<PAGE> 1
As filed with the Securities and Exchange Commission on June 3, 1997
Registration No. 333-5362-NY
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
VIRGINIA GAS COMPANY
(Name of Small Business Issuer as Specified in its Charter)
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<S> <C> <C>
DELAWARE 4923 87-0443823
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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200 EAST MAIN STREET, ABINGDON, VIRGINIA 24210, (540) 676-2380
(Address and Telephone Number of Principal Executive Offices)
200 EAST MAIN STREET, ABINGDON, VIRGINIA 24210, (540) 676-2380
(Address of Principal Place of Business or Intended Principal Place of
Business)
-----------------
MICHAEL L. EDWARDS
200 EAST MAIN STREET
ABINGDON, VIRGINIA 24210
(540) 676-2380
(Name, address and telephone number of agent for service)
Copies to:
BRIGHT & BARNES, P.C.
TWO LEADERSHIP SQUARE, SUITE 810
OKLAHOMA CITY, OKLAHOMA 73102
(405) 236-8016
ATTN: ROBERT C. BRIGHT, ESQ.
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If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [x]
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VIRGINIA GAS COMPANY
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM SB-2
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ITEM IN FORM SB-2 LOCATION IN PROSPECTUS
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1. Front of Registration Statement and Outside Front
Cover of Prospectus . . . . . . . . . . . . . . . . . . . Front of Registration Statement and Outside
Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus . . . . . . . . . . . . . . . . . . . . . . Inside Front Cover Page and Outside Back
Cover Page of Prospectus
3. Summary Information and Risk Factors . . . . . . . . . . . . Prospectus Summary; Risk Factors
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
5. Determination of Offering Price . . . . . . . . . . . . . . . Inapplicable
6. Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
7. Selling Security Holders . . . . . . . . . . . . . . . . . . Shares Eligible for Future Sale; Selling
Securityholders
8. Plan of Distribution . . . . . . . . . . . . . . . . . . . . Outside Front Cover of Prospectus;
Selling Securityholders
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . Inapplicable
10. Directors, Executive Officers, Promoters and Control
Persons . . . . . . . . . . . . . . . . . . . . . . . . . Management
11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . Principal Stockholders
12. Description of Securities . . . . . . . . . . . . . . . . . . Outside Front Cover of Prospectus;
Prospectus Summary; Capitalization;
Description of Securities
13. Interest of Named Experts and Counsel . . . . . . . . . . . . Inapplicable
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities . . . . . . . . . . . . . . Management
15. Organization Within Last Five Years . . . . . . . . . . . . . Inapplicable
16. Description of Business . . . . . . . . . . . . . . . . . . . Business
17. Management's Discussion and Analysis or Plan of
Operations . . . . . . . . . . . . . . . . . . . . . . . . Management's Discussion and Analysis of
Financial Condition and Results of Operations
18. Description of Property . . . . . . . . . . . . . . . . . . . Business; Management's Discussion and Analysis
of Financial Condition and Results of Operations
19. Certain Relationships and Related Transactions . . . . . . . Management
20. Market for Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus; Dividend
Policy; Common Stock Price Range; Shares
Eligible for Future Sale; Description of
Securities
21. Executive Compensation . . . . . . . . . . . . . . . . . . . Management
22. Financial Statements . . . . . . . . . . . . . . . . . . . . Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . Other Matters
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SUBJECT TO COMPLETION, DATED JUNE 3, 1997
PROSPECTUS
VIRGINIA GAS COMPANY
SHARES OF COMMON STOCK
AND
COMMON STOCK PURCHASE WARRANTS
--------------------------
On October 11, 1996, Virginia Gas Company (the "Company") closed the sale
of 1,533,000 shares of its Common Stock pursuant to an underwritten public
offering. The registration statement describing this offering also included the
registration of 800,058 shares of Common Stock owned by one selling
securityholder, 997,312 Common Stock Purchase Warrants ("Warrants") owned by 25
selling securityholders and 997,312 shares of Common Stock underlying the
Warrants (the "Warrant Stock"). As of April 30, 1997 three selling
securityholders had sold 36,396 Warrants from these registered securities and
one had exercised its Warrant for 54,163 shares and obtained 54,162 shares. As
a result of these transactions, the selling securityholders hereby offer
854,220 shares of Common Stock, 906,753 Warrants and 906,753 shares of Warrant
Stock. The owners of these securities are hereinafter collectively referred to
as the Selling Securityholders. The Company did not and will not receive any of
the proceeds on the sale of the securities by the Selling Securityholders. In
the event the Warrants are exercised, the shares registered on behalf of the
Selling Securityholders including those underlying Warrants which have been
sold by Selling Securityholders will constitute 43.33% of the total number of
shares outstanding assuming an unregistered option for 84,654 shares held by an
officer of the Company is not exercised. The resale of the securities of the
Selling Securityholders are subject to Prospectus delivery and other
requirements of the Securities Act of 1933, as amended (the "Act"). Sales of
such securities or the potential of such sales at any time may have an adverse
effect on the market prices of the securities offered hereby. See "Selling
Securityholders" and "Risk Factors -- Shares Eligible for Future Sale."
The Common Stock and 753,453 Warrants ("Tradeable Warrants") are listed
on the Nasdaq National Market System under the symbols VGCO and VGCOW
respectively. Prior to June 2, 1997 the Common Stock and Tradeable Warrants
were listed on the Nasdaq SmallCap Market. The remaining 153,300 Warrants
offered hereby will be tradeable on October 4, 1997. As of May 30, 1997 the
Common Stock was trading at $10 bid, $10 1/2 asked and the Warrants were trading
at $3 bid, $4 asked. See "Risk Factors -- Possible Volatility of Stock
Price."
The Common Stock and Warrants offered by this Prospectus may be sold from
time to time by the Selling Securityholders, or by their transferees. No
underwriting arrangements have been entered into by the Selling
Securityholders. The distribution of the securities by the Selling
Securityholders may be effected in one or more transactions that may take place
in the market, including ordinary broker's transactions, privately-negotiated
transactions or sales to one or more dealers for resale of such shares as
principals at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary
or specifically negotiated brokerage fees or commissions may be paid by the
Selling Securityholders in connection with sales of such securities.
The Selling Securityholders and intermediaries through whom such
securities may be sold may be deemed "underwriters" within the meaning of the
Act, with respect to the securities offered and any profits realized or
commissions received may be deemed underwriting compensation. The Company has
agreed to indemnify certain of the Selling Securityholders against
liabilities, including liabilities under the Act.
All costs incurred in the registration of the securities of the Selling
Securityholders are being borne by the Company. It is estimated that the
expenses to the Company will be $35,000. See "Selling Securityholders."
The Company is engaged in natural gas storage; gathering and distribution
services; exploration, production and well operation; pipeline operation;
natural gas marketing; and propane distribution primarily in southwestern
Virginia. See "Business."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS " COMMENCING ON PAGE 8 HEREOF.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The Date of this Prospectus is _______________________, 1997.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission" or "SEC"). Such reports, proxy and
other information filed by the Company may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549, and at the public reference
facilities maintained by the commission at Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60604; and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such materials may also be
obtained at prescribed rates from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549. The Company's Common Stock is listed on the Nasdaq National Market
System. Documents filed by the Company may also be inspected at the offices
of the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a Post-Effective Amendment to
the Registration Statement on Form SB-2 under the Act, with respect to the
securities offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto,
to which reference is hereby made. Statements made in this Prospectus as to
the contents of any contract, agreement or other documents referred to are not
necessarily complete; with respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. A
copy of the Registration Statement, and the exhibits and schedules thereto, may
be inspected without charge at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549, and at the Public Regional Office of the Commission at 7 World Trade
Center, Suite 1300, New York, New York 10048, and copies of all or any part of
the Registration Statement may be obtained from such offices or by mail from
the Public Reference Section of the Commission at its principal office upon the
payment of the fees prescribed by the Commission.
The Commission also maintains a World Wide Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
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VIRGINIA GAS COMPANY
MAP OF OPERATIONS AREA
[The map highlights in yellow the two counties, Buchanan and Russell, in
western Virginia, in which the Distribution Company is certificated to provide
service by the Virginia State Corporation Commission. It also depicts in red
the Company's natural gas gathering systems located in Dickenson and Buchanan
counties. Triangles depict the Company's natural gas compression facilities
located in Dickenson, Buchanan and Washington counties. The map depicts in
purple the interstate pipelines located in the Company's area of operations.]
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information, including Risk Factors, and financial statements included
elsewhere or incorporated by reference in this Prospectus. Unless otherwise
indicated, all information in this Prospectus gives retroactive effect to a
103.1667-for-1 split of the Common Stock effected on June 10, 1996. Unless the
context otherwise requires, references to the Company are to Virginia Gas
Company and its subsidiaries and affiliates.
THE COMPANY
Virginia Gas Company (the "Company"), its subsidiaries and affiliates
form an integrated natural gas company engaged in natural gas storage,
gathering and distribution services; natural gas exploration, production and
well operation; pipeline operation; natural gas marketing; and propane
distribution. The Company conducts its operations primarily in the
southwestern counties of the Commonwealth of Virginia. See "Business." For
definitions of certain of the terms used in this Prospectus, see the Glossary
on page 47 of this Prospectus. The Company's principal business activities are
summarized as follows:
STORAGE. In December 1991, the Company, through a 50%-owned affiliate,
Virginia Gas Storage Company, (the "Storage Company") purchased the Early Grove
gas field, located in Scott and Washington Counties in Virginia ("Early Grove
Facility"), which is connected to the East Tennessee Natural Gas Company
("ETNG") interstate pipeline system. The Company converted the depleted
production field into the first natural gas storage facility in Virginia. The
Early Grove Facility has been operational since 1993 and is currently being
expanded from its current 985,500 MMBtu of working gas capacity to up to
2,200,000 MMBtu of working gas capacity by 1999.
The Company developed a high deliverability salt cavern storage facility
in Saltville, Virginia with initial capacity of 450,000 MMBtu of working gas.
The Saltville storage facility ("Saltville Facility") will offer 10-day, 60-day
and 90-day service. The Saltville Facility began first injections of natural
gas in August 1996. See "Business -- Storage Operations."
GATHERING. The Company operates 102.6 miles of unregulated natural gas
gathering lines and three compressor stations with 1,400 BHP of compression,
which transport gas from its wells to interstate pipeline systems operated by
third parties. Gathering throughput totaled 1.67 Bcf for the year ended
December 31, 1996.
The Company operates gathering systems in Buchanan and Dickenson Counties
in Virginia which connect its production to the ETNG, CNG Transmission Company
("CNG") and Columbia Gas Transmission Company ("CGT") interstate pipeline
systems. These gathering systems provide the Company pipeline access to
deliver its production directly to the interstate pipeline systems and to its
own customers, thus reducing the risk of revenue interruption by reducing
dependence on others to gather its gas production. The gathering systems also
provide access to reliable supplies of gas for the Company's storage and
distribution businesses. See "Business -- Gas Gathering Operations."
DISTRIBUTION. In 1992, the Company, through a 50%-owned affiliate,
Virginia Gas Distribution Company, (the "Distribution Company") commenced
distribution of natural gas in two previously unserved counties in southwestern
Virginia. As of December 31, 1996, the Company served 178 retail customers
and 25 industrial and commercial customers. The counties served by the Company
have an estimated population of 60,000 persons. The Company plans to increase
its service territory in southwestern Virginia to four counties with an
estimated population of 125,000 persons. See "Business -- Distribution
Operations."
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EXPLORATION AND PRODUCTION. Substantially all of the Company's revenues
from 1987 to 1992 were generated from exploration, development and production
of natural gas and from fees derived from well operations. The Company
organized joint venture operations with third parties and acted as contractor
and operator of various ventures, retaining a working interest in wells and a
promotional consideration. At December 31, 1996, the Company's estimated net
proved reserves were approximately 3.2 Bcf.
In recent years, the Company has placed less emphasis on drilling
activities and intends to increase its natural gas reserves through selective
acquisition of producing natural gas properties. See "Business -- Exploration
and Production Operations."
PIPELINE. In 1996, the Company initiated environmental studies and
commenced acquisition of rights-of-way and permits for the construction of an
80 mile intrastate pipeline which will connect its Saltville Facility to
markets in Smyth, Wythe and Pulaski Counties in southwestern Virginia. The
total cost of the pipeline is estimated to be $14,600,000. Upon completion of
the pipeline and obtaining regulatory approval, the Company expects revenues
from this pipeline to commence in November 1997. See "Business -- Pipeline
Operations."
NATURAL GAS MARKETING. In 1997 the Company, through its subsidiary,
Virginia Gas Marketing Company, commenced marketing operations for its natural
gas and natural gas storage services. The Company anticipates that future
expansion of its marketing operations will include third party supplies and
services.
PROPANE DISTRIBUTION. The Company recently commenced distribution of
propane in its area of operation in southwestern Virginia. In April 1997, the
Company acquired an existing propane business for $840,632. The Company will
operate its propane distribution business in Buchanan, Dickenson and Russell
Counties and in the western part of Tazewell County, Virginia. See "Business
- -- Propane Operations."
GROWTH STRATEGY
It is the Company's intention to take advantage of deregulation of the
domestic natural gas industry by providing services previously supplied by the
interstate pipeline companies. The Company's strategy is 1) to increase
storage and related pipeline capacity to meet increasing demand for natural gas
services in its market area, 2) to add value to its natural gas production by
distributing natural gas directly to residential, commercial and industrial
users through its natural gas utility, 3) to maximize the volume of natural gas
it gathers and markets, 4) to develop and expand into propane distribution, and
5) to increase its natural gas reserves through selective acquisitions.
The Company expects consumption of natural gas to continue to grow faster
than alternative fossil fuels because of environmental pressure to use cleaner
burning fuels, the abundance of a reasonably priced natural gas supply, and the
rapid progress of new natural gas technologies. The Company believes it is
well positioned to take advantage of the increasing demand for natural gas
services in the growing Virginia and Tennessee markets due to its integrated
structure, its ability to provide low cost storage services and its ability to
deliver natural gas to its industrial, commercial and residential customers
reliably during peak demand periods.
SUBSIDIARIES AND AFFILIATES
The Company has four consolidated subsidiaries: Virginia Gas Exploration
Company ("Exploration Company"), Virginia Gas Pipeline Company ("Pipeline
Company"), Virginia Gas Propane Company ("Propane Company") and Virginia Gas
Marketing Company ("Marketing Company") (collectively referred
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to as the "Subsidiaries"). The Exploration Company, the Pipeline Company, the
Propane Company and the Marketing Company are wholly-owned by the Company. The
Distribution Company and the Storage Company are each owned 50% by the Company
and 50% by one individual (collectively referred to as the "Affiliates"). See
"Business -- Subsidiaries and Affiliates."
ORGANIZATION AND OFFICES
The Company was incorporated in Delaware in March 1987. The Company's
principal executive office is located at 200 East Main Street, Abingdon,
Virginia 24210 and its telephone number is (540) 676-2380.
6
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SUMMARY FINANCIAL INFORMATION
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Three Months Ended
March 31, Year Ended December 31,
------------------------- -----------------------------------------------------------------
1997 1996 1996 1995 1994 1993
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OPERATIONS DATA:
Revenues from operations $ 2,139,465 $ 511,689 $ 2,769,718 $ 1,846,996 $ 1,612,195 $ 1,236,229
Revenue revision effect -- -- -- 176,414 -- --
----------- ----------- ----------- ------------ ------------ ------------
Net revenues $ 2,139,465 $ 511,689 $ 2,769,718 $ 2,023,410 $ 1,612,195 $ 1,236,229
=========== =========== =========== =========== ============ ============
Income before income
taxes and effect of
revenue revision $ 400,925 $ 168,577 $ 759,393 $ 360,041 $ 539,991 $ 357,553
Revenue revision effect -- -- -- 176,414 -- --
----------- ----------- ----------- ------------ ------------ ------------
Income before income
taxes $ 400,925 $ 168,577 $ 759,393 $ 536,455 $ 539,991 $ 357,553
=========== =========== =========== ============ ============ ============
Net income from
operations $ 298,849 $ 163,109 $ 607,566 $ 342,750 $ 420,085 $ 302,127
Revenue revision effect -- -- -- 131,124 -- --
----------- ----------- ----------- ------------ ------------ ------------
Net income $ 298,849 $ 163,109 $ 607,566 $ 473,874 $ 420,085 $ 302,127
=========== =========== =========== ============ ============ ============
BALANCE SHEET DATA:
Net Working Capital $ 801,080 $ (906,355) $ ( 429,697) $ (197,206) $ 575,839 $ 98,702
Property, plant and
equipment, net 17,604,936 7,810,488 16,343,480 4,029,137 3,020,067 1,940,955
Total Assets 39,972,007 23,706,490 33,510,403 22,355,664 12,736,200 4,780,624
Long-term debt 21,069,317 15,020,760 12,137,729 12,885,761 8,340,895 1,251,538
Shareholders' equity 15,414,328 5,528,033 17,337,531 5,429,924 2,717,980 2,189,425
OTHER DATA:
Depreciation and
amortization 166,196 68,328 387,116 305,216 190,792 170,380
Capital investment 1,419,876 2,826,997 11,661,500 2,330,968 1,378,323 467,078
</TABLE>
The above net income from operations includes the Company's earnings
from its investment in the Storage Company and the Distribution Company.
During 1995, the Company revised its method of recording certain
revenue. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations for Years 1996 and 1995" and
Note 2 of Notes to the Consolidated Financial Statements and Note 2 of Notes to
the Storage Company Financial Statements.
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RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following risk factors in
evaluating an investment in the shares of Common Stock offered hereby.
COMPANY INDEBTEDNESS. Through its participation in tax exempt bond
offerings offered by the Industrial Development Authorities of Russell and
Buchanan Counties, Virginia, the Company has incurred long-term indebtedness to
construct and extend natural gas distribution facilities and to engage in
related exploration and production and pipeline gathering and storage
activities. A portion of the proceeds of this indebtedness was loaned to the
Distribution Company and the Storage Company, which are 50% owned by the
Company. Risks associated with the Company's indebtedness are:
Limitation on Expansion of Distribution Service Area. The
long-term debt instruments contain restrictive covenants which, among
other things, require the maintenance of certain financial ratios. In
order to maintain the tax exempt status of the bonds, the Distribution
Company is limited to operating only in Russell and Buchanan Counties,
Virginia, or operating in other counties in Virginia through a 50%
owned subsidiary. Unless operated in conjunction with a 50% or less
owned affiliate, the Company cannot participate in future tax exempt
bond offerings offered by Industrial Development Authorities of other
counties in Virginia. Should the Company commence distribution
operations in another county, the Company's existing long-term
indebtedness will lose its tax exempt status and require the Company
to pay a higher rate of interest.
Possible Inadequacy of Future Financing. The Company has also
incurred short-term indebtedness in connection with its recent
acquisition of a joint venture partner's interest in the Saltville
Facility. There can be no assurance that the Company will be able to
participate in future tax exempt bond offerings. Further, there can
be no assurance that revenues from the Company's operations will be
sufficient to satisfy its long-term and short-term debt obligations.
Risk of Default. Should the Company not participate in future
tax exempt bond offerings or if it defaults on any of its
indebtedness, or should any of the Company's Affiliates be unable to
repay the Company as and when required for the portions of the
indebtedness received by them, the Company's assets would be at risk
and its ability to conduct its businesses as presently being conducted
would be severely curtailed. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
NEED FOR ADDITIONAL CAPITAL. The Company will require substantial
additional capital to fund its current projects, to expand and diversify its
operations and to continue its marketing efforts. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources." The Company has not established a line of credit with any
financial institution. Therefore, in the event that additional capital or
adequate financing is not available for expenditures to be incurred by the
Company, there can be no assurance that the Company will be able to complete
its current projects or continue to expand its operations. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
Liquidity and Capital Resources."
POSSIBLE VOLATILITY OF STOCK PRICE. The trading price of the Common
Stock could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, announcements of operating results by the
Company and other events or factors, such as the sale of large blocks of shares
held by existing
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shareholders. See "-- Shares Eligible for Future Sale," below. In addition,
the stock market has from time to time experienced extreme price and volume
fluctuations which have particularly affected the market price for many
companies and which often have been unrelated to the operating performance of
these companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. See "Shares Eligible for Future
Sale."
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of substantial amounts
of Common Stock in the public market following this Offering could adversely
affect the market value for the Common Stock. A "lock-up" agreement entered
into by one shareholder of the Company who owns 800,058 shares of Common Stock
that were acquired in a private placement that closed on May 31, 1996, has
expired and all of such shares are available for sale. No other of the
Company's officers, directors, or shareholders who obtained their shares prior
to the Company's initial public offering are subject to any such "lock-up"
agreements restricting disposition of their shares and therefore, subject to
compliance with certain volume limitations prescribed by Rule 144, such persons
may sell up to an aggregate of 817,686 shares of the Company's Common Stock,
provided that 82,000 of these shares are subject to holding periods imposed by
Rule 144 which expire in July and August 1997. In addition, 943,149 shares of
the Company's Common Stock (to be issued when and if Warrants issued to Company
shareholders as of May 17, 1996, and the underwriter of the Company's initial
public offering are exercised) have been registered and are available for sale
by such persons and their transferees, provided that 153,300 Warrants may not
be exercised or transferred to persons other than officers of the underwriter
of the Company's initial public offering until October 4, 1997. Furthermore,
one employee of the Company holds options to purchase up to 84,654 shares of
the Company's Common Stock. While certain holders of these shares and warrants
do not have any present intention of selling their shares, if all of the
outstanding warrants and options are exercised and if the shares held by the
Company's officers, directors and control persons are held and disposed of in
accordance with Rule 144, a total of 2,645,547 additional shares will be
available for public sale. In the event that large blocks of these shares are
disposed of it is likely that such activities will have a substantial adverse
effect upon the market value of the Common Stock and will cause extreme price
fluctuations in the trading market. In addition, the mere availability of these
shares may have an adverse effect on the trading market. See "Shares Eligible
for Future Sale."
LIMITED MARKET FOR COMMON STOCK AND WARRANTS. The Company's Common
Stock is traded on the Nasdaq National Market System under the symbol VGCO. The
Company believes there are only three active market-makers in the Company's
stock. Daily trading volume to date has been very limited and frequently there
have been no trades on a given day. The Company's Tradeable Warrants are
listed on the Nasdaq National Market System under the symbol VGCOW and there
had only been three sales of Tradeable Warrants as of April 30, 1997. Prior to
June 2, 1997 the Company's Common Stock and Tradeable Warrants were listed on
the Nasdaq SmallCap Market. There can be no assurance that there will be
sufficient liquidity in the Common Stock and Tradeable Warrants to effectuate
large volume trades in the Company's Common Stock and Tradeable Warrants.
DECREASE IN PER SHARE EARNINGS. It is unlikely that the Company will
be able to sustain per share earnings equivalent to those achieved by the
Company in recent periods. The Company received a substantial amount of
capital from the initial public offering of its Common Stock that closed on
October 11, 1996 and from participation in a tax exempt bond offering that was
completed in February 1997. Much of this new capital is being and will be
deployed in long-term capital projects that are intended to have the effect of
enhancing in the long term the Company's gas storage, transportation and
distribution businesses. The Company does not expect to receive returns in the
short run from the deployment of this additional capital. Therefore, the
Company has no expectation of significant short-term increases in its net
income from operations, and the per share
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<PAGE> 12
earnings of the Company are likely to be substantially lower in the short term
than those achieved by the Company with a significantly lesser number of shares
during recent periods.
GOVERNMENTAL REGULATION. The Company's natural gas distribution
operations are regulated by the Virginia State Corporation Commission ("SCC").
The SCC has issued the Company Certificates of Public Convenience and Necessity
which authorize it to conduct its natural gas distribution business in
designated areas and which set the price of utility service at levels
sufficient for the Company to recover its cost of service plus a rate of
return. In June 1996 the Company, through the Pipeline Company, applied for a
Certificate of Public Convenience and Necessity with the SCC in connection with
the operation of the Saltville Facility. In July 1996 the SCC issued an order
authorizing the Company to begin service on an interim basis. A hearing was
held in December 1996 on the Company's application. A final order has not been
issued by the SCC. In the future, the Company will be required to obtain
additional Certificates of Public Convenience and Necessity to conduct its
proposed operations. The Company will also periodically petition the SCC for
adjustments to its utility service rates to compensate for changed conditions.
In the event the SCC denies the Company's requests for Certificates of Public
Convenience and Necessity or for utility rate adjustments or fails to give
approval of rate adjustments on a timely basis, the Company's ability to
conduct its proposed businesses or to generate revenues from such operations
could be adversely affected. Further, any cancellation or revocation of the
Company's Certificates of Public Convenience and Necessity applicable to its
current natural gas distribution operations, or denial by the SCC of the
Company's current and future applications, would result in the Company ceasing
its current natural gas distribution operations in the affected area or in the
Company being unable to expand its natural gas distribution services. See
"Business -- Regulation."
The Company's natural gas storage operations are regulated by both the
SCC and the Federal Energy Regulatory Commission ("FERC") and the Company's
proposed intrastate pipeline operations are subject to rate regulation by the
SCC which, among other requirements, establish the rates and tariffs that the
Company is able to charge its customers for distribution, storage and pipeline
operations. Common carriers are also subject to the jurisdiction of certain
other state and federal agencies with respect to environmental and safety
matters. Changes in regulations or rulings adverse to the Company's financial
interests or failure to comply with such regulations could have a material
adverse effect on the Company's ability to generate revenue from its storage
operations. See "Business -- Regulation."
ENVIRONMENTAL REGULATIONS. The production, handling, transportation
and disposal of natural gas and by-products are subject to regulation under
federal, state and local environmental laws. In most instances, the applicable
regulatory requirements relate to water and air pollution control and solid
waste management measures. Environmental assessments have not been performed
on all of the Company's properties. To date, expenditures for environmental
control facilities and for remediation have not been significant in relation to
the results of operations of the Company. The Company believes, however, that
it is reasonably likely that the trend in environmental legislation and
regulations will continue to be towards stricter standards, which could
materially adversely affect the Company's ability to conduct its operations.
See "Business -- Regulation."
OPERATING HAZARDS. The natural gas business involves a variety of
operating risks, including the risk of fire, explosions, blow-outs, pipe
failure, casing collapse, abnormally pressured formations, and environmental
hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases,
the occurrence of any of which could result in substantial losses to the
Company due to injury and loss of life, severe damage to and destruction of
property, natural resources and equipment, pollution and other environmental
damage, clean-up responsibilities, regulatory investigation and penalties and
suspension of operations. Gathering systems, distribution systems, pipelines
and processing plants are subject to many of the same hazards and any
significant problems related to those facilities could adversely affect the
Company's ability to conduct its operations. The Company
10
<PAGE> 13
maintains insurance against some, but not all, potential risks; however, there
can be no assurance that such insurance will be adequate to cover any losses or
exposure for liability. Furthermore, the Company cannot predict whether
insurance will continue to be available at premium levels that justify its
purchase or whether insurance will be available at all. See "Business --
Operational Hazards and Insurance."
COMPETITION. The natural gas industry is highly competitive. The
Company competes in the areas of exploration, production, transportation,
marketing and distribution of natural gas with major oil companies, other
independent oil and gas concerns and individual producers and operators, and,
in the areas of utility services and pipeline operations, with major utility
and pipeline companies. While the Company currently operates the only natural
gas storage facility in Virginia, it is possible that other companies will
engage in similar activities. Many of these competitors have substantially
greater financial and other resources than the Company. See "Business --
Competition."
GENERAL ECONOMIC CONDITIONS. The Company's natural gas distribution
business is affected by economic trends in its primary service areas.
Significant downturns in the conditions affecting these service areas could
have a material adverse effect on the Company's financial condition.
UNCERTAINTY OF NATURAL GAS PRICES AND SUPPLIES. The Company's
revenues, profitability and future rate of growth substantially depend upon
prevailing prices for natural gas and adequacy of natural gas supplies, which,
in turn, depend upon numerous external factors such as various economic,
political and regulatory developments, weather, and competition from other
sources of energy. The unsettled nature of the energy markets make it
particularly difficult to estimate future prices of natural gas and natural gas
liquids or the security of natural gas supplies. The price of natural gas and
natural gas liquids are subject to wide fluctuations, and there can be no
assurance that future decreases in such prices will not occur. The Company
believes that it has developed multiple sources of natural gas supplies,
however, there can be no assurance that these sources will be adequate to meet
the Company's needs in the future. All of these factors are beyond the control
of the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Regulation."
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET REVENUES. There
are numerous uncertainties inherent in estimating quantities of proved natural
gas reserves, including many factors beyond the control of the Company. This
Prospectus contains estimates of proved and proved developed natural gas
reserves and future net revenues therefrom based on studies performed by the
Company's engineering staff. The Company has not engaged the services of an
independent petroleum engineering firm to confirm the Company's estimates. The
estimates included in this Prospectus are based on procedures prescribed by
Statement of Financial Accounting Standards No. 69 and accordingly are based on
sales prices, cost rates and statutory income tax rates in existence at the
date of the projections or year end and therefore are an inherently imprecise
indication of future net revenues. Actual future production, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable
natural gas reserves may vary substantially from those assumed in the
estimates. Any significant variance in these assumptions could materially
affect the estimated quantity and value of reserves set forth in this
Prospectus. In addition, the Company's reserves may be subject to downward or
upward revision based upon production history, results of future development,
prevailing natural gas prices and other factors. See "Business -- Exploration
and Production Operations."
RELATIONSHIP WITH OTHER PIPELINE COMPANIES. A portion of the natural
gas distributed by the Company flows through natural gas trunk lines owned and
operated by ETNG pursuant to interruptible contracts. The Company has a
ten-year firm transportation contract with ETNG for the winter months of
November through March. There is no assurance that the Company will be
successful in negotiating this contract on favorable
11
<PAGE> 14
terms, thus, there is a risk that service to the Company could be disrupted
under the interruptible contract, particularly in the winter months. In such
event or if ETNG is unable or unwilling to continue the operation of its trunk
lines, the Company would be unable to deliver natural gas to its customers,
thus adversely effecting the financial condition of the Company. See "Business
- -- Distribution Operations."
RELATIONSHIP WITH AFFILIATES. The Company owns a 50% interest in each
of the Distribution Company and the Storage Company. The remaining 50%
interest is owned by one individual. The Company provides management services
to these Affiliates; however, there are no written management agreements
governing the operation of these Affiliates nor are there any agreements
between the Company and the individual owner relating to corporate governance,
buy-sell matters or "deadlock" issues. The inability of the Company and the
other owner of the Distribution Company and the Storage Company to agree on
matters relating to the management and operation of those Affiliates could have
a material adverse effect on the financial condition of the Company. See
"Business -- Subsidiaries and Affiliates."
DEPENDENCE ON MAJOR CUSTOMERS. One of the Company's customers, United
Cities Gas Company, accounted for 31% of 1996 consolidated operating revenue.
Two of the Storage Company's customers, Roanoke Gas Company and Knoxville
Utilities Board, which contract with the Storage Company for natural gas
storage, accounted for 57% of the Storage Company's 1996 operating revenue.
The loss of these customers could have a material adverse financial impact on
the Company. See "Business -- Storage Operations."
RELIANCE ON KEY PERSONNEL. The success of the Company will largely be
dependent upon the efforts and active participation of Michael L. Edwards,
Frank A. Merendino, Jr., Mark N. Witt, John D. Jessee, Karen K. Edwards and
Allan R. Poole. The unexpected loss of the services of any of these
individuals could have a detrimental effect on the Company. See "Management."
DIVIDEND POLICY. The Company has paid cash dividends in each of the
past five calendar years. The primary objective of the Company is to retain
its earnings to support the growth of the Company. Therefore, there can be no
assurance that the Board of Directors of the Company will authorize the Company
to pay cash dividends on its Common Stock in the future. See "Dividend
Policy."
ANTI-TAKEOVER PROVISIONS. The Company's Amended and Restated
Certificate of Incorporation provides that the approval of (i) any amendment to
the Certificate or the Bylaws, (ii) the merger, dissolution, reorganization
(including by share exchange) or recapitalization of the Company, or (iii) the
sale of all or substantially all of the assets of the Company requires the
affirmative vote of the holders of 75% of the Company's capital stock entitled
to vote thereon. This increases the percentage that would otherwise be
required under Delaware law to approve such actions. In addition, the
Certificate provides that members of the Company's Board of Directors are
elected to terms that are staggered. These provisions may make it more
difficult to change control of the Company or replace incumbent management.
See "Description of Securities -- Certain Provisions of Certificate of
Incorporation and Delaware Law" and "Management -- Executive Officers and
Directors."
RISKS ASSOCIATED WITH THE SECURITIES BEING SOLD BY THE SELLING
SECURITYHOLDERS. The Selling Securityholders will have the right to sell their
securities and exercise the Warrants only if a current prospectus relating to
these securities is then in effect and only if such securities are qualified
for sale under applicable state securities laws of the states in which holders
and purchasers reside. There can be no assurance the Company will be successful
in maintaining a current prospectus covering these securities. The Warrants may
be deprived of any value in the event a prospectus covering the shares issuable
upon exercise of the Warrants is not kept effective or if such shares are not
qualified for sale in the states in which holders or prospective purchasers of
the Warrants reside. Also only a portion of the Warrants, the Tradeable
Warrants, are presently eligible for trading on the Nasdaq National Market
System, however all Warrants will be tradeable as of October 4, 1997.
12
<PAGE> 15
COMMON STOCK PRICE RANGE
The Common Stock is traded on the Nasdaq National Market System, where
its symbol is "VGCO". There were approximately 800 stockholders and 26 warrant
holders as of March 1997. The following table sets forth the high and low
trading prices, as reported by the Nasdaq Exchange, for the quarters indicated:
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------------
HIGH LOW
---- ---
<S> <C> <C> <C>
1996
Fourth Quarter $7 3/4 $6 1/2
1997
First Quarter $10 1/2 $7 1/4
</TABLE>
CAPITALIZATION
The following table sets forth the actual capitalization of the
Company as of March 31, 1997 and December 31, 1996. The table should be read
in conjunction with the Company's Consolidated Financial Statements included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Actual Actual
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Current portion of long-term debt $ 274,879 $1,244,490
---------- ----------
Long-term debt:
Note payable to the Industrial Development Authority
of Russell County, Virginia at 9.5%, payable from
2002 through 2017 9,100,000 --
Note payable to the Industrial Development Authority
of Buchanan County, Virginia at an effective rate
of 8.88%, payable from 1995 through 2017 3,977,917 4,009,167
Note payable to the Industrial Development Authority
of Buchanan County, Virginia at 9%, payable
from 1999 to 2020 3,750,000 3,750,000
Note payable to the Industrial Development Authority
of Russell County, Virginia at an effective rate
of 7.35%, payable from 1996 through 2023 2,672,917 2,682,917
Note payable to Tenneco Energy Resources
Corporation, interest at Morgan Guaranty
prime rate plus three percent, payable in
1996 with an option to term the payments
through 1999 -- --
Mortgage note payable monthly at 7%, maturing
February 1999 with a final payment of $95,336 99,989 101,519
Note payable to affiliated company, interest payable
at 9%, payable from 1999 to 2020 965,000 1,000,000
</TABLE>
13
<PAGE> 16
<TABLE>
<S> <C> <C>
Note payable to affiliated company, interest payable
at 7.35%, payable from 1996 to 2023 388,788 390,242
Note payable monthly at 9.25%, payable in monthly
installments of principal and interest through 1999 50,587 57,922
Note payable with interest at 9%, interest payable in
semiannual installments, maturing 2024 -- 100,000
Other 64,119 45,962
---------- ----------
Total long-term debt 21,069,317 12,137,729
---------- ----------
Stockholders' equity:
Preferred Stock, no par; $1,000 per share liquidation
value; 2,000 shares issued and outstanding
as of December 31, 1996 -- 1,725,000
Common Stock, par value $.001 per share; 10,000,000
shares authorized 3,204,906 and 3,150,744
shares issued and outstanding; as of March
31, 1997 and December 31, 1996 3,205 3,151
Additional paid in capital 13,751,471 14,152,137
Retained earnings 1,659,652 1,457,243
----------- -----------
Total stockholders' equity 15,414,328 17,337,531
----------- -----------
Total capitalization $36,758,524 $30,719,750
=========== ===========
</TABLE>
- --------------
DIVIDEND POLICY
The Company has paid cash dividends on its Common Stock in each of the
past five fiscal years. During the past two years a dividend of $.29 was paid
to all shareholders of record on December 22, 1995; a dividend of $.01 per
share was paid to all shareholders of record on December 15, 1996; and a
dividend of $.0125 per share was paid to all shareholders of record on January
31, 1997. The primary objective of the Company is to retain its earnings to
support the growth of the Company. Therefore, there is no assurance that the
Board of Directors of the Company will authorize the Company to pay cash
dividends on its Common Stock in the future.
SELECTED CONSOLIDATED
FINANCIAL AND OPERATING DATA
The following table presents selected consolidated financial and
operating data of the Company for each of the three month periods ended March
31, 1997 and 1996 and each of the four year periods ended December 31, 1996.
The annual financial data for 1996, 1995 and 1994 has been derived from the
consolidated financial statements of the Company audited by Arthur Andersen
LLP, independent public accountants. The financial statements, notes thereto,
and the report of Arthur Andersen LLP for the years ended December 31, 1996 and
1995 are included herein under the caption "Financial Statements."
14
<PAGE> 17
VIRGINIA GAS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------------- -------------------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Natural gas sales and well operations income $1,166,262 $ 174,498 $ 698,645 $ 603,495 $ 489,180 $ 391,084
Natural gas gathering and service revenues 25,458 26,375 103,768 133,794 104,250 52,245
Natural gas storage revenues 626,411 -- 769,025 -- -- --
Management revenues 64,514 93,833 320,532 756,524 738,583 753,467
Interest income 250,867 216,983 877,748 526,797 280,182 30,701
Other income 5,953 -- -- 2,800 -- 8,732
---------- ---------- ----------- ---------- ----------- ----------
2,139,465 511,689 2,769,718 2,023,410 1,612,195 1,236,229
---------- ---------- ----------- ---------- ----------- ----------
Costs and expenses:
Production expenses 36,625 22,480 105,910 65,029 361,610 312,036
Purchased gas expense 20,659 -- 28,537 -- -- --
Operations and maintenance expense 100,466 -- 173,445 -- -- --
Cost of natural gas sold 944,767 -- -- -- -- --
Depreciation and amortization 166,196 68,328 387,116 305,216 190,792 170,380
General and administrative 215,131 132,340 645,673 708,191 425,145 413,312
Other expense 31,313 1,009 2,771 2,752 -- 269
Interest expense 317,822 255,621 1,006,800 673,251 288,073 119,624
---------- ---------- ----------- ---------- ----------- ----------
1,832,979 479,778 2,350,252 1,754,439 1,265,620 1,015,621
---------- ---------- ----------- ---------- ----------- ----------
Income before earnings of affiliated
companies and income taxes 306,486 31,911 419,466 268,971 346,575 220,608
Equity in earnings of affiliated companies 94,439 136,666 339,927 267,484 193,416 136,945
---------- ----------- ----------- ---------- ----------- ----------
400,925 168,577 759,393 536,455 539,991 357,553
Provision for income taxes 102,076 5,468 151,827 62,581 119,906 55,426
---------- ----------- ----------- ---------- ----------- ----------
Net income $ 298,849 $ 163,109 $ 607,566 $ 473.874 $ 420,085 $ 302,127
========== =========== =========== ========== =========== ==========
Summary of operations-50% owned companies:
Storage Company
- ---------------
Revenues $1,427,366 $ 1,393,940 $ 3,985,444 $2,779,048 $ 1,638,233 $1,118,531
Expenses 1,270,969 1,143,409 3,309,706 2,293,665 1,260,152 782,768
---------- ----------- ----------- ---------- ----------- ----------
Net income $ 156,397 $ 250,531 $ 675,738 $ 485,383 $ 378,081 $ 335,763
========== =========== =========== ========== =========== ==========
Company's equity share $ 78,198 $ 125,266 $ 337,869 $ 242,692 $ 189,041 $ 167,882
========== =========== =========== ========== =========== ==========
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
Distribution Company
- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 338,350 $ 254,737 $ 1,023,065 $ 719,188 $ 455,799 $ 274,930
Expenses 305,868 231,937 1,018,950 669,603 447,048 336,803
---------- ----------- ----------- ---------- ----------- ----------
Net income $ 32,482 $ 22,800 $ 4,115 $ 49,585 $ 8,751 $ (61,873)
========== =========== =========== ========== =========== ===========
Company's equity share $ 16,241 $ 11,400 $ 2,058 $ 24,792 $ 4,375 $ (30,937)
========== =========== =========== ========== =========== ===========
Company's equity in earnings of
affiliated companies $ 94,439 $ 136,666 $ 339,927 $ 267,484 $ 193,416 $ 136,945
========== =========== =========== ========== =========== ==========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the historical financial condition and
results of operations of the Company should be read in conjunction with the
Consolidated Financial Statements and related notes set forth in this
Prospectus. Discussions involving the Storage Company and the Distribution
Company should be read in conjunction with the Storage Company Financial
Statements and related notes and the Distribution Company Financial Statements
and related notes set forth in this Prospectus. Unless otherwise noted, the
term "Company" includes the Company and its Subsidiaries and Affiliates.
GENERAL
The Company derives revenues from its exploration, production and
gathering operations. From its 50% investment in the Storage Company and the
Distribution Company, the Company derives earnings from the storage, gathering
and distribution operations of these companies.
In its exploration and production business the Company receives
revenue from the sale of its natural gas production. The Company also receives
revenues from the operation of natural gas facilities. These revenues include
fees for marketing gas on behalf of the working interest partners and
operations fees for general operating duties related to producing wells. In
its gas gathering business, revenues are generated from its ownership interest
in gathering pipelines for natural gas traveling through its gathering systems.
For those facilities built and operated on behalf of joint venture
partners, the Company manages the construction, drilling, development and
operation of the facilities and receives project management fees.
In its storage business, the Storage Company receives fees for use of
its storage space in addition to injection and withdrawal fees for the use of
compression facilities, collectively referred to as storage revenues. Storage
charges to customers are in accordance with storage rates included in its
tariff filed with the Virginia State Corporation Commission.
In the Storage Company's unregulated gas gathering business, revenues
are generated from its ownership interest in gathering pipelines for natural
gas traveling through its gathering systems. The Storage Company also provides
unregulated winter gas supply services.
In its distribution operations, the Distribution Company's gross
profits are realized by the difference between the prices at which it purchases
and the prices at which it sells natural gas to its industrial, commercial and
residential customers. The prices at which the Distribution Company sells
natural gas to its customers are
16
<PAGE> 19
in accordance with the rate schedules in its tariff filed with the Virginia
State Corporation Commission. The Distribution Company purchases natural gas
under short-term contracts which reflect the market price of gas.
The Storage Company's growth in sales of natural gas storage and other
gas services has been stimulated by 1) deregulation of the natural gas industry
as part of which local natural gas distributors for the first time have been
responsible for procuring their own supplies of natural gas, and 2) strong
economic and population growth in the main markets in which the Company
competes, specifically eastern Tennessee and western Virginia.
Adverse weather conditions in the winters of 1993/1994 and 1995/1996
have helped stimulate the Storage Company's ability to generate natural gas
storage and winter service contracts. The Storage Company believes, however,
that these weather conditions are secondary to larger trends such as the
economic and population growth in service territories of the Storage Company's
natural gas storage and winter service customers.
Most of the pipeline facilities on major interstate systems such as
ETNG, CGT and CNG are limited by capacity constraints as to the ability to
deliver additional peak-day volumes. The ability of companies to continue to
supply customers from traditional sources such as the Gulf Coast area are
limited by the high capital costs of building new pipelines and compression
facilities. Local suppliers of natural gas, such as the Company, the Storage
Company and the Distribution Company possess a significant advantage in
delivering these services at a more economical rate due largely to lower
capital costs in developing natural gas facilities.
The Company, the Storage Company and the Distribution Company operate
in a region possessing a favorable tax environment, low labor costs and good
transportation infrastructure. These trends are expected to continue.
RESULTS OF OPERATIONS FOR YEARS 1996 AND 1995
NATURAL GAS STORAGE
Storage revenues from the Saltville Facility totaled $769,000 in 1996.
Initial injections of customer natural gas into the facility occurred in August
1996. Contracted storage capacity for the 1996 contract year totaled 583,000
MMBtu, consisting of 10-day, 60-day and 90-day service. Of the storage
capacity leased to third parties for the 1996 contract year, 10-day service
comprised 59%, 60-day service comprised 10% and 90-day service comprised 31% of
contracted volumes.
NATURAL GAS EXPLORATION AND PRODUCTION
Exploration and production revenues for 1996 reflected sales of
natural gas of $374,000 and well and pipeline operations income of $278,000.
These gas sales and operations fees accounted for 24% of total Company revenue
for 1996. Gas sales and operations income for 1995 totaled $603,000. Revenues
for 1995 reflect $176,000 related to the Company's revision of its method of
recording certain exploration and production revenues. See Note 2 of Notes to
the Consolidated Financial Statements. Of this amount, $73,000 is attributable
to natural gas sales, $68,000 consists of operations fees with the remaining
$35,000 consisting of gathering fees.
Most of the Company's activities prior to 1992 were concentrated in
the exploration and production segment, in which the Company organizes and
manages the drilling and operation of gas wells in joint ventures with other
gas companies and individuals. As the Company's operations have diversified in
recent years with a concentration in developing the operations of the Storage
Company and Distribution Company, the impact of
17
<PAGE> 20
the exploration and production segment on overall Company operations has
declined. There were no wells drilled in 1996 or 1995 in these type ventures,
compared to four in 1994, one in 1993, nineteen in 1992 and twenty in 1991.
PROPANE OPERATIONS
The Company began limited distribution of propane to industrial
customers in Buchanan and Tazewell Counties, Virginia in June 1996. In April
1997, the Company acquired an existing propane business for $840,632. The
Company plans to extend its customer base in these counties in addition to
Russell County as demand warrants and, in part, through selective acquisitions.
Propane sales totaled $47,000 in 1996.
PROJECT MANAGEMENT REVENUES
Project management revenues totaled $321,000 in 1996 as compared to
$757,000 in 1995. Revenues related to the operations of joint venture
facilities including operations performed for the Storage Company and
Distribution Company totaled $202,000 and $275,000, respectively, in 1996 and
1995. The Company also provided management services for the Storage Company
and Distribution Company during 1996 and 1995. These services performed
included financial, marketing, treasury and administrative services. Fees for
these services totaled $119,000 and $204,000, respectively, in 1996 and 1995.
Management revenues related to the development of the Saltville Facility
totaled $278,000 in 1995.
INTEREST INCOME
Interest income in 1996 increased $351,000 to $878,000 from $527,000
in 1995. The majority of this interest income is related to the Company's
participation in tax exempt bond offerings offered by the Industrial
Development Authorities of Russell and Buchanan Counties Virginia. A large
portion of the proceeds of these offerings have been loaned to the Distribution
Company and the Storage Company. Interest earned on promissory notes from
these companies are reflected as interest income by the Company. The 1996
increase largely reflects interest on the 1995 Buchanan County tax exempt bond
offering which closed in December 1995. As described above, a portion of the
proceeds from this offering were loaned to the Distribution Company and the
Storage Company. Notes receivable related to these bond offerings due the
Company from the Distribution Company and the Storage Company totaled $9.5
million at December 31, 1996.
COSTS AND EXPENSES
General and administrative costs for the year ended December 31, 1996
decreased slightly from 1995 reflecting the efforts of the Company during 1996
to shift certain personnel and administrative functions from the corporate
level to the individual operating subsidiary level, including the Storage
Company and the Distribution Company.
Depreciation and amortization expense increased to $387,000 in 1996
from $305,000 in 1995, reflecting recovery of costs for capital projects
recently placed into service. The increase primarily reflects depreciation
expense related to the Saltville Facility which began injections of customer
working gas in August 1996.
The increase in interest expense of $334,000 to $1,007,000 in 1996
primarily reflects the cost of additional debt incurred in conjunction with the
Buchanan County tax-exempt bond offering completed in December 1995. The
interest rate on the bond issue was 9%. In addition, in conjunction with the
Company's purchase of the interest of its joint venture partner in the
development of the Saltville Facility, a promissory note
18
<PAGE> 21
for $1,725,000 was issued by the Company as partial consideration (see Note 8
of Notes to the Consolidated Financial Statements). The Company capitalizes
interest on expenditures for significant projects while activities are in
progress to bring the assets to their intended use. Capitalized interest
totaled $290,000 in 1996 and $93,000 in 1995.
INCOME TAXES
As indicated in Note 2 to the Consolidated Financial Statements, the
Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires an asset-and-liability method of
accounting for income taxes. Under the asset-and-liability method, deferred
income taxes reflect the temporary differences between assets and liabilities
recognized for financial reporting purposes and amounts recognized for tax
purposes. The Company's provision for income taxes as a percentage of income
before earnings of affiliated companies and income taxes was 36% and 23% for
the years ended December 31, 1996 and 1995, respectively.
EQUITY INVESTMENTS
The Company has a 50% ownership interest in the Storage Company and in
the Distribution Company. The Company accounts for its investments in these
companies using the equity method. Earnings from the Company's 50% ownership
in the Storage Company and the Distribution Company increased $73,000 to
$340,000 in 1996 from $267,000 in 1995, reflecting increased combined 1996 net
income of $145,000 for these companies. Following is a discussion of the
operations of the Storage Company and Distribution Company for 1996 and 1995.
NATURAL GAS STORAGE. Storage revenues from the Early Grove Facility
totaled $2.1 million in 1996. This reflects an increase in revenues of
$900,000 over 1995 revenues of $1.2 million, or 74%. This increase is
attributable to an increase in leased storage capacity at Early Grove. The
total contracted storage capacity increased 574,500 MMBtu to 1,560,000 MMBtu
for the 1996 contract year from 985,500 MMBtu for the 1995 contract year.
Contract years vary from customer to customer and do not correspond to calendar
years.
Of the storage capacity leased to third parties for the 1996 contract
year, 60-day service comprised 11% of contracted volumes and 90-day service
comprised 48% while 150-day service comprised the remaining 41% of total
contracted volumes. For the 1995 contract year, 60-day service comprised 18%
of total contracted volumes, 90-day service comprised 57% and 150-day and
interruptible service comprised the remaining 25% of total contracted volumes.
NATURAL GAS GATHERING. Gathering revenues totaled $378,000 in 1996,
reflecting a decrease of $159,000 from 1995 gathering revenues of $537,000.
This decrease partially reflects a decrease in system throughput during 1996 of
163,320 MMBtu. In addition, $110,000 of 1995 revenue reflects the Storage
Company's revision of its method of recording certain gathering revenues. See
Note 2 of Notes to the Storage Company's Financial Statements. The revision is
also reflected in operating and maintenance expenses, where $44,000 in expenses
related to the Storage Company's gathering facilities are reflected as a result
of the revision.
In addition to storage-service and gathering revenues, during 1996 and
1995 the Storage Company provided natural gas to certain of its storage
customers during the peak winter service periods. Revenues from winter service
sales totaled $1.1 million in 1996 compared to $888,000 in 1995. Purchased gas
expenses related to these sales totaled $974,000 and $681,000 for 1996 and
1995, respectively.
19
<PAGE> 22
NATURAL GAS DISTRIBUTION. Distribution revenues increased to $629,000
in 1996 from $556,000 in 1995, an increase of 13%. This increase is partially
due to an increase in residential and commercial customers, reflecting 1996
expansions of distribution facilities in Russell and Buchanan Counties. The
increase also reflects an increase in the average sales price for industrial
customers to $5.30 per MMBtu in 1996, compared to $4.44 per MMBtu for these
customers in 1995.
Sales volumes for 1996 totaled 113,378 MMBtu, a decrease of 4,456
MMBtu from 1995 sales volumes of 117,834 MMBtu. Volume usage by the
Distribution Company's industrial customers decreased to 94,591 MMBtu in 1996
from 103,527 MMBtu in 1995, reflecting primarily the curtailment of gas service
to certain customers with interruptible service contracts for a period of
several days during February 1996. Commercial and residential usage increased
4,480 MMBtu to 18,787 MMBtu in 1996 from 14,307 MMBtu in 1995. The average
sales price per MMBtu increased to $5.53 in 1996 from $4.72 in 1995. Purchased
gas costs related to these sales totaled $330,000 and $234,000 in 1996 and
1995, respectively.
RESULTS OF OPERATIONS FOR THE FIRST THREE MONTHS OF 1997 AND 1996
OVERVIEW
During the three month period ended March 31, 1997, Virginia Gas
Company (the "Company") recorded net income of $298,849, compared to $163,109
for the same period in 1996. The net income per common share available to
common stockholders for the corresponding periods was $.08 in 1997 compared
with $.12 in 1996. The number of weighted-average shares used in calculating
income per common share was 3,188,659 and 808,509 for the quarters ended March
31, 1997 and 1996, respectively.
NATURAL GAS MARKETING, EXPLORATION AND PRODUCTION
The Marketing Company began marketing natural gas during the first
quarter of 1997. The initial source of gas supply for the Marketing Company is
the natural gas production from wells operated by the Company. Sales of
natural gas during the first quarter of 1997 totaled $1,067,000 on sales
volumes of 348,000 MMBtu. Costs associated with these sales totaled $945,000.
Exploration and production revenues, reflecting the Company's revenue
interest in the above sales of natural gas, included natural gas sales of
$122,000 and well and pipeline operations income of $91,000. The 1997 revenues
reflect a 6% increase over 1996 first quarter exploration and production
revenues of $201,000.
STORAGE REVENUES
Storage revenues from the Company's Saltville facility during the
first quarter of 1997 totaled $626,000, consisting of fees charged for storage
and the injections and withdrawals of natural gas. Initial injections of
customer natural gas into the facility occurred in August 1996. Contracted
storage capacity for the current contract year totals 583,000 MMBtu, consisting
of 10-day, 60-day and 90-day service. Of the storage capacity leased to third
parties for the current contract year, 10-day service comprised 59%, 60-day
service comprised 10% and 90-day service comprised 31% of contracted volumes.
PROJECT MANAGEMENT REVENUES
Project management revenues for the three month periods ended March
31, 1997 and 1996 totaled $65,000 and $94,000, respectively. Revenues related
to the operation of other joint venture facilities, including operations
services performed for the Storage Company and the Distribution Company,
totaled $65,000 in 1997 compared to $43,000 in 1996. The Company also provided
management services during 1996 for the Storage
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<PAGE> 23
and Distribution companies for which it received management fees. The services
performed included financial, marketing, treasury and administrative services.
These fees totaled $51,000 for the three month period ended March 31, 1996.
INTEREST INCOME
Interest income for the three month period ended March 31, 1997
totaled $251,000. The 1996 amount for the corresponding period was $217,000.
The majority of interest income is related to the Company's participation in
tax exempt bond offerings offered by the Industrial Development Authorities of
Russell and Buchanan Counties, Virginia. A portion of the proceeds of these
offerings has been loaned by the Company to the Distribution Company and the
Storage Company. Interest earned on promissory notes from these companies is
reflected as interest income by the Company. The increase in the 1997 period
largely reflects interest earned on the 1997 Russell County tax exempt bond
offering which closed in February 1997.
COSTS AND EXPENSES
General and administrative costs were $215,000 for the quarter ended
March 31, 1997, an increase of $83,000 over the first quarter 1996 total of
$132,000. The increase reflects the growth in Company operations during 1996
and the accompanying growth in personnel and facilities.
Operations and maintenance expenses totaled $100,000 during the first
quarter of 1997, reflecting the operations of the Saltville storage facility;
there were no corresponding Saltville facility operations in the first quarter
of 1996.
Depreciation and amortization expense increased to $166,000 in the
first quarter of 1997 from $68,000 in the first quarter of 1996. The increase
reflects the recovery of costs for capital projects recently placed in service,
with much of the increase largely attributable to recovery of capital costs of
the Saltville storage facility, which began operations in August 1996.
The increase in interest expense of $62,000 to $318,000 in 1997 from
$256,000 in the first quarter of 1996 primarily reflects the cost of additional
debt incurred in conjunction with the Russell County, Virginia revenue bond
offering which closed in February 1997. The Company capitalizes interest on
expenditures for significant projects while activities are in progress to bring
the assets to their intended use. Capitalized interest for the three month
periods ended March 31, 1997 and 1996 totaled $71,443 and $61,394,
respectively.
INCOME TAXES
The Company's provision for income taxes as a percentage of income
before taxes and equity in earnings of affiliated companies was 33% and 17% for
the three month periods ended March 31, 1997 and 1996, respectively.
EQUITY INVESTMENTS
Earnings from the Company's 50% ownership in the Storage Company and
the Distribution Company decreased $42,000 to $94,000 for the first quarter
1997 from $136,000 in 1996 due primarily to increases in depreciation,
operations and maintenance expenses and interest expense.
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<PAGE> 24
NATURAL GAS STORAGE. Storage revenues from the Early Grove facility
for the three months ended March 31, 1997 were $655,000 compared with storage
revenues of $396,000 for the same period in 1996. This increase is
attributable to an increase in leased storage capacity at the Early Grove
facility. Contracted storage capacity for the 1996/1997 season is 1,560,000
MMBtu, an increase of 846,000 MMBtu over contracted capacity of 985,500 MMBtu
for the 1995/1996 season. Contract years vary from customer to customer and do
not correspond to calendar years.
Of the storage capacity leased for the current season, 60-day service
comprised 11%, 90-day service comprised 48% and 150-day service comprised the
remaining 41% of total contracted volumes.
NATURAL GAS GATHERING. Gathering revenues totaled $87,000 for the
first quarter 1997 compared to $120,000 in 1996. Natural gas throughput for
the first quarters ended March 31, 1997 and 1996 totaled 289,633 MMBtu and
400,665 MMBtu, respectively. The decrease in throughput is partially
attributable to production decline and also reflects the decreased peak winter
service sales volumes, described below. A portion of these peak winter sales
volumes are transported through the Storage Company's gathering system.
During the peak winter service periods, the Storage Company provides
natural gas to certain of its storage customers. For the three months ending
March 31, 1997, revenues from winter service sales totaled $612,000, compared
to $773,000 in 1996. Purchased gas expense related to these sales totaled
$509,000 and $635,000 in 1997 and 1996, respectively. The decrease in sales
revenues reflects a volume decrease of 38,546 MMBtu to 131,366 MMBtu in 1997
from 169,912 MMBtu in 1996. This volume decrease largely reflects the milder
seasonal temperatures experienced during the first quarter 1997 as compared to
the corresponding period in 1996.
NATURAL GAS DISTRIBUTION. Distribution revenues for the first quarter
1997 were $220,000, an increase of $61,000 over 1996 revenues of $159,000.
Sales volumes for the first quarter 1997 totaled 38,365 MMBtu compared with
29,126 MMBtu for the same period in 1996, an increase of 32%. This volume
increase is largely due to increased usage during the period by one of the
Distribution Company's negotiated service customers. Residential customer
usage decreased 20% during 1997 from 1996 reflecting milder seasonal
temperatures. The average sales price per MMBtu for the first quarter 1997 was
$5.74 compared with $5.46 for the same period in 1996. The increase in sales
price per MMBtu is largely reflected in sales to the Distribution Company's
negotiated service customers, customers whose contracts reflect selling prices
based upon alternative fuels pricing; pricing for these alternative fuels
reflected higher costs in 1997 compared with 1996. Purchase gas costs related
to these first quarter sales totaled $121,000 in 1997 and $77,000 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
The Company's working capital decreased to a $.4 million deficit at
December 31, 1996 from a $.2 million deficit at December 31, 1995. Cash
decreased to $1.7 million at December 31, 1996 compared to $2.1 million at
December 31, 1995 as cash used in operations and investing activities exceeded
cash provided by financing activities. The Company's current ratio at December
31, 1996 decreased to .87 from .94 at the end of 1995.
The combined working capital of the Storage Company and the
Distribution Company decreased to a $.6 million deficit at December 31, 1996
from a $1.9 million surplus at the end of 1995. The combined current ratio of
these companies at December 31, 1996 decreased to 0.8 from 2.06 at the end of
1995.
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<PAGE> 25
The Company's working capital increased to a $.8 million surplus at
March 31, 1997 from a $.4 million deficit at December 31, 1996. The combined
working capital of the Storage Company and the Distribution Company increased
to a $1.4 million surplus at March 31, 1997 from the $.6 million deficit at
December 31, 1996. Cash decreased to $1,250,000 at March 31, 1997 from
$1,653,000 at December 31, 1996 as net cash used in operating and investing
activities exceeded net cash provided by financing activities. The Company's
current ratio at March 31, 1997 increased to 1.29 from .87 at December 31,
1996. Capital investment for the first quarter totaled $1.4 million.
The Company anticipates development activities for the remainder of
1997 will result in net outflows of cash. The Company expects to fund such
activities from the issuance of additional debt and/or equity in addition to
operating cash flows.
INVESTING AND FINANCING ACTIVITIES
The Company's cash requirements prior to 1996 have been met out of
cash generated from operations, and amounts borrowed in conjunction with tax
exempt bonds issued by the Industrial Development Authorities of Russell and
Buchanan Counties, Virginia in addition to other borrowings. The Company's
rapid pace of growth and the timing of the completion of financing transactions
periodically have limited the Company's short term liquidity.
Capital investments of $11.6 million in 1996 reflect primarily the
development of the Saltville Facility ($10.3 million) and the P-25 pipeline
project ($.9 million).
In October 1996, the Company completed an initial public offering of
its common stock. The offering resulted in the issuance of an additional
1,533,000 shares of common stock of the Company at $6 per share. Net proceeds
realized from the offering approximated $8 million. The common stock of the
Company is listed on the Nasdaq National Market System and trades with the
symbol "VGCO."
In September 1995 the Company issued and sold a total of 2,000 shares
of preferred stock in a private placement to a sole investor, Sirrom Capital
Corporation, at a price of $1,000 per share. Proceeds from the sale were used
for working capital, the retirement of debt and general corporate purposes.
During 1995 the Company issued and sold a total of 124,316 shares of
common stock in conjunction with the exercise of stock options. Proceeds from
the sales totaled $496,000.
In May 1996 the Company issued 800,058 shares of its Common Stock to
one investor pursuant to a private placement. The net proceeds of the sale of
these shares were $4,401,317.
In July 1996 the Company issued 42,000 shares of its Common Stock to
an officer of the Company. The net proceeds of the sale of these shares were
$252,000.
The Company's material capital expenditure commitments for 1997 are
expected to include $7.8 million for the development of the P-25 intrastate
pipeline and $1.1 million for continued development of the Saltville Facility.
The Distribution Company expects to spend $2.5 million in 1997 expanding its
distribution service to the town of Lebanon. Funding for these commitments
will be obtained from a portion of the proceeds of the October 1996 initial
public offering, a portion of the proceeds from the February 1997 issuance of
tax-exempt bonds by the Industrial Development Authority of Russell County,
Virginia, proceeds from additional
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<PAGE> 26
borrowings and/or a secondary offering of the Company's common stock and
operating cash flows of the Company.
BUSINESS
OVERVIEW
The Company, its Subsidiaries and Affiliates form an integrated
natural gas company engaged in natural gas storage, gathering and distribution
services; natural gas exploration, production and well operations; pipeline
operations; natural gas marketing; and propane distribution. The Company
conducts its operations primarily in the southwestern counties of the
Commonwealth of Virginia.
Substantially all of the Company's revenues from the date of its
formation in 1987 to 1992 were derived from exploration and production
operations. In 1992, however, the Company reduced its concentration on
exploration and production activities and began diversifying into the natural
gas storage, gathering and distribution business. Expanding into these areas
has resulted in more stable and predictable revenue sources. A propane
distribution Subsidiary was established in 1996, and a natural gas marketing
Subsidiary was established in 1997.
The Company's primary objectives are to continue to develop and expand
its existing storage, gathering and distribution activities and to expand its
business to include pipeline operation, natural gas marketing and propane
distribution services. The Company seeks to take advantage of deregulation of
the domestic natural gas industry by providing services previously supplied by
the interstate pipeline companies. The Company's strategy is to 1) increase
storage and related pipeline capacity to meet increasing demand for natural gas
services in southwestern Virginia and northeastern Tennessee, 2) to add value
to its natural gas production by distributing its natural gas directly to
residential, commercial and industrial users through its natural gas utility,
3) to maximize the volume of natural gas it gathers and markets, 4) to develop
and expand, through acquisition, into propane distribution services, and 5) to
increase its natural gas reserves through selective acquisitions.
The Company expects consumption of natural gas to continue to grow
faster than alternative fossil fuel because of environmental pressure to use
cleaner burning fuels, the abundance of reasonably priced natural gas supply,
and the rapid progress of new natural gas technologies. The Company believes it
is positioned to take advantage of the increasing demand for natural gas
services in the growing markets in southwestern Virginia and northeastern
Tennessee due to its integrated structure, its ability to provide a variety of
low cost storage services and its ability to deliver natural gas to its
industrial, commercial and residential customers reliably during peak demand
periods.
SUBSIDIARIES AND AFFILIATES
The Company has four consolidated wholly-owned Subsidiaries: the
Exploration Company, the Pipeline Company, the Propane Company, and the
Marketing Company Affiliates of the Company, the Distribution Company and the
Storage Company, are each owned 50% by the Company and 50% by one individual
investor, who has no affiliation with either the Company, or any executive
officer, director or controlling shareholder of the Company.
The Company provides certain management services for each of the
Subsidiaries and Affiliates. These services include, but are not limited to,
management, treasury and finance, accounting, information systems,
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<PAGE> 27
human resources, payroll and administration. There are no formal management
contracts or other similar agreements among the Company or any of its
Subsidiaries or Affiliates regarding the payment of management fees or
governance of the their operations. The Company does not presently receive any
management fees for these services. Further, there are no agreements between
the Company and the other owner of the Distribution Company and the Storage
Company relating to buy-sell, shareholders' matters, or "deadlock" issues.
See "Risk Factors -- Subsidiaries and Affiliates."
The Distribution Company and the Storage Company are the holders of
Certificates of Public Convenience and Necessity issued by the SCC that are
required for such companies to conduct their business. Some of the Storage
Company's operations are regulated by both the SCC and the FERC. The Pipeline
Company has applied for a Certificate of Public Convenience and Necessity from
the SCC and its operations will likewise be regulated by both the SCC and the
FERC. In connection with the financing of the Distribution Company's
distribution business, and the Storage Company and Pipeline Company's storage
and related pipeline businesses, the Company participated in three tax exempt
bond issues in 1994 and 1995 that provided financing for these various
projects. Funds from such financing were allocated, as needed, to the various
Subsidiaries and Affiliates and each such entity has provided the Company with
interest-bearing Notes evidencing its obligation of repayment of the funds
advanced by the Company. In February 1997, the Company completed its
participation in a fourth tax exempt bond issue, the proceeds of which will
provide financing for distribution, storage and pipeline projects.
STORAGE OPERATIONS
The Company operates the only two underground natural gas storage
facilities in the Commonwealth of Virginia, the Saltville Facility and the
Early Grove Facility.
The Pipeline Company has developed a high deliverability salt cavern
storage facility in Saltville, Virginia ("Saltville Facility") for use as a
high rate, peak usage storage facility. The Saltville Facility uses caverns
created in underground salt beds to store natural gas. The Company's
engineering staff believes the ultimate working gas capacity of the Saltville
Facility could be up to 10,000,000 MMBtu. In June 1996 the Pipeline Company
filed an application with the SCC for a Certificate of Public Convenience and
Necessity for the operation of the Saltville Facility. In July 1996 the SCC
issued an order authorizing the Pipeline Company to begin service on an interim
basis using the rates set forth in the application. In November 1996, the
Pipeline Company received a limited jurisdiction certificate from the FERC
authorizing the Pipeline Company to engage in the sale, transportation
(including storage), or assignment of natural gas that is subject to FERC's
jurisdiction under the Natural Gas Act, and to charge rates for its interstate
service equal to the intrastate rates approved by the SCC. The Saltville
Facility provides 10, 60 and 90-day service and 20-day refill capacity. In
August 1996 the Pipeline Company injected the first working gas into the field.
The Pipeline Company's customers contracted for 583,000 MMBtu of capacity for
the 1996/1997 winter heating season. Current customer commitments total
633,000 MMBtu of capacity for the 1997/1998 winter season. Peak daily
withdrawal rates of 40,000 MMBtu were achieved in January 1997.
In December 1991, the Company, through the Storage Company, purchased
the Early Grove natural gas field located in Scott and Washington Counties in
Virginia ("Early Grove Facility") for conversion to underground natural gas
storage. The Early Grove Facility was purchased for an aggregate consideration
of $500,000. The Storage Company produced natural gas from the field during
1992 while conducting geological, engineering and marketing studies. In June
1993, the Storage Company injected the first working natural gas into the
field. In December 1994 the Storage Company applied for a Certificate of Public
Convenience and Necessity from the SCC and received a final order from the SCC
in September 1995. In October 1995, the Storage Company received a limited
jurisdiction certificate from the FERC authorizing the Storage Company to
engage in the sale, transportation (including storage), or assignment of
natural gas that is subject to FERC's
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<PAGE> 28
jurisdiction under the Natural Gas Act, and to charge rates for its interstate
service equal to the intrastate rates approved by the SCC. The Early Grove
Facility has 29 storage wells and a certificated area of 2,900 acres. The
Storage Company's rates for 60-day, 90-day, 120-day and 150-day service are
$1.86, $1.50, $1.33 and $.85 cents per MMBtu stored, respectively, plus $.05
per MMBtu injected and $.05 per MMBtu withdrawn.
Total contracted storage volume for the 1994/1995 contract year was
520,000 MMBtu, consisting of 60-day, 90-day and 150-day service. Volume for the
1995/1996 contract year was 985,500 MMBtu. Contracted volume for the 1996/1997
contract year is 1,560,000 MMBtu. Contracts range from one to fifteen years.
The Storage Company increased the deliverability of the Early Grove Facility by
reworking existing wells, drilling new wells, injecting additional base gas,
installing new compression equipment and increasing the maximum operating
pressure of the field to 2,000 PSI from 1,400 PSI. Peak January deliverability
has been increased from 1,000 MMBtu per day in 1992 to over 16,000 MMBtu per
day in 1997. Proposed improvements could increase the field's capacity to
2,200,000 MMBtu for the 1998/1999 contract year. Contract years vary from
customer to customer and do not correspond to calendar years. Increases are
expected to be accomplished by drilling new wells, adding additional base gas
and increasing the maximum operating pressure to up to 2,400 PSI.
The Company is continually assessing the feasibility of developing
additional natural gas storage facilities in its area of operation and is
analyzing available geological and geophysical data and land records related
thereto.
The Storage Company currently has contracts for storage with the
following entities:
KNOXVILLE UTILITIES BOARD. Contracted annual storage is for 270,000
MMBtu in 1995 and 450,000 MMBtu from 1996 to 2002. The estimated gross annual
value of this contract was $432,000 in 1995 and $720,000 thereafter.
POWELL-CLINCH UTILITY DISTRICT. Contracted annual storage is for
150,000 MMBtu in 1995 and 525,000 MMBtu in 1996, increasing by 75,000 MMBtu
annually to 975,000 dth in 2002 and remaining at 975 dth through 2009. The
estimated gross annual value of this contract was $142,500 in 1995, $498,750 in
1996, increasing $71,250 per year from 1997 to a total of $926,250 per year
from 2002 to 2009.
ROANOKE GAS COMPANY. Contracted annual storage of gas is for 292,500
MMBtu in 1995 and 1996. The estimated gross annual value of this contract is
$468,000. Roanoke has indicated interest in retaining this contract after its
expiration following the 1996 contract year.
UNITED CITIES GAS COMPANY. Contracted annual storage is for 180,000
MMBtu through the 2000 contract year. The estimated annual value of this
contract is $352,800.
PUBLIC UTILITY DISTRICT OF JEFFERSON AND COCKE COUNTIES. Contracted
annual storage is for 75,000 MMBtu in 1995, to 112,500 MMBtu in 1996, and to
150,000 MMBtu from 1997 to 2002. The estimated gross annual value of this
contract is $71,250 for 1995, $106,875 for 1996, and $142,500 thereafter.
The Knoxville and Powell-Clinch contracts may be serviced from East
Tennessee Natural Gas Company's ("ETNG") receipt points other than Early Grove,
allowing the Storage Company to meet the needs of these customers from its
facilities in Dickenson County and/or from its Affiliates' Facilities in
Buchanan County or Saltville.
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<PAGE> 29
GAS GATHERING OPERATIONS
The Storage Company and the Exploration Company operate various
unregulated gas gathering systems located mainly in Dickenson and Buchanan
Counties in Virginia which connect the Company's operated wells to interstate
pipelines. The gathering systems consist of 102.6 miles of pipeline, two 640
horsepower compressor stations and one 120 horsepower compressor station. The
gathering systems connect the Company's gas production to the ETNG, CNG and
CGT interstate pipeline systems as well as to the Distribution Company's
distribution system. Total 1996 throughput for the Company's gathering systems
was 1.67 Bcf.
For such gas gathering services, the Company collects certain
transportation allowances from producers (owners of natural gas).
Transportation allowances vary depending upon contractual arrangements and
currently range from $0.05 to $0.50 per MMBtu.
DISTRIBUTION OPERATIONS
The Company, through its Affiliate, the Distribution Company, owns and
operates natural gas distribution systems in Russell and Buchanan Counties in
Virginia. In 1992, the Distribution Company commenced providing gas service on
an unregulated basis to a limited number of customers. In 1993, the
Distribution Company applied to the SCC for a Certificate of Public Convenience
and Necessity authorizing it to provide natural gas service to the town of
Castlewood, Virginia. The Certificate was issued by the SCC in August 1993. An
application was made to the SCC in March 1994 to extend the Distribution
Company's service territory to include all of Russell County and all of
Buchanan County. The SCC approved the Certificate amendment in August 1994. The
Distribution Company is classified as a Virginia public service corporation.
The Distribution Company has been issued a franchise from the town of
Lebanon in Russell County and plans to build a 10 mile pipeline from its
connecting point at the ETNG interstate pipeline near Castlewood, Virginia.
The Company has entered into a franchise agreement with the town of
Richlands in Tazewell County which adjoins the Distribution Company's current
service areas in Buchanan and Russell Counties and Smyth County, where the
Saltville Facility is located. The Distribution Company has applied to the SCC
for a Certificate of Public Convenience and Necessity to provide natural gas
service for Tazewell County. The Company also plans to provide service in
Dickenson County, which adjoins Russell and Buchanan Counties to the west,
where the Company currently operates natural gas production and gathering
systems. See "Risk Factors -- Company Indebtedness."
The Distribution Company's tariffs to its customers are set by the
SCC.
The Distribution Company has an interruptible contract with ETNG
allowing it access to such company's natural gas trunk lines through which it
distributes natural gas to its customers. The Distribution Company has a firm
transportation contract with ETNG which will provide it with firm service for a
ten-year term during the winter months of November through March. This firm
transportation contract provides that the Distribution Company pay ETNG $.24,
plus fuel expenses, per MMBtu transported. The Distribution Company's
interruptible contract with ETNG provides that the Distribution Company pay
ETNG $.2511, plus fuel expenses, per MMBtu transported. Any disruption
accessing ETNG's natural gas truck line could result in the Distribution
Company's inability to serve its customers in the affected areas. See "Risk
Factors -- Relationship with Other Pipeline Companies."
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<PAGE> 30
PIPELINE OPERATIONS
In 1996, the Company initiated environmental and feasibility studies
for the construction of an 80 mile intrastate natural gas pipeline which will
connect the Company's Saltville Facility to the ETNG interstate pipeline system
and transport natural gas to markets in Smyth, Wythe and Pulaski Counties in
southwestern Virginia. The total estimated cost of construction of the
pipeline, designated P-25, is $14,600,000.
The P-25 pipeline will be constructed and maintained consistent with
applicable federal, state and local laws and regulations and accepted industry
practice. The first phase of construction of the pipeline consists of 20 miles
of pipe connecting the Company's Saltville Facility to the ETNG interstate
pipeline system and twinning the ETNG line to the town of Marion. The Company
has contracted with the local distribution company ("LDC") which serves Smyth,
Wythe and Pulaski Counties to provide pipeline capacity in order for the LDC to
supply 20,000 MMBtu per day of service to supply the towns of Marion,
Wytheville, Dublin, Pulaski and Radford. The Company has filed for a
Certificate of Public Convenience and Necessity with the SCC. A tariff will be
set by the SCC and charged by the Pipeline Company for reserved capacity in the
pipeline. Upon completion of construction and obtaining necessary regulatory
approvals, the Company expects the P-25 pipeline to commence operations in late
1997.
Substantially all of the operations conducted through the P-25
pipeline constitute common carrier pipeline activities. Such common carrier
activities are those under which transportation in the pipeline is available at
tariffs published with the SCC to any shipper of natural gas who requests such
services, provided that each product for which transportation is requested
satisfies the conditions and specifications for transportation. For a
description of the tariff regulations applicable to the common carrier
transportation activities of the Company, see "-- Regulation."
PROPANE OPERATIONS
The Company recently commenced distribution of propane in its area of
operations in southwestern Virginia. Because of shared costs and similarities
such as easily converted appliances, many natural gas utilities provide both
products to their customers. Customers often do not distinguish between the
two forms of gas when used in the home. The Company intends, in part, to
develop its propane distribution business through selective acquisitions. In
that regard, the Company acquired a portion of Blue Grass Oil Incorporated's
existing propane distribution business in Buchanan, Dickenson and Russell
Counties and in the western part of Tazewell County, Virginia in April 1997 for
$840,632.
GAS MARKETING OPERATIONS
In 1997 the Company commenced marketing operations of natural gas and
natural gas storage services. The initial source of natural gas supply and
services for the Company will be provided by Company operated wells and
facilities operated by Subsidiaries and Affiliates of the Company. The Company
anticipates that future expansion of its marketing operations will include
third party supplies and services.
EXPLORATION AND PRODUCTION OPERATIONS
The Company's exploration and production operations consist of
acquiring and developing natural gas properties by taking mineral leases from
landowners, drilling and completing wells on the properties and building gas
gathering lines. These activities are frequently organized on a joint venture
basis with third parties, with the Exploration Company acting as contractor and
operator of the ventures, retaining a working interest in the project and
receiving some promotional consideration.
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<PAGE> 31
ACREAGE. The following table sets forth the gross and net acres of
developed and undeveloped natural gas leases held by the company as of
December 31, 1996. Undeveloped acreage includes leasehold interests which may
already have been classified as containing proved undeveloped reserves.
<TABLE>
<CAPTION>
DEVELOPED ACREAGE(1) UNDEVELOPED ACREAGE
-------------------- -------------------
GROSS NET GROSS NET
----- --- ----- ---
<S> <C> <C> <C> <C>
Virginia . . . . . . . . . . . . . . . . . . . . 11,096 3,537 2,239 2,239
West Virginia . . . . . . . . . . . . . . . . . . 257 21 -- --
----- ---
Total . . . . . . . . . . . . . . . . . . 11,353 3,558 2,239 2,239
====== ===== ===== =====
</TABLE>
(1) Developed acreage is acreage assigned to producing wells for the
spacing unit of the producing formation. Developed acreage in certain
of the Company's properties that include multiple formations with
different well spacing requirements may be considered undeveloped for
certain formations, but has only been included as developed acreage in
the presentation above.
GAS RESERVES. The Company has conducted an "in-house" estimate of
the Company's proved reserves, projected future production and estimated future
net revenues from production of proved reserves as of December 31, 1996. The
Company's estimates were based upon a review of production histories and other
geologic, economic, ownership and engineering data provided by the Company. In
determining the estimates of reserve quantities that are economically
recoverable, the Company used natural gas prices and estimated development and
production costs as of December 31, 1996. For further information concerning
the present value of future net revenues from the proved reserves, see Note 14
of Notes to the Consolidated Financial Statements.
The following table sets forth gas reserve information estimated as of
December 31, 1996. The present values of estimated future net revenues
(discounted at 10% per annum) shown in the table are not intended to represent
the current market value of the proved reserves owned by the Company.
<TABLE>
<CAPTION>
PROVED RESERVES
------------------------------------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- -----
<S> <C> <C> <C>
Gas (MMcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,570 593 3,163
Present value of estimated future net revenues before income
taxes (in thousands) . . . . . . . . . . . . . . . . . . . . . . $4,601 $1,194 $5,795
Present value of future net cash flow after income taxes
(in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . $2,848 $ 785 $3,633
</TABLE>
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer. The reserve data set forth herein represent only estimates. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment and the existence of
development plans. As a result, estimates of different engineers often vary.
In addition, results of drilling, testing and production subsequent to the date
of an estimate may justify revision of such estimates. Accordingly, reserve
estimates are often different from the quantities of oil and gas that are
ultimately recovered. Further, the estimated future net revenues from
29
<PAGE> 32
proved reserves and the present value thereof are based upon certain
assumptions, including geologic success, prices, future production levels and
costs, that may not prove correct over time. Predictions about prices and
future production levels are subject to great uncertainty, and the
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they are based. Oil and gas prices have fluctuated
widely in recent years. The weighted average sales price utilized for the
purposes of estimating the Company's proved reserves and future net revenues
therefrom as of December 31, 1996 was $4.23 per Mcf. for gas. The Company
estimates that, if all other factors (including the estimated quantities of
economically recoverable reserves) were held constant, a $.10 per Mcf. decline
in gas price from that used in the reserve reports would reduce such present
value by approximately $152,000. See "Risk Factors -- Uncertainty of Natural
Gas Prices and Supplies."
PRODUCTION. All of the Company's wells produce primarily gas. The
following table sets forth the Company's gas production and sales data during
the period indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Net production:
Gas (Mcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,995 160,798
Average sales price per unit:
Gas ($Mcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.53 $1.47
Average net production cost
($/Mcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.22 $0.20
</TABLE>
The Company owned interests in 85 gross (21 net) natural gas wells as
of December 31, 1996. A well is categorized under state reporting regulations
as an oil well or a gas well based upon the ratio of gas to oil produced when
it first commenced production, and such designation may not be indicative of
current production.
DRILLING ACTIVITY. The Company did not drill or complete any wells
during 1995 or 1996.
OIL FIELD SERVICE OPERATIONS. The Company engages in the business of
supervising drilling operations and operating producing wells. As of December
31, 1996 the Company operated 80 wells located in Virginia and West Virginia.
As operator of producing wells, the Company is responsible for the maintenance
and verification of all production records, contracting for gas sales,
distribution of production proceeds and information, and compliance with
various state and federal regulations. Generally, the Company provides the
routine day-to-day production operations for producing wells and is paid for
such services on a per well, monthly fee basis.
FINANCING
The Company, in connection with the Industrial Development Authorities
of Russell and Buchanan Counties, Virginia, participated in four tax exempt
bond issues for the purpose of providing funds, together with other available
funds to (i) acquire, improve, construct and equip natural gas distribution
facilities and supporting storage, production and gathering facilities to serve
natural gas customers in and near the towns of Castlewood and Grundy, Virginia,
(ii) fund a bond reserve fund and (iii) pay certain costs of issuance of the
offered bonds.
30
<PAGE> 33
The bonds range in maturity from 1 to 30 years and bear interest at rates of
7.35% to 9.5% annually. The bonds are secured by the general revenues of the
Company.
The Company has not established a line of credit with any financial
institution. The Company's ability to finance its current and proposed
operations are therefore dependent upon future participation in tax exempt bond
issues or other financing options.
COMPETITION
The Company competes in the areas of exploration, production,
transportation, marketing and distribution of natural gas with major oil
companies, other independent oil and gas concerns and individual producers and
operators. In the areas of utility services and pipeline operations, the
Company competes with major utility companies and pipeline companies. The
deregulation of the natural gas industry has provided the Company with
marketing and transportation opportunities; however, other pipeline companies,
marketers and brokers with resources far greater than the Company likewise are
the beneficiaries of such deregulation. While the Company currently operates
the only natural gas storage facility in Virginia, it is likely that other
distribution and marketing companies will engage in similar activities. Many of
these competitors have substantially greater financial and other resources than
the Company.
REGULATION
SCC REGULATION. The operations of the Distribution Company are wholly
intrastate and are therefore regulated by the SCC. The SCC regulates the rates
which the Distribution Company can charge to its customers. The rates are set
at levels sufficient to recover the cost of service to its customers including
an approved rate of return. The Distribution Company can apply for revised
rates based on actual costs if its costs are higher than previously anticipated
and conversely the SCC may require a reduction in rates if returns are higher
than anticipated. The Distribution Company believes the rates currently in
effect are adequate to cover the cost of service and achieve the desired rate
of return. The Distribution Company's appliance sales and installations are
non-regulated businesses.
Some of the Storage Company's operations are regulated primarily by
the SCC and the FERC, which has jurisdiction over interstate sales of storage.
The Storage Company's rates are approved also by the SCC and are based on the
cost of service of the facility which includes an approved rate of return. The
Storage Company can apply for revised rates based on actual costs if they are
higher than previously anticipated and conversely the SCC may require a
reduction in rates if returns are higher than anticipated. The Storage Company
believes the rates currently in effect are adequate to cover the cost of
service and achieve the desired rate of return. The Storage Company's gathering
systems are exempt from regulation.
The Company's Saltville Facility will be similarly regulated by the
SCC. The Pipeline Company will operate the Saltville Facility and, on June 10,
1996, filed an application for a Certificate of Public Convenience and
Necessity with the SCC. In July 1996 the SCC issued an order authorizing the
Pipeline Company to begin service on an interim basis using the rates set forth
in the application. In addition, the Pipeline Company filed for a limited
jurisdiction certificate for the Saltville Facility with the FERC as described
below.
The Pipeline Company's P-25 pipeline from Saltville to Radford will
also be regulated by the SCC. In January 1997, the Pipeline Company filed an
application for a Certificate of Public Convenience and Necessity to operate
the pipeline. The Pipeline Company has also filed with the SCC proposed
tariffs on the basis of revenues, expenses and investments. A variety of
factors can affect the rates of return permitted by the SCC. In
31
<PAGE> 34
approving the Pipeline Company's tariffs, the SCC retains the right to review,
in the future, the tariffs established and the service provided.
The Company's gathering facilities and propane distribution are not
subject to service or rate regulation from the SCC.
FERC REGULATION. The Company's gathering facilities are not subject
to service or rate regulation from the FERC. The FERC has issued a limited
jurisdiction certificate to the Storage Company authorizing the Storage Company
to engage in the sale, transportation (including storage), or assignment of
natural gas that is subject to FERC's jurisdiction under the Natural Gas Act,
and to charge rates for its services equal to the intrastate rates approved by
the SCC. The Company plans to follow the same regulatory certification process
for the planned Saltville Facility.
ENVIRONMENTAL AND SAFETY REGULATION. The pipeline operations of the
Company are subject to various federal, state and local environmental laws. In
particular, operations in Virginia are subject to the Virginia Clean Air Act as
administered by the Virginia Air Control Board. The Virginia Clean Air Act
restricts emissions from wells, pipelines and processing plants, and the
Virginia Air Control Board may curtail operations not meeting minimum
standards. The design, construction, operation and maintenance of the Company's
jurisdictional gas pipeline facilities are subject to the safety regulations
established by the Secretary of the Department of Transportation pursuant to
the Natural Gas Pipeline Safety Act of 1968, as amended, or by state agency
regulations meeting the requirements thereunder. The Company is also subject to
other federal, state and local laws covering the handling or discharge into the
environment of materials used by the Company, or otherwise relating to
protection of the environment, safety and health.
Expenditures for environmental control facilities and for remediation
have not been significant in relation to the results of operations of the
Company. The Company believes, however, that it is reasonably likely that the
trend in environmental legislation and regulations will continue to be toward
stricter standards. The Company is unaware of future environmental standards
that are reasonably likely to be adopted that will have a material effect on
the Company's results of operations, but there can be no assurance such
standards will not be adopted in the future.
The Company has designated an officer whose responsibility is to
monitor environmental compliance and potential environmental liabilities at its
facilities. No assessment has found any material environmental noncompliance
or cleanup liabilities the cost of which would have, in the aggregate, a
material effect on the Company's results of operations. However, assessments
have not been performed on all of the Company's facilities.
TITLE TO PROPERTIES
Substantially all of the Company's producing property interests are
held pursuant to leases from third parties. The Company has obtained title
opinions on substantially all of its producing properties and believes that it
has satisfactory title to such properties in accordance with standards
generally accepted in the natural gas industry. The Company's producing
properties are subject to customary royalty interests, liens for current taxes
and other burdens which the Company believes do not materially interfere with
the use of or affect the value of such producing properties.
The Storage Company's titles to properties comprising the Early Grove
Facility are derived from its ownership of mineral leasehold rights and surface
easements. The Early Grove Facility is served by the Storage Company which
holds a 60% interest in the Haysi gathering system and serves as operator. The
remaining interest is owned by Penn Virginia Resources Corporation.
32
<PAGE> 35
The Company's title to properties comprising the Saltville Facility is
derived from a ten-year oil and gas lease from the Industrial Development
Authority of the town of Saltville, and the Counties of Washington and Smyth,
Virginia as well as from a separate deed from the Industrial Development
Authority of the town of Saltville. The oil and gas lease and deed provide the
Company with rights to drill for and produce oil and gas, rights to use any
facilities for natural gas storage use and rights to remove salts to create
cavities for natural gas storage. The oil and gas lease and deed encompass
approximately 11,000 acres of storage rights in Washington and Smyth Counties,
Virginia.
The Company's proposed pipeline, gathering systems and distribution
systems are situated on land not owned by the Company but as to which the
Company and its Subsidiaries and Affiliates have easements or licenses from the
landowners permitting the use of such land for the construction and operation
of pipeline facilities. The Company has received and intends to receive
franchises, permits and other authorizations to construct and operate pipeline,
gathering systems and distribution systems within the jurisdiction of various
cities, counties and other government agencies and jurisdictions, as well as
along and across waterways and rights-of-way for federal, state, county and
city highways, streets and roads.
OPERATIONAL HAZARDS AND INSURANCE
The operations of the Company and its Subsidiaries and Affiliates are
subject to the usual hazards incident to the exploration for and production and
distribution of natural gas. These hazards can result in substantial losses to
the Company and its Subsidiaries and Affiliates due to personal injury and loss
of life, severe damage to and destruction of property and equipment, pollution
or environmental damage or suspension of operations. The Company and its
Subsidiaries and Affiliates maintain insurance coverage against such risks as
are customarily insured against by other businesses in the industry. These
coverages include $2,000,000 ($1,000,000 per occurrence) of general liability
insurance (which insurance is provided in separate policies covering separate
operations), excess liability insurance in the amount of $15,000,000, workers'
compensation insurance and property and automobile insurance. Based on loss
experience, the Company believes that it currently has adequate insurance
coverage. The Company's insurance, however, does not cover every potential risk
associated with the drilling and production of natural gas. In particular,
coverage is not obtainable for certain types of environmental hazards. The
occurrence of a significant adverse event, the risks of which are not fully
covered by insurance, would have a material adverse effect on the results of
operations of the Company and its Subsidiaries and Affiliates. Moreover, no
assurance can be given that the Company will be able to maintain adequate
insurance in the future at rates it considers reasonable.
LITIGATION
There is no pending nor, to the knowledge of the Company, any
threatened litigation against the Company or its Subsidiaries or Affiliates
which could have a material adverse effect on their financial position or which
is considered other than routine litigation incidental to the Company's
business.
OFFICE FACILITIES
The Company currently is paying a mortgage note secured by its
headquarters office building in Abingdon, Virginia. This building contains
1,927 square feet of office space. In addition, the Company leases 5,700
square feet of office space in a building adjacent to its headquarters
building.
33
<PAGE> 36
EMPLOYEES
As of December 31, 1996, the Company employed 35 persons on a full
time basis, none of whom is covered by a collective bargaining agreement. The
Company considers its relations with its employees to be excellent.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael L. Edwards 44 Chairman of the Board and President
Karen K. Edwards 39 Vice President, Secretary, Treasurer and Director
Mark N. Witt 38 Vice President of Strategic Planning
Frank A. Merendino, Jr. 36 Vice President of Operations
John D. Jessee 36 Vice President and Chief Financial Officer
Allan R. Poole II 50 Vice President and Director
Lydia J. Sinemus 26 Vice President
Peter C. Einselen 57 Director
Charles A. Mills, III 50 Director
</TABLE>
Michael L. Edwards. Mr. Edwards has served as President and Chairman
of the Board of the Company since its formation in 1987. His term as a
director expires in 1999. Mr. Edwards also serves as President of each of the
Subsidiaries and Affiliates. From 1983 to 1986 he served as Executive Vice
President and Director of Petroleum Development Corporation. Mr. Edwards is
the husband of Karen K. Edwards.
Karen K. Edwards. Ms. Edwards has served as Vice President,
Secretary, Treasurer and Director of the Company since its formation in 1987.
Her term as a director expires in 1998. Ms. Edwards also serves as Vice
President and Secretary of each of the Subsidiaries and Affiliates. She is the
wife of Michael L. Edwards.
Mark N. Witt. Mr. Witt has served as Vice President of Strategic
Planning since 1994. He also served as Director of the Company from 1994 to
May 1996. From 1984 to 1994 Mr. Witt was employed as financial controller for
global gas for British Petroleum Co., PLC. From 1980 to 1984 he was employed
by KPMG Peat Marwick in Houston, Texas.
Frank A. Merendino, Jr. Mr. Merendino has served as Vice President of
Operations of the Company since 1991. He was employed by the Company as
Engineering Manager in 1990. Mr. Merendino was employed as a production
engineer by Equitable Resources Exploration from 1986 to 1990. He was employed
from 1984 to 1986 as a petroleum engineer by Doran & Associates.
John D. Jessee. Mr. Jessee has served as Vice President and Chief
Financial Officer of the Company since 1995. He was employed by Eastman
Chemical Company from 1994 to 1995. Mr. Jessee was employed
34
<PAGE> 37
by the Company as controller from 1992 to 1994. He was employed as controller
of the golf division of The United Company from 1989 to 1992. He was employed
by Price Waterhouse from 1984 to 1989.
Allan R. Poole II. Mr. Poole has served as Vice President of the
Company since April 1996 and as a Director since September 1996. His term as a
director expires in 1998. Mr. Poole served as Vice President of Penn Virginia
Resources Corporation from 1989 to 1995. From 1978 to 1989 he was employed as
regional manager of Cabot Oil & Gas Corporation. Mr. Poole was employed as a
senior landman by Consolidated Gas Supply Corporation from 1971 to 1978.
Lydia J. Sinemus. Ms. Sinemus was elected as a Vice President of the
Company in September 1996. She has been with the Company since February 1993.
Ms. Sinemus graduated Magna Cum Laude in 1992 from East Tennessee State
University with a B.S. in Geology and is currently working toward a Masters
degree in Environmental Science.
Peter C. Einselen. Mr. Einselen has served as a director of the
Company since May 1996. His term as director expires in July 1997, however he
has been nominated for an additional three year term. Mr. Einselen has served
as Senior Vice President of Anderson & Strudwick Incorporated since 1990. From
1983 to 1990, he was employed by Scott & Stringfellow, Incorporated, Richmond,
Virginia.
Charles A. Mills, III. Mr. Mills has served as a Director of the
Company since September 1996 and has been employed by Anderson & Strudwick
Incorporated as a Senior Vice President since 1986. He served as Chairman of
the Board of Anderson & Strudwick Incorporated from 1990 to 1992 and from 1994
to the present. His term as a director of the Company expires in July 1997,
however he has been nominated for an additional three year term. He has served
as a director of Humphrey Hospitality Trust, Inc. since 1994.
Directors of the Company receive $2,500 for attending each quarterly
Board of Directors meeting. The executive officers of the Company are elected
annually by the Board of Directors. The executive officers serve terms of one
year or until their resignation or removal.
The bylaws of the Company provide that the Board of Directors shall be
comprised of five persons divided into three classes of directors, with each
class serving staggered three year terms. The classification of the directors
makes it more difficult for shareholders to change the composition of the Board
of Directors. The Company believes, however, that the longer time required to
elect a majority of a classified board of directors will help ensure continuity
and stability of the Company's management and policies.
The classification provisions may also have the effect of discouraging
a third-party from accumulating large blocks of the Common Stock of the Company
or attempting to obtain control of the Company, even though such an attempt
might be beneficial to the Company and its shareholders. Accordingly,
shareholders could be deprived of certain opportunities to sell their shares of
Common Stock at a higher market price than might otherwise be the case. See
"Description of Securities -- Certain Provisions of Certificate of
Incorporation and Delaware Law."
Pursuant to a Shareholders' Agreement and Voting Trust entered into on
May 31, 1996, between Michael L. Edwards, Karen K. Edwards and Dr. James T.
Martin, these shareholders assigned all of their shares to Michael L. Edwards
as trustee for a period of five years. Mr. Edwards is directed in the
agreement to vote these shares for three nominees for director selected by the
Edwards and two nominees selected by Dr. Martin. Pursuant to this agreement
Peter C. Einselen was elected as Dr. Martin's nominee for director. At the
annual meeting of the shareholders of the Company held on September 17, 1996,
pursuant to this agreement, the Edwards' nominee
35
<PAGE> 38
Allan R. Poole II, and Dr. Martin's nominee Charles A. Mills, III, a Senior
Vice President and Chairman of the Board of Anderson & Strudwick Incorporated,
were each elected to serve as directors.
Anderson & Strudwick Incorporated received a fee of $348,028 as a
result of the sale of the Company's Common Stock to Dr. Martin and has
underwritten four tax exempt bond offerings through which the Company has
borrowed $20,100,000. It receives a fee equal to 0.125% of the outstanding
principal amount of the bonds for bondholder services. Anderson & Strudwick
Incorporated received commissions totaling $610,375 from the two bond offerings
which closed during the last two years. In addition Anderson & Strudwick
Incorporated served as underwriter for the Company's initial public offering of
its Common Stock for which it received fees of $735,840 and 153,300 Warrants.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation provides that, to the fullest extent permitted by
the Delaware General Corporation Law, no director shall be personally liable to
the Company or its shareholders for monetary damages for the breach of
fiduciary duty in such capacity, except that liability is not eliminated (i)
for breach of the director's duty of loyalty to the Company or its
shareholders, (ii) for acts or omissions by the director not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
willful or negligent declaration of an unlawful dividend, stock purchase or
redemption, or (iv) for any transaction from which such director received an
improper personal benefit. In addition, the Company's bylaws provide generally
for indemnification by the Company for all officers, directors, employees or
agents to the fullest extent permitted by Delaware law.
The Company has been advised that insofar as any of the foregoing
provisions may be invoked to disclaim liability for damages arising under the
Securities Act of 1933, as amended (the "Act"), it is the opinion of the
Securities and Exchange Commission that such provision is against public policy
as expressed in the Act and is therefore enforceable.
EXECUTIVE COMPENSATION
The following table presents information concerning the annual and
long-term compensation of the executive officers whose salary and bonus were
greater than $100,000 for any of the listed years. This table presents
compensation for services rendered in all capacities to the Company in 1996,
1995 and 1994.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS(1) OPTIONS(2) COMPENSATION(3)
---------------------- ---- ----------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Michael L. Edwards 1996 $150,000 $ 727 - $ 2,889
President/Chief 1995 $150,000 $ - - $ 1,524
Executive Officer 1994 $102,086 $ 20,661 - $ 3,000
Mark N. Witt 1996 $ 82,500 $ 655 19,764 $ 8,033
Vice President of 1995 $ 82,500 $ 22,297 50,240 $ 1,913
Strategic Planning 1994 $ 41,490 $ 735 14,650 $ 352
Frank A. Merendino, Jr. 1996 $ 82,500 $ 26,429 - $ 6,496
Vice President of 1995 $ 82,500 $ 16,382 - $ 422
Operations 1994 $ 75,000 $ 8,728 - $ 1,174
</TABLE>
36
<PAGE> 39
<TABLE>
<S> <C> <C> <C> <C> <C>
John D. Jessee 1996 $ 82,500 $ 25,628 - $ 7,074
Vice President 1995 $ 31,250 - - -
1994 $ 34,567 $ 7,312 - -
</TABLE>
- ----------------------
(1) Amounts include cash compensation earned and received by the named
officers as well as amounts deferred under a 401(k) Savings Plan.
(2) See below for a description of outstanding options to purchase the
Company's Common Stock.
(3) Amounts shown include Company contributions to a 401(k) Savings Plan,
vehicle allowances and directors fees.
Mark N. Witt, an officer of the Company, pursuant to an employment
agreement dated January 16, 1995, was granted an option to purchase 2% of the
Company's outstanding Common Stock (84,654 shares) at an exercise price of
$8.72 per share. The option expires June 13, 1999.
EMPLOYMENT AGREEMENT
On May 23, 1996, the Company entered into a ten year employment
agreement with Michael L. Edwards which provides for an annual salary of
$155,000. Mr. Edwards will also receive annual bonuses computed on the basis
of 10% of the Company's pre-tax earnings on all amounts from $1,000,000 to
$1,999,999 and 15% of the Company's pre-tax earnings on all amounts in excess
of $2,000,000, provided his bonus for 1996 was $50,000. In the event Mr.
Edwards employment is terminated by the Company for any reason other than for
cause during the term of the employment agreement, at the election of Mr.
Edwards the Company will be obligated to purchase all or a portion of the
shares held by him and/or his wife at a price equal to 150% of the market value
of the Company's shares on the date of termination. In addition, the Company
will be obligated to pay Mr. Edwards in a lump sum all salary amounts payable
to Mr. Edwards through the term of the employment agreement plus an additional
$2,000,000.
EMPLOYEE BENEFIT PLANS
The Company sponsors a qualified tax deferred savings plan in
accordance with the provisions of Section 401(k) of the Internal Revenue Code.
Employees may defer up to 20% of their compensation, subject to certain
limitations. Effective July 1, 1996, the Company matches 100% of employee
contributions.
EMPLOYEE STOCK PURCHASE LOANS
On May 17, 1996, the Board of Directors of the Company approved a plan
whereby the Company will make available to certain key employees a five year
interest-free loan, not to exceed $240,000, for the purpose of purchasing up to
40,000 shares of the Company's Common Stock at the purchase price of $6.00 per
share. In the event an employee who has been give a loan pursuant to this plan
terminates his employment with the Company at any time prior to the due date of
the loan, the loan is then immediately due and payable, with interest from the
date of the loan at the rate of prime rate plus 2%, compounded monthly. All
certificates for shares issued under this plan to a key employee shall be held
by the Company as security until the loan is paid in full. On July 31, 1996,
the Company made loans to the following key employees for the purchase of
shares of the Company's Common Stock, as follows:
37
<PAGE> 40
<TABLE>
<CAPTION>
NAME LOAN AMOUNT NO. OF SHARES
---- ----------- -------------
<S> <C> <C>
Michael L. and Karen K.
Edwards $90,000 15,000
Allan R. Poole II 90,000 15,000
John D. Jessee 25,200 4,200
Mark N. Witt 12,000 2,000
Frank A. Merendino, Jr. 12,000 2,000
Lydia J. Sinemus 6,000 1,000
Bradley L. Swanson 4,800 800
</TABLE>
KEY MAN INSURANCE
The Company maintains a key man life insurance policy in the amount of
$2,000,000 on the life of Michael L. Edwards. The Company is the beneficiary
of this policy.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of shares of
Common Stock held by the owners of more than five percent of the Company's
issued and outstanding Common Stock as of March 31, 1997:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT OF
BENEFICIAL OWNER CLASS OWNERSHIP PERCENT OF CLASS
- ---------------------- ----- --------- ----------------
<S> <C> <C> <C>
Dr. James T. Martin Common 800,058 24.96%
Tupenny House
Tuckerstown, Bermuda
Michael L. and Karen K. Common 382,563 11.94%
Edwards
200 East Main Street
Abingdon, Virginia 24210
</TABLE>
The following table sets forth the number and percentage of shares of
Common Stock held by each of the Company's directors and the executive officers
and all executive officers and directors as a group as of March 31, 1997:
<TABLE>
<CAPTION>
COMMON STOCK
NAME AND ADDRESS ISSUED AND OUTSTANDING
OF BENEFICIAL OWNER CLASS AS OF MARCH 31, 1997 PERCENT OF CLASS
------------------- ----- ------------------------- -------------------
<S> <C> <C> <C>
Michael L. and Karen K. Common 382,563 11.94%
Edwards
200 East Main Street
Abingdon, Virginia 24210
</TABLE>
38
<PAGE> 41
<TABLE>
<S> <C> <C> <C>
Michael L. Edwards Common 3,600 0.11%
200 East Main Street
Abingdon, Virginia 24210
Frank A. Merendino, Jr. Common 30,371 0.95%
135 Douglas Lane
Bristol, Tennessee 37620
Mark N. Witt Common 8,396 0.26%
288 Clubhouse Drive
Abingdon, Virginia 24211
John D. Jessee Common 4,200 0.13%
152 Kennedy Drive
Lebanon, Virginia 24266
Allan R. Poole II Common 57,000 1.78%
1032 Hanover Court
Kingsport, Tennessee 37660
Lydia J. Sinemus Common 1,000 0.03%
200 East Main Street
Abingdon, Virginia 24210
Peter C. Einselen Common 5,000 0.16%
1 King Street
St. Augustine, Florida
32084
Charles A. Mills, III Common 2,000 0.06%
3 Commercial Place, Suite
100
Norfolk Southern Tower
Norfolk, Virginia 23510
All executive officers and Common 494,130 15.42%
directors as a group
</TABLE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company has authorized 10,000,000 shares of Common Stock, par
value $.001 per share. As of March 31, 1996 there were 3,204,906 shares of
Common Stock issued and outstanding. In addition, options and warrants for
1,027,803 shares were outstanding on that date. The holders of Common Stock are
entitled to share ratably on a share for share basis with respect to any
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." Upon the liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary,
holders of Common Stock are entitled to share ratably, after payment of
liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no preemptive rights, except those rights
granted to certain option and warrant holders, and no right to convert their
Common Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock offered hereby will be, fully paid
and nonassessable.
SHAREHOLDERS' AGREEMENT AND VOTING TRUST
A Shareholders' Agreement and Voting Trust (the "Voting Trust
Agreement") was entered into effective May 31, 1996, by the Company, Michael L.
Edwards, Karen K. Edwards and Dr. James T. Martin. Simultaneous with the
execution of his subscription for 800,058 shares of the Company's Common Stock,
Dr. Martin executed the Voting Trust Agreement providing for the delivery of
his shares along with those of
39
<PAGE> 42
Mr. and Ms. Edwards to Mr. Edwards as trustee for a period of five years from
the date of assignment. The Voting Trust Agreement provides that Mr. Edwards
as trustee must vote the shares at all meetings of the Company's shareholders
in favor of: (a) the election of two nominees to the Board of Directors
selected by Dr. Martin and three nominees to the Board of Directors selected by
Edwards; (b) amendment of the Company's Certificate of Incorporation and
bylaws as further described below; (c) and the issuance of warrants to
shareholders of record of the Company as of May 17, 1996 (which did not include
Dr. Martin) for the purchase of additional Common Stock equal to the number of
shares owned by each shareholder on that date at a price of 165% of the price
paid by Dr. Martin, which was the initial public offering price of the
Company's shares. The trustee may vote in favor of any modification of these
actions only upon each shareholder's instruction to do so. The withdrawal of
the Common Stock pursuant to the Voting Trust Agreement may only be
accomplished by unanimous agreement of the parties. The beneficial ownership
of the shares underlying the Voting Trust Agreement is assignable. Dividends
payable on the underlying shares are distributable by the trustee to the
shareholders. If Dr. Martin decides to sell to a third party 5% or more of the
outstanding shares of the Company held by him, he must first give notice to the
Company and offer the Company the right to purchase the shares pursuant to a
right of first refusal.
The Voting Trust Agreement provided a form for amending the
Certificate of Incorporation and Bylaws of the Company. The amendments, which
were effected on June 10, 1996, implemented a super majority provision
requiring the vote of 75% of the issued and outstanding shares entitled to vote
on any matters involving an amendment to the certificate of incorporation or
the bylaws, the merger, dissolution, reorganization or recapitalization of the
Company, or the sale of all or substantially all of the assets of the Company.
PREFERRED STOCK
The Company has authorized 2,000 shares of Preferred Stock, no par
value, all of which was issued to Sirrom Capital Corporation ("Sirrom"). The
Company redeemed all the shares of the Preferred Stock in February 1997. The
Preferred Stock is entitled to receive, out of funds legally available
therefor, cumulative annual dividends in the amount of $130 per share payable
on a pro rata basis monthly in cash. The Preferred Stock has certain limited
voting rights and holders are entitled to receive preferential payment equal to
$1,000 per share plus any accrued dividends upon liquidation of the Company.
The Company has no arrangements, undertakings or plans with respect to the
issuance of any Preferred Stock.
OPTIONS AND WARRANTS
At March 31, 1997, the Company had an aggregate of 1,027,803 shares of
Common Stock reserved for issuance pursuant to outstanding warrants and
options. Options and warrants presently outstanding or anticipated to be
outstanding upon the closing of this offering include: (i) an option held by
Mark N. Witt, an officer of the Company, to purchase 84,654 shares of the
Company's outstanding Common Stock at an exercise price of $8.72 per share;
(ii) warrants to Sirrom to purchase 54,163 shares of Common Stock at a purchase
price of $9.90 per share; (iii) warrants to Anderson & Strudwick Incorporated,
and its officers, L. McCarthy Downs and Norman K. Marshall, to purchase a
total of 153,300 shares of the Company's outstanding Common Stock at a purchase
price of $9.90 per share (such warrants may be transferred to bona fide
officers of Anderson & Strudwick Incorporated) (the "A&S Warrants"); and (iv)
warrants to shareholders of record of the Company as of May 17, 1996, to
purchase on a pro-rata basis an aggregate of 735,686 shares of the Company's
Common Stock at a purchase price of $9.90 per share. The warrants referred to
in subparagraphs (ii) and (iv) above are referred to as the "Tradeable
Warrants." Three Selling Securityholders have sold a total
40
<PAGE> 43
of 36,396 Tradeable Warrants and as a result a total of 753,453 Tradeable
Warrants are now held by Selling Securityholders.
Sirrom Warrant. Sirrom was granted a warrant to purchase 6% of the
Company's capital stock outstanding as of September 30, 1996, subject to
adjustment to up to 10% of the shares of capital stock outstanding on that date
if the Series A Preferred Stock purchased by Sirrom was not redeemed by
September 28, 2000. Sirrom exercised this warrant and 54,162 shares of Common
Stock were issued to Sirrom by the Company on February 5, 1997 and the warrant
was canceled.
Tradeable Warrants. The Tradeable Warrants are listed for trading on
the Nasdaq National Market System under the symbol VGCOW. The Tradeable
Warrants were issued subject to the terms and conditions of the Warrant
Agreement between the Company and the holders of the Tradeable Warrants. The
following description of the Tradeable Warrants is not complete and is
qualified in all respects by the Warrant Agreement which is filed as an exhibit
to the Registration Statement of which this Prospectus is a part. See
"Available Information."
Each Tradeable Warrant entitles the holder to purchase one share of
Common Stock at an exercise price of $9.90 per share (the "Exercise Price").
The number, character and Exercise Price of the shares of Common Stock are
subject to adjustment in certain events, such as mergers, reorganizations,
stock dividends, subdivisions or reclassifications, to prevent dilution. The
Tradeable Warrants are exercisable at any time after October 4, 1997 until
October 4, 2001. Holders of the Tradeable Warrants will not, as such, have any
of the rights of stockholders of the Company.
In certain cases, the sale of securities by the Company upon exercise
of the Tradeable Warrants could violate the securities laws of the United
States, certain states thereof or other jurisdictions. The Company will use its
best efforts to cause a registration statement with respect to such securities
under the Act to continue to be effective during the term of the Tradeable
Warrants and to take such other actions under the laws of various states as may
be required to cause the sale of securities upon exercise of the Tradeable
Warrants to be lawful. However, the Company will not be required to cause the
sale of securities upon exercise of the Tradeable Warrants if, in the opinion
of counsel, the sale of securities upon such exercise would be unlawful.
The Tradeable Warrants may be exercised by filling out and signing the
appropriate form on the Tradeable Warrants and mailing or delivering the
Tradeable Warrants to First Union National Bank of North Carolina (the "Warrant
Agent") in time to reach the Warrant Agent by the expiration date, accompanied
by payment in full of the exercise price for the Tradeable Warrants being
exercised in United States funds (in cash or by check or bank draft payable to
the order of the Company). Common Stock certificates will be issued as soon as
practicable after exercise and payment of the exercise price as described
above.
A&S Warrants. In connection with its services to the Company as
underwriter of its initial public offering of Common Stock, the Company sold
Anderson & Strudwick Incorporated the A&S Warrants at the purchase price of
$.001 per warrant to purchase 153,300 shares of the Company's Common Stock. The
A&S Warrants will be exercisable from October 4, 1997 to October 4, 2001. Until
October 4, 1997, the A&S Warrants may only be transferred to bona fide
officers of Anderson & Strudwick Incorporated, and transfers have been made to
L. McCarthy Downs and Norman K. Marshall. The A&S Warrants may be traded on the
Nasdaq National Market System after October 4, 1997 and will be subject to the
limitations of the Tradeable Warrants described above. See "Risk Factors --
Risks Associated with the Securities Being Sold by the Selling
Securityholders."
41
<PAGE> 44
REGISTRATION RIGHTS
Pursuant to agreements between the Company and certain holders of
outstanding shares of the Company's Common Stock and holders of warrants for
the purchase of the Company's Common Stock, such holders had the right to
require the Company to register the sale of 1,797,370 shares of Common Stock
(the "Registrable Securities") under the Act under certain circumstances.
The Company has registered for public sale the shares owned by Dr.
Martin (800,058 shares) and the A&S Warrants and the shares underlying the A&S
Warrants (153,300). On June 10, 1996, the Company offered to Sirrom and to the
Company's shareholders of record as of May 17, 1996, warrants to purchase
789,849 shares of the Company's Common Stock at the exercise price of $9.90 per
share, for a purchase price of $.001 per Warrant. In addition Sirrom held a
warrant to acquire shares of the Company's Common Stock which it has exercised
and was issued 54,162 shares. All warrants and options, except an option for
84,654 shares held by an officer of the Company, and the underlying shares were
registered in the Company's initial public offering. All Registrable
Securities have been registered in this offering.
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND DELAWARE LAW
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") contains certain provisions that may have an effect of delaying,
deferring or preventing a change of control of the Company. Specifically, the
Certificate provides that the approval of (i) any amendment to the Certificate
or the bylaws, (ii) the merger, dissolution, reorganization (including by share
exchange) or recapitalization of the Company, or (iii) the sale of all or
substantially all of the assets of the Company requires the affirmative vote of
the holders of 75% of the Company's capital stock entitled to vote thereon.
This increases the percentage that would otherwise be required under Delaware
law to approve such actions, and thus may make it more difficult to effect a
takeover of the Company. Further, the Certificate provides that members of the
Company's Board of Directors are elected to terms that are staggered.
The Company is subject to Section 203 of the Delaware General
Corporation Law ("Section 203"), which subject to certain exceptions, prohibits
a Delaware corporation from engaging in any business combination with any
interested shareholder for a period of three years after that person became an
interested shareholder, unless: (i) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
which resulted in the shareholder becoming an interested shareholder; (ii) upon
consummation of the transaction which resulted in the shareholder becoming an
interested shareholder, the interested shareholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors
and authorized at an annual or special meeting of shareholders, and not by
written consent, by the affirmative vote of at least 66 2/3 % of the
outstanding voting stock which is not owned by the interested shareholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested shareholder, (ii)
any sale, transfer, pledge or other disposition involving the interested
shareholder of 10% or more of the assets of the corporation; (iii) subject to
certain exceptions, any transaction which results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
shareholder; (iv) any transaction involving the corporation which has the
effect of increasing the
42
<PAGE> 45
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested shareholder; or (v) the receipt by the
interested shareholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested shareholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Union
National Bank of North Carolina, Charlotte, North Carolina.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices of the Company's Common Stock
prevailing from time to time. The availability for sale or sales of
substantial amounts of Common Stock of the Company in the public market after
certain legal restrictions lapse (as described below) could adversely affect
the prevailing market price and the ability of the Company to raise equity
capital in the future.
As of March 31, 1997 the Company had 3,204,906 shares of Common Stock
and warrants and options to purchase 1,027,803 shares of Common Stock
outstanding. Of the 3,204,906 shares of Common Stock currently outstanding,
1,587,162 are freely transferable without restriction or further registration
under the Act, except shares purchased by an affiliate (in general, a person
who is in a control relationship with the Company) which will be subject to the
limitations of Rule 144 promulgated under the Act. Of the warrants and options
to purchase 1,027,803 shares of Common Stock, warrants to purchase 943,149 have
been registered. All of Dr. Martin's shares that were purchased by him
pursuant to a private placement that closed on May 31, 1996 have been
registered pursuant to the terms of the Voting Trust Agreement and with the
expiration of the "lock-up" agreement, may be disposed of by Dr. Martin. Dr.
Martin has represented to the Company that he acquired such shares for his own
account and for investment purposes only and not with a view to or for the
resale or distribution of such shares; that he has no agreement or other
agreement, formal or informal, with any person to sell, transfer or pledge any
of the Common Stock acquired by him pursuant to the private placement and that
he has no plans to enter into any such agreement.
The remaining 817,686 shares of Common Stock held by existing
shareholders are "restricted securities" as that term is defined in Rule 144
under the Act ("Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which rules are summarized below. As a result of the provisions of Rules
144, 144(k) and 701, additional shares will be available for sale in the public
market as follows, subject to compliance with the above rules: (i) 735,686
shares are presently eligible for immediate sale, and (ii) 82,000 shares will
be eligible for sale thereafter upon expiration of their respective one-year
holding periods in July and August 1997.
In the event the outstanding warrants are exercised, the holders of
943,149 shares of Common Stock, or their transferees, will hold shares that are
tradeable without restriction under the Act (except for shares purchased by
Affiliates and the limitations imposed on transfer of the A&S Warrants until
October 4, 1997).
See "Risk Factors -- Possible Volatility of Stock Price" and "--
Shares Eligible for Future Sale."
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<PAGE> 46
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least one year (including the holding period of any prior owner
except an Affiliate) would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of: (i) one percent of the
number of shares of Common Stock then outstanding (which was equal to
approximately 32,049 shares on March 31, 1997): or (ii) the average weekly
trading volume of the Common Stock on the Nasdaq Stock Market during the four
calendar weeks preceding the filing of a notice on Form 144 with respect to
such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed to
have been an Affiliate of the Company at any time during the 90 days preceding
a sale, and who has beneficially owned the shares proposed to be sold for at
least two years (including the holding period of any prior owner except an
Affiliate), is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule
144; therefore, unless otherwise restricted, "144(k) shares" may therefore be
sold immediately upon the completion of this Offering. In general, under Rule
701 of the Act as currently in effect, any employee, consultant or advisor of
the Company who purchased shares from the Company in connection with a
compensatory stock or option plan or other written agreement is eligible to
resell such shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.
SELLING SECURITYHOLDERS
The registration statement of which this Prospectus forms a part
covers the sale of 800,058 shares of Common Stock, 997,312 Common Stock
Purchase Warrants (the "Warrants") and 997,312 shares of Common Stock
underlying these Warrants ("Warrant Stock") held by securityholders of the
Company, 398,430 of which Warrants and Warrant Stock were held by officers of
the Company at the time of the Company's initial public offering. Of the
Warrants, 54,162 Warrants have been exercised, one Warrant was canceled and
36,396 Warrants have been sold by Selling Securityholders. Officers of the
Company held 372,034 Warrants as of April 30, 1997. As a result, 854,220
shares of Common Stock, 906,753 Warrants and 906,753 shares of Warrant Stock
remain to be sold by the Selling Securityholders. In the event the Warrants
are exercised, the shares registered on behalf of the Selling Securityholders
including those underlying Warrants which have been sold by the Selling
Securityholders will constitute 43.33% of the Company's outstanding Common
Stock assuming an unregistered option held by an officer of the Company is not
exercised. The Company will not receive any of the proceeds on the sale of the
securities by the Selling Securityholders. The resale of the securities of the
Selling Securityholders are subject to Prospectus delivery and other
requirements of the Act. Sales of such securities or the potential of such
sales at any time may have an adverse effect on the market prices of the
securities offered hereby. See "Risk Factors -- Shares Eligible for Future
Sale." Accordingly, an additional 1,797,369 shares of Common Stock will be
transferable assuming exercise of the Warrants.
The following table sets forth the number of shares of Common Stock
and Warrants owned by the Selling Securityholders before the offering, the
number of Warrants and shares of Common Stock being offered and the number of
shares and the percentage of the class to be owned after the offering is
complete assuming no additional warrants are exercised:
44
<PAGE> 47
<TABLE>
<CAPTION>
Shares of Warrants Common
Common Stock Owned Warrants Stock Shares of Percent of
Owned Before Before Offered Offered Stock Owned Common Stock
Offering Offering Hereby(1) Hereby After Offering After Offering
------------------ --------- ----------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael & Karen Edwards(2) 378,663 363,663 363,663 0 378,663 11.81%
B. Scott White 41,267 41,267 41,267 0 41,267 1.29%
Joan M. Edwards 32,291 32,291 22,291(3) 0 32,291 1.01%
Tazewell Coal & Iron 27,133 27,133 27,133 0 27,133 0.85%
The Hagon Estates 27,133 27,133 27,133 0 27,133 0.85%
Marlene K. Kissler and
Eric Verzuh 103,167 103,167 103,167 0 103,167 3.22%
Harriet S. Edwards
Revocable Trust 18,054 18,054 18,054 0 18,054 0.56%
John W. Gillespie 10,317 10,317 10,317 0 10,317 0.32%
Virginia B. Gillespie 10,317 10,317 10,317 0 10,317 0.32%
Marian L. Banning 7,738 7,738 7,738 0 7,738 0.24%
The Gillespie Irrevocable
Trust 7,738 7,738 7,738 0 7,738 0.24%
John W. Gillespie Trust 7,738 7,738 7,738 0 7,738 0.24%
William Rogers McCall 7,738 7,738 7,738 0 7,738 0.24%
Tom & Linda Callahan 6,448 6,448 6,448 0 6,448 0.20%
Jack A. Upchurch 6,448 6,448 6,448 0 6,448 0.20%
Mark N. Witt(2) 8,396 6,396 0(4) 0 8,396 0.26%
David A. Street 10,317 10,317 10,317 0 10,317 0.32%
Frank A. Merendino, Jr.(2) 30,371 28,371 8,371(5) 0 30,371 0.95%
Colson Children Trust 3,095 3,095 3,095 0 3,095 0.10%
Scott R. Colson 4,127 4,127 4,127 0 4,127 0.13%
Sara L. Colson 4,127 4,127 4,127 0 4,127 0.13%
Susan Swanson-Cooper 2,063 2,063 2,063 0 2,063 0.06%
Dr. James Martin 800,058 0 0 800,058 0 24.96%
Anderson & Strudwick 0 68,985 68,985 0 0 0.00%
L. McCarthy Downs 0 68,985 68,985 0 0 0.00%
Norman K. Marshall 0 15,330 15,330 0 0 0.00%
Sirrom Capital Corporation
$.0001 Warrants 0 54,163 0(6) 54,162 0 0
Sirrom Capital Corporation
Tradeable Warrants 0 54,163 54,163 0 0 0
</TABLE>
- -------------
(1) The Warrants offered hereby may be exercised and an identical number of
shares of Common Stock is issuable by the Company.
(2) Officers and Directors of the Company.
(3) Mrs. Edwards sold 10,000 Warrants on April 11, 1997.
(4) Mr. Witt sold 6,396 Warrants on February 28, 1997.
(5) Mr. Merendino sold 20,000 Warrants on February 7, 1997.
(6) Sirrom Capital Corporation exercised its $.0001 Warrants on February 5,
1997 and instead of paying the $5.42 exercise price it
received 54,162 shares of Common Stock instead of 54,163.
45
<PAGE> 48
PLAN OF DISTRIBUTION FOR SELLING SECURITYHOLDERS
The securities held by Selling Securityholders may be sold by such
persons from time to time either directly or through underwriters, dealers or
agents. The distribution of securities by the Selling Securityholders may be
effected in one or more transactions that may take place in the market,
including ordinary broker's transactions, privately-negotiated transactions or
sales to one or more broker-dealers for resale of such shares as principals, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the
Selling Securityholders in connection with such sales of securities. The
securities offered by the Selling Securityholders may be sold by one or more of
the following methods, without limitations: (a) a block trade in which a broker
or dealer so engaged will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
(b) purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; (c) ordinary brokerage
transactions and transactions in which the broker solicits purchasers, and (d)
face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Selling
Securityholders may arrange for other brokers or dealers to participate. The
Selling Securityholders and intermediaries through whom such securities are
sold may be deemed "underwriters" within the meaning of the Act with respect to
the securities offered, and any profits realized or commissions received may be
deemed underwriting compensation.
At the time a particular offer of securities is made by or on behalf
of a Selling Securityholder, to the extent required, a Prospectus will be
distributed which will set forth the number of shares being offered and the
terms of the offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for sales
purchased from the Selling Securityholder and any discounts, commissions or
concessions allowed or reallowed or paid to dealers and the proposed selling
price to the public.
Sales of securities by the Selling Securityholders or even the
potential of such sales would likely have an adverse effect on the market
prices of the securities offered hereby. See "Risk Factors -- Shares Eligible
for Future Sale."
EXPERTS
The financial statements of the Company, and the financial statements
of Virginia Gas Storage Company and Virginia Gas Distribution Company, as of
December 31, 1996 and 1995 and for the years then ended, included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
OTHER MATTERS
In January 1996 the Company retained Arthur Andersen LLP as its
independent public accountants. Another auditor had served in this capacity
since 1992. There were no disagreements with the former auditors on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or
46
<PAGE> 49
procedures at the time of the change or with respect to the Company's financial
statements which, if not resolved to the former auditors' satisfaction, would
have caused them to make reference to the subject matter of the disagreement in
connection with their reports. The former auditors' reports did not contain an
adverse opinion or disclaimer of opinion and were not modified as to
uncertainty, audit scope or accounting principles. Prior to retaining Arthur
Andersen LLP, the Company had not consulted with Arthur Andersen LLP regarding
accounting principles.
GLOSSARY
The terms defined in this section are used throughout this Prospectus.
Bcf. Billion cubic feet.
BLOW-OUT. A sudden, violent expulsion of oil, gas, and mud (and
sometimes water) from a drilling well, followed by an uncontrolled flow from
the well. It occurs when high pressure gas is encountered in the hole and
sufficient precautions have not been taken.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
CASING. Heavy steel pipe used to seal off fluids from the hole or to
keep the hole from caving in. There may be several strings of casing, one
inside the other, in a single well.
DELIVERABILITY. The amount of natural gas that a pipeline or producer
is able to deliver, limited either by terms of its supply contracts or its own
plant capacity.
Dth. One decatherm. One decatherm is equal to one million British
thermal units (10 therms).
GATHERING SYSTEMS. Pipelines and other equipment, including
regulators, compressors, dehydrators and associated equipment, needed to
transport natural gas from the wells to the transmission pipeline.
GROSS. A Gross number includes all acreage or wells in which the
Company owns an interest.
INJECTION. The introduction of gas under high pressure into a
geological formation.
MMBtu. One million British thermal units.
MBtu. One thousand British thermal units.
Mcf. One thousand cubic feet.
MMcf. One million cubic feet.
NET. A Net number is the Gross number multiplied by the percentage
interest which the Company has in acreage or in wells.
47
<PAGE> 50
PRESENT VALUE. When used with respect to gas reserves, present value
means the estimated future gross revenue to be generated from the production of
proved reserves, net of estimated production and future development costs,
using prices and costs in effect as of December 31, 1996, without giving effect
to non-property related expenses such as general and administrative expenses,
debt service and future income tax expense or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
PROVED DEVELOPED RESERVES. Reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of natural gas and natural
gas liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions.
SERVICE. The amount of gas necessary to fulfill customer supply
contract quantities for the periods indicated if the customer withdraws all
contracted gas at full contracts amounts.
THERM. One hundred thousand British thermal units.
WORKING GAS. The portion of the storage volume that can be removed
from a storage reservoir for deliveries and still maintain pressure sufficient
to meet design deliverability.
WORKING INTEREST. The operating interest which gives the owner the
right to drill, produce and conduct operating activities on the property and a
share of production.
48
<PAGE> 51
FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
VIRGINIA GAS STORAGE COMPANY
Report of Independent Public Accountants F-23
Balance Sheets F-24
Statements of Income F-25
Statements of Changes in Stockholders' Equity F-26
Statements of Cash Flows F-27
Notes to Financial Statements F-28
VIRGINIA GAS DISTRIBUTION COMPANY
Report of Independent Public Accountants F-35
Balance Sheets F-36
Statements of Income F-37
Statements of Changes in Stockholders' Equity F-38
Statements of Cash Flows F-39
Notes to Financial Statements F-40
</TABLE>
F-1
<PAGE> 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Virginia Gas Company:
We have audited the accompanying consolidated balance sheets of Virginia Gas
Company and Subsidiaries as of December 31, 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Virginia Gas Company and
Subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the years ended December 31, 1996 and 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 7, 1997
F-2
<PAGE> 53
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,250,398 $ 1,652,838
Accounts receivable 2,062,581 1,073,276
Notes receivable 116,667 114,556
Other current assets 153,325 134,862
------------- -------------
Total current assets 3,582,971 2,975,532
PROPERTY AND EQUIPMENT, net 17,604,936 16,343,480
INVESTMENT IN AFFILIATED COMPANIES 4,337,459 4,243,020
NOTES RECEIVABLE - AFFILIATED COMPANIES 12,986,277 9,371,062
OTHER ASSETS 1,460,364 577,309
------------- -------------
Total assets $39,972,007 $33,510,403
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 250,000 $ 250,000
Current portion of long-term debt 274,879 1,244,490
Accounts payable 1,484,011 1,197,555
Funds held for future distribution 594,303 544,475
Other current liabilities 178,698 168,709
------------- -------------
Total current liabilities 2,781,891 3,405,229
LONG-TERM DEBT 21,069,317 12,137,729
DEFERRED INCOME TAXES 706,471 629,914
------------- -------------
Total liabilities 24,557,679 16,172,872
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock - No par, 2,000 shares authorized, 2,000 shares
issued and outstanding as of December 31, 1996 - 1,725,000
Common stock - par value $.001, 10,000,000 shares authorized, 3,204,906
(unaudited) and 3,150,744 shares issued and outstanding as of March 31,
1997 and December 31, 1996, respectively 3,205 3,151
Additional paid-in capital 13,751,471 14,152,137
Retained earnings 1,659,652 1,457,243
------------- -------------
Total stockholders' equity 15,414,328 17,337,531
------------- -------------
Total liabilities and stockholders' equity $39,972,007 $33,510,403
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 54
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS ENDED
ENDED MARCH 31 DECEMBER 31
1997 1996 1996 1995
------------ ------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Operating revenue $1,882,645 $ 243,706 $1,772,970 $1,493,813
Interest and other income 256,820 267,983 996,748 529,597
------------ ------------- ------------ ------------
2,139,465 511,689 2,769,718 2,023,410
------------ ------------- ------------ ------------
EXPENSES:
Production expenses 36,625 22,480 105,910 65,029
Purchased gas expense 20,659 - 28,537 -
Operation and maintenance expense 100,466 - 173,445 -
Cost of natural gas sold 944,767 - - -
Depreciation, depletion, and amortization 166,196 68,328 387,116 305,216
General and administrative 215,131 132,340 645,673 708,191
------------ ------------- ------------ ------------
1,483,844 223,148 1,340,681 1,078,436
------------ ------------- ------------ ------------
OTHER EXPENSE:
Interest 317,822 255,621 1,006,800 673,251
Other 31,313 1,009 2,771 2,752
------------ ------------- ------------ ------------
349,135 256,630 1,009,571 676,003
------------ ------------- ------------ ------------
INCOME BEFORE EARNINGS OF AFFILIATED COMPANIES AND
INCOME TAXES 306,486 31,911 419,466 268,971
EQUITY IN EARNINGS OF AFFILIATED COMPANIES 94,439 136,666 339,927 267,484
------------ ------------- ------------ ------------
INCOME BEFORE INCOME TAXES 400,925 168,577 759,393 536,455
PROVISION FOR INCOME TAXES 102,076 5,468 151,827 62,581
------------ ------------- ------------ ------------
NET INCOME $ 298,849 $ 163,109 $ 607,566 $ 473,874
============ ============= ============ ============
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 241,794 $ 98,109 $ 347,566 $ 428,374
============ ============= ============ ============
NET INCOME PER COMMON SHARE $ 0.08 $ 0.12 $ 0.21 $ 0.62
============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 55
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED COMMON ADDITIONAL RETAINED
STOCK STOCK PAID-IN CAPITAL EARNINGS
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 $ - $ 1,792,741 $ - $ 925,239
Issuance of 124,316 shares of common stock
pursuant to stock option agreements - 496,000 - -
Issuance of 2,000 shares of preferred stock and
warrants covering 54,163 shares of common stock 1,725,000 - 275,000 -
Net income - - - 473,874
Preferred stock dividends paid - - - (45,500)
Common stock dividends paid - - - (212,430)
-------------- -------------- -------------- --------------
BALANCE, December 31, 1995 1,725,000 2,288,741 275,000 1,141,183
Issuance of 800,058 shares of common stock - 4,401,317 - -
Issuance of 42,000 shares of common stock - 42 251,958 -
Issuance of 40,000 shares of common stock to
officers and employees, net of notes receivable
of $240,000 - 40 - -
Issuance of 1,533,000 shares of common stock - 1,533 7,911,657 -
Payment for cancellation of warrant and options - - (975,000) -
Net income - - - 607,566
Preferred stock dividends paid - - - (260,000)
Common stock dividends paid - - - (31,506)
Change from no par to $.001 par value of common
stock - (6,688,522) 6,688,522 -
-------------- -------------- -------------- --------------
BALANCE, December 31, 1996 1,725,000 3,151 14,152,137 1,457,243
Preferred stock dividends paid (unaudited) - - - (57,055)
Common stock dividends paid (unaudited) - - - (39,385)
Net income (unaudited) - - - 298,849
Costs related to stock issuance (unaudited) - - (125,666) -
Issuance of 54,162 shares of common stock pursuant
to exercise of warrant (unaudited) - 54 - -
Redemption of 2,000 shares of preferred stock
(unaudited) (1,725,000) - (275,000) -
-------------- -------------- -------------- --------------
BALANCE, March 31, 1997 (unaudited) $ - $ 3,205 $13,751,471 $1,659,652
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 56
VIRGINIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS ENDED
ENDED MARCH 31 DECEMBER 31
1997 1996 1996 1995
------------ ------------ ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 298,849 $ 163,109 $ 607,566 $ 473,874
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, and amortization 166,196 68,328 387,116 305,216
Undistributed earnings of affiliated companies (94,439) (136,666) (339,927) (267,484)
Deferred income taxes 76,557 14,160 141,596 27,693
Increase in accounts receivable (989,305) (99,848) (180,903) (322,611)
(Increase) decrease in other current assets (18,463) 64,946 66,720 (90,136)
Decrease (increase) in other assets 107,937 (2,987) 20,477 78,359
(Decrease) increase in notes payable - (182,212) (332,212) 582,212
Increase (decrease) in accounts payable 286,456 (1,673,137) (978,177) 1,692,954
Increase (decrease) in current liabilities 59,817 466,727 190,145 (4,119)
------------ ------------ ------------ -------------
Net cash (used in) provided by operating
activities (106,395) (1,317,580) (417,599) 2,475,958
------------ ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,393,235) (1,101,997) (9,803,768) (1,314,286)
Issuance of notes receivable, net (3,650,000) - - (3,721,911)
Payments received on notes receivable 32,674 30,202 128,221 16,838
Investment in joint venture - - - (1,016,682)
------------ ------------ ------------ -------------
Net cash used in investing activities (5,010,561) (1,071,795) (9,675,547) (6,036,041)
------------ ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal (1,164,664) (97,821) (2,731,952) (181,222)
Proceeds from new loans 9,100,000 1,000,000 1,100,000 3,750,000
Redemption of preferred stock (2,000,000) - - -
Proceeds from issuance of common stock, net (125,666) - 12,566,547 496,000
Proceeds from issuance of preferred stock, net - - - 1,220,000
Purchase of warrants and options - - (975,000) -
Payment of debt issuance costs (439,964) (49,274) (54,719) (382,399)
Establishment of financing reserve funds (558,750) - - (46,244)
Dividends paid (96,440) (65,000) (291,506) (257,930)
------------ ------------ ------------ -------------
Net cash provided by financing activities 4,714,516 787,905 9,613,370 4,598,205
------------ ------------ ------------ -------------
NET (DECREASE) INCREASE IN CASH (402,440) (1,601,470) (479,776) 1,038,122
CASH, beginning of period 1,652,838 2,132,614 2,132,614 1,094,492
------------ ------------ ------------ -------------
CASH, end of period $1,250,398 $531,144 $1,652,838 $ 2,132,614
============ ============ ============ =============
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 370,804 $ 251,047 $1,282,705 $ 656,833
============ ============ ============ =============
Income taxes paid $ - $ 158 $ 26,158 $ 95,830
============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 57
VIRGINIA GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(including notes applicable to unaudited periods)
1. DESCRIPTION OF OPERATIONS:
Virginia Gas Company (the "Company") was organized in 1987 under the laws of
the state of Delaware. The Company is an integrated natural gas company, with
its storage, distribution, transmission and exploration operations located
primarily in the southwestern counties of the commonwealth of Virginia. All
operations of the Company are components of the natural gas industry.
The Company's operations are subject to certain risks and uncertainties
including, among others, the adequacy of future financing, the need for
additional capital, dependence on major customers, and current and potential
competitors with greater financial and marketing resources.
INTERIM FINANCIAL INFORMATION
The unaudited financial statements as of March 31, 1997, and for the three
months ended March 31, 1997 and 1996, include, in the opinion of management,
all adjustments (that are normal and recurring in nature) necessary to present
fairly the Company's financial position, results of operations, and cash flows.
Operating results for the three months ended March 31, 1997, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for 1996 include the accounts of three
wholly owned subsidiaries. The consolidated financial statements for 1995
include the accounts of one wholly owned subsidiary. All significant
intercompany balances and transactions have been eliminated in consolidation.
INVESTMENT IN AFFILIATED COMPANIES
The Company's investments in affiliated companies are accounted for using the
equity method. Investments carried at equity and the percentage interest owned
consist of Virginia Gas Storage Company (50 percent) and Virginia Gas
Distribution Company (50 percent).
F-7
<PAGE> 58
Combined financial information as of December 31, 1996, and for the years ended
December 31, 1996 and 1995, and as of March 31, 1997, and for the three months
ended March 31, 1997 and 1996 (unaudited), for investments in affiliated
companies accounted for by the equity method is as follows.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
Current assets $ 3,841,315 $ 2,386,057
Property and equipment, net 17,573,589 16,079,543
Other assets 6,284,224 4,917,958
------------- -------------
$27,699,128 $23,383,558
============= =============
Current liabilities $ 2,406,170 $ 2,941,557
Long-term debt payable to:
Affiliated companies 16,002,189 11,390,406
Third parties 9,142 13,870
Other liabilities 606,709 551,686
Stockholders' equity 8,674,918 8,486,039
------------- -------------
$27,699,128 $23,383,558
============= =============
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS ENDED
ENDED MARCH 31 DECEMBER 31
1997 1996 1996 1995
-------------- ------------- -------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Revenues $ 1,765,716 $ 1,648,677 $ 5,008,509 $ 3,498,236
Income before income taxes 286,181 414,137 1,030,079 821,876
Net income 188,879 273,331 679,853 534,968
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes natural gas sales and transmission revenues upon
delivery of natural gas to the common pipeline carrier.
In January 1997, the Company's wholly owned subsidiary, Virginia Gas Marketing
Company, began marketing natural gas services. These services include the
marketing of natural gas and are later expected to include natural gas storage
services. The initial source of natural gas supply will be provided by Company-
operated wells and initial future storage services will be provided by
facilities operated by the Company and/or its affiliated companies.
F-8
<PAGE> 59
During the year ended December 31, 1995, the Company and Virginia Gas Storage
Company revised their method of recording certain revenue. Prior to 1995,
recognition of production and transmission revenues was deferred for three
months after the actual production and transmission of natural gas had
occurred, primarily to match the recognition of revenues with the period these
revenues were distributed to working interest parties and royalty owners. The
policy revision to record revenues on a current basis reflects the companies'
ability to estimate net revenues on a current basis. This change is reflected
on a prospective basis beginning in January 1995 and results in 15 months of
production and transmission revenues being recognized in 1995. The effect of
this change was to increase revenue and net income by $176,000 and $131,000,
respectively, for the year ended December 31, 1995.
INCOME PER COMMON SHARE
Income per common share is computed using the weighted-average shares of common
stock and dilutive common stock equivalents (options and warrants) outstanding
during the respective periods. Net income available to common stockholders is
net income less dividends on preferred stock. The number of weighted-average
shares used in calculating income per common share was 1,637,576 and 695,669
for the years ended December 31, 1996 and 1995, and 3,188,659 (unaudited) and
808,509 (unaudited) for the three months ended March 31, 1997 and 1996,
respectively, after retroactive effect of 103.1667 per share stock split, as
discussed in Note 8.
PROPERTY AND EQUIPMENT
The Company follows the successful efforts method of accounting for its natural
gas exploration activities. Under this method, geological and geophysical costs
and costs of carrying and retaining undeveloped properties are expensed when
incurred. All direct and certain indirect costs relating to property
acquisition, successful exploratory wells, development costs, and support
equipment and facilities are capitalized as the properties are obtained or the
facilities are placed into service. Costs of exploratory wells are charged to
expense if it is determined that proven reserves are not found.
Unproved gas properties that are individually significant are periodically
assessed for impairment of value, with losses recognized at the time of
impairment. The Company provides for depreciation, depletion, and amortization
of its investment in producing gas properties on a units-of-production method.
The remaining property and equipment is depreciated using the straight-line
method over estimated useful lives, ranging from 5 to 30 years. Maintenance and
repairs are charged to expense as incurred. Improvements and betterments are
capitalized.
CAPITALIZED INTEREST
The Company capitalizes interest on expenditures for significant projects while
activities are in progress to bring the assets to their intended use. Interest
capitalized totaled $290,398 and $92,851 for the years ended December 31, 1996
and 1995, respectively. Interest capitalized totaled $71,443 (unaudited) and
$61,394 (unaudited) for the three months ended March 31, 1997 and 1996,
respectively.
F-9
<PAGE> 60
OTHER ASSETS
In conjunction with the 1997 issuance of the Russell County, the 1995 issuance
of the Buchanan County and the 1994 issuance of the Russell County and Buchanan
County, Virginia, Natural Gas Facilities Revenue Bonds by the Industrial
Development Authorities of the respective counties, reserve funds have been
established by the trustee for each issuance. Amounts in the reserve funds will
be used to make payments of principal and interest, whether at maturity, by
acceleration, call for redemption, or otherwise, where trust funds accumulated
by scheduled Company payments are insufficient to satisfy bond requirements.
Such amounts are invested in debt securities issued by the U.S. Treasury and
other U.S. government corporations and agencies. The Company records these
investments at cost and recognizes related interest as earned. The carrying
value of investments approximates market value.
Costs incurred in conjunction with financing transactions are amortized on a
basis that approximates the effective interest method.
FUNDS HELD FOR FUTURE DISTRIBUTION
Revenues are collected by the Company as operator and marketer of the gas sold
on behalf of the working interest parties and held for final distribution to
them and to land owners. Until these funds are distributed, they are recorded
as funds held for future distribution.
INCOME TAXES
Income taxes are accounted for using the asset-and-liability method. Under the
asset-and-liability method, deferred income taxes reflect the temporary
differences between assets and liabilities recognized for financial reporting
purposes and amounts recognized for tax purposes.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1995 balances to conform with
the 1996 presentation.
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
Trade receivables $ 493,831 $ 451,436
Lease operating expenses receivable 140,804 145,528
Joint-interest receivables 72,980 64,098
Financing proceeds due from trustee 500,000 --
Due from affiliated companies 854,966 412,214
------------ ------------
$2,062,581 $1,073,276
============ ============
</TABLE>
The majority of the Company's accounts receivable are due from companies
predominately involved in the marketing and distribution of oil and gas
products.
F-10
<PAGE> 61
4. NOTES RECEIVABLE - AFFILIATED COMPANIES:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------------- --------------
(unaudited)
<S> <C> <C>
Note receivable from Virginia Gas Distribution Company; interest receivable at
9.5%; principal payable in maturities of $110,000 to $447,000 from
2002 to 2017. $ 3,650,000 $ -
Note receivable from Virginia Gas Distribution Company; interest receivable at
9%; principal payable in maturities of $4,000 to $263,000 from 1999
to 2020. 2,879,214 2,879,214
Note receivable from Virginia Gas Storage Company; interest receivable at
8.88%; principal payable in maturities of $12,000 to $241,000 from 1995
to 2017. 2,549,094 2,567,837
Note receivable from Virginia Gas Distribution Company; interest receivable at
7.35%; principal payable in maturities of $17,000 to $97,000 from
1996 to 2023. 1,280,697 1,284,833
Note receivable from Virginia Gas Storage Company; interest receivable at
7.35%; principal payable in maturities of $13,000 to $77,000 from 1996
to 2023. 1,015,300 1,018,580
Note receivable from Virginia Gas Distribution Company; interest receivable at
8.88%; principal payable in maturities of $4,000 to $84,000 from 1995
to 2017. 885,942 892,457
Note receivable from Virginia Gas Storage Company; interest receivable at
9%; principal payable in maturities of $1,000 to $77,000 from 1999 to
2020. 842,697 842,697
--------------- --------------
13,102,944 9,485,618
Less- Current portion (116,667) (114,556)
--------------- --------------
$12,986,277 $9,371,062
=============== ==============
</TABLE>
F-11
<PAGE> 62
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
Storage properties $12,490,888 $11,311,486
Pipelines 2,453,940 2,338,410
Producing properties 2,494,370 2,494,370
Wells, pipelines, and storage properties in
progress 646,459 588,643
Vehicles 254,596 217,955
Propane facilities 174,804 165,756
Building and improvements 163,287 150,898
Office equipment 230,735 221,685
Well and pipeline equipment 32,093 32,093
------------- -------------
18,941,172 17,521,296
Less- Accumulated depreciation, depletion, and
amortization (1,336,236) (1,177,816)
------------- -------------
$17,604,936 $16,343,480
============= =============
</TABLE>
6. OTHER ASSETS:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
Deferred financing costs $ 799,546 $ 455,350
Restricted cash and investments- reserve funds 655,769 116,809
Other 5,049 5,150
------------- -------------
$1,460,364 $ 577,309
============= =============
</TABLE>
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
Note payable to the Industrial Development Authority of Russell County,
Virginia; interest payable monthly at 9.5%, beginning in March 1997;
principal payable in maturities of $275,000 to $1,115,000 from 2002 to
2017. $ 9,100,000 $ -
Note payable to the Industrial Development Authority of Buchanan County,
Virginia; interest payable monthly at 9%, beginning in February 1996;
principal payable in maturities of $5,000 to $342,000 from 1999 to 2020. 3,750,000 3,750,000
Note payable to the Industrial Development Authority of Buchanan County,
Virginia; interest payable monthly at an effective rate of 8.88%, beginning
in December 1994; principal payable in maturities of $20,000
to $386,000 from 1995 to 2017. 4,080,000 4,110,000
</TABLE>
F-12
<PAGE> 63
<TABLE>
<S> <C> <C>
Note payable to the Industrial Development Authority of Russell County,
Virginia; interest payable monthly at an effective rate of 7.35%, beginning
in February 1994; principal payable in maturities of $35,000
to $205,000 from 1996 to 2023. 2,709,167 2,717,917
Note payable to Tenneco Energy Resources Corporation; interest at Morgan
Guaranty prime rate plus 3%; payable in quarterly installments of
principal plus interest through 1997. - 975,000
Note payable with interest at 7%; payable in monthly installments of principal
and interest of $1,099; maturing in February 1999, with a final payment of
$95,336 secured by an asset with a book value of
$148,234 as of March 31, 1997 105,855 107,283
Note payable with interest at 9%; interest payable in semiannual installments,
maturing October 2024 - 100,000
Note payable to the Industrial Development Authority of Washington County,
Virginia with interest at 9.25%; payable in monthly installments of
principal and interest of $2,872 through October 1999; secured by an asset
with a book value of $101,142 as of March 31, 1997 78,937 85,626
Note payable to Virginia Gas Distribution Company; interest payable at 9%;
principal payable in maturities of $1,000 to $91,000 from 1999 to 2020. 965,000 1,000,000
Note payable to Virginia Gas Distribution Company; interest payable at 7.35%;
principal payable in maturities of $5,000 to $30,000 from 1996 to
2023. 394,061 395,333
Note payable to Virginia Gas Storage Company; interest payable at 8%;
balance due December 1997. 70,000 70,000
Notes payable through 2001 with interest from 8.95% to 10.75%; secured by
assets with a book value of $108,413 as of March 31, 1997 91,176 71,060
------------- -------------
21,344,196 13,382,219
Less- Current portion (274,879) (1,244,490)
------------- -------------
Long-term debt $21,069,317 $12,137,729
============= =============
</TABLE>
In February 1997, the Industrial Development Authority of Russell County,
Virginia (the "Russell County Authority"), issued its Subordinated Natural Gas
Facilities Revenue Bonds Series 1997 with principal of $9,100,000. The bonds
are payable from and are secured by a promissory note issued by the Company to
the Russell County Authority. A portion of the proceeds was loaned to an
affiliated company and is being used to construct a natural gas distribution
facility in and around the town of Lebanon, Virginia, and for related storage
and pipeline facilities.
F-13
<PAGE> 64
In December 1995, the Industrial Development Authority of Buchanan County,
Virginia (the "Buchanan County Authority"), issued its Senior Subordinated
Natural Gas Facilities Revenue Bonds Series 1995 with principal of $3,750,000.
The bonds are payable from and are secured by a promissory note issued by the
Company to the Buchanan County Authority. A portion of the proceeds was loaned
to affiliated companies and are being used to extend existing natural gas
distribution facilities in and around the town of Grundy, Virginia, and for
related supporting pipeline gathering and storage facilities.
In January 1994, the Russell County Authority issued its Natural Gas Revenue
Bond Series A and B with combined principal of $3,000,000. The bonds are
payable from and are secured by a promissory note issued by the Company to the
Russell County Authority. The proceeds were loaned by the Company to affiliated
companies to construct a natural gas distribution facility in and around the
town of Castlewood, Virginia, and for related supporting exploration and
production, pipeline and storage facilities in the amount of $2,630,000 and to
retire $370,000 of long-term debt.
In November 1994, the Buchanan County Authority issued its Natural Gas Revenue
Bond Series A with principal of $4,250,000. The bonds are payable from and are
secured by a promissory note issued by the Company to the Buchanan County
Authority. The bonds were also issued in parity with the Russell County Bonds
discussed above. A portion of the proceeds was loaned to affiliated companies
and are being used to construct a natural gas distribution facility in an
around the town of Grundy, Virginia, and for related supporting exploration and
production, pipeline, and storage facilities.
On February 29, 1996, the Company purchased the interest of its joint venture
partner in the development of the Saltville, Virginia, natural gas storage
facility. The purchase price of the interest was $2,225,000, with consideration
consisting of a $500,000 payment in March 1996 and the issuance of a promissory
note for $1,725,000. Interest accrues at the Morgan Guaranty prime rate plus 3
percent. Quarterly installments of principal and interest were made during
1996. In December 1996 the Company, in accordance with terms of the Transfer
Agreement and after providing adequate security to the lender, elected to pay
the remaining principal in quarterly installments of principal and interest
through 1997. The former joint venture partner retains the option to jointly
develop with the Company on a 50-50 percent basis any additional storage
caverns on the Saltville property.
As of December 31, 1996, principal payments on long-term debt for the next five
years are as follows:
<TABLE>
<S> <C>
1997 $ 1,244,490
1998 202,867
1999 356,189
2000 187,355
2001 256,345
</TABLE>
Based upon the borrowing rates currently available to the Company for loans
with similar terms and remaining maturities, the approximate fair value of
long-term debt at December 31, 1996, is approximately $12,972,000 and at March
31, 1997 is approximately $20,877,000 (unaudited).
F-14
<PAGE> 65
8. STOCKHOLDERS' EQUITY:
References to the common stock of the Company in these financial statements and
in the accompanying notes reflect retroactive application of an increase in the
number of authorized shares from 20,000 to 10,000,000 and a 103.1667 per share
stock split, effected June 1996, by the shareholders of the Company. In
conjunction with the stock split, the shareholders also implemented a super
majority provision requiring the vote of 75 percent of the issued and
outstanding shares entitled to vote on any matters involving an amendment to
the certificate of incorporation or the bylaws; the merger, dissolution,
reorganization, or recapitalization of the Company; or the sale of all or
substantially all of the assets of the Company.
In October 1996, the Company completed an initial public offering of its common
stock. The offering resulted in the issuance of an additional 1,533,000 common
shares of the Company at $6 per share. In connection with the offering, the
Company granted warrants to the underwriter to purchase, on a post-offering
basis, 153,300 shares of the Company's common stock at a purchase price equal
to 165 percent of the public offering price, or $9.90 per share.
In September 1995, the Company issued for $2,000,000 cash consideration 2,000
shares of its Series A nonvoting preferred stock and warrants to purchase
common stock equal to 6 percent of the then outstanding common stock of the
Company (increasing 1 percent per year until September 29, 2000, and an
additional 10 percent per year thereafter through September 29, 2003, if the
preferred stock is not redeemed before then) all to one investment corporation.
The Company can redeem the preferred stock at any time with five days' notice
to the holder. The agreement under which the preferred stock and warrants were
sold contains a number of covenants, including requiring the preferred stock
purchaser's consent to certain transactions outside the ordinary course of
business, environmental compliance, and compliance with covenants of other loan
obligations. Dividends, whether declared or not, accrue on the preferred stock
at 13 percent per annum and are payable monthly. The liquidation preference of
the preferred stock is $2,000,000 plus unpaid dividends. In February 1997, the
Company redeemed the outstanding 2,000 shares of preferred stock for the
liquidation price of $2,000,000 plus unpaid dividends.
Subordinated indebtedness of the Company in the amount of $780,000 was paid
from the proceeds of the preferred stock issuance during 1995, resulting in net
cash proceeds to the Company of $1,220,000. In conjunction with the issuance of
the subordinated indebtedness in April 1993, the Company issued a warrant
entitling the lender to purchase 76,756 shares of the Company's common stock at
$6.46 per share. The warrant is exercisable upon the earlier of repayment by
the Company of the debenture; the entering into a contract for the sale of all
or substantially all of the assets of the Company or any of its subsidiaries; a
bona fide offer being made by any person for, or the sale in one or more
related transactions of, more than 10 percent of the Company's then outstanding
common stock, or 10 percent of any of its subsidiaries' then outstanding common
stock; on February 28, 1998; the effective date of the first registration
statement filed by the Company covering an underwritten offering of any of its
securities to the general public; or the occurrence of an event of default
under the terms of the financing agreement. The warrant expires on February 28,
2003. Concurrent with the issuance of the warrant, the Company has issued stock
options to the lender to purchase a number of common shares sufficient for the
lender to maintain 14 percent of the ownership of the Company's common stock on
a fully diluted basis. The options grant the lender the right to purchase the
common stock at 66 percent of issue price of any proposed common stock
offerings and were exercisable subject to the terms described earlier. The
options expire on February 28, 2003. In July 1996, the Company negotiated a
release with the lender and paid $975,000 to the lender in exchange for the
cancellation of the lender's warrant and options.
In May 1996, the Company completed a private placement for 800,058 shares of
the Company's common stock, resulting in net proceeds to the Company of
$4,401,317. All shares were sold to a single investor.
F-15
<PAGE> 66
In August 1996, the company sold 42,000 shares of common stock to an officer of
the Company for $252,000 and made loans to eight employees totaling $240,000
related to the purchase of 40,000 shares of the Company's common stock.
In June 1996, the Company issued warrants on a pro rata basis to shareholders
of record of the Company as of May 17, 1996, to purchase an aggregate of
735,686 shares of the Company's common stock at a purchase price equal to 165
percent of the planned public offering price per share of $6, or $9.90 per
share. In conjunction with the terms of the agreement under which the preferred
stock and warrants were sold, the Company issued, in June 1996, warrants to the
preferred stockholder to purchase an aggregate of 54,163 shares of the
Company's common stock at a purchase price equal to 165 percent of the planned
public offering price per share of $6, or $9.90 per share.
9. STOCK OPTIONS:
The Company has granted certain management and directors stock options that
allow the individual to purchase previously unissued common shares at a set
price. The exercise prices of options granted approximate the estimated fair
market value, as determined by the Board of Directors, of the Company's common
stock as of the grant date. The Company is also obligated to grant options to
certain members of management upon issuance of additional shares of the
Company's common stock to ensure that these employees' portion of the Company's
outstanding common stock will not become diluted. The Company's obligation is 2
percent of its common shares at December 31, 1996.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its options. Accordingly, no compensation cost has been recognized for its
stock option plans. Had compensation cost for the Company's stock options been
determined based on the fair value at the grant dates for awards, consistent
with the method of FASB Statement No. 123, Accounting for Stock-Based
Compensation, the Company's net income and earnings per share would not be
materially different from amounts reported for the years ended December 31,
1996 and 1995.
The Company estimates the fair value of each option grant on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants: dividend yield of .67 percent and
risk free interest rate of approximately 6 percent for 1996 and 1995, and
expected lives of approximately 3 and 4 years for the options granted in 1996
and 1995, respectively. All options were granted prior to the Company's initial
public offering. Consequently, as permitted by SFAS No. 123, the Company has
excluded volatility from its fair value computations.
F-16
<PAGE> 67
Changes in the options outstanding during the years ended December 31, 1996 and
1995, and for the three months ended March 31, 1997, were as follows.
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE
PRICE PER
SHARES SHARE
------------ ---------
<S> <C> <C>
Outstanding, December 31, 1994 139,894 $4.09
Granted 14,650 $8.72
Exercised (124,316) $3.99
Expired (15,578) $4.88
------------
Outstanding, December 31, 1995 14,650 $8.72
Granted 70,004 $8.72
------------
Outstanding, December 31, 1996 84,654 $8.72
============
Outstanding, March 31, 1997 (unaudited) 84,654 $8.72
============
</TABLE>
As a result of the excess of exercise price over the share price during 1996,
the Black-Scholes option-pricing model indicates that the fair value of options
granted in 1996 is zero. The weighted-average fair value of options granted
during 1995 was $1.95.
As of December 31, 1996, all outstanding options are exercisable, at an
exercise price of $8.72, and expire in 1999.
10. COMMITMENTS AND CONTINGENT LIABILITIES:
Certain of the Company's leases require the Company to pay minimum royalties or
rentals. The aggregate minimum royalty and rental payments on leases for the
next five years are as follows.
<TABLE>
<S> <C>
1997 $ 31,736
1998 31,546
1999 30,678
2000 29,828
2001 29,828
</TABLE>
The Company is subject to various Federal, state, and local laws and
regulations relating to the protection of the environment. The Company believes
that it is in compliance with these laws and regulations and does not expect to
incur significant capital expenditures in future years to maintain compliance.
11. SALES TO MAJOR CUSTOMERS
One of the Company's customers accounted for 31 percent of consolidated
operating revenue for the year ended December 31, 1996. One of the Company's
customers accounted for 24 percent, one customer accounted for 23 percent,
while another customer accounted for 17 percent, respectively, of operating
revenue for the three months ended March 31, 1997.
F-17
<PAGE> 68
12. INCOME TAXES:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31 DECEMBER 31
1997 1996 1996 1995
---------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Current:
Federal $ 23,131 ($ 8,692) $ 10,231 $ 30,996
State 2,388 - - 3,892
---------- ---------- ---------- -----------
25,519 (8,692) 10,231 34,888
Deferred:
Federal 64,086 13,492 124,985 18,176
State 12,471 668 16,611 9,517
---------- ---------- ---------- -----------
76,557 14,160 141,596 27,693
---------- ---------- ---------- -----------
$102,076 $ 5,468 $151,827 $ 62,581
========== ========== ========== ===========
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- ----------
(unaudited)
<S> <C> <C>
Deferred tax assets:
Minimum tax credit carryforwards $104,609 $104,609
Net operating loss carryforward 86,910 86,910
---------- ----------
Total 191,519 191,519
---------- ----------
Deferred tax liabilities:
Capital assets 897,990 821,433
---------- ----------
Net deferred tax liabilities $706,471 $629,914
========== ==========
</TABLE>
The Company has no valuation allowances as of December 31, 1996, or as of March
31, 1997, and there were no changes in the valuation allowance during the years
ended December 31, 1996 or 1995, or during the three months ended March 31,
1997 and 1996.
F-18
<PAGE> 69
A reconciliation of the tax provision at the statutory Federal income tax rate
and the Company's actual provision for income tax is as follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31 DECEMBER 31
1997 1996 1996 1995
---------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Tax at statutory rate of 34% $136,315 $ 57,316 $258,194 $182,395
Equity in earnings of affiliated companies (32,109) (46,466) (115,576) (90,945)
State income taxes, less Federal benefit 8,010 834 10,963 7,030
Statutory depletion in excess of cost
depletion (25,595) (19,925) (26,693) (19,837)
Other, net 15,455 13,709 24,939 (16,062)
---------- ----------- ---------- -----------
$102,076 $ 5,468 $151,827 $ 62,581
========== =========== ========== ===========
</TABLE>
In addition, the Company has minimum tax credits that can be carried forward
indefinitely to offset future regular tax. The aggregate amount of minimum tax
credits available at December 31, 1996, is $104,609.
13. SUPPLEMENTARY INFORMATION ON NATURAL GAS PRODUCING ACTIVITIES (UNAUDITED):
The following supplementary information regarding the gas producing activities
of the Company is presented in accordance with the requirements of Statement of
Financial Accounting Standards ("SFAS") No. 69. The amounts shown include the
Company's net working and royalty interests in all of its natural gas
operations. The Company has no material investments in unproved properties.
NATURAL GAS RESERVES
Users of this information should be aware that the process of estimating
quantities of proved and proved developed natural gas reserves is complex,
requiring significant subjective decisions in the evaluation of all available
geological, engineering, and economic data for each reservoir. The data for a
given reservoir may also change substantially over time as a result of numerous
factors including, but not limited to, additional development activity,
evolving production history, and continual reassessment of the viability of
production under varying economic conditions. Consequently, material revisions
to existing reserve estimates occur from time to time. Although every
reasonable effort is made to ensure that reserve estimates reported represent
the most accurate assessments possible, the significance of the subjective
decisions required and variances in available data for various reservoirs makes
these estimates generally less precise than other estimates presented in
connection with financial statement disclosures.
Proved reserves represent estimated quantities of natural gas that geological
and engineering data demonstrate, with reasonable certainty, to be recoverable
in future years from known reservoirs under economic and operating conditions
existing at the time the estimates were made.
Proved developed reserves are proved reserves expected to be recovered through
wells and equipment in place and under operating methods being utilized at the
time the estimates were made.
No major discovery or other favorable or adverse event subsequent to December
31, 1996 is believed to have caused a material change in the estimates of
proved or proved developed reserves as of that date.
F-19
<PAGE> 70
CAPITAL COSTS RELATING TO NATURAL GAS PRODUCING ACTIVITIES:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Proved natural gas properties $2,581,634 $2,573,132
Support equipment and facilities 32,093 31,882
------------ ------------
2,613,727 2,605,014
Less - Accumulated depreciation, depletion and amortization (668,526) (520,649)
------------ ------------
Net capitalized costs $1,945,201 $2,084,365
============ ============
</TABLE>
COSTS INCURRED IN NATURAL GAS ACTIVITIES:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Proved property acquisition costs $ - $ 320,241
Exploration costs 2,688 4,202
Development costs 8,502 270,091
------------ ------------
$ 11,190 $ 594,534
============ ============
</TABLE>
RESULTS OF OPERATIONS FOR NATURAL GAS PRODUCING ACTIVITIES
The following table includes results solely from the production and sale of
natural gas and changes for property impairments. It excludes general and
administrative expenses and gains or losses on property dispositions. The
income tax expense is calculated by applying the statutory tax rates to the
revenues after deducting costs, which include depletion allowances and giving
effect to permanent differences and tax credits.
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues $ 416,201 $ 236,204
Cost of natural gas sold (42,349) (26,755)
Exploration costs (2,688) (4,202)
Depreciation, depletion and amortization (168,977) (157,394)
Revenue adjustment (see Note 2) - 72,992
----------- -----------
202,187 120,845
Income tax expense (43,287) (21,876)
----------- -----------
Results of operations $ 158,900 $ 98,969
=========== ===========
</TABLE>
The revenue adjustment for 1995 relates to the Company's revision of its method
of recording certain revenue, as discussed in Note 2.
NATURAL GAS RESERVES (UNAUDITED)
The following table presents the estimated natural gas reserves owned by the
Company. This information includes the Company's royalty and working interest
share of the reserves in southwestern Virginia. These reserves were estimated
by the Company; however, by their nature they are subject to upward and
downward revisions as additional information regarding fields and technology
becomes available. All reserves are located in the United States.
F-20
<PAGE> 71
NATURAL GAS
PROVED DEVELOPED AND UNDEVELOPED RESERVES (UNAUDITED):
(THOUSANDS OF CUBIC FEET/MCF)
<TABLE>
<S> <C>
December 31, 1995 4,072,782
Revisions of previous estimates (1,401,793)
Production (160,798)
Purchase of reserves 654,025
-----------
December 31, 1995 3,164,216
Revisions of previous estimates 160,830
Production (161,995)
Purchase of reserves -
-----------
December 31, 1996 3,163,051
===========
Proved Developed Producing Reserves:
December 31, 1995 2,316,276
===========
December 31, 1996 2,309,325
===========
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
The following information relating to proved natural gas reserves has been
developed utilizing procedures prescribed by SFAS No. 69 and based on natural
gas reserve and production volumes estimated by the engineering staff of the
Company. It may be useful for certain comparison purposes but should not be
relied upon solely in evaluating the Company or its performance. Further,
information contained in the following table should not be considered as
representative of realistic assessments of future cash flows, nor should the
Standardized Measure of Discounted Future Net Cash Flows be viewed as
representative of the current value of the Company.
The future cash flows presented below are based on sales prices, cost rates,
and statutory income tax rates in existence as of the date of the projection.
It is expected that material revisions to some estimates of natural gas
reserves may occur in the future, development and production of the reserves
may occur in periods other than those assumed, and actual prices realized and
costs incurred may vary significantly from those used.
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
Future cash inflows $10,870,114 $5,505,812
Future production costs (1,804,856) (1,680,171)
Future development costs (196,300) (242,889)
------------ ------------
Future cash inflows before income taxes 8,868,958 3,582,752
Future income tax expense (2,506,544) (1,057,790)
------------ ------------
Future net cash flows 6,362,414 2,524,962
10% annual discount for estimated timing of cash flows (3,514,491) (1,416,025)
------------ ------------
Standardized measure of discounted future net cash flows $2,847,923 $1,108,937
============ ============
</TABLE>
F-21
<PAGE> 72
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
Sales of natural gas, net of production costs $2,372,780 $ 244,799
Development costs incurred during the period 22,280 (56,189)
Purchase of minerals-in-place - 362,994
Net change in income taxes (656,074) (168,055)
------------ ------------
Net increase (decrease) 1,738,986 383,549
Beginning of year 1,108,937 725,388
------------ ------------
End of year $2,847,923 $1,108,937
============ ============
</TABLE>
14. EMPLOYMENT COMMITMENTS:
On May 23, 1996, the Company entered into a ten-year employment contract with
its President and CEO (the "President"), which provides for an annual salary of
$155,000. The contract provides for a bonus to be paid based upon 10 percent of
the Company's pretax earnings on all amounts from $1,000,000 to $1,999,999 and
15 percent of the Company's pretax earnings on all amounts in excess of
$2,000,000. The President's bonus for 1996 was $50,000. If the President is
terminated by the Company for any reason other than for cause during the term
the term of the employment contract, at the President's election, the Company
would be obligated to purchase all or a portion of the shares held by him and
his family (378,663 shares as of December 31, 1996) at a price equal to 150
percent of the market value of the Company's shares on the date of termination.
In addition, the Company would be obligated to pay the President in a lump sum
all salary amounts owed through the term of the employment agreement plus an
additional $2,000,000.
15. SUBSEQUENT EVENTS:
In April 1997, the Company acquired a portion of the existing propane
distribution operations of Blue Grass Oil, Inc. at a cost of $840,632. These
propane distribution operations are located in Buchanan, Dickenson and Russell
Counties and in the western part of Tazewell County, Virginia.
In May, 1997, the Company agreed in principle with an investment corporation on
terms for the issuance of subordinated debentures in the amount of $5,000,000,
together with warrants to purchase common stock of the Company. The debentures
would bear interest at 11.5%. There can be no assurance, however, that this
transaction will be consummated as contemplated by the parties.
F-22
<PAGE> 73
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Virginia Gas Storage Company:
We have audited the accompanying balance sheets of Virginia Gas Storage Company
as of December 31, 1996, and the related statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Virginia Gas Storage Company
as of December 31, 1996, and the results of its operations and its cash flows
for the years ended December 31, 1996 and 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 7, 1997
F-23
<PAGE> 74
VIRGINIA GAS STORAGE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 498,552 $ 148,619
Accounts receivable 1,031,366 1,233,227
Notes receivable 70,000 570,000
Other current assets 28,655 85,369
------------- -------------
Total current assets 1,628,573 2,037,215
PROPERTY AND EQUIPMENT, net 14,255,424 13,323,883
OTHER ASSETS 960,559 956,099
------------- -------------
Total assets $16,844,556 $16,317,197
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 106,395 $ 104,915
Accounts payable 1,416,725 2,193,010
Other current liabilities 245,844 108,929
------------- -------------
Total current liabilities 1,768,964 2,406,854
LONG-TERM DEBT 7,354,780 6,386,212
DEFERRED INCOME TAXES 591,970 551,686
------------- -------------
Total liabilities 9,715,714 9,344,752
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock - no par value, 50,000 shares authorized, 38,200
(unaudited) shares issued and outstanding as of March 31,
1997; no par value, 50,000 shares authorized, 38,200 issued
and outstanding as of December 31, 1996 5,640,000 5,640,000
Retained earnings 1,488,842 1,332,445
------------- -------------
Total stockholders' equity 7,128,842 6,972,445
------------- -------------
Total liabilities and stockholders' equity $16,844,556 $16,317,197
============= =============
</TABLE>
The accompanying notes are an integral part of these
balance sheets.
F-24
<PAGE> 75
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS ENDED
ENDED MARCH 31 DECEMBER 31
1997 1996 1996 1995
------------ ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Operating revenue $1,408,752 $1,329,797 $ 3,831,224 $2,696,594
Interest and other income 18,614 64,143 154,220 82,454
------------ ------------- ------------- -------------
1,427,366 1,393,940 3,985,444 2,779,048
------------ ------------- ------------- -------------
EXPENSES:
Production expenses 59,857 72,379 222,808 277,167
Purchased gas expense 509,042 635,296 974,277 680,857
Operation and maintenance expense 223,314 55,485 374,579 294,249
Depreciation, depletion, and amortization 128,195 88,980 416,699 308,039
General and administrative 155,825 110,739 565,941 351,075
------------ ------------- ------------- -------------
1,076,233 962,879 2,554,304 1,911,387
------------ ------------- ------------- -------------
OTHER EXPENSE:
Interest 77,367 43,155 272,941 115,010
Other 36,801 8,314 134,355 5,904
------------ ------------- ------------- -------------
114,168 51,469 407,296 120,914
------------ ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 236,965 379,592 1,023,844 746,747
PROVISION FOR INCOME TAXES 80,568 129,061 348,106 261,364
------------ ------------- ------------- -------------
NET INCOME $ 156,397 $ 250,531 $ 675,738 $ 485,383
============ ============= ============= =============
VIRGINIA GAS COMPANY'S EQUITY IN VIRGINIA GAS
STORAGE COMPANY'S EARNINGS
$ 78,198 $ 125,266 $ 337,869 $ 242,692
============ ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 76
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS
------------- -------------
<S> <C> <C>
BALANCE, December 31, 1994 $ 2,000,000 $ 171,324
Issuance of 18,200 shares 3,640,000 -
Net income - 485,383
------------- -------------
BALANCE, December 31, 1995 5,640,000 656,707
Net income - 675,738
------------- -------------
BALANCE, December 31, 1996 5,640,000 1,332,445
Net income (unaudited) - 156,397
------------- -------------
BALANCE, March 31, 1997 (unaudited) $ 5,640,000 $ 1,488,842
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 77
VIRGINIA GAS STORAGE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS ENDED
ENDED MARCH 31 DECEMBER 31
1997 1996 1996 1995
------------ ------------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 156,397 $ 250,531 $ 675,738 $ 485,383
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, and amortization 128,195 88,980 416,699 308,039
Deferred income taxes 40,284 53,119 212,476 139,214
Increase in accounts receivable 201,861 366,561 (304,140) (194,420)
Increase in other current assets 56,714 (55,463) (22,353) (50,441)
Increase in other assets (8,377) (11,464) (37,981) (31,946)
Increase in accounts payable (776,285) 207,095 1,092,591 64,109
Decrease in other current liabilities 136,915 36,405 (58,690) (27,763)
------------ ------------- ------------ -------------
Net cash (used in) provided by operating
activities (64,296) 935,764 1,974,340 692,175
------------ ------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,055,819) (1,302,264) (4,225,530) (2,870,185)
Payments received on notes receivable 500,000 50,000 1,720,000 100,000
------------ ------------- ------------ -------------
Net cash used in investing activities (555,819) (1,252,264) (2,505,530) (2,770,185)
------------ ------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal (29,952) (28,144) (117,677) (23,006)
Proceeds from new loans 1,000,000 500,000 500,000 1,342,697
Proceeds from issuance of common stock - - - 500,000
Payment of financing issuance costs - - - (42,131)
Establishment of financing reserve funds - - - (75,843)
------------ ------------- ------------ -------------
Net cash provided by financing activities 970,048 471,856 382,323 1,701,717
------------ ------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH 349,933 155,356 (148,867) (376,293)
CASH, beginning of period 148,619 297,486 297,486 673,779
------------ ------------- ------------ -------------
CASH, end of period $ 498,552 $ 452,842 $148,619 $ 297,486
============ ============= ============ =============
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 166,083 $ 175,382 $ 606,505 $ 450,501
============ ============= ============ =============
Income taxes paid $ 17,635 $ 39,024 $ 159,024 $ 123,349
============ ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 78
VIRGINIA GAS STORAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
(including notes applicable to unaudited periods)
1. DESCRIPTION OF OPERATIONS:
Virginia Gas Storage Company (the "Company") was organized in 1992 under the
laws of the state of Virginia. The Company is 50 percent owned by Virginia Gas
Company ("VGC") and 50 percent owned by a private investor. The primary
business of the Company is to develop and operate natural gas storage and
transmission facilities.
The Company's operations are subject to certain risks and uncertainties
including, among others, the adequacy of future financing, the need for
additional capital, dependence on major customers, and current and potential
competitors with greater financial and marketing resources.
INTERIM FINANCIAL INFORMATION
The unaudited financial statements as of March 31, 1997, and for the three
months ended March 31, 1997 and 1996, include, in the opinion of management,
all adjustments (that are normal and recurring in nature) necessary to present
fairly the Company's financial position, results of operations, and cash flows.
Operating results for the three months ended March 31, 1997, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes gas sales and transmission revenues upon delivery of gas
to the common pipeline carrier. Storage revenues are recognized evenly
throughout the contract terms with injection and withdrawal revenues recognized
as natural gas is injected or withdrawn from the storage facility.
During the year ended December 31, 1995, the Company revised its method of
recording certain revenue. Prior to 1995, recognition of transmission revenues
was deferred for three months after the actual transmission of natural gas had
occurred, primarily to match the recognition of revenues with the period these
revenues were distributed to the working interest owners. The policy revision
to record revenues on a current basis reflects the Company's ability to
estimate its net revenues on a current basis. This change is reflected on a
prospective basis beginning in January 1995 and results in 15 months of
transmission revenues being recognized in 1995. The effect of this change was
to increase revenue and net income by $110,000 and $43,000, respectively, for
the year ended December 31, 1995.
F-28
<PAGE> 79
PROPERTY AND EQUIPMENT
All direct and indirect costs relating to property acquisition, development
costs and support equipment and facilities are capitalized as the properties
are obtained or the facilities are placed into service. The Company provides
for depreciation of property and equipment using the straight-line method over
estimated useful lives ranging from 5 to 30 years.
CAPITALIZED INTEREST
The Company capitalizes interest on expenditures for significant projects while
activities are in progress to bring the assets to their intended use. Interest
capitalized totaled $283,564 and $317,312 for the years ended December 31, 1996
and 1995, respectively. Interest capitalized totaled $73,502 (unaudited) and
$96,047 (unaudited) in the three months ended March 31, 1997 and 1996,
respectively.
OTHER ASSETS
In conjunction with the 1997 issuance of the Russell County, the 1995 issuance
of the Buchanan County and the 1994 issuance of the Russell County and Buchanan
County, Virginia, Natural Gas Facilities Revenue Bonds by the Industrial
Development Authorities of the respective counties, reserve funds have been
established by the trustee for each issuance. Amounts in the reserve funds will
be used to make payments of principal and interest, whether at maturity, by
acceleration, call for redemption, or otherwise, where trust funds accumulated
by scheduled Company payments are insufficient to satisfy bond requirements.
Such amounts are invested in debt securities issued by the U.S. Treasury and
other U.S. government corporations and agencies. The Company records these
investments at cost and recognizes related interest as earned. The carrying
value of investments approximates market value.
Costs incurred in conjunction with financing transactions are amortized on a
basis that approximates the effective interest method.
INCOME TAXES
Income taxes are accounted for using the asset-and-liability method. Under the
asset-and-liability method, deferred income taxes reflect the temporary
differences between assets and liabilities recognized for financial reporting
purposes and amounts recognized for tax purposes.
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
Trade receivables $ 270,662 $ 618,275
Receivables from affiliated companies 564,947 469,656
Pipeline operating expenses 73,728 54,944
Joint-interest receivables 121,926 90,249
Other 103 103
------------ ------------
$1,031,366 $1,233,227
============ ============
</TABLE>
F-29
<PAGE> 80
4. NOTES RECEIVABLE:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(unaudited)
<S> <C> <C>
Notes receivable from Virginia Gas Company; interest receivable at 8%;
principal received as consideration for the issuance of common shares,
due 1997. $ - $ -
Note receivable from shareholder; interest receivable at 8%; principal received
as consideration for the issuance of common shares. The note receivable
from shareholder was collected in March 1997. - 500,000
Note receivable from Virginia Gas Exploration Company; interest receivable
at 8%; principal balance due 1997. 70,000 70,000
----------- ------------
70,000 570,000
Less- Current portion (70,000) (570,000)
----------- ------------
$ - $ -
=========== ============
</TABLE>
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
Storage properties $13,143,672 $12,095,480
Pipelines 2,025,288 2,026,091
Vehicles 133,742 133,742
Office equipment 72,303 63,335
Wells and pipelines in progress 68,294 68,832
------------- -------------
15,443,299 14,387,480
Less- Accumulated depreciation, depletion, and
amortization (1,187,875) (1,063,597)
------------- -------------
$14,255,424 $13,323,883
============= =============
</TABLE>
6. OTHER ASSETS:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
Restricted cash and investments-reserve funds $ 590,943 $ 582,233
Deferred debt issuance costs 361,790 365,707
Other 7,826 8,159
------------- -------------
$ 960,559 $ 956,099
============= =============
</TABLE>
F-30
<PAGE> 81
7. ACCOUNTS PAYABLE:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
Trade payables $ 671,555 $1,827,867
Payable to affiliated companies 745,170 365,143
------------ ------------
$1,416,725 $2,193,010
============ ============
</TABLE>
8. OTHER CURRENT LIABILITIES:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
Amounts due affiliated companies $ 30,561 $ 46,255
Funds held for future distribution 101,154 8,120
Income taxes payable 58,377 17,569
Other 55,752 36,985
------------ ------------
$ 245,844 $ 108,929
============ ============
</TABLE>
9. LONG-TERM DEBT:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
Note payable to Virginia Gas Company; interest payable at 8.88%; principal
payable in maturities of $12,000 to $241,000 from 1995 to 2017. $ 2,549,094 $ 2,567,837
Note payable to Virginia Gas Company; interest payable at 7.35%; principal
payable in maturities of $13,000 to $77,000 from 1996 to 2023. 1,015,300 1,018,579
Notes payable to Virginia Gas Distribution Company; interest payable at 9%;
principal payable in maturities of $1,000 to $91,000 from 1999 to 2020. 1,000,000 1,000,000
Notes payable to Virginia Gas Distribution Company; interest payable at 9.5%;
principal payable in maturities of $30,000 to $123,000 from 2002
to 2017. 1,000,000 -
Note payable to Virginia Gas Company; interest payable at 9%; principal payable
in maturities of $1,000 to $77,000 from 1999 to 2020. 842,697 842,697
Notes payable to Virginia Gas Distribution Company; interest payable at 8.88%;
principal payable in maturities of $3,000 to $53,000 from 1995 to
2017. 564,407 568,557
Notes payable to Virginia Gas Distribution Company; interest payable at 7.35%;
principal payable in maturities of $6,000 to $36,000 from 1996 to
2023. 469,283 470,798
</TABLE>
F-31
<PAGE> 82
<TABLE>
<S> <C> <C>
Notes payable through 1999 with interest from 8.0% to 12.75%; secured by assets
with a book value of $19,380 as of March 31, 1997
20,394 22,659
------------ ------------
7,461,175 6,491,127
Less- Current portion (106,395) (104,915)
------------ ------------
Long-term debt $7,354,780 $6,386,212
============ ============
</TABLE>
In February 1997, the Industrial Development Authority of Russell County,
Virginia (the "Russell County Authority"), issued its Subordinated Natural Gas
Facilities Revenue Bonds Series 1997 with principal of $9,100,000. A portion
($1,000,000) of the proceeds was loaned to the Company by Virginia Gas
Distribution Company.
In December 1995, the Industrial Development Authority of Buchanan County,
Virginia (the "Buchanan County Authority"), issued its Senior Subordinated
Natural Gas Facilities Revenue Bonds Series 1995 with principal of $3,750,000.
A portion ($842,697) of the proceeds was allocated to the Company by VGC which
was used by the Company to construct natural gas storage facilities to support
natural gas distribution facilities owned by Virginia Gas Distribution Company.
In January 1994, the Industrial Development Authority of Russell County,
Virginia (the "Russell County Authority"), issued its Natural Gas Revenue Bond
Series A and B with combined principal of $3,000,000. A portion ($1,330,000) of
the proceeds was allocated to the Company by an affiliated company, which was
used by the Company to construct natural gas storage and gathering facilities
to support natural gas distribution facilities owned by Virginia Gas
Distribution Company.
In November 1994, the Buchanan County Authority issued its Natural Gas Revenue
Bond Series A with principal of $4,250,000. A portion ($2,655,306) of the
proceeds was allocated to the Company by VGC which was used by the Company to
construct natural gas storage and gathering facilities to support natural gas
distribution facilities owned by Virginia Gas Distribution Company.
As of December 31, 1996, principal payments on long-term debt for the next five
years are as follows:
<TABLE>
<S> <C>
1997 $ 104,915
1998 109,450
1999 132,363
2000 89,441
2001 143,117
</TABLE>
10. SALES TO MAJOR CUSTOMERS:
One of the Company's customers accounted for 12 percent and 20 percent while
another customer accounted for 45 percent and 29 percent, respectively, of
operating revenue for the years ended December 31, 1996 and 1995. One customer
accounted for 10 percent of 1996 operating revenue while another customer
accounted for 12 percent of 1995 operating revenue. One of the Company's
customers accounted for 55 percent and 64 percent, respectively, of operating
revenue for the three months ended March 31, 1997 and 1996.
F-32
<PAGE> 83
11. COMMITMENTS:
Certain of the Company's leases require the Company to pay minimum rentals. The
aggregate minimum rental payments on leases for the next five years are as
follows:
<TABLE>
<S> <C>
1997 $ 91,523
1998 91,523
1999 62,373
2000 59,723
2001 59,723
</TABLE>
12. INCOME TAXES:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31 DECEMBER 31
1997 1996 1996 1995
---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Current:
Federal $ 40,284 $ 75,942 $135,630 $108,482
State - - - 13,668
---------- ---------- ---------- ----------
40,284 75,942 135,630 122,150
---------- ---------- ---------- ----------
Deferred:
Federal 40,284 53,119 212,476 139,214
State - - - -
---------- ---------- ---------- ----------
40,284 53,119 212,476 139,214
---------- ---------- ---------- ----------
$ 80,568 $129,061 $348,106 $261,364
========== ========== ========== ==========
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- ----------
(unaudited)
<S> <C> <C>
Deferred tax assets:
Minimum tax credit carryforwards $ 4,656 $ 4,656
---------- ----------
Deferred tax liabilities:
Capital assets 596,626 556,342
---------- ----------
Net deferred tax liabilities $591,970 $551,686
========== ==========
</TABLE>
The Company has no valuation allowances as of December 31, 1996, or as of March
31, 1997, and there were no changes in the valuation allowance during the years
ended December 31, 1996 and 1995, or during the three months ended March 31,
1997 and 1996.
F-33
<PAGE> 84
A reconciliation of the tax provision at the statutory Federal income tax rate
and the Company's actual provision for income tax is as follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31 DECEMBER 31
1996 1995 1996 1995
----------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Tax at statutory rate $ 80,568 $129,061 $348,106 $253,894
State income taxes, less Federal benefit - - - 10,961
Other, net - - - (3,491)
----------- ---------- ---------- ----------
$ 80,568 $129,061 $348,106 $261,364
=========== ========== ========== ==========
</TABLE>
13. RELATED-PARTY TRANSACTIONS:
With the exception of sales and storage fees charged to outside third parties,
a significant portion of the Company's transactions is with VGC and affiliated
companies.
VGC provides certain general and administrative services for the Company. These
services include professional services, insurance coverage and administrative
services (with associated costs). Accordingly, management fees of $105,000 and
$180,000 have been charged to the Company by VGC for the years ended December
31, 1996 and 1995, respectively. Other transactions with affiliated companies
includes purchases of natural gas, natural gas storage and technical services
provided for and by affiliated companies.
F-34
<PAGE> 85
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Virginia Gas Distribution Company:
We have audited the accompanying balance sheet of Virginia Gas Distribution
Company as of December 31, 1996, and the related statements of income, changes
in stockholders' equity, and cash flows for the years ended December 31, 1996
and 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Virginia Gas Distribution
Company as of December 31, 1996, and the results of its operations and its cash
flows for the years ended December 31, 1996 and 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 7, 1997
F-35
<PAGE> 86
VIRGINIA GAS DISTRIBUTION COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,424,217 $ 16,166
Accounts receivable 660,131 151,752
Other current assets 102,038 154,920
Notes receivable 26,356 26,004
------------- -------------
Total current assets 2,212,742 348,842
PROPERTY AND EQUIPMENT, net 3,318,165 2,755,660
NOTES RECEIVABLE 4,370,557 3,413,066
DEFERRED TAX ASSET - 1,995
OTHER ASSETS 953,108 546,798
------------- -------------
Total assets $10,854,572 $ 7,066,361
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 39,815 $ 39,240
Accounts payable 547,636 462,095
Other current liabilities 49,755 33,368
------------- -------------
Total current liabilities 637,206 534,703
LONG-TERM DEBT 8,656,551 5,018,064
DEFERRED INCOME TAXES 14,739 -
------------- -------------
Total liabilities 9,308,496 5,552,767
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock - no par value, 100,000 shares authorized, 75,000
(unaudited) shares issued and outstanding as of March 31,
1997; no par value, 75,000 issued and outstanding as of
December 31, 1996
1,500,000 1,500,000
Retained earnings 46,076 13,594
------------- -------------
Total stockholders' equity 1,546,076 1,513,594
------------- -------------
Total liabilities and stockholders' equity $10,854,572 $ 7,066,361
============= =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-36
<PAGE> 87
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS ENDED
ENDED MARCH 31 DECEMBER 31
1997 1996 1996 1995
------------- ------------- -------------- --------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Operating revenue $ 220,084 $ 158,914 $ 629,280 $ 556,052
Interest income 96,422 78,212 320,836 129,249
Other income 21,844 17,611 72,949 33,887
------------- ------------- -------------- --------------
338,350 254,737 1,023,065 719,188
------------- ------------- -------------- --------------
EXPENSES:
Purchased gas expense 120,530 77,164 330,332 234,297
Operation and maintenance expense 18,955 8,991 55,032 50,563
Depreciation, depletion, and amortization 23,149 17,419 78,013 76,162
General and administrative 31,104 27,322 191,619 125,982
------------- ------------- -------------- --------------
193,738 130,896 654,996 487,004
------------- ------------- -------------- --------------
OTHER EXPENSE:
Interest 86,778 82,848 358,158 147,915
Other 8,618 6,448 3,676 9,140
------------- ------------- -------------- --------------
95,396 89,296 361,834 157,055
------------- ------------- -------------- --------------
INCOME BEFORE INCOME TAXES 49,216 34,545 6,235 75,129
PROVISION FOR INCOME TAXES 16,734 11,745 2,120 25,544
------------- ------------- -------------- --------------
NET INCOME $ 32,482 $ 22,800 $ 4,115 $ 49,585
============= ============= ============== ==============
VIRGINIA GAS COMPANY'S EQUITY IN VIRGINIA GAS $ 16,241 $ 11,400 $ 2,058 $ 24,792
DISTRIBUTION COMPANY'S EARNINGS ============= ============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 88
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON STOCK (DEFICIT)
------------ -------------
<S> <C> <C>
BALANCE, December 31, 1994 $1,500,000 $ (40,106)
Net income - 49,585
------------ -------------
BALANCE, December 31, 1995 1,500,000 9,479
Net income - 4,115
------------ -------------
BALANCE, December 31, 1996 1,500,000 13,594
Net income (unaudited) - 32,482
------------ -------------
BALANCE, March 31, 1997 (unaudited) $1,500,000 $ 46,076
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 89
VIRGINIA GAS DISTRIBUTION COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS ENDED
ENDED MARCH 31 DECEMBER 31
1997 1996 1996 1995
------------ ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32,482 $ 22,800 $ 4,115 $ 49,585
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, and amortization 23,149 17,419 78,013 76,162
Deferred income taxes 16,734 530 2,120 22,197
(Increase) decrease in accounts receivable (508,379) (4,142) 52,074 (108,776)
Decrease (increase) in receivable from
affiliate
- 1,562,500 1,562,500 (1,562,500)
Decrease (increase) in other current assets 52,882 61,722 (3,220) (81,914)
Increase in other assets (4,723) (1,680) (25,239) (6,973)
Increase (decrease) in accounts payable 85,541 (142,315) 227,747 68,609
Increase (decrease) in other current liabilities 16,387 (59,037) (70,345) 82,471
------------ ------------- ------------- -------------
Net cash (used in) provided by operating
activities (285,927) 1,457,797 1,827,765 (1,461,139)
------------ ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (583,239) (147,823) (674,263) (412,178)
Loans made to affiliated companies (1,000,000) (1,500,000) (1,500,000) (500,000)
Payments received on notes receivable 42,157 10,727 98,200 20,741
------------ ------------- ------------- -------------
Net cash used in investing activities (1,541,082) (1,637,096) (2,076,063) (891,437)
------------ ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan principal (10,938) (9,496) (42,223) (4,644)
Proceeds from new loans 3,650,000 - - 2,881,314
Payment of financing costs (75,502) - - (66,368)
Establishment of financing reserve funds (328,500) - - (259,129)
------------ ------------- ------------- -------------
Net cash provided by (used in) financing
activities 3,235,060 (9,496) (42,223) 2,551,173
------------ ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH 1,408,051 (188,795) (290,521) 198,597
CASH, beginning of period 16,166 306,687 306,687 108,090
------------ ------------- ------------- -------------
CASH, end of period $1,424,217 $ 117,892 $ 16,166 $ 306,687
============ ============= ============= =============
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 137,163 $ 186,693 $ 533,085 $ 97,181
============ ============= ============= =============
Income taxes paid $ - $ - $ - $
============ ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 90
VIRGINIA GAS DISTRIBUTION COMPANY
NOTES TO FINANCIAL STATEMENTS
(including notes applicable to unaudited periods)
1. DESCRIPTION OF OPERATIONS:
Virginia Gas Distribution Company (the "Company") was organized during 1992
under the laws of the state of Virginia. The Company is 50 percent owned by
Virginia Gas Company ("VGC") and 50 percent owned by a private investor. The
primary business of the Company is to develop and operate natural gas
distribution systems, located primarily in the southwestern counties of the
Commonwealth of Virginia.
The Company's operations are subject to certain risks and uncertainties
including, among others, the adequacy of future financing, the need for
additional capital, dependence on major customers, and current and potential
competitors with greater financial and marketing resources.
INTERIM FINANCIAL INFORMATION
The unaudited financial statements as of March 31, 1997, and for the three
months ended March 31, 1997 and 1996, include, in the opinion of management,
all adjustments (that are normal and recurring in nature) necessary to present
fairly the Company's financial position, results of operations, and cash flows.
Operating results for the three months ended March 31, 1997, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue in the period the natural gas is delivered to
the customer.
PROPERTY AND EQUIPMENT
All direct and indirect costs relating to property acquisition, development
costs, and support equipment and facilities are capitalized as the properties
are obtained or the facilities are placed into service. The Company provides
for depreciation of property and equipment using the straight-line method over
estimated useful lives ranging from 5 to 30 years.
F-40
<PAGE> 91
CAPITALIZED INTEREST
The Company capitalizes interest on expenditures for significant projects while
activities are in progress to bring the assets to their intended use. Interest
capitalized totaled $74,927 and $25,930 for the years ended December 31, 1996
and 1995, respectively. Interest capitalized totaled $58,895 (unaudited) and
$25,439 (unaudited) for the three months ended March 31, 1997 and 1996,
respectively.
OTHER ASSETS
In conjunction with the 1997 issuance of the Russell County, the 1995 issuance
of the Buchanan County and the 1994 issuance of the Russell County and Buchanan
County, Virginia, Natural Gas Facilities Revenue Bonds by the Industrial
Development Authorities of the respective counties, reserve funds have been
established by the trustee for each issuance. Amounts in the reserve funds will
be used to make payments of principal and interest, whether at maturity, by
acceleration, call for redemption, or otherwise, where trust funds accumulated
by scheduled Company payments are insufficient to satisfy bond requirements.
Such amounts are invested in debt securities issued by the U.S. Treasury and
other U.S. government corporations and agencies. The Company records these
investments at cost and recognizes related interest as earned. The carrying
value of investments approximates market value.
Costs incurred in conjunction with financing transactions are amortized on a
basis that approximates the effective interest method.
INCOME TAXES
Income taxes are accounted for using the asset-and-liability method. Under the
asset-and-liability method, deferred income taxes reflect the temporary
differences between assets and liabilities recognized for financial reporting
purposes and amounts recognized for tax purposes.
3. NOTES RECEIVABLE
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
Note receivable from Virginia Gas Storage Company; interest receivable at
8.88%; principal due in maturities of $3,000 to $53,000 from 1995 to
2017. $ 564,407 $ 568,557
Notes receivable from Virginia Gas Storage Company; interest receivable at 9%;
principal due in maturities of $1,000 to $91,000 from
1999 to 2020. 1,000,000 1,000,000
Note receivable from Virginia Gas Pipeline Company; interest receivable at 9%;
principal due in maturities of $1,000 to $91,000 from
1999 to 2020. 965,000 1,000,000
Note receivable from Virginia Gas Storage Company; interest receivable at 9.5%;
principal due in maturities of $30,000 to $123,000 from 2002 to
2017. 1,000,000 -
Note receivable from Virginia Gas Storage Company; interest receivable at
7.35%; principal due in maturities of $6,000 to $36,000 from 1996 to
2023. 469,283 470,798
</TABLE>
F-41
<PAGE> 92
<TABLE>
<S> <C> <C>
Note receivable from Virginia Gas Exploration Company; interest receivable at
7.35%; principal due in maturities of $5,000 to $30,000 from 1996 to
2023. 394,061 395,333
Other 4,162 4,382
-------------- --------------
4,396,913 3,439,070
Less- Current portion (26,356) (26,004)
-------------- --------------
$4,370,557 $ 3,413,066
============== ==============
</TABLE>
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
Pipelines $ 2,357,391 $ 2,343,856
Project and construction in progress 1,151,395 555,232
Other property and equipment 77,927 104,386
------------- --------------
3,586,713 3,003,474
Less- Accumulated depreciation and amortization
(268,548) (247,814)
------------- --------------
$ 3,318,165 $ 2,755,660
============= ==============
5. OTHER ASSETS:
MARCH 31, DECEMBER 31,
1997 1996
------------- --------------
(unaudited)
Restricted cash and investments-reserve funds $ 729,840 $ 396,285
Defined debt issuance costs 220,279 147,191
Other 2,989 3,322
------------- --------------
$ 953,108 $ 546,798
============= ==============
</TABLE>
6. LONG-TERM DEBT:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
-------------- --------------
(unaudited)
<S> <C> <C>
Note payable to Virginia Gas Company; interest payable at 9.5%; principal
payable in maturities of $110,000 to $447,000 from 2002 to 2017. $ 3,650,000 $
-
Note payable to Virginia Gas Company; interest payable at 9%; principal payable
in maturities of $4,000 to $263,000 from
1999 to 2020. 2,879,214 2,879,214
</TABLE>
F-42
<PAGE> 93
<TABLE>
<S> <C> <C>
Note payable to Virginia Gas Company; interest payable at 7.35%; principal
payable in maturities of $17,000 to $97,000 from 1996 to 2023. 1,280,697 1,284,833
Note payable to Virginia Gas Company; interest payable at 8.88%; principal
payable in maturities of $4,000 to $84,000 from 1995 to 2017. 885,943 892,457
Note payable through 1997 with interest, secured by an asset with a book
value of $1,505. 512 800
------------- -------------
8,696,366 5,057,304
Less- Current portion (39,815) (39,240)
------------- -------------
Long-term debt $ 8,656,551 $ 5,018,064
============= =============
</TABLE>
In February 1997, the Industrial Development Authority of Russell County,
Virginia (the "Russell County Authority"), issued its Subordinated Natural Gas
Facilities Revenue Bonds Series 1997 with principal of $9,100,000. A portion
($3,650,000) of the proceeds was allocated to the Company by VGC and is being
used to construct a natural gas distribution facility in and around the town of
Lebanon, Virginia.
In December 1995, the Industrial Development Authority of Buchanan County,
Virginia (the "Buchanan County Authority"), issued its Senior Subordinated
Natural Gas Facilities Revenue Bonds Series 1995 with principal of $3,750,000.
A portion ($2,879,214) of the proceeds was allocated to the Company by VGC
which was used by the Company to extend existing natural gas distribution
facilities in and around the town of Grundy, Virginia.
In January 1994, Russell County Authority issued its Natural Gas Revenue Bond
Series A and B with combined principal of $3,000,000. A portion ($1,300,000) of
the proceeds was allocated to the Company by VGC which was used by the Company
to construct a natural gas distribution facility in and around the town of
Castlewood, Virginia.
In November 1994, the Buchanan County Authority issued its Natural Gas Revenue
Bond Series A with principal of $4,250,000. A portion ($922,857) of the
proceeds was allocated to the Company by VGC which was used by the Company to
construct a natural gas distribution facility in and around the town of Grundy,
Virginia.
As of December 31, 1996, principal payments on long-term debt for the next five
years are as follows:
<TABLE>
<S> <C>
1997 $ 39,240
1998 41,347
1999 74,435
2000 81,048
2001 102,339
</TABLE>
7. SALES TO MAJOR CUSTOMERS:
One of the Company's customers accounted for 35 percent and 35 percent, one
customer accounted for 20 percent and 23 percent, while another customer
accounted for 14 percent and 16 percent, respectively, of operating revenue for
the years ended December 31, 1996 and 1995. One of the Company's customers
accounted for 42 percent and 40 percent, while another customer accounted for
24 percent and 25 percent, respectively, of operating revenue for the three
months ended March 31, 1997 and 1996.
F-43
<PAGE> 94
8. INCOME TAXES:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31 DECEMBER 31
1997 1996 1996 1995
----------- ---------- ------------ ----------
(unaudited)
<S> <C> <C> <C> <C>
Current:
Federal $ $ 11,215 $ $ 3,347
State - - - -
----------- ---------- ------------ ----------
- 11,215 - 3,347
----------- ---------- ------------ ----------
Deferred:
Federal 16,734 530 2,120 22,197
State - - - -
----------- ---------- ------------ ----------
16,734 530 2,120 22,197
----------- ---------- ------------ ----------
$ 16,734 $ 11,745 $ 2,120 $ 25,544
=========== ========== ============ ==========
</TABLE>
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 128,657 $ 128,657
------------- -------------
Deferred tax liabilities:
Capital assets 143,396 126,662
------------- -------------
Net deferred tax (liabilities) assets $ (14,739) $ 1,995
============= =============
</TABLE>
The Company has no valuation allowances as of December 31, 1996, or as of March
31, 1997, and there were no changes in the valuation allowance during the years
ended December 31, 1996 or 1995, or during the three months ended March 31,
1997 and 1996, respectively.
The Company's actual provision for income tax as of December 31, 1996 and 1995,
and for the three months ended March 31, 1997 and 1996, approximates the tax
provision at the statutory Federal income tax rate.
9. RELATED-PARTY TRANSACTIONS:
With the exception of sales to outside third parties, a significant portion of
the Company's transactions is with VGC and affiliated companies.
VGC provides certain general and administrative services for the Company. These
services include professional services, insurance coverage and administrative
services (with associated costs). Accordingly, management fees of $14,000 and
$24,000 have been charged to the Company by VGC for the years ended December
31, 1996 and 1995, respectively. Other transactions with affiliated companies
include purchases of natural gas, natural gas storage and technical services
provided for and by affiliated companies.
F-44
<PAGE> 95
[The map to be included on the inside back cover page of the prospectus depicts
the existing storage facilities operated by the Company and the Storage Company
in western Virginia. It also depicts the existing and proposed pipelines of the
Company in red and existing interstate pipelines in blue. It depicts certain
gas gathering lines of Columbia Gas Transmission Company in green.]
49
<PAGE> 96
<TABLE>
<S> <C>
==================================================== =================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS
BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES TO VIRGINIA GAS COMPANY
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL.
TABLE OF CONTENTS
PAGE
Available Information . . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . . 4
The Company . . . . . . . . . . . . . . . . . 4
COMMON STOCK
Risk Factors . . . . . . . . . . . . . . . . 8 AND
COMMON STOCK
Common Stock Price Range . . . . . . . . . . 13 PURCHASE WARRANTS
Capitalization . . . . . . . . . . . . . . . 13
Dividend Policy . . . . . . . . . . . . . . . 14
Selected Consolidated Financial and Operating ----------------------------------
Data . . . . . . . . . . . . . . . . . . . . 14 PROSPECTUS
Management's Discussion and Analysis of ---------------------------------
Financial Condition and Results of Operations 16
____________, 1997
Business . . . . . . . . . . . . . . . . . . 24
Management . . . . . . . . . . . . . . . . . 34
Description of Securities . . . . . . . . . . 39
Shares Eligible for Future Sale . . . . . . . 43
Selling Securityholders . . . . . . . . . . . 44
Experts . . . . . . . . . . . . . . . . . . . 46
Other Matters . . . . . . . . . . . . . . . . 46
Glossary . . . . . . . . . . . . . . . . . . 47
Financial Statements . . . . . . . . . . . . F-1
======================================================= ================================================================
</TABLE>
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the Registrant's Bylaws provide that the Registrant
shall indemnify its officers, directors and employees to the full extent
permitted by Section 145 of the Delaware General Corporation Law.
Section 8 of the Underwriting Agreement filed as Exhibit 1.1 hereto
provides for reciprocal indemnification between the Registrant and Anderson &
Strudwick Incorporated against certain liabilities in connection with the
offering contemplated by this Registration Statement, including liabilities
under the Securities Act of 1933, as amended (the "Act").
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the Securities offered by the Selling Securityholders. All of the amounts
shown are estimates.
<TABLE>
<S> <C>
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Printing Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,000
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of
securities by the Registrant during the past three years that were not
registered under the Act. The information set forth below gives effect to a
103.1667-for-1 split of the Company's Common Stock effected on June 10, 1996.
1. The following shares of Common Stock have been privately placed during
the past three years:
<TABLE>
<CAPTION>
Date Number of Shares Purchaser Total Offering Price
---- ---------------- --------- --------------------
<S> <C> <C> <C>
August 3, 1996 15,000 Michael L. and $ 90,000
Karen K. Edwards
August 3, 1996 15,000 Allan R. Poole II $ 90,000
August 3, 1996 4,200 John D. Jessee $ 25,200
August 3, 1996 2,000 Mark N. Witt $ 12,000
August 3, 1996 2,000 Frank A. Merendino, Jr. $ 12,000
August 3, 1996 1,000 Lydia J. Sinemus $ 6,000
</TABLE>
<PAGE> 98
<TABLE>
<S> <C> <C> <C>
August 3, 1996 800 Bradley L. Swanson $ 4,800
July 30, 1996 42,000 Allan R. Poole II $ 252,000
May 31, 1996 800,058 Dr. James T. Martin $ 4,800,345
November 1, 1994 20,634 Marlene Kissler and $ 200,000
Eric Verzuh, JT
</TABLE>
These shares were sold to employees of the Company, relatives and
accredited investors in reliance on Section 4(2) of the Act based on the
limited number of purchasers, their sophistication and close relationship to
principals of the Company and access to information regarding the Company as a
result of these relationships.
2. The following shares of Common Stock have been issued as the result of
the exercise of stock options:
<TABLE>
<CAPTION>
Date Number of Shares Purchaser Total Offering Price
---- ---------------- --------- --------------------
<S> <C> <C> <C>
December 29, 1995 5,159 David Street $ 25,000
December 21, 1995 23,213 Frank A. Merendino, Jr. $ 5,000
December 20, 1995 4,127 Scott R. Colson $ 8,000
December 20, 1995 4,127 Sara L. Colson $ 8,000
December 13, 1995 82,534 Marlene Kissler and $400,000
Eric Verzuh, JT
July 5, 1995 5,159 Frank A. Merendino, Jr. $ 10,000
December 29, 1994 32,292 Joan M. Edwards $ 62,600
December 29, 1994 6,397 Mark N. Witt $ 12,400
</TABLE>
These stock options were issued to employees of the Company, relatives
and accredited investors and were issued in reliance on Section 4(2) of the Act
based on the limited number of purchasers, their sophistication and close
relationship to principals of the Company and access to information regarding
the Company as a result of these relationships. No underwriters were involved
in these transactions.
3. On September 28, 1995, 2,000 shares of the Registrant's Series A were
issued to Sirrom Capital Corporation for an aggregate purchase price of
$2,000,000. This sale was made in reliance on Section 4(2) of the Act. Sirrom
Capital Corporation is a venture capital firm which qualifies as an accredited
investor and is extremely sophisticated. Sirrom Capital Corporation had access
to all the records of the Company before its purchase of this stock. No
underwriter was involved in this transaction.
4. On September 28, 1995, Registrant issued warrants to Sirrom Capital
Corporation to purchase 54,163 shares of Registrant's Common Stock (increasing
to up to 94,398 shares in the event Registrant has not redeemed the Series A
Preferred Shares by September 28, 2000), at a purchase price of $.0001 per
share. The warrant was issued in consideration of the purchase of the Series A
by Sirrom Capital Corporation. Sirrom Capital Corporation is a venture capital
firm which qualifies as an accredited investor and is extremely
II-2
<PAGE> 99
sophisticated. Sirrom Capital Corporation had access to all the records of the
Company before its purchase of this security. No underwriter was involved in
the transaction and the sale was made in reliance on Section 4(2) of the Act.
5. As of July 31, 1996, Registrant had options issued and outstanding to
an officer of the Company to purchase 2% of Registrant's Common Stock at an
exercise price of $8.72 per share. No underwriter was involved in the
transaction and the option was issued in consideration of the employee's
services. The option was issued in reliance on Section 4(2) of the Act. As an
officer of the Company this option holder had full access to information about
the Company and is sophisticated.
ITEM 27. EXHIBITS
The following is a complete list of Exhibits filed or incorporated by
reference as part of this Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
* 1.1 Form of Underwriting Agreement
* 1.2 Escrow Agreement
* 1.3 Selected Dealer Agreement
* 3.1 Amended and Restated Certificate of Incorporation
* 3.2 Bylaws
* 4.1 Specimen Common Stock Certificate
* 4.2 Warrant to Anderson & Strudwick Incorporated
* 4.3 Shareholder "Lock-Up" Agreement
* 5.1 Opinion of Bright & Barnes a Professional Corporation as to the legality of the securities being registered
* 9.1 Shareholders' Agreement and Voting Trust
*10.1 Series A Securities Purchase Agreement by and between Virginia Gas Company
and Sirrom Capital Corporation
*10.2 Stock Purchase Warrant issued by Virginia Gas Company to Sirrom Capital Corporation
*10.3 Placement Agreement between Virginia Gas Company and Anderson & Strudwick Incorporated
*10.4 Employment Agreement between Virginia Gas Company and Frank A. Merendino, Jr.
*10.5 Employment Agreement between Virginia Gas Company and Mark N. Witt
*10.6 Employment Agreement between Virginia Gas Company and Michael L. Edwards
*10.7 Lease Agreement between J.D. Morefield, et. al. and Virginia Gas Company
*10.8 Firm Gas Storage Agreement between Virginia Gas Storage Company and Roanoke Gas Company
*10.9 Firm Storage Service Agreement between Virginia Gas Storage Company and Powell-Clinch
Utility District
*10.10 Firm Storage Service Agreement between Virginia Gas Storage Company and the Public Utility
District of Jefferson and Cocke Counties, Tennessee
*10.11 Gas Storage Agreement between Virginia Gas Storage Company and United Cities Gas Company
*10.12 Firm Gas Storage Agreement between Virginia Gas Storage Company and Knoxville Utilities
Board
</TABLE>
II-3
<PAGE> 100
<TABLE>
<S> <C>
*10.13 Winter Service Firm Natural Gas Sales Agreement between Virginia Gas Storage Company and
Knoxville Utilities Board
*10.14 Agreement for Construction, Ownership and Operation of the Haysi Gathering System between
Virginia Gas Storage Company and Penn Virginia Resources Corporation
*10.15 Interruptible Gathering Service Agreement between Columbia Gas Transmission Corporation and
Virginia Gas Storage Company
*10.16 Transfer Agreement between Virginia Gas Company and Tenneco Energy Resources Corporation
*10.17 Promissory Note in principal amount of $1,725,000 in favor of Tenneco Energy Resources
Corporation
*10.18 United Cities Contract
*10.19 Pipeline Balancing Agreement between East Tennessee Natural Gas Company and Virginia Gas
Pipeline Company
*10.20 Warrant to Shareholders
10.21 Amendment to Transfer Agreement between Virginia Gas Company and Tenneco Energy
Marketing Company, successor-in-interest to Tenneco Energy Resources Corporation
(incorporated by reference to Exhibit 10.17 to Virginia Gas Company's Form 10-KSB
for the fiscal year ended December 31, 1996)
10.22 Firm Storage Service Agreement between Virginia Gas Storage Company and Sevier County
Utility District (incorporated by reference to Exhibit 10.22 to Virginia Gas Company's Form
10-KSB for the fiscal year ended December 31, 1996)
10.23 Firm Storage Service Agreement between Virginia Gas Storage Company and Natural Gas
Utility District of Hawkins County (incorporated by reference to Exhibit 10.23 to Virginia
Gas Company's Form 10-KSB for the fiscal year ended December 31, 1996)
10.24 Firm Storage Service Agreement between Virginia Gas Pipeline Company and Citizens
Gas Utility District (incorporated by reference to Exhibit 10.24 to Virginia Gas Company's
Form 10-KSB for the fiscal year ended December 31, 1996)
*10.25 Firm Gas Storage Agreement between Virginia Gas Pipeline Company and Knoxville
Utilities Board (incorporated by reference to Exhibit 10.25 to Virginia Gas Company's
Form 10-KSB for the fiscal year ended December 31, 1996)
21.1 Subsidiaries and Affiliates of the Registrant (incorporated by reference to Exhibit 21.1
to Virginia Gas Company's Form 10-KSB for the fiscal year ended December 31, 1996)
*23.1 Consent of Bright & Barnes a Professional Corporation (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
*24.1 Powers of Attorney
27.1 Financial Data Schedule (incorporated by reference to Exhibit 27.1 to Virginia Gas Company's
Form 10-KSB for the fiscal year ended December 31, 1996)
</TABLE>
- -----------------
* Previously filed
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes that it will:
II-4
<PAGE> 101
(1) File, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended (the "Act");
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
Registration Statement;
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in the
Registration Statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act") that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to provisions of its Certificate of Incorporation, its Bylaws, or the
Delaware General Corporation Law, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
II-5
<PAGE> 102
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b) or (4) or 497(h)
under the Act shall be deemed to be a part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide the
underwriters, at the closing specified in the underwriting Agreement,
certificates in such denominations and registered in the such names as required
by the underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-6
<PAGE> 103
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
Post-Effective Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Abingdon, Commonwealth of Virginia, on June 3, 1997.
VIRGINIA GAS COMPANY
By: S/Michael L. Edwards
-----------------------------------------------
Michael L. Edwards
President and Chief Executive Officer
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933,
THIS POST-EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN
SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
S/Michael L. Edwards President, Chief Executive Officer June 3, 1997
- --------------------------------------------- and Chairman of the Board of
Michael L. Edwards Directors (Principal Executive
Officer)
Karen K. Edwards* Vice President, Secretary, June 3, 1997
- --------------------------------------------- Treasurer and Director
Karen K. Edwards
Peter C. Einselen* Director June 3, 1997
- ---------------------------------------------
Peter C. Einselen
John D. Jessee* Vice President and Principal June 3, 1997
- --------------------------------------------- Financial Officer
John D. Jessee
* S/Michael L. Edwards
- ---------------------------------------------
Michael L. Edwards
As Attorney-in-fact for each
of the above
</TABLE>
<PAGE> 104
INDEX TO EXHIBITS
<TABLE>
<S> <C>
* 1.1 Form of Underwriting Agreement
* 1.2 Escrow Agreement
* 1.3 Selected Dealer Agreement
* 3.1 Amended and Restated Certificate of Incorporation
* 3.2 Bylaws
* 4.1 Specimen Common Stock Certificate
* 4.2 Warrant to Anderson & Strudwick Incorporated
* 4.3 Shareholder"Lock-Up" Agreement
* 5.1 Opinion of Bright & Barnes a Professional Corporation as to the legality of the securities being registered
* 9.1 Shareholders' Agreement and Voting Trust
*10.1 Series A Securities Purchase Agreement by and between Virginia Gas Company and
Sirrom Capital Corporation
*10.2 Stock Purchase Warrant issued by Virginia Gas Company to Sirrom Capital Corporation
*10.3 Placement Agreement between Virginia Gas Company and Anderson & Strudwick Incorporated
*10.4 Employment Agreement between Virginia Gas Company and Frank A Merendino, Jr.
*10.5 Employment Agreement between Virginia Gas Company and Mark N. Witt
*10.6 Employment Agreement between Virginia Gas Company and Michael L. Edwards
*10.7 Lease Agreement between J. D. Morefield, et. al. and Virginia Gas Company
*10.8 Firm Gas Storage Agreement between Virginia Gas Storage Company and Roanoke Gas Company
*10.9 Firm Storage Service Agreement between Virginia Gas Storage Company and Powell-Clinch Utility
District
*10.10 Firm Storage Service Agreement between Virginia Gas Storage Company and the Public Utility District
of Jefferson and Cocke Counties, Tennessee
*10.11 Gas Storage Agreement between Virginia Gas Storage Company and United Cities Gas Company
*10.12 Firm Gas Storage Agreement between Virginia Gas Storage Company and Knoxville Utilities Board
*10.13 Winter Service Firm Natural Gas Sales Agreement between Virginia Gas Storage Company and Knoxville
Utilities Board
*10.14 Agreement for Construction, Ownership and Operation of the Haysi Gathering System between Virginia
Gas Storage Company and Penn Virginia Resources Corporation
*10.15 Interruptible Gathering Service Agreement between Columbia Gas Transmission Corporation and Virginia
Gas Storage Company
*10.16 Transfer Agreement between Virginia Gas Company and Tenneco Energy Resources Corporation
*10.17 Promissory Note in principal amount of $1,725,000 in favor of Tenneco Energy Resources Corporation
*10.18 United Cities Contract
*10.19 Pipeline Balancing Agreement between East Tennessee Natural Gas Company and Virginia Gas Pipeline
Company
*10.20 Warrant to Shareholders
10.21 Amendment to Transfer Agreement between Virginia Gas Company and Tenneco Energy Marketing
Company, successor-in-interest to Tenneco Energy Resources Corporation (incorporated by reference to
Exhibit 10.17 to Virginia Gas Company's Form 10-KSB for the fiscal year ended December 31, 1996)
</TABLE>
<PAGE> 105
<TABLE>
<S> <C>
10.22 Firm Storage Service Agreement between Virginia Gas Storage Company and Sevier County Utility
District (incorporated by reference to Exhibit 10.22 to Virginia Gas Company's Form 10-KSB for the
fiscal year ended December 31, 1966)
10.23 Firm Storage Service Agreement between Virginia Gas Storage Company and Natural Gas Utility District
of Hawkins County (incorporated by reference to Exhibit 10.23 to Virginia Gas Company's Form 10-KSB
for the fiscal year ended December 31, 1966)
10.24 Firm Storage Service Agreement between Virginia Gas Pipeline Company and Citizens Gas Utility District
(incorporated by reference to Exhibit 10.24 to Virginia Gas Company's Form 10-KSB for the fiscal year
ended December 31, 1966)
*10.25 Firm Gas Storage Agreement between Virginia Gas Pipeline Company and Knoxville Utilities Board
(incorporated by reference to Exhibit 10.25 to Virginia Gas Company's Form 10-KSB for the fiscal year
ended December 31, 1966.)
21.1 Subsidiaries and Affiliates of the Registrant (incorporated by reference to Exhibit 21.1 to Virginia Gas
Company's Form 10-KSB for the fiscal year ended December 31, 1996)
*23.1 Consent of Bright & Barnes a Professional Corporation (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
*24.1 Power of Attorney
27.1 Financial Data Schedule (incorporated by reference to Exhibit 27.1 to Virginia Gas Company's Form
10-KSB for the fiscal year ended December 31, 1966)
</TABLE>
- ----------------
* Previously Filed
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in this Post-Effective Amendment
No. 1 to the Form SB-2 Registration Statement.
ARTHUR ANDERSEN LLP
Richmond, Virginia
June 2, 1997
