<PAGE>
As filed with the Securities and Exchange Commission on June 5, 1998
Registration No. 333-5362-NY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
POST-EFFECTIVE AMENDMENT NO. 4
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)
<TABLE>
<CAPTION>
<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.)
</TABLE>
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.
--------------------
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/
--------------------
<PAGE>
PROSPECTUS
VIRGINIA GAS COMPANY
SHARES OF COMMON STOCK
AND
COMMON STOCK PURCHASE WARRANTS
--------------
PROSPECTUS SUMMARY
In October 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 "Initial Public Offering"). In September 1997 the
Company closed the sale of 2,300,000 shares of its Common Stock pursuant to
another underwritten public offering (the "Secondary Offering"). The
registration statement describing the Initial Public 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 May 29, 1998 the Company had been
notified that 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 27.87% of the
total number of shares outstanding assuming an unregistered option for 10,000
shares held by an employee 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 -- Limited Market for Common
Stock; Shares Eligible for Future Sale."
The Common Stock and Warrants offered hereby are listed on the
Nasdaq National Market under the symbols VGCO and VGCOW respectively. On May
15, 1998 the Common Stock was trading at $6.50 bid, $6.875 asked and the
Warrants were trading at $1.625 bid, $2.50 asked. For the quarter ending
March 31, 1998 the high and low bid was $9.00 and $7.25 for the Common Stock
and $2.875 and $3.125 for the Warrants. 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
<PAGE>
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 $11,500. 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. The Company has four consolidated wholly-owned
subsidiaries: Virginia Gas Exploration Company (the "Exploration Company"),
Virginia Gas Pipeline Company (the "Pipeline Company"), Virginia Gas Propane
Company (the "Propane Company") and Virginia Gas Marketing Company (the
"Marketing Company"). Affiliates of the Company, Virginia Gas Distribution
Company (the "Distribution Company") and Virginia Gas Storage Company (the
"Storage Company" also known as the Early Grove Affiliate), 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. It is located at 200 East Main Street, Abingdon,
Virginia 24210 and its telephone number is (540)676-2380. See "Business."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS " COMMENCING ON PAGE 3.
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 June , 1998.
-----------------
2
<PAGE>
RISK FACTORS
An investment in the Company involves a high degree of risk. In
addition to the other information contained in the Prospectus, prospective
investors should consider carefully the following risk factor in evaluating
an investment in the securities offered hereby.
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 registration statement under which the Common Stock and
Warrants offered hereby are registered expires on October 4, 1998 and the
Company is not obligated to register the Common Stock or Warrants again. The
Warrants may be deprived of any value in the event a prospectus covering the
shares issuable upon exercise of the Warrants is not effective or if such
shares are not qualified for sale in the states in which holders or
prospective purchasers of the Warrants reside.
Need for Additional Capital. The Company will require substantial
additional capital to expand and diversify its operations beyond its current
plans. 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 in
the event of cost overruns, or to continue to expand its operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Completion of Pipelines. In 1996, the Company began the
development of an 80-mile intrastate natural gas pipeline (designated
"P-25"), by acquiring certain land easements and other property rights. The
Company filed an application with the Virginia State Corporation Commission
("VSCC") for issuance of a Certificate of Public Convenience and Necessity
("CPCN") which, among other things, would grant the Company the right of
eminent domain over property needed to construct the pipeline, which may be
necessary to obtain all necessary land rights. This CPCN was obtained in
December 1997. Should the issuance of a CPCN, or other necessary governmental
licenses, franchises and permits, be delayed or should such issuances not
occur, the Company could experience a delay in, or could be prevented from,
constructing the P-25 pipeline, or could be required to incur significant
costs to reconfigure the pipeline. Such delays, cost increases, or the
inability of the Company to build the P-25 pipeline would have a material
adverse effect on the financial performance and the prospects of the Company.
Comparable requirements would apply to construction of an additional 40-mile
intrastate pipeline ("designated P-24"). The Company recently initiated
development of the P-24 pipeline. The uncertainties that exist with respect
to the P-25 pipeline, exist with respect to the P-24 pipeline.
In addition, capital intensive projects such as pipeline
construction frequently encounter cost overruns as a result of factors
including geography of the project, timing of construction, and adverse
weather conditions. There can be no assurance that the Company's current cost
estimates will prove accurate or that adequate financing will be available to
complete these projects. See "Business--Regulation" and "Business--Pipeline
Operations."
Competition. The natural gas industry is highly competitive.
While the Company currently operates the only underground natural gas storage
facilities in Virginia, it is possible that other companies will engage in
similar or competing activities. The Company's pipeline operation has
numerous competitors in its geographic area of operations, many of which are
larger pipeline companies with more extensive pipeline networks. Many of
these competitors, particularly those affiliated with major integrated oil
and interstate and intrastate pipeline companies, have financial resources
substantially greater than those of the Company and have access to supplies
of natural gas substantially greater than those available to the Company.
Although the Company's plan to expand its pipeline operations is designed to
meet presently growing markets, other competitors may decide to provide
3
<PAGE>
pipelines to these areas. It is also possible that large volume customers or
gas suppliers will attempt to construct gas facilities to connect to an
interstate pipeline or other source of gas supply in order to bypass the
Company's systems and/or avoid use of its storage facilities.
The Company also competes in the areas of exploration,
production, marketing and distribution of propane and natural gas with major
oil and gas companies, other independent oil and gas concerns and individual
producers and operators, and, in the area of utility services, with major
utility companies. Many of these competitors have substantially greater
financial and other resources than the Company. The Company's competition may
have a material adverse effect on the Company's ability to recover its
capital costs and repay outstanding indebtedness. See "Business--Competition."
Governmental Regulation. The distribution affiliate's natural gas
distribution operations and the Company's Saltville storage facility are
regulated by the VSCC. The VSCC has issued CPCNs which authorize their
natural gas business in designated areas. The VSCC also sets the price of
utility services at levels intended to enable these entities to recover
their cost of service plus a rate of return.
In the future, the Company will be required to obtain additional
CPCNs to conduct its proposed pipeline operations. The Company and the
distribution affiliate may also periodically petition the VSCC for
adjustments to rates to compensate for changed conditions. In the event the
VSCC denies such requests or fails to give approval of such requests on a
timely basis, the Company's and the distribution affiliate's ability to
conduct their businesses or to generate sufficient revenues from such
operations could be adversely affected. Further, any cancellation or
revocation of the Company's or the distribution affiliate's CPCN, or denial
by the VSCC of the Company's current and future applications, would result in
the Company or the distribution affiliate ceasing storage, pipeline or
distribution operations in the affected areas or the inability to expand such
operations. See "Business--Regulation."
Common carriers such as the Company's pipelines 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 and pipeline operations and from the
distribution affiliate's distribution operations. See "Business--Regulation."
Uncertainty of Propane and Natural Gas Prices, Supplies and
Demand. The Company's revenues, profitability and future rate of growth
substantially depend upon prevailing prices for propane and natural gas and
adequacy of propane and 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 makes it particularly difficult to
estimate future prices of propane, natural gas and natural gas liquids or the
security of propane and natural gas supplies. The prices of propane, 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 propane and
natural gas supply. However, there can be no assurance that these sources
will meet the Company's forecasted demand in the future. As a result of the
factors referred to above, there also can be no assurance that the Company's
forecasted demand for its products and services will prove to be accurate.
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".
4
<PAGE>
Relationship with Affiliates. The Company owns a 50% interest in
Virginia Gas Storage Company and Virginia Gas Distribution 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 affiliates 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.
Dependence on Major Customers. One of the Company's customers,
United Cities Gas Company, accounted for 22% of 1997 consolidated operating
revenue and 20% of revenues for the three-month period ended as of March 31,
1998. Two of the Early Grove Affiliate's customers, Powell Clinch Utility
District and Knoxville Utilities Board, which contract with the Early Grove
Affiliate for natural gas storage, accounted for 72% of operating revenue for
the three month period ended March 31, 1998. For the three-month period in
1998, Medusa Mineral Company and Buchanan General Hospital accounted for 21%
and 17%, respectively, of the operating revenues for the distribution
affiliate. The loss of these customers, or an adverse business or financial
development affecting any of these customers, could have a material adverse
financial impact on the Company. See "Business--Storage Operations."
Operating Hazards. The Company's storage, pipeline, gathering and
distribution operations are subject to the many hazards inherent in the
natural gas transmission and storage industry and in propane distribution.
These include damage to pipeline and storage facilities, related equipment
and surrounding properties caused by hurricanes, floods, fires and other acts
of God, inadvertent damage from construction and farm equipment, leakage of
natural gas and other hydrocarbons, fires and explosions and other hazards
that could also result in personal injury and loss of life, pollution and
suspension of operations. The Company's exploration and production operations
involve 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.
Any significant problems related to its facilities could
adversely affect the Company's ability to conduct its operations. The Company
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. The occurrence of a significant event not
fully insured against could materially adversely affect the Company's
operations and financial condition. 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."
Reliance on Key Personnel. The success of the Company will
largely be dependent upon the efforts and active participation of Michael L.
Edwards. He is party to an employment agreement with the Company. The
unexpected loss of his services could have a detrimental effect on the
Company. See "Management."
5
<PAGE>
Dividend Policy. The Company has paid cash dividends in each of
the past six fiscal years and in the current fiscal year. 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.
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 by-laws, (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
issued and outstanding shares entitled to vote thereon. This increases the
percentage that would otherwise be required under Delaware law to approve
such actions. In addition, the Company's by-laws provide 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
- --Certain Relationships and Related Transactions."
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
unanticipated operating results by the Company and other events or factors,
such as the sale of large blocks of shares held by existing shareholders. See
"--Limited Market for Common Stock; Shares Eligible for Resale." In addition,
the stock market has from time to time experienced extreme price and volume
fluctuations which have particularly affected the market price for certain
companies in a manner often unrelated to the operating performance of these
companies. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock.
Limited Market for Common Stock; Shares Eligible for Resale. The
Company's Common Stock is traded on the Nasdaq National Market under the
symbol VGCO. Average daily trading volume for the Common Stock as reported by
Nasdaq for the first quarter of 1998 was approximately 17,400 shares. Because
there is a small public float in the Common Stock and it is thinly traded,
sales of small amounts of Common Stock in the public market could materially
adversely affect the market price for the Common Stock. Sales of Common
Stock, or the perception that such sales could occur, could materially
adversely affect prevailing market prices for the Common Stock and may make
it more difficult for the Company to sell shares of Common Stock in the
future at times and for prices that it deems appropriate. The Company has
5,504,906 shares of Common Stock outstanding and 10,000 shares issuable upon
the exercise of outstanding employee stock options and, 943,149 shares
issuable upon the exercise of warrants. Substantially all of the 5,504,906
shares of Common Stock outstanding (and 953,149 shares issuable upon exercise
of options and warrants, when exercisable) will be transferable without
restriction or registration under the Securities Act, except for
approximately 1,273,334 outstanding shares and an additional 373,663 shares
issuable upon exercise of options and warrants held by persons deemed to be
affiliates of the Company (as that term is defined under the Securities Act)
which will be subject to the volume and other restrictions under Rule 144.
See "Shares Eligible for Future Sale."
Environmental Regulations. The production, handling,
transportation and disposal of natural gas by-products and propane 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 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."
6
<PAGE>
Cautionary Statement Regarding Forward-looking Information.
Certain statements contained in this Prospectus, such as those concerning the
Company's business strategy, acquisition and expansion plans, projected
values and revenues, capital requirements, governmental regulation and other
statements regarding matters that are not historical facts, are
forward-looking statements (as such term is defined in the Securities Act).
Because such forward-looking statements include risks and uncertainties, and
are based upon certain assumptions, actual results may differ materially from
those expressed in or implied by such forward-looking statements. Factors
that could cause actual results to differ materially include, but are not
limited to, those discussed herein under "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." The Company undertakes no obligation to publicly release the
results of any revision of those forward-looking statements that may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the Nasdaq National
Market under the symbol "VGCO." As of March 31, 1998 there were approximately
1,600 holders of Common Stock and 26 holders of Warrants. The following table
sets forth, for the period indicated, the high and low sales prices of the
Common Stock, compiled from quotations supplied by the Nasdaq Monthly
Statistical Report (the stock began trading on October 4, 1996), in addition
to dividends per share declared for the periods indicated:
<TABLE>
<CAPTION>
Price Range of
Common Stock
--------------------
Dividends
High Low per Share
---- --- ---------
<S> <C> <C> <C> <C>
1996
Fourth Quarter $ 7 3/4 $ 6 1/2 $ 0.0125
1997
First Quarter 10 1/2 7 1/4 0.0150
Second Quarter 10 3/4 8 3/4 0.0175
Third Quarter 10 3/4 8 3/4 0.0175
Fourth Quarter 9 8 0.0175
1998
First Quarter 9 7 1/4 0.0175
</TABLE>
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.
7
<PAGE>
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 contained in herein.
General
The Company derives revenues from its storage, exploration,
production, gathering, marketing and propane distribution operations. From
its 50% investments in the Storage Company and the Distribution Company, the
Company derives earnings from the storage, gathering and distribution
operations of these companies. The Company accounts for its investments in
these companies using the equity method.
In its storage business, the 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 tariffs
approved by the Virginia State Corporation Commission.
8
<PAGE>
In its exploration and production business, the Company receives
revenues from the sale of its natural gas production. The Company also
receives revenues from managing the construction, drilling, development and
operation of natural gas facilities, including management and operations
fees. In its natural gas gathering business, revenues are generated from its
ownership interest in gathering pipelines for natural gas traveling through
its gathering systems. In its gas marketing operations, the Company generates
revenues from the sale of natural gas. In its propane distribution business,
the Company generates revenues from the sale of propane to industrial,
commercial and residential customers.
In the Storage Company's unregulated natural 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 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 natural gas.
First Three Months of 1998 and 1997
Overview. During the three months ended March 31, 1998, Virginia Gas
Company (the "Company") recorded a net loss of $17,238 compared to net income
of $241,794 for the same period in 1997. Basic and diluted net income per
common share available to common stockholders for the corresponding periods
was $0.00 in 1998 compared to $0.08 in 1997. The number of weighted-average
shares used in calculating income per common share was 5,504,906 and
3,188,659 for the three months ended March 31, 1998 and 1997, respectively.
The quarter was impacted by an extraordinary loss on extinquishment of debt,
which totaled $233,305. Before the extraordinary loss, the Company earned
$0.04 per common share.
Revenues. Total revenues increased 26% to $2.7 million for the three
months ended March 31 1998, compared to $2.1 million for the same period in
1997. The company experienced significant growth in its propane operations.
Propane gas sales increased significantly to $505,000 from $32,000. The
increase reflects a mid-1997 acquisition and the continued growth of the
existing propane operation. Natural gas sales decreased to $992,000 from
$1,068,000 largely due to the warmer than usual weather in the Company's
service area. The company sold 327,320 Dth of gas during the first quarter of
1998 compared to 347,597 Dth during the same period in 1997, a 6% decrease.
Natural gas storage revenues totaled $609,000 and $626,000, respectively, for
the three months ended March 31, 1998 and 1997. Withdrawals decreased from
576,330 to 327,936 Dth, reflective of the warmer weather. However, revenue
remained stable due to consistent demand charges. Interest income increased
from $251,000 to $433,000, which reflects the Company's increased liquidity
from the September 1997 Secondary Offering.
Costs and Expenses. Total operating costs and expenses totaled $1,955,000
for the three months ended March 31, 1998, compared to $1,484,000 for the same
period in 1997. Production and purchased gas expenses increased to $1,195,000
from $1,002,000, which reflects the increase in purchased propane and a slight
decrease in the cost of natural gas sold due to the lower sales volume.
Operations and maintenance expenses totaled $234,000 for the three months
ended March 31, 1998 compared to $100,000 for the same period in 1997, primarily
reflecting increased operating costs related to the Saltville storage facility
in addition to the propane distribution operations.
General and administrative costs increased to $323,000 from $215,000. This
increase reflects higher expenses in support of construction on the first
portion of the Tidewater pipeline. This segment runs 72 miles from the Company's
Saltville storage facility to Radford, VA.
Depreciation, depletion and amortization increased 24% to $206,000 in the
first quarter of 1998 from $166,000 for the first quarter of 1997. These
increases reflect the recovery of costs
9
<PAGE>
for capital projects recently placed into service, primarily the Company's
Saltville storage facility.
Interest Expense. Interest expense increased 35% to $428,000 during the
first quarter of 1998 from $318,000 for the same period in 1997. These increases
are due primarily to additional tax-exempt bond financing, particularly the
Russell County 1997 issue that was closed in February of 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 months ended March 31, 1998 totaled $51,000 compared to $71,000
during the same period in 1997.
Equity in Earnings of Affiliates. The Company has a 50% ownership interest
in two affiliated companies which provide natural gas storage, gathering and
distribution services. The Company accounts for its investments in these
companies using the equity method. For the three months ended March 31, 1998,
the Company's equity in earnings of these affiliates decreased 73% to $25,000
from $94,000 for the comparable period in 1997. These decreases reflect
significant margin deterioration in the Company's distribution subsidiary as a
result of petroleum indexed contracts.
Income Taxes. Using 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 income tax
purposes. The Company's provision for income taxes as a percentage of income
before its equity in earnings of affiliates (the Company's equity in earnings
of affiliates is reflected on a post-income tax basis) was 35% to 25% for the
three months ended March 31, 1998 and 1997.
Equity Investments
Natural Gas Storage. Storage revenues from the Early Grove facility for the
three months ended March 31, 1998, were $614,000 compared to $655,000 for the
same period in 1997. The Early Grove facility also experienced lower natural gas
sales. Gas sales decreased from $612,000 to $576,000 as volume increased from
131,000 to 181,012 Dths. The lower revenue resulted from an approximate $1.50
decrease in the average sales price of gas. Consistent with the reduction in
sales price was the purchase price of gas. Purchased gas expense decreased from
$509,042 to $431,535 reflecting a $1.50 decrease in average purchase price.
Natural Gas Distribution. Distribution revenues for the three months ended
March 31, 1998, were $281,000, an increase of $61,000 over revenues of $220,000
for the same period in 1997. These increases primarily reflect increased usage
during 1998 by industrial customers. Usage increased to 56,387 Dths compared to
38,365 Dths. Purchased gas costs related to these sales totaled $195,000 and
$120,000 for the three months ended March 31, 1998. Natural gas gross margin
during the first quarter of 1998 decreased from 45% during the first quarter of
1997 to 31%. This is primarily due to the drop in petroleum prices. The
distribution subsidiary has contracts indexed to petroleum prices.
10
<PAGE>
Financial Condition, Liquidity and Capital Resources
The Company's working capital improved from $13.0 million on December 31,
1997 to $13.3 million on March 31, 1998. The combined working capital of the
Company's affiliates, Virginia Gas Storage Company and Virginia Gas Distribution
Company, increased to a $975,000 deficit at March 31, 1998, from a $1,311,000
deficit at December 31, 1997. Cash increased to $13.5 million at March 31, 1998
from $11.8 million at December 31, 1997.
In March 1998, the Company completed a refinancing transaction whereby the
Company issued a $24,000,000 note to John Hancock. With the proceeds, the
Company retired or defeased $19.6 million of industrial revenue bonds. The
remaining proceeds will be used to develop the Company's Tidewater pipeline
project.
11
<PAGE>
Other Events
Virginia Gas Company filed on March 31, 1998 a Form 10-KSB for the fiscal
year ended December 31, 1997. The Company's 10-KSB contained disclosures
concerning a one-time extraordinary loss relating to a debt refinancing which
was consummated on March 19, 1998.
The Company's orginal estimate of the one-time extraordinary loss, net of
tax, was disclosed as $815,000 for the consolidated entity, and $640,000 and
$340,000 for the affiliated Virginia Gas Storage and Distribution Companies
(the "Affiliates"), respectively. The Company completed its research of this
issue and concluded that the magnitude of the loss, net of tax, was $233,000
rather than $815,000 for the consolidated entity. The Company recognized the
remaining costs as a regulatory asset on its wholly-owned regulated
subsidiary Viriginia Gas Pipeline Company. In addition, the company
recognized all the costs as regulatory assets on its Affiliates. This
recognition is appropriate under the provisions of Statement of Financial
Accounting Standards No. 71 "Accounting for Effects of Certain Types of
Regulation".
The regulatory assets on the affiliated companies and wholly-owned
subsidiary will be amortized over the 14-year life of the refinanced notes.
The Company believes it will be permitted to include the regulatory asset in
its rate filings with the Virginia State Corporation Commission and may
obtain rate recovery for the related amortization.
Results of Operations for Years 1997 and 1996
Overview. During the year ended December 31, 1997, the Company recorded
net income of $908,000, compared to $608,000 for 1996. Net income per common
share available to common stockholders for the years was $0.22 in 1997 compared
with $0.21 in 1996. The number of weighted average shares used in calculating
income per common share was 3,943,274 and 1,637,576 for the years ended December
31, 1997 and 1996, respectively. The adoption of SFAS No. 128 in 1997 resulted
in no change to previously reported net income per share.
Revenues. Total revenues increased 237% to $9.3 million for the year
ended December 31, 1997 compared to $2.8 million for 1996. Natural gas sales and
well operation revenues totaled $4.5 million for 1997 compared to $652,000 in
1996. The increase primarily reflects the formation of the Company's marketing
operations during the first quarter of 1997. Sales of natural gas during 1997
totaled $4,199,000 on sales volumes of 1,594,000 MMBtu. These gas sales included
sales of natural gas totaling $570,000 to a natural gas storage customer of the
Company. Exploration and production revenues, reflecting the Company's revenue
interest in these sales of natural gas, consisted of natural gas sales of
$388,000 and well operation revenues of $265,000 during 1997 compared to
$374,000 and $278,000, respectively, for 1996.
Propane sales totaled $643,000 during 1997 on sales volumes of 652,000
gallons, compared with 1996 sales of $47,000 on sales volumes of 51,000 gallons.
Natural gas storage revenues totaled $2.4 million for the year ended
December 31, 1997, compared with $769,000 for 1996. Initial injections of
customer gas into the Company's storage facility located in Saltville, Virginia,
began in August 1996.
Management revenues, interest and other income increased 42% to $1.7
million in 1997, compared to $1.2 million in 1996, primarily as a result of an
increase in interest income of $486,000.
12
<PAGE>
Costs and Expenses. Total operating costs and expenses increased $5.5
million to $6.8 million for the year ended December 31, 1997, compared to $1.3
million for 1996. Production and purchased gas expenses increased to $1.2
million in 1997 from $134,000 in 1996. This increase reflects increased
production expenses, increased purchased gas expense attributed to the expanding
propane distribution operations and purchased gas expense related to the sale of
natural gas to a storage customer of the Company.
Operation and maintenance expenses totaled $684,000 in 1997 compared to
$173,000 in 1996, primarily reflecting operating costs related to the Saltville
storage facility in addition to the propane distribution operations.
Cost of natural gas sold, related to the Company's marketing of natural
gas, totaled $3.1 million for the year ended December 31, 1997, compared to zero
in 1996, reflecting the initiation of marketing operations and the corresponding
costs.
General and administrative costs totaled $1.0 million in 1997, an
increase of $354,000 from 1996 costs of $646,000. This increase largely reflects
the growth in Company operations and the accompanying growth in personnel and
facilities.
Depreciation, depletion and amortization increased 108% to $806,000 for
the year ended December 31, 1997 from $387,000 in 1996. This increase reflects
the recovery of costs for capital projects recently placed into service,
including the Company's Saltville storage facility and the expanding propane
distribution operations.
Interest Expense. Interest expense increased 50% to $1.5 million in
1997 from $1.0 million in 1996, primarily due to additional tax-exempt bond
financing and short-term borrowings. 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 $328,000 in 1997
and $290,000 in 1996.
Equity in Earnings of Affiliates. The Company has a 50% ownership
interest in two affiliated companies which provide natural gas storage,
gathering and distribution services. The Company accounts for its investments in
these companies using the equity method. For the year ended December 31, 1997,
the Company's equity in earnings of these affiliates decreased 36% to $217,000
from $340,000 in 1996. This decrease reflects increased operating expenses
related to natural gas storage and distribution operations in addition to higher
interest costs.
Income Taxes. Using 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 income
tax purposes. The Company's provision for income taxes as a percentage of income
before its equity in earnings of affiliates (the Company's equity in earnings of
affiliates is reflected on a post-income tax basis) was 30% in 1997 and 36% in
1996.
Equity Investments
Natural Gas Storage. Storage revenues from the Early Grove storage
facility totaled $2.5 million in 1997, an increase of $400,000 over 1996
revenues of $2.1 million. This increase is attributable to an increase in leased
storage capacity at the facility.
13
<PAGE>
Natural Gas Gathering. Gathering revenues totaled $312,000 in 1997,
reflecting a decrease of $66,000 from 1996 gathering revenues of $378,000. This
decrease primarily reflects a decrease in system throughput during 1997 of
204,068 MMBtu. Revenues from winter service and other natural gas sales totaled
$1.5 million in 1997 compared to $1.1 million in 1996. Purchased gas expense
related to these sales totaled $1.3 million and $974,000 for the years ended
December 31, 1997 and 1996, respectively.
Natural Gas Distribution. Distribution revenues increased to $891,000
in 1997 from $629,000 in 1996, an increase of 42%. This increase primarily
reflects increased usage by industrial customers, reflecting 1997 expansions of
distribution facilities in Russell County. Sales volumes for 1997 totaled
172,939 MMBtu, an increase of 59,561 MMBtu from 1996 sales volumes of 113,378
MMBtu. Purchased gas costs related to these sales totaled $513,000 and $330,000
in 1997 and 1996, respectively.
The Distribution Company incurred a loss on operations for the year.
The expansion of distribution facilities in Russell County for a major customer
resulted in increased expenses for the Company, which will not be fully
recoverable until late 1998 or early 1999 when the customer's natural gas usage
is expected to approach normal capacity. Similarly, natural gas contracts,
linked to the price of fuel oil and/or propane, for several commercial customers
[6~suffered modest revenue shortfalls due to falling prices for fuel oil and
propane. Efforts are currently underway for renegotiating these contracts and,
if successful, the Distribution Company expects to obtain better results from
operations in 1998.
Liquidity and Capital Resources
Working Capital
At December 31, 1997, the Company's working capital reflected a $13.0
million surplus, an increase in working capital from the $430,000 deficit at
December 31, 1996. The Company's current ratio at December 31, 1997 was 7.95, an
increase from the ratio of 0.87 at December 31, 1996. The combined working
capital of the Storage Company and the Distribution Company decreased to a $1.3
million deficit at December 31, 1997 from the $600,000 deficit at December 31,
1996. The combined current ratio of these companies was 0.64 at December 31,
1997.
Investing and Financing Activities
The Company's cash requirements in the past have been met out of cash
generated from operations, proceeds from the issuance of the Company's common
stock, 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. On December 31, 1997, the Company had a cash and
cash equivalent balance of $11,751,000 compared to $1,653,000 at December 31,
1996.
Capital investments of $6.9 million in 1997 reflect primarily the
continued development of the Saltville storage facility ($3.7 million), the P-25
pipeline project ($0.95 million) and the expansion of propane distribution
facilities ($1.7 million).
Capital investments of $11.6 million in 1996 reflect primarily the
development of the Saltville storage facility ($10.3 million) and the P-25
pipeline project ($0.9 million).
14
<PAGE>
In September 1997, the Company completed a secondary public offering of
its common stock. The offering resulted in the issuance of an additional
2,300,000 common shares of the Company at $8.50 per share. Net proceeds realized
from the offering approximated $17.5 million. The common stock of the Company is
traded on the Nasdaq National Market under the symbol "VGCO."
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. Net proceeds realized
from the offering approximated $8 million.
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.
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 approximately $4.4 million.
The Company's material capital expenditure commitments for 1998 are
expected to include $12.9 million for the development of the P-25 intrastate
pipeline and $2.9 million for continued development of the Saltville storage
facility. Funding for these commitments will be obtained from a portion of the
proceeds of the September 1997 secondary public offering, proceeds from
additional borrowings and operating cash flows of the Company.
Recent Accounting Pronouncements
Effective for the fiscal year ended December 31, 1998, the Company is
required to adopt SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information." The
Company does not expect that adoption of these standards will have a material
impact on the Company's financial position or results of operations. The
adoption of SFAS No. 130 will require reporting comprehensive income in an
alternative format prescribed by the standard.
Year 2000 Issue
The Company uses vendor-supported software exclusively. After
discussions with vendors, the Company believes that the year 2000 issue has been
appropriately addressed and does not expect the year 2000 issue to have a
material adverse impact on the financial position, results of operations, or
cash flows in future periods.
Debt Refinancing
On March 19, 1998 the Company completed a significant financing
arrangement with the John Hancock Mutual Life Insurance Companies. Under the
terms of the arrangement, Virginia Gas Company issued to John Hancock $24
million of 8.5% senior notes due 2012. With the proceeds, the Company retired
approximately $19.5 million of industrial revenue bonds which had an average
interest rate of 9%. The remaining proceeds will be used to develop segments of
the Company's pipeline expansion projects and to fund other planned corporate
expansions. In addition, the retirement of the industrial revenue bonds
released, for the Company's use, another $2.1 million (including interest
earned through March 19, 1998) of reserve funds associated with the issuance
of the bonds. These funds will also be used to fund planned corporate
expansions.
15
<PAGE>
16
<PAGE>
BUSINESS
BUSINESS
General
Virginia Gas Company (the "Company") was organized in 1987 under the
laws of the state of Delaware. The Company, directly or through affiliated
companies, is primarily engaged in the storage, marketing, distribution,
gathering, exploration, and production of natural gas, and the distribution of
propane gas. The Company's principal assets are located in the southwestern
counties of the Commonwealth of Virginia.
The Company's business has developed in response to the growing need
for natural gas storage, pipelines and distribution in its market area,
resulting principally from economic growth and the impact of deregulation.
Deregulation has given natural gas customers more flexibility in negotiating
their natural gas purchases and transportation contracts. The Company's pipeline
connections to the East Tennessee Natural Gas ("ETNG"), CNG Transmission Company
("CNG") and Columbia Gas Transmission Company ("TCO") interstate pipeline
systems, and to the Company's adjacent storage facilities, are being combined to
create a hub which provides opportunities for more efficient gas distribution,
including to local, growing markets. At present, the Company's business
primarily consists of: (i) producing, gathering and marketing natural gas from
wells in which the Company has an ownership interest to municipal distributors,
local distribution companies and major oil and gas companies; (ii) storing
natural gas for municipal distributors and local distribution companies which
have supplied their own gas, or purchased it from third parties or the Company;
and (iii) distributing propane and natural gas purchased from third parties or
the Company to local industrial, commercial and residential customers.
The Company's principal sources of revenue have varied depending on its
level of activity in any given segment of natural gas operations. From 1987 to
1992, substantially all of the Company's income was derived from exploration,
development and production of natural gas and from fees derived from managing
wells. From 1993 to 1996, the Company's income reflected the growth of its
storage operations. In 1996 and 1997, the Company initiated its propane
distribution and gas marketing operations, respectively. Currently, the Company
is developing transmission pipeline projects and expanding its storage capacity
and expects to derive future income primarily from natural gas storage and
transportation fees.
Management believes that current upward trends in the economy, a
favorable regulatory environment, the deregulation of the industry which has
resulted in end-users' ability to purchase gas on a competitive basis from a
greater variety of sources, and the increasing availability of natural gas as a
form of energy for residential, commercial and industrial markets will enable
the Company to expand into new markets and to better develop its current
markets.
Subsidiaries and Affiliates
The Company has four consolidated wholly-owned subsidiaries:
Virginia Gas Exploration Company (the "Exploration Company"), Virginia Gas
Pipeline Company (the "Pipeline Company"), Virginia Gas Propane Company (the
"Propane Company") and Virginia Gas Marketing Company (the "Marketing
Company"). Affiliates of the Company, Virginia Gas Distribution Company (the
"Distribution Company") and Virginia Gas Storage Company (the "Storage
Company" also known as the Early Grove Affiliate), 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.
17
<PAGE>
The Pipeline Company, the Distribution Company and the Storage Company
are the holders of Certificates of Public Convenience and Necessity ("CPCN")
issued by the Virginia State Corporation Commission ("VSCC") that are required
for such companies to conduct their business. The Pipeline Company's and a
portion of the Storage Company's operations are regulated by both the VSCC and
the Federal Energy Regulatory Commission ("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 four tax exempt bond issues in 1994, 1995 and 1997 that
provided financing for these various projects. Funds from such financings were
allocated, as needed, to the various subsidiaries and affiliates and each such
entity has provided the Company with interest-bearing promissory notes
evidencing its obligation to repay the funds advanced by the Company.
Storage Operations
The Company has the only two underground natural gas storage facilities
in the Commonwealth of Virginia. One of these facilities is located in Smyth and
Washington counties (the "Saltville Facility"), while the other facility is
located in Scott and Washington counties (the "Early Grove Field"). The Pipeline
company owns the Saltville Facility while the Storage Company owns and operates
the Early Grove Field.
The Pipeline Company developed the 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 Bcf. In June 1996 the Pipeline Company filed an application with the VSCC
for a CPCN for the operation of the Saltville Facility. In July 1996 the VSCC
issued an order authorizing the Pipeline Company to begin service on an interim
basis using the rates set forth in the application. The CPCN was issued to the
Pipeline Company in December 1997. 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 VSCC. The Saltville Facility provides 10-day,
60-day and 90-day service and 20-day refill capacity. In August 1996 the
Pipeline Company injected the first working gas into the field. Peak daily
withdrawal rates of 40,000 MMBtu were achieved in January 1997.
The Early Grove Field is an underground natural gas storage facility
owned and operated by the Storage Company. The Storage Company has received a
CPCN from the VSCC, authorizing it to engage in the sale, transportation
(including storage), or assignment of natural gas and to charge rates approved
by the VSCC. The Early Grove Field includes 29 storage wells and a certificated
area of 2,900 acres. Contracted storage volume for 60-day, 90-day and 150-day
service has increased from 520,000 MMBtu for the 1994/1995 heating season to
1,835,000 MMBtu for the 1997/1998 heating season. The deliverability of the
Early Grove Field has been increased by reworking existing wells, drilling new
wells, injecting additional base gas, installing larger diameter pipe, 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 to over 20,000 MMBtu per day from 1992 to 1997.
Further improvements, including drilling new wells, adding additional base gas
and increasing the maximum operating pressure to up to 2,400 PSI, are being
considered. Proposed improvements could increase the field's capacity to
2,200,000 MMBtu in the future.
18
<PAGE>
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.
Pipeline Operations
The Company has begun construction and is currently acquiring remaining
rights-of-way and permits for the construction of a 71.5 mile intrastate
pipeline ("P-25") which will connect the Company's Saltville Facility and
transport natural gas to growing markets in Smyth, Wythe and Pulaski Counties in
southwestern Virginia. These areas currently are served only by ETNG's #3300
interstate pipeline, which currently has insufficient capacity to meet the
area's needs.
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 will consist of twinning the ETNG line
to the town of Marion. The remaining phases will extend the P-25 pipeline from
Marion to Radford, Virginia. The Company has entered into a 15-year contract
with United Cities Gas Company ("UCG"), the local distribution company which
serves Smyth, Wythe and Pulaski Counties, to provide pipeline capacity to supply
20,000 MMBtu per day, or 67% of planned pipeline capacity. Completion of the
P-25 pipeline is expected by late 1998. The Company filed an application for a
CPCN with the VSCC in January 1997 for authorization to develop, construct, own
and operate the P-25 pipeline. This CPCN was received by the Company in December
1997.
Substantially all of the operations conducted through the P-25 pipeline
will constitute common carrier pipeline activities. Such common carrier
activities are those under which transportation in the pipeline is available at
tariffs published with the VSCC 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.
The Company has recently initiated environmental studies and
acquisitions of rights-of-way for permits for the construction of a 40-mile
intrastate pipeline ("P-24"). When completed, the P-24 pipeline would connect
the Company's Saltville Facility and the P-25 pipeline to the CNG interstate
pipeline system. The P-24 pipeline is expected to provide a strategic
interconnect between the ETNG and CNG interstate pipeline systems.
Natural Gas and Propane Distribution Operations
The Company, through the Distribution Company, owns and operates 33
miles of distribution pipelines and provides natural gas service to over 200
customers in Russell and Buchanan Counties in Virginia. Construction of a
10-mile pipeline providing service to the town of Lebanon in Russell County was
completed in June 1997. The Distribution Company has a CPCN authorizing it to
provide natural gas service in these counties. In January 1997, the Distribution
Company filed an application with the VSCC to extend its service territory to
include all of Dickenson and Tazewell Counties in Virginia, with the exception
of the service territory in Tazewell County currently certificated to
Commonwealth Public Service Corporation. This application was subsequently
amended to include the town of Saltville, Virginia as part of the proposed
service territory. In December 1997, the VSCC issued CPCNs to the Distribution
Company authorizing it to provide natural gas service to the western portion of
Tazewell County, excluding the service territory allotted to Commonwealth Public
Service Corporation, all of Dickenson County, and the town of Saltville. The
Distribution Company's tariff rates are approved by the VSCC.
19
<PAGE>
The Distribution Company has a firm transportation service contract for
a ten-year term with East Tennessee Natural Gas for the winter months of
November through March, and an interruptible transportation contract with ETNG
for the remainder of the year.
In 1996, the Company commenced distribution of propane gas 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 Oils, Inc.'s existing propane
distribution business in Buchanan, Dickenson and Russell Counties and in the
western part of Tazewell County, Virginia in April 1997. The Company is also
expanding its propane distribution operations through an aggressive growth
program. At the end of 1997, the Company was providing propane gas service to
over 1,900 customers in southwestern Virginia.
Exploration, Production, Gathering, and Marketing Operations
Drilling Activity. The Company did not drill or complete any natural
gas wells during 1996 or 1997.
Service Operations. The Company engages in the business of supervising
drilling operations and operating producing wells. As of December 31, 1997 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, 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.
Gas Gathering Operations. The Company and the Storage Company operate
various unregulated natural 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 natural gas production to
the ETNG, CNG and TCO interstate pipeline systems as well as to the Distribution
Company's distribution system.
For such natural gas gathering services, the Company and the Storage
Company collect certain transportation allowances from producers (owners of
natural gas). Transportation allowances vary depending upon contractual
arrangements and currently range from $.05 to $.50 per MMBtu.
Marketing. In 1997 the Company commenced marketing operations of
natural gas. The Company currently markets and sells natural gas provided from
Company-operated wells and facilities. The Company anticipates that future
expansion of its marketing operations will include purchases of natural gas
supplies from third party sources, storing these supplies in its Saltville
Facility and marketing these supplies to its customers.
20
<PAGE>
Competition
The Company competes with major utility companies and pipeline
companies in the areas of utility services and pipeline operations. 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 and the Storage Company
currently own and operate the only underground natural gas storage facilities in
Virginia, it is possible that other distribution and marketing companies could
develop other underground natural gas storage facilities and companies could
rely on other methods of storage such as above-ground stored liquefied natural
gas. The Company competes in the areas of exploration, production,
transportation and marketing of natural gas and distribution of propane with
major oil companies, other independent oil and gas concerns and individual
producers and operators. Many of the Company's competitors have substantially
greater financial and other resources than the Company.
Regulation
VSCC Regulation. The Company's and the Storage Company's natural gas
storage operations are regulated primarily by the VSCC and the FERC, which has
jurisdiction over interstate sales of storage services. Storage rates are
subject to VSCC approval and are based on the cost of service of the facility,
which provide for an approved rate of return. A facility can apply for revised
rates based on actual costs if they are higher than previously anticipated and
conversely the VSCC may require a reduction in rates if returns are higher than
anticipated.
The Company's non-gathering pipeline operations will also be regulated
by the VSCC. Substantially all of the operations conducted through these
pipelines would constitute common carrier pipeline activities. Such common
carrier activities are those under which transportation in the pipeline is
available at tariff rates published with the VSCC 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.
The natural gas distribution operations of the Distribution Company are
also regulated by the VSCC, which regulates the rates which may be charged to
end-users, setting them at levels sufficient to recover the cost of service to
its customers including an approved rate of return.
The Company's gathering facilities and propane distribution operations
are not subject to service or rate regulation from the VSCC.
FERC Regulation. The Company's operations either are not governed by,
or by virtue of limited jurisdiction certificates having been issued by FERC,
are exempt from, further regulation by FERC under the Natural Gas Act.
21
<PAGE>
Environmental and Safety Regulation. The 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 Department of Environmental Quality ("VDEQ"). The Virginia Clean
Air Act restricts emissions from wells, pipelines and processing plants, and the
VDEQ may curtail operations not meeting minimum standards. The design,
construction, operation and maintenance of the Company's VSCC jurisdictional
facilities are subject to the safety regulations established by the United
States 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.
Title to Properties
Substantially all of the properties comprising the Saltville Facility
and the Early Grove Field are situated on land not owned by the Company or the
Storage Company.
The Company's rights to develop and operate the Saltville Facility are
derived from a deed from the Industrial Development Authority of the town of
Saltville. The deed provides the Company with rights to store gas, rights to use
any facilities and surface area for natural gas storage use and rights to remove
salts to create cavities for natural gas storage. The deed encompasses
approximately 11,000 acres of storage rights in Washington and Smyth Counties,
Virginia.
The Storage Company's rights to develop and operate the Early Grove
Field are derived from its ownership of mineral leasehold rights and from
surface easements.
The Company's existing pipelines, and gathering systems and
distribution systems are situated on land not owned by the Company but as to
which the Company and its affiliates have easements from the landowners
permitting the use of such land for the construction and operation of pipeline
facilities. The Company has received or intends to receive franchises,
easements, licenses, permits and other authorizations to construct and operate
proposed or future pipelines, 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.
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.
22
<PAGE>
Employees
As of December 31, 1997, the Company, its subsidiaries and affiliated
companies employed 46 persons on a full time basis, none of whom is covered by a
collective bargaining agreement.
Operational Hazards and Insurance
The operations of the Company and its Affiliates are subject to the
usual hazards incident to the storage, distribution, exploration for and
production of natural gas. These hazards can result in substantial losses to the
Company and its 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 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 $25,000,000, workers' compensation insurance and property and
automobile insurance. Based on loss experience, the Company believes that it and
its Affiliates currently have adequate insurance coverage. Their insurance,
however, does not cover every potential risk associated with the storage,
distribution, drilling and production of natural gas and the distribution of
propane. 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 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.
Office Facilities
The Company currently owns its headquarters office building in
Abingdon, Virginia, subject to a mortgage. 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.
MANAGEMENT
The Board of Directors is divided into three classes of directors,
with each serving staggered three year terms. The Board of Directors currently
consists of five directors. The two directors nominated for election at the 1998
Annual Meeting are Glenn B. Rogers and Karen K. Edwards. The nominees, if
elected, will serve until the Annual Meeting of Stockholders held in 2001 and
until their respective successors are elected and qualified. To be elected as a
director, each nominee must receive the favorable vote of a majority of the
shares represented and entitled to vote at the meeting. Although all nominees
currently intend to serve on the Board,
23
<PAGE>
if any nominee should decline or be unable to serve, the Board will designate a
substitute nominee. The Company has no reason to believe that any nominee will
decline or be unable to serve.
Set forth below for each nominee is information regarding the
nominee's age, the period during which the nominee has served as a director, the
nominee's business experience during at least the past five years and other
directorships currently held by the nominee.
Glenn B. Rogers. Mr. Rogers, age 59, served as Senior Vice President
of Marketing and Gas Supply for United Cities Gas Company from 1987 until his
retirement in October 1997. In this position, he was responsible for the propane
operations of United Cities Gas Company. From 1979 to 1987 Mr. Rogers served
United Cities Gas Company as Group Vice President of Gas Supply, Marketing and
Rates and from 1976 to 1979 he served as Vice President of Gas Supply. Mr.
Rogers is a past president of the Southeastern Gas Association. He also serves
as a director of Vietti Food Corporation. Mr. Rogers holds a B.S. degree in
mathematics from Peabody College and a Master's degree in mathematics from
Southeast Oklahoma State College.
Karen K. Edwards. Ms. Edwards, age 40, has served as Vice President
and Director of the Company since its formation in 1987. She served as Treasurer
until September 1995 and as Secretary until March 1998. Ms. Edwards also serves
as Vice President, Secretary and Treasurer of Virginia Gas Exploration Company,
Virginia Gas Pipeline Company, Virginia Gas Marketing Company, Virginia Gas
Storage Company and Virginia Gas Distribution Company. She also serves as Vice
President and Secretary of Virginia Gas Propane Company. Ms. Edwards received an
MBA from the Colgate Darden Graduate School of Business at the University of
Virginia and a Bachelor's degree in Business Administration from the University
of Colorado. She is the wife of Michael L. Edwards.
Continuing Directors
Set forth below is information regarding the Company's continuing
Directors, their ages, the period during which they have served as a director,
their business experience during at least the past five years and other
directorships currently held by them.
Michael L. Edwards, age 45, has served as President, Chairman of the
Company and Director since its formation in 1987. He also serves as President of
Virginia Gas Exploration Company, Virginia Gas Pipeline Company, Virginia Gas
Marketing Company, Virginia Gas Propane Company, Virginia Gas Storage Company
and Virginia Gas Distribution Company. From 1983 to 1986 Mr. Edwards served as
Executive Vice President and Director of Petroleum Development Corporation. Mr.
Edwards is a Phi Beta Kappa graduate of the University of California, Berkeley
and he received an MBA from the Stanford University School of Business. Mr.
Edwards' term as Director expires in 1999. He is the husband of Karen K.
Edwards.
Everette G. Allen, Jr., age 57, has served as a Director of the
Company since January 1998. He has served as Chairman of Hirschler, Fleischer,
Weinberg, Cox & Allen, a law firm located in Richmond, Virginia since 1986, and
has been employed by that firm since 1970. Mr. Allen has served as a member of
the Board of Trustees for Randolph-Macon College and is a Fellow with the
American College of Trial Lawyers. He is a Phi Beta Kappa graduate of
Randolph-Macon College and a graduate of the University of Virginia Law School.
Mr. Allen's term as Director expires in 2000.
G. Lee Crenshaw, II, age 39, has served as a Director of the Company
since January 1998. He has served as a Director and Senior Vice President of
Anderson & Strudwick, Inc. since 1994. From 1991 to 1994
24
<PAGE>
he was employed at Scott & Stringfellow as Vice President. Mr. Crenshaw was
employed as a stockbroker at Wheat, First Securities, Inc. from 1982 to 1991.
He is a graduate of Virginia Commonwealth University. Mr. Crenshaw's term as
Director expires in 2000.
Compensation of Directors
Directors of the Company receive $2,500 for attending each Board of
Directors meeting.
Executive Officers
The executive officers are elected to serve annual terms at the
first Board of Directors meeting following the annual meeting of the
stockholders. Certain information concerning the Company's executive officers as
of May 29, 1998 is set forth below, except that information concerning Mr. and
Mrs. Edwards is presented above.
James E. Talkington, III, age 38, has served as Vice President of
the Company since April 1998. He has been employed by the Company since 1994 as
land manager. From 1989 to 1993 Mr. Talkington was employed by Continental
Reserves Oil Company as land manager.
Bradley L. Swanson, age 51, has served as Vice President of the
Company since April 1998. He has been employed by the Company since 1987 with
responsibility for land leasing, right of way purchases, legal matters and
government relations. From 1983 to 1987 Mr. Swanson was the owner and operator
of Home Town Properties, a residential and commercial real estate firm.
G. Scott Hill, age 41, has served as Vice President of the Company
since April 1998. He has been employed by the Company since March 1997 with
responsibility for gas storage and pipeline operations. From 1985 to 1996 Mr.
Hill was employed by Columbia Natural Resources as a drilling engineer.
Robert C. Bright, age 55, has served as Secretary of the Company
since April 1998. He has served as President and Director of Bright & Barnes, a
Professional Corporation, a law firm located in Oklahoma City, Oklahoma since
1992. From 1979 to 1992 Mr. Bright served as President and Director of Bright &
Nichols, an Oklahoma City law firm.
Robert C. Withrow, age 50, has served as Treasurer of the Company
since April 1998. He has been employed by the Company since February 1998 as
director of finance. From 1981 to 1997 Mr. Withrow was employed as Vice
President of Finance of The Dosco Corporation. From 1979 to 1980 he was employed
by American Electric Power Company as internal audit manager. Mr. Withrow was
employed by Deloitte & Touche from 1972 to 1979 as senior auditor. He is a
certified public accountant.
William L. Clear, age 27, has served as Controller and Assistant
Secretary of the Company since April 1998. He has been employed by the Company
since March 1998 as accounting manager. From 1993 to February 1998 Mr. Clear was
employed by Coopers and Lybrand L.L.P as a business assurance senior associate
specializing in audits of utility companies. He received a B.S. in accounting
from Emory & Henry College and an M.A. in accounting from the University of
Tennessee, Knoxville. Mr. Clear is a certified public accountant.
25
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number and percentage of shares
of common stock held beneficially by the owners of more than five percent of the
Company's issued and outstanding common stock as of April 22, 1998 or by
directors, director nominees or officers of the Company:
<TABLE>
<CAPTION>
Amount of Percent of
Name and Address of Beneficial Owner (1) Ownership Class
- ---------------------------------------- --------- ---------
<S> <C> <C>
Dr. James T. Martin ................................ 800,058 14.53%
Tupenny House
Tuckerstown, Bermuda
Michael L. and Karen K. Edwards .................... 748,576(2) 12.76%
Michael L. Edwards ................................. 6,000 *
Karen K. Edwards ................................... 3,900 *
Allan R. Poole, II ................................. 57,000 1.04%
1032 Hanover Court
Kingsport, Tennessee 37660
G. Lee Crenshaw, II ................................ 3,600 *
707 East Main Street, 20th Floor
Richmond, Virginia 23219
Everett G. Allen, Jr ............................... 10,000 *
Federal Reserve Bank Building
701 East Byrd Street
Richmond, Virginia 23219
James E. Talkington, III ........................... 12,000(3) *
Bradley L. Swanson ................................. 2,863 *
G. Scott Hill ...................................... 3,000 *
All executive officers and directors as a group .... 846,939 14.41%
</TABLE>
* Less than 1%.
(1) Except as otherwise noted, the address of the holder is in care of the
Company.
(2) Includes 363,663 shares which may be issued to Mr. and Mrs. Edwards
upon exercise of a warrant.
(3) Includes 10,000 shares which may be issued to Mr. Talkington upon exercise
of an option.
Executive Compensation
The following table presents information concerning the annual
compensation of the executive officers of the Company whose salary and bonus
were greater than $100,000 in 1997. This table presents compensation for
services rendered in all capacities to the Company in 1997, 1996 and 1995.
26
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
All Other
Name and Principal Position Year Salary (1) Bonus (1) Compensation
- --------------------------- ---- ---------- --------- ------------
(2)
<S> <C> <C> <C> <C>
Michael L. Edwards ......... 1997 $157,917 $ 50,000 $ 32,837
President and Chief 1996 $150,000 $ 727 $ 2,889
Executive Officer 1995 $150,000 $ -- $ 1,524
</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) Amounts shown include Company contributions to a 401(K) Savings Plan,
vehicle allowances and directors' fees.
Employee Stock Purchase Loans
On May 17, 1996, the Board of Directors of the Company approved a
plan whereby the Company made available to certain key employees five year
interest-free loans for the purpose of purchasing a total of 40,000 shares of
the Company's common stock at a purchase price of $6.00 per share, which was the
fair market value of the shares on that date. In the event an employee who has
been given 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 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. Pursuant to this plan, on July 31, 1996, the Company made a
loan of $90,000 to Michael L. and Karen K. Edwards to purchase 15,000 shares and
a loan of $90,000 to Allan R. Poole, II to purchase 15,000 shares.
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. This bonus for 1996 was
paid in 1997. 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.
Certain Relationships and Related Transactions
Mr. Crenshaw, Senior Vice President of Anderson & Strudwick, Inc.
serves as a director of the Company. He receives $2,500 for each meeting of the
Board of Directors he attends.
27
<PAGE>
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. A fee equal to 0.25% of the outstanding principal amount
of the bonds is paid to Anderson & Strudwick Incorporated and one of its senior
officers 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 in
1996 for which it received fees of $735,840 and warrants exercisable for 153,300
shares at an exercise price of $9.90 per share, which are subject to a shelf
registration statement.
Mr. Bright, Secretary of the Company, is a stockholder in Bright &
Barnes, a Professional Corporation ("Bright & Barnes"), which provides certain
legal services to the Company. During 1996 and 1997 and for the three months
ended March 31, 1998, Bright & Barnes received legal fees from the Company of
approximately $204,000, $169,000 and $124,000 respectively. It is anticipated
that Bright & Barnes will continue to provide legal services to the Company.
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 by-laws may only be amended with
the approval of holders of 75% of the outstanding shares of stock of Company.
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."
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.
28
<PAGE>
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.
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.
DESCRIPTION OF SECURITIES
The Company has authorized 10,000,000 shares of Common Stock, par
value $.001 per share. As of May 29, 1998 there were 5,504,906 shares of Common
Stock issued and outstanding. In addition, options and warrants for 953,149
shares are currently outstanding. 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. 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 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 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. 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. If a purchaser acquires shares of Common
Stock of the Company from Dr. Martin which represent 10% or more of the shares
of outstanding Common Stock of the Company, such purchaser must become a party
to the Voting Trust Agreement.
Preferred Stock
The Company has authorized 2,000 shares of Preferred Stock, no par
value, none of which is issued and outstanding.
29
<PAGE>
Warrants
At May 15, 1998, the Company had an aggregate of 943,149 shares of
Common Stock reserved for issuance pursuant to outstanding warrants (exclusive
of an option for 10,000 shares held by an officer of the Company, which is not
presently exercisable). These warrants include (i) warrants held by 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 ; and (ii) warrants held by
present or former shareholders of record of the Company to purchase a total of
789,849 shares of the Company's Common Stock at a purchase price of $9.90 per
share. The Company has been notified that three present or former Selling
Securityholders have sold a total of 36,396 Warrants and as a result a total of
753,453 Warrants are now held by Selling Securityholders.
The Warrants are listed for trading on the Nasdaq National Market
under the symbol VGCOW. The Warrants were issued subject to the terms and
conditions of the Warrant Agreements between the Company and the holders of the
Warrants. The following description of the Warrants is not complete and is
qualified in all respects by the Warrant Agreements which are filed as exhibits
to the Registration Statement of which this Prospectus is a part. See "Available
Information."
Each 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 Warrants
are exercisable until October 4, 2001. Holders of the 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 Warrants could violate the securities laws of the United States,
certain states thereof or other jurisdictions. Subject to the terms of the
Warrant Agreements, the Company will use its best efforts to cause the
registration statement with respect to such securities under the Act to continue
to be effective until October 4, 1998 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 Warrants to be lawful. However, the Company will not be required
to cause the sale of securities upon exercise of the Warrants if, in the opinion
of counsel, the sale of securities upon such exercise would be unlawful.
The Warrants may be exercised by filling out and signing the
appropriate form on the Warrants and mailing or delivering the 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 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. See "Risk Factors -- Risks Associated
with the Securities Being Sold by the Selling Securityholders."
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
30
<PAGE>
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. At the annual shareholders meeting to be held June 10, 1998 the
shareholders will vote on the deletion of these provisions. 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 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.
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. Officers of the Company held
363,663 Warrants as of May 15, 1998. Of the Warrants, 54,162 Warrants have been
exercised, one Warrant was canceled and the Company has been notified that
36,396 Warrants have been sold by Selling Securityholders. As a result, 854,220
shares of Common Stock, 906,753
31
<PAGE>
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 27.87% 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 outstanding 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 outstanding warrants are exercised:
<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) 384,913 363,663 363,663 0 384,913 6.99%
B. Scott White 41,267 41,267 41,267 0 41,267 (3)
Joan M. Edwards 32,291 32,291 22,291(4) 0 32,291 (3)
Tazewell Coal & Iron 27,133 27,133 27,133 0 27,133 (3)
The Hagon Estates 27,133 27,133 27,133 0 27,133 (3)
Marlene K. Kissler and Eric Verzuh 103,167 103,167 103,167 0 103,167 1.87%
Harriet S. Edwards Revocable Trust 18,054 18,054 18,054 0 18,054 (3)
John W. Gillespie 10,317 10,317 10,317 0 10,317 (3)
Virginia B. Gillespie 10,317 10,317 10,317 0 10,317 (3)
Marian L. Banning 7,738 7,738 7,738 0 7,738 (3)
The Gillespie Irrevocable Trust 7,738 7,738 7,738 0 7,738 (3)
John W. Gillespie Trust 7,738 7,738 7,738 0 7,738 (3)
William Rogers McCall 7,738 7,738 7,738 0 7,738 (3)
Tom & Linda Callahan 6,448 6,448 6,448 0 6,448 (3)
Jack A. Upchurch 6,448 6,448 6,448 0 6,448 (3)
Mark N. Witt (5) 8,396 6,396 0 0 8,396 (3)
David A. Street 10,317 10,317 10,317 0 10,317 (3)
Frank A. Merendino, Jr. (6) 30,371 28,371 8,371 0 30,371 (3)
Colson Children Trust 3,095 3,095 3,095 0 3,095 (3)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Scott R. Colson 4,127 4,127 4,127 0 4,127 (3)
Sara L. Colson 4,127 4,127 4,127 0 4,127 (3)
Susan Swanson-Cooper 2,063 2,063 2,063 0 2,063 (3)
Dr. James Martin 800,058 0 0 800,058 0 0.00%
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(7) 54,162 0 0.00%
Sirrom Capital Corporation Warrants
0 54,163 54,163 0 0 0.00%
</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) Represents less that 1% of the Common Stock outstanding after the
offering.
(4) Mrs. Edwards sold 10,000 Warrants on April 11, 1997.
(5) Mr. Witt sold 6,396 Warrants on February 28, 1997. He served as Vice
President of the Company from 1994 to 1997.
(6) Mr. Merendino sold 20,000 Warrants on February 7, 1997. He served as
Vice President of the Company from 1991 to 1997.
(7) 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.
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.
33
<PAGE>
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 --Limited Market
for Common Stock; Shares Eligible for Future Sale."
SHARES ELIGIBLE FOR FUTURE SALE
The Company has 5,504,906 shares of Common Stock outstanding.
Substantially all of these shares of Common Stock are transferable without
restriction, except for approximately 1,273,334 shares owned by persons deemed
to be affiliates of the Company (as that term is defined under the Securities
Act) which will be subject to certain volume restrictions under Rule 144 under
the Securities Act. A total of 943,149 shares are issuable upon exercise of the
Warrants at an exercise price of $9.90 per share. An additional 10,000 shares of
Common Stock are issuable pursuant to the exercise of an option, which is not
presently exercisable.
In general, under Rule 144, as recently amended, a person (or
persons whose shares are aggregated) including an affiliate, who has
beneficially owned his shares for one year, may sell in the open market within
any three-month period a number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of the Company's Common Stock
(approximately 5,500 shares) or (ii) the average weekly trading volume in the
Common Stock on the Nasdaq during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain limitations on the manner of
sale, notice requirements and availability of current public information about
the Company. A person (or persons whose shares are aggregated) who is deemed not
to have been an "affiliate" of the Company at any time during the 90 days
preceding a sale by such person and who has beneficially owned his shares for at
least two years, will be able to sell such shares in the public market under
Rule 144(k) without regard to the volume limitations, manner of sale provisions,
notice requirements or availability of current information referred to above.
Restricted shares properly sold in reliance upon Rule 144 are thereafter freely
tradable without restrictions or registration under the Securities Act, unless
thereafter held by an "affiliate" of the Company.
LEGAL PROCEEDINGS
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.
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, 1997 and for each of the two years in the period
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 procedures at the time of the change with respect to the
Company's financial statement 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
34
<PAGE>
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.
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 Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; 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. Documents filed by the Company
may also be inspected at the office 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 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.
GLOSSARY
The terms defined in this section are used throughout this
Prospectus.
Bcf. Billion cubic feet.
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.
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.
35
<PAGE>
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.
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.
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 contract 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.
36
<PAGE>
Financial Statements
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
Virginia Gas Company and Subsidiaries
Report of the Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December
31, 1997 and 1996 Notes to Consolidated Financial Statements
Virginia Gas Storage Company
Report of the Independent Public Accountants
Balance Sheets as of December 31, 1997 and 1996
Statements of Income for the years ended December 31, 1997 and 1996
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997 and 1996
Statements of Cash Flows for the years ended December 31, 1997 and
1996 Notes to Financial Statements
Virginia Gas Distribution Company
Report of the Independent Public Accountants
Balance Sheets as of December 31, 1997 and 1996
Statements of Income for the years ended December 31, 1997 and 1996
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997 and 1996
Statements of Cash Flows for the years ended December 31, 1997 and
1996 Notes to Financial Statements
Virginia Gas Company and Subsidiaries
Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997
Consolidated Statements of Income for the three months ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Virginia Gas Storage Company
Balance Sheets as of March 31, 1998 and December 31, 1997
Statements of Income for the three months ended March 31, 1998
and 1997
Statements of Cash Flows for the three months ended March 31, 1998
and 1997 Notes to Financial Statements
Virginia Gas Distribution Company
Balance Sheets as of March 31, 1998 and December 31, 1997
Statements of Income for the three months ended March 31, 1998
and 1997
Statements of Cash Flows for the three months ended March 31, 1998
and 1997 Notes to Financial Statements
</TABLE>
38
<PAGE>
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, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended. 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, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 6, 1998
(except with respect to the
matter discussed in Note 15,
as to which the date is
March 19, 1998)
39
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Balance Sheets
As of December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets
1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $11,750,899 $ 1,652,838
Accounts receivable 2,681,818 1,073,276
Notes receivable 120,898 114,556
Other current assets 305,223 134,862
----------- -----------
Total current assets 14,858,838 2,975,532
Property and equipment, net 22,459,289 16,343,480
Investment in affiliated companies 4,459,937 4,243,020
Notes receivable - affiliated companies 12,900,164 9,371,062
Other assets 1,159,272 577,309
----------- -----------
Total assets $55,837,500 $33,510,403
----------- -----------
----------- -----------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ -- $ 250,000
Current portion of long-term debt 218,611 1,244,490
Accounts payable 1,092,846 1,197,555
Funds held for future distribution 511,099 544,475
Other current liabilities 46,111 168,709
----------- -----------
Total current liabilities 1,868,667 3,405,229
Long-term debt 19,728,422 12,137,729
Deferred income taxes 925,908 629,914
----------- -----------
Total liabilities 22,522,997 16,172,872
----------- -----------
Stockholders' equity:
Preferred stock - No par, 2,000 shares authorized, issued, and
outstanding as of December 31, 1996 -- 1,725,000
Common stock - par value $.001, 10,000,000 shares authorized, 5,504,906 and
3,150,744 shares issued and outstanding as of December 31, 1997 and 1996,
respectively 5,505 3,151
Additional paid-in capital 31,241,082 14,152,137
Retained earnings 2,067,916 1,457,243
----------- -----------
Total stockholders' equity 33,314,503 17,337,531
----------- -----------
Total liabilities and stockholders' equity $55,837,500 $33,510,403
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
40
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revenue:
Operating revenue $7,897,394 $1,772,970
Interest and other income 1,446,233 996,748
---------- ----------
9,343,627 2,769,718
---------- ----------
Expenses:
Cost of natural gas sold 3,105,310 --
Purchased gas expense 1,025,014 28,537
General and administrative 1,003,464 645,673
Depreciation, depletion, and amortization 806,469 387,116
Operation and maintenance expense 683,763 173,445
Production expenses 216,290 105,910
---------- ----------
6,840,310 1,340,681
---------- ----------
Other expense:
Interest 1,513,964 1,006,800
Other -- 2,771
---------- ----------
1,513,964 1,009,571
---------- ----------
Income before earnings of affiliated companies and income
taxes 989,353 419,466
Equity in earnings of affiliated companies 216,917 339,927
---------- ----------
Income before income taxes 1,206,270 759,393
Provision for income taxes 298,663 151,827
---------- ----------
Net income $ 907,607 $ 607,566
---------- ----------
---------- ----------
Net income available to common stockholders $ 850,552 $ 347,566
---------- ----------
---------- ----------
Basic and dilutive net income per common share $ 0.22 $ 0.21
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Retained
Stock Stock Capital Earnings
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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 -- --
Change from no par to $.001 par value of common
stock -- (6,688,522) 6,688,522 --
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)
------------ ------------ ------------ ------------
Balance, December 31, 1996 1,725,000 3,151 14,152,137 1,457,243
Issuance of 54,162 shares of common stock pursuant
to exercise of warrant -- 54 -- --
Redemption of 2,000 shares of preferred stock (1,725,000) -- (275,000) --
Issuance of 2,300,000 shares of common stock -- 2,300 17,504,623 --
Payment for cancellation of options -- -- (140,678) --
Net income -- -- -- 907,607
Preferred stock dividends paid -- -- -- (57,055)
Common stock dividends paid -- -- -- (239,879)
------------ ------------ ------------ ------------
Balance, December 31, 1997 $ -- $ 5,505 $ 31,241,082 $ 2,067,916
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 907,607 $ 607,566
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion, and amortization 806,469 387,116
Undistributed earnings of affiliated companies (216,917) (339,927)
Deferred income taxes 295,994 141,596
Increase in accounts receivable (1,608,542) (180,903)
(Increase) decrease in other current assets (170,361) 66,720
Decrease in other assets 278,971 20,477
Decrease in notes payable (250,000) (332,212)
Decrease in accounts payable (104,709) (978,177)
(Decrease) increase in other current liabilities (155,974) 190,145
------------ ------------
Net cash used in operating activities (217,462) (417,599)
------------ ------------
Cash flows from investing activities:
Capital expenditures (6,097,356) (9,803,768)
Issuance of note receivable (3,650,000) --
Payments received on notes receivable 114,556 128,221
------------ ------------
Net cash used in investing activities (9,632,800) (9,675,547)
------------ ------------
Cash flows from financing activities:
Payment of loan principal (3,330,959) (2,731,952)
Proceeds from new loans 9,100,000 1,100,000
[6~ Proceeds from issuance of common stock, net 17,506,977 12,566,547
Redemption of preferred stock (2,000,000) --
Purchase of warrants and options (140,678) (975,000)
Payment of debt issuance costs (331,333) (54,719)
Establishment of financing reserve funds (558,750) --
Dividends paid (296,934) (291,506)
------------ ------------
Net cash provided by financing activities 19,948,323 9,613,370
------------ ------------
Net increase (decrease) in cash 10,098,061 (479,776)
Cash, beginning of year 1,652,838 2,132,614
------------ ------------
Cash, end of year $ 11,750,899 $ 1,652,838
------------ ------------
------------ ------------
Supplemental disclosure:
Interest paid $ 1,972,624 $ 1,282,705
------------ ------------
------------ ------------
Income taxes paid $ 22,158 $ 26,158
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
Virginia Gas Company and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 1997 and 1996
1. Description of Operations:
Virginia Gas Company (the "Company") was organized in 1987 under the laws of the
state of Delaware. The Company, directly or through affiliated companies, is
primarily engaged in the storage, marketing, distribution, gathering,
exploration, and production of natural gas, and the distribution of propane gas,
principally in the southwestern counties of the Commonwealth of Virginia.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements for 1997 include the accounts of four
wholly owned subsidiaries. The consolidated financial statements for 1996
include the accounts of three wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of all cash balances and highly liquid
investments which have an original maturity at purchase of three months or less.
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).
Combined financial information as of December 31, 1997 and 1996, and for the
years then ended, for investments in affiliated companies accounted for by the
equity method is as follows.
44
<PAGE>
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current assets $ 2,352,128 $ 2,386,057
Property and equipment, net 21,479,467 16,079,543
Other assets 5,318,164 4,917,958
----------- -----------
$29,149,759 $23,383,558
----------- -----------
Current liabilities $ 3,662,965 $ 2,941,557
Long-term debt payable to:
Affiliated companies 15,848,285 11,390,406
Third parties 5,194 13,870
Other liabilities 713,441 551,686
Stockholders' equity 8,919,874 8,486,039
----------- -----------
$29,149,759 $23,383,558
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended
December 31
1997 1996
----------- -----------
<S> <C> <C>
Revenues $ 5,977,069 $ 5,008,509
Income before income taxes 657,329 1,030,079
Net income 433,835 679,853
</TABLE>
The Company provides certain general and administrative services for Virginia
Gas Storage Company and Virginia Gas Distribution Company. These services
include professional services, insurance coverage and administrative services.
Other transactions include purchases and sales of natural gas, natural gas
storage, and technical services provided for the affiliated companies.
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 assets and liabilities and disclosure of
contingent assets and liabilities (if any) at the date of the financial
statements and 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 gathering revenues upon delivery of
natural 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.
Propane gas sales are recognized upon delivery of gas to the customer.
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. Revenues
attributable to the marketing operations totaled $3.6 million for the year ended
December 31, 1997.
45
<PAGE>
Income Per Common Share
Income per common share is computed in accordance with SFAS No. 128, "Earnings
per Share," using the weighted-average shares of common stock and dilutive
common stock equivalents (options and warrants) outstanding during the
respective periods. Adoption of SFAS No. 128 in 1997 resulted in no change to
previously reported net income per share. 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
3,943,274 and 1,637,576 for the years ended December 31, 1997 and 1996,
respectively, after retroactive effect of a 103.1667 per share stock split, as
discussed in Note 9.
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 $328,011 and $290,398 for the years ended December 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.
46
<PAGE>
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 landowners. 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 1996 balances to conform with
the 1997 presentation.
3. Accounts Receivable:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Trade receivables $ 654,624 $ 451,436
Lease operating expenses receivable 130,294 145,528
Joint-interest receivables 96,320 64,098
Due from affiliated companies 1,800,580 412,214
---------- ----------
$2,681,818 $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.
47
<PAGE>
4. Notes Receivable - Affiliated Companies:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<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 2,504,839 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 1,268,288 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 1,005,462 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 870,562 892,457
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
------------ ------------
13,021,062 9,485,618
Less- Current portion (120,898) (114,556)
------------ ------------
$ 12,900,164 $ 9,371,062
------------ ------------
------------ ------------
</TABLE>
5. Property and Equipment:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Storage properties $ 12,971,791 $ 9,226,332
Pipelines 3,127,293 1,039,035
Producing properties 2,499,105 2,494,370
Propane facilities 1,658,805 165,756
Wells, pipelines, and storage properties in progress 3,300,630 3,973,172
Vehicles 362,889 217,955
Building and improvements 183,650 150,898
Office equipment 278,166 221,685
Well and pipeline equipment 32,093 32,093
------------ ------------
24,414,422 17,521,296
Less- Accumulated depreciation, depletion, and amortization (1,955,133) (1,177,816)
------------ ------------
$ 22,459,289 $ 16,343,480
------------ ------------
------------ ------------
</TABLE>
48
<PAGE>
6. Other Assets:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Restricted cash and investments - reserve funds $ 688,792 $ 116,809
Deferred financing costs 455,116 455,350
Other 15,364 5,150
------------ ------------
$ 1,159,272 $ 577,309
------------ ------------
------------ ------------
</TABLE>
7. Accounts Payable:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Trade payables $ 773,017 $ 752,617
Payables to affiliated companies 319,829 444,938
------------ ------------
$ 1,092,846 $ 1,197,555
------------ ------------
------------ ------------
</TABLE>
8. Long-Term Debt:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<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 4,009,167 4,110,000
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 2,682,917 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 8%; payable in monthly installments of principal
and interest of $1,802 through November 2007; secured by an asset with a
book value of $172,335 as of December 31, 1997 147,688 --
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
$146,224 as of December 31, 1997 101,504 107,283
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C>
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 $101,932 as of December 31, 1997 57,922 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 -- 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 -- 395,333
Note payable to Virginia Gas Storage Company; interest payable at 8%;
balance due December 1997 -- 70,000
Notes payable through 2001 with interest from 9% to 10.75%; secured by assets
with a book value of $97,166 as of December 31, 1997 97,835 71,060
------------ ------------
19,947,033 13,382,219
Less- Current portion (218,611) (1,244,490)
------------ ------------
Long-term debt $ 19,728,422 $ 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.
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 is 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.
50
<PAGE>
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 is being used to construct a natural gas distribution facility in and 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. 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, 1997, principal payments on long-term debt for the next five
years are as follows:
<TABLE>
<S> <C>
1998 $ 218,611
1999 362,241
2000 188,853
2001 255,317
2002 514,793
</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, 1997 and 1996, is approximately $20,201,000 and $12,972,000
respectively.
9. 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 September 1997, the Company completed a secondary offering of its common
stock. The offering resulted in the issuance of an additional 2,300,000 common
shares of the Company at $8.50 per share.
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.
51
<PAGE>
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. At December 31, 1997, the Company had
a total of 943,149 shares reserved pursuant to the warrants discussed above.
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.
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) all to one investment
corporation. 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.
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. Concurrent with the issuance of
the warrant, the Company 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
granted the lender the right to purchase the common stock at 66 percent of the
issue price of any proposed common stock offerings. 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.
10. 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. At December 31, 1996, the Company was 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 was cancelled during 1997.
On July 1, 1997, the Company issued to certain of its officers and employees
options to purchase 120,000 shares of the Company's common stock at an exercise
price of $10 per share. The options are subject to a three-year vesting period
from July 1, 1997 until June 30, 2000. The options expire on June 30, 2002. None
of the options outstanding at December 31, 1997 are currently exercisable.
52
<PAGE>
Changes in the options outstanding during the years ended December 31, 1997 and
1996, were as follows:
<TABLE>
<CAPTION>
Weighted-Average
Exercise
Price Per
Shares Share
-------- --------
<S> <C> <C>
Outstanding, December 31, 1995 14,650 $8.72
Granted 70,004 $8.72
--------
Outstanding, December 31, 1996 84,654 $8.72
Granted 43,266 $8.72
Granted 120,000 $10.00
Cancelled (137,920) $8.81
--------
Outstanding, December 31, 1997 110,000 $10.00
--------
--------
</TABLE>
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," and elected to account for its stock options under APB Opinion
No. 25, under which no compensation cost has been recognized. Had compensation
cost for these stock options been determined in accordance with SFAS No. 123,
the Company's net income and earnings per share would have been reduced by
approximately $28,000 ($.01 per share) in 1997, and would not have been
materially different from amounts reported for 1996. The weighted average fair
value of options granted during 1997 and 1996 was approximately $3.80 and $1.00,
respectively.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants in 1997 and 1996, respectively: risk-free rate
of return of 6.3% and 6.0%; expected dividend yield of .71% and .67%; expected
time of exercise of five and three years; expected volatility of 34% in both
years.
11. 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>
1998 $ 38,746
1999 34,278
2000 30,728
2001 29,828
2002 26,886
</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.
53
<PAGE>
12. Sales to Major Customers:
One of the Company's customers accounted for 22 percent and 31 percent of
consolidated operating revenue for the years ended December 31, 1997 and 1996.
One customer accounted for 16 percent, one customer accounted for 14 percent,
while another customer accounted for 13 percent, respectively, of 1997
consolidated operating revenue.
13. Income Taxes:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current:
Federal $ 2,669 $ 10,231
State -- --
--------- ---------
2,669 10,231
--------- ---------
Deferred:
Federal 305,082 124,985
State (9,088) 16,611
--------- ---------
295,994 141,596
--------- ---------
$ 298,663 $ 151,827
--------- ---------
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Minimum tax credit carryforwards $ 111,615 $ 104,609
Net operating loss carryforward 146,456 86,910
---------- ----------
Total 258,071 191,519
---------- ----------
Deferred tax liabilities:
Capital assets 1,183,979 821,433
---------- ----------
Net deferred tax liabilities $ 925,908 $ 629,914
---------- ----------
---------- ----------
</TABLE>
The Company has no valuation allowances as of December 31, 1997 and there were
no changes in the valuation allowance during the years ended December 31, 1997
or 1996.
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>
1997 1996
--------- ---------
<S> <C> <C>
Tax at statutory rate of 34% $ 410,132 $ 258,194
Equity in earnings of affiliated companies (73,752) (115,576)
State income taxes, less Federal benefit (5,998) 10,963
Statutory depletion in excess of cost depletion (27,670) (26,693)
Other, net (4,049) 24,939
--------- ---------
$ 298,663 $ 151,827
--------- ---------
--------- ---------
</TABLE>
54
<PAGE>
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, 1997, is $111,615.
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 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
(382,563 shares as of December 31, 1997 and 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 Event:
On March 19, 1998, the Company completed a significant financing arrangement
with the John Hancock Mutual Life Insurance Companies. Under the terms of the
arrangement, Virginia Gas Company issued to John Hancock $24 million of 8.5%
senior notes due 2012. With the proceeds, the Company retired approximately
$19.5 million of industrial revenue bonds which had an average interest rate of
9%. The remaining proceeds will be used to develop segments of the Company's
pipeline expansion projects and to fund other planned corporate expansions. In
addition, the retirement of the industrial revenue bonds released, for the
Company's use, another $2.1 million (including interest earned through March 19,
1998) of reserve funds associated with the issuance of the bonds. These funds
will also be used to fund planned corporate expansions.
As a result of the refinancing described above, the Company expects to incur,
during the first quarter of 1998, a one time after tax charge to earnings of
approximately $815,000. This is due to accelerated amortization of issue
costs previously expensed over the term of the industrial revenue bonds, and
defeasement premiums, interest, and fees associated with the 1994 Russell
County bond issue.
55
<PAGE>
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, 1997 and 1996, and the related statements of income, changes
in stockholders' equity, and cash flows for the years then ended. 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, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 6, 1998
(except with respect to the
matters discussed in Note 14,
as to which the date
is March 19, 1998)
56
<PAGE>
Virginia Gas Storage Company
Balance Sheets
As of December 31, 1997 and 1996
Assets
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash $ 375,958 $ 148,619
Accounts receivable 1,409,401 1,233,227
Notes receivable - 570,000
Other current assets 31,156 85,369
------------- -------------
Total current assets 1,816,515 2,037,215
Property and equipment, net 15,063,002 13,323,883
Other assets 1,133,920 956,099
------------- -------------
Total assets $18,013,437 $16,317,197
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 109,450 $ 104,915
Accounts payable 2,231,125 2,193,010
Other current liabilities 268,643 108,929
------------- -------------
Total current liabilities 2,609,218 2,406,854
Long-term debt 7,226,762 6,386,212
Deferred income taxes 713,441 551,686
------------- -------------
Total liabilities 10,549,421 9,344,752
------------- -------------
------------- -------------
Stockholders' equity:
Common stock - no par value, 50,000 shares authorized, 38,200
shares issued and outstanding 5,640,000 5,640,000
Retained earnings 1,824,016 1,332,445
------------- -------------
Total stockholders' equity 7,464,016 6,972,445
------------- -------------
Total liabilities and stockholders' equity $18,013,437 $16,317,197
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
57
<PAGE>
Virginia Gas Storage Company
Statements of Income
For the Years Ended December 31, 1997 and 1996
<TABLE>
[6~<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revenue:
Operating revenue $4,511,503 $3,831,224
Interest and other income 53,772 154,220
---------- ----------
4,565,275 3,985,444
---------- ----------
Expenses:
Purchased gas expense 1,314,688 974,277
General and administrative 718,666 700,296
Operation and maintenance expense 711,986 374,579
Depreciation, depletion, and amortization 512,566 416,699
Production expenses 198,866 222,808
---------- ----------
3,456,772 2,688,659
---------- ----------
Interest expense 363,697 272,941
---------- ----------
Income before income taxes 744,806 1,023,844
Provision for income taxes 253,235 348,106
---------- ----------
Net income $ 491,571 $ 675,738
---------- ----------
---------- ----------
Virginia Gas Company's equity in Virginia Gas Storage Company's
earnings $ 245,785 $ 337,869
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
Virginia Gas Storage Company
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Common Retained
Stock Earnings
----------- -------------
<S> <C> <C>
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 - 491,571
----------- -------------
Balance, December 31, 1997 $ 5,640,000 $ 1,824,016
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
59
<PAGE>
Virginia Gas Storage Company
Statements of Cash Flows
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 491,571 $ 675,738
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion, and amortization 512,566 416,699
Deferred income taxes 161,755 212,476
Increase in accounts receivable (176,174) (304,140)
Decrease (increase) in other current assets 54,213 (22,353)
Increase in other assets (195,137) (37,981)
Increase in accounts payable 38,115 1,092,591
Increase (decrease) in other current liabilities 159,714 (58,690)
----------- -----------
Net cash provided by operating activities 1,046,623 1,974,340
----------- -----------
Cash flows from investing activities:
Capital expenditures (2,234,369) (4,225,530)
Payments received on notes receivable 570,000 1,720,000
----------- -----------
Net cash used in investing activities (1,664,369) (2,505,530)
----------- -----------
Cash flows from financing activities:
Payment of loan principal (154,915) (117,677)
Proceeds from new loans 1,000,000 500,000
----------- -----------
Net cash provided by financing activities 845,085 382,323
----------- -----------
Net increase (decrease) in cash 227,339 (148,867)
Cash, beginning of year 148,619 297,486
----------- -----------
Cash, end of year $ 375,958 $ 148,619
----------- -----------
----------- -----------
Supplemental disclosure:
Interest paid $ 665,610 $ 606,505
----------- -----------
----------- -----------
Income taxes paid $ 97,635 $ 159,024
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
60
<PAGE>
Virginia Gas Storage Company
Notes to Financial Statements
As of December 31, 1997 and 1996
1. Description of Operations:
Virginia Gas Storage Company (the "Company") was organized in 1992 under the
laws of the Commonwealth 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 gathering facilities.
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 assets and liabilities and disclosure of
contingent assets and liabilities (if any) at the date of the financial
statements and 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.
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 $267,100 and $283,564 for the years ended December 31, 1997
and 1996, respectively.
61
<PAGE>
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>
1997 1996
----------- -----------
<S> <C> <C>
Trade receivables $ 614,132 $ 618,275
Receivables from affiliated companies 486,851 469,656
Pipeline operating expenses 91,415 54,944
Joint-interest receivables 217,003 90,249
Other - 103
----------- -----------
$1,409,401 $1,233,227
----------- -----------
----------- -----------
</TABLE>
4. Notes Receivable:
<TABLE>
<CAPTION>
1996
---------------
<S> <C>
Note receivable from shareholder; interest receivable at 8%;
principal received as consideration for the issuance of
common shares, paid in March 1997 $ 500,000
Note receivable from Virginia Gas Exploration Company;
interest receivable at 8%; paid in 1997 70,000
---------------
$ 570,000
---------------
---------------
</TABLE>
62
<PAGE>
5. Property and Equipment:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Storage properties $14,320,327 $12,095,480
Pipelines 2,024,620 2,026,091
Vehicles 108,242 133,742
Office equipment 80,101 63,335
Wells and pipelines in progress 68,584 68,832
----------- -----------
16,601,874 14,387,480
Less- Accumulated depreciation, depletion, and amortization (1,538,872) (1,063,597)
----------- -----------
$15,063,002 $13,323,883
----------- -----------
----------- -----------
</TABLE>
6. Other Assets:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Restricted cash and investments - reserve funds $ 617,982 $ 582,233
Deferred debt issuance costs 509,112 365,707
Other 6,826 8,159
------------- ------------
$ 1,133,920 $ 956,099
------------- ------------
------------- ------------
</TABLE>
7. Accounts Payable:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Trade payables $ 958,796 $ 1,827,867
Payable to affiliated companies 1,272,329 365,143
------------- ------------
$ 2,231,125 $ 2,193,010
------------- ------------
------------- ------------
</TABLE>
8. Other Current Liabilities:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Amounts due affiliated companies $ 15,997 $ 46,255
Funds held for future distribution 243,503 8,120
Income taxes payable (2,178) 17,569
Other 11,321 36,985
------------- ------------
$ 268,643 $ 108,929
------------- ------------
------------- ------------
</TABLE>
63
<PAGE>
9. Long-Term Debt:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<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 $ 2,504,839 $ 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 1,005,462 1,018,579
Note 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 Distribution Company; interest payable at 9%;
principal payable in maturities of $1,000 to $91,000 from 1999 to 2020 950,000 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
Note 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 554,608 568,557
Note 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 464,736 470,798
Note payable through 1999 with interest from 8.0% to 12.75%; secured by assets
with a book value of $11,658 as of December 31, 1997 13,870 22,659
------------ -----------
7,336,212 6,491,127
Less- Current portion (109,450) (104,915)
------------ -----------
Long-term debt $7,226,762 $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 Virginia Gas
Company which was used by the Company to construct natural gas storage
facilities to support natural gas distribution facilities owned by Virginia Gas
Distribution Company.
64
<PAGE>
In January 1994, 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 Virginia Gas
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 Virginia Gas 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.
As of December 31, 1997, principal payments on long-term debt for the next five
years are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 109,450
1999 132,363
2000 89,441
2001 143,117
2002 183,646
</TABLE>
10. Sales to Major Customers:
One of the Company's customers accounted for 37 percent and 45 percent while
another customer accounted for 11 percent and 10 percent, respectively, of
operating revenue for the years ended December 31, 1997 and 1996. One customer
accounted for 13 percent of 1997 operating revenue while another customer
accounted for 12 percent of 1996 operating revenue.
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>
<CAPTION>
<S> <C>
1998 $ 92,829
1999 63,679
2000 61,029
2001 61,029
2002 61,029
</TABLE>
65
<PAGE>
12. Income Taxes:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Current
Federal $ 91,480 $ 135,630
State - -
---------- -----------
91,480 135,630
---------- -----------
Deferred
Federal 161,755 212,476
State - -
---------- -----------
161,755 212,476
---------- -----------
$ 253,235 $ 348,106
---------- -----------
---------- -----------
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Deferred tax assets:
Minimum tax credit carryforwards $ 20,648 $ 4,656
---------- -----------
Deferred tax liabilities:
Capital assets 734,089 556,342
---------- -----------
Net deferred tax liabilities $ 713,441 $ 551,686
---------- -----------
---------- -----------
</TABLE>
The Company has no valuation allowances as of December 31, 1997 and 1996, and
there were no changes in the valuation allowance during the years then ended.
The Company's actual provision for income tax as of December 31, 1997 and 1996,
approximates the tax provision at the statutory Federal income tax rate.
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. Other transactions with affiliated companies include purchases of
natural gas, natural gas storage and technical services provided for and by
affiliated companies.
66
<PAGE>
14. Subsequent Event:
On March 19, 1998, Virginia Gas Company, a principal owner of Virginia Gas
Storage Company, completed a significant financing arrangement with the John
Hancock Mutual Life Insurance Companies. Under the terms of the arrangement,
Virginia Gas Company issued to John Hancock $24 million of 8.5% senior notes due
2012. With the proceeds, the Company retired approximately $19.5 million of
industrial revenue bonds, most of which had been previously allocated to
Virginia Gas Storage Company and three other affiliated companies, and which had
an average interest rate of 9%. The remaining proceeds will be used to develop
segments of the Company's pipeline expansion projects and to fund other planned
corporate expansions. In addition, the retirement of the industrial revenue
bonds released, for the Company's use, another $2.1 million (including interest
earned through March 19, 1998) of reserve funds associated with the issuance of
the bonds. These funds will also be used to fund planned corporate expansions.
Virginia Gas Storage Company, from the debt refinancing, will replace its
long-term debt of approximately $7.3 million with a similar amount of long term
debt at a moderately lower interest rate. In addition, the Company's bond
reserve funds (including interest earned through March 19, 1998) of $626,000
will now be available to fund additional capital expansion projects.
As a result of the refinancing described above, the Company expects to incur,
during the first quarter of 1998, a one time after tax charge to earnings of
approximately $640,000 due to the accelerated amortization of issue costs
previously expensed over the term of the industrial revenue bonds, and
defeasement premiums, interest, and fees associated with the 1994 Russell
County bond issue.
67
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
Virginia Gas Distribution Company:
We have audited the accompanying balance sheets of Virginia Gas Distribution
Company as of December 31, 1997 and 1996, and the related statements of income,
changes in stockholders' equity, and cash flows for the years then ended. 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, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 6, 1998
(except with respect to the
matter discussed in Note 10,
as to which the date is
March 19, 1998)
68
<PAGE>
Virginia Gas Distribution Company
Balance Sheets
As of December 31, 1997 and 1996
Assets
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash $ 45,939 $ 16,166
Accounts receivable 220,389 151,752
Other current assets 248,062 154,920
Notes receivable 21,223 26,004
------------- -------------
Total current assets 535,613 348,842
Property and equipment, net 6,416,465 2,755,660
Notes receivable - affiliated companies 2,948,121 3,413,066
Deferred tax asset 31,736 1,995
Other assets 1,204,387 546,798
------------- -------------
Total assets $11,136,322 $7,066,361
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 41,347 $ 39,240
Accounts payable 980,560 462,095
Other current liabilities 31,840 33,368
------------- -------------
Total current liabilities 1,053,747 534,703
Long-term debt 8,626,717 5,018,064
------------- -------------
Total liabilities 9,680,464 5,552,767
------------- -------------
Stockholders' equity:
Common stock - no par value, 100,000 shares authorized, 75,000
shares issued and outstanding
1,500,000 1,500,000
Retained earnings (deficit) (44,142) 13,594
------------- -------------
Total stockholders' equity 1,455,858 1,513,594
------------- -------------
Total liabilities and stockholders' equity $11,136,322 $ 7,066,361
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
69
<PAGE>
Virginia Gas Distribution Company
Statements of Income
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenue:
Operating revenue $ 890,647 $ 629,280
Interest income 431,628 320,836
Other income 89,519 72,949
------------ ------------
1,411,794 1,023,065
------------ ------------
Expenses:
Purchased gas expense 513,443 330,332
General and administrative 197,940 191,619
Depreciation, depletion, and amortization 162,740 78,013
Operation and maintenance expense 116,620 55,032
------------ ------------
990,743 654,996
------------ ------------
Other expense:
Interest 502,582 358,158
Other 5,946 3,676
------------ ------------
508,528 361,834
------------ ------------
Income (loss) before income taxes (87,477) 6,235
Provision (benefit) for income taxes (29,741) 2,120
------------ ------------
Net income (loss) $ (57,736) $ 4,115
------------ ------------
------------ ------------
Virginia Gas Company's equity in Virginia Gas Distribution Company's
earnings $ (28,868) $ 2,058
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
70
<PAGE>
Virginia Gas Distribution Company
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Retained
Common Earnings
Stock (Deficit)
----------- -------------
<S> <C> <C>
Balance, December 31, 1995 $1,500,000 $ 9,479
Net income - 4,115
----------- -------------
Balance, December 31, 1996 1,500,000 13,594
Net loss - (57,736)
----------- -------------
Balance, December 31, 1997 $1,500,000 $ (44,142)
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
71
<PAGE>
Virginia Gas Distribution Company
Statements of Cash Flows
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 57,736) $ 4,115
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion, and amortization 162,740 78,013
Deferred income taxes (29,741) 2,120
(Increase) decrease in accounts receivable (68,637) 52,074
Decrease in receivable from affiliate - 1,562,500
Increase in other current assets (93,142) (3,220)
Increase in other assets (42,792) (25,239)
Increase in accounts payable 518,465 227,747
Decrease in other current liabilities (1,528) (70,345)
------------ -------------
Net cash provided by operating activities 387,629 1,827,765
------------ -------------
Cash flows from investing activities:
Capital expenditures (3,807,720) (674,263)
Loans made to affiliated companies (1,000,000) (1,500,000)
Payments received on notes receivable 1,469,726 98,200
------------ -------------
Net cash used in investing activities (3,337,994) (2,076,063)
------------ -------------
Cash flows from financing activities:
Payment of loan principal (39,240) (42,223)
Proceeds from new loans 3,650,000 -
Payment of financing costs (302,122) -
Establishment of financing reserve funds (328,500) -
------------ -------------
Net cash provided by (used in) financing activities 2,980,138 (42,223)
------------ -------------
Net increase (decrease) in cash 29,773 (290,521)
Cash, beginning of year 16,166 306,687
------------ -------------
Cash, end of year $ 45,939 $ 16,166
------------ -------------
------------ -------------
Supplemental disclosure:
Interest paid $ 745,053 $ 533,085
------------ -------------
------------ -------------
Income taxes paid $ - $ -
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
72
<PAGE>
Virginia Gas Distribution Company
Notes to Financial Statements
As of December 31, 1997 and 1996
1. Description of Operations:
Virginia Gas Distribution Company (the "Company") was organized during 1992
under the laws of the Commonwealth 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 in certain southwestern counties of the
Commonwealth of Virginia, for which it has received Certificates of Public
Convenience and Necessity issued by the Virginia State Corporation Commission.
The 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
Company sells natural gas to its customers are in accordance with the rate
schedules in its tariff filed with the Virginia State Corporation Commission.
The Company purchases natural gas under short-term contracts that reflect the
market price of natural gas.
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 assets and liabilities and disclosure of
contingent assets and liabilities (if any) at the date of the financial
statements and 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.
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 $243,122 and $74,927 for the years ended December 31, 1997
and 1996, respectively.
73
<PAGE>
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 - Affiliated Companies:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<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 $ 554,608 $ 568,557
Note receivable from Virginia Gas Storage Company; interest receivable at 9%;
principal due in maturities of $1,000 to $91,000
from 1999 to 2020 950,000 1,000,000
Note receivable from Virginia Gas Pipeline Company; interest
receivable at 9% -- 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 464,736 470,798
Note receivable from Virginia Gas Exploration Company; interest
receivable at 7.35% -- 395,333
Other -- 4,382
----------- -----------
2,969,344 3,439,070
Less- Current portion (21,223) (26,004)
----------- -----------
$ 2,948,121 $ 3,413,066
----------- -----------
----------- -----------
</TABLE>
74
<PAGE>
4. Property and Equipment:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Pipelines $ 6,244,892 $ 2,343,856
Project and construction in progress 507,986 555,232
Other property and equipment 57,089 104,386
----------- -----------
6,809,967 3,003,474
Less- Accumulated depreciation and amortization (393,502) (247,814)
----------- -----------
$ 6,416,465 $ 2,755,660
----------- -----------
----------- -----------
</TABLE>
5. Other Assets:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Restricted cash and investments - reserve funds $ 765,194 $ 396,285
Deferred debt issuance costs 437,204 147,191
Other 1,989 3,322
----------- -----------
$ 1,204,387 $ 546,798
----------- -----------
----------- -----------
</TABLE>
6. Long-Term Debt:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<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
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 1,268,288 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 870,562 892,457
Note payable through 1997 with interest -- 800
----------- -----------
8,668,064 5,057,304
Less- Current portion (41,347) (39,240)
----------- -----------
Long-term debt $ 8,626,717 $ 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 Virginia Gas
Company and is being used to construct a natural gas distribution facility in
and around the town of Lebanon, Virginia.
75
<PAGE>
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, 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 ($1,300,000) 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, 1997, principal payments on long-term debt for the next five
years are as follows:
<TABLE>
<S> <C>
1998 $ 41,347
1999 74,435
2000 81,048
2001 102,339
2002 211,823
</TABLE>
7. Sales to Major Customers:
One of the Company's customers accounted for 33 percent and 35 percent, one
customer accounted for 14 percent and 20 percent, while another customer
accounted for 18 percent and 14 percent, respectively, of operating revenue for
the years ended December 31, 1997 and 1996. One customer accounted for 11
percent of 1997 operating revenue.
8. Income Taxes:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current:
Federal $ -- $ --
State -- --
-------- --------
-- --
-------- --------
Deferred:
Federal (29,741) 2,120
State -- --
-------- --------
(29,741) 2,120
-------- --------
($29,741) $ 2,120
-------- --------
-------- --------
</TABLE>
76
<PAGE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $225,620 $128,657
-------- --------
Deferred tax liabilities:
Capital assets 193,884 126,662
-------- --------
Net deferred tax assets $ 31,736 $ 1,995
-------- --------
-------- --------
</TABLE>
The Company has no valuation allowances as of December 31, 1997 and 1996, and
there were no changes in the valuation allowance during the years then ended.
The Company's actual provision for income tax as of December 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. Other transactions with affiliated companies include purchases of
natural gas, natural gas storage and technical services provided for and by
affiliated companies.
10. Subsequent Event:
On March 19, 1998, Virginia Gas Company, a principal owner of Virginia Gas
Distribution Company, completed a significant financing arrangement with the
John Hancock Mutual Life Insurance Companies. Under the terms of the
arrangement, Virginia Gas Company issued to John Hancock $24 million of 8.5%
senior notes due 2012. With the proceeds, the Company retired approximately
$19.5 million of industrial revenue bonds, most of which had been previously
allocated to Virginia Gas Distribution Company and three other affiliated
companies and which had an average interest rate of 9%. The remaining proceeds
will be used to develop segments of the Company's pipeline expansion projects
and to fund other planned corporate expansions. In addition, the retirement of
the industrial revenue bonds released, for the Company's use, another
$2.1 million (including interest earned through March 19, 1998) of reserve funds
associated with the issuance of the bonds. These funds will also be used to fund
planned corporate expansions.
Virginia Gas Distribution Company, from the debt refinancing, will replace their
long term debt of approximately $8.7 million with a similar amount of long term
debt at a moderately lower interest rate. In addition, the Company's bond
reserve funds (including interest earned through March 19, 1998) of $775,000
will now be available to fund additional capital expansion projects.
As a result of the refinancing described above, the Company expects to incur,
during the first quarter of 1998, a one time after tax charge to earnings of
approximately $340,000 due to the accelerated amortization of issue costs
previously expensed over the term of the industrial revenue bonds, and
defeasement premiums, interest, and fees associated with the 1994 Russell
County bond issue.
77
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Assets
March 31, December 31,
1998 1997
--------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,503,318 $ 11,750,899
Accounts receivable 2,729,637 2,681,818
Notes receivable 100,748 120,898
Other current assets 350,126 305,223
------------ ------------
Total current assets 16,683,829 14,858,838
Property and equipment, net 27,201,261 22,459,289
Investment in affiliated companies 4,485,413 4,459,937
Notes receivable - affiliated companies 12,900,164 12,900,164
Other assets 587,227 1,159,272
------------ ------------
Total assets $ 61,857,894 $ 55,837,500
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 69,684 $ 218,611
Accounts payable 2,960,268 1,092,846
Funds held for future distribution 278,249 511,099
Other current liabilities 94,166 46,111
------------ ------------
Total current liabilities 3,402,367 1,868,667
Long-term debt 24,097,498 19,728,422
Deferred income taxes 1,150,315 925,908
------------ ------------
Total liabilities 28,650,180 22,522,997
------------ ------------
Stockholders' equity:
Common stock - par value $.001, 10,000,000
shares authorized, 5,504,906 shares issued
and outstanding as of March 31, 1998 and
December 31, 1997 5,505 5,505
Additional paid-in capital 31,248,068 31,241,082
Retained earnings 1,954,141 2,067,916
------------ ------------
Total stockholders' equity 33,207,714 33,314,503
------------ ------------
Total liabilities and stockholders' $ 61,857,894 $ 55,837,500
------------ ------------
------------ ------------
</TABLE>
78
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1998 1997
-------- --------
<S> <C> <C>
Revenue:
Operating revenue $2,228,061 $ 1,882,645
Interest and other income 460,818 256,820
----------- -----------
2,688,879 2,139,465
----------- -----------
Expenses:
Production expenses 37,813 36,625
Purchased propane gas expense 240,923 20,659
Cost of natural gas sold 916,345 944,767
Operation and maintenance expense 230,697 100,466
Depreciation, depletion, and amortization 206,059 166,196
General and administrative 323,366 215,131
----------- -----------
1,955,203 1,483,844
----------- -----------
Other expense:
Interest 427,578 317,822
Other 42,666 31,313
----------- -----------
470,244 349,135
Income before earnings of affiliated companies,
income taxes, and extraordinary loss 263,432 306,486
Equity in earnings of affiliated companies 25,491 94,439
----------- -----------
Income before income taxes and extraordinary
loss 288,923 400,925
Provision for income taxes 72,856 102,076
----------- -----------
Net income before extraordinary item 216,067 298,849
Extraordinary loss on extinguishment of debt
(net of tax) (233,305) -
----------- -----------
Net income (loss) (17,238) 298,849
Preferred dividends paid - (57,055)
----------- -----------
Net income (loss) available to common
stockholders $ (17,238) $ 241,794
----------- -----------
----------- -----------
Earnings (loss) per common share, basic and
diluted:
Net income before extraordinary item $ 0.04 $ 0.08
----------- -----------
----------- -----------
Extraordinary loss on extinguishment
of debt (net of tax) $ (0.04) $ -
----------- -----------
----------- -----------
Net income (loss) $ 0.00 $ 0.08
----------- -----------
----------- -----------
Weighted-average common shares outstanding 5,504,906 3,188,659
----------- -----------
----------- -----------
</TABLE>
79
<PAGE>
Virginia Gas Company and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (17,238) $ 298,849
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, depletion, and amortization 206,059 166,196
Undistributed earnings of affiliated companies (25,491) (94,439)
Deferred income taxes 224,407 76,557
Increase in accounts receivable (47,819) (989,305)
Increase in other current assets (24,753) (18,463)
Decrease in other assets 572,045 107,937
Increase in accounts payable 1,867,422 286,456
Increase (decrease) in other current liabilities (333,722) 59,817
----------- -----------
Net cash provided by (used in) operating activities 2,420,910 (106,395)
----------- -----------
Cash flows from investing activities:
Capital expenditures (4,946,246) (1,393,235)
Issuance of notes receivable - (3,650,000)
Payments received on notes receivable - 32,674
----------- -----------
Net cash used in investing activities (4,946,246) (5,010,561)
----------- -----------
Cash flows from financing activities:
Payment of loan principal (19,630,924) (1,164,664)
Proceeds from new loans 24,000,000 9,100,000
Redemption of preferred stock - (2,000,000)
Payment of issuance costs - (125,612)
Proceeds from exercised warrants 5,015 -
Payment of debt issuance costs - (440,018)
Establishment of financing reserve fund - (558,750)
Dividends paid (96,336) (96,440)
----------- -----------
Net cash provided by financing activities 4,277,755 4,714,516
----------- -----------
Net increase (decrease) in cash 1,752,419 (402,440)
Cash, beginning of period 11,750,899 1,652,838
----------- -----------
Cash, end of period $13,503,318 $ 1,250,398
----------- -----------
----------- -----------
Supplemental disclosure:
Interest paid $ 226,659 $ 370,804
----------- -----------
----------- -----------
</TABLE>
80
<PAGE>
VIRGINIA GAS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The accompanying unaudited consolidated financial statements as of March
31, 1998, and for the three months ended March 31, 1998, have been prepared
in accordance with generally accepted accounting principles. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Virginia Gas Company (the "Company") annual report on
Form 10-KSB for the year ended December 31, 1997. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary to present fairly the financial position, results of
operations and cash flows of the Company have been included. Operating
results for the three months ended March 31, 1998, are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998.
The consolidated financial statements for 1997 and the unaudited
consolidated financial statements for 1998 include the accounts of four
wholly-owned subsidiaries. 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).
In March 1998, the Company completed a refinancing transaction whereby the
Company issued a $24 million note to John Hancock. With the proceeds, the
Company retired or defeased $19.6 million of industrial revenue bonds. The
remaining proceeds will be used to develop the Company's Tidewater pipeline
project. As a result of this refinancing, the Company incurred a one time
after-tax charge of approximately $233,000. This was due to the accelerated
amortization of issue costs related to the industrial revenue bonds, and
defeasement premiums, interest, and other fees related to the 1994 Russell
County bond issue.
81
<PAGE>
Virginia Gas Storage Company
Balance Sheets
<TABLE>
<CAPTION>
Assets
March 31, December 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 394,284 $ 375,958
Accounts receivable 1,572,699 1,409,401
Notes receivable -- --
Other current assets 24,641 31,156
----------- ------------
Total current assets 1,991,624 1,816,515
Property and equipment, net 15,674,449 15,063,002
Other assets 731,774 1,133,920
----------- ------------
Total assets $18,397,847 $18,013,437
----------- ------------
----------- ------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 90,549 $ 109,450
Accounts payable 2,525,012 2,231,125
Other current liabilities 259,168 268,643
----------- ------------
Total current liabilities 2,874,729 2,609,218
Long-term debt 7,176,762 7,226,762
Deferred income taxes 713,441 713,441
----------- ------------
Total liabilities 10,764,932 10,549,421
----------- ------------
Stockholders' equity:
Common stock - no par value, 50,000 shares authorized,
38,200 shares issued and outstanding as of March 31, 1998
and December 31, 1997 5,640,000 5,640,000
Retained earnings 1,992,915 1,824,016
----------- ------------
Total stockholders' equity 7,632,915 7,464,016
----------- ------------
Total liabilities and stockholders' equity $18,397,847 $18,013,437
----------- ------------
----------- ------------
</TABLE>
82
<PAGE>
Virginia Gas Storage Company
Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
Revenue:
Operating revenue $1,276,971 $1,408,752
Interest income 7,791 18,614
----------- ------------
1,284,762 1,427,366
----------- ------------
Expenses:
Production expenses 48,586 59,857
Purchased gas expense 436,278 509,042
Operation and maintenance expense 135,510 223,314
Depreciation, depletion, and amortization 135,584 128,195
General and administrative 69,788 155,825
----------- ------------
825,746 1,076,233
----------- ------------
Other expense:
Interest 158,213 77,367
Other 44,895 36,801
----------- ------------
203,108 114,168
----------- ------------
Income before income taxes 255,908 236,965
Provision for income taxes 87,009 80,568
----------- ------------
Net income $ 168,899 $ 156,397
----------- ------------
----------- ------------
Virginia Gas Company's equity in Virginia Gas
Storage Company's earnings $ 84,450 $ 78,198
----------- ------------
----------- ------------
</TABLE>
83
<PAGE>
Virginia Gas Storage Company
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 168,899 $ 156,397
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion, and amortization 135,584 128,195
Deferred income taxes -- 80,891
Decrease (increase) in accounts receivable (163,298) 201,861
Decrease in other current assets 6,515 56,714
Decrease (increase) in other assets 398,320 (8,377)
(Decrease) increase in accounts payable 293,887 (776,285)
(Decrease)Increase in other current liabilities (28,376) 96,308
----------- ------------
Net cash (used in) provided by operating
activities 811,531 (64,296)
----------- ------------
Cash flows from investing activities:
Capital expenditures (743,205) (1,055,819)
Payments received on notes receivable -- 500,000
----------- ------------
Net cash used in investing activities (743,205) (555,819)
----------- ------------
Cash flows from financing activities:
Payment of loan principal (50,000) (29,952)
Proceeds from new loans -- 1,000,000
----------- ------------
Net cash provided by (used in) financing
activities (50,000) 970,048
----------- ------------
Net increase in cash 18,326 349,933
Cash, beginning of period 375,958 148,619
----------- ------------
Cash, end of period $ 394,284 $ 498,552
----------- ------------
----------- ------------
Supplemental disclosure:
Interest paid $ 105,562 $ 166,083
----------- ------------
----------- ------------
Income taxes paid $ -- $ 17,635
----------- ------------
----------- ------------
</TABLE>
84
<PAGE>
VIRGINIA GAS STORAGE COMPANY
Notes to Financial Statements
(Unaudited)
The accompanying unaudited financial statements as of March 31, 1998, and
for the three months ended March 31, 1998 and 1997, have been prepared in
accordance with generally accepted accounting principles. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the annual report on Form 10-KSB for the year ended
December 31, 1997 of Virginia Gas Company, the parent of Virginia Gas Storage
Company. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary to present fairly the financial
position, results of operations and cash flows of the Virginia Gas Storage
Company have been included. Operating results for the three months ended
March 31, 1998, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
In March 1998, the Virginia Gas Storage Company's parent, Virginia Gas
Company (the Parent), completed a refinancing transaction whereby the Parent
issued a $24 million note to John Hancock. With the proceeds, the Company
retired or defeased $19.6 million of industrial revenue bonds, most of which had
been previously allocated to Virginia Gas Storage Company and three other
affiliated companies. The remaining proceeds will be used to develop the
Parent's Tidewater pipeline project. As a result of this refinancing, the
Virginia Gas Storage Company has recorded a regulatory asset of approximately
$725,000. This asset is made up of issue costs related to the industrial revenue
bonds, and defeasement premiums, interest, and other fees related to the 1994
Russell County bond issue. The regulatory asset will be amortized over 14 years,
the life of the John Hancock note.
85
<PAGE>
Virginia Gas Distribution Company
Balance Sheets
<TABLE>
<CAPTION>
Assets
March 31, December 31,
1998 1997
--------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 79,207 $ 45,939
Accounts receivable 933,149 220,389
Current portion of notes receivable 17,686 248,062
Other current assets 97,974 21,223
------------- -------------
Total current assets 1,128,016 535,613
Property and equipment, net 6,423,311 6,416,465
Notes receivable 2,898,121 2,948,121
Deferred tax asset 30,215 31,736
Other assets 704,500 1,204,387
------------- -------------
Total assets $ 11,184,163 $ 11,136,322
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 34,455 $ 41,347
Accounts payable 1,140,830 980,560
Other current liabilities 44,250 31,840
------------- -------------
Total current liabilities 1,219,535 1,053,747
Long-term debt 8,626,717 8,626,717
------------- -------------
Total liabilities 9,846,252 9,680,464
------------- -------------
Stockholders' equity:
Common stock - no par value, 100,000 shares authorized,
75,000 shares issued and outstanding as of March 31, 1998
and December 31, 1997 1,500,000 1,500,000
Retained earnings (deficit) (162,089) (44,142)
------------- -------------
Total stockholders' equity 1,337,911 1,455,858
------------- -------------
Total liabilities and stockholders' equity $ 11,184,163 $ 11,136,322
------------- -------------
------------- -------------
</TABLE>
86
<PAGE>
Virginia Gas Distribution Company
Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1998 1997
--------- ---------
<S> <C> <C>
Revenue:
Operating revenue $281,093 $220,084
Interest income 73,022 96,422
Other income 19,343 21,844
--------- ---------
373,458 338,350
--------- ---------
Expenses:
Purchased gas expense 195,150 120,530
Operation and maintenance expense 41,492 18,955
Depreciation, depletion, and amortization 56,771 23,149
General and administrative 41,788 31,104
--------- ---------
335,201 193,738
--------- ---------
Other expense:
Interest 193,599 86,778
Other 23,318 8,618
--------- ---------
216,917 95,396
--------- ---------
Income (loss) before income taxes (178,660) 49,216
Provision for income taxes (60,743) 16,734
--------- ---------
Net income (loss) $(117,917) $ 32,482
--------- ---------
--------- ---------
Virginia Gas Company's equity in Virginia Gas
Distribution Company's earnings (loss) $ (58,959) $ 16,241
--------- ---------
--------- ---------
</TABLE>
87
<PAGE>
Virginia Gas Distribution Company
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (117,917) $ 32,482
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, and amortization 56,771 23,149
Deferred income taxes 1,521 16,734
Increase in accounts receivable (712,760) (508,379)
Decrease (increase) in other current assets (80,253) 52,882
Decrease (increase) in other assets 499,857 (4,723)
Increase in accounts payable 160,270 85,541
Increase in other current liabilities 5,519 16,387
------------ ------------
Net cash used in operating activities (186,992) (285,927)
------------ ------------
Cash flows from investing activities:
Capital expenditures (60,116) (583,239)
Loans made to affiliated companies -- (1,000,000)
Payments received on notes receivable 280,376 42,157
------------ ------------
Net cash provided by (used in) investing activities 220,260 (1,541,082)
------------ ------------
Cash flows from financing activities:
Payment of loan principal -- (10,938)
Proceeds from new loans -- 3,650,000
Payment of financing costs -- (75,502)
Establishment of financing reserve fund -- (328,500)
------------ ------------
Net cash provided by financing activities -- 3,235,060
------------ ------------
Net increase in cash 33,268 1,408,051
Cash, beginning of period 45,939 16,166
------------ ------------
Cash, end of period $ 79,207 $1,424,217
------------ ------------
------------ ------------
Supplemental disclosure:
Interest paid $ 129,066 $ 137,163
------------ ------------
------------ ------------
</TABLE>
88
<PAGE>
VIRGINIA GAS DISTRIBUTION COMPANY
Notes to Financial Statements
(Unaudited)
The accompanying unaudited financial statements as of March 31, 1998, and
for the three months ended March 31, 1998 and 1997, have been prepared in
accordance with generally accepted accounting principles. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the annual report on Form 10-KSB for the year ended
December 31, 1997 of Virginia Gas Company, the parent of Virginia Gas
Distribution Company. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary to present
fairly the financial position, results of operations and cash flows of
Virginia Gas Distribution Company have been included. Operating results for
the three months ended March 31, 1998, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
In March 1998, the Virginia Gas Distribution Company's parent, Virginia Gas
Company (the Parent), completed a refinancing transaction whereby the Parent
issued a $24 million note to John Hancock. With the proceeds, the Parent retired
or defeased $19.6 million of industrial revenue bonds, most of which had been
previously allocated to Virginia Gas Distribution Company and three other
affiliated companies. The remaining proceeds will be used to develop the
Parent's Tidewater pipeline project. As a result of this refinancing, the
Virginia Gas Distribution Company has recorded a regulatory asset of
approximately $679,000. This asset is made up of issue costs related to the
industrial revenue bonds, and defeasement premiums, interest, and other fees
related to the 1994 Russell County bond issue. The regulatory asset will be
amortized over 14 years, the life of the John Hancock note.
89
<PAGE>
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 any person in any jurisdiction in which such offer or solicitation
would be unlawful.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.............................................. 1
Risk Factors.................................................... 3
Market for Common Equity and Related Stockholder
Matters......................................................... 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 8
Business........................................................ 17
Management...................................................... 23
Description of Securities....................................... 29
Selling Securityholders......................................... 31
Shares Eligible for Future Sale................................. 34
Legal Proceedings............................................... 34
Experts......................................................... 34
Other Matters................................................... 34
Available Information........................................... 35
Glossary........................................................ 35
Financial Statements............................................ 37
</TABLE>
VIRGINIA GAS COMPANY
COMMON STOCK
AND
COMMON STOCK
PURCHASE WARRANTS 20
June , 1998
----
------------
PROSPECTUS
------------
90
<PAGE>
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>
<CAPTION>
<S> <C>
Accounting Fees and Expenses $ 2,000
Legal Fees and Expenses 7,500
Printing Expenses 2,000
-------
Total $11,500
</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
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
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
</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
</TABLE>
II-2
<PAGE>
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 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 August 29, 1997, Registrant had options issued and outstanding to an
officer of the Company to purchase 2%, or 127,920 shares, 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. This option was subsequently canceled.
6. As of May 15, 1998, Registrant had an option issued and outstanding to one
officer of the Company to purchase 10,000 shares of the Registrant's Common
Stock at an exercise price of $10.00 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, the option holder has 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.
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
- -------
<S> <C>
* l.1 Form of Underwriting Agreement with Anderson & Strudwick
Incorporated
* 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
4.4 Loan Agreement between Industrial Development Authority of
Russell County and Virginia Gas Company dated as of February 1,
1997 (incorporated by reference to Exhibit 4.2 to Virginia Gas
Company's Form SB-2 Registration No. 333- 32009)
4.5 Promissory Note between Industrial Development Authority of
Russell County and Virginia Gas Company dated as of February 1,
1997 (incorporated by reference to Exhibit 4.3 to Virginia Gas
Company's Form SB-2 Registration No. 333- 32009)
4.6 Loan Agreement between Industrial Development Authority of
Buchanan County, Virginia and Virginia Gas Company dated as of
November 1, 1994 (incorporated by reference to Exhibit 4.4 to
Virginia Gas Company's Form SB-2 Registration No. 333-32009)
4.7 Promissory Note between Industrial Development Authority of
Buchanan County, Virginia and Virginia Gas Company dated as of
November 1, 1994 (incorporated by reference to Exhibit 4.5 to
Virginia Gas Company's Form SB-2 Registration No. 333-32009)
* 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 Preferred Stock 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 Storage Agreement between Virginia Gas Storage Company and
Roanoke Gas Company dated as of March 19, 1997
*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
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*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 Firm Storage contract between Virginia Pipeline Company and United
Cities Gas Company
*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)
10.26 Underwriting Agreement between Virginia Gas Company and Ferris, Baker
Watts, Incorporated (incorporated by reference to Exhibit 1.1 to
Virginia Gas Company's Form SB-2 Registration No. 333-32009)
10.27 Description of Stock Options issued to named executive officers
(incorporated by reference to Exhibit 10.27 to Virginia Gas Company's
Form SB-2 Registration No. 333-32009)
10.28 Amendment to the Firm Storage Service Agreement between Virginia
Gas Storage Company and Powell-Clinch Utility District dated as
of January 16, 1996 (incorporated by reference to Exhibit 10.28
to Virginia Gas Company's Form SB-2 Registration No. 333-32009)
10.29 Firm Storage Service Contract between Virginia Gas Storage
Company and Hawkins County Utility District dated as of February
25, 1997 (incorporated by reference to Exhibit 10.29 to Virginia
Gas Company's Form SB-2 Registration No. 333-32009)
10.30 Firm Storage Service Contract between Virginia Gas Pipeline
Company and ALCOA dated as of June 30, 1997 (incorporated by
reference to Exhibit 10.30 to Virginia Gas Company's Form SB-2
Registration No. 333-32009)
10.31 Gas Transportation Agreement between Virginia Gas Distribution
Company and East Tennessee Gas Company dated as of November 1,
1997 (incorporated by reference to Exhibit 10.31 to Virginia Gas
Company's Form SB-2 Registration No. 333-32009)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 (included in signature page)
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, 1997)
27.2 Financial Data Schedule (incorporated by reference to Exhibit 27 to
Virginia Gas Company's Form 10-QSB for the quarter ended March 31,
1998)
</TABLE>
* Previously filed
Item 28. Undertakings
The undersigned Registrant hereby undertakes that it will:
(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
II-6
<PAGE>
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:
(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.
II-7
<PAGE>
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. 4 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 May 29, 1998.
VIRGINIA GAS COMPANY
By: s/Michael L. Edwards
--------------------
Michael L. Edwards
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
officers and directors of Virginia Gas Company hereby constitutes and appoints
Michael L. Edwards as his or her true and lawful attorney-in-fact and agent,
with full power of substitution , for him or her and in his or her name, place
and stead in any and all capacities to sign any or all amendments or
post-effective amendments to this Registration Statement, and to file the same,
and with all exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or its substitutes, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933,
this Post-Effective Amendment No. 4 to the Registration Statement has been
signed by the following persons in the capacities and on the dates stated.
Signature Title Date
s/Michael L. Edwards President, Chief Executive Officer May 29, 1998
- -------------------- and Chairman of the Board of
Michael L. Edwards Directors (Principal Executive
Officer and Principal Financial
Officer)
s/Karen K. Edwards* Vice President, Secretary May 29, 1998
- ------------------- and Director
Karen K. Edwards
s/Everette G. Allen Jr. Director May 29, 1998
- -----------------------
Everette G. Allen, Jr.
s/William L. Clear Controller May 29, 1998
- ------------------
William L. Clear
* s/Michael L. Edwards
- ----------------------
Michael L. Edwards
As Attorney-in-fact for each
of the above
II-8
<PAGE>
Exhibit 23.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
reports dated March 6, 1998, and to all references to our firm included in
this registration statement.
ARTHUR ANDERSEN LLP
Richmond, Virginia
June 4, 1998
