2.75 per share of Company Common Stock is fair to the Public
Stockholders from a financial point of view as of the date of
February 9, 1995.
All of the foregoing factors supported the determinations and
recommendations of the Special Committee set forth above. The Special
Committee did not assign any specified weight to the consideration of any of
the foregoing factors on an individual basis.
REASONS FOR THE MERGER
During August 1994, the Company's management and Board of Directors
concluded that the existing limitations on the Company's access to credit and
capital and the Company's increased liquidity requirements would become an
increasing impediment to continued growth and even to the maintenance of the
business at then existing levels. The Board considered whether the Company
should continue to implement its business plan as an independent company or
seek strategic alternatives, including a possible sale of the Company. The
Board determined that without the implementation of a strategic alternative,
the Company would likely be required to significantly reduce its operations
because of the limitations on access to credit and capital and increased
liquidity requirements. The Board was informed of the possible transactions
resulting from the efforts of S.G. Warburg in their search for a strategic
partner or buyer for the Company conducted prior to the formation of the
Special Committee. The Board was also informed of the negotiations by the
Special Committee and Dillon Read with El Paso and Parent and of the factors
referred to above as supporting the determinations and recommendations of the
Special Committee regarding the Parent Proposal. Based on the foregoing, the
Board determined that the Merger was the best alternative reasonably available
for the Company and its stockholders.
RECOMMENDATION OF THE BOARD
The Board of Directors of the Company approved the Merger and the
Merger Agreement, has determined that the Merger and the Merger Agreement are
in the best interests of the Company and its stockholders and has recommended
that such stockholders approve the Merger and the Merger Agreement. Although
the Board of Directors did not address whether the Merger is fair to the Public
Stockholders, the Special Committee concluded that the allocation of the
consideration to be paid by Parent pursuant to the
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<PAGE> 19
Merger Agreement, the Prudential Securities Purchase Agreement and the Santa Fe
Securities Purchase Agreement among Prudential, Santa Fe and the Public
Stockholders is fair and reasonable to the Public Stockholders. The approval
of the Board of Directors included the necessary approval under Section
203(a)(1) of the DGCL. Because Prudential and Santa Fe own in the aggregate
over 65.04% of the outstanding Company Common Stock and have executed a
written consent in favor of the Merger and the Merger Agreement, no vote of the
remaining stockholders is necessary or required to approve the Merger and the
Merger Agreement.
In making the determination and recommendations set forth above, the
Board considered the following factors:
(i) the recommendation of the Special Committee; and
(ii) the Board's determination, based upon (a) its familiarity with
the procedures followed by S.G. Warburg involving a possible
transaction with the Company, (b) the report of the Special
Committee on its procedures and activities concerning
proposals for the Company and (c) the opinion of Dillon Read
and the procedures followed by Dillon Read in acting as
financial advisor to the Special Committee, that the Special
Committee duly performed its function and followed the proper
procedures in evaluating each proposal.
The Board also considered the fact that following the Merger,
stockholders would no longer have an equity interest in the Company, but
concluded that in light of the alternatives available to the Company, such fact
did not detract from the Board's determination that the Merger would be in the
best interests of the Company and its stockholders.
OPINION OF FINANCIAL ADVISOR
On February 9, 1995, the Special Committee received Dillon Read's
written opinion, that, as of the date of such opinion, the consideration to be
received by the Public Stockholders in the Merger was fair to such Public
Stockholders from a financial point of view. A copy of Dillon Read's written
opinion dated February 9, 1995, as well as its confirmatory opinion dated the
date of this Information Statement is attached as Exhibit B to this
Information Statement and should be read in its entirety. Dillon Read's
opinion is directed only to the fairness of the consideration to be received by
Public Stockholders on the date thereof . The Company gave no instructions and
imposed no limitations on Dillon Read in connection with the rendering of its
opinion.
In arriving at its opinion, Dillon Read, among other things: (i)
reviewed certain publicly available business and financial information relating
to the Company; (ii) reviewed and analyzed certain financial forecasts and
other data provided by the Company relating to the business, financial
condition, operations and prospects of the Company; (iii) conducted discussions
with members of senior management of the Company with respect to the business,
financial condition, operations and prospects of the Company; (iv) reviewed and
analyzed certain publicly available information, including financial
information and stock market data with respect to certain other companies in
lines of business which Dillon Read believed to be generally comparable to
those of the Company; (v) reviewed the historical market prices and trading
volumes of the shares of Company Common Stock; (vi) reviewed and analyzed
certain financial terms of the Merger with the financial terms of certain other
mergers and acquisitions which Dillon Read believed to be generally comparable;
(vii) reviewed and analyzed the historical premiums paid to minority
stockholders in certain other mergers and acquisitions; and (viii) conducted
such other financial studies, analyses and investigations, and considered such
other information as Dillon Read deemed necessary or appropriate.
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<PAGE> 20
In connection with its review, Dillon Read did not independently
verify any of the foregoing information and relied on it being complete and
accurate in all material respects. In addition, Dillon Read did not make any
independent evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise) of the Company, nor was Dillon Read furnished with
any such evaluation or appraisal. With respect to the financial forecasts
referred to above, Dillon Read assumed that they were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
Company's management as to the future financial performance of the Company.
Further, Dillon Read's opinion is based on economic, monetary and market
conditions existing on the date thereof.
The consideration to be received by the Public Stockholders,
Prudential and Santa Fe pursuant to the Merger Agreement and Securities
Purchase Agreements was determined through negotiations among the Special
Committee, Parent, Prudential and Santa Fe.
In connection with rendering its opinion, Dillon Read considered a
variety of valuation methods which are summarized below:
Discounted Cash Flow Analysis: Dillon Read performed a discounted
cash flow analysis based in part upon certain plan projections and assumptions
regarding future Company operations prepared and provided by Company senior
management (the "Company Base Plan"). In preparing its discounted cash flow
analysis, Dillon Read derived from the Company projections, after incorporating
Dillon Read's fundamental assumptions regarding marketing and natural gas
liquids margins, natural gas and oil prices, and other factors it deemed
appropriate, the unlevered free cash flow (defined as the cash flow from
operating activities less projected capital expenditures) for the Company for
the five years ending December 31, 1999 for three separate scenarios which were
presented to the Special Committee: (i) the Company Base Plan not adjusted for
current credit constraints, (ii) the "Low Case" adjusted for certain
assumptions made by Dillon Read as to increases in letter of credit
requirements and (iii) the "Low Case 2" adjusted for further increases in
letter of credit requirements, in essence reflecting the Company's current
operating environment.
Utilizing these projections, Dillon Read discounted to a present
value, under varying assumed discounts rates, (i) the unlevered free cash flows
through 1999 and (ii) the projected terminal value at the end of 1999,
utilizing various assumed multiples of earnings before interest, taxes,
depreciation and amortization ("EBITDA"). After deducting net debt (total
indebtedness less cash and cash equivalents) to derive the indicated value
ranges for the Company's total equity value, Dillon Read then calculated the
ranges of estimated values per share of Company Common Stock in each of the
three cases. These ranges of estimated values were as follows: Company Base
Plan - $1.88 (based on an assumed terminal EBITDA multiple of 6.5x and a
discount rate of 17.0%) to $3.62 (based on an assumed terminal EBITDA multiple
of 8.0x and a discount rate of 14.5%) per share of Company Common Stock. The
results of the analysis based on "Low Case" and "Low Case 2" assumptions were
not meaningful due to negative implied equity values per share of Company
Common Stock.
Analysis of Comparable Publicly-Traded Companies. Using publicly
available information, Dillon Read calculated market trading multiples of
certain financial data for a group of companies which, in Dillon Read's
judgment, were comparable to the Company. The companies used for this analysis
were: Aquila Gas Pipeline Corporation, KN Energy, Inc., Tejas Gas Corporation,
Tejas Power Corporation and Western Gas Resources, Inc. Dillon Read calculated
each comparable company's trading multiples with respect to (A) its EBITDA for
(i) the twelve months ended September 30, 1994 (ii) 1994 (estimated) (iii) 1995
(estimated) and (iv) 1996 (estimated), (B) earnings before interest and taxes
("EBIT") for (i) the twelve-month period ended September 30, 1994 (ii) 1994
(estimated) (iii) 1995 (estimated) and (iv) 1996 (estimated) and (C) cash flow
from operations (before changes in working capital) ("CFFO") for (i) the
twelve-month period ended September 30, 1994 (ii) 1994 (estimated) (iii) 1995
(estimated) and (iv) 1996 (estimated). Dillon Read then calculated implied
valuation ranges based on the trading multiples for the group of comparable
companies,
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<PAGE> 21
and the mean and median of the implied multiples of the comparable companies
and applied such multiples to original Company Base Plan for the periods
indicated. Dillon Read also examined the results obtained by applying the
comparable companies' historical and forecast net income multiples to the
Company's net loss for the twelve-month period ended September 30, 1994, 1994
(estimated) and 1995 (estimated) and 1996 (estimated) net income. In
particular, Dillon Read focused on EBITDA, EBIT and CFFO for the twelve months
ended September 30, 1994 and for 1995 (estimated), and reviewed other forecast
periods as discussed below.
To provide historical perspective for the appropriateness of the
trading multiples used in the foregoing analysis, Dillon Read reviewed the
performance of the per share market price of Company Common Stock versus that
of the group used in its analysis of comparable publicly-traded companies and
versus the Standard & Poor's 400 over the period from the Company's emergence
from bankruptcy on December 4, 1992 to February 6, 1995, and over the period
from the consummation of the Adobe Merger on December 14, 1993 to February 6,
1995.
The mean and median EBITDA, EBIT and CFFO multiples calculated for the
group of comparable companies for the twelve months ended September 30, 1994
(estimated), 1995 (estimated) and 1996 (estimated) are as follows: EBITDA (i)
the twelve months ended September 30, 1994 - 8.4x, 8.6x, (ii) 1994 (estimated)
- - 7.9x, 7.9x, (iii) 1995 (estimated) - 6.1x, 6.1x, (iv) 1996 (estimated) -
5.5x, 5.3x; EBIT (i) the twelve months ended September 30, 1994 - 15.3x, 12.6x,
(ii) 1994 (estimated) - 14.2x, 12.2x, (iii) 1995 (estimated) - 9.3x, 10.0x,
(iv) 1996 (estimated) - 8.0x, 7.8x; CFFO (i) the twelve months ended September
30, 1994 - 7.2x, 6.8x, (ii) 1994 (estimated) 6.8x, 6.1x, (iii) 1995 (estimated)
- - 4.9x, 4.7x, (iv) 1996 (estimated) - 4.3x, 4.5x. The mean and median 1996 net
income multiple for the group of comparable companies was 10.8x and 11.4x,
respectively.
The implied values per share of Company Common Stock resulting from
this analysis were: (i) the twelve months ended September 30, 1994, 1994
(estimated) and 1995 (estimated) EBITDA - results were not meaningful, (ii)
1996 (estimated) EBITDA - $0.96 to $1.13, (iii) the twelve months ended
September 30, 1994, 1994 (estimated) and 1995 (estimated) EBIT - results were
not meaningful, (iv) 1996 (estimated) EBIT - $0.59 to $0.69, (v) the twelve
months ended September 30, 1994 CFFO - $2.12 to $2.24, (vi) 1994 (estimated)
CFFO - $1.94 to $2.16, (vii) 1995 (estimated) CFFO - $2.32 to $2.41, (viii)
1996 (estimated) CFFO - $3.09 to $3.23, (ix) 1996 (estimated) net income -
$0.52 to $0.54. Results which were not meaningful indicate a negative implied
equity value per share.
Analysis of Comparable Company Acquisitions. In this methodology,
Dillon Read examined 33 selected mergers and other acquisitions in the gas
gathering and processing industry since August 1, 1987. Public data regarding
latest twelve months EBITDA was available only with respect to 17 of the 33
transactions. These 17 transactions produced a range of EBITDA multiples from
3.5x to 13.1x. The mean and median of such multiples was 7.6x and 7.7x,
respectively. Applying the mean multiple of 7.6x to the Company's 1995
estimated EBITDA would produce an implied value per share of Company Common
Stock of $0.78. The application of the mean multiple of 7.6x to the Company's
EBITDA for the twelve-month period ended September 30, 1994 did not yield a
meaningful result.
Of the 17 transactions for which EBITDA results were available, Dillon
Read focused on four transactions which in its judgment were the most relevant
in terms of business mix and timing. The four transactions were the
acquisition of Grand Valley Gas Company by Associated Natural Gas Corporation,
the acquisition of Associated Natural Gas Corporation by Panhandle Eastern
Corporation, the acquisition of American Oil & Gas Corporation by KN Energy,
Inc. and the acquisition of Exxon Corporation's Texas and Louisiana intrastate
natural gas pipeline systems by Tejas Gas Corporation. The latest twelve
months EBITDA multiples in each of these transactions was 7.7x, 10.4x, 10.3x
and 8.1x, respectively. While each transaction was comparable to some extent,
Dillon Read viewed the Grand Valley Gas acquisition as the most relevant, given
Grand Valley's business mix. The implied per share values of the Company
Common Stock based on the above multiples applied to the Company's latest
twelve month financial data for the period ended September 30, 1994 yield a
range of not meaningful to $0.24 per share of Company Common Stock. The
implied per share value based on the Company's 1995 estimated EBITDA yield a
range of $0.86 to $2.88 per share of Company Common Stock.
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<PAGE> 22
Analysis of Premiums Paid In Noncontrol Position Buyouts. Dillon Read
reviewed 156 buyouts of noncontrol equity positions in publicly owned entities
by controlling persons effected during the period January 1, 1986 through
February 17, 1995. Data with respect to these 156 buyouts were obtained from
an unaffiliated statistical source, Securities Data Corporation. Dillon Read
did not attempt to categorize or subdivide these transactions into subgroups by
industry or otherwise. In analyzing the premiums paid in these transactions,
Dillon Read considered the "premium" to be equivalent to the percentage price
change in the market price of the relevant stock between the "undisturbed"
price on a date one month prior to the date of public announcement of the
transaction and the price on the announcement date. Dillon Read's review of
the 156 transactions revealed a wide range of premiums, as illustrated by the
fact that approximately 75% of the transactions yield a premium which ranged
from 0% to 70%. Dillon Read found that the mean of the premiums for all 156
transactions was 36.1% and the median was 29.7%. Based on the closing price
per share of the Company Common Stock on November 14, 1994 (one month prior to
the December 15, 1994 El Paso press release) of $2.25, the mean premium would
suggest a value of $3.06 per share and the median premium would suggest a value
of $2.92 per share of Company Common Stock. Dillon Read refined its analysis
to focus on all transactions subsequent to December 31, 1993. Because of the
recentness of such transactions, Dillon Read considered them to be more
relevant to its analysis . Since January 1, 1994 and prior to February 17,
1995, there were 17 buyouts of noncontrol equity positions according to
Securities Data Corporation. Dillon Read found that the mean of the premiums
for those 17 transactions one month prior to public announcement was 23.5% and
the median was 15.5%. Based on the closing price per share of Company Common
Stock on November 14, 1994 of $2.25, the mean premium suggested a value of
$2.78 and the median premium suggested a value of $2.60 per share of Company
Common Stock.
Dillon Read believes that its analyses must be considered as a whole
and that selecting portions of its analyses and other factors considered by it,
without considering all factors and analyses, could create a misleading view of
the processes underlying its opinion. Dillon Read did not quantify the effect
of each factor upon its opinion. Dillon Read made numerous assumptions with
respect to industry performance, commodity prices, general business and
economic conditions and the other matters discussed herein, many of which are
beyond the Company's and Dillon Read's control. Any estimates contained in
Dillon Read's analyses are not necessarily indicative of actual values, which
may be significantly more or less favorable. Estimates of the financial value
of companies inherently are subject to uncertainty and do not purport to be
appraisals or necessarily reflect the prices at which companies may actually be
sold.
Dillon Read is an internationally recognized investment banking firm
which, as part of its investment banking business, is regularly engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. The Special Committee
selected Dillon Read on the basis of the firm's expertise and reputation.
As compensation for Dillon Read's services as financial advisor to the
Special Committee, Dillon Read has been paid a fee of $500,000 and will receive
an additional fee of $650,000 upon the successful completion of the Merger.
The Company has also agreed to indemnify Dillon Read against certain
liabilities, including liabilities arising under the federal securities laws.
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<PAGE> 23
Prior to its engagement by the Special Committee, Dillon Read was
engaged by the Company as its exclusive agent in connection with a possible
sale of the Company to NorAm Energy Corp. pursuant to a letter agreement dated
September 9, 1994. Negotiations between the Company and NorAm Energy Corp.
were terminated in October 1994 and Dillon Read's engagement by the Company was
terminated effective November 1, 1994. Other than with respect to its services
under the September 9, 1994 agreement, for which Dillon Read received a fee of
$25,000 and expense reimbursements, Dillon Read has not provided investment
banking services to the Company in the past three years.
CONFLICTS OF INTEREST/INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering the recommendation of the Board with respect to the
Merger, the Company's stockholders should be aware that certain members of the
Company's management and the Board have certain interests that are described
below that may present them with actual or potential conflicts of interest in
connection with the Merger.
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 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 "THE MERGER-- The Merger Agreement--Indemnification and
Directors' and Officers' Insurance."
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
Company's 1992 Equity Incentive Plan (as amended and restated, the "Equity
Incentive Plan"), the Nonstatutory Stock Option Agreement dated December 13,
1993 and the Nonstatutory Stock Option Agreement dated December 14, 1993
(collectively, the "Company Option Plans"), whether or not exercisable, shall
be cancelled and such 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 Company Common Stock subject thereto. See "THE MERGER--The Merger
Agreement--Company Benefit Options."
Employment Agreements and Severance Agreements. Messrs. Cannon
(Chairman of the Board), Jenkins (President and Chief Executive Officer), Capps
(Executive Vice President, Chief Financial Officer and Treasurer), Coffman
(Controller), Pounds (Vice President, Legal Affairs and General Counsel) and
Ms. Eisbrenner (Vice President, Marketing and Gas Administration) and two other
employees who are not executive officers have entered into Employment
Agreements (the "Employment Agreements") with the Company which provide for
severance payments upon termination of employment by the Company for any reason
other than for disability, breach of contract or "cause" (as defined in such
Employment Agreements) or by the employee upon the occurrence of certain events
as set forth in such Employment Agreements. The severance payments described
above consist of (i) the employee's base salary and vacation earned but not
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<PAGE> 24
taken through the date of such termination, together with the full amount of
any bonus that would have been payable to the employee for the year in which
such termination occurred had such employee been employed by the Company at the
end of such year and (ii) an amount equal to a multiple (2 in the cases of
Messrs. Cannon, Jenkins, Capps and Pounds and Ms. Eisbrenner; 1.5 in the case
of Mr. Coffman; 1 in the case of one of the two other employees; and .5 with
respect to salary only for the other employee) of the total of (a) the amount
of the employee's highest annual base salary plus (b) an amount equal to 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. For
Messrs. Cannon, Jenkins, Capps, Pounds, Coffman and Ms. Eisbrenner, the
severance payments would equal $450,000, $720,000, $491,400, $420,000, $267,300
and $338,000, respectively, plus the actual amount of bonus the employee would
have been entitled to for the year in which termination occurs. The two other
employees holding Employment Agreements would be entitled to $127,075 and
$45,000, respectively, plus the actual amount of bonus the employee would have
been entitled to for the year in which termination occurs. The bonus amounts
for the year of termination cannot currently be determined because payout of
the bonus is based on various factors which cannot be determined until year
end. In addition to severance payments, the Employment Agreements for Messrs.
Cannon, Jenkins, Capps, Coffman, Pounds and Ms. Eisbrenner require the Company,
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, to 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. Additionally, seven other employees who are not executive
officers have entered into Severance Agreements (the "Severance Agreements")
with the Company. Beginning with the execution of a letter of intent or other
agreement evidencing the Company's intent to enter into a transaction resulting
in a change of control and continuing for a two-year period following a change
of control, if any of such employees (i) is terminated by the Company for other
than disability or cause or (ii) elects to terminate his employment for good
reason (as defined in such Severance Agreements), that employee shall be
entitled to severance payments as well as continuation of the life, medical and
dental insurance in the manner described above. The Merger itself does not
give rise to the payment of severance benefits under either the Employment or
Severance Agreements.
Parent has entered into written agreements with Messrs. Jenkins and
Coffman and Ms. Eisbrenner. Under the agreements between Parent and Messrs.
Jenkins and Coffman, the severance payments of such individuals have been
changed to $675,000 and $258,000, respectively.
Mr. Cannon has entered into a consulting agreement with Parent to
provide consulting services to Parent from the Effective Time until December
31, 1996. The agreement, which is renewable for successive one-year periods,
provides for the payment to Mr. Cannon of $6,000 per month while the agreement
is in force, provided that Mr. Cannon shall not be required to provide
consulting services to Parent for more than 100 days in any one year. Mr.
Cannon has also entered into a Termination Agreement (the "Termination
Agreement") with Parent which supersedes his Employment Agreement with the
Company. Under the Termination Agreement, effective as of the Closing Date Mr.
Cannon will receive from Parent the amount of severance payments to which he
would have been entitled under his Employment Agreement, except that such
amount shall be payable over a five year period, the first payment to be made
on January 10, 1996.
Gas Contract. Santa Fe, Santa Fe Energy Operating Partners, L.P.,
("SFEOP") and the Company (through a wholly-owned subsidiary) are parties to a
Master Gas Purchase Contract (the "Gas Contract"), which was entered into in
December 1993 at the time of the Adobe Merger. Effective December 31, 1994,
SFEOP was merged with and into Santa Fe. 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
its 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.
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<PAGE> 25
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 of its domestic development wells , 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.
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 million 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 agreed 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 million and (iii) certain
bankruptcy, insolvency and similar events.
During 1994, the Company purchased 53,977,229 million British thermal
units of gas from Santa Fe and paid Santa Fe a total of $99,248,000 for such
gas.
Parent Contracts. In order to enhance its liquidity position, 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
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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 the Storage Contract are
from February 24, 1995 through September 30, 1995.
Trust Agreement. In connection with the Adobe Merger, the Company,
the Prudential Group 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 the Prudential Group. The general purpose of the H/P Trust is
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") will be paid to the Prudential Group
in place of its interest in a specified number of shares of Company Common
Stock.
The Company funded the H/P Trust with 4,983,180 shares of Company
Common Stock ("Trust Shares"), all of which were initially allocated to the
Prudential Group's beneficial interest. Under the terms of the H/P Trust
Agreement, the Company is 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 are to be allocated to the Prudential Group's
beneficial interest and remitted to the Prudential Group on a quarterly basis
(provided that an adequate number of Series B Preferred shares have been
converted during the quarter, as determined under a formula specified in the
H/P Trust Agreement). Simultaneously, a prescribed number of Trust Shares are
to be reallocated from the Prudential Group's beneficial interest to the
Company's beneficial interest.
The H/P Trust will 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, the Prudential Group will 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 are to be voted as
directed by the Prudential Group, and the Prudential Group is to receive any
dividends or other distributions with respect to Trust Shares allocated to its
beneficial interest. The Company is responsible for all expenses of the H/P
Trust, including all costs and compensation of the Trustee. The Prudential
Group has agreed to vote the Trust Shares in favor of the Merger and the Merger
Agreement. Pursuant to the terms of the Merger Agreement, the Trust Shares
will be cancelled upon the effectiveness of the Merger.
To date, 1,489 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, all of which remain allocated to the
Prudential Group's beneficial interest because, in accordance with the terms of
the H/P Trust Agreement, the Conversion Proceeds associated with the conversion
of the 1,489 shares of Series B Preferred have not been remitted to the
Prudential Group.
As part of the Merger, the Company, the Prudential Group and the
Trustee will consent to an amendment of the H/P Trust Agreement specifically
authorizing the assignment by the Prudential Group of its beneficial interest
in the H/P Trust, and the Prudential Group will assign its interest to Parent.
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
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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 and (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 them 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.
Agreement with Elliot. The Company has entered into an agreement with
Elliot, which is the beneficial owner of 1,251,576 shares of Company Common
Stock and 891,143 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 El Paso
proposal and the Merger and for assisting the Company in obtaining any
stockholder approvals required for the Merger.
THE MERGER AGREEMENT
The Merger Agreement, a copy of which is attached hereto as Exhibit A,
provides for the merger of Merger Sub with and into the Company. As a result,
the separate corporate existence of Merger Sub will terminate, the common stock
of Merger Sub will become the common stock of the Company, as the surviving
corporation in the Merger, and the Company will become an indirect wholly-owned
subsidiary of Parent with the exception of the outstanding shares of Series B
Preferred not owned by Parent subsequent to the Merger. The description of the
terms and conditions of the Merger and of the Merger Agreement are qualified in
their entirety by the Merger Agreement, which is incorporated herein by
reference.
Merger Consideration. Upon consummation of the Merger, each share of
Company Common Stock issued and outstanding immediately prior to the Effective
Time (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 DGCL and (iii) beneficially owned
by Parent or its subsidiaries, including, without limitation, shares of the
Company Common Stock held in the H/P Trust) will be converted into the right to
receive $2.75 in cash without any interest thereon. Each share of Company
Common Stock issued and held in the Company's treasury (or beneficially owned
by Parent or its subsidiaries, including without limitation shares of Company
Common Stock held in the H/P Trust and as to which beneficial interest will be
acquired by Parent pursuant to the Prudential Securities Purchase Agreement) at
the Effective Time shall cease to be outstanding and shall be cancelled and
retired without payment of any consideration therefor. Each share of Series A
Preferred and Series B Preferred of the Company issued and outstanding
immediately prior to 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. Upon the Effective Time and
until December 14, 1995, a holder of Series B Preferred can receive $2.75 per
share by paying
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$3.225 per share to the Company. On December 14, 1995, each share of Series B
Preferred will automatically be converted into the right to receive $0.00275
in cash, without any interest thereon, being one-one thousandth of the
consideration payable in the Merger to the holders of the Company Common Stock.
At the Effective Time and in anticipation of this automatic conversion, Parent
will deposit into an irrevocable trust account, an amount of cash
(approximately $13,703) sufficient to pay each holder of Series B Preferred
$0.00275 per share on December 14, 1995.
Effective Time of the Merger. The Merger will become effective upon
the satisfaction or the waiver of various conditions and on the date of the
filing with the Secretary of State of the State of Delaware of the Certificate
of Merger or at such later time as the Company, Parent and Merger Sub shall
have agreed upon and designated in such filing as the effective time of the
Merger.
Vote Required of Stockholders. 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 collectively
own, or have the right to vote, 16,708,616 shares of Company Common Stock
(65.04% of the Company Common Stock). Prudential and Santa Fe have executed
a written consent approving the Merger and the Merger Agreement effective May
15, 1995. Under the DGCL, the Merger and the Merger Agreement do not require
the vote or consent of any other stockholder.
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 Company Option, whether or not exercisable,
shall be cancelled and such 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 Company Common Stock subject thereto.
Conditions. Notwithstanding the approval of the Merger by the
stockholders, the Merger is subject to certain conditions pursuant to the
Merger Agreement which, if not fulfilled or waived, permit termination by the
party entitled to the benefit thereof. The respective obligations of the
Company, Parent and Merger Sub under the Merger Agreement are subject to (i)
approval of the Merger by the holders of a majority of the outstanding Company
Common Stock, (ii) expiration or termination of the applicable waiting period
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act, (iii) receipt by
the Board of confirmation as of the date of this Information Statement of the
fairness opinion from Dillon Read (which confirmation has been received), (iv)
the absence of certain court orders or injunctions and (v) certification of the
Lawsuit as a class action, the members of which shall not have opt out rights
or the right to otherwise elect not to participate therein and the Memorandum
of Understanding shall have been approved and become final and non-appealable .
Unless all such conditions to their obligations are satisfied or have been
waived, none of the parties is required to complete the transactions provided
for in the Merger Agreement. Because the Company and Parent do not anticipate
that the condition specified in section (v) above will be satisfied prior to
the anticipated closing date of the Merger of May 15, 1995, the Company and
Parent have agreed in principle to waive this condition, and Prudential and
Sante Fe have agreed in principle to consent to such waiver in accordance with
their respective rights under the Securities Purchase Agreements.
The obligations of the Company are subject to the following
conditions: (i) the performance by Parent and Merger Sub in all material
respects of their respective agreements under the Merger Agreement and the
accuracy in all material respects of the representations and warranties made by
Merger Sub and Parent in the Merger Agreement, both at the date of signing the
Merger Agreement and at the closing of the Merger; and (ii) receipt of a
satisfactory legal opinion from counsel to Parent and Merger Sub.
The obligations of Parent and Merger Sub are subject to the
following conditions: (i) the performance by the Company in all material
respects of its agreements under the Merger Agreement and the accuracy in all
material respects of the representations and warranties made by the Company in
the Merger Agreement; (ii) Parent and Merger Sub shall have entered into the
Securities Purchase Agreements and all conditions to the obligations of Parent
and Merger Sub to close the transactions thereunder shall have been satisfied
or waived; (iii) receipt of a satisfactory legal opinion from counsel to the
Company; (iv) receipt by Parent and Merger Sub on the date of mailing of this
Information Statement of a letter from the Company's
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independent public accountants regarding the satisfactory review of certain
financial matters concerning the Company; (v) the cancellation and surrender to
the Company of all options to purchase Company Common Stock; (vi) the
procurement of all necessary consents required in connection with the Merger;
(vii) the absence of any proceedings that would delay the Merger or the closing
of the transactions contemplated by the Securities Purchase Agreements; and
(viii) the absence of any material adverse changes to the Company except as
previously disclosed.
Amendment. The Merger Agreement may be amended or modified in whole or
in part (before or after approval of the Merger by stockholders).
Termination. The Merger Agreement may be terminated and the Merger
may be abandoned any time prior to the Effective Time by the mutual written
consent of Parent and the Company. In the event that all conditions to
consummation of the Merger are not satisfied or waived and the Merger is not
consummated by June 30, 1995, or a court or governmental agency issues a final
and non- appealable order or ruling permanently prohibiting the Merger, Parent
or the Company may terminate the Merger Agreement. In addition, the Merger
Agreement may be terminated in certain circumstances, including, but not
limited to the circumstances set forth below:
(i) By the Company if Parent or Merger Sub has breached
any representation or warranty in the Merger
Agreement which would have a material adverse effect
on Parent;
(ii) By Parent or Merger Sub if there is any inaccuracy in
any representation or warranty of the Company in the
Merger Agreement which would reasonably be expected
to have a material adverse effect on the business,
assets, liabilities, financial condition or prospects
of the Company and its subsidiaries taken as a whole;
(iii) By the Company if, in the judgment of the Special
Committee, such action may be required for the Board
to comply with its fiduciary duties to the Company
and its stockholders; provided, however, that if the
Company terminates the Merger Agreement under this
circumstance, it must pay Parent $1,500,000 as
reimbursement for Parent's expenses; and provided
further that if following such action the Company
consummates a transaction in which the Company is
acquired (i) within 15 months following the date of
the Merger Agreement or (ii) thereafter pursuant to a
definitive agreement executed by the Company during
such 15-month period, the Company must pay Parent an
additional $3,500,000; and
(iv) Automatically upon termination of the Santa Fe
Securities Purchase Agreement due to Santa Fe's
objection to the economic terms of the Memorandum of
Understanding, but if so terminated, the Company must
pay Parent its reasonable expenses incurred in
connection with the Merger up to $1,500,000.
Conduct of Business by the Company Before the Merger. The Company has
agreed to conduct its operations prior to the Effective Time according to its
ordinary and usual course of business, except as disclosed to Parent. Subject
to certain exceptions, the Company has agreed not to engage in certain
transactions including, among others, issuing securities, paying dividends,
amending its Certificate of Incorporation or Bylaws, incurring certain
indebtedness, disposing of assets, and entering certain material transactions
or commitments.
Certain Negotiations. The Merger Agreement provides that the Company
will not solicit, negotiate with, enter an agreement with or provide
information to others concerning any merger or similar transaction
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until the Effective Time or termination of the Merger Agreement. However, the
Board may supply information and negotiate with other potential acquirors that
make an unsolicited proposal to acquire the Company if the Special Committee
concludes in good faith on advice of its outside counsel that it is required to
do so by its fiduciary obligations to the Company and the stockholders.
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 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.
Expenses of the Merger. The Company, Parent and Merger Sub have
incurred and will incur expenses in connection with the Merger. Under the
Merger Agreement, each party to the Merger is required to bear its own expenses
except that if the Merger is consummated and the expenses incurred by the
Company in connection with the Merger exceed $3,250,000, then Prudential will
reimburse the Company for the first $250,000 of such excess and Santa Fe will
reimburse the Surviving Corporation for any such fees in excess of $3,500,000;
provided that, if the Santa Fe Securities Purchase Agreement is terminated due
to Santa Fe's objection to the economic terms of the Memorandum of
Understanding as approved by the Court, the Company will reimburse Parent and
Merger Sub for Parent's out-of-pocket expenses incurred in connection with the
Merger Agreement, such reimbursement not to exceed $1,500,000.
Payment for Company Common Stock. The conversion of the Company
Common Stock into the right to receive $2.75 will occur at the Effective Time
without regard to the dates on which certificates formerly representing Company
Common Stock are physically surrendered. The Merger Agreement requires that on
the date of the Merger, Parent will deposit with Parent's transfer agent or
such other bank or trust company mutually acceptable to the Company and Parent
(the "Exchange Agent") the funds necessary to pay the aggregate amount of cash
the stockholders are entitled to receive upon surrender of certificates
formerly representing Company Common Stock. After the Merger, a letter of
transmittal containing instructions with respect to the surrender of Company
Common Stock certificates will be furnished promptly to the stockholders for
use in surrendering their stock certificates with the Exchange Agent for
payment.
Upon surrender of a certificate for cancellation to the Exchange Agent
together with a duly executed and completed letter of transmittal, the holder
of such certificate will be entitled to receive in exchange and in cash,
without interest, an amount equal to the Purchase Price multiplied by the
number of shares of Company Common Stock represented by the surrendered
certificate, and the surrendered certificate will be cancelled.
Settlement of Litigation. Parent, Merger Sub and the Company have
agreed to use all commercially reasonable efforts to cause the stipulation of
settlement contemplated by the Memorandum of Understanding to become final and
non-appealable.
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SECURITIES PURCHASE AGREEMENTS
Concurrently with the execution and delivery of the Merger Agreement,
Parent and Merger Sub entered into the Securities Purchase Agreements with
Prudential and Santa Fe. Pursuant to 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 the Prudential Securities for $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 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 Santa Fe Securities for
$55,250,000.
The Prudential Securities Purchase Agreement. The consummation of the
purchase and sale of the Prudential Securities is subject to certain conditions
which, if not fulfilled or waived, permit termination by the party entitled to
the benefit thereof. The conditions to the obligations of Prudential include:
(i) the accuracy in all material respects of the representations of Parent and
Merger Sub in the Prudential Securities Purchase Agreement, both at the date of
signing the Prudential Securities Purchase Agreement and at the date the
Prudential Securities are sold; (ii) receipt of certain regulatory approvals;
(iii) receipt by the Board of confirmation as of the date of this Information
Statement of the fairness opinion of Dillon Read (which confirmation has been
received); (iv) all conditions to the Merger contained in the Merger Agreement
shall have been satisfied or waived (other than the purchases and sales under
the Securities Purchase Agreements); and (v) receipt of satisfactory evidence
of the accuracy of certain representations and warranties of Parent and Merger
Sub contained in the Prudential Securities Purchase Agreement.
The conditions to the obligations of Parent and Merger Sub include:
(i) the accuracy in all material respects of the representations of Prudential
in the Prudential Securities Purchase Agreement, both at the date of signing
the Prudential Securities Purchase Agreement and at the date the Prudential
Securities are sold; (ii) receipt of certain regulatory approvals; (iii) all
conditions to the Merger contained in the Merger Agreement shall have been
satisfied or waived (other than the purchases and sales under the Securities
Purchase Agreements); (iv) receipt of satisfactory evidence of the accuracy of
certain representations and warranties of Prudential contained in the
Prudential Securities Agreements; and (v) the amendment of the H/P Trust
Agreement to permit the transfer of the rights and benefits under the H/P Trust
Agreement.
The Prudential Securities Purchase Agreement may be terminated and the
purchase and sale of Prudential Securities abandoned upon the mutual consent of
Prudential, Parent and Merger Sub. In the event that all conditions to
consummation of the transaction contemplated by the Prudential Securities
Purchase Agreement are not satisfied or waived and the purchase and sale of
Prudential Securities is not consummated by June 30, 1995, or a court or
governmental agency issues a final and non-appealable order or ruling
permanently prohibiting such purchase and sale or the Merger, Parent and Merger
Sub or Prudential may terminate the Prudential Securities Purchase Agreement.
In addition, the Prudential Securities Purchase Agreement will terminate
automatically upon termination of the Merger Agreement or the Santa Fe
Securities Purchase Agreement.
The Santa Fe Securities Purchase Agreement. The consummation of the
purchase and sale of the Santa Fe Securities is subject to certain conditions
which, if not fulfilled or waived, permit termination by the party entitled to
the benefit thereof. The conditions to the obligations of Santa Fe include:
(i) the accuracy in all material respects of the representations of Parent and
Merger Sub in the Santa Fe Securities Purchase Agreement, both at the date of
signing the Santa Fe Securities Purchase Agreement and at the date the Santa Fe
Securities are sold; (ii) receipt of certain regulatory approvals; (iii)
receipt of the fairness opinion of Dillon Read; (iv) all conditions to the
Merger contained in the Merger Agreement shall have been satisfied or waived
(other than the purchases and sales under the Securities Purchase Agreements);
and (v) receipt of an opinion
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of counsel or other satisfactory evidence of the accuracy of certain
representations and warranties of Parent and Merger Sub contained in the Santa
Fe Securities Purchase Agreement.
The conditions to the obligations of Parent and Merger Sub include:
(i) the accuracy in all material respects of the representations of Santa Fe in
the Santa Fe Securities Purchase Agreement, both at the date of signing the
Santa Fe Securities Purchase Agreement and at the date the Santa Fe Securities
are sold; (ii) receipt of certain regulatory approvals; (iii) all conditions to
the Merger contained in the Merger Agreement shall have been satisfied or
waived (other than the purchases and sales under the Securities Purchase
Agreements); and (iv) receipt of an opinion of counsel or other satisfactory
evidence of the accuracy of certain representations and warranties of Santa Fe
contained in the Santa Fe Securities Agreements.
The Santa Fe Securities Purchase Agreement may be terminated and the
purchase and sale of Santa Fe Securities abandoned upon the mutual consent of
Santa Fe, Parent and Merger Sub. In the event that (i) all conditions to
consummation of the transactions contemplated by the Santa Fe Securities
Purchase Agreement are not satisfied or waived and the purchase and sale of
Santa Fe Securities is not consummated by June 30, 1995, or (ii) a court or
governmental agency issues a final and non-appealable order or ruling
permanently prohibiting such purchase and sale or the Merger [or (iii) the
settlement of the Lawsuit pursuant to the Memorandum of Understanding has not
been entered into by each of the parties thereto and filed with the Court prior
to 5:00 p.m. on March 15, 1995] or (iv) if, at any time prior to the entry of
the scheduling order forming part of the settlement of the Lawsuit, Santa Fe
objects to the economic terms of the proposed settlement, Parent and Merger Sub
or Santa Fe may terminate the Santa Fe Securities Purchase Agreement (provided
that the Company must reimburse Parent for its reasonable expenses incurred in
connection with the Merger up to $1,500,000). In addition, the Santa Fe
Securities Purchase Agreement will terminate automatically upon termination of
the Merger Agreement.
STATUS OF LAWSUIT
On February 10, 1995, prior to the execution of the Securities
Purchase Agreements and the Merger Agreement, an agreement (the "Memorandum of
Understanding") was reached among all the parties to the Lawsuit to settle all
litigation which was brought in the Delaware Court of Chancery. 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. The
Memorandum of Understanding is not currently binding on all holders of Company
Common Stock, but will become binding upon receipt of Court approval, provided
that no appeal is taken with respect to the Memorandum of Understanding within
30 days after receiving Court approval. Once approved, the Memorandum of
Understanding will preclude the holders of Company Common Stock from further
challenging the corporate actions covered by the Lawsuit, but will not
otherwise restrict the ability of a holder of Company Common Stock to challenge
unrelated corporate action taken by the Company. The approval by the Court of
the Memorandum of Understanding does not preclude a stockholder from exercising
dissenter's rights of appraisal.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
This discussion summarizes the material anticipated Federal income tax
consequences of the Merger to United States persons (i.e., U.S. citizens or
residents, domestic corporations, domestic partnerships, and trusts or estates
that are subject to Federal income tax regardless of the source of their
income) who own shares of Company Common Stock.
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The receipt of cash for Company Common Stock pursuant to the Merger
will be a taxable transaction for federal income tax purposes, and also may be
a taxable transaction under applicable state, local, foreign and other tax
laws.
In general, a stockholder will recognize gain or loss equal to the
difference between such stockholder's tax basis in the Company Common Stock
sold and the amount of cash received in exchange therefor. Such gain or loss
will be capital gain or loss if the Company Common Stock is a capital asset in
the hands of the stockholder and will be long-term capital gain or loss if the
holding period for the Company Common Stock is more than one year. Under
present law, long-term capital gains of noncorporate stockholders are taxable
at a maximum rate of 28%. In general, noncorporate stockholders may deduct any
capital losses recognized on the exchange against other capital gains. The
excess of any capital losses over capital gains may be deducted by noncorporate
stockholders against ordinary income up to $3,000 ($1,500 for married couples
filing separately). Any unused capital losses may be carried over by
noncorporate stockholders to future years, subject to the same limitations.
This discussion does not address the federal income tax consequences of the
Merger to stockholders subject to special tax treatment under the Internal
Revenue Code of 1986, including, without limitation, tax-exempt entities and
pension plans, life insurance companies, and stockholders who acquired their
Company Common Stock pursuant to the exercise of an employee option or
otherwise as compensation and stockholders who are not citizens of the United
States.
BECAUSE THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT
NECESSARILY SET FORTH ALL OF THE TAX CONSEQUENCES OF THE MERGER THAT MAY BE
RELEVANT TO A PARTICULAR STOCKHOLDER, STOCKHOLDERS SHOULD CONSULT THEIR TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR
CIRCUMSTANCES, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS.
REGULATORY APPROVALS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act") provides that certain transactions may not be consummated unless certain
information has been furnished to the Antitrust Division of the Department of
Justice (the "Antitrust Division") and the Federal Trade Commission (the "FTC")
and certain waiting period requirements have been satisfied. The consummation
of the Merger is subject to such requirements. The regulations promulgated by
the FTC under the HSR Act require that Notification and Report Forms (the
"Forms") be filed by Santa Fe and Parent with the Antitrust Division and the
FTC with respect to the Merger and the Merger may not be consummated until
thirty days after receipt of the Forms by the Antitrust Division and the FTC,
unless such thirty-day waiting period is earlier terminated by the FTC or the
Antitrust Division.
On March 7, 1995, Santa Fe and Parent filed Forms with the FTC and the
Antitrust Division relating to the Merger and requested early termination of
the thirty-day waiting period. Any waiting period under the HSR Act may be
terminated in individual cases by the FTC or the Antitrust Division before
expiration. On March 21, 1995, the Federal Trade Commission notified Santa
Fe and Parent that early termination had been granted.
Except as described above, the Company is not aware of any license or
regulatory permit that is material to its business that might be adversely
affected by the Merger, nor of any approval or other action by any
governmental, administrative or regulatory agency or authority that would be
required prior to the Effective Time.
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ACCOUNTING TREATMENT OF MERGER
The Merger will be accounted for under the "purchase" method of
accounting, whereby the purchase price will be allocated based on fair values
of assets and liabilities assumed.
CERTAIN EFFECTS OF THE MERGER
The Company is currently subject to the information filing
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, is required to file reports and other
information with the Securities and Exchange Commission (the "Commission")
relating to its business, financial statements and other matters. As a result
of the Merger, there will cease to be any public market for the Company Common
Stock. The Company is expected to apply to the Commission for the
deregistration of the Company Common Stock under the Exchange Act.
Additionally, although the Series B Preferred will continue to be registered
under the Exchange Act, the Company and Parent have applied to the Commission
for permission not to file reports or other information under the Exchange Act.
Upon deregistration and receipt of requisite consent from the Commission, the
Company will no longer be required to file reports and other information under
the Exchange Act. Additionally, upon the termination of the registration of
the Company Common Stock under the Exchange Act, the Company Common Stock will
no longer constitute "margin securities" under the regulations of the Board of
Governors of the Federal Reserve System.
APPRAISAL RIGHTS
In the event the Merger is consummated, record holders of Company
Common Stock will be entitled to appraisal rights under Section 262 of the DGCL
because such persons hold stock of a constituent corporation in the Merger and
such holders are required by the terms of the Merger Agreement to accept for
such stock consideration other than shares of the surviving corporation or
shares of any other corporation either listed on a national securities exchange
or designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. and/or cash in
lieu of fractional shares. Holders of Company Common Stock will have the right
to obtain a cash payment for the "fair value" of their shares (excluding any
element of value arising from the accomplishment or expectation of the Merger).
Such "fair value" would be determined in judicial proceedings, the result of
which cannot be predicted. In order to exercise appraisal rights, dissenting
stockholders must comply with the procedural requirements of Section 262 of the
DGCL, a description of which is provided immediately below and the full text of
which is attached to this Information Statement as Exhibit C and is
incorporated herein by reference. Failure to take any of the steps required
under Section 262 of the DGCL on a timely basis may result in the loss of
appraisal rights.
The appraisal rights described below are available to holders of
record of Company Common Stock. A person having a beneficial interest in
shares of Company Common Stock held of record in the name of another person,
such as a broker or nominee, must act promptly to cause the record holder to
follow the steps summarized below properly and in a timely manner to perfect
whatever appraisal rights the beneficial owner may have. Holders of shares of
Series B Preferred are not entitled to assert appraisal rights with respect to
those shares.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW
PERTAINING TO APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS ENTIRETY
BY THE FULL TEXT OF SECTION 262 WHICH IS REPRINTED IN ITS ENTIRETY AS EXHIBIT C
TO THIS INFORMATION STATEMENT. ALL REFERENCES IN SECTION 262 AND IN THIS
SUMMARY TO A "STOCKHOLDER" ARE TO THE RECORD HOLDER OF THE SHARES OF COMPANY
COMMON STOCK AS TO WHICH APPRAISAL RIGHTS ARE ASSERTED.
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Under the DGCL, holders of shares of Company Common Stock who follow
the procedures set forth in Section 262 will be entitled to have their shares
of Company Common Stock appraised by the Delaware Court of Chancery and to
receive payment of the "fair value" of such shares, exclusive of any element of
value arising from the accomplishment or expectation of the Merger, together
with a fair rate of interest, as determined by such court. Under Section 262,
a corporation, either before the effective date of a merger or within 10 days
thereafter, must notify each of its stockholders entitled to appraisal rights
of the effective date of the merger and that such appraisal rights are
available and include in such notice a copy of Section 262. This Information
Statement shall constitute such notice to the holders of shares of Company
Common Stock and a copy of Section 262 is attached to this Information
Statement as Exhibit C. Any stockholder who wishes to exercise such appraisal
rights or who wishes to preserve his right to do so, should review the
following discussion and Exhibit C carefully because failure to comply timely
and properly with the procedures specified will result in the loss of appraisal
rights under the DGCL.
A holder of shares of Company Common Stock wishing to exercise his
appraisal rights must deliver to the Company, as the surviving corporation in
the Merger, on or prior to May 14, 1995 (being 20 days after the date of the
mailing of this Information Statement), a written demand for appraisal of his
shares of Company Common Stock. In addition, a holder of shares of Company
Common Stock wishing to exercise his appraisal rights must hold of record such
shares on the date the written demand for appraisal is made and must continue
to hold such shares until the Merger is consummated.
Only a holder of record of shares of Company Common Stock is entitled
to assert appraisal rights for the shares of Company Common Stock registered in
that holder's name. A demand for appraisal should be executed by or on behalf
of the holder of record, fully and correctly, as his name appears on his stock
certificates. If the shares of Company Common Stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, execution of
the demand should be made in that capacity, and if the shares of Company Common
Stock are owned of record by more than one person, as in a joint tenancy and
tenancy in common, the demand should be executed by or on behalf of all joint
owners. An authorized agent, including one or more joint owners, may execute a
demand for appraisal on behalf of a holder of record; however, the agent must
identify the record owner or owners and expressly disclose the fact that, in
executing the demand, the agent is agent for such owner or owners. A record
holder, such as a broker, who holds shares of Company Common Stock as nominee
for several beneficial owners may exercise appraisal rights with respect to the
shares of Company Common Stock held for one or more beneficial owners while not
exercising such rights with respect to the shares of Company Common Stock held
for other beneficial owners; in such case, the written demand should set forth
the number of shares of Company Common Stock as to which appraisal is sought
and where no number of shares of Company Common Stock is expressly mentioned
the demand will be presumed to cover all shares of Company Common Stock held in
the name of the record owner. Stockholders who hold their shares of Company
Common Stock in brokerage accounts or other nominee forms and who wish to
exercise appraisal rights are urged to consult with their brokers to determine
the appropriate procedures for the making of a demand for appraisal by such a
nominee. All written demands for appraisal should be sent or delivered to the
Company at 2777 Stemmons Freeway, Suite 700, Dallas, Texas 75207, Attention:
Thomas W. Pounds, Vice President, Legal Affairs and General Counsel.
Within 120 days after the Merger is consummated, but not thereafter,
the Company or any stockholder entitled to appraisal rights under Section 262
may file a petition in the Delaware Court of Chancery demanding a determination
of the "fair value" of the shares of the Company Common Stock held by any such
stockholders. The Company is under no obligation to and has no present
intention to file a petition with respect to the appraisal of the fair value of
the shares of Company Common Stock. Accordingly, it is the obligation of the
holders of the Company Common Stock to initiate all necessary action to perfect
their appraisal rights within the time prescribed in Section 262.
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Within 120 days after the Merger is consummated, any holders of the
Company Common Stock who have complied with the requirements for exercise of
appraisal rights will be entitled, upon written request, to receive from the
Company a statement setting forth the aggregate number of shares of Company
Common Stock with respect to which demands for appraisal have been received and
the aggregate number of holders of such shares. Such statement must be mailed
to such holders of the Company Common Stock within ten days after a written
request therefor has been received by the Company or within ten days after the
expiration of the 20-day period for delivery of demands for appraisal by
holders of the Company Common Stock outlined above, whichever is later.
If a petition for an appraisal is timely filed, after a hearing on
such petition, the Delaware Court of Chancery will determine the stockholders
entitled to appraisal rights and will appraise the "fair value" of their shares
of Company Common Stock, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the "fair value."
Stockholders considering seeking appraisal should be aware that the "fair
value" of their shares of Company Common Stock as determined under Section 262
could be more than, the same as or less than the consideration they would
receive pursuant to the Merger Agreement if they did not seek appraisal of
their shares of Company Common Stock. The Delaware Supreme Court has stated
that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered in the appraisal proceedings. In addition,
Delaware courts have decided that the statutory appraisal remedy, depending on
factual circumstances, may or may not be a dissenter's exclusive remedy. The
costs of the action may be determined by the court and taxed upon the parties
as the court deems equitable. The court may also order that all or a portion
of the expenses incurred by any stockholder in connection with an appraisal,
including, without limitation, reasonable attorneys' fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all of the shares of Company Common Stock entitled to
appraisal.
Any holder of shares of Company Common Stock who has duly demanded an
appraisal in compliance with Section 262 will not, after the Merger is
consummated, be entitled to vote the shares of Company Common Stock subject to
such demand for any purpose or be entitled to the payment of dividends or other
distributions on those shares (except dividends or other distributions payable
to holders of record of shares of Company Common Stock as of a date on or prior
to the date the Merger is consummated).
If any stockholder who demands appraisal of his or its shares of
Company Common Stock under Section 262 fails to perfect, or effectively
withdraws or loses, his or its right to appraisal, as provided in the DGCL, the
shares of Company Common Stock of such stockholder will be converted into the
right to receive the Purchase Price in accordance with the Merger. A
stockholder will fail to perfect, or effectively lose or withdraw, his right to
appraisal if no petition for appraisal is filed within 120 days after the date
the Merger is consummated, or if the stockholder delivers to the Company a
written withdrawal of his demand for appraisal and acceptance of the Merger,
except that any such attempt to withdraw made more than 60 days after the date
the Merger is consummated will require the written approval of the Company.
Failure to follow the steps required by Section 262 of the DGCL for
perfecting appraisal rights may result in the loss of such rights (in which
event a holder of Company Common Stock will be entitled to receive $2.75 for
each share of Company Common Stock held as of the date the Merger is
consummated).
BUSINESS
GENERAL
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.
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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 and AGPC, then an indirect,
wholly-owned subsidiary of Santa Fe. Pursuant to the Adobe Merger Agreement,
AGPC was merged 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 Series A Preferred and (B) 10,395,665 shares of 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 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 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);
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(iii) each outstanding share of the existing Common Stock, par value
$.01 per share, of the Company 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 Prudential, were
converted into the right to receive a portion of the "P Interest" in the H/P
Trust, which interest (in its entirety) initially represented a beneficial
trust interest in 4,983,180 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 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.
Concurrently with the Merger, the Company and Prudential entered into a
securities purchase agreement pursuant to which the Company issued, subject to
certain 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.
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,
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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 Parent. See "THE MERGER."
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
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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 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 interruption at the option of the pipeline, and
firm transportation is the highest quality transmission service and anticipates
no interruption. 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
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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.
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 SFEOP entered
into 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.
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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 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,
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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.
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
documents 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 statutes. The
Comprehensive Environmental Response,
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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 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.
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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
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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 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
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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.
(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.
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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
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
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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.
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
"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 "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.
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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 "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.
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.
45
<PAGE> 52
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 "BUSINESS -- Subsequent Events --
Acquisition of the Company by Parent."
CLASS ACTION COMPLAINT
See "THE MERGER - Background of the Transaction" and "Status of Lawsuit."
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.
46
<PAGE> 53
MARKET PRICES AND DIVIDEND POLICY
MARKET PRICES
The Company Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "HAD." 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, adjusted to give effect to the approximate
one-for-15 reverse split of the Company Common Stock that occurred on December
14, 1993:
<TABLE>
<CAPTION>
Quarter High Low
(per share) -------- -------
<S> <C> <C>
Fiscal year ending December 31, 1993
First . . . . . . . . . . . . . . . . . . 4-7/32 2-7/64
Second . . . . . . . . . . . . . . . . . 4-11/16 2-13/16
Third . . . . . . . . . . . . . . . . . . 4-11/16 3-3/36
Fourth . . . . . . . . . . . . . . . . . 2-5/8 2-7/64
Fiscal year ending December 31, 1994
First . . . . . . . . . . . . . . . . . . 3-3/4 2-5/8
Second . . . . . . . . . . . . . . . . . 3 2-3/8
Third . . . . . . . . . . . . . . . . . . 2-5/8 2
Fourth . . . . . . . . . . . . . . . . . 2-1/2 1-7/8
</TABLE>
On December 14, 1994, the last trading day before announcement that
the Company had entered into negotiations with El Paso, the high and low sales
prices per share of Company Common Stock were $2-1/4 and $2, respectively. On
February 9, 1995, the last trading day before announcement of the Merger, the
high and low sales prices per share of Company Common Stock were $2-1/8 and
$2- 1/8, respectively. On the Record Date, the high and low sales prices per
share of Company Common Stock were $2-5/8 and $2-5/8, respectively.
DIVIDEND POLICY
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 the Company Common Stock is dependent on 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 and among the Company and the Prudential Group in connection with the Adobe
Merger. In addition, the Company's current bank loan agreement restricts the
Company's ability to pay dividends.
47
<PAGE> 54
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 has been derived from
the Company's audited consolidated financial statements. The following
information should be read in conjunction with the Company's financial
statements and related notes and other financial information included elsewhere
herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1990(1) 1991 1992 1993 1994
--------- -------- -------- -------- --------
Statement of Operations Data: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
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 common 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 bank borrowings
and 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>
- ----------------------
48
<PAGE> 55
(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 of the Company have been
accounted for as discontinued operations and, 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 (losses) 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 the power systems operations. The year
ended December 31, 1993 included a gain of $5,553,000 related to a contract
settlement from defense systems.
(4) On December 14, 1993, the Company 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 such merger there were 25,689,147 shares of Company
Common Stock outstanding.
49
<PAGE> 56
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 "BUSINESS -- Subsequent
Events -- Acquisition of the Company by Parent."
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 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
50
<PAGE> 57
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
$3,500,000 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
Restructuring, 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 HERC in the amount of
$6,355,000 which is a non-operating item, (ii) the write-off of
51
<PAGE> 58
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. Accruals 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% 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
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<PAGE> 59
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.
<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>
53
<PAGE> 60
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
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.
54
<PAGE> 61
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.
55
<PAGE> 62
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.
56
<PAGE> 63
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 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.
57
<PAGE> 64
BENEFICIAL OWNERSHIP OF SECURITIES
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of March 24, 1995 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 the Company Common Stock, the only class of
voting securities of the Company.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Ownership
of Company 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 24.57%
Prudential Plaza
Newark, NJ 87182-3777
Elliot Associates, L.P.(2) 2,147,463 8.36%
110 East 59th Street
New York, NY 10022
Santa Fe Energy Resources, Inc.(3) 10,395,665 40.46%
1616 South Voss Road, Suite 1000
Houston, TX 77057
The H/P Trust(4) 4,983,180 19.4%
c/o Liberty Bank and Trust Company of
Oklahoma City, N.A., as Trustee
P.O. Box 25048
Oklahoma City, OK 73125-9969
LG&E Energy Corp.(5) 16,708,616 65.04%
220 West Main Street
Louisville, KY 40232
</TABLE>
__________________________________
(1) Based on information obtained by the Company from the Prudential
Group on March 2, 1995. Includes 1,329,771 shares of Company
Common Stock directly owned by Prudential and 4,983,180 shares of
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 in
accordance with the H/P Trust Agreement. See footnote 4 below.
(2) Based on Amendment No. 3 to Schedule 13D dated March 24, 1994
and filed with the Commission. Includes 1,251,576 shares of 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.
(5) Represents those shares of Company Common Stock beneficially owned by
Prudential and Santa Fe and subject to the Securities Purchase
Agreements.
58
<PAGE> 65
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of March 24, 1995
(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 the
Company Common Stock and the Series B Preferred by (i) each director of the
Company, (ii) each executive officer of the Company whose total annual salary
and bonus for 1994 exceeded $100,000, and (iii) all directors and executive
officers of the Company as a group. None of such persons beneficially owns any
shares of the Company's Series A Preferred, the only other class of equity
securities of the Company.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership
---------------------------------------------------------------
Company Common Stock Series B Preferred
------------------------- --------------------------
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) 0 * -- *
R.A. Walker(7) 0 * -- *
J.E. Cannon(8) 37,500 * -- *
</TABLE>
__________________________________
(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 Hadson Corporation Employee
401(k) Savings Plan (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.
(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.
59
<PAGE> 66
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership
-----------------------------------------------------------------
Company Common Stock Series B Preferred
-------------------------- -----------------------------------
Number of Percent of Number of Percent of
Name of Beneficial Owner Shares Class Shares Class
- ------------------------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Greg G. Jenkins(8) 50,000 * -- *
Robert P. Capps(8) 47,917 * 572 *
C. Jeff Goodell(9) (10) 42,947 * 634 *
Kathleen M. Eisbrenner(11) 15,547 * 54 *
All executive officers and
directors as a group 286,477 * 2,760 *
(12 persons)
* Less than 1%.
</TABLE>
__________________________________
(9) The number of shares of Company Common Stock beneficially owned
incudes: 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.
(10) 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.
(11) 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.
60
<PAGE> 67
AVAILABLE INFORMATION
The Company is subject to the informational filing requirements of the
Exchange Act and, in accordance therewith, is required to file with the
"Commission" periodic reports, proxy statements, and other information relating
to its business, financial condition, and other matters. The Company is
required to disclose in such reports certain information, as of the particular
dates, concerning the Company's operating results, financial condition,
directors and officers (including their remuneration), the principal holders of
the Company's securities, any material interest of such persons in transactions
with the Company, and other matters. These reports, proxy statements, and
other informational filings required by the Exchange Act should be available
for inspection at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and also should be available for inspection and copying at the regional offices
of the Commission located at Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material may be obtained by mail, upon
payment of the Commission's customary fees, from the Commission's principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Information regarding the Company may also be obtained at the office of the New
York Stock Exchange, 11 Wall Street, New York, New York 10005.
61
<PAGE> 68
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> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
AMONG
LG&E ENERGY CORP.,
CAROUSEL ACQUISITION CORPORATION
AND
HADSON CORPORATION
DATED AS OF FEBRUARY 10, 1995
<PAGE> 95
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
THE MERGER
----------
1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II
CERTIFICATE OF INCORPORATION AND
BY-LAWS OF THE SURVIVING CORPORATION
------------------------------------
2.1 Certificate of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 By-laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE III
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
---------------------------------------------------
3.1 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE IV
CONVERSION OF COMPANY STOCK; COMPANY OPTIONS
--------------------------------------------
4.1 Conversion of Company Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4.2 Exchange of Certificates Representing Company Common Stock . . . . . . . . . . . . . . . . . . . . . . . . 3
4.3 Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.4 Company Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
5.1 Existence; Good Standing; Corporate Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.2 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.3 Authorization, Validity and Effect of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.4 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.5 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.6 Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
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5.7 Other Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.8 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.9 SEC Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.11 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.12 Certain Employee Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.13 Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.14 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.15 Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.16 Maintenance of Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.18 Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.19 Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.20 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.21 No Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.22 Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.23 Absence of Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
-------------------------------------------------------
6.1 Existence; Good Standing; Corporate Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.2 Authorization, Validity and Effect of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.3 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.4 Availability of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.5 No Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE VII
COVENANTS
---------
7.1 Takeover Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.2 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.3 Stockholder Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.4 Filings; Other Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.5 Inspection of Records; Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.6 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.7 Further Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.8 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.9 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.10 Certain Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.11 Settlement of Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.12 No Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.13 Payment of Certain Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
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ARTICLE VIII
CONDITIONS
----------
8.1 Conditions to Each Party's Obligation to Effect the Merger . . . . . . . . . . . . . . . . . . . . . . . 31
8.2 Condition to Obligation of the Company to Effect the Merger . . . . . . . . . . . . . . . . . . . . . . 31
8.3 Conditions to Obligation of Parent and Merger Sub to Effect the Merger . . . . . . . . . . . . . . . . . 32
ARTICLE IX
TERMINATION
-----------
9.1 Termination by Mutual Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.2 Termination by Either Parent or the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.3 Termination by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.4 Termination by Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9.5 Automatic Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9.6 Effect of Termination and Abandonment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9.7 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE X
GENERAL PROVISIONS
------------------
10.1 Survival of Representations and Warranties; Consequences of Inaccuracy . . . . . . . . . . . . . . . . . 34
10.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
10.3 Assignment; Binding Effect; Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
10.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
10.5 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
10.6 Governing Law; Choice of Forum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
10.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
10.8 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
10.9 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
10.10 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
10.11 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
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<PAGE> 98
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of February
10, 1995, among LG&E Energy Corp., a Kentucky corporation ("Parent"), Carousel
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary
of Parent ("Merger Sub"), and Hadson Corporation, a Delaware corporation (the
"Company").
RECITALS
A. The Board of Directors of each of Parent and Merger Sub,
believing it advisable for the respective benefit of Parent and Merger Sub and
their respective stockholders, has approved the merger of Merger Sub with and
into the Company (the "Merger") upon the terms and subject to the conditions
set forth herein.
B. The Board of Directors of the Company has received a fairness
opinion relating to the transactions contemplated hereby as more fully
described herein.
C. The Board of Directors of the Company and the special
committee thereof (the "Committee"), believing it advisable for the benefit of
the Company and its stockholders, has agreed to submit to the Company's
stockholders for their approval the Merger upon the terms and subject to the
conditions set forth herein.
D. Concurrently with the execution and delivery of this
Agreement, Parent and Merger Sub are entering into Securities Purchase
Agreements with Santa Fe Energy Resources, Inc., a Delaware corporation ("Santa
Fe"), and The Prudential Insurance Company of America, a New Jersey
corporation, Pruco Life Insurance Company, a New Jersey corporation, and
Prusupply, Inc., an Arizona corporation (collectively, "Prudential") (the
"Securities Purchase Agreements").
E. Parent, Merger Sub and the Company desire to make certain
representations, warranties and agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.3), Merger Sub shall
be merged with and into the Company in accordance with this Agreement and the
separate corporate existence of Merger Sub shall thereupon cease (the
"Merger"). The Company shall be the surviving corporation in the Merger
(sometimes hereinafter referred to as the "Surviving Corporation"). The Merger
shall have the effects specified in the Delaware General Corporation Law (the
"DGCL").
<PAGE> 99
1.2 THE CLOSING. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place at the
offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 4100 First City Center,
1700 Pacific Avenue, Dallas, Texas at 9:00 a.m., local time, on the first
business day immediately following the later of (a) the day on which the last
to be fulfilled or waived of the conditions set forth in Article 8 shall be
fulfilled or waived in accordance herewith (or such later date, not more than
ten days thereafter, as the parties may mutually agree upon) or (b) if
applicable, the twentieth calendar day after the mailing of the information
statement described in Section 7.3(b). The date on which the Closing occurs is
hereinafter referred to as the "Closing Date".
1.3 EFFECTIVE TIME. If all the conditions to the Merger set forth
in Article 8 shall have been fulfilled or waived in accordance herewith and
this Agreement shall not have been terminated as provided in Article 9, the
parties hereto shall cause a Certificate of Merger meeting the requirements of
Section 251 of the DGCL to be properly executed and filed in accordance with
such Section on the Closing Date. The Merger shall become effective at the
time of filing of the Certificate of Merger with the Secretary of State of the
State of Delaware in accordance with the DGCL or at such later time which the
parties hereto shall have agreed upon and designated in such filing as the
effective time of the Merger (the "Effective Time").
ARTICLE II
CERTIFICATE OF INCORPORATION AND
BY-LAWS OF THE SURVIVING CORPORATION
2.1 CERTIFICATE OF INCORPORATION. The Certificate of
Incorporation of the Company in effect immediately prior to the Effective Time
shall be the Certificate of Incorporation of the Surviving Corporation, until
duly amended in accordance with applicable law.
2.2 BY-LAWS. The By-laws of Merger Sub in effect immediately
prior to the Effective Time shall be the By-laws of the Surviving Corporation,
until duly amended in accordance with applicable law.
ARTICLE III
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
3.1 DIRECTORS. The directors of Merger Sub immediately prior to
the Effective Time shall be directors of the Surviving Corporation as of the
Effective Time, unless and until thereafter changed in accordance with the DGCL
and the Surviving Corporation's Certificate of Incorporation and By-laws.
3.2 OFFICERS. The officers of the Company immediately prior to
the Effective Time shall be the officers of the Surviving Corporation as of the
Effective Time, unless and until
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<PAGE> 100
thereafter changed in accordance with the DGCL and the Surviving Corporation's
Certificate of Incorporation and By-laws.
ARTICLE IV
CONVERSION OF COMPANY STOCK; COMPANY OPTIONS
4.1 CONVERSION OF COMPANY STOCK. Subject to the terms and
conditions of this Agreement, at the Effective Time, by virtue of the Merger
and without any action on the part of Parent, Merger Sub, the Company or the
holder of any of the following securities:
(a) Each share of the common stock, $1.00 par value, of
Merger Sub issued and outstanding immediately prior to the Effective Time shall
be converted into and become one validly issued, fully paid and nonassessable
share of common stock, $.01 par value, of the Surviving Corporation.
(b) Each share of the common stock, $.01 par value, of
the Company (the "Company Common Stock") issued and outstanding immediately
prior to the Effective Time (other than shares of Company Common Stock to be
canceled pursuant to Section 4.1(c) hereof and shares of Company Common Stock
held by any holder who shall have properly exercised, and not withdrawn or
lost, appraisal rights under the DGCL) shall be converted into and become a
right to receive $2.75 in cash, without any interest thereon (the "Purchase
Price").
(c) Each share of Company Common Stock issued and held in
the Company's treasury (or beneficially owned by Parent or its subsidiaries,
including, without limitation, shares of Company Common Stock held in the "HP
Trust," as defined in, and as to which a beneficial interest is acquired by
Parent or Merger Sub pursuant to, the Securities Purchase Agreement among
Parent, Merger Sub and Prudential) at the Effective Time shall cease to be
outstanding and shall be cancelled and retired without payment of any
consideration therefor.
(d) Each share of Senior Cumulative Preferred Stock,
Series A (the "Series A Preferred") and Junior Exercisable Automatically
Convertible Preferred Stock, Series B (the "Series B Preferred") of the Company
issued and outstanding immediately prior to the Effective Time 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 Surviving Corporation.
4.2 EXCHANGE OF CERTIFICATES REPRESENTING COMPANY COMMON STOCK.
(a) Prior to the Effective Time, Parent shall deposit, or
shall cause to be deposited, with an exchange agent selected by Parent, which
shall be Parent's Transfer Agent or such other party reasonably satisfactory to
the Company (the "Exchange Agent"), for the benefit of the holders of
outstanding shares of Company Common Stock, for payment in accordance with this
Article 4, a sum in cash equal to the product of (i) the Purchase Price and
(ii) the number of shares of Company Common Stock issued and outstanding as set
forth in Section 5.4 (other than shares of Company Common Stock to be canceled
pursuant to Section
-3-
<PAGE> 101
4.1(c) hereof and shares of Company Common Stock held by any holder who shall
have properly exercised, and not withdrawn or lost, appraisal rights under the
DGCL), such sum being hereinafter referred to as the "Exchange Fund", to be
paid pursuant to this Section 4.2 in exchange for outstanding shares of Company
Common Stock.
(b) Promptly after the Effective Time, Parent shall cause
the Exchange Agent to mail to each holder of record of a certificate or
certificates representing outstanding shares of Company Common Stock (other
than shares of Company Common Stock to be canceled pursuant to Section 4.1(c)
hereof and shares of Company Common Stock held by any holder who shall have
properly exercised, and not withdrawn or lost, appraisal rights under the DGCL)
(i) a letter of transmittal which shall specify that delivery of such
certificates shall be effected, and risk of loss and title to the certificates
shall pass, only upon delivery of the certificates to the Exchange Agent and
shall be in such form and have such other provisions as Parent may reasonably
specify and (ii) instructions for use in effecting the surrender of the
certificates in exchange for payment of the Purchase Price per share hereunder.
Upon surrender of a certificate for cancellation to the Exchange Agent together
with such letter of transmittal, duly executed and completed in accordance with
the instructions thereto, the holder of such certificate shall be entitled to
receive in exchange therefor, in cash, without interest, the product of (x) the
Purchase Price and (y) the number of shares of Company Common Stock represented
by such certificates so surrendered by such holder, and the certificate so
surrendered shall forthwith be cancelled. In the event of a transfer of
ownership of Company Common Stock which is not registered in the transfer
records of the Company, the Exchange Agent may condition payment hereunder upon
the surrender of the certificate representing such Company Common Stock to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and to evidence that any applicable stock transfer taxes have
been paid.
(c) At or after the Effective Time, there shall be no
transfers on the stock transfer books of the Company of the shares of Company
Common Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, certificates are presented to the Surviving
Corporation, they shall be exchanged for payment and cancelled in accordance
with the procedures set forth in this Article 4.
(d) Any portion of the Exchange Fund (including the
proceeds of any investments thereof) that remains unclaimed by the former
stockholders of the Company twelve (12) months after the Effective Time shall,
at the option of the Surviving Corporation, be delivered to the Surviving
Corporation. Any former stockholders of the Company who have not theretofore
complied with this Article 4 shall thereafter look only to the Surviving
Corporation for payment of the Purchase Price in respect of each share of
Company Common Stock that such stockholder holds as determined pursuant to this
Agreement, in each case, without any interest thereon.
(e) None of Parent, the Company, the Exchange Agent or
any other person shall be liable to any former holder of shares of Company
Common Stock for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
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<PAGE> 102
(f) If any certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such certificate, the Exchange
Agent will pay in respect of such lost, stolen or destroyed certificate an
amount of cash, without interest, equal to the product of (x) the Purchase
Price and (y) the number of shares of Company Common Stock previously
represented by such lost, stolen or destroyed certificate.
4.3 DISSENTING SHARES.
(a) Notwithstanding anything in this Agreement to the
contrary, shares of Company Common Stock that are held by any record holder who
has not voted in favor of the Merger or consented thereto in writing and who
has demanded appraisal rights in accordance with Section 262 of the DGCL (the
"Dissenting Shares") shall not be converted into the right to receive the
Purchase Price hereunder but shall instead become the right to receive such
consideration as may be determined to be due in respect of such Dissenting
Shares pursuant to the DGCL; provided, however, that any holder of Dissenting
Shares who shall have failed to perfect, or shall have withdrawn or lost, his
rights to appraisal of such Dissenting Shares, in each case under the DGCL,
shall forfeit the right to appraisal of such Dissenting Shares, and each of
such Dissenting Shares shall be deemed to have been converted into the right to
receive, as of the Effective Time, the Purchase Price in accordance with
Article 4, without interest. Notwithstanding anything contained in this
Section 4.3, if (i) the Merger is rescinded or abandoned or (ii) if the
stockholders of the Company revoke the authority to effect the Merger, then the
right of any stockholder to receive such consideration as may be determined to
be due in respect of such Dissenting Shares pursuant to the DGCL shall cease.
The Surviving Corporation shall comply with all of its obligations under the
DGCL with respect to holders of Dissenting Shares.
(b) The Company shall give Parent (i) prompt notice of
any demands for appraisal, and any withdrawals of such demands, received by the
Company and any other related instruments served pursuant to the DGCL and
received by the Company and (ii) the opportunity to direct all negotiations and
proceedings with respect to demands for appraisal under the DGCL. The Company
shall not, except with the prior written consent of Parent, make any payment
with respect to any demands for appraisal or offer to settle any such demands.
4.4 COMPANY OPTIONS. 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
(individually, a "Company Option" and collectively, the "Company Options")
granted under the Hadson Corporation 1992 Equity Incentive Plan, as amended and
restated as of March 9, 1994, the Nonstatutory Stock Option Agreement dated
December 13, 1993, and the Nonstatutory Stock Option Agreement dated December
14, 1993 (collectively, the "Company Option Plans"), whether or not
exercisable, shall be cancelled and surrendered to the Company and each holder
of each such outstanding option, outstanding stock appreciation right and
outstanding limited stock appreciation right or other outstanding similar right
shall be entitled to receive from the Company, upon surrender of the applicable
right, with respect to each such
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<PAGE> 103
right, an amount in cash equal to the excess, if any, of the Purchase Price
over the exercise price per share of Company Common Stock of such right. As
used herein, the term "Option Cash-Out Amount" shall mean the sum of (a) all
payments made by the Company to effect the cancellation and surrender of
Company Options pursuant to this Section 4.4 and (b) the amount by which (i)
the product of $2.75 multiplied by the number of shares of Company Common Stock
issued upon exercise of Company Options exercised after the date of this
Agreement and prior to the Effective Time exceeds (ii) the sum of all payments
received by the Company upon the exercise of such Company Options during such
period.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure letter delivered by or on behalf
of the Company to Parent at or prior to the execution hereof (the "Company
Disclosure Letter"), the Company represents and warrants to Parent as follows:
5.1 EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY. The Company is
a corporation duly incorporated, validly existing and in good standing under
the laws of the State of Delaware. The Company is duly licensed or qualified
to do business as a foreign corporation and is in good standing under the laws
of each other state of the United States in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where the failure to be so
licensed or qualified or be in good standing would not, individually or in the
aggregate, be reasonably expected to have a material adverse effect on the
business, assets, liabilities, financial condition or prospects (the
"Condition") of the Company and its Subsidiaries taken as a whole (a "Material
Adverse Effect"). The Company has all requisite corporate power and authority
to own, operate and lease its properties and carry on its business as now
conducted. The copies of the Company's Restated Certificate of Incorporation,
dated December 14, 1993, as amended by the Certificate of Amendment to Restated
Certificate of Incorporation, dated November 21, 1994, and By-laws, dated
December 14, 1993, previously delivered to Parent are true and correct.
5.2 COMPLIANCE WITH LAW. Neither the Company nor any of its
Subsidiaries is in violation of any order of any court, governmental authority
or arbitration board or tribunal, or any law, ordinance, governmental rule or
regulation to which the Company or any of its Subsidiaries or any of their
respective properties or assets is subject, except where such violation would
not, individually or in the aggregate, have a Material Adverse Effect. The
Company and its Subsidiaries (a) have made all required filings, applications,
notifications and reports, and amendments thereto, with all federal, state,
local or foreign governmental authorities (the "Filings") and (b) possess all
licenses, permits, ordinances, franchises, certificates, and other
authorizations of any federal, state, local or foreign governmental authority
(the "Licenses") which are necessary to the ownership or operation of their
business as currently conducted or to collect the current fees, prices, rates
or other charges levied in connection with their business and all such Filings
and Licenses are in full force and effect and no proceeding is pending or, to
the Company's knowledge, threatened seeking the revocation or limitation of any
such Filing
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or License, except where the failure to make any Filing or possess any License
or the failure of any such Filing or License to be in such force and effect or
the revocation or limitation of such Filing or License would not, individually
or in the aggregate, have a Material Adverse Effect.
5.3 AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS.
(a) The Company has the requisite corporate power and
authority to execute and deliver this Agreement and all agreements and
documents contemplated hereby. Upon receipt of the approval of this Agreement
and the transactions contemplated hereby by the holders of a majority of the
outstanding shares of Company Common Stock, the consummation by the Company of
the transactions contemplated hereby will have been duly authorized by all
requisite corporate action. This Agreement constitutes the valid and legally
binding obligation of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights and general
principles of equity.
(b) The Board of Directors of the Company has taken all
necessary action to approve the transactions contemplated by this Agreement and
the Securities Purchase Agreements pursuant to Section 203(a) of the DGCL.
5.4 CAPITALIZATION. The authorized capital stock of the Company
consists of 50,000,000 shares of Company Common Stock, and 25,000,000 shares of
preferred stock, par value $.01 per share (the "Company Preferred Stock"),
5,193,250 shares of which have been designated Series A Preferred and 4,983,180
shares of which have been designated Series B Preferred. As of the date
hereof, there are 25,690,890 shares of Company Common Stock issued and
outstanding, 2,271,496 shares of Series A Preferred issued and outstanding and
4,981,743 shares of Series B Preferred issued and outstanding. No additional
shares of capital stock of the Company have been issued or will be issued prior
to the Effective Time except such shares of Company Common Stock as may be
issued upon exercise of Company Options or shares of Series B Preferred
outstanding as of the date hereof. All such issued and outstanding shares of
Company Common Stock and Company Preferred Stock are duly authorized, validly
issued, fully paid, nonassessable and free of preemptive rights. Other than as
contemplated by this Agreement, the Company Option Plans or the Series B
Preferred, there are not at the date of this Agreement any existing options,
warrants, calls, subscriptions, convertible securities, or other rights,
agreements or commitments which obligate the Company or any of its Subsidiaries
to issue, transfer or sell any shares of capital stock of the Company or any of
its Subsidiaries. As of the date of this Agreement, there are reserved for
issuance, and issuable upon or otherwise deliverable in connection with the
exercise of outstanding Company Options, the number of shares of Company Common
Stock set forth in the Company Disclosure Letter; since that date, no Company
Options have been granted under the Company Option Plans and no new option
plans have been authorized or adopted and no options have otherwise been
granted. After the Effective Time, the Surviving Corporation will have no
obligation to issue, transfer or sell any shares of capital stock of the
Company or the Surviving Corporation pursuant to any Company Benefit Plan (as
defined in Section 5.12) except pursuant to such Company Options, if any, as
shall not be cancelled and terminated prior to the Closing. Except for the
Company's obligations under the Trust Agreement dated as of December 14, 1993
among the Company, Prudential and
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certain other parties (the "H/P Trust Agreement"), there are no outstanding
obligations of the Company or any of its Subsidiaries to purchase, redeem or
otherwise acquire any shares of Company Common Stock, any capital voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of the Company. The Exercise Price (as such term is used in
the Company's Restated Certificate of Incorporation, dated December 14, 1993,
as amended through the date of this Agreement) of the Series B Preferred is
$3.225 per share of Company Common Stock.
5.5 SUBSIDIARIES. Each of the Company's subsidiaries (each a
"Subsidiary," and collectively the "Subsidiaries") is a corporation or
partnership duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation or organization, has the corporate or
partnership power and authority to own its properties and to carry on its
business as it is now being conducted, is duly licensed or qualified to do
business and is in good standing in each jurisdiction in which the ownership of
its property or the conduct of its business requires such qualification, except
for jurisdictions in which failure to be so licensed or qualified or to be in
good standing, individually or in the aggregate, would not have a Material
Adverse Effect. Each of the outstanding shares of capital stock of each of the
Subsidiaries is duly authorized, validly issued, fully paid and nonassessable,
was not issued in violation of any preemptive rights and is owned, directly or
indirectly, by the Company free and clear of all liens, pledges, security
interests, claims or other encumbrances. The following information for each
Subsidiary has been previously provided to Parent, if applicable: (a) its name
and jurisdiction of incorporation or organization; (b) its authorized capital
stock or other ownership interests; and (c) the number of issued and
outstanding shares of capital stock or other ownership interests owned of
record or beneficially by the Company.
5.6 RELATED PARTY TRANSACTIONS. There are no contracts,
arrangements or transactions currently in effect between the Company or any of
its Subsidiaries, on the one hand, and Santa Fe, Prudential, or any officer,
director or 5% stockholder of the Company, or any affiliate of the foregoing
persons, on the other hand, except as set forth in the Company Reports (as
defined in Section 5.9).
5.7 OTHER INTERESTS. Except for interests in the Subsidiaries,
neither the Company nor any Subsidiary owns directly or indirectly any interest
or investment in any corporation, partnership, joint venture, business, trust
or entity.
5.8 NO VIOLATION. Neither the execution and delivery by the
Company of this Agreement nor the consummation by the Company of the
transactions contemplated hereby in accordance with the terms hereof will: (a)
result in a breach of any provisions of the certificate of incorporation or
By-laws (or similar governing documents) of the Company or any Subsidiary; (b)
result in a breach or violation of, a default under, or the triggering of any
payment or other material obligations pursuant to, or accelerate vesting under,
any of its existing Company Stock Option Plans, or any grant or award made
under any of the foregoing by reason of, in whole or in part, the consummation
of the Merger; (c) violate or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination or in a right
of termination or cancellation of, or accelerate the performance required by,
or give rise to any payments or
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compensation under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties of the Company or its
Subsidiaries under, or result in being declared void, voidable, or without
further binding effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any material license, franchise,
permit, lease, contract, agreement or other instrument, commitment or
obligation to which the Company or any of its Subsidiaries is a party, or by
which the Company or any of its Subsidiaries or any of their properties is
bound or affected, except for any of the foregoing matters which would not,
individually or in the aggregate, have a Material Adverse Effect and will not
impose any liability on either Parent or Merger Sub; or (d) violate any order,
writ, injunction, decree, law, statute, rule or regulation applicable to the
Company or any of its Subsidiaries or any of their respective properties or
assets, except for violations which would not, individually or in the
aggregate, have a Material Adverse Effect or prevent or delay consummation of
the transactions contemplated hereby; (e) other than the filings provided for
in Article I and filings required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act") or the Securities Exchange Act of
1934, as amended (the "Exchange Act") (collectively the "Regulatory Filings"),
require any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority, or any
other person or entity, the failure to obtain or make which would, individually
or in the aggregate, have a Material Adverse Effect or prevent or delay
consummation of the transactions contemplated hereby.
5.9 SEC DOCUMENTS.
(a) The Company has delivered to Parent each registration
statement, report (including any report on Form 8-K), proxy statement or
information statement prepared by it since December 31, 1993 and filed with the
Securities and Exchange Commission (the "SEC") pursuant to the Exchange Act,
including, without limitation, (i) its Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, (ii) its Quarterly Reports on Form 10-Q
for the periods ended March 31, June 30 and September 30, 1994 and (iii) its
Proxy Statement for the Annual Meeting of Stockholders held May 26, 1994, each
in the form (including exhibits and any amendments thereto) filed with the SEC
(collectively, the "Company Reports"). As of their respective dates, the
Company Reports (including, without limitation, any financial statements or
schedules included or incorporated by reference therein) (1) were prepared in
all material respects in accordance with the applicable requirements of the
Securities Act of 1933, as amended (the "Securities Act"), the Exchange Act,
and the respective rules and regulations promulgated thereunder and (2) did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. Each of the consolidated balance sheets of the Company included in
or incorporated by reference into the Company Reports (including the related
notes and schedules) fairly presents the consolidated financial position of the
Company and its Subsidiaries as of its date, and each of the consolidated
statements of income, retained earnings and cash flows of the Company included
in or incorporated by reference into the Company Reports (including any related
notes and schedules) fairly presents the results of operations, retained
earnings or cash flows, as the case may be, of the Company and the Subsidiaries
for the periods set forth therein (subject, in the case of unaudited
statements, to normal year-end audit adjustments which would not be material in
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amount or effect), in each case in accordance with generally accepted
accounting principles ("GAAP") consistently applied during the periods
involved, except as may be noted therein.
(b) In addition, the Company has delivered to Parent an
unaudited consolidated balance sheet of the Company as of December 31, 1994 and
an unaudited consolidated statement of income of the Company for the year then
ended, in each case without notes (collectively, the "Unaudited 1994
Statements"). The Unaudited 1994 Statements have been prepared from the
Company's accounting records using accounting methods consistent with those
used to prepare the financial statements included in the Company Reports and,
to the Company's knowledge, fairly present in all material respects the
unaudited consolidated financial position and unaudited results of operations
of the Company and its Subsidiaries as of and for the year ended December 31,
1994.
(c) Except as and to the extent set forth (i) on the
consolidated balance sheet of the Company and its Subsidiaries at September 30,
1994, including all notes thereto, (ii) on the consolidated balance sheet
included in the Unaudited 1994 Statements or (iii) in the Company Reports filed
with the SEC prior to the date of this Agreement, neither the Company nor any
of its Subsidiaries has any material liabilities or obligations (whether
accrued, absolute, contingent or otherwise), except liabilities arising in the
ordinary course of business since such date.
5.10 LITIGATION. Except as disclosed in the Company Reports filed
with the SEC prior to the date of this Agreement, there are no actions, suits
or proceedings pending against the Company or any of its Subsidiaries or, to
the knowledge of the Company, threatened against the Company or any of its
Subsidiaries or any of their respective properties or assets, at law or in
equity, or before or by any federal or state commission, board, bureau, agency
or instrumentality, that (a) if determined adversely, would reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect,
(b) if determined adversely, would reasonably be expected to prevent or delay,
in any material respect, the consummation of the transactions contemplated by
this Agreement or (c) is a stockholder's derivative action on behalf of the
Company against any of its directors, officers, employees or agents. Except as
disclosed in the Company Reports filed with the SEC prior to the date of this
Agreement, neither the Company nor any of its Subsidiaries is subject to any
order, writ, injunction or decree which, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect or prevent or
delay the consummation of the transactions contemplated hereby.
5.11 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the
Company Reports filed with the SEC prior to the date of this Agreement, since
December 31, 1993, each of the Company and its Subsidiaries has conducted its
business only in the ordinary course and there has not been (a) any event or
change with respect to the Company and its Subsidiaries having or which would
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect, (b) any declaration, setting aside or payment of any dividend
or other distribution with respect to its capital stock or repurchase or
redemption of shares of its capital stock, (c) any material change in its
accounting principles, practices or methods, (d) any damage, destruction or
loss, whether or not covered by insurance, resulting in a Material Adverse
Effect, or any deterioration in the operating condition of the assets of the
Company and its Subsidiaries resulting in a Material Adverse Effect, (e) any
change or any threat of change
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in the Company's relations with, or any loss or threat of loss of, any of the
Company's important suppliers or customers which would reasonably be expected
to have a Material Adverse Effect, (f) any termination, cancellation or waiver,
or any material uncured violation, of any contract or other right material to
the operation of the business of the Company and its Subsidiaries, taken as a
whole, or (g) any payment in respect of indebtedness of the Company held by
Prudential or Company Preferred Stock.
5.12 CERTAIN EMPLOYEE PLANS.
(a) Each employee benefit or compensation plan or
arrangement, including each "employee benefit plan," as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
maintained by the Company or any of its Subsidiaries (the "Company Benefit
Plans") complies, and has been administered in accordance, with all applicable
requirements of law. All reports, returns and similar documents with respect
to the Company Benefit Plans required to be filed with any governmental entity
or distributed to any Company Benefit Plan participant have been duly and
timely filed or distributed. There are no pending or, to the Company's
knowledge, threatened investigations by any governmental entity, termination
proceedings or other claims (except claims for benefits payable in the normal
operation of the Company Benefit Plans), suits or proceedings against or
involving any Company Benefit Plan or asserting any rights or claims to
benefits under any Company Benefit Plan that would give rise to any liability.
The Company Benefit Plans are listed in the Company Disclosure Letter, and
copies and summary plan descriptions of all such plans have previously been
provided to Parent.
(b) With respect to each Company Benefit Plan intended to
qualify under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), (i) a favorable determination letter has been issued by the
Internal Revenue Service (the "IRS") with respect to the qualification of each
Company Benefit Plan and (ii) no "reportable event" or "prohibited transaction"
(as such terms are defined in ERISA) or termination has occurred under
circumstances which present a risk of liability by the Company or any of its
Subsidiaries to any governmental entity or other person, including a Company
Benefit Plan. Each Company Benefit Plan which is subject to Part 3 of Subtitle
B of Title I of ERISA or Section 412 of the Code has been maintained in
compliance with the minimum funding standards of ERISA and the Code and no such
Company Benefit Plan has incurred any "accumulated funding deficiency" (as
defined in Section 412 of the Code and Section 302 of ERISA), whether or not
waived.
(c) All contributions to, and payments from, the Company
Benefit Plans required to be made in accordance with the Company Benefit Plans
have been timely made.
(d) Except as provided in the Hadson Corporation
Severance Benefits Plan or in individual employment agreements disclosed to
Parent and Merger Sub in the Company Disclosure Letter, neither the Company nor
any of its Subsidiaries maintains or contributes to or has an obligation to
contribute to any welfare plan, within the meaning of Section 3(1) of ERISA,
which provides, or has any liability to provide, life insurance, medical or
other employee welfare benefits to or on behalf of any employee or former
employee upon his or her retirement or termination of employment, except as may
be required by federal statute or such
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benefits that may be unilaterally terminated by the Company or one of its
Subsidiaries at any time.
(e) Neither the Company nor any of its Subsidiaries or
any person or entity that is treated as a single employer with the Company or
any of its Subsidiaries within the meaning of Section 414 of the Code
maintains, contributes to or has an obligation to contribute to, or any
liability arising under a plan that is subject to Title IV of ERISA, including
a multiemployer plan, within the meaning of Section 4001(a)(3) of ERISA.
5.13 LABOR MATTERS.
(a) None of the Company or any of its Subsidiaries is a party to,
or bound by, any collective bargaining agreement, contract or other agreement
or understanding with a labor union or labor organization. There is no unfair
labor practice or labor arbitration proceeding pending or, to the knowledge of
the Company, threatened against the Company or its Subsidiaries relating to
their business. To the knowledge of the Company, there are no organizational
efforts with respect to the formation of a collective bargaining unit presently
being made or threatened involving employees of the Company or any of its
Subsidiaries.
(b) The Company has delivered to Parent copies of all employment
agreements, consulting agreements, severance agreements, bonus and incentive
plans, profit-sharing plans and other agreements, plans or arrangements with
respect to compensation of the employees of the Company and its Subsidiaries
(the "Compensation Arrangements"). The Merger will not accelerate or otherwise
give rise to payments pursuant to the Compensation Arrangements. The
Compensation Arrangements are listed in the Company Disclosure Letter.
5.14 ENVIRONMENTAL MATTERS.
(a) For the purposes of this Agreement:
"Assets" means all real or personal property owned or leased
by the Company or as to which an easement exists in favor of the Company.
"Environmental Matters" means any matter arising out of,
relating to or resulting from pollution, contamination, protection of the
environment, human health or safety, health or safety of employees, sanitation
and any matters relating to emissions, discharges, disseminations, releases or
threatened releases, of Hazardous Materials into the air (indoor and outdoor)
surface water, groundwater, soil, land surface or subsurface, buildings,
facilities, real or personal property or fixtures or otherwise arising out of,
resulting from or relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, handling, release or threatened
release of Hazardous Materials.
"Environmental Costs" means, without limitation, any actual or
potential cleanup costs, remediation, removal, or other response costs (which
without limitation shall include costs to cause the Company to come into
compliance with Environmental Laws), investigation costs (including without
limitation fees of consultants, counsel and other experts in connection with
any environmental investigation, testing, audits or studies), losses,
liabilities or obligations
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(including without limitation, liabilities or obligations under any lease or
other contract), payments, damages (including any actual, punitive or
consequential damages under any statutory laws, common law cause of action or
contractual obligations or otherwise, including charges (i) of third parties
for personal injury or property damage or (ii) to natural resources), civil or
criminal fines or penalties, judgments, and amounts paid in settlement arising
out of or relating to or resulting from any Environmental Matters.
"Environmental Laws" means, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Sections 9601 et seq., the Emergency Planning and Community Right-to-Know Act
of 1986, 42 U.S.C. Sections 1101 et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. Sections 6901 et seq., the Toxic Substances Control Act,
15 U.S.C. Sections 2601 et seq., the Federal Insecticide, Fungicide, and
Rodenticide Act, 7 U.S.C. Sections 136 et seq., the Clean Air Act, 42
U.S.C. Sections 7401 et seq.,the Clean Water Act (Federal Water Pollution
Control Act), 33 U.S.C. Sections 1251 et seq., the Safe Drinking Water Act, 42
U.S.C. Sections 300f et seq., the Occupational Safety and Health Act, 29 U.S.C.
Sections 641 et seq., the Hazardous Materials Transportation Act, 49 U.S.C.
Sections 1801 et seq., as any of the above statutes have been or may be amended
from time to time, all rules and regulations promulgated pursuant to any of the
above statutes, and any other foreign, federal, state or local law, statute,
ordinance, rule or regulation governing Environmental Matters, as the same have
been or may be amended from time to time, including any common law cause of
action providing any right or remedy with respect to Environmental Matters, all
indemnity agreements and other contractual obligations (including, without
limitation, leases, asset purchase and merger agreements) relating to
environmental matters, and all applicable judicial and administrative decisions,
orders, and decrees relating to Environmental Matters.
"Hazardous Materials" means any pollutants, contaminants or
hazardous or toxic substances, materials, wastes, constituents or chemicals
that are regulated by, or from the basis for liability under, any Environmental
Laws.
(b) The Company and each of its Subsidiaries at all times
has been operated, and is, in compliance with all applicable Environmental Laws
except for such failures to comply which would not reasonably be expected to
result in a Material Adverse Effect.
(c) The Company has obtained, and is in compliance with,
all permits, licenses, authorizations, registrations and other governmental
consents ("Environmental Permits") required to be obtained by it by applicable
Environmental Laws, including, without limitation, those regulating emissions,
discharges, or releases of Hazardous Materials, or the use, storage, treatment,
transportation, release, emission and disposal of raw materials, by-products,
wastes and other substances used or produced by or otherwise relating to its
business except for such failures to comply which would not reasonably be
expected to result in a Material Adverse Effect.
(d) All such Environmental Permits are in full force and
effect, and the Company has made all appropriate filings for issuance or
renewal of such Environmental Permits.
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(e) All of the Assets of the Company are free of any
Hazardous Materials (except those authorized pursuant to and in accordance with
Environmental Permits held by the Company) and free of all contamination
arising from, relating to or resulting from any such Hazardous Materials except
for such failures to comply which would not reasonably be expected to result in
a Material Adverse Effect. Furthermore, (i) there are no polychlorinated
byphenyls ("PCBs"), mercury or PCB or mercury containing equipment at, on,
about, under or within any Assets owned, operated or controlled in whole or in
part by the Company or its Subsidiaries and (ii) all of the Company's Assets
are free of any groundwater contamination arising from, relating to or
resulting from any Hazardous Materials.
(f) There are no claims, notices, civil, criminal or
administrative actions, suits, hearings, investigations, inquiries or
proceedings pending or threatened that are based on or related to any
Environmental Matters or the failure to have any required Environmental
Permits.
(g) The Company has not used any waste disposal site, or
otherwise disposed of, transported or arranged for the transportation of, any
Hazardous Materials to any place or location (including any place or location
owned or operated by the Company), or in violation of any Environmental Laws.
(h) There are no underground or above ground storage
tanks, incinerators or surface impoundments at, on, about, under or within any
of the Assets, or any portion thereof.
(i) Neither the Company nor any of its Subsidiaries has
received any notice or other communication asserting that it may be a
potentially responsible party, or otherwise liable in connection with, any
waste disposal site or other location used for the disposal of any Hazardous
Materials or notice of any failure of the Company or any of its Subsidiaries to
comply in any material respect with any Environmental Law or the requirements
of any Environmental Permit.
(j) There are no past or present conditions, events,
circumstances, facts, activities, practices, incidents, actions, omissions or
plans: (i) that may interfere with or prevent continued compliance by the
Company with Environmental Laws and the requirements of Environmental Permits,
(ii) that may give rise to any liability or other obligation under any
Environmental Laws that may require the Company to incur any actual or
potential Environmental Costs or (iii) that may form the basis of any claim,
action, suit, proceeding, hearing, investigation or inquiry against or
involving the Company based on or related to any Environmental Matter or which,
in each case, could require the Company to incur any Environmental Costs which
would reasonably be expected to have a Material Adverse Effect.
(k) No lien exists, and no condition exists which could
result in the filing of a lien, against any property of the Company under any
Environmental Law or relating to any Environmental Matters.
(l) There has been no release or other dissemination at
any time of any Hazardous Materials at, on, or about, under or within any real
property currently or formerly owned or leased by the Company or any
predecessor of the Company or as to which an
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easement in favor of the Company currently exists or formerly existed or any
real properties operated or controlled by the Company or any predecessor of the
Company (other than pursuant to and in accordance with permits held by the
Company or any such predecessor) which was required to be reported to any
governmental authority pursuant to any Environmental Law and which would
reasonably be expected to have a Material Adverse Effect.
(m) The Company has not been requested or required by any
governmental authority to perform any investigatory or remedial activity or
other action in connection with any Environmental Matter which would reasonably
be expected to have a Material Adverse Effect.
5.15 TITLE. Except as described in the Company Reports, the
Company and its Subsidiaries have good and defensible title to all real and
personal property owned by them and reflected on the Company's consolidated
balance sheet as of September 30, 1994 included in the Company Reports free and
clear of any and all liens, security interests, pledges, claims and other
encumbrances (each, a "Lien") other than Permitted Encumbrances, as defined
below, except for defects in title and Liens which, individually or in the
aggregate, would not have a Material Adverse Effect. "Permitted Encumbrances"
shall mean (a) inchoate Liens securing payments to mechanics and materialmen
for materials, labor and supplies furnished in the normal course of business of
the Company and its Subsidiaries and Liens securing payments of taxes or
assessments, that are, in the case of each Lien described in this clause (a),
not yet delinquent, or, if delinquent, that are being contested in good faith
in the normal course of business, (b) preferential rights to purchase and
required third party consents to assignments or similar agreements, except for
those rights that become exercisable upon, or consents required to be obtained
prior to, consummation of the Merger or the transactions contemplated hereby
and those rights and consents that remain unsatisfied with respect to any prior
transaction, (c) all applicable laws, rules, regulations and orders of any
municipality or governmental, tribal, statutory or public authority, (d) the
terms and conditions of all documents and agreements that create the easements,
licenses, permits, rights-of-way, surface leasehold interests, fee interests,
privileges, franchises, servitudes, prescriptions, surface use rights under oil
and gas leases and unitization agreements and similar property interests
reasonably necessary for operating and maintaining, on the lands where located,
the assets of the Company and its Subsidiaries (the "Easements"), (e) the terms
and conditions of the documents that transfer the Easements and other similar
documents or agreements under which the subject assets are held to the extent
same do not have a material adverse effect on the ownership, use, maintenance
or operation by the Company or its Subsidiaries of the subject assets to which
they pertain, (f) the terms and conditions of all operating agreements,
participation agreements, maintenance agreements and other agreements to which
any of such assets or properties are subject, to the extent same do not have a
material adverse effect on the ownership, use, maintenance or operation by the
Company or its Subsidiaries of the subject assets to which they pertain; and
(g) the fact that certain portions of the assets of the Company or its
Subsidiaries may be located on lands pursuant to rights to use the surface of
such lands under oil and gas leases and/or unitization agreements. To the
Company's knowledge, none of the Permitted Encumbrances materially interferes
with the use of any of the Company's assets in the conduct of the Company's
business in the ordinary course, nor do any of the Permitted Encumbrances
materially detract from the value of such assets as reflected on the Company's
financial statements included in the Company Reports.
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5.16 MAINTENANCE OF FACILITIES. All physical facilities of the
Company and its Subsidiaries which are material to the Company have been
maintained in accordance with the Company's customary maintenance practices and
are in a state of repair (normal wear and tear accepted) adequate for the
normal use of such facilities in the ordinary conduct of the business of the
Company and its Subsidiaries.
5.17 INSURANCE. The Company Disclosure Letter lists all policies
of liability and property and casualty insurance in effect covering the Company
and its Subsidiaries (specifying the insurer, type of insurance, policy number
and pending claims thereunder with respect to the Company which are, in the
aggregate, material). There are no notices of any pending or threatened
terminations, or expectations of premium increases (other than increases of
general applicability), with respect to any of such insurance policies. The
Company is in substantial compliance with all conditions contained therein, and
the coverage of none of such policies will be terminated or adversely affected
by the transactions contemplated by this Agreement.
5.18 FAIRNESS OPINION. The Board of Directors of the Company has
received an opinion of Dillon, Read & Co. Inc. to the effect that, as of the
date hereof, the Merger consideration to be received by the holders of Company
Common Stock other than Santa Fe and Prudential is fair to such holders.
5.19 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Company nor
any of its Subsidiaries is a "public utility company," a "holding company" or a
"subsidiary company" of a "holding company," or an "affiliate" of any of the
foregoing, in each case within the meaning of the Public Utility Holding
Company Act of 1935, as amended, or the rules and regulations of the SEC
promulgated thereunder. Neither the Company nor any of its Subsidiaries is
subject to regulation as a utility under applicable state law.
5.20 TAXES.
(a) For purposes of this Section 5.20 the following terms
shall have the following meanings:
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Tax" (and, with correlative meaning, "Taxes" and "Taxable")
shall mean:
(i) any federal, state, local or foreign income,
gross receipts, windfall profits, severance, property, production,
sales, use, license, excise, franchise, employment, payroll,
withholding, alternative or add-on minimum, ad valorem, transfer,
excise, stamp, or environmental tax, or any other tax, custom, duty,
governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest or penalty, addition to tax or
additional amount imposed by any governmental authority; and
(ii) liability of the Company or any Subsidiary
for the payment of amounts with respect to payments of a type
described in clause (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group, or as a result of
any
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obligation of the Company or any subsidiary under a Tax Sharing
Arrangement or Tax indemnity arrangement or agreement.
"Tax Return" shall mean any return, report or similar
statement required to be filed with respect to any Tax (including any
attached schedules), including, without limitation, any information
return, claim for refund, amended return and declaration of estimated
Tax.
"Tax Sharing Arrangement" shall mean any written or unwritten
agreement or arrangement for the allocation or payment of Tax
liabilities or payment for Tax benefits with respect to a
consolidated, combined or unitary Tax Return which Tax Return includes
the Company or any Subsidiary, and including, but not limited to, any
tax indemnity arrangement or agreement.
(b) All Tax Returns that are required to be filed on or
before the Closing Date by the Company or any of the Subsidiaries (including
but not limited to returns of any affiliated group of corporations filing
consolidated income tax returns of which the Company or Subsidiary was a
member) have been or will be correctly and accurately completed and timely
filed with the appropriate foreign, federal, state and local authorities and
disclose all taxes required to be paid by the Company and each Subsidiary for
the period covered by the Tax Return. All Taxes due from the Company or any
Subsidiary or for which the Company or any Subsidiary is liable with respect to
all taxable years or any portion thereof ending on or before the Closing Date
have been fully and timely paid or adequately reflected as an appropriate
liability or reserve on the Financial Statements even if they are being
contested in good faith by appropriate proceedings. No payments are or will be
required to be made by the Company or any Subsidiary pursuant to any Tax
Sharing Agreement and all such Tax Sharing Agreements will be terminated with
respect to the Company and each Subsidiary as of the Closing Date to the extent
they would require payments to be made by the Company or any Subsidiary.
(c) None of such Tax Returns are under audit or
examination by any foreign, federal, state or local authority and there are no
agreements or waivers providing for an extension of time with respect to the
assessment or collection of any Tax against the Company or any of the
Subsidiaries with respect to any such Tax Return. For all taxable years or
portions thereof ending on or before the Closing Date, no assessment of Taxes
has been made or proposed by any taxing authority against the Company or any
Subsidiary for which the Company or any Subsidiary is liable. The Company has
no knowledge of any facts that if known to any taxing authority would likely
result in the issuance of a notice of proposed deficiency or similar notice to
assess Taxes against the Company or any Subsidiary. The statute of limitations
for the collection of federal, state, local and foreign income taxes has been
extended only with respect to the jurisdictions and years in the Company
Disclosure Letter. The statute of limitations for the payment or collection of
gross receipts, sales and use taxes has been extended only with respect to the
jurisdictions and years set forth in the Company Disclosure Letter.
(d) All Taxes assessed and due and owing from or against
the Company or any of the Subsidiaries on or before the Closing Date
(including, but not limited to, ad valorem Taxes) have been or will be timely
paid in full or accrued on the Financial Statements on or before the Closing
Date.
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(e) All withholding Tax and Tax deposit requirements
imposed on the Company or any of the Subsidiaries for any periods ending on or
before the Closing Date have been or will be timely satisfied in full or
accrued on the Financial Statements on or before the Closing Date.
(f) There has been no ownership change, as defined in
Section 382(g) of the Code (an "Ownership Change"), with respect to the Company
and Subsidiaries since December 16, 1992.
(g) The combined Net Operating Loss Carryforward as
determined for federal income tax purposes ("NOL") of the Company and its
Subsidiaries as of December 31, 1994 is approximately $120,000,000 of which
approximately $109,000,000 is subject to limitation under Section 382 of the
Code and approximately $11,000,000 is not currently subject to limitation under
Section 382 of the Code. The Company and its subsidiaries currently have some
NOL which is not subject to the SRLY Rules of Regulation Section 1.1502-21.
(h) The combined Net Operating Loss Carryforward as
determined for federal alternative minimum tax purposes ("AMTNOL") of the
Company and its Subsidiaries as of December 31, 1994 is approximately
$108,000,000 of which approximately $98,000,000 is subject to limitation under
Section 382 of the Code and approximately $10,000,000 is not currently subject
to limitation under Section 382 of the Code.
(i) The annual limitation for use of the NOL by the
Company and its Subsidiaries under Section 382 of the Code is at least
$4,451,852. The limitation under Section 382 of the Code applies to the
Affiliated Group of Corporations (as defined in Section 1504 of the Code) as a
whole and no Subsidiary is subject to a separate limitation under Section 382
of the Code or the Consolidated Return Regulations issued under Section 1502 of
the Code including any proposed regulations.
(j) The annual limitation for use of the AMTNOL by the
Company and its Subsidiaries under Section 382 of the Code is at least
$4,451,852. The limitation under Section 382 of the Code applies to the
Affiliated Group of Corporations (as defined in Section 1504 of the Code) as a
whole and no Subsidiary is subject to a separate limitation under Section 382
of the Code or the Consolidated Return Regulations issued under Section 1502 of
the Code including any proposed regulations.
(k) The Company and its Subsidiaries have made a proper
election under Section 382(1)(5)(H) of the Code with respect to the ownership
changes on December 16, 1992 and Section 382(l)(5)(D) of the Code will not
apply to the Company and its Subsidiaries with respect to any ownership change.
(l) The net unrealized built in gain of the Company and
the Subsidiaries for purposes of Section 382(h)(3)(A) of the Code with respect
to the Ownership Change on December 16, 1992 is approximately $50,000,000 as of
the Closing Date.
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(m) The Company has not received on or before the Closing
Date any formal or informal communication from the Internal Revenue Service
("IRS") that it will not issue the rulings requested in the ruling request
filed by the Company dated August 26, 1994.
(n) The NOL and the AMTNOL of the Company are properly
allocated among the Company and the Subsidiaries as set forth in the Company
Disclosure Letter.
(o) The Company is entitled to and will file a
consolidated federal income tax return for the taxable year which ends on or
includes the Closing Date with each Subsidiary. The Company is the Common
Parent Corporation of the Affiliated Group of Corporations (as defined in
Section 1504 of the Code) which includes the Company. Each Subsidiary is an
includible corporation (as defined in Section 1504 of the Code). Each
Subsidiary is 100 percent owned by the Company or another member of the
Affiliated Group of Corporations of which the Company is the Common Parent
Corporation. The Company has filed a consolidated federal income tax return
with its Subidiaries each year since the year ending 1979. No consent pursuant
to the collapsible corporation provisions of Section 341(f) of the Code (or any
corresponding provision of state, local or foreign income tax law) or agreement
to have Section 341 (f)(2) of the Code (or any corresponding provision of
state, local or foreign income tax law) apply to any disposition of any asset
owned by the Company or any Subsidiary is in effect with respect to the Company
or any Subsidiary. None of the assets of the Company or any Subsidiary
directly or indirectly secures any debt the interest on which is tax exempt
under Section 103(a) of the Code. None of the assets of the Company or any
Subsidiary is "tax-exempt use property" within the meaning the Section 168(h)
of the Code. The Company and each Subsidiary have not agreed to make, nor is
it required to make, any adjustment under Section 481(a) of the Code by reason
of a change in accounting method or otherwise. The Company and each Subsidiary
are not a party to any agreement, contract, arrangement or plan that has
resulted or would result, separately or in the aggregate, in the payment or any
"excess parachute payments" within the meaning of Section 28OG of the Code. No
income or gain of the Company has been deferred pursuant to Treasury Regulation
Section 1.1502-13 or -14, or Temporary Treasury Regulations Section 1.1502-13T
or -14T. No excess loss account (as described in Treasury Regulation Section
1.1502-14, 1.1502-19 and 1.1502-32) exists with respect to the Company or any
Subsidiary except as set forth in the Company Disclosure Letter. No power of
attorney has been granted with respect to any matter relating to Taxes of the
Company or any Subsidiary which is currently in force except with respect to
the Ruling Request. None of the property of the Company or any Subsidiary is
required to be treated as owned by another person pursuant to Section 168(f)(8)
of the Code (as in effect prior to its amendment by the Tax Reform Act of
1986). The Company or any Subsidiary has not participated in or cooperated in
an international boycott, within the meaning of Section 999 of the Code, nor
has any such corporation had operations which are or may hereafter become
reportable under Section 999 of the Code. Neither the Company nor any
Subsidiary has disposed of property in a transaction being accounted for under
the installment method pursuant to Section 453 or 453A of the Code. The
Company or any Subsidiary has no corporate acquisition indebtedness, as
described in Section 279(b) of the Code. No transaction by this Agreement is
subject to withholding under Section 1445 of the Code and no stock transfer
taxes, real estate transfer taxes, or other similar taxes will be imposed on
the transfer of the Shares pursuant to this Agreement.
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(p) Parent or its designee reserves the right to make an
election under Section 338(g) of the Code with respect to the acquisition of
the Company and its Subsidiaries. The consummation of the Merger pursuant to
this Agreement will not affect the status of the 1993 Merger as a qualified tax
free reorganization under 368(a)(1)(A) of the Code.
5.21 NO BROKERS. The Company has not entered into any contract,
arrangement or understanding with any person or firm, including any bonus or
similar arrangement with any officer, director or employee of the Company,
which may result in the obligation of the Company or Parent or Merger Sub to
pay any success fee, finder's fee, brokerage or agent's commission or other
like payment in connection with the negotiations leading to this Agreement or
the consummation of the transactions contemplated hereby, except that the
Company has retained S.G. Warburg & Co. Inc. and Dillon, Read & Co. Inc., the
arrangements with which have been disclosed in writing to Parent prior to the
date hereof. Other than the foregoing arrangements, the Company is not aware
of any claim against the Company for payment of any success fee, finder's fee,
brokerage or agent's commission or other like payment in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. The Company shall not pay any expenses of any stockholder
incurred in connection with the Merger or any other transaction contemplated by
this Agreement or the transactions contemplated by the Securities Purchase
Agreements.
5.22 MATERIAL CONTRACTS. Neither the Company nor any of its
Subsidiaries is a party to or bound by any lease, agreement or other contract
that would be required to be filed as an exhibit to the Annual Report on Form
10-K filed by the Company if that report were filed as of the date of this
Agreement that has not already been filed as an exhibit to any Company Report
that has been filed by the Company with the SEC after December 31, 1993.
5.23 ABSENCE OF OTHER AGREEMENTS. Neither the Company nor any of
its officers, directors or other authorized representatives has entered into
any agreement, letter of intent or similar agreement (whether oral or written)
with any party other than Parent and Merger Sub whereby all or a substantial
part of the Company, its capital stock or its debt instruments would be sold,
merged, consolidated, transferred or otherwise combined with or into another
entity.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub, jointly and severally, represent and warrant to
the Company as follows:
6.1 EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY. Each of Parent
and Merger Sub is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation. Each of Parent
and Merger Sub is duly licensed or qualified to do business as a foreign
corporation and is in good standing under the laws of each other state of the
United States in which the character of the properties owned or leased by it
therein or in which the transaction of its business makes such qualification
necessary, except where the failure
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to be so licensed or qualified or be in good standing would not have a material
adverse effect on the ability of Parent or Merger Sub to perform its respective
obligations hereunder (a "Parent Material Adverse Effect"). Parent has all
requisite corporate power and authority to own, operate and lease its
properties and carry on its business as now conducted. Merger Sub was
incorporated on January 30, 1995, and since its incorporation Merger Sub has
not conducted any business activities except in connection with the
transactions contemplated in this Agreement.
6.2 AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. Each of
Parent and Merger Sub has the requisite corporate power and authority to
execute and deliver this Agreement and all agreements and documents
contemplated hereby, and the consummation by Parent and Merger Sub of the
transactions contemplated hereby has been duly authorized by all requisite
corporate action. This Agreement constitutes, and all agreements and documents
contemplated hereby (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of Parent
and Merger Sub, enforceable against each of them in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity.
6.3 NO VIOLATION. Neither the execution and delivery by Parent
and Merger Sub of this Agreement, nor the consummation by Parent and Merger Sub
of the transactions contemplated hereby in accordance with the terms hereof,
will: (a) result in a breach of any provisions of the Certificate of
Incorporation or By-laws of Parent or Merger Sub; (b) violate or result in a
breach of any provisions of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result
in the termination or in a right of termination or cancellation of, or
accelerate the performance required by, or give rise to any payments or
compensation under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties of Parent or its Subsidiaries
under, or result in being declared void, voidable, or without further binding
effect, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any material license, franchise, permit, lease,
contract, agreement or other instrument, commitment or obligation to which
Parent or any of its Subsidiaries is a party, or by which Parent or any of its
Subsidiaries or any of their properties is bound or affected, except for any of
the foregoing matters which would not, individually or in the aggregate, have a
Parent Material Adverse Effect and will not impose any liability on the
Company; (c) violate any order, writ, injunction, decree, law, statute, rule or
regulation applicable to Parent or any of its Subsidiaries or any of their
respective property or assets, except for violations which would not
individually or in the aggregate, have a Parent Material Adverse Effect; or (d)
based upon the representation and warranty of the Company made in Section 5.19
and compliance by the Company with Section 7.4, require any consent, approval
or authorization of, or declaration, filing or registration with, any domestic
governmental or regulatory authority (other than the Regulatory Filings), or
any other person or entity, the failure to obtain or make which would have,
individually or in the aggregate, a Parent Material Adverse Effect.
6.4 AVAILABILITY OF FUNDS. Parent will have available at the
Closing sufficient funds to enable it to consummate the transactions
contemplated by this Agreement (upon the terms contained herein) and the
Securities Purchase Agreements (upon the terms contained therein).
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6.5 NO BROKERS. Neither Parent nor Merger Sub has entered into
any contract, arrangement or understanding with any person or firm which may
result in the obligation of the Company to pay any finder's fee, brokerage or
agent's commission or other like payment in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
ARTICLE VII
COVENANTS
7.1 TAKEOVER PROPOSALS. The Company agrees that, from and after
its execution of this Agreement through the Effective Time, it shall not, nor
shall it permit any of its Subsidiaries to, and it shall use its best efforts
to cause its officers, directors or employees, and all investment bankers,
attorneys or other advisors or representatives retained by the Company or any
of its Subsidiaries not to, (a) solicit or encourage the submission of, any
Takeover Proposal (as hereinafter defined), (b) enter into any agreement with
respect to any Takeover Proposal or (c) participate in any discussions or
negotiations regarding, or furnish to any person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, a Takeover Proposal; provided, however, that nothing
contained in this Section 7.1 shall prohibit the Board of Directors of the
Company from (x) furnishing information to or entering into discussions or
negotiations with, any person or entity that makes an unsolicited Takeover
Proposal if, in the judgment of the Committee after consultation with outside
counsel, such action may be required for the Board of Directors of the Company
to comply with its fiduciary duties to the Company and its stockholders; or (y)
from disclosing to the Company's stockholders a position with respect to a
tender offer by a third party pursuant to Rules 14d-9 and 14e-2 promulgated
under the Exchange Act or from making such disclosure to the Company's
stockholders which, in the judgment of the Board of Directors, may be required
under applicable law. For purposes of this Agreement, "Takeover Proposal"
means any proposal or offer for a merger or other business combination
involving the Company or to acquire a material equity interest in, or a
substantial portion of the assets of, the Company, other than as contemplated
by this Agreement.
7.2 CONDUCT OF BUSINESS. Prior to the Effective Time, except as
specifically set forth in the Company Disclosure Letter or as contemplated by
any other provision of this Agreement, unless Parent has consented in writing
thereto, the Company:
(a) shall, and shall cause each of its Subsidiaries to,
conduct its operations according to its usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(b) shall use its reasonable efforts, and shall cause
each of its respective Subsidiaries to use its reasonable efforts, to preserve
intact its business organization and goodwill, keep available the services of
its officers and employees and maintain satisfactory relationships with those
persons having business relationships with it;
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(c) shall confer on a regular basis with one or more
representatives of Parent to report material operational matters;
(d) shall not amend its certificate of incorporation or
by-laws;
(e) shall promptly notify Parent of (i) any material
emergency or other material change in the Condition of the Company or the
Subsidiaries, (ii) any material litigation or material governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated) involving the Company or any of its Subsidiaries, or (iii) the
breach in any material respect of any representation or warranty or covenant of
the Company contained herein;
(f) shall promptly deliver to Parent true and correct
copies of any report, statement or schedule filed by the Company with the SEC
subsequent to the date of this Agreement;
(g) shall not (i) except pursuant to the exercise of
options, warrants, conversion rights and other contractual rights existing on
the date hereof and disclosed in the Company Reports, the Company Disclosure
Letter or otherwise pursuant to this Agreement, issue any shares of its capital
stock, effect any stock split or otherwise change its capitalization as it
exists on the date hereof, (ii) grant, confer or award any option, warrant,
conversion right or other right not existing on the date hereof to acquire any
shares of its capital stock from the Company, (iii) increase any compensation
or enter into or amend any employment, severance, termination or similar
agreement with any of its present of future officers or directors, except for
normal increases in compensation to employees consistent with past practice and
the payment of cash bonuses to employees pursuant to and consistent with
existing plans or programs or (iv) adopt any new employee benefit plan
(including any stock option, stock benefit or stock purchase plan) or amend any
existing employee benefit plan in any material respect, except for changes
which are less favorable to participants in such plans or as may be required by
applicable law;
(h) shall not (i) declare, set aside or pay any dividend
or make any other distribution or payment with respect to any shares of its
capital stock (other than pay-in-kind dividends on the Series A Preferred in
accordance with its terms); (ii) directly or indirectly redeem, purchase or
otherwise acquire any shares of its capital stock or capital stock of any of
its Subsidiaries, or make any commitment for any such action or (iii) split,
combine or reclassify any of its capital stock;
(i) not set aside or pay any interest or principal or
make any other distribution or payment with respect to any indebtedness of the
Company held by Prudential or Santa Fe (other than regularly scheduled interest
payments on such indebtedness held by Prudential or Santa Fe as of the date of
this Agreement or as required under Section 7.13 hereof);
(j) shall not, and shall not permit any of its
Subsidiaries to, acquire, sell, lease or otherwise dispose of any of its assets
(including capital stock of Subsidiaries) (i) with a fair market value in
excess of $250,000 or (ii) which are material, individually or in the
aggregate, to the Company's business except in the ordinary course of business;
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(k) shall not (i) incur or assume any long-term or
short-term debt or issue any debt securities except for borrowings under
existing lines of credit or the creation of trade payables in the ordinary
course of business; (ii) except with respect to obligations of wholly-owned
Subsidiaries of the Company; assume, guaranty, endorse or otherwise become
liable or responsible (whether directly, indirectly, contingently or otherwise)
for the obligations of any other person except in the ordinary course of
business consistent with past practices in an amount not material to the
Company and its Subsidiaries, taken as a whole; (iii) other than to
wholly-owned Subsidiaries of the Company, make any loans, advances or capital
contributions to, or investments in, any other person; (iv) pledge or otherwise
encumber shares of capital stock of the Company or its Subsidiaries; or (v)
mortgage or pledge any of its material assets, tangible or intangible, or
create or suffer to create any material mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect to such asset;
(l) except as may be required as a result of a change in
law or in generally accepted accounting principles shall not change any of the
accounting principles or practices used by the Company;
(m) shall not (i) acquire (by merger, consolidation or
acquisition of stock or assets) any corporation, partnership or other business
organization or division thereof or any equity interest therein; (ii) enter
into any contract or agreement other than in the ordinary course of business
consistent with past practice which would be material to the Company and its
Subsidiaries taken as a whole; (iii) violate any order, writ, injunction,
decree, law, statute, rule or regulation applicable to Parent or any of its
Subsidiaries or any of their respective property or assets, except for
violations which would not individually or in the aggregate, have a Parent
Material Adverse Effect; or (iv) enter into or amend any contract, agreement,
commitment or arrangement providing for the taking of any action which would be
prohibited hereunder;
(n) shall not make any tax election or settle or
compromise any income tax liability material to the Company and its
Subsidiaries taken as a whole;
(o) shall not pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction in
the ordinary course of business of liabilities reflected, reserved against or
disclosed in the consolidated financial statements (or the notes thereto) of
the Company and its Subsidiaries or incurred in the ordinary course of business
consistent with past practice or in connection with the consummation of
transactions contemplated by this Agreement;
(p) shall not settle or compromise any pending or
threatened suit, action or claim relating to the transactions contemplated
hereby; or
(q) shall not take, or agree in writing or otherwise to
take any action that would constitute a breach of the covenants contained in
Section 7.2(a) through 7.2(p) or that would make any of the representations and
warranties of the Company contained in this Agreement untrue or incorrect as of
the date when made.
7.3 STOCKHOLDER ACTION. (a) If required by applicable law in
order to consummate the Merger, the Company shall take all action necessary in
accordance with the DGCL and its
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Restated Certificate of Incorporation and By-laws to convene a meeting of
stockholders of the Company as promptly as practicable following the execution
of this Agreement for the purpose of approving the Merger and this Agreement.
The date of any such stockholders' meeting shall be set by the Board of
Directors of the Company after consultation with, and on a date approved by,
Parent, whose approval shall not be unreasonably withheld. Unless otherwise
required by the fiduciary duty of the Board of Directors of the Company (as
determined by them in good faith after consultation with outside counsel), the
Board of Directors of the Company shall (i) recommend that the Company's
stockholders vote to approve the Merger and this Agreement if proxies are
solicited by the Company with respect to such vote, (ii) cause the Company to
use its best efforts to solicit from stockholders of the Company proxies in
favor of the Merger, unless, in accordance with applicable law and the
regulations of the New York Stock Exchange, such solicitation is not required
to achieve approval of the Merger (taking into account proxies granted by Santa
Fe and Prudential pursuant to the Securities Purchase Agreements), and (iii)
take all other action in their judgment necessary and appropriate to secure the
vote of stockholders required by the DGCL to effect the Merger. To the extent
required by the fiduciary obligations of the Board of Directors (as determined
by them in good faith after consultation with outside counsel), the Board of
Directors of the Company may, at any time prior to the Effective Time, withdraw
or modify its approval or recommendation to the Company's stockholders of the
Merger and this Agreement.
(b) In connection with the Merger, the Company shall
prepare a proxy statement pursuant to Regulation 14A under the Exchange Act or,
if applicable law and regulations of the New York Stock Exchange do not so
require, an information statement pursuant to Regulation 14C under the Exchange
Act, file such proxy statement and/or information statement with the SEC under
the Exchange Act as promptly as practicable and use all reasonable efforts to
have such proxy statement and/or information statement cleared by the SEC. If
requested by Parent, the Company will include in such proxy and/or information
statement a proposal (the "Series B Proposal") to the effect that the Surviving
Corporation's Certificate of Incorporation be amended, promptly following the
later of (i) consummation of the Merger or (ii) the vote of the Series B
Preferred stockholders upon such proposal (such later date being hereinafter
referred to as the "Outside Date"), to provide that the Scheduled Automatic
Conversion Date of the Series B Preferred be changed from December 14, 1995 to
a date specified by Parent within ten business days following the Outside Date.
Parent, Merger Sub and the Company shall cooperate with each other in the
preparation of the proxy statement and/or information statement, and the
Company shall notify Parent of the receipt of any comments of the SEC with
respect to the proxy statement and/or information statement and of any requests
by the SEC for any amendment or supplement thereto or for additional
information and shall provide to Parent promptly copies of all correspondence
between the Company or any representative of the Company and the SEC. The
Company shall give Parent and its counsel the opportunity to review the proxy
statement and/or information statement prior to its being filed with the SEC
and shall give Parent and its counsel the opportunity to review all amendments
and supplements to the proxy statement and/or information statement and all
responses to requests for additional information and replies to comments prior
to their being filed with, or sent to, the SEC. Each of the Company, Parent
and Merger Sub agrees to use its reasonable best efforts, after consultation
with the other parties hereto to respond promptly to all such comments of and
requests by the SEC. As promptly as practicable after the proxy statement
and/or information statement has been cleared by the SEC, the Company shall
mail
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the proxy statement and/or information statement to the stockholders of the
Company. The Company agrees that the proxy statement and/or information
statement and each amendment or supplement thereto at the time of mailing
thereof and (if applicable) at the time of the meeting of the stockholders of
the Company, will not include any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made,
not misleading; provided, however, that the foregoing shall not apply to the
extent that any such untrue statement of a material fact or omission to state a
material fact was made by the Company in reliance upon and in conformity with
written information furnished to the Company by Parent or Merger Sub
specifically for use in the proxy statement and/or information statement.
Parent and Merger Sub agree that the written information concerning Parent and
Merger Sub provided by them for inclusion in the proxy statement and/or
information statement and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the meeting of stockholders of the Company,
will not include an untrue statement of a material fact or omit to state a
material fact to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. No
amendment or supplement to the proxy statement and/or information statement
will be made by the Company without the approval of the Parent.
7.4 FILINGS; OTHER ACTION.
(a) Subject to the terms and conditions herein provided,
the Company and Parent shall: (i) promptly make their respective filings and
thereafter make any other required submissions under the HSR Act with respect
to the Merger; (ii) use all reasonable efforts to cooperate with one another in
(1) promptly determining which filings are required to be made prior to the
Effective Time with, and which consents, approvals, permits or authorizations
are required to be obtained prior to the Effective Time from, governmental or
regulatory authorities of the United States, the several states and foreign
jurisdictions in connection with the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby and (2) timely
making all such filings and timely seeking all such consents, approvals,
permits or authorizations; and (iii) use all reasonable efforts to take, or
cause to be taken, all other action and to do, or cause to be done, all other
things necessary, proper or appropriate to promptly consummate and make
effective the transactions contemplated by this Agreement. Each of Parent and
the Company will use all reasonable efforts to resolve such objections, if any,
as may be asserted with respect to the Merger under the HSR Act or other
antitrust laws. If, at any time after the Effective Time, any further action
is necessary or desirable to carry out the purpose of this Agreement, the
proper officers and directors of Parent and the Company shall take all such
necessary action.
(b) Prior to the Effective Time, the Company shall sell,
assign or otherwise transfer any interest of the Company or any Subsidiary or
affiliate thereof in the power generation facilities located at Chinese
Station, California to a third party not affiliated with the Company or Buyers
on terms which would not have a Material Adverse Effect.
7.5 INSPECTION OF RECORDS; ACCESS. From the date hereof to the
Effective Time, the Company shall allow all designated officers, attorneys,
accountants and other representatives or agents of Parent ("Parent's
Representatives") access at all reasonable times to all employees,
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offices, warehouses, and other facilities and to the records and files,
correspondence, audits and properties (whether owned or leased, or as to which
an easement in favor of the Company exists), as well as to all information
relating to commitments, contracts, titles and financial position, or otherwise
pertaining to the business and affairs, of the Company and its Subsidiaries
including, without limitation, access to all properties of the Company (whether
owned or leased, or as to which an easement in favor of the Company exists) to
conduct such reasonable investigation of the business and properties of the
Company and its Subsidiaries as Parent deems appropriate; provided, however,
Parent's Representatives shall use reasonable efforts to avoid interfering
with, hindering or otherwise disrupting the employees of the Company in the
execution of their employment duties during any visit to, or inspection of, the
Company's facilities. Parent agrees that any written report regarding any such
environmental investigation shall be confidential and shall not be provided to
any third party, including any governmental authority, without the prior
written consent of the Company. Parent agrees to promptly provide the Company
with a copy of any such written environmental report.
7.6 PUBLICITY. Parent, the Company, Santa Fe and Prudential
shall, subject to their respective legal obligations (including requirements of
stock exchanges and other similar regulatory bodies), agree upon the text of
any press release relating to this Agreement or the transactions contemplated
hereby before issuing any such press release or otherwise making public
statements with respect to the transactions contemplated hereby and in making
any filings with any federal or state governmental or regulatory agency or with
any national securities exchange with respect thereto.
7.7 FURTHER ACTION. Each party hereto shall, subject to the
fulfillment at or before the Effective Time of each of the conditions to
performance set forth herein or the waiver thereof, perform such further acts
and execute such documents as may be reasonably required to effect the Merger
and the other transactions contemplated hereby.
7.8 EXPENSES. Except as set forth in Section 9.3(b) (under the
circumstances therein contemplated), whether or not the Merger is consummated,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses; provided, however, that if the Merger is consummated and the Merger
Expenses (as defined below) exceed $3,250,000, then (a) the amount of such
excess shall be reimbursed to the Surviving Corporation by Prudential on or
before ten days after the receipt by Prudential of a written request therefor
from the Surviving Corporation accompanied by documentation in reasonable
detail evidencing the total amount of expenses incurred, including such excess;
provided, however, in no event shall the amount required to be paid by
Prudential pursuant to this sub-clause (a) exceed $250,000; and (b) the amount
by which the Merger Expenses exceed $3,500,000 shall be reimbursed to the
Surviving Corporation by Santa Fe on or before ten days after the receipt by
Santa Fe of a written request therefor from the Surviving Corporation
accompanied by documentation in reasonable detail evidencing the total amount
of Merger Expenses, including such excess; and provided further, however, that
if the Securities Purchase Agreement among Parent, Merger Sub and Santa Fe is
terminated by Santa Fe pursuant to Section 7.2(d) thereof, the Company shall
reimburse Parent and Merger Sub for Parent's out-of-pocket expenses incurred in
connection with this Agreement and the transaction contemplated hereby, such
reimbursement not to exceed $1,500,000. Upon the reasonable request of
Prudential or Santa Fe, the Surviving Corporation shall provide additional
documentation to
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verify the accuracy of the information furnished to such party regarding the
expenses incurred by the Company or the Surviving Corporation. As used in this
Section 7.8, "Merger Expenses" shall mean the Option Cash-Out Amount, all
amounts due from the Company to Vinson & Elkins L.L.P., Akin, Gump, Strauss,
Hauer & Feld, L.L.P., Morris Nichols Arsht & Tunnel and Morris, James, Hitchens
& Williams for services rendered in connection with the Merger and the Lawsuit,
amounts due from the Company to S.G. Warburg & Co. Inc. for services rendered
in connection with the Merger (not to exceed $1,250,000 plus expenses), amounts
due from the Company to Dillon, Read & Co. Inc. for services rendered in
connection with the Merger (not to exceed $1,150,000), amounts due Elliot
Associates L.P. for services rendered in connection with the Merger (not to
exceed $75,000), amounts due in settlement of the Lawsuit and printing and
mailing costs and expenses incurred in connection with the Merger.
7.9 INDEMNIFICATION.
(a) Parent shall cause the Surviving Corporation to
indemnify each of the present and former officers, directors, employees and
agents of the Company and its Subsidiaries (the "Indemnified Parties") with
respect to his service in any such capacity or service at the request of the
Company or any of its Subsidiaries as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise in
regard to any matter, including the transactions contemplated hereby, occurring
at or prior to the Effective Time to the full extent permitted by the DGCL, the
Company's Certificate of Incorporation or Bylaws or indemnification agreements,
or the certificate of incorporation or bylaws of such Subsidiary, in each case
as in effect as of the date of this Agreement. Neither Parent nor the
Surviving Corporation shall amend such indemnification provisions currently
contained in the certificates of incorporation and bylaws of the Company and
its Subsidiaries (except as required by applicable law) if the amendments
effected thereby would diminish the Indemnified Parties' right of
indemnification.
(b) Parent shall cause the Surviving Corporation to use
its best efforts to cause to be maintained in effect for six years from the
later of the Effective Time or the expiration of the current policy (such later
date being herein referred to as the "Commencement Date"), the current policies
of directors' and officers' liability insurance maintained by the Company and
its Subsidiaries with respect to all matters, including the transactions
contemplated hereby, occurring prior to or at the Effective Time; provided,
however, the Surviving Corporation may substitute therefor policies of at least
the same coverage containing terms and conditions which are no less
advantageous to the insured officers and directors so long as no lapse in
coverage occurs as a result of such substitution; and provided further,
however, that, effective on the third anniversary of the Effective Time (or at
any time thereafter), the Surviving Corporation may substitute for such
policies an indemnity from Parent providing coverage no less advantageous to
the insured officers and directors so long as no lapse in coverage occurs as a
result of such substitution; if such substitution of an indemnity is effected,
the Surviving Corporation will provide to each such insured officer or director
so requesting a contract from Parent evidencing such indemnity.
(c) This Section 7.9 shall survive the closing of the
transactions contemplated hereby, is intended to benefit the Company and each
of the Indemnified Parties (each of whom shall be entitled to enforce this
Section 7.9 against the Surviving Corporation and Parent) and
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shall be binding on all successors and assigns of the Surviving Corporation and
Parent. If the Surviving Corporation or the Parent or any of their respective
successors or assigns (i) consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers all or substantially all of its
properties and assets to any person, then, and in each such case, proper
provisions shall be made so that the successors and assigns of Surviving
Corporation and/or Parent assume the obligations set forth in this Section 7.9.
7.10 CERTAIN BENEFITS.
(a) From and after the Effective Time, subject to
applicable law, Parent and Subsidiaries will honor in accordance with their
terms, all Company Benefit Plans; provided, however, that nothing herein shall
preclude any change effected on a prospective basis in any Company Benefit
Plan.
(b) The Surviving Corporation shall employ at the
Effective Time all employees of the Company and its Subsidiaries who are
employed on the Closing Date on terms consistent with the Company's current
employment practices and at comparable levels of compensation and positions.
Such employment shall be at will and Parent and the Surviving Corporation shall
be under no obligation to continue to employ any individuals.
7.11 SETTLEMENT OF LITIGATION. The parties hereto agree to use all
commercially reasonable efforts (a) to enter into a memorandum of understanding
or other appropriate agreement in a form and on terms reasonably acceptable to
the parties hereto, Prudential and Santa Fe (the "Memorandum of Understanding")
settling the lawsuit styled as Engel v. Hadson Corporation, et al., Civil
Action No. 13934 (the "Lawsuit"), pending in the Court of Chancery of the State
of Delaware in and for New Castle County (the "Court") and providing for, among
other things, (i) the approval by the litigants of the consideration to be paid
to holders of Common Stock pursuant to Section 4.1(b) hereof, (ii) payment of
fees and expenses of plaintiff's counsel and (iii) a release of each of the
defendants named therein, Parent, the Company, Santa Fe and Prudential and
their respective officers, directors, agents, employees and affiliates from any
and all claims by stockholders of the Company with respect to the Merger (the
"Settlement"), (b) as soon as practicable after the Memorandum of Understanding
is entered into, to cause (i) the stipulation of settlement or other
appropriate document having such effect contemplated by the Memorandum of
Understanding (which shall be in a form reasonably acceptable to the parties
hereto, Santa Fe and Prudential) to be filed in the Court, (ii) the Court to
certify the Lawsuit as a class action the members of which shall be all holders
of Common Stock (other than Santa Fe and Prudential), and in connection with
which the members of the class do not have the right to opt out or otherwise
elect not to participate in the Settlement and (iii) the Settlement to become
final and non-appealable.
7.12 NO AMENDMENT. Without the express written consent of the
Company, Parent and Merger Sub agree not to amend or modify either of the
Securities Purchase Agreements in any respect.
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7.13 PAYMENT OF CERTAIN INDEBTEDNESS. Immediately prior to the
Effective Time, the Company shall pay to Prudential, as holder of the Company's
$56,400,000 original aggregate principal amount of 8% Senior Secured Notes due
2003 (the "8% Senior Secured Notes"), all interest accrued 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 Effective Time shall occur.
ARTICLE VIII
CONDITIONS
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligation of each party to effect the Merger shall be subject
to the fulfillment at or prior to the Closing Date of the following conditions:
(a) The waiting period applicable to the consummation of
the Merger under the HSR Act shall have expired or been terminated.
(b) Neither of the parties hereto shall be subject to any
order or injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement.
(c) The Board of Directors of the Company shall have
received from Dillon, Read & Co. Inc. confirmation, as of the date of the proxy
or information statement relating to the Merger, of its opinion described in
Section 5.18.
(d) This Agreement and the Merger shall have been
approved by the stockholders of the Company in accordance with the DGCL and the
Company's Restated Certificate of Incorporation and By-laws.
(e) The Lawsuit shall have been certified as a class
action as provided for in Section 7.11 hereof, the members of which shall not
have opt out rights or the right to otherwise elect not to participate therein,
and the Settlement shall have been approved and become final and
non-appealable.
8.2 CONDITION TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER.
The obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following condition:
(a) Parent and Merger Sub shall have performed in all
material respects their respective agreements contained in this Agreement
required to be performed on or prior to the Closing Date and the
representations and warranties of Parent and Merger Sub contained in this
Agreement shall be true and correct as of the date of this Agreement and
(unless made as of a specified date) as of the Closing Date, with the same
force and effect as if made at, and effective as of, such date; and the Company
shall have received a certificate of the President or a Vice President of
Parent and Merger Sub, dated the Closing Date, certifying to such effect.
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(b) The Company shall have received from Gardner Carton &
Douglas, counsel to Parent and Merger Sub, an opinion covering the matters set
forth on Exhibit A hereto.
8.3 CONDITIONS TO OBLIGATION OF PARENT AND MERGER SUB TO EFFECT
THE MERGER. The obligations of Parent and Merger Sub to effect the Merger
shall be subject to the fulfillment at or prior to the Closing Date of the
following conditions:
(a) The Company shall have performed in all material
respects its agreements contained in this Agreement required to be performed on
or prior to the Closing Date and the representations and warranties of the
Company contained in this Agreement shall be true and correct as of the date of
this Agreement and (unless made as of a specified date) as of the Closing Date,
with the same force and effect as if made at, and effective as of, such date
(provided, however, in addition, that each representation and warranty in
Section 5.12, Section 5.14(d), (e), (f), (g), (h), (i) and (k), Section 5.16,
Section 5.17, Section 5.20, Section 5.22 or Section 5.23 shall be deemed to be
untrue or incorrect as of either such date only to the extent that the
inaccuracies of such representation and warranty would reasonably be expected
to have a Material Adverse Effect), and Parent shall have received a
certificate of the Company, dated the Closing Date, certifying to all of the
foregoing.
(b) All necessary governmental and third party consents
required in connection with the transactions contemplated by this Agreement
shall have been obtained and there shall be no action, suit or proceeding
pending or threatened against the Company, the Parent or any of their
subsidiaries which would reasonably be expected to prevent or delay the
transactions contemplated by this Agreement or either of the Securities
Purchase Agreements or result in material damages in connection herewith or
therewith.
(c) Parent and Merger Sub shall have entered into the
Securities Purchase Agreements and all conditions to the obligations of Parent
and Merger Sub to close the transactions contemplated thereby shall have been
satisfied or waived.
(d) Parent and Merger Sub shall have received from Akin,
Gump, Strauss, Hauer & Feld, L.L.P., counsel to the Company, an opinion
covering the matters set forth on Exhibit B hereto.
(e) On the date of commencement of mailing to the
Company's stockholders of the proxy or information statement with respect to
the Merger and immediately prior to the Effective Time, Parent and Merger Sub
shall have received a letter customary in form and substance in transactions of
this type, dated the date of such mailing and the date of the Effective Time,
respectively, and reasonably satisfactory to them, from Price Waterhouse,
independent public accountants for the Company, in connection with such
accountants' review of certain financial matters regarding the Company and its
Subsidiaries contained in such proxy or information statement.
(f) All Company Options shall have been cancelled and
terminated by the Compensation Committee of the Board of Directors of the
Company.
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(g) Except as disclosed in the Company Reports filed with
the SEC prior to the date of this Agreement or in the Company Disclosure
Letter, since December 31, 1993, there shall not have occurred any event or
change with respect to the Company and its Subsidiaries having or which would
be reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect.
ARTICLE IX
TERMINATION
9.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time by the mutual written consent of Parent and the Company.
9.2 TERMINATION BY EITHER PARENT OR THE COMPANY. This Agreement
may be terminated and the Merger may be abandoned by Parent or the Company if
(a) all conditions to consummation of the Merger shall not have been satisfied
or waived and the Merger shall not have been consummated by June 30, 1995, or
(b) a United States federal or state court of competent jurisdiction or United
States federal or state governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any other
action permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement and such order, decree, ruling or
other action shall have become final and non-appealable; provided, that the
party seeking to terminate this Agreement pursuant to clause (b) of this
Section 9.2 shall have used all reasonable efforts required by this Agreement
to remove such injunction, order or decree.
9.3 TERMINATION BY THE COMPANY.
(a) This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Time by the Company, if there
has been a breach by Parent or Merger Sub of any representation or warranty
contained in this Agreement which would have a Parent Material Adverse Effect.
(b) In addition, this Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time by the Company
if, in the judgment of the Committee, such action may be required for the Board
of Directors to comply with its fiduciary duties to the Company and its
stockholders; provided, however, if such action is taken by the Company, the
Company shall pay to Parent $1,500,000 as reimbursement to Parent for Parent's
expenses incurred in connection with the transactions contemplated by this
Agreement (for which Parent shall not be required to account); and provided
further, however, that if, following such action, the Company shall consummate
any transaction pursuant to a Takeover Proposal (i) within 15 months following
the date of this Agreement or (ii) thereafter pursuant to a definitive
agreement executed by the Company during such 15-month period, the Company
shall also pay to Parent $3,500,000 promptly upon the occurrence of such
transaction.
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9.4 TERMINATION BY PARENT. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time by the
Parent, if there is any inaccuracy in any representation or warranty of the
Company contained in this Agreement which would reasonably be expected to have
a Material Adverse Effect.
9.5 AUTOMATIC TERMINATION. This Agreement shall terminate
automatically upon any termination of the Securities Purchase Agreement among
Parent, Merger Sub and Santa Fe pursuant to Section 7.2(d) thereof.
9.6 EFFECT OF TERMINATION AND ABANDONMENT. In the event of
termination of this Agreement and the abandonment of the Merger pursuant to
this Article 9, all obligations of the parties hereto shall terminate, except
the obligations of the parties pursuant to this Section 9.6, Sections 7.8 and
9.3(b), the last two sentences of Section 7.5 and the Confidentiality Agreement
referred to in Section 10.4. Moreover, in the event of termination of this
Agreement, nothing herein shall prejudice the ability of the non-breaching
party from seeking damages from any other party for any breach of this
Agreement, including without limitation, attorneys' fees and the right to
pursue any remedy at law or in equity.
9.7 EXTENSION; WAIVER. At any time prior to the Effective Time,
any party hereto may, to the extent legally allowed, (a) extend the time for
the performance of any of the obligations or other acts of the other parties
hereto, (b) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto and
(c) waive compliance with any of the agreements or conditions for the benefit
of such party contained herein. Any agreements on the part of a party hereto
to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by or on behalf of the party granting such
extension or waiver.
ARTICLE X
GENERAL PROVISIONS
10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; CONSEQUENCES OF
INACCURACY. Unless this Agreement has previously been terminated pursuant to
Article IX, the representations and warranties and covenants made in this
Agreement shall terminate at the Closing, except that any covenant herein which
by its terms contemplates performance after the Closing Date shall survive the
Closing Date for the period contemplated thereby. Prior to Closing, inaccuracy
of a representation or warranty made in this Agreement shall serve as a basis
for monetary liability of any party to this Agreement to another only if made
with actual knowledge of such inaccuracy and only to the extent that such
inaccuracy would reasonably be expected to have a Material Adverse Effect (in
the case of a representation or warranty of the Company) or Parent Material
Adverse Effect (in the case of a representation or warranty of Parent or Merger
Sub); otherwise, inaccuracy of a representation or warranty shall serve only as
a basis for termination of the Agreement or refusal to close in accordance with
Sections 9.3(a), 9.4, 8.2(a) or 8.3(a).
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10.2 NOTICES. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
<TABLE>
<S> <C>
If to the Company: If to Parent or Merger Sub:
Hadson Corporation LG&E Energy Corp.
2777 Stemmons Freeway 220 West Main Street
Suite 700 P.O. Box 32030
Dallas, Texas 75207 Louisville, Kentucky 40202
Attention: President Attention: President
Fax: (214) 640-6932 Fax: (502) 627-2995
With a copy to: With a copy to
Hadson Corporation LG&E Energy Corp.
2777 Stemmons Freeway 220 West Main Street
Suite 700 P.O. Box 32030
Dallas, Texas 75207 Louisville, Kentucky 40202
Attention: General Counsel Attention: General Counsel
Fax: (214) 640-6801 Fax: (502) 627-2585
</TABLE>
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
10.3 ASSIGNMENT; BINDING EFFECT; BENEFIT. Neither this Agreement
nor any of the rights interests or obligations hereunder shall be assigned by
any of the parties hereto (whether by operation of law or otherwise) without
the prior written consent of the other parties and any purported assignment
without such prior written consent of the other parties shall be void;
provided, however, that Parent may assign this Agreement to any of its
subsidiaries or affiliates whether or not such subsidiaries or affiliates exist
at the date hereof; provided, further, that no such assignment shall relieve
Parent of any of its obligations hereunder. Subject to the preceding sentence,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
Notwithstanding anything contained in this Agreement to the contrary, except
for the provisions of Section 7.8 or 7.9, which are expressly intended to be
enforceable by the beneficiaries thereof, nothing in this Agreement, expressed
or implied, is intended to confer on any person other than the parties hereto
or their respective heirs, successors, executors, administrators and assigns
any rights, remedies, obligations or liabilities under or by reason of this
Agreement.
10.4 ENTIRE AGREEMENT. This Agreement, the Company Disclosure
Letter, the Securities Purchase Agreements and the Confidentiality Agreement
dated December 28, 1994, between the Company and Parent constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings (oral and written) among the
parties with respect thereto. No addition to or modification of any provision
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of this Agreement shall be binding upon any party hereto unless made in writing
and signed by all parities hereto.
10.5 AMENDMENT. This Agreement may be amended by the parties
hereto only by an instrument in writing signed by or on behalf of each of the
parties hereto.
10.6 GOVERNING LAW; CHOICE OF FORUM.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules
of conflict of laws.
(b) Each of the parties hereto irrevocably (i) agrees
that any legal suit, action or proceeding brought by any of the parties hereto
against another arising out of or based upon this Agreement or the transaction
contemplated hereby may be instituted in any state or federal court located in
the State of Delaware, (ii) waives, to the fullest extent it may effectively do
so, any objection which it may now or hereafter have to the laying of venue of
any such proceeding and (iii) submits to the exclusive jurisdiction of such
courts in any such suit, action or proceeding.
10.7 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies of
this Agreement, each of which may be signed by less than all of the parties
hereto, but together all such copies are signed by all of the parties hereto.
10.8 HEADINGS. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
10.9 INTERPRETATION. In this Agreement, unless the context
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and partnerships
and vice versa.
10.10 WAIVERS. Except as provided in this Agreement, no action
taken pursuant to this Agreement, including, without limitation, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any
other provisions hereunder.
10.11 SEVERABILITY. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or otherwise affecting the validity or enforceability of any of the
terms or provisions of this Agreement in any other jurisdiction. If any
provisions of this
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Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
IN WITNESS WHEREOF, the parties have executed this Agreement and
caused the same to be duly delivered on their behalf as of the day and year
first written above.
LG&E ENERGY CORP.
By: /s/ EDWARD J. CASEY, JR.
__________________________________
Name: Edward J. Casey, Jr.
Title: Group President, LG&E Energy
Services, LG&E Energy Corp.
CAROUSEL ACQUISITION CORPORATION
By: /s/ EDWARD J. CASEY, JR.
__________________________________
Name: Edward J. Casey, Jr.
Title: President
HADSON CORPORATION
By: /s/ GREG G. JENKINS
__________________________________
Name: Greg G. Jenkins
Title: President and Chief Executive
Officer
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EXHIBIT A
The opinion of Gardner, Carton & Douglas, counsel to Parent and Merger
Sub shall be substantially to the following effects:
1. Each of Parent and Merger Sub is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation. Each of Parent and Merger Sub is duly licensed
or qualified to do business as a foreign corporation and is in good standing
under the laws of each other state of the United States in which the character
of the properties owned or leased by it therein or in which the transaction of
its business makes such qualification necessary, except where the failure to be
so licensed or qualified or be in good standing would not have a material
adverse effect on the ability of Parent or Merger Sub to perform its respective
obligations under the Merger Agreement (a "Parent Material Adverse Effect").
Parent has all requisite corporate power and authority to own, operate and
lease its properties and carry on its business as now conducted. Merger Sub
was incorporated on January 30, 1995, and, to such counsel's knowledge, since
its incorporation Merger Sub has not conducted any business activities except
in connection with the transactions contemplated in this Agreement.
2. Each of Parent and Merger Sub has the requisite corporate
power and authority to execute and deliver the Merger Agreement and all
agreements and documents contemplated thereby, and the consummation by Parent
and Merger Sub of the transactions contemplated thereby has been duly
authorized by all requisite corporate action. The Merger Agreement
constitutes, and all agreements and documents contemplated thereby (when
executed and delivered pursuant thereto for value received) will constitute,
the valid and legally binding obligations of Parent and Merger Sub, enforceable
against each of them in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
3. Neither the execution and delivery by Parent and Merger Sub of
the Merger Agreement, nor the consummation by Parent and Merger Sub of the
transactions contemplated thereby in accordance with the terms thereof, will:
(1) result in a breach of any provisions of the Certificate of Incorporation or
By-laws of Parent or Merger Sub; (2) violate or result in a breach of any
provisions of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the
termination or in a right of termination or cancellation of, or accelerate the
performance required by, or give rise to any payments or compensation under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties of Parent or Merger Sub under, or result in being
declared void, voidable, or without further binding effect, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust
or any material license, franchise, permit, lease, contract, agreement or other
instrument, commitment or obligation to which Parent or Merger Sub is a party,
or by which Parent or Merger Sub or any of their properties is bound or
affected, except for any of the foregoing matters which would not, individually
or in the aggregate, have a Parent Material Adverse Effect and will not impose
any liability on the Company; (3) violate any order, writ, injunction, decree,
law, statute, rule or regulation applicable to Parent or Merger Sub or any of
their respective property or assets of which were are aware (after consultation
with Parent's General Counsel), except for violations which would not
individually or in the aggregate, have a Parent Material Adverse Effect; or
<PAGE> 135
(4) based upon the representation and warranty of the Company made in Section
5.19 and compliance by the Company with Section 7.4, require any consent,
approval or authorization of, or declaration, filing or registration with, any
domestic governmental or regulatory authority (other than the Regulatory
Filings), or any other person or entity, the failure to obtain or make which
would have, individually or in the aggregate, a Parent Material Adverse Effect.
<PAGE> 136
EXHIBIT B
The opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., special
counsel to the Company, shall be substantially to the following effects:
1. The Company is a corporation, duly incorporated, validly
existing and in good standing under the laws of the State of Delaware. The
Company is duly licensed or qualified to do business as a foreign corporation
and is in good standing under the laws of each other state of the United States
in which the character of the properties owned or leased by it therein or in
which the transaction of its business makes such qualification necessary
[relying as to factual matters in support thereof solely upon an Officer's
Certificate of the Company], except where the failure to be so licensed or
qualified or be in good standing would not reasonably be expected to have a
Material Adverse Effect. The Company has all requisite corporate power and
authority to own, operate and lease its properties and carry on its business as
now conducted.
2. The Company has the requisite corporate power and authority to
execute and deliver the Merger Agreement and all agreements and documents
contemplated thereby. The Company Board Approval as well as all approvals of
the stockholders of the Company required under the DGCL, the charter and bylaws
of the Company and the Merger Agreement have been duly obtained and remain in
full force and effect and constitute all requisite corporate action on the part
of the Company necessary for the consummation by the Company of the
transactions contemplated by the Merger Agreement. The Merger Agreement
constitutes the valid and legally binding obligation of the Company. The
Company Board Approval constitutes all necessary action to approve the
transactions contemplated by the Merger Agreement and the Securities Purchase
Agreements pursuant to Section 203(a) of the DGCL.
3. The authorized capital stock of the Company is as set forth in
Section 5.4 of the Merger Agreement.
4. Each of Hadson Gas Systems, Inc. ("Gas Systems"); Llano, Inc.
("Llano"); Minerals, Inc. ("Minerals"); Western Natural Gas and Transmission
Corporation ("Western"); Hadson Gas Co. ("Gas Co."); Hadson Gas Marketing Co.
("Gas Marketing") and Hadson Gas Gathering & Processing Co. ("Hadson Gas
Processing") is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation, has the corporate
power and authority to own its properties and to carry on its business as it is
now being conducted, and is duly licensed or qualified to do business as a
foreign corporation and is in good standing under the laws of each other state
of the United States in which the character of the properties owned or leased
by it therein or in which the transaction of its business makes such
qualification necessary [relying as to factual matters in support thereof
solely upon an Officer's Certificate from each of such companies], except where
the failure to be so licensed or qualified would not reasonably be expected to
have a Material Adverse Effect. To the Opinion Giver's Knowledge, all of the
outstanding stock of Gas Systems, Llano, Minerals, Western Gas Co., Gas
Marketing and Hadson Gas Processing is owned directly or indirectly by the
Company free and clear of all liens, pledges, security interests, claims or
other encumbrances.
<PAGE> 137
5. Neither the execution and delivery by the Company of the
Merger Agreement nor the consummation by the Company of the Merger Agreement in
accordance with its terms:
a. contravenes or results in a breach of any provision of the
certificate of incorporation or by-laws (or similar governing
documents) of the Company;
b. violates, or constitutes a default under, or permits the
termination of, any agreement, contract, lease or other
commitment of the Company filed as an Exhibit to any Company
Report filed by the Company with the SEC after December 31,
1993, other than as set forth in the Disclosure Letter or as
set forth in Schedule 1 [to be attached to this opinion at the
time of delivery].
c. to the Opinion Giver's Knowledge, violates any order, writ,
injunction, decree, law, statute, rule or regulation
applicable to the Company or any of its properties or assets,
except for violations which would not reasonably be expected
to have a Material Adverse Effect or to prevent or delay
consummation of the transactions contemplated by the Merger
Agreement.
d. other than the filings provided for in Article I of the Merger
Agreement and filings required under the HSR Act or the
Exchange Act (collectively the "Regulatory Filings"), require
any consent, approval or authorization of, or declaration,
filing or registration with, any domestic, governmental or
regulatory authority, or any other person or entity, which has
not been obtained or made except for those the failure to
obtain or make would not reasonably be expected to have a
Material Adverse Effect or prevent or delay consummation of
the transactions contemplated by the Merger Agreement.
6. To the Opinion Giver's Knowledge, there is no litigation,
proceeding or governmental investigation pending or threatened against or
relating to the Company, any of its subsidiaries or any of their respective
properties which questions the validity of, or seeks damages in connection
with, the Merger Agreement or, except as set forth in the Disclosure Letter,
which, if determined adversely to the Company or its subsidiaries, would result
in a Material Adverse Effect on the Company.
7. The Company is not (a) an "investment company" or, to the
Opinion Giver's Knowledge, a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, or (b) a
"holding company" or, to the Opinion Giver's Knowledge, a "subsidiary company"
of a "holding company" or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
2
<PAGE> 138
8. The statements in the definitive Proxy Statement or
Information Statement delivered to the stockholders of the Company in
connection with the Merger under the caption "Merger Agreement" [or other
caption employed under which the Merger Agreement and the transactions
contemplated thereby are summarized or described], insofar as such statements
purport to summarize the provisions of the Merger Agreement and the
transactions contemplated thereby , fairly summarize or describe such
provisions of the Merger Agreement in all material respects.
3
<PAGE> 139
EXHIBIT B
Dillon, Read & Co. Inc.
2001 Ross Avenue
Suite 3950
Dallas, Texas 75201
214-969-4000
February 9, 1995
Special Committee of the Board of Directors
Hadson Corporation
2777 Stemmons Freeway, Suite 700
Dallas, Texas 75207
Gentlemen:
You have requested our opinion as to the fairness from a financial
point of view to the holders (the "Public Shareholders") of the outstanding
common stock of Hadson Corporation, a Delaware corporation (the "Company"),
other than the shares of common stock held by The Prudential Insurance Company
of America and certain of its affiliates (collectively "Prudential") or Santa
Fe Energy Resources, Inc., a Delaware corporation ("Santa Fe"), of the
consideration to be received by them pursuant to the proposed merger ("Merger")
of a wholly-owned subsidiary (the "Merger Sub") of LG&E Energy Corp., a
Kentucky corporation ("LG&E") with and into the Company. We understand that
the Merger is to be effected pursuant to a Merger Agreement (the "Merger
Agreement") dated as of February 10, 1995 among LG&E, the Merger Sub and the
Company and that simultaneous with the execution of the Merger Agreement,
Prudential and Santa Fe are entering into securities purchase agreements (the
"Securities Purchase Agreements") with LG&E pursuant to which they will sell to
LG&E all of the securities of the Company they own.
The Securities Purchase Agreements provide that Prudential and Santa
Fe will receive from LG&E the amounts in cash reflected in the Securities
Purchase Agreements in exchange for all of their collective holdings of
securities of the Company. The securities covered by the Securities Purchase
Agreements include all long-term debt, Series A Preferred Stock, Series B
Preferred Stock and common stock of the Company held by Prudential and Santa
Fe. Upon execution of the Securities Purchase Agreements, Prudential and Santa
Fe agree, subject to certain conditions, to vote their aggregate holdings
(approximately 65%) of common stock of the Company in favor of the Merger. In
addition, upon consummation of the Merger, the Public Shareholders will receive
in cash $2.75 per share.
Dillon, Read & Co. Inc. is acting as financial advisor to the Special
Committee of the Board of Directors of the Company in connection with, among
other things, the Merger.
In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and financial information relating to the
Company; (ii) reviewed and analyzed certain financial forecasts and other data
provided to us by the Company relating to the business,
<PAGE> 140
financial condition, operations and prospects of the Company; (iii) conducted
discussions with members of the senior management of the Company with respect
to the business, financial condition, operations and prospects of the Company;
(iv) reviewed and analyzed certain publicly available information including
financial information and stock market data with respect to certain other
companies in lines of business we believe to be generally comparable to those
of the Company; (v) reviewed the historical market prices and trading volumes
of the shares of common stock of the Company; (vi) reviewed and analyzed
certain financial terms of the Merger with the financial terms of certain other
mergers and acquisitions which we believe to be generally comparable; (vii)
reviewed and analyzed the historical premiums paid to minority shareholders in
certain other mergers and acquisitions; and (viii) conducted such other
financial studies, analyses and investigations, and considered such other
information, as we deemed necessary or appropriate.
In connection with our review, we have not independently verified any
of the foregoing information and have, with your consent, relied on it being
complete and accurate in all material respects. In addition, we have not made
any independent evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise) of the Company, nor have we been furnished with any
such evaluation or appraisal. With respect to the financial forecasts referred
to above, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
Company's management as to the Company's future financial performance.
Further, our opinion is based on economic, monetary and market conditions
existing on the date hereof.
Dillon Read has performed investment banking services for the Company
and Santa Fe, for which we received customary fees. In addition, in the
ordinary course of business, we have traded the debt and equity securities of
the Company, Santa Fe and LG&E for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities, and may engage in business transactions on an ongoing basis
with Prudential.
Based upon and subject to the foregoing, we are of the opinion that
the consideration to be received in the Merger by the Public Shareholders is
fair to the Public Shareholders from a financial point of view as of the date
hereof.
Very truly yours,
/s/ Dillon, Read & Co. Inc.
Dillon, Read & Co. Inc.
<PAGE> 141
Dillon, Read & Co. Inc.
2001 Ross Avenue
Suite 3950
Dallas, Texas 75201
214-969-4000
April 21, 1995
Special Committee of the Board of Directors
Hadson Corporation
2777 Stemmons Freeway, Suite 700
Dallas, Texas 75207
Gentlemen:
You have requested our opinion as to the fairness from a financial
point of view to the holders (the "Public Shareholders") of the outstanding
common stock of Hadson Corporation, a Delaware corporation, (the "Company"),
other than the shares of common stock held by The Prudential Insurance Company
of America and certain of its affiliates (collectively "Prudential") or Santa
Fe Energy Resources, Inc., a Delaware corporation ("Santa Fe"), of the
consideration to be received by them pursuant to the proposed merger ("Merger")
of a wholly-owned subsidiary (the "Merger Sub") of LG&E Energy Corp., a
Kentucky corporation ("LG&E") with and into the Company. We understand that
the Merger is to be effected pursuant to a Merger Agreement (the "Merger
Agreement") dated as of February 10, 1995 among LG&E, the Merger Sub and the
Company and that simultaneous with the execution of the Merger Agreement,
Prudential and Santa Fe are entering into securities purchase agreements (the
"Securities Purchase Agreements") with LG&E pursuant to which they will sell to
LG&E all of the securities of the Company they own.
The Securities Purchase Agreements provide that Prudential and Santa
Fe will receive from LG&E the amounts in cash reflected in the Securities
Purchase Agreements in exchange for all of their collective holdings of
securities of the Company. The securities covered by the Securities Purchase
Agreements include all long-term debt, Series A Preferred Stock, Series B
Preferred Stock and common stock of the Company held by Prudential and Santa
Fe. Upon execution of the Securities Purchase Agreements, Prudential and Santa
Fe agree, subject to certain conditions, to vote their aggregate holdings
(approximately 65%) of common stock of the Company in favor of the Merger. In
addition, upon consummation of the Merger, the Public Shareholders will receive
in cash $2.75 per share.
Dillon, Read & Co. Inc. is acting as financial advisor to the Special
Committee of the Board of Directors of the Company in connection with, among
other things, the Merger.
In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and financial information relating to the
Company; (ii) reviewed and analyzed certain financial forecasts and other data
provided to us by the Company relating to the business, financial condition,
operations and prospects of the Company; (iii) conducted discussions with
<PAGE> 142
members of the senior management of the Company with respect to the business,
financial condition, operations and prospects of the Company; (iv) reviewed and
analyzed certain publicly available information including financial information
and stock market data with respect to certain other companies in lines of
business we believe to be generally comparable to those of the Company; (v)
reviewed the historical market prices and trading volumes of the shares of
common stock of the Company; (vi) reviewed and analyzed certain financial terms
of the Merger with the financial terms of certain other mergers and
acquisitions which we believe to be generally comparable; (vii) reviewed and
analyzed the historical premiums paid to minority shareholders in certain other
mergers and acquisitions; and (viii) conducted such other financial studies,
analyses and investigations, and considered such other information, as we
deemed necessary or appropriate.
In connection with our review, we have not independently verified any
of the foregoing information and have, with your consent, relied on it being
complete and accurate in all material respects. In addition, we have not made
any independent evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise) of the Company, nor have we been furnished with any
such evaluation or appraisal. With respect to the financial forecasts referred
to above, we have assumed that they been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
Company's management as to the Company's future financial performance.
Further, our opinion is based on economic, monetary and market conditions
existing on the date hereof.
Dillon Read has performed investment banking services for the Company
and Santa Fe, for which we received customary fees. In addition, in the
ordinary course of business, we have traded the debt and equity securities of
the Company, Santa Fe and LG&E for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities, and may engage in business transactions on an ongoing basis
with Prudential.
Based upon and subject to the foregoing, we are of the opinion that
the consideration to be received in the Merger by the Public Shareholders is
fair to the Public Shareholders from a financial point of view as of the date
hereof.
Very truly yours,
/s/ Dillon, Read & Co. Inc.
Dillon, Read & Co. Inc.
<PAGE> 143
EXHIBIT C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds
shares of Stock on the date of the making of a demand pursuant to subsection
(d) of this section with respect to such shares, who continuously holds such
shares through the effective date of the merger or consolidation, who has
otherwise complied with Subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consent thereto in writing
pursuant to sec. 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depositary.
(b) Appraisal rights shall be available for the shares of any
class or series of stock of a constituent corporation in a merger or
consolidation to be effective pursuant to sec. 251, 252, 254, 257, 258, 263 or
264 of this title:
(1) Provided, however, that no appraisal rights under
this section shall be available for the shares of any class or series
of stock, which stock, or depository receipts in respect thereof, at
the record date fixed to determine the stockholders entitled to
receive notice of and to vote at the meeting of stockholders to act
upon the agreement of merger or consolidation, were either (i) listed
on a national securities exchange or designated as a national market
system security on a interdealer quotation system by the National
Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights
shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the holders of the surviving corporation as
provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares
of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to secs. 251, 252, 254, 257, 258, 263 and 264
of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving
or resulting from such merger or consolidation, or depository
receipts in respect thereof;
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b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock
or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities
exchange or designated as a national market system security on
an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or
fractional depository receipts described in the foregoing
subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock,
depository receipts and cash in lieu of fractional shares or
fractional depository receipts described in the foregoing
subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary
Delaware corporation party to a merger effected under sec. 253 of
this title is not owned by the parent corporation immediately prior to
the merger, appraisal rights shall be available for the shares of the
subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be available for
the shares of any class or series of its stock as a result of an amendment to
its certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially
all of the assets of the corporation. If the certificate of incorporation
contains such a provision, the procedures of this section, including those set
forth in subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be submitted
for approval at a meeting of stockholders, the corporation, not less
than 20 days prior to the meeting, shall notify each of its
stockholders who was such on the record date for such meeting with
respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for
any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of his shares. A proxy or vote
against the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do so by a
separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection and has
not voted in favor of or consented to the merger or consolidation of
the date that the merger or consolidation has become effective; or
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<PAGE> 145
(2) If the merger or consolidation was approved pursuant
to sec. 228 or 253 of this title, the surviving or resulting
corporation, either before the effective date of the merger or
consolidation or within 10 days thereafter, shall notify each of the
stockholders entitled to appraisal rights of the effective date of the
merger or consolidation and that appraisal rights are available for
any or all of the shares of the constituent corporation, and shall
include in such notice a copy of this section. The notice shall be
sent by certified or registered mail, return receipt requested,
addressed to the stockholder at his address as it appears on the
records of the corporation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of the notice,
demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it
reasonable informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of
his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise entitled
to appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the requirements
of subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after this written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If the
petition shall be filed by the surviving or resulting corporation, the petition
shall be accompanied by such a duly verified list. The Register in Chancery,
if so ordered by the Court, shall give notice of the time and place fixed for
the hearing of such petition by registered or certified mail to the surviving
or resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
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<PAGE> 146
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal,
the Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger of consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to subsection
(f) of this section and who has submitted his certificates of stock to the
Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to appraisal
rights under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this state
or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal rights as provided
in subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
his demand for an appraisal and an acceptance of the merger
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<PAGE> 147
or consolidation, either within 60 days after the effective date of the merger
or consolidation as provided in subsection (e) of this section or thereafter
with the written approval of the corporation, then the right of such
stockholder to an appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which
the shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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<PAGE> 148
EXHIBIT D
GLOSSARY OF DEFINED TERMS
The following terms are defined in this information statement on the pages
indicated:
<TABLE>
<S> <C>
6.20% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8% Senior Secured Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
9% Junior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii)
1992 Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Adobe Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Adobe Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
AGPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Antitrust Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
BCF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Beck & Root . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii)
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii)
Carousel Gas Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Carousel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
CFFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Company Option Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Company Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Company Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Company Base Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Conversion Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
CST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
DGCL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Dillon Reed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
El Paso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Elliot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Engel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
EPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Equity Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Exchange Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Excluded Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
FERC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
FTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Gas Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Gas Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
H/P Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
H/P Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
HERC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
HGG&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Independent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Lawsuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
LDC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Llano . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Llano Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Low Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Low Case 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
D-1
<PAGE> 149
<TABLE>
<S> <C>
Market Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Memorandum of Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Merger Sub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Meyers-Reynolds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Minerals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
MMBTU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
New El Paso Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
NGA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
NGLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
NGPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
NYSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Old El Paso Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Order 436/500 Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Order 636 Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Parent Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Parker & Parsley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PDH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
PDH Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Power-Tex System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii)
Pruco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Prudential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Prudential Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Prudential Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Prudential Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Prudential Securities Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
PruSupply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Public Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii)
RRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
S.G. Warburg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Santa Fe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Santa Fe Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Santa Fe Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii)
Santa Fe Securities Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii)
Securities Purchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Series A Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Series B Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover page
Settlement Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Severance Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SFEOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Special Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii)
Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Storage Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
TEPPCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Termination Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Trust Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
TSCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
TSCA Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
United . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
United Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Western . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
D-2
<PAGE> 150
EXHIBIT INDEX
Exhibit 27 -- Financial Data Schedule
<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>
