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Pursuant to Rule 424(b)4 Prospectus
Registration No. 33-53343
EMPIRE GAS CORPORATION
$127,200,000 REPRESENTING 12,720 UNITS,
EACH UNIT CONSISTING OF TEN 12 7/8% SENIOR SECURED NOTES DUE 2004
AND 13.8 WARRANTS TO PURCHASE COMMON STOCK
-----------------
INTEREST PAYABLE JANUARY 15 AND JULY 15
-------------------
CASH INTEREST ON THE SENIOR SECURED NOTES WILL BE PAYABLE AT THE RATE OF 7% PER
ANNUM OF THEIR PRINCIPAL AMOUNT AT MATURITY THROUGH AND INCLUDING
JULY 15, 1999, AND AFTER SUCH DATE WILL BE PAYABLE AT THE RATE OF
12 7/8% PER ANNUM OF THEIR PRINCIPAL AMOUNT AT MATURITY. THE SENIOR
SECURED NOTES WILL BE ISSUED AT A SUBSTANTIAL DISCOUNT FROM
THEIR PRINCIPAL AMOUNT AT MATURITY. SEE "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS." THE PRICE TO PUBLIC OF THE
SENIOR SECURED NOTES SHOWN BELOW REPRESENTS A YIELD
TO MATURITY OF 12 7/8% PER ANNUM, COMPUTED ON THE
BASIS OF SEMIANNUAL COMPOUNDING.
------------------------
THE SENIOR SECURED NOTES WILL BE REDEEMABLE AT THE OPTION OF THE COMPANY, IN
WHOLE OR IN PART, AT ANY TIME ON OR AFTER JULY 15, 1999, INITIALLY AT 106.438%
OF THEIR ACCRETED VALUE, PLUS ACCRUED INTEREST, DECLINING TO 100% OF THEIR
ACCRETED VALUE PLUS ACCRUED INTEREST, ON OR AFTER JULY 15, 2001. IN
ADDITION, UP TO $44.52 MILLION AGGREGATE PRINCIPAL AMOUNT AT MATURITY
(35%) OF THE SENIOR SECURED NOTES WILL BE REDEEMABLE, IN WHOLE OR IN
PART, AT THE OPTION OF THE COMPANY, FROM THE PROCEEDS OF ONE OR MORE
PUBLIC EQUITY OFFERINGS (AS DEFINED HEREIN) FOLLOWING WHICH THERE
IS A PUBLIC MARKET (AS DEFINED HEREIN), AT THE REDEMPTION PRICES SET
FORTH HEREIN, PLUS ACCRUED INTEREST.
------------------------
EACH WARRANT ENTITLES THE HOLDER THEREOF TO PURCHASE ONE SHARE OF THE COMPANY'S
COMMON STOCK AT A PRICE OF $.01 PER SHARE, SUBJECT TO ADJUSTMENT. THE
WARRANTS OFFERED HEREBY ENTITLE THE HOLDERS THEREOF TO PURCHASE, IN
THE AGGREGATE, 10% OF THE COMPANY'S OUTSTANDING COMMON STOCK
(AFTER GIVING EFFECT TO THE EXERCISE OF THE WARRANTS). THE
WARRANTS WILL BE SEPARATELY TRANSFERABLE BEGINNING,
AND WILL BE EXERCISABLE ON OR AFTER, JANUARY
15, 1995 AND EXPIRE ON JULY 15, 2004.
------------------------
THE SENIOR SECURED NOTES WILL BE SENIOR OBLIGATIONS OF THE COMPANY SECURED
BY A PLEDGE OF ALL OF THE CAPITAL STOCK OF THE COMPANY'S PRESENT AND FUTURE
SUBSIDIARIES. THERE IS CURRENTLY NO ESTABLISHED TRADING MARKET FOR SUCH STOCK
AND THE COMPANY DOES NOT INTEND TO HAVE THE STOCK LISTED FOR TRADING ON ANY
SECURITIES EXCHANGE OR ON ANY AUTOMATED DEALER QUOTATION SYSTEM. THE SENIOR
SECURED NOTES WILL RANK PARI PASSU WITH ALL EXISTING AND FUTURE SENIOR
INDEBTEDNESS OF THE COMPANY. THE SENIOR SECURED NOTES WILL BE GUARANTEED BY ALL
WHOLLY-OWNED SUBSIDIARIES OF THE COMPANY, WHICH CARRY ON THE RETAIL BUSINESS OF
THE COMPANY. ON A PRO FORMA BASIS, AS OF MARCH 31, 1994, AFTER GIVING EFFECT TO
THE TRANSACTION (AS DEFINED HEREIN), THE OFFERING AND THE APPLICATION OF THE NET
PROCEEDS THEREFROM, THE COMPANY WOULD HAVE HAD NO SENIOR INDEBTEDNESS
OUTSTANDING, EXCLUDING THE SENIOR SECURED NOTES. THE COMPANY IS A HOLDING
COMPANY, AND ACCORDINGLY, THE SENIOR SECURED NOTES WILL BE EFFECTIVELY
SUBORDINATED TO ALL EXISTING AND FUTURE LIABILITIES OF THE COMPANY'S
SUBSIDIARIES (EXCEPT TO THE EXTENT THAT THE GUARANTEES REPRESENT DIRECT CLAIMS
AGAINST SUCH SUBSIDIARIES). ON A PRO FORMA BASIS, AS OF MARCH 31, 1994, AFTER
GIVING EFFECT TO THE TRANSACTION, THE OFFERING AND THE APPLICATION OF THE NET
PROCEEDS THEREFROM, THE COMPANY'S SUBSIDIARIES WOULD HAVE HAD APPROXIMATELY
$530,000 OF OUTSTANDING LIABILITIES (EXCLUDING GUARANTEES), INCLUDING TRADE
PAYABLES AND ACCRUED EXPENSES AND TAXES PAYABLE.
-------------------
SEE "RISK FACTORS" FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
-------------------
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.
-------------------
PRICE $7,867.60 A UNIT AND ACCRUED INTEREST
-----------------
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC (1) COMMISSIONS (2) COMPANY (1)(3)
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PER UNIT.................................... 78.676% 2.754% 75.922%
TOTAL....................................... $100,075,872 $3,502,656 $96,573,216
</TABLE>
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(1) PLUS ACCRUED INTEREST ON THE SENIOR SECURED NOTES FROM JUNE 29, 1994.
(2) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITER AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. SEE "THE UNDERWRITER."
(3) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $945,907.
------------------------
THE UNITS ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITER AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS BY SKADDEN,
ARPS, SLATE, MEAGHER & FLOM, COUNSEL FOR THE UNDERWRITER. IT IS EXPECTED THAT
THE DELIVERY OF THE UNITS WILL BE MADE ON OR ABOUT JUNE 29, 1994, AT THE OFFICE
OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, NEW YORK, AGAINST PAYMENT
THEREFOR IN NEW YORK FUNDS.
-------------------
MORGAN STANLEY & CO.
INCORPORATED
JUNE 23, 1994
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[GRAPHIC]
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE UNITS OFFERED
HEREBY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
UNTIL SEPTEMBER 21, 1994 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
-------------------
TABLE OF CONTENTS
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PAGE
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Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 10
The Transaction............................................................................................ 16
Use of Proceeds............................................................................................ 17
Capitalization............................................................................................. 18
Selected Consolidated Financial and Other Data For the Company Prior to the Transaction.................... 19
Pro Forma Consolidated Financial and Other Data............................................................ 21
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 29
Business................................................................................................... 37
Management................................................................................................. 44
Principal Shareholders..................................................................................... 50
Certain Relationships and Related Transactions............................................................. 51
Description of the Units................................................................................... 54
Description of the Senior Secured Notes.................................................................... 57
Description of the Warrants................................................................................ 83
Description of Capital Stock............................................................................... 86
Certain Federal Income Tax Considerations.................................................................. 87
Description of Other Indebtedness.......................................................................... 91
The Underwriter............................................................................................ 92
Legal Matters.............................................................................................. 93
Experts.................................................................................................... 93
Available Information...................................................................................... 93
Index to Financial Statements.............................................................................. F-1
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR SECURED
NOTES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
3
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN
THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT REQUIRES OTHERWISE, THE
TERMS "EMPIRE GAS" AND THE "COMPANY" REFER TO EMPIRE GAS CORPORATION AND ITS
SUBSIDIARIES ASSUMING CONSUMMATION OF THE TRANSACTION, WHICH WILL OCCUR
SIMULTANEOUSLY WITH THIS OFFERING. ALL REFERENCES IN THE PROSPECTUS TO FISCAL
YEARS ARE TO THE COMPANY'S FISCAL YEAR WHICH ENDS ON JUNE 30.
THE COMPANY
Empire Gas is one of the largest retail distributors of propane in the
United States and, through its subsidiaries, has been engaged in the retail
distribution of propane since 1963. During the fiscal year ended June 30, 1993,
without giving effect to the Transaction, Empire Gas supplied propane to
approximately 200,000 customers in 27 states from 284 retail service centers and
sold approximately 142.1 million gallons of propane, accounting for
approximately 91.4% of its operating revenue. The Company also sells related
gas-burning appliances and equipment and rents customer storage tanks.
The Company will implement a change in ownership and management
contemporaneously with this Offering by repurchasing shares of its common stock
from its controlling shareholder, Mr. Robert W. Plaster, and certain other
departing officers (the "Stock Purchase") in exchange for all of the shares of
common stock of a subsidiary that owns 133 retail service centers located
primarily in the Southeast. Mr. Paul S. Lindsey, Jr., who has been with the
Company for 26 years and currently serves as the Company's Chief Operating
Officer and Vice Chairman of the Board, will become the Company's controlling
shareholder, Chief Executive Officer, and President. The change in ownership and
management will enable the Company to pursue a growth strategy focused on
acquiring propane operating companies. Contemporaneously with the Offering, the
Company will acquire the assets of PSNC Propane Corporation, a company located
in North Carolina that has six retail service centers and five additional bulk
storage facilities with annual volume of approximately 9.5 million gallons (the
"Acquisition," and together with the Stock Purchase, the "Transaction"), for an
aggregate purchase price of approximately $14.0 million (which includes payment
for inventory and accounts receivable). The Company also recently completed the
acquisition of a retail propane company in Colorado with annual volume of
approximately 700,000 gallons, and has entered into a contract to purchase a
retail propane company in Missouri with annual volume of approximately 690,000
gallons.
Following the Transaction, Empire Gas' operations will consist of 158 retail
service centers with 22 additional bulk storage facilities. During the fiscal
year ended June 30, 1993, Empire Gas, after giving effect to the Transaction,
sold approximately 84.8 million gallons of propane (approximately 40% less than
prior to the Transaction) to approximately 112,000 customers in 20 states, which
(based on retail gallons sold) makes it one of the 11 largest retail
distributors of propane in the United States. The impact on the Company's
operations of weather fluctuations in a particular region will be reduced as a
result of the substantial geographic diversification of the Company after the
Transaction, with operations in the west, the southwest, Colorado, the upper
midwest, the Mississippi Valley and the southeast.
Propane, a hydrocarbon with properties similar to natural gas, is separated
from natural gas at gas processing plants and refined from crude oil at
refineries. It is stored and transported in a liquid state and vaporizes into a
clean-burning energy source that is used for a variety of residential,
commercial, and agricultural purposes. Residential and commercial uses include
heating, cooking, water heating, refrigeration, clothes drying, and
incineration. Commercial uses also include metal cutting, drying, container
pressurization, and charring, as well as use as a fuel for internal combustion
engines. As of December 31, 1991, the propane industry had grown, as measured by
the gallons of retail residential/commercial propane sold, at the rate of 3.7%
per annum since 1984.
The Company believes the highly fragmented retail propane market presents
substantial opportunities for growth through consolidation. As of December 31,
1991, there were approximately 8,000 propane retail marketing companies in the
continental United States with approximately 13,500 retail distribution points.
In addition, Empire Gas believes growth can be achieved by the conversion to
propane of homes that
4
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currently use either electricity or fuel oil products because of the price
advantage propane has over electricity and because propane is a cleaner source
of energy than fuel oil products. As of December 31, 1990, there were
approximately 23.7 million homes that used electricity for heating, water
heating, cooking and other household purposes, approximately 11.2 million homes
that used fuel oil products, and approximately 5.7 million homes that used
propane for such purposes.
Empire Gas focuses on propane distribution to retail customers, including
residential, commercial, and agricultural users, emphasizing, in particular,
sales to residential customers, a stable segment of the retail propane market
that traditionally has generated higher gross margins per gallon than other
retail segments. Sales to residential customers, giving effect to the
Transaction, accounted for approximately 65.5% of the Company's aggregate
propane sales revenue and 74.3% of its aggregate gross margin from propane sales
in fiscal year 1993.
Empire Gas attracts and retains its residential customers by supplying them
storage tanks, by offering them superior service and by strategically locating
visible and accessible retail service centers on or near major highways. Empire
Gas focuses its operations on sales to customers to which it also leases tanks,
as sales to this segment of the retail propane market tend to be more stable and
typically provide higher gross margins than sales to customers who own tanks.
After the Transaction, Empire Gas will own approximately 109,000 storage tanks
that it leases to approximately 83% of its customers. Empire Gas' residential
customer base is relatively stable, because (i) fire safety regulations and
state container laws restrict the filling of a leased tank solely to the propane
supplier that leases the tank, (ii) rental agreements for its tanks restrict the
customers from using any other supplier, and (iii) the cost and inconvenience of
switching tanks minimizes a customer's tendency to change suppliers.
Historically, the Company has retained 90% of all its customers from year to
year, with the average customer remaining with Empire Gas for approximately 10
years.
The change in ownership and management of the Company will enable it to
pursue a business strategy to increase its revenues and profitability through
(i) expansion by acquisitions and start-ups, (ii) expansion of its existing
residential customer base, and (iii) geographic rationalization and the
reduction of operating expenses. Empire Gas will seek opportunities to acquire
retail service centers in areas where it already has a strong presence and to
develop new retail service centers in new markets. Efforts to expand the
existing residential customer base will focus primarily on conversion of
customers currently using electricity for heating, conversion of customers
currently using fuel oil and wood due to environmental impact, and soliciting
customers created by the new home construction market in growth areas. Empire
Gas intends to dispose of a limited number of retail service centers that are
located in markets in which it does not have, and does not desire to develop, a
strong presence or that do not have the potential for long-term growth. Empire
Gas believes it will be able to reduce its operating expenses through a program
of consolidating a number of retail service centers where such consolidations
will yield operating efficiencies.
The Company's principal executive offices are located at 1700 South
Jefferson Street, Lebanon, Missouri 65536. The Company's telephone number is
(417) 532-3101.
THE OFFERING
THE UNITS
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Securities Offered................ 12,720 Units (the "Units") consisting of ten 12 7/8%
Senior Secured Notes due 2004 (the "Senior Secured
Notes"), each having an initial accreted value of
$786.76, and 13.8 Warrants. Each Warrant entitles the
holder thereof to purchase one share of Common Stock ,
par value $.001 per share, of the Company (the "Common
Stock") at an exercise price of $.01 per share. See
"Description of the Units."
Separability...................... The Senior Secured Notes and the Warrants will become
separately transferrable on January 15, 1995 (the
"Separation Date").
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5
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THE SENIOR SECURED NOTES
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Notes Offered..................... $127,200,000 aggregate principal amount ($100,075,872
initial accreted value) of 12 7/8% Senior Secured Notes
due 2004. See "Description of the Senior Secured
Notes."
Maturity Date..................... July 15, 2004
Interest.......................... Cash interest on the Senior Secured Notes will be
payable at the rate of 7% per annum of their principal
amount at maturity through and including July 15,
1999, and after such date will be payable at the rate
of 12 7/8% per annum of their principal amount at
maturity. See "Original Issue Discount" below. In-
terest on the Senior Secured Notes is payable
semiannually on January 15, and July 15, commencing
January 15, 1995. The price to the public of the
Senior Secured Notes represents a yield to maturity of
12 7/8% per annum, computed on the basis of semiannual
compounding.
Optional Redemption............... The Senior Secured Notes will be redeemable at the
option of the Company, in whole or in part, on or after
July 15, 1999 at the redemption prices set forth
herein, plus accrued interest. In addition, up to
$44.52 million aggregate principal amount at maturity
(35%) of the Senior Secured Notes are redeemable, in
whole or in part, at the option of the Company, from
the proceeds of one or more Public Equity Offerings
following which there is a Public Market, at the
redemption prices set forth herein, plus accrued
interest.
Change of Control................. Upon a Change of Control (as defined herein), holders of
the Senior Secured Notes will have the right to require
the Company to purchase the Senior Secured Notes at a
purchase price of 101% of the accreted value thereof,
plus accrued and unpaid interest, if any, to the date
of purchase. The Company may not have sufficient funds
or the financing to satisfy its obligations to
repurchase the Senior Secured Notes and other debt
that may come due upon a Change of Control.
Security.......................... The Senior Secured Notes will be secured by a pledge of
all of the capital stock of the Company's present and
future subsidiaries, subject to certain exceptions.
Subsidiary Guarantees............. The Senior Secured Notes will be guaranteed (each a
"Subsidiary Guarantee") by all of the wholly owned
subsidiaries of the Company, which carry on the retail
business of the Company (collectively, the "Subsidiary
Guarantors"). The Subsidiary Guarantees will be senior
indebtedness of the respective Subsidiary Guarantors
and will rank PARI PASSU with the guarantees by the
Subsidiary Guarantors of other senior indebtedness,
including indebtedness under the New Credit Facility
(as hereinafter defined).
Ranking........................... The Senior Secured Notes will be senior obligations of
the Company and will rank PARI PASSU in right of payment
with the Company's existing and future senior
indebtedness. On a pro forma basis as of March 31,
1994, after giving effect to the application of the
net proceeds of the Offering and the Transaction, the
Company would have had no senior indebtedness
outstanding, excluding the Senior Secured Notes. In
addition,
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6
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because the Company is a holding company, the Senior
Secured Notes will be effectively subordinated to all
existing and future liabilities of the Company's
subsidiaries (except to the extent the Subsidiary
Guarantees represent direct claims against such
subsidiaries). On a pro forma basis as of March 31,
1994, after giving effect to the application of the
net proceeds of the Offering and the Transaction, the
aggregate liabilities (excluding guarantees) of the
Company's subsidiaries would have been approximately
$530,000, including trade payables, accrued expenses,
and taxes payable. On a pro forma basis, as of March
31, 1994, after giving effect to the application of
the net proceeds of the Offering and the Transaction,
the Senior Secured Notes would be senior to
approximately $4.9 million of 9% Subordinated
Debentures due 2007.
Certain Covenants................. The Indenture governing the Senior Secured Notes (the
"Indenture") will contain covenants, including, but not
limited to, covenants with respect to the following
matters: (i) limitations on the incurrence of
additional indebtedness; (ii) limitations on
restricted payments; (iii) limitations on incurrence
of additional indebtedness by subsidiaries; (iv)
limitations on the sale and issuance of capital stock
by subsidiaries; (v) limitations on dividends and
other payments; (vi) limitations on transactions with
affiliates; (vii) limitations on liens; (viii)
limitations on mergers, consolidations, or asset
sales; and (ix) limitations on subsidiary investments.
Events of Default................. Events of default under the Senior Secured Notes
include: (i) non-payment of interest for 30 days; (ii)
non-payment of principal when due or failure to redeem
when required; (iii) default in performance of other
covenants or agreements for 30 days after written
notice to the Company; (iv) default on other
indebtedness of the Company or its subsidiaries having
a principal amount of $2,000,000 singly or $5,000,000
in the aggregate; (v) a final judgment or order for
the payment of money in the amount of $2,000,000
singly or $5,000,000 in the aggregate that is not
discharged or appealed within 30 days; (vi) certain
events of bankruptcy, insolvency and reorganization of
the Company; (vii) except as permitted by the Inden-
ture, the Trustee's failure to have a perfected
security interest in the Collateral; and (viii) except
as permitted by the Indenture and the Senior Secured
Notes, the cessation of effectiveness of any
Subsidiary Guarantee as against any Subsidiary
Guarantor.
Actions by Noteholders............ Holders of the Senior Secured Notes may not pursue any
remedy with respect to the Indenture (except actions for
payment of overdue principal or interest) unless: (i)
the Holder has given notice to the Trustee of a
continuing Event of Default: (ii) Holders of at least
25% in principal amount of the Senior Secured Notes
have made a written request to the Trustee to pursue
such remedy and offered the Trustee security or indem-
nity reasonably satisfactory to the Trustee; (iii) the
Trustee has not complied with such request within 60
days; and (iv) the
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Holders of a majority in principal amount of the
Senior Secured Notes have not given the Trustee an
inconsistent direction during such 60-day period.
Original Issue Discount........... The Senior Secured Notes are being issued with original
issue discount. For Federal income tax purposes, holders
of the Senior Secured Notes will be required to
include amounts in gross income in advance of receipt
of cash to which the income is attributable. See
"Certain Federal Income Tax Considerations."
Use of Proceeds................... The net proceeds to the Company from this Offering will
be used to repay certain indebtedness of the Company, to
complete the Acquisition, to repay certain amounts due
in connection with the Stock Purchase, and for general
corporate purposes.
Governing Law..................... State of New York.
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THE WARRANTS
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Warrants Offered.................. 175,536 Warrants to purchase Common Stock. The aggregate
number of shares of Common Stock issuable upon
exercise of the Warrants is equal to 10% of the
outstanding shares of Common Stock on a fully diluted
basis, subject to certain exceptions. See "Description
of the Warrants."
Exercise Price.................... Each Warrant entitles the holder thereof to purchase one
share of Company Common Stock at the exercise price of
$.01 per share, subject to adjustment.
Exercise.......................... The Warrants may be exercised at any time on or after
January 15, 1995 and prior to July 15, 2004. Warrants
that are not exercised by such date will expire. A
Warrant does not entitle the holder thereof to receive
any dividends paid on the Common Stock.
Repurchase Offer.................. Following the occurrence of a Repurchase Event, the
Company must offer to repurchase all of the outstanding
Warrants. A Repurchase Event will occur upon the
merger or consolidation of the Company with or into,
or the sale by the Company of all or substantially all
of its assets to, another person, if the consid-
eration for such transaction does not consist solely
of cash or if the transaction is entered into with
certain entities.
Repurchase Price.................. The repurchase of Warrants following a Repurchase Event
will be: (i) at the average of the closing sales prices
of the Common Stock for the 20 days prior to such
Repurchase Event if the Common Stock is registered
under the Securities Exchange Act of 1934, as amended;
or (ii) if the Common Stock is not so registered or
the value cannot be computed under clause (i), at the
value, as determined by an independent financial
expert, of the shares of Common Stock or other
securities issuable upon exercise of the Warrants less
the exercise price thereof.
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RISK FACTORS
An investment in the Units involves a high degree of risk. Each prospective
purchaser of the Units should consider carefully the specific factors set forth
under "Risk Factors," as well as the other information set forth in this
Prospectus, before purchasing the Units offered by this Prospectus.
8
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SUMMARY PRO FORMA FINANCIAL AND OTHER DATA
The following table presents selected summary pro forma financial and other
data of the subsidiaries that will be retained by the Company following the
consummation of the Stock Purchase and PSNC Propane Corporation (the "PSNC
Operations") for the year ended June 30, 1993, and for the nine and twelve
months ended March 31, 1994. The pro forma financial operating and other data
for the year ended June 30, 1993 and for the nine and twelve months ended March
31, 1994 give effect to the Offering and the Transaction, as if these
transactions had occurred on July 1, 1992. Due to the seasonal nature of the
Company's business, the majority of the Company's revenues are earned in its
second and third fiscal quarters. Accordingly, the results of operations for the
nine months ended March 31, 1994 are not indicative of the results of operations
to be expected for the full year. Data for the twelve months ended March 31,
1994 have been set forth to provide recent data covering a full year's
operations. The financial data set forth below should be read in conjunction
with the Company's consolidated financial statements and related notes,
"Selected Consolidated Financial and Other Data for the Company Prior to the
Transaction," "Pro Forma Financial and Other Data," and "Management's Discussion
and Analysis of Results of Operations and Financial Condition," all contained
elsewhere in this Prospectus. See "Selected Consolidated and Other Financial
Data for the Company Prior to the Transaction" for a presentation of the
Company's historical consolidated financial data.
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PRO FORMA FOR THE
TRANSACTION AND OFFERING(1)
----------------------------------------------------
YEAR ENDED
JUNE 30, NINE MONTHS ENDED TWELVE MONTHS ENDED
1993 MARCH 31, 1994 MARCH 31, 1994
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(IN THOUSANDS, EXCEPT RATIOS AND GROSS PROFIT
PER GALLON DATA)
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OPERATING DATA:
Operating revenue............................... $ 76,931 $ 64,996 $ 76,463
Gross profit (2)................................ 41,243 34,931 41,951
Operating expenses.............................. 23,825 18,617 24,304
Depreciation and amortization................... 6,722 4,980 6,332
Operating income................................ 10,696 11,334 11,315
Interest expense:
Cash interest................................. 10,230 7,420 9,881
Amortization of debt discount and expense..... 4,964 3,886 5,159
Total interest expense...................... 15,194 11,306 15,040
Net (loss)...................................... (3,166) (375) (2,896)
OTHER OPERATING DATA AND FINANCIAL RATIOS:
Capital expenditures:
Existing operations........................... 1,905 1,834 2,358
Start-up of new retail service centers........ 729 453 664
Acquisitions.................................. -- 444 444
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Total capital expenditures.................. 2,634 2,731 3,466
Cash from sale of retail service centers and
other assets................................... 898 228 948
EBITDA (3)...................................... 17,418 16,314 17,647
EBITDA (3) to interest expense.................. 1.15x 1.44x 1.17x
EBITDA (3) to cash interest..................... 1.70x 2.20x 1.79x
Retail gallons sold............................. 84,840 72,021 83,980
Weighted average gross profit per gallon........ .429 .435 .442
<FN>
- ------------
(1) For an explanation of adjustments to arrive at pro forma data, see
"Capitalization," and "Pro Forma Consolidated Financial and Other Data."
(2) Represents operating revenue less the cost of products sold.
(3) EBITDA consists of earnings before depreciation, amortization, interest,
income taxes, and other non-recurring expenses. EBITDA is presented here
because it is a widely accepted financial indicator of a highly leveraged
company's ability to service and/ or incur indebtedness. However, EBITDA
should not be construed as an alternative either (i) to operating income
(determined in accordance with generally accepted accounting principles) or
(ii) to cash flows from operating activities (determined in accordance with
generally accepted accounting principles).
</TABLE>
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
PURCHASERS OF THE UNITS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN
EVALUATING AN INVESTMENT IN THE UNITS.
HIGH LEVERAGE AND ABILITY TO SERVICE DEBT
As of March 31, 1994, on a pro forma basis after giving effect to the
application of the proceeds of this Offering as set forth in "Use of Proceeds,"
and the Transaction, the Company would have had approximately $105.2 million
aggregate outstanding principal amount (in the case of the Senior Secured Notes,
such amount being the accreted value) of indebtedness on a consolidated basis,
and a stockholders' deficit of approximately $26.3 million. See
"Capitalization."
On a pro forma basis, after giving effect to the application of the proceeds
of this Offering and the Transaction, earnings would have been inadequate to
cover fixed charges by $4.9 million for fiscal year 1993, $2.4 million for the
nine months ended March 31, 1994 and by $4.7 million for the twelve months ended
March 31, 1994, resulting in the reporting of losses of $3.2 million, $.4
million and $2.9 million, respectively. On an historical basis, the Company
reported income of $2.2 million, $5.8 million and $2.1 million for the fiscal
year ended June 30, 1993, and the nine and twelve months ended March 31, 1994,
respectively. See "Capitalization"; "Selected Consolidated Financial and Other
Data for the Company Prior to the Transaction"; and "Pro Forma Consolidated
Financial and Other Data." The Company expects earnings to be inadequate to
cover fixed charges for fiscal year 1994, resulting in the reporting of a loss
for that period.
The Company's high degree of leverage will make it vulnerable to adverse
changes in the weather and may limit its ability to respond to market
conditions, to capitalize on business opportunities, and to meet its contractual
and financial obligations. Fluctuations in interest rates will affect the
Company's financial condition inasmuch as the credit facility the Company will
enter into simultaneously with this Offering (the "New Credit Facility") will
bear interest at a floating rate.
The Company will be required to use a significant portion of its cash flow
from operations to meet its debt service obligations, which through fiscal year
1997 are expected to consist primarily of interest, including interest on the
Senior Secured Notes. On a pro forma basis, after giving effect to the Offering
and the Transaction, debt service obligations (which consist of interest expense
and mortgage principal payments) would have been $10.4 million for the fiscal
year ended June 30, 1993 and $7.5 million for the nine months ended March 31,
1994, and earnings before interest, taxes, depreciation and amortization
(EBITDA) would have been $17.4 million and $16.3 million, respectively. After
meeting its debt service obligations, operating cash flow for the Company on a
pro forma basis would have been approximately $2.2 million and approximately
$7.8 million respectively for these periods. The ability of the Company to meet
its debt service obligations, including the increase in the cash interest rate
on the Senior Secured Notes to 12 7/8% in fiscal year 1999, and to reduce its
total debt, will be dependent upon the future performance of the Company and its
subsidiaries, which, in turn, will be subject to general economic conditions and
to financial, business, weather, and other factors, including factors beyond the
Company's control. The Company believes that, based on current levels of
operations and assuming winter weather that is not substantially warmer in the
various regions in which the Company operates than the historical average of
winter temperatures for these regions, it will be able to fund these debt
service obligations from funds generated from operations, proceeds of the sales
of service centers pursuant to the Company's consolidation strategy and, if
necessary, funds available under the New Credit Facility. If the Company and its
subsidiaries are unable to comply with the terms of their debt agreements and
fail to generate sufficient cash flow from operations in the future, they may be
required to refinance all or a portion of their existing debt or to obtain
additional financing. There can be no assurance that any such refinancing would
be possible or that any additional financing could be obtained, particularly in
view of the Company's anticipated high levels of debt, the fact that a
significant portion of the Company's consolidated current assets will be given
as collateral to secure indebtedness under the New Credit Facility and all of
the capital stock of the Company's present and future subsidiaries will be
pledged to secure the Senior Secured Notes, and the debt incurrence restrictions
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<PAGE>
under existing debt agreements. If no such refinancing or additional financing
were available, the Company could be forced to default on its respective debt
obligations and, as an ultimate remedy, seek protection under the federal
bankruptcy laws.
RESTRICTIONS IN FINANCING AGREEMENTS
The Indenture contains provisions that will limit, among other things, (a)
the ability of the Company and its subsidiaries to incur additional
indebtedness, (b) certain restricted payments and investments, (c) the sale and
issuance of capital stock by subsidiaries, (d) dividend and other payments, (e)
transactions with affiliates, (f) the creation of liens, (g) the types of
mergers, consolidations, or asset sales in which the Company may participate,
and (h) subsidiary investments. The Indenture also contains provisions which
require the Company, in the event of a Change in Control, to make an offer to
purchase the Senior Secured Notes. A Change in Control is defined in the
Indenture to include: (i) the acquisition of over 30% of the voting shares of
the Company in certain circumstances; (ii) certain changes in the Board of
Directors of the Company; (iii) a sale of all or substantially all of the assets
of the Company; (iv) a reduction in the percentage of voting shares of the
Company held by certain members of management below 50%; or (v) the failure of
the Board of Directors to have at least two independent members, to have an
audit committee consisting solely of independent members or to have fewer than
eight members. See "Description of the Senior Secured Notes -- Certain
Definitions (Change of Control)." There can be no assurance that the Company
will have the financial resources necessary to purchase the Senior Secured Notes
upon a Change in Control. See "Description of the Senior Secured Notes --
Covenants."
The New Credit Facility will contain provisions similar to the provisions in
the Indenture, as well as certain financial maintenance tests. Any failure of
the Company to comply with these or other covenants contained in these
agreements could result in a default thereunder, which, in turn, could cause
such indebtedness (and by reason of cross-default provisions, the Senior Secured
Notes) to be declared immediately due and payable. The ability of the Company to
comply with these provisions may be affected by events beyond its control. See
"Description of Other Indebtedness -- New Credit Facility."
EFFECTIVE RANKING OF SENIOR SECURED NOTES
The Senior Secured Notes will be senior secured obligations of the Company
and will rank PARI PASSU with all other existing and future senior indebtedness
of the Company. Pursuant to the Indenture, the Company may incur up to $15.0
million of senior secured indebtedness under the New Credit Facility and may,
subject to certain limitations, incur other secured indebtedness. In the event
of a bankruptcy, liquidation or similar proceeding affecting the Company, the
other secured creditors of the Company would be entitled to repayment in full
from the proceeds of any collateral subject to their security interests before
any payment therefrom could be made to holders of the Senior Secured Notes. See
"Description of Senior Secured Notes -- General" and "Description of Other
Indebtedness."
The Company is a holding company that conducts its operations through its
subsidiaries (the vast majority of which are retail service centers) and has no
material assets other than its interests in its subsidiaries. As a result of the
Company's holding company structure, except to the extent that the Senior
Secured Notes (and the Subsidiary Guarantees) constitute recognized creditor
claims against the assets and earnings of the Company's subsidiaries, claims of
creditors of the Company's subsidiaries (including lenders under the New Credit
Facility which will also be guaranteed by subsidiaries of the Company) will have
priority with respect to the assets and earnings of such subsidiaries over the
claims of creditors of the Company, including holders of the Senior Secured
Notes, even though such subsidiary obligations do not constitute senior
indebtedness. On a pro forma basis as of March 31, 1994, after giving effect to
the application of the proceeds of the Offering and the Transaction, the
obligations of the Company's subsidiaries, other than their respective
guarantees of Empire Gas' obligations under the Senior Secured Notes and the New
Credit Facility, would have consisted of total payables of approximately
$530,000 including trade payables, accrued expenses and taxes payable. The New
Credit Facility and the Indenture will restrict the subsidiaries' ability to
incur additional indebtedness other than in limited circumstances, including to
fund acquisitions. See "Description of the Senior Secured Notes."
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<PAGE>
SECURITY FOR THE SENIOR SECURED NOTES
The Senior Secured Notes will be secured by a pledge of all of the capital
stock of the Company's present and future subsidiaries. Currently there is no
market for such stock. There can be no assurance that the proceeds from the sale
or sales of all such collateral would be sufficient to satisfy the amounts due
on the Senior Secured Notes in the event of a default. If such proceeds are not
sufficient to repay all such amounts due on the Senior Secured Notes, then
Holders of the Senior Secured Notes (to the extent not repaid from the proceeds
of the sale of the collateral) would have only an unsecured claim against the
Company's remaining assets (together with a claim against the Subsidiary
Guarantors pursuant to the Subsidiary Guarantees). In addition, the ability of
the Holders of the Senior Secured Notes to rely upon the collateral (or upon the
Subsidiary Guarantees) for fulfillment of the Company's obligations under the
Indenture may be subject to certain bankruptcy law limitations in the event of a
bankruptcy.
PAYMENTS DUE ON INDEBTEDNESS PRIOR TO MATURITY OF SENIOR SECURED NOTES
The Company intends to refinance or replace some portion of its New Credit
Facility prior to its maturity on or about July 1997. There can be no assurance
that any such refinancing will be possible, or that any additional financing in
the future can be obtained, particularly in view of the Company's anticipated
high levels of debt, and the restrictions on the Company's ability to incur
additional debt under the New Credit Facility and the Indenture. If no such
refinancing or additional financing is available or possible, as the case may
be, the Company could be forced to default on its debt obligations and, as an
ultimate remedy, seek protection under the federal bankruptcy laws.
TAX CONSEQUENCES OF THE OFFERING
The Senior Secured Notes will be issued at a substantial discount from their
principal amount. Consequently, purchasers of Units generally will be required
to include amounts in gross income for Federal income tax purposes in advance of
their receipt of the cash payments to which the income is attributable. Because
the Senior Secured Notes are "applicable high yield discount obligations," the
Company's federal income tax deductions with respect to the original issue
discount on the Senior Secured Notes will be deferred until the Company makes
the related payments. See "Certain Federal Income Tax Considerations -- Certain
Federal Income Tax Consequences to the Company and to Corporate Holders."
BANKRUPTCY CONSIDERATIONS
If a bankruptcy case is commenced by or against the Company under the
Bankruptcy Code after the issuance of the Senior Secured Notes, the claim of a
holder of Senior Secured Notes may be limited to an amount equal to the sum of
(i) the initial public offering price of the Senior Secured Notes (which may
exclude amounts attributable to the value of the Warrants) and (ii) that portion
of original issue discount which is not deemed to constitute "unmatured
interest" for purposes of the Bankruptcy Code. Any original issue discount that
was not amortized as of the date of any such bankruptcy filing would constitute
"unmatured interest."
WEATHER
Weather conditions have a substantial impact on the demand for propane,
particularly by retail customers, with peak sales typically occurring during the
winter months. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Warmer than normal winter weather in fiscal years
1991 and 1992 had a material adverse effect on the Company's operating income in
each of those years. Warmer than normal weather in the future could have a
material adverse effect on the Company's operating income and could affect its
ability to fulfill its debt service obligations. While the fiscal year 1993
winter was a nearly normal winter, there can be no assurance that average
temperatures in future years will be closer to the historical average.
PROPANE COST VOLATILITY
The cost of propane purchased by the Company can fluctuate dramatically over
a short period of time due to a variety of factors, including severe cold
weather and product transportation difficulties. In general, the Company's
supply contracts permit its suppliers to charge posted prices at the time of
delivery, less any
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<PAGE>
negotiated discount. The Company has generally been able to pass any cost
increases on to its customers; however, there can be no assurance that the
Company will be able to pass on such cost increases in the future.
COMPETITION
Empire Gas encounters competition from a number of other propane
distributors in each geographic region in which it operates and competes for
customers against suppliers of other energy sources. For residential and
commercial customers, Empire Gas competes primarily with suppliers of
electricity and propane. The Company currently enjoys, and historically has
enjoyed, a competitive advantage over suppliers of electricity because of the
higher cost of electricity. The Company believes that fuel oil does not present
a significant competitive threat in the Company's primary service areas because:
(i) propane is a residue-free, cleaner energy source, (ii) environmental
concerns make fuel oil relatively unattractive, and (iii) fuel oil appliances
are not as efficient as propane appliances. Empire Gas generally does not
attempt to sell propane in areas served by natural gas distribution systems,
except sales for specialized industrial applications and for motor fuel, because
the price per equivalent energy unit of propane is, and has historically been,
higher than that of natural gas. To use natural gas, however, a retail customer
must be connected to a distribution system provided by a local utility. Because
of the costs involved in building or connecting to a natural gas distribution
system, natural gas is not expected to create significant competition for the
Company in areas that are not currently served by natural gas distribution
systems.
CONSERVATION AND IMPROVED EFFICIENCY OF GAS APPLIANCES
Retail customers primarily use propane for heating, water heating, and
cooking. Conservation measures or technological advances, including the
development of more efficient gas appliances, could slow the growth of demand
for propane by retail propane customers. The Company believes that decreases in
oil and gas prices in recent years have decreased the incentive to conserve and
that the gas appliances used today are already operating at high levels of
efficiency. The Company can predict neither the impact of future conservation
measures nor the effect that any technological advances might have on the
Company's operations.
OPERATING RISKS
The Company's propane operations are subject to all operating hazards and
risks normally incident to handling, storing and transporting combustible
liquids, such as the risk of personal injury and property damage caused by fire.
Empire Gas maintains insurance policies with insurers in such amounts and with
such coverages and deductibles as management of the Company believes is
reasonable and prudent. Empire Gas' current automobile liability policy provides
coverage for losses of up to $101.0 million per occurrence with a $500,000
deductible per occurrence. Empire Gas' general liability policy has a $500,000
deductible per occurrence (subject to an aggregate deductible of $1.0 million
per policy period) with total coverage of $101.0 million. Current workers
compensation coverage also has a $500,000 deductible per incident. Current
liability insurance coverage substantially exceeds any liability Empire Gas has
previously incurred, though the $500,000 deductible on each of the policies
means that the Company is effectively self-insured for liability up to these
deductibles. The occurrence of an event not fully covered by insurance could
have a material adverse effect on the Company's financial condition and results.
See "Business of the Company -- Propane Operations -- Risks of Business."
REORGANIZATION OF THE COMPANY
Prior to the Offering, the Company consisted of 284 retail outlets operating
in 27 states. As a result of the Transaction, the number of retail outlets will
be reduced to 158 operating in 20 states (resulting in a decrease of
approximately 40% based on gallons sold during the fiscal year ended June 30,
1993). In addition, new management of the Company after the Offering intends to
pursue a strategy of acquisitions and start-ups, expansion of the Company's
existing residential customer base, geographic rationalization and reduction of
operating expenses, which differs in some regards from the strategy of current
management. See "Business -- Business Strategy." The operations of the Company
after the Offering will therefore differ from the operations prior to the
Offering in terms of the size, geographical scope, management and leverage
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<PAGE>
of the Company and there is no assurance that new management's business strategy
will be carried out effectively. Accordingly, operations of the Company prior to
the Offering are not indicative of expected operations of the Company after the
Offering.
POTENTIAL ACQUISITIONS AND DEVELOPMENT OF NEW RETAIL SERVICE CENTERS
The Company intends to consider and evaluate opportunities for growth in its
industry through acquisitions and the development of new retail propane service
centers. While the Company recently completed an acquisition of one retail
service center in Colorado, has signed an agreement to purchase a small retail
propane company in Missouri, and will complete the Acquisition contemporaneously
with this Offering, there can be no assurance that the Company will continue to
find attractive acquisition opportunities, or to the extent such opportunities
or opportunities to develop new retail service centers are identified, that the
Company will be able to consummate the acquisitions or develop such centers or
will be able to obtain financing for any such acquisitions or projects. In
addition, the Company's ability to undertake acquisitions will be limited in
certain geographic areas by the non-competition agreement (the "Non-Competition
Agreement") entered into by the Company and Empire Energy Corporation
("Energy"), whose stock will be transferred to Mr. Plaster and certain other
departing officers as part of the Transaction. Subject to an exception for
multi-state acquisitions, the Non-Competition Agreement restricts the Company
from making acquisitions in seven states (Alabama, Florida, Georgia, Indiana,
Kentucky, Mississippi and Tennessee) and certain territories in three states
(southeastern Missouri, northern Arkansas and an area within a 50-mile radius of
an existing Energy operation in Illinois) (the "Energy Territories") for a
period of three years from the date the Stock Purchase is consummated (the
"Effective Date"). The Non-Competition Agreement also restricts the Company from
starting service centers (other than through acquisitions) in western Virginia
and western West Virginia. The Non-Competition Agreement also requires the
Company not to disclose secret information it may have regarding Energy, not to
solicit Energy customers or employees, and to grant Energy an option to purchase
from the Company (on terms substantially equivalent to the terms on which the
Company acquired the business) any business the Company acquires in violation of
the Non-Competition Agreement. The same restrictions apply to Energy under the
Non-Competition Agreement. See "The Transaction" and "Certain Relationships and
Related Transactions -- The Transaction." No assurance can be given as to the
extent to which acquisitions or new retail service centers will contribute to
the Company's cash flows or results of operations.
DEPENDENCE ON CONTROLLING SHAREHOLDER AND CONFLICT OF INTERESTS
Upon consummation of the Transaction, Empire Gas will be dependent on the
efforts of Paul S. Lindsey, Jr. who will serve as the Company's Chief Executive
Officer, President, and Chairman of the Board. Mr. Lindsey and his wife, Kristin
L. Lindsey, will hold approximately 96% of the Company's Common Stock and
generally will be able to control the Company's operations. Although the Company
will purchase a key man life insurance policy in the amount of $30 million, the
loss of Mr. Lindsey's services could have a material adverse effect on the
business of the Company. As the holder of a majority of the Company's
outstanding Common Stock, Mr. Lindsey may have interests different from those of
holders of the Units. In case of such a conflict of interests, there can be no
assurance that the Company will take actions in the best interests of the
holders of the Units.
FRAUDULENT TRANSFER CONSIDERATIONS ASSOCIATED WITH THE STOCK REPURCHASE AND DEBT
REFINANCING
Under fraudulent transfer provisions of the Bankruptcy Code or comparable
provisions of state fraudulent transfer law, a transfer of property made within
a year before a bankruptcy filing (or within the applicable state law period)
can be avoided if a company or a subsidiary thereof (a) made such transfer with
the intent of hindering, delaying, or defrauding current or future creditors, or
(b)(i) received less than reasonably equivalent value or fair consideration
therefor and (ii) at the time of such transfer (A) was insolvent or was rendered
insolvent by such transfer, (B) was engaged or was about to engage in a business
or transaction for which its remaining assets constituted unreasonably small
capital to carry on such business, or (C) intended to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they mature.
If a court were to find that, in substance, the Senior Secured Notes were
issued to repurchase the Common Stock of Mr. Plaster and the departing officers,
the court could find that the Company did not
14
<PAGE>
receive fair consideration or reasonably equivalent value for the issuance of
the Senior Secured Notes. In addition, to the extent the proceeds are being used
to repay (i) the Company's 12% Senior Subordinated Debentures due 2002 (the "12%
Senior Subordinated Debentures") which were incurred in repaying certain
indebtedness incurred in the 1983 leveraged buy-out of Empire Gas Corporation
(the "LBO"), and (ii) $16.5 million principal amount of the Company's 9%
Subordinated Debentures due 2007 (the "2007 9% Subordinated Debentures"), which
were incurred in the LBO, of which $4.7 million principal amount will be
purchased from Mr. Plaster, a court could find that the Company did not receive
fair consideration or reasonably equivalent value for the issuance of the Senior
Secured Notes. If a court found a lack of fair consideration for the Senior
Secured Notes and also concluded that one or more of the financial conditions
described above was satisfied at the time Empire Gas incurred the debt to the
holders of the Senior Secured Notes, or if the court found that the transaction
was entered into with the intent of hindering, delaying, or defrauding
creditors, the court could set aside the transaction as a fraudulent transfer
and void the Senior Secured Notes and order the return of any payments of
principal and interest made on the Senior Secured Notes. To the extent any
Senior Secured Note was avoided as a fraudulent transfer, the holder of that
Senior Secured Note would cease to have any claim in respect of the Company. In
addition, the avoidance of the Senior Secured Notes could result in an event of
default with respect to the other indebtedness of the Company and could result
in the acceleration of such indebtedness, a change in control of the Company, or
otherwise adversely affect the Company.
The obligations of the Company's existing subsidiaries to guarantee the
Company's obligations under the Senior Secured Notes pursuant to the Subsidiary
Guarantees may also be avoidable as fraudulent transfers. In the event that a
court finds that (a) any such subsidiary did not receive reasonably equivalent
value or fair consideration in exchange for such subsidiary's incurrence of the
obligations under its respective Subsidiary Guaranty, and (b) that such
subsidiary was insolvent or rendered insolvent by such Subsidiary Guaranty, had
unreasonably small capital, or intended to or believed that it would incur debt
beyond its ability to repay, such Subsidiary Guaranty could be avoided. The
Subsidiary Guarantees could also be subject to avoidance as a fraudulent
transfer if a court finds that such obligations were incurred with actual intent
to delay, hinder or defraud any of the subsidiaries' creditors.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally, however,
a company will be considered insolvent if the sum of its debts, including
estimated contingent liabilities, was greater than all of its assets at a fair
valuation or if the present fair saleable value of its assets is less than the
amount that would be required to pay its probable liability on its existing
debts, including estimated contingent liabilities, as they become absolute and
mature.
The Company believes that the indebtedness represented by the Senior Secured
Notes and the Subsidiary Guarantees is being incurred for proper purposes and in
good faith, and without any actual intent to delay, hinder, or defraud the
Company's creditors. Furthermore, the Company believes, based on analyses of
internal cash flow, that it (i) will not be considered insolvent, at the time of
or as a result of the issuance of the Senior Secured Notes, under any of the
foregoing standards, (ii) will have sufficient capital to meet the needs of the
business in which it is engaged, and (iii) will not have incurred debts beyond
its ability to pay such debts as they mature. Furthermore, as a condition to the
consummation of the Stock Purchase, the Company will receive a solvency opinion
that the Stock Purchase and this Offering will not render the Company insolvent,
leave the Company with inadequate or unreasonably small capital or result in the
Company incurring indebtedness beyond its ability to repay such indebtedness as
it matures. There can be no assurance, however, that a court passing on such
questions would agree with the Company.
ABSENCE OF PUBLIC MARKET
There is currently no established trading market for the Units, the Senior
Secured Notes, the Warrants or shares of Common Stock and the Company does not
intend to have the Units, the Senior Secured Notes, the Warrants or the shares
of Common Stock listed for trading on any securities exchange or on any
automated dealer quotation system. The Underwriter has advised the Company that
it presently intends to make a market in the Units, the Senior Secured Notes and
the Warrants, but the Underwriter is not obligated to make such markets and any
such market making may be discontinued at any time at the sole discretion of the
Underwriter. Accordingly, no assurance can be given as to the prices or
liquidity of, or
15
<PAGE>
trading markets for, the Units, the Senior Secured Notes, the Warrants or shares
of Common Stock. The liquidity of any market for the Units, the Senior Secured
Notes, the Warrants or shares of Common Stock will depend upon the number of
holders of such securities, the interest of securities dealers in making a
market in such securities, and other factors. The absence of an active market
for the Units, the Senior Secured Notes, the Warrants or shares of Common Stock
would adversely affect the liquidity of such securities. The liquidity of, and
trading markets for, the Senior Secured Notes may also be adversely affected by
the liquidity of, and market for high yield securities generally. Such a decline
may adversely affect the liquidity of, and trading markets for, the Senior
Secured Notes, independent of the financial performance of, and prospects for,
the Company.
THE TRANSACTION
The Company will implement a change in ownership and management
contemporaneously with this Offering by repurchasing shares of its common stock
from its controlling shareholder, Mr. Robert W. Plaster, and certain other
departing officers in exchange for all of the shares of a subsidiary that owns
133 retail service centers located primarily in the Southeast. Mr. Paul S.
Lindsey, Jr., who has been with the Company for 26 years and currently serves as
the Company's Chief Operating Officer and Vice Chairman of the Board, will
become the Company's controlling shareholder, Chief Executive Officer, and
President. The change in ownership and management will enable the Company to
pursue a growth strategy focusing on acquiring propane operating companies.
Contemporaneously with the Offering, the Company will acquire the assets of PSNC
Propane Corporation, a company located in North Carolina that has six retail
service centers and five additional bulk storage facilities with annual volume
of approximately 9.5 million gallons, for an aggregate purchase price of
approximately $14.0 million (which includes payment for inventory and accounts
receivable). The Company also recently completed the acquisition of a retail
propane company in Colorado with annual volume of approximately 700,000 gallons,
and has entered into a contract to purchase a retail propane company in Missouri
with annual volume of approximately 690,000 gallons.
Pursuant to the Stock Purchase, the Company will transfer 100% of the common
stock of its subsidiary, Energy ("Energy Common Stock"), to Mr. Robert W.
Plaster and certain departing directors, officers and employees in exchange for
12,004,430 of their shares of Common Stock. Certain of the departing officers
and employees will receive $7.00 per share for the remaining 346,223 of shares
of Common Stock that they hold. Energy owns the common stock of approximately
136 subsidiaries, 133 of which are retail service centers located in ten states,
primarily in the Southeast, and certain other assets. Empire Gas will retain
ownership of 158 retail service centers located in 20 states and 8 nonretail
subsidiaries that provide services related to the Company's retail propane
business. Following the Transaction, Mr. Lindsey and his wife Kristin Lindsey
will beneficially own approximately 96% of the 1,579,225 shares of the Company's
Common Stock remaining outstanding and Mr. Lindsey will become the Company's
Chief Executive Officer and President.
In connection with the Stock Purchase, Mr. Plaster will terminate his
positions with the Company as Chief Executive Officer and Chairman of the Board
of Directors. Mr. Plaster's employment contract with the Company will be
terminated. See "Management -- Employment Agreement." Similarly, the departing
directors, officers and employees will terminate their positions with the
Company and its subsidiaries.
In connection with the Stock Purchase, certain lease and use agreements
between the Company and Mr. Plaster, or entities controlled by Mr. Plaster, will
be terminated. The Company has also entered into certain agreements that will
become effective on the Effective Date, including the Non-Competition Agreement,
a lease for the Company's headquarters, and a services agreement pursuant to
which Empire Service Corporation ("Service Corp."), a subsidiary of Energy, will
provide data processing, management information and other services to the
Company (the "Service Agreement"). See "Certain Relationships and Related
Transactions."
The Company has received a private letter ruling from the Internal Revenue
Service concerning the federal income tax consequences of the Stock Purchase,
which provides, among other things, that, based on certain representations
contained in the rulings, neither income nor gain for federal income tax
purposes will be recognized by the Company as a result of the Stock Purchase.
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The obligations of the parties to consummate the Stock Purchase are also
subject to certain other conditions, including the receipt of a solvency opinion
that the consummation of the Stock Purchase and this Offering will not render
the Company insolvent, leave the Company with inadequate or unreasonably small
capital or result in the Company incurring indebtedness beyond its ability to
repay such indebtedness as it matures.
Simultaneously with this Offering, the Company will consummate the
acquisition of PSNC Propane Corporation, a company that has six retail service
centers and an additional five bulk storage facilities located in North
Carolina, an area in which the Company desires to strengthen its presence. The
Company will use approximately $12.0 million of the proceeds towards the $14.0
million aggregate purchase price. Approximately $1.5 million of the remaining
purchase price will be funded by borrowings on the Company's New Credit
Facility. The remaining $500,000 will be paid by the Company over five years.
See "Use of Proceeds." During 1993, PSNC Propane Corporation sold approximately
9.5 million gallons, 70% of which were higher margin sales to residential
customers.
The Company will use a portion of the proceeds to repay certain of its
existing indebtedness that have earlier maturity dates or that carry a higher
effective interest rate. The Company will enter into the $15.0 million New
Credit Facility.
Immediately prior to the consummation of the Offering, the Company's
subsidiary, Empire Gas Operating Corporation ("EGOC"), which owns the
outstanding capital stock of the Company's retail service centers and certain
nonretail subsidiaries, and certain other assets, will merge into the Company.
USE OF PROCEEDS
The net proceeds to the Company from the issuance and sale of the Units
offered hereby will be approximately $95.6 million. The Company intends to use
approximately $72.0 million of the net proceeds to retire existing indebtedness.
Approximately $22.3 million will be used to redeem the Company's 12% Senior
Subordinated Debentures due 2002, which currently have an annual sinking fund
requirement of $690,000. Approximately $20.0 million will be used to redeem the
Company's 9% Convertible Subordinated Debentures due 1998, which currently have
an annual sinking fund requirement of $1.25 million. Approximately $16.1 million
will be used to repay the term loan (currently accruing interest at 6.125% per
annum) under the existing credit facility (the "Term Loan"), which matures June
30, 1998 and which currently has a quarterly sinking fund requirement of
$650,000. Approximately $13.6 million will be used to repurchase $16.5 million
principal amount of 2007 9% Subordinated Debentures, $4.7 principal amount of
which will be purchased from Mr. Robert W. Plaster. See "Certain Relationships
and Related Transactions." The purchase of the 2007 9% Subordinated Debentures
will satisfy the Company's $1.37 million annual sinking fund requirement through
the maturity date of the Senior Secured Notes. Approximately $12.0 million of
the remaining net proceeds will be used by the Company to complete the
Acquisition, which has an aggregate purchase price of $14.0 million (which
includes payment for inventory and accounts receivable). See "The Transaction"
and "Business -- Business Strategy -- Growth through acquisition of retail
service centers." Approximately $2.6 million of the net proceeds will be used to
repurchase, at $7.00 per share, approximately 346,223 shares of Common Stock
held by the departing directors, officers and employees, and approximately
31,642 shares of Common Stock held by other shareholders. The Company will use
approximately $4.1 million of the net proceeds to make a payment to Energy in
connection with the Stock Purchase, reduced to the extent Energy may be required
to make a payment to the Company based on the balance, as of the Effective Date,
of certain of the Company's liabilities net of certain of its assets. See
"Certain Relationships and Related Transactions -- The Transaction." Any
remaining net proceeds (estimated to be $4.9 million) will be used by the
Company for general corporate purposes which could include payment of accrued
interest, repayment of the existing credit facility and future acquisitions.
17
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1994, the historical
capitalization of the Company and the pro forma capitalization of the Company as
adjusted to give effect to the Transaction and the application of the proceeds
of the Offering as described in "Use of Proceeds." This table should be read in
conjunction with the Company's consolidated financial statements and the pro
forma financial statements, including the notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1994
-----------------------------
HISTORICAL AS ADJUSTED
------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt.............. $ 6,135 $ 329
------------- -------------
------------- -------------
Long-term debt (excluding current portion of
long-term debt):
Existing Credit Facility:
Term Loan....................................... $ 13,450 $ --
$22 million revolving credit facility........... 3,500 --
New Credit Facility:
$15 million revolving credit facility........... --
12 7/8% Senior Secured Notes due 2004............. 98,849(2)
9% Convertible Subordinated Debentures due
1998............................................. 15,875 --
9% Subordinated Debentures due 2007.............. 14,731 4,889(1)
12% Senior Subordinated Debentures due 2002....... 18,201 --
Purchase contract obligations..................... 939 1,101
------------- -------------
Total long-term debt............................ 66,696 104,839
------------- -------------
Stockholders' equity (deficit):
Common stock...................................... 14 14
Common stock purchase warrants.................... -- 1,227(2)
Additional paid-in capital........................ 27,088 27,088
Retained earnings................................. 5,899 33,369
------------- -------------
33,001 61,698
Less: Treasury stock.............................. (1,299) (87,975)
------------- -------------
Total stockholders' equity (deficit)............ 31,702 (26,277)
------------- -------------
Total capitalization.......................... $ 98,398 $ 78,562
------------- -------------
------------- -------------
<FN>
- ---------
(1) Face amount $9.5 million.
(2) Reflects estimated $100 million of gross proceeds of the Units offered
hereby, including $98.8 million of allocated value to the Senior Secured
Notes and $1.2 million of allocated value to the warrants.
</TABLE>
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
FOR THE COMPANY PRIOR TO THE TRANSACTION
The following table presents selected consolidated operating and balance
sheet data of Empire Gas, prior to the consummation of the Transaction, as of
and for each of the years in the five-year period ended June 30, 1993, as of and
for the nine months ended March 31, 1993 and 1994, and for the twelve months
ended March 31, 1994. The financial data of the Company as of and for each of
the years in the five-year period ended June 30, 1993 were derived from the
Company's audited consolidated financial statements. The financial data for the
Company as of and for the nine months ended March 31, 1993 and 1994, were
derived from the Company's unaudited consolidated financial statements which, in
the opinion of the Company, reflect all adjustments, of a normal and recurring
nature, necessary for a fair presentation of the results for the unaudited
periods. Due to the seasonal nature of the Company's business, the majority of
the Company's revenues are earned in its second and third fiscal quarters.
Accordingly, the results of operations for the nine months ended March 31, 1994
are not indicative of the results of operations to be expected for the full
year. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Data for the twelve months ended March 31, 1994 have
been set forth to provide recent data concerning a full year's operations. The
financial and other data set forth below should be read in conjunction with the
Company's consolidated financial statements, including the notes thereto,
included elsewhere in this Prospectus. Because these data do not take into
account the effects of the Transaction on the Company's results and financial
condition, management does not believe they are indicative of the results of the
Company that can be expected after the Transaction and Offering.
<TABLE>
<CAPTION>
EMPIRE GAS BEFORE THE TRANSACTION AND OFFERING
------------------------------------------------------------------------------------
NINE MONTHS ENDED TWELVE MONTHS
YEAR ENDED JUNE 30, MARCH 31, ENDED
------------------------------------------------ ------------------ MARCH 31,
1989 (1) 1990 1991 1992 1993 1993 1994 1994
-------- -------- -------- -------- -------- -------- -------- --------------
(IN THOUSANDS EXCEPT RATIOS AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating data:
Operating revenue..................... $108,389 $123,153 $121,758 $112,080 $128,401 $111,332 $110,108 $127,177
Gross profit (2)...................... 61,995 64,962 61,787 61,107 68,199 58,525 59,338 69,012
Operating expenses.................... 36,438 39,062 44,772 40,052 41,845 31,986 33,109 42,968
Depreciation and amortization......... 9,152 9,334 9,552 10,062 10,351 7,672 7,494 10,173
Operating income...................... 16,405 16,566 7,463 10,993 16,003 18,867 18,735 15,871
Interest expense:
Cash interest....................... 12,288 11,437 12,038 10,721 9,826 7,541 6,446 8,731
Amortization of debt discount and
expenses........................... 1,469 1,147 890 1,006 1,686 1,167 1,396 1,915
-------- -------- -------- -------- -------- -------- -------- --------------
Total interest expense............ 13,757 12,584 12,928 11,727 11,512 8,708 7,842 10,646
Net income (loss) (3)................. 857 1,216 (4,557) (1,474) 2,228 5,929 5,789 2,088
Other operating data:
Ratio of earnings to fixed
charges (4).......................... 1.16x 1.23x -- -- 1.36x 2.14x 2.27x 1.39x
Deficiency in earnings available to
cover fixed charges (4).............. -- -- $ (6,167) $ (1,184) -- -- -- --
Capital expenditures:
Existing operations................. 4,310 3,993 4,148 4,048 2,964 1,839 3,429 4,554
Acquisitions........................ 2,863 260 1,708 225 -- -- 444 444
Start up of new retail service
centers............................ 450 1,987 2,957 2,430 1,394 1,259 848 983
-------- -------- -------- -------- -------- -------- -------- --------------
Total capital expenditures.......... 7,623 6,240 8,813 6,703 4,358 3,098 4,721 5,981
Cash from sale of retail service
centers and other assets............. 1,301 430 497 3,062 1,088 360 153 881
EBITDA (5)............................ 25,557 25,900 17,015 21,055 26,354 26,539 26,229 26,044
Income (loss) per share............... $ .05 $ .04 $ (.33) $ (.11) $ .16 $ .41 $ .40 $ .14
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
---------------------------------------------------------------------------------- MARCH 31, 1994
1989 1990 1991 1992 1993 --------------
-------------- -------------- -------------- -------------- -------------- (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Total assets................ $ 161,155 $ 158,383 $157,138 $ 151,471 $ 148,020 $152,193
Long-term debt (including
current maturities)........ 77,775 79,666 84,289 78,958 79,249 72,831
Stockholders' equity........ 29,473 30,982 26,438 24,901 25,913 31,702
<FN>
- ------------
(1) The operating data for 1989 include the operating results of the Company's
predecessor, which was also named Empire Gas Corporation ("Old Empire"),
for the period ended October 28, 1988. The Company was formed in September
1988 to acquire Old Empire.
(2) Represents operating revenue less the cost of products sold.
(3) Empire Gas did not declare or pay dividends on its common stock during the
five-year period ending June 30, 1993 or during the nine-month period
ending March 31, 1994.
(4) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents net income before income taxes, plus "fixed charges"
and the amortization of capitalized interest, less interest capitalized.
"Fixed charges" consist of interest (including amortization of debt
issuance costs) and amortization of discount on indebtedness.
(5) EBITDA consists of earnings before depreciation, amortization, interest,
income taxes, and other non-recurring expenses. EBITDA is presented here
because it is a widely accepted financial indicator of a highly leveraged
company's ability to service and/ or incur indebtedness. However, EBITDA
should not be construed as an alternative either (i) to operating income
(determined in accordance with generally accepted accounting principles)
or (ii) to cash flows from operating activities (determined in accordance
with generally accepted accounting principles).
</TABLE>
20
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA
The following unaudited pro forma consolidated statements of operations have
been derived from the consolidated statement of operations of the Company for
the fiscal year ended June 30, 1993 and the consolidated statement of operations
for the nine months and twelve months ended March 31, 1994 and adjust such
information to give effect to the Offering and the Transaction as if they had
been consummated on July 1, 1992. The unaudited pro forma consolidated balance
sheet has been derived from the consolidated balance sheet of the Company and
adjusts such information to give effect to the Offering and the Transaction as
if they had been consummated on March 31, 1994. The Pro Forma Consolidated
Financial and Other Data and accompanying notes should be read in conjunction
with the consolidated financial statements and related notes thereto appearing
elsewhere in this Prospectus. The Pro Forma Consolidated Financial and Other
Data is presented for informational purposes only and does not purport to
represent what the results of operations would actually have been if the
Offering and the Transaction had occurred on July 1, 1992, or what the Company's
financial position would actually have been if the Offering and the Transaction
had occurred on March 31, 1994, or to project the Company's results of
operations or financial position at any future date or for any future period.
The Transaction is being accounted for as a treasury stock transaction using the
fair value of Energy assets conveyed to repurchase the Company's stock. The fair
value of Energy assets is derived from a valuation method based principally on
gallons of retail sales and operating cash flows, and, in management's view, is
consistent with valuation methods generally used in valuing propane distribution
companies.
21
<PAGE>
EMPIRE GAS CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1993
----------------------------------------------------------------
ADJUSTMENTS EFFECTS OF
EMPIRE TO EXCLUDE PSNC EFFECTS OF
GAS ENERGY ACQUISITION* OFFERING PRO FORMA
-------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE....................... $128,401 $(61,057)(1) $ 9,587 $ $ 76,931
COST OF PRODUCT SOLD.................... 60,202 (29,157)(1) 4,643 35,688
-------- ------------ ------------ ---------
GROSS PROFIT............................ 68,199 (31,900) 4,944 41,243
-------- ------------ ------------ ---------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts....... 958 (442)(1) 30 546
General and administrative............ 40,437 (19,852)(2) 2,619 23,204
Rent expense to related party......... 450 (375)(2) 75
Depreciation and amortization......... 10,351 (4,687)(3) 1,058 6,722
-------- ------------ ------------ ---------
52,196 (25,356) 3,707 30,547
-------- ------------ ------------ ---------
OPERATING INCOME........................ 16,003 (6,544) 1,237 10,696
-------- ------------ ------------ ---------
OTHER EXPENSE
Interest expense...................... (8,877) 271(4) (1,102) (522) (6) (10,230)
Interest expense to related party..... (949) 94(4) 855(6)
Amortization of debt discount and
expense.............................. (1,686) (501) (2,777) (7) (4,964)
Restructuring proposal costs.......... (223) 105(2) (118)
-------- ------------ ------------ ----------- ---------
(11,735) 470 (1,603) (2,444) (15,312)
-------- ------------ ------------ ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES....... 4,268 (6,074) (366) (2,444) (4,616)
PROVISION (CREDIT) FOR INCOME TAXES..... 2,040 (2,433)(5) (140) (917) (8) (1,450)
-------- ------------ ------------ ----------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM................................... $ 2,228 $ (3,641) $ (226) $(1,527) (9) $ (3,166)
-------- ------------ ------------ ----------- ---------
-------- ------------ ------------ ----------- ---------
INCOME (LOSS) PER SHARE BEFORE
EXTRAORDINARY ITEM..................... $ .16 -- -- -- $ (2.00)
-------- ---------
-------- ---------
OTHER OPERATING DATA AND FINANCIAL
RATIOS
Ratio of earnings to fixed charges.... 1.36x -- -- -- --
--------
--------
Deficiency in earnings to cover fixed
charges.............................. -- -- -- -- $ (4,889)
---------
---------
EBITDA**.............................. $ 26,354 -- -- -- $ 17,418
EBITDA to total interest expense...... 2.29x -- -- -- 1.15x
EBITDA to cash interest............... 2.68x -- -- -- 1.70x
<FN>
- ------------
* For adjustments from actual PSNC results see Pro Forma Financial
Statements of PSNC elsewhere in this Prospectus.
** EBITDA consists of earnings before depreciation, amortization, interest,
income taxes, and other non-recurring expenses. EBITDA is presented here
because it is a widely accepted financial indicator of a highly leveraged
company's ability to service and/ or incur indebtedness. However, EBITDA
should not be construed as an alternative either (i) to operating income
(determined in accordance with generally accepted accounting principles)
or (ii) to cash flows from operating activities (determined in accordance
with generally accepted accounting principles).
</TABLE>
22
<PAGE>
EMPIRE GAS CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 1994
----------------------------------------------------------------
ADJUSTMENTS EFFECTS OF
EMPIRE TO EXCLUDE PSNC EFFECTS OF
GAS ENERGY ACQUISITION* OFFERING PRO FORMA
-------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE....................... $110,108 $(54,638)(1) $ 9,526 $ $ 64,996
COST OF PRODUCT SOLD.................... 50,770 (25,368)(1) 4,663 30,065
-------- ------------ ------------ ----------- ---------
GROSS PROFIT............................ 59,338 (29,270) 4,863 34,931
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts....... 413 (215)(1) 34 232
General and administrative............ 32,359 (15,925)(2) 1,894 18,328
Rent expense to related party 337 (280)(2) 57
Depreciation and amortization......... 7,494 (3,292)(3) 778 4,980
-------- ------------ ------------ ---------
40,603 (19,712) 2,706 23,597
-------- ------------ ------------ ---------
OPERATING INCOME........................ 18,735 (9,558) 2,157 11,334
-------- ------------ ------------ ---------
OTHER EXPENSE
Interest expense...................... (6,446) 105(4) (831) (248)(6) (7,420)
Amortization of debt discount and
expense.............................. (1,396) (422) (2,068)(7) (3,886)
Restructuring proposal costs.......... (674) 321(2) (353)
-------- ------------ ------------ ----------- ---------
(8,516) 426 (1,253) (2,316) (11,659)
-------- ------------ ------------ ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES....... 10,219 (9,132) 904 (2,316) (325)
PROVISION FOR INCOME TAXES.............. 4,430 (3,717)(5) 350 (1,013)(8) 50
-------- ------------ ------------ ----------- ---------
NET INCOME (LOSS)....................... $ 5,789 $ (5,415) $ 554 $(1,303) $ (375)
-------- ------------ ------------ ----------- ---------
-------- ------------ ------------ ----------- ---------
INCOME (LOSS) PER SHARE................. $ .40 -- -- -- $ (.24)
-------- ---------
-------- ---------
OTHER OPERATING DATA AND FINANCIAL
RATIOS
Ratio of earnings to fixed charges.... 2.27x -- -- --
--------
--------
Deficiency in earnings to cover fixed
charges.............................. -- -- -- -- $ (2,374)
---------
---------
EBITDA**.............................. $ 26,229 -- -- -- $ 16,314
EBITDA to total interest expense...... 3.34x -- -- -- 1.44x
EBITDA to cash interest............... 4.07x -- -- -- 2.20x
<FN>
- ------------
* For adjustments from actual PSNC results see Pro Forma Financial Statements
of PSNC elsewhere in this Prospectus.
** EBITDA consists of earnings before depreciation, amortization, interest,
income taxes, and other non-recurring expenses. EBITDA is presented here
because it is a widely accepted financial indicator of a highly leveraged
company's ability to service and/ or incur indebtedness. However, EBITDA
should not be construed as an alternative either (i) to operating income
(determined in accordance with generally accepted accounting principles) or
(ii) to cash flows from operating activities (determined in accordance with
generally accepted accounting principles).
</TABLE>
23
<PAGE>
EMPIRE GAS CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED MARCH 31, 1994
------------------------------------------------------------------
ADJUSTMENTS EFFECTS OF
EMPIRE TO EXCLUDE PSNC EFFECTS OF
GAS ENERGY ACQUISITION* OFFERING PRO FORMA
--------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE....................... $ 127,177 $(61,319)(1) $ 10,605 $ $ 76,463
COST OF PRODUCT SOLD.................... 58,165 (28,817)(1) 5,164 34,512
--------- ------------ ------------ ---------
GROSS PROFIT............................ 69,012 (32,502) 5,441 41,951
--------- ------------ ------------ ---------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts....... 1,073 (512)(1) 40 601
General and administrative............ 41,445 (20,308)(2) 2,491 23,628
Rent expense to related party......... 450 (375)(2) 75
Depreciation and amortization......... 10,173 (4,880)(3) 1,039 6,332
--------- ------------ ------------ ---------
53,141 (26,075) 3,570 30,636
--------- ------------ ------------ ---------
OPERATING INCOME........................ 15,871 (6,427) 1,871 11,315
--------- ------------ ------------ ---------
OTHER EXPENSE
Interest expense...................... (8,450) 85(4) (1,100) (416)(6) (9,881)
Interest expense to related party..... (281) 94(4) 187(6) --
Amortization of debt discount and
expense.............................. (1,915) (552) (2,692)(7) (5,159)
Restructuring proposal costs.......... (897) 426(2) (471)
--------- ------------ ------------ ------------ ---------
(11,543) 605 (1,652) (2,921) (15,511)
--------- ------------ ------------ ------------ ---------
INCOME (LOSS) BEFORE INCOME TAXES....... 4,328 (5,822) 219 (2,921) (4,196)
PROVISION (CREDIT) FOR INCOME TAXES..... 2,240 (2,500)(5) 85 (1,125)(8) (1,300)
--------- ------------ ------------ ------------ ---------
NET INCOME (LOSS)....................... $ 2,088 $ (3,322) $ 134 $ (1,796) $ (2,896)
--------- ------------ ------------ ------------ ---------
--------- ------------ ------------ ------------ ---------
INCOME (LOSS) PER SHARE................. $ .14 $ (1.83)
--------- ---------
--------- ---------
OTHER OPERATING DATA AND FINANCIAL
RATIOS
Ratio of earnings to fixed charges.... 1.39x
---------
---------
Deficiency in earnings to cover fixed
charges.............................. $ $ (4,663)
---------
---------
EBITDA**.............................. $ 26,044 $ 17,647
EBITDA to total interest expense...... 2.45x 1.17x
EBITDA to cash interest............... 2.98x 1.79x
Total Long-term debt (including
current portion) to EBITDA........... 2.80x 5.96x
<FN>
- ------------
* For adjustments from actual PSNC results see Pro Forma Financial
Statements of PSNC elsewhere in this Prospectus.
** EBITDA consists of earnings before depreciation, amortization, interest,
income taxes, and other non-recurring expenses. EBITDA is presented here
because it is a widely accepted financial indicator of a highly leveraged
company's ability to service and/ or incur indebtedness. However, EBITDA
should not be construed as an alternative either (i) to operating income
(determined in accordance with generally accepted accounting principles)
or (ii) to cash flows from operating activities (determined in accordance
with generally accepted accounting principles).
</TABLE>
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS OF EMPIRE GAS
CORPORATION (EGC)
FOR THE YEAR ENDED JUNE 30, 1993, NINE MONTHS ENDED MARCH 31, 1994,
AND TWELVE MONTHS ENDED MARCH 31, 1994.
The pro forma consolidated income statement amounts are based on the
estimated pro forma effects of the consolidated balance sheet adjustments
assuming the transactions were consummated on July 1, 1992. The basis for the
allocation of income and expenses between the Company and Energy is described in
detail below. The amounts presented reflect actual operations of the retail
subsidiaries while certain non-retail general and administrative expenses have
been allocated on the bases set forth below to the extent they were not
otherwise related to specific subsidiaries. The consolidated statement of
operations amounts after the Transaction closes may differ from the pro forma
statements because of changes in the consolidated balance sheet between July 1,
1992 and the actual consummation date.
(1) The revenues and expenses of the retail subsidiaries of Energy were
excluded. These subsidiaries represent substantially all the Operating
Revenue, Cost of Product Sold and the Provision for Doubtful Accounts
excluded on the pro forma statement of operations.
(2) The general and administrative expenses of Energy retail subsidiaries were
excluded. Exclusions of Energy non-retail general and administrative
expenses were determined as follows:
The amounts related to the salaries and related expenses of the
departing officers and certain agreements between the Company and
Mr. Plaster, or entities controlled by him, being terminated were
estimated as follows and eliminated:
<TABLE>
<S> <C>
Year Ended June 30, 1993.................. $2,556,100
Nine Months Ended March 31, 1994.......... $1,740,425
Twelve Months Ended March 31, 1994........ $2,320,567
</TABLE>
Expenses related to maintenance and management of specific energy
non-retail assets were identified and eliminated.
All remaining non-retail expenses were assigned 52.3% to the
Company and 47.7% to Energy based on the respective proportions of
consolidated retail revenues.
(3) Depreciation and amortization of the assets of Energy retail subsidiaries
and non-retail subsidiaries were excluded.
(4) Interest expense and amortization of debt acquisition costs related to (a)
amounts directly related to liabilities of Energy retail subsidiaries and
(b) the revolving bank debt and related party note borrowings applicable to
Energy were excluded.
(5) Income tax expenses were based on the proportion of Energy taxable income to
the consolidated EGC taxable income.
(6) To (a) recognize additional interest expense assuming interest paid at 7% on
face value $111,936,000 (which represents 88% of the total $127,200,000) of
Senior Secured Note borrowings (the remaining $15,264,000 of Senior Secured
borrowings are included in the pro forma statements reflecting the
Acquisition), (b) eliminate interest expense on the repaid term credit
facility, 9% Convertible Subordinated Debentures due 1998 and the 12% Senior
Subordinated Debentures due 2002, the reduced amount of the 9% Subordinated
Debentures due 2007, and related party note borrowings and (c) reduce
interest expense on the revolving credit facility to reflect the reduction
due to the proceeds of this Offering.
(7) To (a) recognize amortization of new debt acquisition costs being amortized
over 10 years, (b) recognize amortization of new original issue discount on
new Senior Secured Secured Notes to bring the effective rate of the new debt
(excluding the amount included in the PSNC purchase accounting adjustments)
to 13.1% using the effective interest method, (c) eliminate amortization of
the discount on the 9% Convertible Subordinated Debentures due 1998 and the
12% Senior Subordinated Debentures due 2002, (d) reduce the amortization of
the discount that will result from the reduction of 9% Subordinated
Debentures due 2007 outstanding as a result of the Offering, and (e)
eliminate amortization of debt acquisition costs related to Bank of Boston
term credit facility and revolving credit facility being repaid.
25
<PAGE>
(8) To record the increased estimated income tax credit provision, computed at
an effective rate of 38%, associated with the additional deductible expense
as a result of the operations after the Offering.
(9) The foregoing pro forma consolidated income statement does not give effect
to the gain of approximately $37.2 million, resulting from the excess of the
fair value of Energy assets ($84.0 million) over the book value of these
assets ($46.8 million) which have been conveyed to repurchase EGC common
stock, and the extraordinary expense of approximately $7.6 million (net of
estimated income tax effect of approximately $3.7 million) for the remaining
unamortized debt discount related to the 9% Convertible Subordinated
Debentures due 1998 and the 12% Senior Subordinated Debentures due 2002 and
the reduction of the 9% Subordinated Debentures due 2007 that will be
recognized as a result of the use of proceeds of the Offering. The gain on
disposition of Energy has been assumed to be non-taxable. If any portion of
the gain is deemed to be taxable, such liability would be accrued and
payable by the Company.
26
<PAGE>
EMPIRE GAS CORPORATION
PRO FORMA BALANCE SHEET
MARCH 31, 1994
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS EFFECTS OF
EMPIRE TO EXCLUDE PSNC EFFECTS OF
GAS ENERGY ACQUISITION* OFFERING PRO FORMA
--------- ------------ ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash.................................. $ 183 $ (454)(1) $ $ (239)(5) $ 1,717
(2,645)(8)
4,872(10)
Trade Receivables..................... 15,072 (7,351)(1) 1,180 8,901
Inventories........................... 9,313 (4,506)(1) 700 5,507
Prepaid Expenses...................... 299 (110)(1) 189
Due from Energy....................... 3,886(2) (3,886)(5)
Deferred Income taxes................. 408 (350)(1) 287(6) 345
--------- ------------ ----------- ------------ ---------
Total current assets................ 25,275 (8,885) 1,880 (1,611) 16,659
--------- ------------ ----------- ------------ ---------
PROPERTY AND EQUIPMENT
At cost, net of accumulated
depreciation......................... 107,838 (51,174)(1) 12,000 68,664
--------- ------------ ----------- ---------
OTHER ASSETS
Debt acquisition, costs, net of
amortization......................... 446 4,554(7) 5,000
Excess of cost over fair value of net
assets acquired, at amortized cost... 17,870 (3,567)(3) 14,303
Other................................. 764 (275)(1) 500 (250)(11) 739
--------- ------------ ----------- ------------ ---------
19,080 (3,842) 500 4,304 20,042
--------- ------------ ----------- ------------ ---------
$ 152,193 $(63,901) $ 14,380 $ 2,693 $105,365
--------- ------------ ----------- ------------ ---------
--------- ------------ ----------- ------------ ---------
CURRENT LIABILITIES
Due to Energy......................... $ $ 4,125(2) $ $ (4,125)(5) $
Current maturities of long-term
debt................................. 6,135 (76)(1) 100 (5,830)(10) 329
Accounts payable and accrued
expenses............................. 14,407 (2,463)(1) 250 (1,126)(10) 10,818
(250)(11)
--------- ------------ ----------- ------------ ---------
Total current liabilities........... 20,542 1,586 350 (11,331) 11,147
--------- ------------ ----------- ------------ ---------
LONG-TERM DEBT.......................... 66,696 (162)(1) 12,000 86,849(9)
400 (74,118)(10)
1,630 11,544(6)
104,839
--------- ------------ ----------- ------------ ---------
DEFERRED INCOME TAXES................... 31,214 (13,921)(1) (2,713)(6) 14,580
--------- ------------ ------------ ---------
ACCRUED SELF INSURANCE LIABILITY........ 2,039 (963)(1) 1,076
--------- ------------ ---------
STOCKHOLDERS' EQUITY (DEFICIT)
Capital stock
Common stock.......................... 14 14
Common stock purchase warrants........ 1,227(9) 1,227
Additional paid-in capital............ 27,088 27,088
Retained earnings..................... 5,899 33,590(4) (6,120)(6) 33,369
--------- ------------ ------------ ---------
33,001 33,590 (4,893) 61,698
Treasury Stock at cost................ (1,299) (84,031)(4) (2,645)(8) (87,975)
--------- ------------ ------------ ---------
31,702 (50,441) (7,538) (26,277)
--------- ------------ ----------- ------------ ---------
$ 152,193 $(63,901) $ 14,380 $ 2,693 $105,365
--------- ------------ ----------- ------------ ---------
--------- ------------ ----------- ------------ ---------
<FN>
- ------------
* For adjustments from actual PSNC results see Pro Forma Financial
Statements of PSNC elsewhere in this Prospectus.
</TABLE>
27
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF EMPIRE GAS
CORPORATION (EGC) AS OF MARCH 31, 1994
The pro forma consolidated balance sheet amounts assume the transactions
described below were consummated on March 31, 1994. The allocation of assets and
liabilities between the Company and Energy is based on the allocation in the
Stock Redemption Agreement. The actual consolidated amounts may differ
substantially because of changes in the financial position of the Company,
Energy and PSNC Propane Corporation as of the actual consummation date.
(1) The assets and liabilities of the retail distribution subsidiaries and
certain non-retail assets of Energy (principally administrative office and
data processing equipment, vehicles, airplanes, and home office parts
inventories) were excluded.
(2) The amount of $3,886,000 due from Energy was accrued under the provisions
of the Stock Redemption Agreement pertaining to certain non-retail assets
retained and liabilities assumed by the Company. The amount due to Energy
of $4,125,000 was accrued under the provisions of the Stock Redemption
Agreement.
(3) The historical unamortized excess of cost over fair value of net assets
acquired for Energy retail subsidiaries was excluded.
(4) The fair value ($84,031,000) of Energy assets conveyed to repurchase
12,004,430 of EGC common stock was charged to Treasury Stock and the
resulting gain of $33,590,000, representing the excess of fair value of
Energy assets over book value, was credited to Retained Earnings. The gain
on disposition of Energy has been assumed to be non-taxable. If any portion
of the gain is deemed to be taxable, such liability would be accrued and
payable by the Company.
(5) To record the net payment due to Energy at the closing date of the
Transaction.
(6) To (a) eliminate the unamortized discount from face value of the 9%
Convertible Subordinated Debentures due 1998 and the 12% Senior
Subordinated Debentures due 2002 and the unamortized discount from face
value related to the paid 9% Subordinated Debentures due 2007 and (b)
record the tax benefit from the deductions related to the discounts.
(7) To (a) record $5,000,000 of debt acquisition costs paid in arranging the
financing which will be amortized on a straight-line basis over the term of
the new debt of 120 months and (b) eliminate the remaining unamortized debt
issuance costs of $446,000 for Bank of Boston term credit facility and
revolving credit facility.
(8) To record $2,645,000 for the purchase of 346,220 shares of Common Stock
from departing officers, directors and employees and 31,540 shares of
Common Stock from employees who are remaining with the Company.
(9) To record the estimated gross proceeds from the Units offered hereby, which
include $1,227,000 of assumed value of Warrants with the remainder
consisting of the initial accreted value of the Senior Secured Notes. For
pro forma purposes, the Warrants are valued using Black-Scholes methodology
with an assumed annualized volatility of the underlying Common Stock and
without any liquidity discount. No assurance can be given that this
valuation is indicative of the price at which the Warrants may actually
trade.
(10) To (a) record repayment of $58,768,000 face value of existing debentures,
(b) record repayment of $16,050,000 of the term credit facility, (c) record
reduction of $5,130,000 of the revolving credit facility, (d) payment of
$1,126,000 of accrued interest and (e) excess proceeds of $4,872,000.
(11) To eliminate in consolidation of the financial statements a $250,000
deposit made for the Acquisition.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's results of
operations, financial condition and liquidity should be read in conjunction with
the "Selected Consolidated Financial and Other Data," the "Consolidated Pro
Forma Financial and Other Data" and the historical consolidated financial
statements of Empire Gas and the notes thereto included in this Prospectus. Pro
forma results reflect completion of the Transaction and the Offering. The
Company believes that the pro forma results are most indicative of the past
performance of the business of the Company as constituted after the Transaction
and Offering. Historical results and percentage relationships set forth in
"Selected Consolidated Financial Information," "Consolidated Pro Forma Financial
and Other Data" and the financial statements of Empire Gas should not be taken
as indicative of future operations of the Company.
RESULTS OF OPERATIONS
GENERAL
Empire Gas' primary source of revenue is retail propane sales, which
accounted for approximately 91.4% (90.4% on a pro forma basis taking account of
the Transaction) of its revenue in fiscal year 1993. Other sources of revenue
include sales of gas appliances and rental of customer tanks.
The Company's operating revenue is subject to both price and volume
fluctuations. Price fluctuations are generally caused by changes in the
wholesale cost of propane. The Company is not materially affected by these price
fluctuations, inasmuch as it can generally recover any cost increase through a
corresponding increase in retail prices. Consequently, the Company's gross
profit per retail gallon is relatively stable from year to year within each
customer class. Volume fluctuations from year to year are generally caused by
variations in the winter weather from year to year. Because a substantial amount
of the propane sold by the Company to residential and commercial customers is
used for heating, the severity of the weather will affect the volume sold.
Volume fluctuations do materially affect the Company's operations because lower
volume produces less revenue to cover the Company's fixed costs, including any
debt service costs. Because a substantial amount of the propane sold to
residential and commercial customers is used for heating, the Company's business
is seasonal with approximately 60% (62% on a pro forma basis) of Empire Gas'
sales occurring during the five months of November through March.
The Company's expenses consist primarily of cost of products sold, general
and administrative expenses and, to a much lesser extent, depreciation and
amortization and interest expense. Purchases of propane inventory account for
the vast majority of the cost of products sold. Historically, the Company has
purchased approximately 75% of its propane under supply contracts with major oil
companies. The Company purchases propane on the spot market to satisfy its
remaining propane requirements. The typical supply contract is for a one-year
term and requires the Company to purchase propane at the supplier's daily posted
price or at a negotiated discount. The Company believes that it will continue to
purchase inventory in this manner. While the cost of propane may fluctuate
considerably from year to year, as discussed above, these fluctuations do not
generally affect the Company's operating income because of corresponding changes
in the Company's retail price. See "Risk Factors -- Propane Cost Volatility" and
"Risk Factors -- Operating Risks." The Company has not experienced any
difficulty in obtaining propane in recent years and believes that domestic
sources of propane will continue to meet its needs.
The Company's general and administrative expenses consist mainly of salaries
and related employee benefits, vehicle expenses, and insurance.
The Company's interest expense has consisted primarily of interest on its
existing credit facility, 12% Senior Subordinated Debentures, 1998 9%
Subordinated Debentures, and 2007 9% Subordinated Debentures. While the Company
will use a portion of the proceeds of this Offering or the New Credit Facility
to repay all of its existing indebtedness except a portion of its 2007 9%
Subordinated Debentures (see "Use of Proceeds"), the Company's interest expense
will increase substantially as a result of the issuance of the Senior Secured
Notes. Through 1999 a significant portion of the increase will be non-cash
interest expense.
29
<PAGE>
PRO FORMA OPERATIONS
GENERAL. Operating revenue of the Company on a pro forma basis is less than
actual operating revenue for each period because of a decrease in operating
revenue of approximately $61.1 million for the year ended June 30, 1993 and
$54.6 million for the nine months ended March 31, 1994 from the exclusion of the
sales from the 133 retail service centers that are being transferred in the
Transaction. This decrease will be partially offset by an increase of
approximately $9.6 million for the year ended June 30, 1993 and $9.5 million for
the nine months ended March 31, 1994 from the inclusion of sales from service
centers acquired in the Acquisition. On a pro forma basis, the Company reported
a loss of approximately $3.2 million for the fiscal year ended June 30, 1993 and
a loss of $.4 million for the nine months ended March 31, 1994. These compare to
income of $2.2 million and $5.8 million for the respective historical periods.
The changes from historical results are caused by an increase in interest
expense after the Transaction and by the fact that the Company will bear all of
the interest expense even though approximately 40% of the Company (based on
retail gallons sold) will be divested in the Transaction.
Changes between actual and pro forma results for most other operating
results (cost of products sold, gross profit, provisions for doubtful accounts
and depreciation and amortization) are roughly equivalent (on a percentage
basis) to changes in operating revenue. Other than for general and
administrative expenses and interest expense (discussed further below), the
Company does not currently foresee any changes in operating results resulting
from the Transaction that are not roughly proportional to changes in operating
revenue resulting from the disposition of centers and the Acquisition.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses on
a pro forma basis are $15.9 million less for the nine months ended March 31,
1994, and $19.9 million less for the year ended June 30, 1993, than the
respective historical amounts. The reduction represents the elimination of
salaries and related expenses of the departing officers, the termination of
certain agreements between the Company and Mr. Plaster or entities controlled by
him, and the elimination of costs related to service centers that will not be
part of the Company after the Transaction. This reduction will be partially
offset by an increase in costs of $1.9 million and $2.6 million for the nine
months ended March 31, 1994 and the year ended June 30, 1993, respectively,
related to the operations acquired in the Acquisition. The expenses of the
operations acquired in the Acquisition were, however, reduced by approximately
$1.2 million for the fiscal year ended June 30, 1993, reflecting elimination of
the costs of duplicative personnel and certain other items. The Company believes
that it will realize additional reductions in operating expenses (which are not
reflected in the pro forma financial information) through the consolidation of a
number of existing retail service centers.
INTEREST EXPENSE. Pro forma interest expense (plus amortization of debt
discount and expense) was $11.3 million and $15.2 million for the nine months
ended March 31, 1994 and the fiscal year ended June 30, 1993, respectively, an
increase of approximately 44% and 32%, respectively, over the actual amounts.
The overall increase results from a $32.5 million increase in total indebtedness
of the Company and a small increase in the weighted average effective interest
rate from 12.8% (as of March 31, 1994) to 13.0%. The increase in the effective
interest rate results from the repayment of all of the Company's currently
outstanding debt (other than approximately $9.5 million principal amount of the
2007 9% Subordinated Indentures) in connection with the Offering, and the
replacement of that indebtedness with the Senior Secured Notes and the New
Credit Facility, which will carry a higher effective interest rate.
INCOME TAXES. The effective rate for pro forma income taxes varies from the
historical rate because of the increase in the nondeductible excess of cost over
fair value of net assets acquired as a result of the Transaction.
NINE MONTHS ENDED MARCH 31, 1994 AND MARCH 31, 1993
OPERATING REVENUE. Operating revenue decreased by approximately $1.2
million, or 1.1%, from $111.3 million for the nine months ended March 31, 1993
to $110.1 million for the nine months ended March 31, 1994. This decrease was
due to a decrease in propane sales of approximately $1.8 million offset by an
increase in parts and appliances sales of approximately $.6 million. The
decrease in propane sales was due to an approximate $.006 decrease in the
average net sales price per gallon combined with a 1% decrease in gallons sold.
The increase in parts and appliance sales was due to increased sales efforts by
the Company.
30
<PAGE>
COST OF PRODUCTS SOLD. Cost of products sold decreased by approximately
$2.0 million, or 3.8%, from $52.8 million for the nine months ended March 31,
1993 to $50.8 million for the nine months ended March 31, 1994. This decrease
was due to a decrease of approximately $2.5 million in the cost of propane
offset by an increase of approximately $.5 million in the cost of parts and
appliances. The decrease in the cost of propane was due to a $.016 decrease in
the average net cost per gallon combined with a 1% decrease in gallons sold. The
increase in the cost of parts and appliances was due to the increased sales
activity.
GROSS PROFIT. The Company's gross profit increased by approximately
$800,000 (or 1.4%) from $58.5 million for the nine months ended March 31, 1993
to $59.3 million for the nine months ended March 31, 1994. The Company's gross
profit per gallon increased from $.422 for the nine months ended March 31, 1993
to $.434 for the nine months ended March 31, 1994.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses for
the nine months ended March 31, 1994, increased approximately $1.1 million due
to increases of $700,000 in insurance and liability claims expense, $500,000 in
salaries and commissions, and $200,000 in payroll taxes and employee benefits.
These increases were offset by decreases of $100,000 each in vehicle fuel and
maintenance, rent and maintenance, and travel and entertainment. The increase in
insurance and liability claims was due primarily to increased claims. The
increase in salaries and commissions was due to normal pay increases combined
with a slight increase in the total number of employees. The increase in payroll
taxes and employee benefits was due to the increase in taxes related to the
increased payroll and the increase in health insurance expenses. The decrease in
vehicle fuel and maintenance was due to reduced vehicle maintenance as a result
of the purchase of new vehicles to replace older vehicles.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization remained
relatively constant, decreasing by approximately $200,000 or 3% from $7.7
million for the nine months ended March 31, 1993 to $7.5 million for the nine
months ended March 31, 1994.
INTEREST EXPENSE. Interest expense and amortization of debt discount and
expense decreased approximately $800,000 or 9%, from $8.7 million for the nine
months ended March 31, 1993 to $7.9 million for the nine months ended March 31,
1994. This decrease was the result of lower interest rates and reduced borrowing
levels as compared to the comparable period for the prior year.
INCOME TAXES. The effective income tax rate for the nine months ended March
31, 1994 was essentially unchanged from the effective rate for the nine months
ended March 31, 1993.
TRANSACTION PROPOSAL COSTS. Transaction proposal costs of $674,000 for the
nine months ended March 31, 1994 consisted of legal and accounting expenses
incurred in connection with a proposed restructuring of the Company's debt and
equity that resulted in the Transaction described herein.
FISCAL YEARS ENDED JUNE 30, 1993 AND JUNE 30, 1992
OPERATING REVENUE. Operating revenue increased $16.3 million, or 14.5%,
from $112.1 million in fiscal year 1992 to $128.4 million in fiscal year 1993.
This increase was the result of a $15.9 million increase in propane sales and
$800,000 increase in sales of parts and gas appliances, offset by a $400,000
decrease in other revenues. The increase in propane sales was caused by a 12.1%
increase in gallons sold and a 2% increase in the average gross sales price per
gallon. The increased volume reflects the results of a winter heating season
that was considered nearly normal based on historical standards as compared to a
warmer winter heating season in fiscal year 1992. There were approximately 12.7%
more weighted average heating degree days in fiscal year 1993 than in fiscal
year 1992. Other revenues decreased by $400,000 primarily due to a decrease in
fixed asset sales.
COST OF PRODUCTS SOLD. Cost of products sold increased $9.2 million, or
18%, from $51.0 million in fiscal year 1992 to $60.2 million in fiscal year
1993. The increase resulted from the 12.1% increase in gallons sold, which
reflects the increase in weighted average heating degree days, and a 4% increase
in the wholesale cost of propane.
31
<PAGE>
GROSS PROFIT. The Company's gross profit for the year increased $7.1
million, or 11.6%. The increase was caused by a 14.5% increase in operating
revenue offset by an 18% increase in cost of products sold. The Company's gross
profit per gallon was relatively constant at $.429 in fiscal year 1993 and $.425
in fiscal year 1992.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
increased $1.0 million, or 2.5%, from $39.4 million in fiscal year 1992 to $40.4
million in fiscal year 1993. The increase was due primarily to increases of
$800,000 in salaries and commissions and $600,000 in insurance and liability
claims, offset by a decrease of $200,000 in professional fees. The increase in
salaries and commissions reflects an increase in the commissions earned due to
the increased sales activity. The increase in insurance costs is primarily due
to higher worker compensation insurance premiums. The decrease in professional
fees is due to reduced legal fees primarily related to federal income tax
matters that have been settled.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
increased $760,000 from $200,000 in fiscal year 1992 to $960,000 in fiscal year
1993. This increase reflects the adjustment of the Company's annual provision to
a level that the Company believes will be indicative of normal provisions for
future years. The provision for fiscal year 1992 was much lower because the
Company had significantly increased its provision in fiscal year 1991 due to
concerns about the effect of the Persian Gulf crisis and the economy on its
operations. The provision for fiscal year 1991 was more than adequate due, in
part, to certain measures the Company implemented in fiscal year 1992 that
improved the monitoring of its accounts receivable. Accordingly, a relatively
small provision was required for fiscal year 1992. See "Fiscal Years Ended June
30, 1992 and June 30, 1991."
DEPRECIATION AND AMORTIZATION. Depreciation and amortization remained
relatively constant, increasing by $300,000 or 3%, from $10.1 million in 1992 to
$10.4 million in 1993.
INTEREST EXPENSE. Cash interest expense decreased by approximately $900,000
or 8.4%, from $10.7 million in fiscal year 1992 to $9.8 million in fiscal year
1993. This decrease was primarily attributable to lower interest rates in fiscal
year 1993. Amortization of debt discount and expense increased $700,000 or 70%
from $1.0 million in 1992 to $1.7 million in 1993. This increase related to
increased amortization of the discounts on the Company's 1998 9% Subordinated
Debentures, 2007 9% Subordinated Debentures, and 12% Senior Subordinated
Debentures, as well as amortization of expenses related to the Company's
Existing Credit Facility.
RECAPITALIZATION COSTS. During fiscal year 1993, the Company incurred
$200,000 in expenses relating to a proposed recapitalization that the Company
later decided not to pursue.
INCOME TAXES. The effective tax rate for the fiscal year ended June 30,
1993 was 47.8% compared to 24.5% for the fiscal year ended June 30, 1992. The
increase was the result of the Company's reporting an income in the 1993 period
compared to a loss in the 1992 period. The Company had a positive effective tax
rate in 1992 despite its reported loss primarily because of state taxes imposed
on operations that were profitable in individual states and because of the
effective tax resulting from the amortization of the excess of cost over fair
value of assets sold.
FISCAL YEARS ENDED JUNE 30, 1992 AND JUNE 30, 1991
OPERATING REVENUE. Operating revenue decreased $9.7 million, or 8%, from
$121.8 million in 1991 to $112.1 million in 1992. The decrease was the result of
a $10.2 million decrease in propane sales offset by a $500,000 increase in other
revenues. The decrease in retail sales was the result of a 8.8% decrease in the
average gross sales price per gallon offset by a 1% increase in gallons sold.
The decrease in selling price was primarily attributable to the general trend of
a reduction in petroleum prices following the end of the Persian Gulf crisis.
Volume did not fluctuate significantly inasmuch as the weighted average degree
days decreased by less than 1% from fiscal year 1991 to 1992. Other revenues
increased $500,000 primarily due to gains on the sale of surplus real estate.
COST OF PRODUCTS SOLD. Cost of products sold decreased by $9.0 million, or
15%, from $60.0 million in fiscal year 1991 to $51.0 million in fiscal year
1992. The decrease in cost of products sold resulted from a
32
<PAGE>
15.7% decrease in the wholesale cost of propane offset by the 1% increase in
gallons sold. As discussed above, this cost decrease related to the general
trend of a reduction in petroleum prices following the end of the Persian Gulf
crisis.
GROSS PROFIT. The gross profit for the year decreased by $700,000, or 1.1%.
This decrease was caused by the 8% decrease in operating revenue offset by a
decrease of 15% in the cost of products sold. The Company's gross profit per
gallon decreased from $.441 in fiscal year 1991 to $.425 in fiscal year 1992.
The gross profit per gallon in 1991 was abnormally high as a result of the
Persian Gulf war.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
decreased $2.1 million, or 5%, from $41.5 million in 1991 to $39.4 million in
1992. The decrease was due to decreases of $800,000 in transportation expense,
$600,000 in insurance and liability claims, $400,000 in rent and maintenance,
and $300,000 in employee benefits. The decrease in transportation expense
primarily reflects the decrease in the cost of propane fuel used in the
transportation equipment. Insurance and liability claims expense decreased due
to a reduction in claims expense as the result of fewer claims. Maintenance
expense decreased primarily due to lower maintenance costs for the underground
storage facility and reduced purchases of paint for painting storage tanks.
Employee benefits decreased due to the reduction of the Company's costs for
employee health insurance claims due to an increase in the premiums charged to
employees which partially offset the cost of providing this insurance.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
decreased $2.6 million, or 92.9%, from $2.8 million in 1991 to $200,000 in 1992.
In fiscal year 1991 the Company reevaluated its reserve for doubtful accounts
and significantly increased its reserve because of concerns about the collection
of accounts due to the increase in retail propane prices caused by the Persian
Gulf Crisis and general concerns about the economy. Historically the Company's
provision had been approximately $1.2 million per year. During fiscal year 1992,
the Company completed the installation of computers in all of its retail service
centers, which enabled it to improve its monitoring of accounts receivable.
Because the Company's collection of accounts receivable relating to fiscal year
1991 was better than anticipated and because the Company improved its collection
process through the installation of the computers, a much smaller provision for
doubtful accounts was required for fiscal year 1992.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$500,000, or 5.2%, from $9.6 million in fiscal year 1991 to $10.1 million in
fiscal year 1992. This was primarily attributable to increased capital
expenditures.
INTEREST EXPENSE. Interest expense decreased $1.3 million, or 10.8%, from
$12.0 million in 1991 to $10.7 million in 1992. This decrease was primarily
attributable to decreased borrowing levels and lower interest rates in 1992 as
compared to 1991. Amortization of debt discount and expense increased $110,000
or 12.3% from $890,000 in 1991 to $1.0 million in 1992. This increase relates
primarily to increased amortization of the discounts on the Company's 1998 9%
Subordinated Debentures, 2007 9% Subordinated Debentures, and 12% Senior
Subordinated Debentures.
MERGER PROPOSAL COSTS. During fiscal year 1992, the Company recorded
expenses of $450,000 related to a proposed acquisition of a large competitor.
The Company incurred these costs in performing due diligence related to the
acquisition. The acquisition was later abandoned with the related costs being
expensed.
CRESTED BUTTE LITIGATION EXPENSE. During 1991, the Company incurred
approximately $700,000 in litigation losses related to a matter that was
concluded in fiscal year 1993. No further costs will be incurred.
INCOME TAXES. The effective tax rate for the fiscal year ended June 30,
1992 was approximately 24.5% compared to a tax benefit of 26.1% in the prior
year. Although the Company reported a loss for both periods, the loss was
greater in the fiscal year ended June 30, 1991 and taxes on earnings in
individual states where operations were profitable, plus the effect of
amortization of excess of costs over fair value of net assets acquired, resulted
in a net positive tax rate in the 1992 period.
33
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have arisen primarily from funding its
working capital needs, capital expenditures and debt service obligations.
Historically, the Company has met these requirements from cash flow generated by
operations and from borrowings under its revolving credit line.
OPERATING ACTIVITIES. Cash flow provided from operating activities was $6.2
million in fiscal year 1993 as compared to $10.0 million in fiscal year 1992.
Cash flow from operations for fiscal year 1993 does not fully reflect the
beneficial impact that the first nearly normal winter since fiscal year 1988 had
on the Company's operations. As discussed above, the Company's operating revenue
and gross profit increased approximately $16.3 million and $7.1 million,
respectively, due primarily to increased sales of propane as a result of the
increase in weighted average heating degree days for fiscal year 1993. See
"Results of Operations -- Fiscal Years Ended June 30, 1993 and June 30, 1992."
EBITDA also increased, from $21.1 million for fiscal year 1992 to $26.4 million
for fiscal year 1993. Cash flow from operations did not experience a similar
increase due to the following factors: (i) the Company used approximately $2.4
million during fiscal year 1993 for a non-recurring payment of accrued interest
on federal income taxes, (ii) the Company used approximately $3.5 million during
fiscal year 1993 to pay the current year's income taxes, a substantial increase
from the prior year's income tax payment, (iii) the Company used approximately
$1.5 million during fiscal year 1993 to reduce its accounts payables and accrued
expenses, and (iv) accounts receivable at the end of fiscal year 1993 increased
as a result of the increased sales activity.
Cash flow provided from operating activities was $12.3 million for the nine
months ended March 31, 1994, compared to $4.6 million for the same period in
1993. The increase in cash flow resulted primarily from an increase in payables
and a smaller increase in receivables compared to the prior period.
Cash flow of the Company from operating activities on a pro forma basis for
the fiscal year ended June 30, 1993 and for the nine months ended March 31, 1994
was $3.8 million and $4.4 million lower than the respective historical levels as
a result of the disposition of service centers in the Stock Purchase (resulting
in reductions of $4.0 million and $6.5 million for the respective periods),
partially offset by an increase (of $.2 million and $2.1 million in the
respective periods) resulting from operating cash flow contributed by the
centers acquired in the Acquisition. The Company intends to increase its
operating cash flow by reducing operating expenses by consolidating a number of
retail service centers, and by increasing its operating revenue through
acquisitions (including the Acquisition) of retail service centers, development
of new retail service centers, and expansion of the Company's existing
residential customer base. There can be no assurance that the foregoing
increases in cash flow from operations can be realized.
The seasonal nature of the Company's business will require it to rely on
borrowings under the $15.0 million New Credit Facility as well as cash from
operations, particularly during the summer and fall months when the Company is
building its inventory in preparation for the winter heating season. While
approximately 62% of the Company's operating revenue (on a pro forma basis) is
earned in the second and third quarters of its fiscal year, certain expense
items such as general and administrative expense are recognized on a more
annualized basis. Interest expense also tends to be higher during the summer and
fall months because the Company relies in part on increased borrowings on its
revolving credit line to finance inventory purchases in preparation for the
Company's winter heating season.
CAPITAL EXPENDITURES. The Company's capital expenditures consist of routine
expenditures for existing operations as well as non-recurring expenditures,
purchases of assets for the start-up of new retail service centers, and
acquisition costs (including costs of acquiring retail service centers). Routine
expenditures usually consist of expenditures relating to the Company's bulk
delivery trucks, customer tanks, and costs associated with the installation of
new tanks. The Company believes that capital expenditures will increase as the
Company more actively pursues acquisitions. See "Business -- Business Strategy."
The Company's capital expenditures totalled $4.4 million in fiscal year 1993
and $6.7 million in fiscal year 1992. These capital expenditures were offset by
proceeds from the sale of retail service centers and surplus real estate
totalling $1.1 million in fiscal year 1993 and $3.1 million in fiscal year 1992.
Of these amounts, approximately $2.5 million in fiscal year 1993 and $3.4
million in fiscal year 1992 were for routine
34
<PAGE>
capital expenditures for existing operations. The Company incurred relocation
expenditures of $225,000 in fiscal year 1992, relating to the relocation of the
Company's retail service centers to locations on or near major highways. The
Company incurred nonrecurring expenditures of $336,000 in fiscal year 1993 and
$268,000 in fiscal year 1992. These expenditures related to the development of a
new program to build dispensing stations and expenditures for the jet used by
the Company, which the Company is disposing of in connection with the
Transaction. The Company started 10 new retail service centers in fiscal year
1993, and 11 new retail service centers in fiscal year 1992, incurring costs of
approximately $1.4 million and $2.4 million, respectively. No expenditures were
made for acquisitions during fiscal year 1993, and acquisition costs of
approximately $225,000 were incurred in fiscal year 1992.
The Company believes that capital expenditures for routine expenditures
after the Transaction will be approximately $2.0 million per year, and that
capital expenditures for the start-up of new retail service centers will not
exceed $1.0 million per year. The Company anticipates that capital expenditures
in fiscal year 1994 will be significantly larger than 1993, primarily due to an
increase in acquisition activity. The Company will use approximately $12.0
million of the proceeds of this Offering to fund the majority of the $14.0
million Acquisition purchase price, with approximately $1.5 million being funded
through the Company's New Credit Facility. The remaining $500,000 will be funded
with cash from operations over a five-year period. The Company acquired a
service center in Colorado in March, 1994, at a cost of approximately $473,000,
of which $273,000 was paid in cash, with the remaining amount financed through
the issuance of two five-year notes to the seller, one for $100,000 bearing
interest at 7% and the other for $100,000 bearing no interest. The Company has
entered into an agreement to purchase another service center in Missouri at a
cost of $325,000, of which $210,000 will be paid in cash at closing and the
remaining amount will be financed through the issuance of two ten-year notes to
the seller, one for $90,000 bearing interest at 7% and the other for $25,000
bearing no interest. For future acquisitions, the Company intends to fund
acquisitions with seller financing, to the extent feasible, and with cash from
operations or bank financing. The Company intends to fund its routine capital
expenditures and the purchases of assets for new retail service centers with
cash from operations, borrowings on the New Credit Facility, or other bank
financing. The Company is currently in the process of opening two new service
centers at an expected initial cost of $150,000 each. The Company does not
currently have any material commitments for any capital expenditures other than
the agreements for the pending acquisitions and the new service centers
discussed above. The Company is also exploring the possibility of making
modifications to its underground storage facility, which will require additional
capital expenditures. The Company has not yet determined the amount that it
would need to spend to make such modifications, or whether such modifications
will in fact be made. See "Business -- Propane Operations (Distribution)." Any
acquisitions or purchases of assets will be subject to the restrictions on
investments and debt incurrence contained in the New Credit Facility and the
Indenture as well as the restrictions contained in the Non-Competition
Agreement. See "Financing Activities"; "Description of Senior Secured Notes";
"Description of Other Indebtedness"; and "Certain Relationships and Related
Transactions -- The Transaction."
FINANCING ACTIVITIES. During fiscal year 1993, the Company replaced its old
term loan and its Old Working Capital Facility with the Company's current
existing credit facility. The Company also made non-recurring expenditures of
approximately $2.1 million in connection with the termination of two employee
benefit plans.
Upon consummation of the Offering and application of the net proceeds
therefrom, the Company will have substantial debt service obligations. While the
net proceeds will be used to retire all the Company's existing indebtedness and
approximately $16.5 million principal amount 2007 9% Subordinated Debentures,
the Company will carry a significant amount of debt and will be required to use
a substantial portion of its cash flow to make interest payments. On a pro forma
basis, after giving effect to the consummation of this Offering and the
application of the net proceeds therefrom, for the year ended June 30, 1993, the
Company's cash interest expense would have been approximately $10.2 million.
Because the New Credit Facility will bear interest at a floating rate, the
Company's financial condition will be affected by fluctuations in interest
rates. See "Description of Other Indebtedness -- New Credit Facility."
35
<PAGE>
The Company's $15.0 million New Credit Facility will mature on or about
July, 1997, at which time the Company will have to refinance or replace some
portion of the facility and may be required to pay some portion of any
outstanding balance. There can be no assurance that the Company will be able to
refinance or replace the New Credit Facility, or the terms upon which any such
financing may occur. Beginning in fiscal year 1999, the cash interest rate on
the Senior Secured Notes will increase to 12 7/8%. The Company believes cash
from operations will be sufficient to meet the increased interest payments. See
"Risk Factors -- Payment on Indebtedness Prior to Maturity of Senior Secured
Notes."
The Company's New Credit Facility and the Indenture will impose restrictions
on the Company's ability to incur additional indebtedness. Such restrictions,
together with the highly leveraged position of the Company, could restrict
corporate activities, including the Company's ability to respond to market
conditions, to provide funds for capital expenditures, to refinance its debt, if
desired, or to take advantage of business opportunities. After consummation of
the Offering, the Company's ability to borrow will be very limited.
The Company believes that based on current levels of operations and assuming
normal winter weather, cash flow from operations together with borrowings under
the New Credit Facility will be adequate to fund the Company's operating needs,
anticipated capital expenditures, and debt service obligations until the New
Credit Facility expires in 1997. The Company believes that earnings before
interest, taxes, depreciation and amortization and operating cash flow will
exceed debt service requirements and that seasonal needs for cash can be met
through borrowings under the New Credit Facility. The Company believes that it
will have sufficient capitalization and cash flow to refinance the New Credit
Facility when it expires, but there can be no assurance of this. In particular,
there can be no assurance that the Company's current level of operations will
continue or that the winter weather in the various regions in which the Company
operates will not be substantially warmer than the historical average of winter
temperatures for these regions. The Company's revenues and operating income
could decrease as a result of substantially abnormal winter weather to a level
that could adversely affect the Company's ability to service its debt with funds
from operations. Furthermore, a substantial increase in interest rates could
result in an increase in interest expense under the New Credit Facility that
could similarly endanger the Company's ability to service its debt. If the
Company were unable to meet its debt service obligations or obtain refinancing
or additional financing, it could be forced to default on its respective debt
obligations and, as an ultimate remedy, seek protection under the federal
bankruptcy laws. See "Risk Factors -- High Leverage and Ability to Service
Debt."
EFFECTS OF INFLATION AND CHANGING PRICES
General inflation does not have a material effect upon Company operations.
Prices of propane will change materially from time to time due to either the
combined or individual effects of weather and available supplies of petroleum
products. Such changes may have differing effects on revenues and costs of
products sold depending upon the inventory levels when such changes occur.
Generally, increases in the cost of propane do not substantially affect the
Company's gross margin, inasmuch as these cost increases are usually recovered
through a corresponding increase in the Company's retail price.
FUTURE CHANGES IN ACCOUNTING PRINCIPLE
Effective July 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). As a result of this change, there was no material effect upon the
Company's financial statements.
SFAS 109 requires recognition of deferred tax liabilities and assets for the
difference between the financial statement and tax basis of assets and
liabilities. Under this new standard, a valuation allowance is established to
reduce deferred tax assets if it is more likely than not that a deferred tax
asset will not be realized.
Prior to fiscal year 1994, deferred taxes were determined using the
Statement of Financial Accounting Standards No. 96.
36
<PAGE>
BUSINESS
GENERAL
Empire Gas is one of the largest retail distributors of propane in the
United States and, through its subsidiaries, has been engaged in the retail
distribution of propane since 1963. During the fiscal year ended June 30, 1993,
without giving effect to the Transaction, Empire Gas supplied propane to
approximately 200,000 customers in 27 states from 284 retail service centers and
sold approximately 142.1 million gallons of propane, accounting for
approximately 91.4% of its operating revenue. The Company also sells related
gas-burning appliances and equipment and rents customer storage tanks.
The Company will implement a change in ownership and management
contemporaneously with this Offering by repurchasing shares of its common stock
from its controlling shareholder, Mr. Robert W. Plaster, and certain other
departing officers in exchange for all of the shares of common stock of a
subsidiary that owns 133 retail service centers located primarily in the
Southeast. Mr. Paul S. Lindsey, Jr., who has been with the Company for 26 years
and currently serves as the Company's Chief Operating Officer and Vice Chairman
of the Board, will become the Company's controlling shareholder, Chief Executive
Officer, and President. The change in ownership and management will enable the
Company to pursue a growth strategy focussed on acquiring independent propane
operating companies. Contemporaneously with the Offering, the Company will
acquire the assets of PSNC Propane Corporation, a company located in North
Carolina that has six retail service centers and five additional bulk storage
facilities with annual volume of approximately 9.5 million gallons for an
aggregate purchase price of approximately $14.0 million (which includes payment
for inventory and accounts receivable). The Company also recently completed the
acquisition of a retail propane company in Colorado with annual volume of
approximately 700,000 gallons and has entered into a contract to purchase a
retail propane company in Missouri with annual volume of approximately 690,000
gallons.
Following the Transaction, Empire Gas' operations will consist of 158 retail
service centers with 22 additional bulk storage facilities. During the fiscal
year ended June 30, 1993, Empire Gas, after giving effect to the Transaction,
sold approximately 84.8 million gallons of propane (approximately 40% less than
prior to the Transaction) to approximately 112,000 customers in 20 states, which
(based on retail gallons sold) makes it one of the 11 largest retail
distributors of propane in the United States. The impact on the Company's
operations of weather fluctuations in a particular region will be reduced as a
result of the substantial geographic diversification of the Company after the
Transaction, with operations in the west, the southwest, Colorado, the upper
midwest, the Mississippi Valley and the southeast.
Propane, a hydrocarbon with properties similar to natural gas, is separated
from natural gas at gas processing plants and refined from crude oil at
refineries. It is stored and transported in a liquid state and vaporizes into a
clean-burning energy source that is used for a variety of residential,
commercial, and agricultural purposes. Residential and commercial uses include
heating, cooking, water heating, refrigeration, clothes drying, and
incineration. Commercial uses also include metal cutting, drying, container
pressurization, and charring, as well as use as a fuel for internal combustion
engines. As of December 31, 1991, the propane industry had grown, as measured by
the gallons of retail residential/commercial propane sold, at the rate of 3.7%
per annum since 1984.
The Company believes the highly fragmented retail propane market presents
substantial opportunities for growth through consolidation. As of December 31,
1991, there were approximately 8,000 propane retail marketing companies in the
continental United States with approximately 13,500 retail distribution points.
In addition, Empire Gas believes growth can be achieved by the conversion to
propane of homes that currently use either electricity or fuel oil products
because of the price advantage propane has over electricity and because propane
is a cleaner source of energy than fuel oil products. As of December 31, 1990,
there were approximately 23.7 million homes that used electricity for heating,
water heating, cooking and other household purposes, approximately 11.2 million
homes that used fuel oil products, and approximately 5.7 million homes that used
propane for such purposes.
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<PAGE>
Empire Gas focuses on propane distribution to retail customers, including
residential, commercial, and agricultural users, emphasizing, in particular,
sales to residential customers, a stable segment of the retail propane market
that traditionally has generated higher gross margins per gallon than other
retail segments. Sales to residential customers, giving effect to the
Transaction, accounted for approximately 65.5% of the Company's aggregate
propane sales revenue and 74.3% of its aggregate gross margin from propane sales
in fiscal year 1993.
Empire Gas attracts and retains its residential customers by supplying
storage tanks, by offering superior service and by strategically locating
visible and accessible retail service centers on or near major highways. Empire
Gas focuses its operations on sales to customers to which it also leases tanks,
as sales to this segment of the retail propane market tend to be more stable and
typically provide higher gross margins than sales to customers who own tanks.
After the Transaction, Empire Gas will own approximately 109,000 storage tanks
that it leases to approximately 83% of its customers. Empire Gas' residential
customer base is relatively stable, because (i) fire safety regulations and
state container laws restrict the filling of a leased tank solely to the propane
supplier that leases the tank, (ii) rental agreements for its tanks restrict the
customers from using any other supplier, and (iii) the cost and inconvenience of
switching tanks minimizes a customer's tendency to change suppliers.
Historically, the Company has retained 90% of all its customers from year to
year, with the average customer remaining with Empire Gas for approximately 10
years.
BUSINESS STRATEGY
The change in ownership and management of the Company will enable it to
pursue a business strategy to increase its revenues and profitability through
(i) expansion by acquisitions and start-ups, (ii) expansion of its existing
residential customer base, and (iii) geographic rationalization and the
reduction of operating expenses. Empire Gas will seek opportunities to acquire
retail service centers in areas where it already has a strong presence and to
develop new retail service centers in new markets. Efforts to expand the
existing residential customer base will focus primarily on conversion of
customers currently using electricity for heating, conversion of customers
currently using fuel oil and wood due to environmental impact, and soliciting
customers created by the new home construction market in growth areas. Empire
Gas intends to dispose of a limited number of retail service centers that are
located in markets in which it does not have, and does not desire to develop, a
strong presence or that do not have the potential for long-term growth. Empire
Gas believes it will be able to reduce its operating expenses through a program
of consolidating a number of retail service centers where such consolidations
will yield operating efficiencies.
GROWTH THROUGH ACQUISITION OF RETAIL SERVICE CENTERS. Historically, the
acquisition of other retail service centers has been viewed by the industry as
one of the primary means of growth and much of the Company's growth over the
past thirty years has been attributable to acquisitions. As of December 31,
1991, there were substantially in excess of 8,000 retail marketing companies in
the continental United States with at least 13,500 distribution points. The
Company intends to focus its acquisition efforts on candidates that meet certain
criteria, including minimum cash flow requirements and location in areas of
economic growth or areas in which the Company currently has a market position
which it desires to strengthen.
The Company has not engaged in significant acquisition activity over the
past several years. With the change in ownership and management, the new
management, under the leadership of Mr. Lindsey, will emphasize achieving growth
through acquisitions. The Company has entered into an agreement which provides
that, contemporaneously with this Offering, the Company will complete the
acquisition of the assets of PSNC Propane Corporation, a company that has six
retail service centers with five additional bulk storage facilities located in
North Carolina, an area the Company has targeted because of its high economic
growth. The aggregate purchase price of the Acquisition will be approximately
$14.0 million (which includes payment for inventory and accounts receivable),
which consists of $12.0 million for certain assets, primarily customer and
storage tanks, approximately $1.5 million for accounts receivable and inventory,
and $500,000 for a non-compete agreement with the seller. The Company will fund
$12.0 million of the purchase price with the proceeds of this Offering and will
fund the $1.5 million for the purchase of the accounts receivable and inventory
through the Company's New Credit Facility. The purchase price for the
non-compete agreement will be paid out over five years with cash flow from
operations.
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<PAGE>
The Acquisition will enable the Company to expand its geographic market, to
increase its high margin residential customer base and to improve its operating
results and cash flow. The Company currently has only limited operations in
North Carolina, and all of the operations to be acquired from PSNC in the
Acquisition are out of the Company's current service territory. Based on the
gallons sold by the acquired operations in 1993, the Company believes this
acquisition will increase its annual propane sales by approximately 9.5 million
gallons, approximately 64% of which will be for sales to residential customers
with generally higher margins than sales to industrial and agricultural
customers. Empire Gas believes it will be able to improve PSNC Propane
Corporation's operating results and cash flow through the integration of its
operations into the Company's operations and the elimination of certain
administrative personnel as well as the elimination of certain other general and
administrative costs. See "Pro Forma Financial and Other Data." There can be no
assurance that the anticipated cash flows will be indicative of the actual cash
flows realized by the Company.
In March of 1994, the Company completed the acquisition of a retail service
center in Colorado with annual propane volume of approximately 700,000 gallons
and in April of 1994 signed a contract for the acquisition of a retail service
center in Missouri with annual propane volume of approximately 690,000 gallons.
The Colorado acquisition was completed at a cost of approximately $473,000, of
which $273,000 was paid in cash, with the remaining amount financed through the
issuance of two five-year notes to the sellers, one for $100,000 bearing
interest at 7% and the other for $100,000 bearing no interest. The Missouri
center will be purchased for a total cost of $325,000, of which $210,000 will be
paid in cash at closing, with the remaining amount financed through the issuance
of two ten-year notes to the seller, one for $90,000 bearing interest at 7% and
the other for $25,000 bearing no interest. The Company does not currently have
any material commitments for any acquisitions other than the agreements for the
pending acquisitions discussed above. The Company will continue to seek
additional opportunities to acquire retail service centers and intends to
finance such acquisitions, to the extent possible, through seller financing. The
Company will also rely on internally generated cash flow and bank financing,
including borrowing under the New Credit Facility, to meet any remaining
financing requirements. See "Risk Factors -- Potential Acquisitions and
Development of New Retail Service Centers." Any acquisitions will be subject to
the restrictions on investments and debt incurrence contained in the New Credit
Facility and the Indenture as well as the restrictions contained in the
Non-Competition Agreement. See "Description of the Senior Secured Notes";
"Description of Other Indebtedness"; "Certain Relationships and Related
Transactions -- The Transaction."
GROWTH THROUGH DEVELOPMENT OF NEW RETAIL SERVICE CENTERS IN NEW
MARKETS. The Company believes opportunities exist to increase the size and
profitability of its operations by starting new retail service centers in new
markets. The Company generally looks for opportunities in areas experiencing
economic growth. Indicators of this growth include the relocation of businesses
to an area or an increase in the population in the area. The Company started
three new retail service centers in fiscal year 1992 that will remain with the
Company after the Transaction (at an aggregate cost of $502,000) and four such
centers in fiscal year 1993 (at an aggregate cost of $453,000), and has started
three new retail service centers to date during fiscal year 1994 (at an
aggregate cost of $75,000 to date).
The Company continues to look for opportunities to purchase land and assets
to start new retail service centers. It is currently in the process of opening
new centers in Toledo, Ohio and Wilkesboro, North Carolina. Although the Company
expects to open additional centers, it has not yet begun opening any additional
centers and there can be no assurance additional centers will be open. Because
minimal capital expenditures (approximately $150,000 per center) are required to
cover first-year start up costs of a new retail service center, the Company
intends to rely primarily on internally generated cash flow to fund this
activity, with any remaining financing needs being met by bank financing. In
addition, the Company currently owns excess propane storage tanks that it will
be able to use to supply storage tanks needed in opening new service centers and
to reduce the cost of starting a new retail service center.
EXPANSION OF THE COMPANY'S EXISTING RESIDENTIAL RETAIL CUSTOMER
BASE. Empire Gas will also look for opportunities to expand its existing
residential customer retail base other than through acquisitions or the
development of new retail service centers. The Company believes there are
several factors that will enable it
39
<PAGE>
to expand its residential customer base including (i) the Company's ability to
supply storage tanks to its customers, (ii) the Company's reputation for quality
service, and (iii) the accessibility and visibility of the Company's retail
service centers, many of which are located on or near highways. The Company's
ability to expand its residential customer base other than through acquisitions
or the development of new retail service centers in new markets may be limited
by the relative stability of this market.
In addition to the foregoing, Empire Gas will look for growth opportunities
including opportunities to expand its commercial customer base and opportunities
presented from developments in the industry, including the potential for the
growth in the use of propane in the alternative motor fuel market or in
cogeneration plants. Any acquisitions or purchases of assets will be subject to
the restrictions on investments and debt incurrence contained in the New Credit
Facility and the Indenture. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- Financing Activities"; "Description of Senior Secured Notes"; "Description of
Other Indebtedness -- New Credit Facility." Any acquisitions or start-ups of
retail service centers will also be subject to the restrictions in the
Non-Competition Agreement. See "The Transaction" and "Certain Relationships and
Related Transactions."
GEOGRAPHIC RATIONALIZATION AND REDUCTION OF OPERATING EXPENSES. The Company
believes that it can increase the efficiency with which it serves its customers
by consolidating a number of retail service centers, thereby reducing its
operating expenses. The Company has selected 16 service centers (two in
Missouri, six in Oklahoma and the remaining eight in Colorado, California,
Louisiana and Oregon) that can be consolidated into eight service centers. The
Company consolidated several of these service centers in May of this year and
the remainder will be consolidated in June and July. The Company will continue
to evaluate opportunities to consolidate additional retail outlets. The
consolidation of companies will result in reduced operating expense due to
reduced general and administrative expenses and operating costs without a
corresponding reduction in revenue.
There can be no assurance as to the extent to which the implementation of
the Company's business strategy will contribute to the Company's operating
efficiencies, results of operations, or cash flow. See "Risk Factors --
Potential Acquisitions and Development of New Retail Service Centers."
PROPANE OPERATIONS
Propane is used for residential, commercial, and agricultural purposes.
Residential and commercial uses include heating, cooking, water heating,
refrigeration, clothes drying, and incineration. Commercial uses also include
metal cutting, drying, container pressurization, and charring, as well as use as
a fuel for internal combustion engines. Agricultural uses include brooder
heating, stock tank heating, crop drying, and weed control, as well as use as a
motor fuel for farm equipment and vehicles. Propane is also used for a number of
other purposes.
Sales of propane to residential and commercial customers, which account for
the vast majority of the Company's revenue, have provided a relatively stable
source of revenue for the Company. Sales to residential customers accounted for
65.5% of the Company's propane sales revenue and 74.3% of its gross margin (on a
pro forma basis after giving effect to the Transaction) in fiscal year 1993.
Historically, this market has provided higher margins than other retail propane
sales. Based on fiscal year 1993 propane sales revenue, the remaining customer
base consisted of 22.1% commercial and 12.4% agricultural and other customers.
While commercial propane sales are generally less profitable than residential
retail sales, the Company has traditionally relied on this customer base to
provide a steady, noncyclical source of revenues. No single customer accounts
for more than 2.1% of sales. On a pro forma basis, the Company's operations will
have substantial geographic diversification reducing the potential impact of
fluctuations of weather in a particular region.
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<PAGE>
The following table sets forth, for the five years ending June 30, 1993,
selected aggregate operating data for the retail service centers of the Company
that will be retained after the Transaction and for the retail service centers
the Company is acquiring in the Acquisition.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------
1989 1990 1991 1992 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PERCENTAGES, DEGREE DAYS AND PER
GALLON DATA)
<S> <C> <C> <C> <C> <C>
Operating revenue.......................................... $ 65,469 $ 75,342 $ 75,250 $ 69,216 $ 76,931
Gross profit (1)........................................... $ 36,838 $ 39,455 $ 37,799 $ 38,031 $ 41,243
Retail gallons sold........................................ 87,852 82,180 74,278 76,167 84,840
Weighted average gross profit per gallon................... $ .360 $ .418 $ .441 $ .426 $ .429
Actual weighted average heating degree days (2)............ 8,191 7,872 7,303 7,321 8,265
Deviation from normal weighted average heating degree days
(2)....................................................... 150 (193) (749) (715) 100
Percent deviation from normal average heating degree
days...................................................... 1.9% (2.4%) (9.3%) (8.9%) 1.2%
<FN>
- ---------
(1) Represents operating revenue less the cost of product sold.
(2) Actual weighted average heating degree days represents the average heating
degree days in the Company's market areas for November through March of
each year weighted to reflect the retail gallons sold in each area.
Heating degree days represent the summation of the amount by which a 65
degree Fahrenheit base amount exceeds the mean daily temperature (average
of daily maximum and minimum temperatures) at various locations in the
United States and are calculated by the National Weather Service. Normal
weighted average heating degree days are determined based on a 50-year
moving average. The increase in actual weighted average heating degree
days for fiscal year 1993 was due primarily to a change in the markets in
which the Company did business.
</TABLE>
SOURCES OF SUPPLY. Propane is derived from the refining of crude oil or is
extracted in the processing of natural gas. The Company obtains its supply of
propane primarily from oil refineries and natural gas plants located in the
South, West and Midwest. Most of the Company's propane inventory is purchased
under supply contracts with major oil companies which typically have a one-year
term, at the suppliers' daily posted prices or a negotiated discount. During
fiscal 1993, contract suppliers sold nearly 75% of the propane purchased by the
Company (including the centers that are being transferred in the Transaction),
and the two largest suppliers sold 21.2% and 18.5%, respectively, of the total
volume purchased by Empire Gas. The Company has established relationships with a
number of suppliers over the past few years and believes it would have ample
sources of supply under comparable terms to draw upon to meet its propane
requirements if it were to discontinue purchasing propane from its two largest
suppliers. The Company takes advantage of the spot market as appropriate. The
Company has not experienced a shortage that has prevented it from satisfying its
customer's needs and does not foresee any significant shortage in the supply of
propane.
DISTRIBUTION. The Company purchases propane at refineries, gas processing
plants, underground storage facilities and pipeline terminals and transports the
propane by railroad tank cars and tank trailer trucks to the Company's retail
service centers, each of which has bulk storage capacity ranging from 16,000 to
180,000 gallons. After the Transaction, the Company will have retail service
centers with an aggregate storage capacity of approximately 8.7 million gallons
of propane, and each service center will have equipment for transferring the gas
into and from the bulk storage tanks. The Company operates 15 over-the-road
tractors and 37 transport trailers to deliver propane to its retail service
centers and also relies on common carriers to deliver propane to its retail
service centers. The Company also maintains an underground storage capacity of
approximately 120 million gallons. This facility is not currently being used and
cannot be used until a new disposal well is constructed, and the system is
tested and brought up to industry standards. The Company can meet its storage
needs from existing capacity and third-party sources, but is considering
41
<PAGE>
making the necessary modifications to provide storage that it may use for its
own purposes or lease to third parties. The Company has not yet determined the
amount that it would need to spend to make such modifications, or whether such
modifications will in fact be made.
Deliveries to customers are made by means of 325 bulk delivery tank trucks
owned by the Company. Propane is stored by the customers on their premises in
stationary steel tanks generally ranging in capacity from 25 to 1,000 gallons,
with large users having tanks with a capacity of up to 30,000 gallons.
Approximately 96% of the propane storage tanks used by the Company's residential
and commercial customers are owned by the Company and leased, rented, or loaned
to customers.
PROPANE GAS FROM SOURCE TO CUSTOMER
[GRAPHIC]
OPERATIONS. The Company has organized its operations in a manner that the
Company believes enables it to provide superior service to its customers and to
achieve maximum operating efficiencies. The Company's retail propane
distribution business is organized into eight regions: West Coast (North); West
Coast (South); Colorado; Midwest (North); Midwest (South); Midwest (Central);
North and South Carolina; and Mideast. Each region is supervised by a regional
manager. The regions are grouped into three divisions and the regional managers
report to their respective divisional vice president. Personnel located at the
retail service centers in the various regions are primarily responsible for
customer service and sales.
A number of functions are centralized at the Company's corporate
headquarters in order to achieve certain operating efficiencies as well as to
enable the personnel located in the retail service centers to focus on customer
service and sales. The Company makes centralized purchases of propane through
its corporate headquarters for resale to the retail service centers enabling the
Company to achieve certain advantages, including price advantages, because of
its status as a large volume buyer. The functions of cash management,
accounting, taxes, payroll, permits, licensing, asset control, employee
benefits, human resources, and strategic planning are also performed on a
centralized basis.
The corporate headquarters and the retail service centers are linked via a
computer system. Each of the Company's primary retail service centers is
equipped with a computer that is connected to a central data processing
department in the Company's corporate headquarters. Following the Transaction,
this central data processing department will be owned and operated by Service
Corp, which will be an affiliate of Energy. Service Corp. will provide data
processing and management information services to the Company pursuant to the
Services Agreement. See "Certain Relationships and Related Transactions." This
computer network system provides retail company personnel with accurate and
timely information on pricing, inventory, and customer accounts. In addition,
this system enables management to monitor pricing, sales, delivery and the
general operations of its numerous retail service centers and plan accordingly
to improve the operations of the Company as a whole.
42
<PAGE>
FACTORS INFLUENCING DEMAND. Because a substantial amount of propane is sold
for heating purposes, the severity of winter weather and resulting residential
and commercial heating usage have an important impact on the Company's earnings.
Approximately 62% of the Company's retail propane sales (on a pro forma basis)
usually occur during the five months of November through March. Sales and
profits are subject to variation from month to month and from year to year,
depending on temperature fluctuations. See "Risk Factors -- Weather."
COMPETITION. The Company encounters competition from a number of other
propane distributors in each geographic region in which it operates. The Company
competes with these distributors primarily on the basis of service, stability of
supply, availability of consumer storage equipment, and price. The propane
distribution industry is composed of two types of participants: larger
multi-state marketers, including the Company, and smaller intrastate marketers.
Most of the Company's retail service centers face competition from a number of
other marketers.
Empire Gas also competes with suppliers of other energy sources. The Company
competes with suppliers of electricity for sales to residential and commercial
customers. The Company currently enjoys, and historically has enjoyed, a
competitive advantage because of the higher cost of electricity. Fuel oil does
not present a significant competitive threat in Empire Gas' primary service
areas due to the following factors: (i) propane is a residue-free, cleaner
energy source, (ii) environmental concerns make fuel oil relatively
unattractive, and (iii) fuel oil appliances are not as efficient as propane
appliances.
Empire Gas generally does not attempt to sell propane in areas served by
natural gas distribution systems, except sales for specialized industrial
applications, because the price per equivalent energy unit of propane is, and
has historically been, higher than that of natural gas. To use natural gas,
however, a retail customer must be connected to a distribution system provided
by a local utility. Because of the costs involved in building or connecting to a
natural gas distribution system, natural gas does not create significant
competition for the Company in areas that are not currently served by natural
gas distribution systems. In each of the past five years, the Company has lost
fewer than 0.5% of its customers to natural gas distributors.
The Company's ability to compete through acquisitions will be limited in
certain geographic areas as a result of the Non-Competition Agreement. Subject
to an exception for multi-state acquisitions, the Non-Competition Agreement
restricts the Company from making acquisitions in seven states (Alabama,
Florida, Georgia, Indiana, Kentucky and Tennessee) and certain territories in
three other states (southeastern Missouri, northern Arkansas and an area within
a 50-mile radius of an existing Energy operation in Illinois) for a period of
three years from the date the Stock Purchase Agreement is consummated. The Non-
Competition Agreement also restricts the Company from starting service centers
(other than through acquisitions) in western Virginia and western West Virginia.
The Non-Competition Agreement also requires the Company not to disclose secret
information it may have regarding Energy, not to solicit Energy customers or
employees, and to grant Energy an option to purchase from the Company (on terms
substantially equivalent to the terms on which the Company acquired the
business) any business the Company acquires in violation of the Non-Competition
Agreement. The same restrictions apply to Energy under the Non-Competition
Agreement. See "The Transaction" and "Certain Relationships and Related
Transactions -- The Transaction."
RISKS OF BUSINESS. The Company's propane operations are subject to all the
operating hazards and risks normally incident to handling, storing, and
transporting combustible liquids, such as the risk of personal injury and
property damages caused by accident or fire. The Company's current automobile
liability policy provides coverage for losses of up to $101.0 million with a
$500,000 deductible per occurrence. The Company's general liability policy
provides coverage for losses of up to $101.0 million per occurrence with a
$500,000 deductible per occurrence subject to an aggregate deductible of $1.0
million for any policy period. Current workers compensation coverage also has a
$500,000 deductible per incident. The deductibles mean that the Company is
effectively self-insured for liability up to these deductibles.
REGULATION
The Company's operations are subject to various federal, state, and local
laws governing the transportation, storage and distribution of propane,
occupational health and safety, and other matters. All states in
43
<PAGE>
which the Company operates have adopted fire safety codes that regulate the
storage and distribution of propane. In some states these laws are administered
by state agencies, and in others they are administered on a municipal level.
Certain municipalities prohibit the below ground installation of propane
furnaces and appliances, and certain states are considering the adoption of
similar regulations. The Company cannot predict the extent to which any such
regulations might affect the Company, but does not believe that any such effect
would be material. It is not anticipated that the Company will be required to
expend material amounts by reason of environmental and safety laws and
regulations, but inasmuch as such laws and regulations are constantly being
changed, the Company is unable to predict the ultimate cost to the Company of
complying with environmental and safety laws and regulations.
Empire Gas currently meets and exceeds Federal regulations requiring that
all persons employed in the handling of propane gas be trained in proper
handling and operating procedures. All employees have participated, or will
participate within 90 days of their employment date, in the National Propane Gas
Association's ("NPGA") Certified Employee Training Program. The Company has
established ongoing training programs in all phases of product knowledge and
safety.
EMPLOYEES
As of June 1, 1994, the Company had approximately 1,075 employees, none of
whom was represented by unions. Upon consummation of the Transaction, the
Company will have approximately 600 employees. The Company has never experienced
any significant work stoppage or other significant labor problems and believes
it has good relations with its employees.
LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in various routine
litigation incident to its business, none of which is expected to have a
material adverse effect on the Company's financial position or results of
operations.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Upon consummation of the Transaction, the directors and executive officers
of the Company will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- ---------------------------------------------
<S> <C> <C>
Paul S. Lindsey, Jr. 49 Chairman of the Board, Chief Executive
Officer, and President
Douglas A. Brown 33 Director
Kristin L. Lindsey 46 Director/Vice President
Bruce M. Withers, Jr. 67 Director
Jim J. Shoemake 56 Director
Mark W. Buettner 51 Divisional Vice President
Kenneth J. DePrinzio 46 Divisional Vice President
Robert C. Heagerty 46 Divisional Vice President
James E. Acreman 56 Vice President/Treasurer
Valeria Schall 39 Vice President/Corporate Secretary
Willis D. Green 56 Controller
</TABLE>
The directors will serve for a term ending on the date of the Company's next
annual meeting in October 1994, or until their successors are elected or
qualified. Officers of the Company are elected by the Board of Directors of the
Company and will serve at the discretion of the Board. As required by the
Indenture, immediately following this Offering, an audit committee will be
formed consisting of two independent directors. See "Description of the Senior
Secured Notes -- Covenants."
BOARD OF DIRECTORS
Upon consummation of the Offering, the Company's directors will be as
follows:
44
<PAGE>
PAUL S. LINDSEY, JR. Mr. Lindsey will serve as Chairman of the Board, Chief
Executive Officer, and President of the Company. Mr. Lindsey currently serves as
Vice Chairman of the Board and Chief Operating Officer of the Company, positions
he has held since February 1987 and March 1988, respectively. Mr. Lindsey joined
the Company in 1967 when the company by which he was employed, a subsidiary of
Gulf Oil Company, was acquired by the Company. He has a total of 29 years of
experience in the oil and gas industry, 26 of which are with the Company. After
serving in various administrative positions with the Company, including the
position of Vice President of Finance, Mr. Lindsey assumed responsibility for
operation of the Company's retail service centers and, essentially, all other
operational functions of the Company. Mr. Lindsey has been a Director of the
NPGA, the industry's leading association, since February 1991, and has served on
the Governmental Affairs Committee of the NGPA since May 1987. He was recently
elected to NPGA's executive committee.
DOUGLAS A. BROWN. Mr. Brown will serve as a director of the Company. Since
1989, Mr. Brown has been a member of Holding Capital Group, Inc. an equity
investment group specializing in the acquisition of and investment in privately
held, middle market businesses. Holding Capital Group has performed certain
investment services for Empire Gas. See "Certain Relationships and Related
Transactions."
KRISTIN L. LINDSEY. Mrs. Lindsey will serve as a director and Vice
President of the Company. Mrs. Lindsey is the wife of Paul S. Lindsey, Jr., (see
above). For the past five years, Mrs. Lindsey has been pursuing charitable and
other personal interests. Ms. Lindsey has 11 years of experience in the LP gas
industry, all of these with the Company. Her experience is primarily in the area
of LP gas supply and distribution. In her capacity as Vice President, Mrs.
Lindsey will be involved in the Company's propane supply and distribution
activities.
BRUCE M. WITHERS, JR. Mr. Withers will serve as a director of the Company.
Mr. Withers is Chairman and Chief Executive Officer of Trident NGL Holding,
Inc., a major fully-integrated natural gas liquids company, a position he has
held since August, 1991. For the previous 18 years, Mr. Withers was President of
the Transmission & Processing Division of Mitchell Energy Corporation and, prior
to that, Mr. Withers was associated with Tenneco Oil & Gas.
JIM J. SHOEMAKE. Mr. Shoemake will serve as a Director of the Company. Mr.
Shoemake is lead litigation partner of Guilfoil, Petzall & Shoemake, located in
St. Louis, Missouri, where he has been since 1970. Mr. Shoemake was Assistant
U.S. Attorney of the Eastern District of Missouri from 1967 to 1970 and was with
the U.S. Dept of Justice for one year prior to that time.
EXECUTIVE OFFICERS
Upon consummation of the Transaction, the individuals listed below will
serve as the Company's executive officers. These individuals have an average of
20 years of experience in the LP gas industry and have been with the Company an
average of 12 years.
PAUL S. LINDSEY, JR. Chairman of the Board, Chief Executive Officer and
President. See description under "Board of Directors."
MARK W. BUETTNER. Mr. Buettner will serve the Company as a Divisional Vice
President, a position he has held with the Company since mid-1993. Mr. Buettner
has also held the positions of Regional Vice President and Regional Manager
during his five years with the Company. Mr. Buettner began his career in the LP
gas industry in a family-owned business and has a total of 39 years experience
in the LP gas industry. As Divisional Vice President of the Company, Mr.
Buettner is responsible for the Company's retail operations on the West Coast
and in Arizona, Colorado, and Idaho.
KENNETH J. DEPRINZIO. Mr. DePrinzio will serve the Company as a Divisional
Vice President, a position he has held with the Company since mid-1993. Mr.
DePrinzio joined the Company in May 1992 as a Regional Manager. From 1990 to
1991, Mr. DePrinzio was a Vice President of Star Gas Corporation. For the prior
17 years, Mr. DePrinzio worked with Petrolane, Inc., serving as an Area Vice
President during part of his tenure. From 1991 to 1992, he owned and operated a
restaurant. As Divisional Vice President of the Company, Mr. DePrinzio is
responsible for the Company's retail operations in Michigan, Ohio, South
Carolina, and North Carolina.
45
<PAGE>
ROBERT C. HEAGERTY. Mr. Heagerty will serve the Company as a Divisional
Vice President, a position he has held with the Company since mid-1993. Mr.
Heagerty has also held the positions of Regional Manager and Regional Vice
President during his seven years with the Company. He has 15 years of experience
in the LP gas industry and joined the Company when it acquired D&H Propane. At
the time of the acquisition, Mr. Heagerty was President of D&H Propane. As
Divisional Vice President of the Company, Mr. Heagerty is responsible for the
Company's retail operations in Oklahoma, Kansas, Missouri, Arkansas, Texas,
Louisiana, Iowa, Minnesota, Wisconsin, and Illinois.
JAMES E. ACREMAN. Mr. Acreman will serve the Company as Vice President and
Treasurer. Mr. Acreman has held the position of Senior Vice President of the
Company since 1989. Mr. Acreman has 16 years of experience in the LP gas
industry, all of those with the the Company. During that time he has held the
positions of Regional Vice President, Regional Manager, and Retail Manager. As
Senior Vice President of the Company, Mr. Acreman has been responsible for
various areas including expense control and human resources.
VALERIA SCHALL. Ms. Schall will serve the Company as Vice President,
Corporate Secretary, and Assistant to the Chairman of the Board of Directors.
She has held the position of Vice President of Empire Gas since December 1992,
and those of Corporate Secretary and Assistant to the Vice Chairman of the Board
of Directors since September 1985, and February 1987, respectively. Ms. Schall
has 13 years of experience in the LP gas industry, all of those with the
Company. During that time she has had various administrative and accounting
responsibilities. Ms. Schall is responsible for federal compliance filings,
acquisitions, divestitures, real estate closings, control of certain corporate
assets, internal audit, risk management, and communications with employees
through various corporate handbooks and manuals, and acting as a liaison with
legal counsel.
KRISTIN L. LINDSEY. Director and Vice President. See description under
"Board of Directors."
WILLIS D. GREEN. Mr. Green will serve as Controller of the Company, a
position he has held with the Company since July 1989. Mr. Green has 22 years of
experience in the LP gas industry. He joined the Company in 1979 and during his
tenure has had responsibility for various administrative and accounting
functions. Prior thereto, he was an internal auditor and systems analyst with
Phillips Petroleum Co. for nine years. Mr. Green is a Certified Public
Accountant and is responsible for the corporate financial control of the
Company.
The individuals currently serving as directors and executive officers of
Empire Gas are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- --------------------------------------------------
<S> <C> <C>
Chairman of the Board and Chief Executive
Robert W. Plaster* 63 Officer (1)
Vice Chairman of the Board and Chief Operating
Paul S. Lindsey, Jr. 49 Officer
Stephen R. Plaster* 35 Director and President (2)
Robert L. Wooldridge* 63 Executive Vice President -- Marketing (3)
James E. Acreman 56 Senior Vice President
Valeria Schall 39 Vice President/Corporate Secretary
Willis D. Green 56 Vice President/Controller
<FN>
- ---------
* These individuals will terminate their employment with Empire Gas upon
consummation of the Transaction.
(1) Mr. Plaster has served as the Chairman of the Board and Chief Executive
Officer of the Company since 1963. Mr. Plaster established the Company in
1963 and has been involved in the propane industry since the early 1960s.
(2) Mr. Stephen Plaster has served as a director and President of the Company
since 1988. Prior thereto, Mr. Plaster served the Company in various
positions. Mr. Plaster is the son of Mr. Robert W. Plaster, the Chairman of
the Board, Chief Executive Officer and President of the Company.
</TABLE>
46
<PAGE>
<TABLE>
<S> <C>
(3) Mr. Wooldridge has served the Company as Executive Vice President --
Marketing since April 1992. Prior thereto, he held the position of Senior
Vice President -- Marketing at the Company.
</TABLE>
EXECUTIVE COMPENSATION
The following table provides compensation information for each of the years
ended June 30, 1993, 1992, and 1991 for Empire Gas' Chief Executive Officer and
the four other most highly compensated executive officers of Empire Gas for
services rendered to the Company during each of those years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------- ALL
OTHER OTHER
FISCAL ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) (1) (2)
- --------------------------------------------- ------ ---------- ------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Robert W. Plaster(3) 1993 $1,000,000 -- $ 100,000(4) $ 1,648
Chief Executive Officer 1992 1,000,000 -- -- --
and Chairman of the Board 1991 947,916 -- -- --
Paul S. Lindsey, Jr. 1993 230,000 $ 5,000 -- 1,648
Chief Operating Officer and 1992 230,000 -- -- --
Vice Chairman of the Board 1991 230,000 -- -- --
Stephen R. Plaster(3) 1993 100,000 50,000 -- 927
President and Director 1992 75,000 50,000 -- --
1991 75,000 50,000 -- --
Robert L. Wooldridge(3) 1993 90,000 69,222 -- 970
Executive Vice President -- 1992 85,000 45,663 -- --
Marketing 1991 85,000 45,000 -- --
James E. Acreman 1993 70,000 34,794 -- 464
Senior Vice President 1992 40,000 22,664 -- --
1991 40,000 27,866 -- --
<FN>
- ---------
(1) In accordance with the transitional provisions applicable to the revised
rules on executive officer and director compensation disclosures adopted by
the Securities and Exchange Commission, amounts of Other Annual
Compensation and All Other Compensation for Empire Gas' 1992 and 1991
fiscal years are excluded.
(2) This amount includes the allocation of a portion of the forfeitures under
the Company's profit sharing plan (the "Profit Sharing Plan") to each of
the named officers in the following amounts: Mr. R. Plaster -- $1,296, Mr.
Lindsey -- $1,296, Mr. S. Plaster -- $198, Mr. Wooldridge -- $207, and Mr.
Acreman -- $99. This amount also includes the allocation of a portion of
the forfeitures under the Company's stock bonus plan (the "Stock Bonus
Plan") to each of the named officers in the following amounts: Mr. R.
Plaster -- $352, Mr. Lindsey -- $352, Mr. S. Plaster -- $729, Mr.
Wooldridge -- $763, and Mr. Acreman -- $365. The Company made no
contributions to either plan in fiscal year 1993. In September 1992, the
Company terminated both plans and filed with the Internal Revenue Service
("IRS") for determination that the plans were qualified at termination. The
IRS issued favorable determination letters for both plans in December 1992.
The Company liquidated the assets of both plans and paid out the plan
accounts to participants on March 31, 1993.
(3) Upon consummation of the Transaction, these individuals will no longer
serve as executive officers of the Company.
(4) Includes $75,000 to meet the requirements for a new car each year for Mr.
Plaster and $25,000 for services provided by the Company, free of charge,
to Empire Ranch, Inc., a corporation wholly owned by Mr. Plaster and
members of his family. These perquisites were provided to Mr. Plaster in
accordance
</TABLE>
47
<PAGE>
<TABLE>
<S> <C>
with the terms of his employment agreement with the Company. See "--
Employment Agreements." This amount does not include amounts paid to a
corporation owned by Mr. Plaster to lease the jet aircraft used by Mr.
Plaster. Nor does it include amounts paid to Empire Ranch, Inc. pursuant to
an agreement between the Company and Empire Ranch, Inc. See "Certain
Relationships and Related Transactions -- Past Transactions and
Relationships."
</TABLE>
EMPLOYMENT AGREEMENTS
Upon consummation of the Transaction, Mr. Lindsey will enter into an
employment agreement with the Company. The agreement will have a five-year term
and will provide for the payment of an annual salary of $350,000 and
reimbursement for reasonable travel and business expenses. The agreement will
require Mr. Lindsey to devote substantially all of his time to the Company's
business.
The Company has an employment agreement with Mr. Robert W. Plaster that will
be terminated, at no cost to the Company, in connection with the Transaction.
The agreement provides for payment of an annual salary of at least $1.0 million,
reimbursement of all expenses incurred pursuant to his employment and certain
fringe benefits, including but not limited to, a new car each year, the
provision of certain services free of charge to Empire Ranch, Inc., a
corporation owned by Mr. Plaster and members of his family, and the use of the
jet aircraft leased by the Company. See "Certain Relationships and Related
Transactions." Under the agreement, if Mr. Plaster dies or becomes permanently
incapacitated during its term, the agreement provides that the Company will make
a one-time payment, in an amount equal to Mr. Plaster's annual salary, to the
Robert W. Plaster Trust established December 31, 1988.
INCENTIVE STOCK OPTION PLAN
Pursuant to the Company's Incentive Stock Option Plan (the "Stock Option
Plan"), the Company grants options to its employees for the purchase of its
Common Stock. Options granted pursuant to the Stock Option Plan are exercisable
at the end of the first month following the date of grant at 6.7% of the total
number of shares subject to options and for each month thereafter, at the rate
of 1.7% of the total number of shares subject to options. The options expire ten
years from their grant. Stock issued under the Plan is subject to restrictions
on transfer including a right of first refusal exercisable by the Company in the
event an employee terminates his employment with the Company or wishes to
transfer his shares. During fiscal year 1993 no options were granted pursuant to
this Plan. Prior to the consummation of the Offering, all of the 129,250
outstanding options, all of which are exercisable, must be exercised. See
"Certain Relationships and Related Transactions."
The following table sets forth certain information concerning options
exercised during fiscal year 1993 and unexercised options held as of that date
by each of the individuals named in the Summary Compensation Table:
AGGREGATED OPTION EXERCISES IN THE FISCAL YEAR ENDED JUNE 30, 1993
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED JUNE 30, 1993 JUNE 30, 1993(1)
ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- --------- ----------- ---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Plaster.......... -- -- -- -- -- --
Paul S. Lindsey, Jr........ -- -- -- -- -- --
Stephen R. Plaster......... 19,500 $ 112,313 -- -- -- --
Robert L. Wooldridge....... 72,467 479,898 40,000 -- $ 220,000
James E. Acreman........... 13,250 87,755 8,000 -- 44,000 --
<FN>
- ---------
(1) Calculated based on the estimated fair market value of the Company's common
stock at the exercise date or year-end, as the case may be, minus the
exercise price. The Company has estimated the fair market value of the
stock as of these dates to be $7.00, the price per share to be received by
certain officers, directors, and employees in connection with the
Transaction.
</TABLE>
48
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee. Mr. Lindsey, the Vice
Chairman of the Board and Chief Operating Officer of the Company, makes the
initial decision concerning executive compensation for the executive officers of
the Company, other than decisions concerning his own and his wife's
compensation, which are then approved by the Board of Directors of the Company.
Upon consummation of the Transaction, the Company will not have a compensation
committee, and all decisions concerning compensation, other than decisions
concerning his own and his wife's compensation, will be made by Mr. Lindsey,
subject to approval by the Company's Board of Directors. The independent
directors will determine the compensation of Mr. Lindsey and his wife.
DIRECTOR COMPENSATION
The directors of Empire Gas do not receive any compensation for their
services. Directors of a subsidiary of Empire Gas, other than Mr. Lindsey and
Mr. Stephen Plaster, receive an annual fee of $25,000, payable quarterly, for
their services. Following the Transaction, all directors of Empire Gas will
receive an annual fee of $25,000, payable quarterly.
49
<PAGE>
PRINCIPAL SHAREHOLDERS
EMPIRE GAS
The table below sets forth the following information with respect to the
beneficial ownership of Empire Gas as of April 1, 1994, and on a pro forma
basis, upon consummation of the Transaction and this Offering and the
application of net proceeds therefrom, by persons owning more than five percent
of any class, by all directors of the Company, by the individuals named in the
Summary Compensation Table, and by all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
PRO FORMA FOR THE
AS OF APRIL 1, 1994 TRANSACTION
---------------------------- --------------------------
NUMBER OF SHARES NUMBER OF SHARES
NAME OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED PERCENT BENEFICIALLY OWNED PERCENT
- ---------------------------------------- ------------------ -------- --------------------------
<S> <C> <C> <C> <C>
Robert W. Plaster(2).................... 10,974,103 79.3% -- --
Paul S. Lindsey, Jr.(3)................. 1,507,610 10.9 1,507,610 95.5%
Kristin L. Lindsey(3)................... 753,805 5.4 753,805 47.7
Stephen R. Plaster(4)................... 619,888 4.5 -- --
Robert L. Wooldridge(5)................. 260,500 1.9 -- --
James E. Acreman(6)..................... 21,550 .2 17,701 1.1
Douglas A. Brown........................ -- -- -- --
Bruce M. Withers, Jr.................... -- -- -- --
Jim J. Shoemake......................... -- -- -- --
All directors and executive officers as
a group
(3 persons, 8 persons on a pro forma
basis)(7).............................. 13,411,554 96.6 1,554,170 98.4
<FN>
- ---------
(1) The address of each of the beneficial owners is c/o Empire Gas
Corporation, P.O. Box 303, 1700 South Jefferson Street, Lebanon, Missouri
65536.
(2) Prior to the Transaction, Mr. Plaster's shares consist of 10,515,103
shares owned by the Robert W. Plaster Trust established December 13, 1988
and 459,000 shares owned by four trusts for the benefit of three of Mr.
Plaster's daughters, the Tammy Jane Plaster Trust established July 30,
1984, the Dolly Francine Plaster Trust established July 30, 1984, the
Cheryl Jean Plaster Schaefer Trust dated October 30, 1988 and the Cheryl
Jean Plaster Schaefer Trust dated July 30, 1984.
(3) Mr. Lindsey's shares consist of 753,805 shares owned by the Paul S.
Lindsey, Jr. Trust established January 24, 1992 and 753,805 shares owned
by the Kristin L. Lindsey Trust established January 24, 1992. Mr. Lindsey
has the power to vote and to dispose of the shares held in the Kristin L.
Lindsey Trust. Mrs. Lindsey's shares consist of the shares owned by the
Kristin L. Lindsey Trust. Mrs. Lindsey disclaims beneficial ownership of
the shares held by her husband in the Paul S. Lindsey, Jr. Trust.
(4) Mr. Stephen Plaster's shares are owned by the Stephen Robert Plaster Trust
established October 30, 1988 and the Stephen Robert Plaster Trust
established July 30, 1984.
(5) Includes 40,000 shares Mr. Wooldridge may acquire upon exercise of options
that are currently exercisable. Mr. Wooldridge will be required to
exercise these options prior to the Effective Date. See "Management --
Incentive Stock Option Plan."
(6) Includes 8,000 shares Mr. Acreman may acquire upon exercise of options
that are currently exercisable. Mr. Acreman will be required to exercise
these options prior to the Effective Date. See "Management -- Incentive
Stock Option Plan."
(7) The amount shown as of April 1, 1994, includes the shares beneficially
owned by Messrs. R. Plaster, Lindsey, S. Plaster, Wooldridge, and Acreman
as set forth above, and 236,903 shares owned by other executive officers,
including 15,000 shares those officers may acquire upon exercise of
options that are currently exercisable. The options must be exercised
prior to the Effective Date. See "Management --
</TABLE>
50
<PAGE>
<TABLE>
<S> <C>
Incentive Stock Option Plan." The amounts shown immediately after the
Transaction include the shares beneficially owned by Messrs. Lindsey and
Acreman, and Mrs. Lindsey as set forth above, and 28,859 shares owned by
other executive officers.
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE TRANSACTION
The following will occur in connection with the Transaction:
Pursuant to the terms of the Stock Redemption Agreement, the Company will
repurchase the shares of Common Stock held by Mr. Robert W. Plaster, and trusts
for the benefit of Mr. Plaster, Mr. Stephen Plaster, and certain of their
relatives by exchanging one share of Energy Common Stock for each share of
Common Stock. The Stock Redemption Agreement also obligates the Company to
repurchase the shares of Common Stock held by Mr. Robert L. Wooldridge, an
executive officer of the Company, and Mr. S. A. Spencer, a director of a
subsidiary of the Company. Mr. Wooldridge and Mr. Spencer will receive $7.00 per
share for a portion of their shares of Common Stock and one share of Energy
Common Stock for each of their remaining shares of Common Stock. The aggregate
amount of shares of Common Stock held by these individuals and the consideration
to be received for the shares is as set forth below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF SHARES OF ENERGY COMMON
NAME OF COMMON STOCK STOCK CASH
- ---------------------------------- ---------------- ---------------- --------
<S> <C> <C> <C>
Mr. Robert W. Plaster............. 10,974,103(1) 10,974,103 --
Mr. Stephen R. Plaster............ 619,888(2) 619,888 --
Mr. Wooldridge.................... 260,500(3) 163,686 $677,698
Mr. S.A. Spencer.................. 125,000 100,000 175,000
<FN>
- ---------
(1) Includes 459,000 shares held in four trusts for Mr. Plaster's daughters.
(2) These shares are held in two trusts for Mr. S. Plaster.
(3) Includes 40,000 options Mr. Wooldridge is required to exercise prior to
the Effective Date.
</TABLE>
Following the Transaction, Mr. Plaster will be the controlling shareholder of
Energy, which will own approximately 133 retail services centers located in ten
states. See "The Transaction."
Upon consummation of the Transaction, Mr. Plaster will resign from his
positions as Chairman of the Board and as Chief Executive Officer of the Company
and from his positions with the Company's subsidiaries. Messrs. S. Plaster,
Wooldridge, and Spencer will also resign from their positions with the Company
and its subsidiaries. Energy and Messrs. Plaster and S. Plaster have entered
into the Non-Competition Agreement which restricts them and their affiliates
from competing with the Company, Mr. Lindsey and their affiliates in the
territories in which the Company is doing business immediately following the
Stock Purchase. Similarly, Empire Gas, Mr. Lindsey, and their affiliates are
restricted from competing with Energy, Messrs. Plaster and S. Plaster and their
affiliates in seven states and certain areas within five states. The Non-
Competition Agreement is for a term of three years from the Effective Date.
Certain relatives of Mr. Plaster and Mr. Lindsey, and the officers of Energy and
the Company must enter into a substantially similar non-competition agreement.
See "The Transaction."
The Stock Redemption Agreement also provides for: (i) a payment to be made
by either the Company or Energy based on the balance of certain liabilities net
of certain assets as of the Effective Date; (ii) a payment of approximately $4.1
million to be made by the Company to Energy; (iii) an agreement regarding use of
the Empire Gas name and logo; and (iv) the allocation, between the Company and
Energy, of the responsibility for litigation relating to matters or events
occurring prior to the Effective Date (most of which is related to liability
within the Company's deductibles under its insurance policies), and the
responsibility for any costs related to any such litigation. The Company and
Energy have also entered into a tax indemnity agreement allocating liability for
taxes incurred prior to the Transaction.
51
<PAGE>
Pursuant to the terms of the Stock Redemption Agreement, the Company will
repurchase, at face value, $4.7 million principal amount of the Company's 2007
9% Subordinated Debentures from Robert W. Plaster and will purchase, at face
value, $300,000 principal amount of the Company's 2007 9% Subordinated
Debentures from certain departing officers and employees of the Company. See
"Use of Proceeds." The Company is required to redeem approximately $1.37 million
principal amount of the debentures in December of each year through the year
2006. As a result of this transaction and the purchase by the Company of an
additional $11.5 million principal amount of the 2007 9% Subordinated Debentures
from unaffiliated noteholders, the Company will not be required to purchase
additional 2007 9% Subordinated Debentures to meet sinking fund requirements
until after the maturity of the Senior Secured Notes.
ONGOING TRANSACTIONS AND RELATIONSHIPS
The following discussion describes ongoing transactions that will occur in
connection with the Transaction, and existing transactions and relationships
that are expected to continue following the Transaction.
The Company and Empire Service Corp. ("Service Corp."), a wholly owned
subsidiary of Energy that will be controlled by Mr. Robert W. Plaster following
the Transaction, have entered into the Service Agreement pursuant to which
Service Corp. will provide to the Company certain data processing, management
information, receptionist and switchboard services. The Company will perform its
own accounting and bookkeeping functions. The Company shall pay a monthly fee
equal to (i) its proportionate share of the actual costs incurred by Service
Corp. in providing these services to the Company and to Energy, less
approximately $2,500 for services provided to two other entities controlled by
Mr. Plaster, and (ii) the actual cost incurred for certain telephone and postal
costs and for the maintenance contract for the computer terminals used by the
Company in its operations. At any time after June 30, 1998, the Company may
terminate the Service Agreement in the event of a change in its business
circumstances, such as an acquisition. In the event the Service Agreement is
terminated by the Company prior to its expiration date, the Company will
continue to be obligated to pay, for the remainder of the original term, a
monthly payment equal to the amount paid by the Company for the last full month
for which services were rendered. The Service Agreement is for a term expiring
June 30, 2001, subject to earlier termination if the Company's new lease for its
headquarters expires or if there is a change in control of the Company.
The Company leases its headquarters in Lebanon, Missouri from a corporation
controlled by Mr. Robert W. Plaster, under a lease agreement effective June 30,
1991 for an initial term ending June 30, 2001. The Company made annual lease
payments of $200,000 in fiscal years 1991, 1992, and 1993. The Company also paid
the utilities, taxes and maintenance costs during each of those years. This
lease will be terminated and a new lease will become effective upon consummation
of the Transaction. The new lease provides the Company the right to use
approximately 8,020 square feet of office space in the Lebanon location as well
as the use of the parking facilities for a term expiring June 30, 2001. The
Company will pay monthly rent of $6,250 and will be responsible for its
proportionate share of utilities and taxes and for the payment of certain
repairs and maintenance costs. The lease is subject to earlier termination, at
the option of the lessor, in the event of a change in control of the Company. At
any time after June 30, 1998, the Company may terminate the lease in the event
of a change in its business circumstances, such as an acquisition. In the event
the Company terminates the lease prior to its expiration date, the Company will
continue to be obligated to pay, for the remainder of the original term, the
monthly rent payment; provided, however, that the lessor shall use its best
efforts to re-let the premises.
Pursuant to the Aircraft Facility Agreement, the Company leased a jet
aircraft and an airport hangar from a corporation owned by Mr. Robert W. Plaster
during the last quarter of fiscal year 1992 and all of fiscal year 1993. Under
the terms of this agreement, the Company was responsible for direct lease
payments and operating costs, including insurance, of the aircraft and the
hangar. The Company paid direct rent of $25,000 in fiscal year 1992 and $100,000
in fiscal year 1993. The Company also paid operating expenses relating to the
lease of $385,000 in fiscal year 1992 and $276,000 in fiscal year 1993. This jet
had been purchased by Mr. Plaster from the Company on June 30, 1991, when he
exercised an option to purchase the jet at its depreciated net book value of
$32,399, an amount the Company believes was substantially less than its fair
market value at that date. This option had been granted to Mr. Plaster pursuant
to an employment
52
<PAGE>
agreement, negotiated in 1983 between Mr. Plaster and the then-controlling
shareholders of the Company in connection with a leveraged buy-out and merger
involving the Company. In connection with the Transaction, the Aircraft Facility
Agreement will be terminated; however, pursuant to the Stock Redemption
Agreement, the Company may use the hangar, at no cost, for storage and
maintenance of the Company's two turbo prop aircraft for a term that coincides
with the Company's new lease for its headquarters.
Mrs. Kristin L. Lindsey, who beneficially owns approximately 5.4% of the
Company's outstanding common stock and who will become a director of the Company
upon consummation of the Transaction, is the majority stockholder in a company
that supplies paint to the Company. The Company's purchases of paint from this
company totalled $117,000 in fiscal year 1992 and $125,000 in fiscal year 1993.
During fiscal year 1993, the Company received certain financial advisory
services in connection with the negotiation of the existing credit facility from
Mr. Douglas A. Brown and Holding Capital Group, Inc. ("HCGI"), who received
$125,000 as compensation for these services. Mr. Brown, who will become a
director of the Company upon consummation of the Transaction and Mr. S.A.
Spencer, a director of a subsidiary of the Company, are affiliated with HCGI.
Mr. Brown and HCGI have been engaged to provide certain financial advisory
services in connection with the negotiation of the New Credit Facility and the
structuring and execution of this Offering, and will receive $500,000 for these
services.
The Company has entered into an agreement with each of its current
shareholders (all of whom are directors or employees of the Company) providing
that the Company has a right of first refusal with respect to the sale of any
shares by such shareholders. In addition, the Company has the right to purchase
from such shareholders all shares they hold at the time of their termination of
employment with the Company at the then current fair market value of the shares.
The fair market value is determined in the first instance by the Board of
Directors and by an independent appraisal (the cost of which is split between
the Company and the departing shareholder) if the departing shareholder disputes
the board's determination.
PAST TRANSACTIONS AND RELATIONSHIPS
The following discussion describes transactions that have occurred during
the past three fiscal years that are not expected to continue following the
Transaction.
During fiscal years 1991, 1992, and 1993, pursuant to the terms of the Ranch
Agreement, the Company paid $150,000 annually and provided services each year at
a cost of approximately $25,000 to a wildlife preserve owned by Empire Ranch,
Inc. The Company used the facilities at the preserve for meetings with Company
employees and business guests. In connection with the Transaction, the Ranch
Agreement is being terminated.
Mr. Robert W. Plaster and trusts or entities controlled by Mr. Plaster have
provided demand loans to the Company over the past three years. The maximum
amount loaned to the Company during fiscal year 1991, 1992, and 1993 was
$5,928,000, $5,753,000, and $3,000,000, respectively. These loans were fully
repaid by June 30, 1993. The interest rate on these loans was equal to or below
the average rates available to the Company through its bank lines of credit in
effect during each of those years. The Company incurred total interest expense
of $583,000, $315,000, and $200,000 for fiscal years 1991, 1992, and 1993,
respectively.
The Company provides bookkeeping, data processing, and accounting services
to two corporations controlled by Mr. Robert W. Plaster for an annual fee of
$84,000. The Company received an annual fee of $84,000 in fiscal year 1991,
1992, and 1993 for providing these services. Following the Transaction, the
Company will no longer provide these services to the two corporations. See "--
Ongoing Transactions and Relationships"
Mr. Paul W. Zeller, a director of a subsidiary of the Company during fiscal
year 1991 and 1992, was an officer of Reliance Insurance Company, the Company's
lender on its Old Term Loan. The maximum outstanding balance on the Old Term
Loan was $20 million during fiscal year 1991 and fiscal year 1992. The Company
paid interest of $2.9 million, $2.4 million, and $710,000 on the Old Term Loan
during fiscal years 1991, 1992, and 1993, respectively. In November 1992, the
Old Term Loan (which was accruing interest at 14.5% per annum) was repaid with
funds provided by a $13.25 million loan from Mr. Robert W. Plaster,
53
<PAGE>
through the Robert W. Plaster Trust established December 13, 1988. This loan was
secured by substantially all of the assets of the Company and its subsidiaries
on a PARI PASSU basis with the Company's Old Working Capital Facility. The loan
bore interest at 10% per annum and was repaid in June 1993 with the proceeds
from the Term Loan. The Company incurred interest expense of $749,000 during
fiscal year 1993 for this loan.
DESCRIPTION OF THE UNITS
Each Unit consists of ten Senior Secured Notes, each such Senior Secured
Note having a principal amount at maturity of $1,000 and 13.8 Warrants each to
purchase one share of the Company's Common Stock at a price of $.01 per share,
subject to adjustment. The Senior Secured Notes and the Warrants will become
separately transferable on January 15, 1995 (the "Separation Date"). See
"Description of the Senior Secured Notes" and "Description of the Warrants" for
further information concerning the Senior Secured Notes and Warrants,
respectively. In addition, see "Description of Capital Stock" for additional
information relating to the Common Stock issuable upon exercise of the Warrants.
FORM, DENOMINATION AND REGISTRATION
The Senior Secured Notes will be issued in the form of a fully registered
Global Note (the "Global Note") and the Warrants will be issued in the form of a
fully registered Global Warrant (the "Global Certificate" and together with the
Global Note, the "Global Securities"), each of which will be deposited with, or
on behalf of, The Depository Trust Company (the "Depositary") and registered in
the name of a nominee of the Depositary. The Depositary has provided the Company
and the Underwriter with the information set forth below.
The Depositary will act as securities depositary for the Global Securities.
The Global Securities will be issued as fully-registered securities in the name
of Cede & Co. (the Depositary's partnership nominee).
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary holds securities that its participants (the "Participants")
deposit with the Depositary. The Depositary also facilitates the settlement
among Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations. The Depositary is owned by a number of its Direct Participants
and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc., and
the National Association of Securities Dealers, Inc. Access to the Depositary
system is also available to others such as securities brokers and dealers,
banks, and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly ("Indirect
Participants"). The rules applicable to the Depositary and its Participants are
on file with the Commission.
Purchases of Senior Secured Notes or Warrants under the Depositary system
must be made by or through Direct Participants, which will receive a credit for
the Senior Secured Notes or Warrants on the Depositary's records. The ownership
interest of each actual purchaser of each Senior Secured Note or Warrant (the
"Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from the Depositary of their purchase, but Beneficial Owners are expected to
receive written confirmations providing details of the transaction, as well as
periodic statements of their holdings, from the Direct or Indirect Participant
through which the Beneficial Owner entered into the transaction. Transfers of
ownership interests in the Senior Secured Notes or Warrants are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in Senior Secured Notes or Warrants, except in the
event that use of the book-entry system for the Senior Secured Notes or the
Warrants is discontinued.
54
<PAGE>
To facilitate subsequent transfers, all Senior Secured Notes and Warrants
deposited by Participants with the Depositary are registered in the name of the
Depositary's partnership nominee, Cede & Co. The deposit of Senior Secured Notes
or Warrants with the Depositary and their registration in the name of Cede & Co.
effect no change in beneficial ownership. The Depositary has no knowledge of the
actual Beneficial Owners of the Senior Secured Notes or the Warrants. The
Depositary's records reflect only the identity of the Direct Participants to
whose accounts such Senior Secured Notes or Warrants are credited, which may or
may not be the Beneficial Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. if less than all of the
Senior Secured Notes within an issue are being redeemed. The Depositary's
practice is to determine by lot the amount of the interest of each Direct
Participant in such issue to be redeemed.
Neither the Depositary nor Cede & Co. will consent or vote with respect to
the Senior Secured Notes. Under its usual procedures, the Depositary made an
Omnibus Proxy to the Company as soon as possible after the record date. The
Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Senior Secured Notes are credited on the
record date identified in a listing attached to the Omnibus Proxy.
Principal and interest payments on the Senior Secured Notes will be made to
the Depositary. The Depositary's practice is to credit Direct Participants'
accounts on the payment date in accordance with their respective holdings shown
on the Depositary's records unless the Depositary has reason to believe that it
will not receive payment on such date. Payments by Participants to Beneficial
Owners will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of such Participant
and not of the Depositary, the Agent, or the Company, subject to any statutory
or regulatory requirements as may be in effect from time to time. Payment of
principal and interest to the Depositary is the responsibility of the Company or
the Agent, disbursement of such payments to Direct Participants shall be the
responsibility of the Depositary, and disbursement of such payments to the
Beneficial Owners shall be the responsibility of Direct and Indirect
Participants.
So long as the Depositary, or its nominee, is the registered owner of the
Global Securities, the Depositary or its nominee, as the case may be, will be
considered the record owner (the "Holder") of the Senior Secured Notes
represented by the Global Note or the Warrants represented by the Global
Certificate, as the case may be, for all purposes under the Indenture governing
such Senior Secured Notes and under the Warrant Agreement governing such
Warrants. Except as set forth below, owners of beneficial interests in such
Global Securities will not be entitled to have Senior Secured Notes represented
by the Global Note or Warrants represented by the Global Certificate registered
in their names, will not receive or be entitled to receive physical delivery of
Senior Secured Notes or Warrants, as the case may be, in definitive form and
will not be considered the owners or Holders thereof under the Indenture or the
Warrant Agreement, as the case may be. Accordingly, each person owning a
beneficial interest in a Global Security must rely on the procedures of the
Depositary and, if such person is not a Participant, those of the Participant
through which such person owns its interests, in order to exercise any rights of
a Holder under the Indenture or the Senior Secured Notes, or the Warrant
Agreement or the Warrant, as the case may be.
The Indenture provides that the Depositary, as a Holder, may appoint agents
and otherwise authorize Participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action which a Holder
is entitled to give or take under the Indenture or the Warrant Agreement,
including the right to sue for payment of principal or interest pursuant to
Section 316(b) of the Trust Indenture Act of 1939, as amended. The Company
understands that under existing industry practices, when the Company requests an
action of Holders or when a Beneficial Owner desires to give or take any action
which a Holder is
55
<PAGE>
entitled to give or take under the Indenture or the Warrant Agreement, as the
case may be, the Depositary generally will give or take such action, or
authorize the relevant Participants to give or take such action, and such
Participants would authorize Beneficial Owners through such Participants to give
or take such action or would otherwise act upon the instructions of Beneficial
Owners owning through them.
The Company has been informed by the Depositary that the Depositary will
assist its Participants and their customers (Beneficial Owners) in taking any
action a Holder is entitled to take under the Indenture or the Warrant
Agreement, as the case may be, or exercise any rights available to Cede & Co.,
as the holder of record of the Senior Secured Notes or the Warrants, as the case
may be, including the right to demand acceleration upon an event of default as
defined under the Indenture or to institute suit for the enforcement of payment
of principal or interest pursuant to Section 316(b) of the Trust Indenture Act
of 1939, as amended. The Depositary has advised the Company that it will act
with respect to such matters upon written instructions from a Participant to
whose account with the Depositary the relevant beneficial ownership in the
Senior Secured Notes or the Warrants is credited. The Company understands that a
Participant will deliver such written instructions to the Depositary upon itself
receiving similar written instructions from either Indirect Participants or
Beneficial Owners, as the case may be. Under Rule 6 of the rules and procedures
filed by the Depositary with the Securities and Exchange Commission pursuant to
Section 17 of the Securities Exchange Act of 1934, as amended, Participants are
required to indemnify the Depositary against all liability the Depositary may
sustain without fault on the part of the Depositary or its nominee, as a result
of any action they may take pursuant to the instructions of the Participant in
exercising any such rights.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of such securities in definitive form. Such limits and
such laws may impair the ability to transfer beneficial interests in Global
Securities.
Payments of principal, premium, if any, and interest on Senior Secured Notes
and payments made with respect to the Warrants registered in the name of or held
by the Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner or the Holder of the Global
Securities representing such Senior Secured Notes or Warrants. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in a Global Security or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
If the Depositary is at any time unwilling, unable or ineligible to continue
as depositary, or if the Company determines to discontinue use of the system of
book-entry transfers through the Depositary, and a successor depositary is not
appointed by the Company within sixty days (and with respect to the Senior
Secured Notes, if an Event of Default under the Indenture has occurred and is
continuing), the Company will issue Senior Secured Notes or Warrants in
definitive registered form, in exchange for the Global Security representing
such Senior Secured Notes or Warrants. In addition, the Company may at any time
and in its sole discretion determine not to have any Senior Secured Notes or
Warrants in registered form represented by the Global Securities and, in such
event, will issue Senior Secured Notes or Warrants in definitive registered form
in exchange for the Global Securities representing such Senior Secured Notes or
Warrants. In any such instance, an owner of a beneficial interest in Global
Securities will be entitled to physical delivery in definitive form of Senior
Secured Notes or Warrants represented by such Global Securities equal in
principal amount to such beneficial interest and to have such Senior Secured
Notes or Warrants registered in its name.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
and the Underwriter believe to be reliable, but the Company and the Underwriter
take no responsibility for the accuracy thereof.
56
<PAGE>
DESCRIPTION OF THE SENIOR SECURED NOTES
GENERAL
The Senior Secured Notes are to be issued under an Indenture (the
"Indenture") to be dated as of June 29, 1994, among the Company, the Subsidiary
Guarantors (as defined herein) and Shawmut Bank Connecticut, National
Association, as trustee (the "Trustee"). A copy of the proposed form of the
Indenture has been filed as an exhibit to the Registration Statement, of which
this Prospectus is a part. See "Available Information."
The following summary of certain provisions of the Indenture and the
Subsidiary Guarantees does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Indenture,
including the definitions of certain terms therein.
The Senior Secured Notes will be issued in fully registered form only,
without coupons, in denominations of $1,000 or integral multiples thereof.
The Senior Secured Notes are transferable and exchangeable at the office of
the Registrar. Principal, premium, if any, and interest are payable at the
office of the Paying Agent, but at the option of the Company, interest may be
paid by check mailed to the registered holders at their registered addresses.
The Company has initially appointed the Trustee as the Paying Agent and the
Registrar under the Indenture.
The Company has no sinking fund or mandatory redemption obligations with
respect to the Senior Secured Notes.
The Company is subject to the informational reporting requirements of
Sections 13 and 15(d) under the Exchange Act and, in accordance therewith, will
file certain reports and other information with the Commission. See "Available
Information." In addition, if Sections 13 and 15(d) cease to apply to the
Company, the Company will covenant in the Indenture to file such reports and
information with the Trustee and the Commission, and mail such reports and
information to Noteholders at their registered addresses, for so long as any
Senior Secured Notes remain outstanding.
The Company conducts substantially all of its operations through its
subsidiaries. Creditors of its subsidiaries, including trade creditors, would
have a claim on the subsidiaries' assets that would (except to the extent that
the Subsidiary Guarantees represent direct claims against such subsidiaries) be
prior to the claims of the holders of the Senior Secured Notes. See "Risk
Factors -- Effective Ranking of Senior Secured Notes."
The Senior Secured Notes will be issued in the form of a fully registered
Global Note and will be deposited with, or on behalf of, The Depository Trust
Company and registered in the name of a nominee of the Depositary. Except as set
forth in "Description of the Units -- Form, Denomination and Registration"
above, owners of beneficial interests in such Global Note will not be entitled
to have Senior Secured Notes registered in their names, will not receive or be
entitled to receive physical delivery of Senior Secured Notes in definitive form
and will not be considered the owners or Holders thereof under the Indenture.
See "Description of the Units -- Form, Denomination and Registration." No
service charge will be made for any registration of transfer or exchange of
Senior Secured Notes, but the Company may require payment of a sum sufficient to
cover any transfer tax or other similar governmental charge payable in
connection therewith.
SUBSIDIARY GUARANTEE
The Senior Secured Notes will be unconditionally guaranteed as to the
payment of principal, premium, if any, and interest by the Subsidiary Guarantors
pursuant to the Subsidiary Guarantees. See "-- Certain Definitions -- Subsidiary
Guarantees." The Subsidiary Guarantors constitute all the subsidiaries of the
Company and they are all guaranteeing the Senior Secured Notes on a full,
unconditional and joint and several basis. Accordingly, separate financial
statements of the Subsidiary Guarantee have not been presented.
Upon the redesignation by the Company of a Subsidiary Guarantor from
Restricted Subsidiary to an Unrestricted Subsidiary in compliance with the
provisions of the Indenture, such Subsidiary shall cease to be a Subsidiary
Guarantor and shall be released from all of the obligations of a Subsidiary
Guarantor under its Subsidiary Guarantee.
57
<PAGE>
Upon the sale or disposition (by merger or otherwise) of any Subsidiary
Guarantor by the Company or any Subsidiary of the Company to any entity that is
not a Subsidiary of the Company and which sale or disposition is otherwise in
compliance with the terms of the Indenture, each such Subsidiary Guarantor shall
automatically be released from all obligations under its Subsidiary Guarantee,
PROVIDED, that each such Subsidiary Guarantor is sold or disposed of for fair
market value (evidenced by a board resolution and set forth in an Officers'
Certificate delivered to the Trustee).
TERMS OF THE SENIOR SECURED NOTES
The Senior Secured Notes will be senior obligations of the Company. The
Senior Secured Notes will mature on July 15, 2004. Prior to July 15, 1999,
interest will accrue on the Senior Secured Notes from June 29, 1994, or from the
most recent Interest Payment Date to which interest has been paid or provided
for, and will be payable in cash semiannually at the rate of 7% per annum of the
principal amount at maturity of the Senior Secured Notes (to Holders of record
at the close of business on the January 1 or July 1 immediately preceding the
Interest Payment Date) on January 15 and July 15 of each year, commencing
January 15, 1995. In addition, prior to July 15, 1999, original issue discount
will accrete on the Senior Secured Notes such that the yield to maturity will be
12 7/8% per annum, compounded on the basis of semiannual compounding. From and
after July 15, 1999, interest on the Senior Secured Notes will accrue and be
payable in cash semiannually at the rate of 12 7/8% per annum of the principal
amount at maturity of the Senior Secured Notes (to Holders of record at the
close of business on the January 1 or July 1 immediately preceding the Interest
Payment Date) on January 15 and July 15 of each year, commencing January 15,
2000.
For federal income tax purposes, Holders of Senior Secured Notes will be
required to recognize interest income in respect of the Senior Secured Notes in
the form of original issue discount in advance of the receipt of the cash
payments to which such income is attributable. See "Certain Federal Income Tax
Considerations" for information concerning certain federal income tax
considerations associated with the Senior Secured Notes.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Company may not redeem
the Senior Secured Notes prior to July 15, 1999. On and after such date, the
Company may redeem the Senior Secured Notes at any time as a whole, or from time
to time in part, at the following redemption prices (expressed in percentages of
Accreted Value), plus accrued interest to the redemption date, if redeemed
during the 12-month period beginning July 15:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
1999........................................................................ 106.438%
2000........................................................................ 103.219%
2001 and thereafter......................................................... 100.000%
</TABLE>
The Company may redeem up to $44.52 million principal amount at maturity
(35%) of Senior Secured Notes with the proceeds of one or more Public Equity
Offerings following which there is a Public Market, at any time as a whole or
from time to time in part, at a redemption price (expressed as a percentage of
Accreted Value), plus accrued interest to the redemption date, of 110% if
redeemed at any time prior to July 15, 1997.
SELECTION FOR REDEMPTION
In the case of any partial redemption, selection of the Senior Secured Notes
for redemption will be made by the Trustee on a pro rata basis, by lot or by
such other method that complies with applicable legal and securities exchange
requirements, if any, and that the Trustee in its sole discretion shall deem to
be fair and appropriate; provided that no Senior Secured Note of $1,000 in
principal amount at maturity or less shall be redeemed in part. If any Senior
Secured Note is to be redeemed in part only, the notice of redemption relating
to such Senior Secured Note shall state the portion of the principal amount
thereof to be redeemed. A Senior Secured Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Senior Secured Note.
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RANKING
The Indebtedness evidenced by the Senior Secured Notes constitutes Senior
Indebtedness of the Company and will rank PARI PASSU in right of payment with
all existing and future Senior Indebtedness of the Company, including, without
limitation, amounts due under the New Credit Facility. The Subsidiary Guarantees
constitute senior indebtedness of the respective Subsidiary Guarantors and will
rank PARI PASSU with all existing and future senior indebtedness of the
Subsidiary Guarantors, including, without limitation, guarantees of amounts due
under the New Credit Facility. Any borrowings under the New Credit Facility, but
not the Senior Secured Notes, will be secured by the inventory and accounts
receivable of the Company and its subsidiaries. The Company conducts
substantially all of its operations through its subsidiaries. Claims of
creditors of such subsidiaries, including trade creditors and holders of
indebtedness guaranteed by such subsidiaries, will have priority with respect to
the assets and earnings of such subsidiaries over creditors of the Company,
including holders of Senior Secured Notes (except to the extent that such
creditors hold claims against such subsidiaries, such as guarantees). See "Risk
Factors -- Effective Ranking of Senior Secured Notes."
COLLATERAL AND SECURITY
Pursuant to the Indenture and the Pledge Agreement, the Company will pledge
to the Trustee all shares of Capital Stock of each of its Restricted
Subsidiaries (including, without limitation, PSNC Propane Corporation) and all
other Restricted Subsidiaries of the Company formed or acquired after the date
of the Indenture (such Capital Stock, together with any proceeds therefrom or
replacements therefor pursuant to the terms of the Indenture, being hereafter
referred to as the "Collateral"). The security interest in the Collateral will
be a first priority perfected security interest. However, absent any Default or
Event of Default, the Company will be able to receive dividends and vote, as it
sees fit in its sole discretion, the Capital Stock of the Restricted
Subsidiaries, provided that no vote may be cast, and no consent, waiver or
ratification given or action taken, which would be inconsistent with or violate
any provision of the Indenture or the Senior Secured Notes.
The Indenture will provide that the Collateral may be released from the Lien
thereon (a) upon payment in full of all obligations under the Indenture and the
termination thereof or (b) upon the sale or other disposition of such Collateral
if (i) the Company or a Subsidiary receives consideration at the time of such
sale or other disposition at least equal to the fair market value, as determined
in good faith by the Board of Directors, of the Collateral subject to the sale
or other disposition, (ii) at least 80% of the consideration thereof received by
the Company or a Subsidiary is in the form of Additional Assets or cash or cash
equivalents which cash equivalents are promptly converted into cash by the
Company, and (iii) an amount equal to 100% of the Net Available Cash is applied
by the Company as set forth in the following paragraph. The Net Available Cash
resulting from the sale or other disposition of any Collateral shall, to the
extent permitted by law, be immediately deposited in an account (the "Collateral
Account") subject to a first priority perfected Lien in favor of the Trustee,
and the Company shall cause any non-cash proceeds from such sale or other
disposition (including securities) received by the Company or a Subsidiary to
immediately become subject to a first priority perfected Lien in favor of the
Trustee.
Within 360 days after consummation of any sale or disposition of Collateral,
the Company shall apply 100% of the Net Available Cash resulting from such sale
or disposition to (i) the purchase of Additional Assets (the "Replacement
Assets"), provided, however, that, when acquired, such Replacement Assets are
subject to a first priority perfected Lien in favor of the Trustee, (ii) the
purchase of Senior Secured Notes tendered to the Company for purchase at a price
equal to at least 100% of the Accreted Value thereof, plus accrued interest, if
any, to the date of purchase (which purchase shall be made pursuant to an offer
substantially similar to an Asset Sale Offer to all of the holders of the Senior
Secured Notes), or (iii) the acquisition or formation of a Subsidiary, provided,
however, that, when acquired or formed, the Capital Stock of such Subsidiary is
subject to a first priority perfected Lien in favor of the Trustee; PROVIDED,
that if the Company does not apply such Net Available Cash in accordance with
(i), (ii) or (iii) above, such Net Available Cash shall remain in the Collateral
Account and not be released until the obligations of the Company under the
Indenture and the Senior Secured Notes have been discharged. See "-- Covenants
- -- Sale of Assets." Subject to the proviso in the preceding sentence, amounts in
the Collateral Account shall be
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released (i) upon the purchase of Additional Assets, (ii) upon the purchase of
Senior Secured Notes pursuant to an clause (ii) above, or (iii) upon the
acquisition or formation of a Subsidiary, all of whose Capital Stock has been
pledged to the Trustee. Any such actions by the Trustee to release the
Collateral must be taken in accordance with the Trust Indenture Act of 1939, as
amended, including Section 314 thereunder.
There can be no assurance that the proceeds of any sale of the Collateral
pursuant to the Indenture following an Event of Default would be sufficient to
satisfy payments due on the Senior Secured Notes. If such proceeds are not
sufficient to repay all such amounts due on the Senior Secured Notes, then
Holders of the Senior Secured Notes (to the extent not repaid from the proceeds
of the sale of the Collateral) would have only an unsecured claim against the
Company's remaining assets. In addition, the ability of the Holders of the
Senior Secured Notes to rely upon the Collateral for fulfillment of the
Company's obligations under the Indenture may be subject to certain bankruptcy
law limitations in the event of a bankruptcy.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the
Indentures.
"ACCRETED VALUE" as of any date (the "specified date") means, with respect
to each $1,000 face amount of Senior Secured Notes, the following amount:
(i) if the specified date is one of the following dates (each an
"accrual date"), the amount set forth opposite such date below:
<TABLE>
<CAPTION>
ACCRETED
ACCRUAL DATE VALUE
- --------------------------------------------- -------------
<S> <C>
July 15, 1994................................ $ 788.20
January 15, 1995............................. 803.95
July 15, 1995................................ 820.70
January 15, 1996............................. 838.53
July 15, 1996................................ 857.51
January 15, 1997............................. 877.72
July 15, 1997................................ 899.22
January 15, 1998............................. 922.11
July 15, 1998................................ 946.47
January 15, 1999............................. 972.40
July 15, 1999................................ $ 1,000.00;
</TABLE>
(ii) if the specified date occurs between two accrual dates, the sum of
(A) the accreted value for the accrual date immediately preceding the
specified date and (B) an amount equal to the product of (i) the accreted
value for the immediately following accrual date less the accreted value for
the immediately preceding accrual date and (ii) a fraction, the numerator of
which is the number of days (not to exceed 180 days) from the immediately
preceding accrual date to the specified date, using a 360-day year of twelve
30-day months, and the denominator of which is 180; and
(iii) if the specified date occurs after July 15, 1999, $1,000.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person existing at the time
at which such Person became a Subsidiary and not incurred in connection with, or
in contemplation of, such Person becoming a Subsidiary. Acquired Indebtedness
shall be deemed to be Incurred on the date the acquired Person becomes a
Subsidiary.
"ACQUISITION INDEBTEDNESS" means Indebtedness of a Restricted Subsidiary
incurred in connection with the acquisition of property or assets related to the
Line of Business which will be owned and used by the Company or a Restricted
Subsidiary, which Indebtedness is without recourse to the Company or any other
Restricted Subsidiary other than the Restricted Subsidiary issuing such
Acquisition Indebtedness.
"ADDITIONAL ASSETS" means (i) any property or assets related to the Line of
Business which will be owned and used by the Company or a Restricted Subsidiary;
(ii) the Capital Stock of a Person that becomes a
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Restricted Subsidiary as a result of the acquisition of such Capital Stock by
the Company or another Restricted Subsidiary or (iii) Capital Stock constituting
a minority interest in any Person that at such time is a Restricted Subsidiary.
"AFFILIATE" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "-- Covenants -- Transactions with
Affiliates" and "-- Sales of Assets" only, "Affiliate" shall also mean any
beneficial owner of 5% or more of the total Voting Shares (on a Fully Diluted
Basis) of the Company or of rights or warrants to purchase such stock (whether
or not currently exercisable) and any Person who would be an Affiliate of any
such beneficial owner pursuant to the first sentence hereof. For purposes of the
provision described under "-- Covenants -- Limitation on Restricted Payments"
only, "Affiliate" shall also mean any Person of which the Company owns 5% or
more of any class of Capital Stock or rights to acquire 5% or more or any class
of Capital Stock and any Person who would be an Affiliate of any such Person
pursuant to the first sentence hereof.
"ASSET SALE" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale leaseback transactions, but excluding (except
as provided for in the provisions described in the last paragraph under "--
Covenants -- Sales of Assets") those permitted by the provisions described under
"-- Covenants -- Merger and Consolidation") in one or a series of transactions
by the Company or any Restricted Subsidiary to any Person other than the Company
or any Wholly Owned Subsidiary, of (i) all or any of the Capital Stock of the
Company or any Restricted Subsidiary, (ii) all or substantially all of the
assets of any operating unit, division or line of business of the Company or any
Restricted Subsidiary or (iii) any other property or assets or rights to acquire
property or assets of the Company or any Restricted Subsidiary outside of the
ordinary course of business of the Company or such Restricted Subsidiary.
"ATTRIBUTABLE DEBT" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Senior Secured Notes, compounded annually) of the total obligations
of the lessee for rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended).
"AVERAGE LIFE" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of (A) the numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such Indebtedness or
scheduled redemption or similar payment with respect to such Indebtedness or
Preferred Stock multiplied by (B) the amount of such payment by (ii) the sum of
all such payments.
"BASIC AGREEMENTS" means (i) the Stock Redemption Agreement, dated May 7,
1994, among the Company, Energy, Mr. Lindsey, Mr. Robert Plaster, and the other
parties named therein; (ii) the Services Agreement between the Company and
Empire Service Corporation entered into pursuant to the Stock Redemption
Agreement; (iii) the Lease Agreement between the Company and Evergreen National
Corporation entered into pursuant to the Stock Redemption Agreement; (iv) and
the Non-Competition Agreement among the Company, Energy, Paul Lindsey, Robert
Plaster and Stephen Plaster entered into pursuant to the Stock Redemption
Agreement.
"BOARD OF DIRECTORS" means the Board of Directors of the Company or any
authorized committee thereof.
"BUSINESS DAY" means each day which is not a Legal Holiday.
"CAPITAL STOCK" means any and all shares, interests, participations or other
equivalents (however designated) of capital stock of a corporation or any and
all equivalent ownership interests in a Person (other than a corporation).
"CAPITALIZED LEASE" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; the Stated
Maturity
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thereof shall be the date of the last payment of rent or any other amount due
under such lease prior to the first date upon which the lease may be terminated
by the lessee without payment of a penalty; and "Capitalized Lease Obligations"
means the rental obligations, as aforesaid, under such lease.
"CHANGE OF CONTROL" means the occurrence of any of the following events: (i)
at any time after the occurrence of a Public Market, any "person" (as such term
is used in Sections 13(d) and 14(d) of the Exchange Act), other than the
Management Group or an underwriter engaged in a firm commitment underwriting on
behalf of the Company, is or becomes the beneficial owner (as such term is used
in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of
this clause (i) a person shall be deemed to have "beneficial ownership" of all
shares that such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 30%, of the total Voting Shares of the Company; (ii)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board of Directors together with any new directors
whose election by Board of Directors or whose nomination for election by the
stockholders was approved by a vote of 66 2/3% of the directors of the Company
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved cease
for any reason to constitute a majority of the Board of Directors, as the case
may be, then in office; (iii) a majority of the Company's and its Restricted
Subsidiaries' assets are sold, leased, exchanged or otherwise transferred to any
Person or group of Persons acting in concert; (iv) the Company is liquidated or
dissolved or adopts a plan of liquidation; (v) prior to the occurrence of a
Public Market, the Management Group ceases in the aggregate to beneficially own,
directly or indirectly, at least 50% in the aggregate of the total Voting Shares
of the Company; or (vi) at any time prior to the occurrence of a Change of
Control pursuant to clauses (i) to (v) of this definition as a result of which a
Change of Control Offer was made, (A) the failure of the Company for a period of
greater than 90 days in any 12 month period to continuously maintain (following
the 6 month anniversary of the Offering) on its Board of Directors at least two
Outside Directors, (B) the failure of the Company for a period of greater than
90 days in any 12 month period to continuously maintain an audit committee of
its Board of Directors consisting solely of Outside Directors or (C) the Board
of Directors consists of greater than seven members; and the Company has agreed
that upon the occurrence of any of the events in this item (vi) the Company
shall notify the Trustee of such occurrence.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" means the party named as such in the Indenture until a successor
replaces it pursuant to the terms and conditions of the Indenture and thereafter
means the successor.
"CONSOLIDATED COVERAGE RATIO" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters to (ii) the Consolidated Interest Expense for
such four fiscal quarters; PROVIDED, HOWEVER, that if the Company or any
Restricted Subsidiary has Incurred any Indebtedness since the beginning of such
period that remains outstanding or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or
both, both EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to (x) such new Indebtedness
as if such Indebtedness had been Incurred on the first day of such period and
(y) the repayment, redemption, repurchase, defeasance or discharge of any
Indebtedness repaid, redeemed, repurchased, defeased or discharged with the
proceeds of such new Indebtedness as if such repayment, redemption, repurchase,
defeasance or discharge had been made on the first day of such period; PROVIDED,
FURTHER, that if within the period during which EBITDA or Consolidated Interest
Expense is measured, the Company or any of its Restricted Subsidiaries shall
have made any Asset Sales, (x) the EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive) directly attributable to the assets or
Capital Stock which are the subject of such Asset Sales for such period, or
increased by an amount equal to the EBITDA (if negative), directly attributable
thereto for such period and (y) the Consolidated Interest Expense for such
period shall be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness for which neither Company nor any
Restricted Subsidiary shall continue to be liable as a result of any such Asset
Sale or repaid, redeemed, defeased, discharged or otherwise retired in
connection with or with the proceeds of the assets or
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Capital Stock which are the subject of such Asset Sales for such period; and
PROVIDED, FURTHER, that if the Company or any Restricted Subsidiary shall have
made any acquisition of assets or Capital Stock (occurring by merger or
otherwise) since the beginning of such period (including any acquisition of
assets or Capital Stock occurring in connection with a transaction causing a
calculation to be made hereunder) the EBITDA and Consolidated Interest Expense
for such period shall be calculated, after giving pro forma effect thereto (and
without regard to clause (iv) of the definition of "Consolidated Net Income"),
as if such acquisition of assets or Capital Stock took place on the first day of
such period. For all purposes of this definition, if the date of determination
occurs prior to the completion of the first four full fiscal quarters following
the Issue Date, then "EBITDA" and "Consolidated Interest Expense" shall be
calculated after giving effect on a pro forma basis to the Offering as if the
Offering occurred on the first day of the four full fiscal quarters that were
completed preceding such date of determination.
"CONSOLIDATED CURRENT LIABILITIES," as of the date of determination, means
the aggregate amount of liabilities of the Company and its Consolidated
Restricted Subsidiaries which may properly be classified as current liabilities
(including taxes accrued as estimated), after eliminating (i) all inter-company
items between the Company and any Subsidiary and (ii) all current maturities of
long-term Indebtedness, all as determined in accordance with GAAP.
"CONSOLIDATED INCOME TAX EXPENSE" means, for any period, as applied to the
Company, the provision for local, state, federal or foreign income taxes on a
Consolidated basis for such period determined in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, as applied to the
Company, the sum of (a) the total interest expense of the Company and its
Consolidated Restricted Subsidiaries for such period as determined in accordance
with GAAP, including, without limitation, (i) amortization of original issue
discount on any Indebtedness and the interest portion of any deferred payment
obligation, calculated in accordance with the effective interest method of
accounting, and amortization of debt issuance costs (other than issuance costs
with regard to the Offering, the execution of the New Credit Facility and the
related transactions occurring simultaneously therewith), (ii) accrued interest,
(iii) noncash interest payments, (iv) commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing, (v) interest actually paid by the Company or any such Subsidiary
under any guarantee of Indebtedness or other obligation of any other Person and
(vi) net costs associated with Interest Rate Agreements (including amortization
of discounts) and Currency Agreements, plus (b) all but the principal component
of rentals in respect of Capitalized Lease Obligations paid, accrued, or
scheduled to be paid or accrued by the Company or its Consolidated Restricted
Subsidiaries, plus (c) one-third of all Operating Lease Obligations paid,
accrued and/or scheduled to be paid by the Company and its Consolidated
Restricted Subsidiaries, plus (d) amortization of capitalized interest, plus (e)
dividends paid in respect of Preferred Stock of the Company or any Restricted
Subsidiary held by Persons other than the Company or a Wholly Owned Subsidiary,
plus (f) cash contributions to any employee stock ownership plan to the extent
such contributions are used by such employee stock ownership plan to pay
interest or fees to any person (other than the Company or a Restricted
Subsidiary) in connection with loans incurred by such employee stock ownership
plan to purchase Capital Stock of the Company.
"CONSOLIDATED NET INCOME (LOSS)" means, for any period, as applied to the
Company, the Consolidated net income (loss) of the Company and its Consolidated
Restricted Subsidiaries for such period, determined in accordance with GAAP,
adjusted by excluding (without duplication), to the extent included in such net
income (loss), the following: (i) all extraordinary gains or losses; (ii) any
net income of any Person if such Person is not a Restricted Subsidiary, except
that (A) the Company's equity in the net income of any such Person for such
period shall be included in Consolidated Net Income (Loss) up to the aggregate
amount of cash actually distributed by such Person during such period to the
Company or a Restricted Subsidiary as a dividend or other distribution and (B)
the equity of the Company or a Restricted Subsidiary in a net loss of any such
Person for such period shall be included in determining Consolidated Net Income
(Loss); (iii) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such Restricted
Subsidiary of such income is not at the time thereof permitted, directly or
indirectly, by operation of the terms of its charter or by-laws or any
agreement, instrument, judgment,
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decree, order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary or its stockholders; (iv) any net income (or loss) of any
Person combined with the Company or any of its Restricted Subsidiaries on a
"pooling of interests" basis attributable to any period prior to the date of
such combination; (v) any gain or loss realized upon the sale or other
disposition of any property, plant or equipment of the Company or its Restricted
Subsidiaries (including pursuant to any sale-and-leaseback arrangement) which is
not sold or otherwise disposed of in the ordinary course of business and any
gain (but not loss) realized upon the sale or other disposition by the Company
or any Restricted Subsidiary of any Capital Stock of any Person; and (vi) the
cumulative effect of a change in accounting principles; and further adjusted by
subtracting from such net income the tax liability of any parent of the Company
to the extent of payments made to such parent by the Company pursuant to any tax
sharing agreement or other arrangement for such period.
"CONSOLIDATED NET TANGIBLE ASSETS" means, as of any date of determination,
as applied to the Company, the total amount of assets (less accumulated
depreciation or amortization, allowances for doubtful receivables, other
applicable reserves and other properly deductible items) which would appear on a
Consolidated balance sheet of the Company and its Consolidated Restricted
Subsidiaries, determined on a Consolidated basis in accordance with GAAP, and
after giving effect to purchase accounting and after deducting therefrom, to the
extent otherwise included, the amounts of: (i) Consolidated Current Liabilities;
(ii) minority interests in Consolidated Subsidiaries held by Persons other than
the Company or a Restricted Subsidiary; (iii) excess of cost over fair value of
assets of businesses acquired, as determined in good faith by the Board of
Directors; (iv) any revaluation or other write-up in value of assets subsequent
to December 31, 1993 as a result of a change in the method of valuation in
accordance with GAAP; (v) unamortized debt discount and expenses and other
unamortized deferred charges, goodwill, patents, trademarks, service marks,
trade names, copyrights, licenses, organization or developmental expenses and
other intangible items; (vi) treasury stock; and (vii) any cash set apart and
held in a sinking or other analogous fund established for the purpose of
redemption or other retirement of Capital Stock to the extent such obligation is
not reflected in Consolidated Current Liabilities.
"CONSOLIDATED NET WORTH" means, at any date of determination, as applied to
the Company, stockholders' equity as set forth on the most recently available
Consolidated balance sheet of the Company and its Consolidated Restricted
Subsidiaries (which shall be as of a date no more than 60 days prior to the date
of such computation), less any amounts attributable to Redeemable Stock or
Exchangeable Stock, the cost of treasury stock and the principal amount of any
promissory notes receivable from the sale of Capital Stock of the Company or any
Subsidiary.
"CONSOLIDATION" means, with respect to any Person, the consolidation of
accounts of such Person and each of its subsidiaries if and to the extent the
accounts of such Person and such subsidiaries are consolidated in accordance
with GAAP. The term "Consolidated" shall have a correlative meaning.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values to
or under which the Company or any Restricted Subsidiary is a party or a
beneficiary on the Issue Date or becomes a party or beneficiary thereafter.
"DEFAULT" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"DOMESTIC SUBSIDIARY" means a Restricted Subsidiary that is not a Foreign
Subsidiary.
"DEFAULTED INTEREST" means any interest on any Security which is payable,
but is not punctually paid or duly provided for on any Interest Payment Date.
"EBITDA" means, for any period, as applied to the Company, the sum of
Consolidated Net Income (Loss) (but without giving effect to adjustments,
accruals, deductions or entries resulting from purchase accounting,
extraordinary losses or gains and any gains or losses from any Asset Sales),
plus the following to the extent included in calculating Consolidated Net Income
(Loss): (a) Consolidated Income Tax Expense, (b) Consolidated Interest Expense,
(c) depreciation expense, and (d) amortization expense, in each case for
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such period; PROVIDED that, if the Company has any Subsidiary that is not a
Wholly Owned Subsidiary, EBITDA shall be reduced (to the extent not otherwise
reduced by GAAP) by an amount equal to (A) the consolidated net income (loss) of
such Subsidiary (to the extent included in Consolidated Net Income (Loss)
multiplied by (B) the quotient of (1) the number of shares of outstanding common
stock of such Subsidiary not owned on the last day of such period by the Company
or any Wholly Owned Subsidiary of the Company divided by (2) the total number of
shares of outstanding common stock of such Subsidiary on the last day of such
period.
"ENERGY" means Empire Energy Corporation, a Tennessee corporation.
"EXCESS PAYMENTS" means any amounts paid in respect of salary, bonus,
insurance or annuity premiums (other than premiums for "key man" insurance the
sole beneficiary of which is the Company), or other payments or contributions to
any employee benefit, severance, retirement, stock ownership or stock purchase
plan or program or any similar plan or arrangement, to, or for the benefit of, a
Lindsey Entity in excess of the lesser of (A) the aggregate scheduled amounts of
any such payments as set forth in the Employment Agreements between each of Paul
Lindsey and Kristen Lindsey, on the one hand, and the Company on the other hand,
each dated as of June 29, 1994, as they may be amended from time to time, and
(B) an aggregate of $1,000,000.
"EXCHANGEABLE STOCK" means any Capital Stock which by its terms is
exchangeable or convertible at the option of any Person other than the Company
into another security (other than Capital Stock of the Company which is neither
Exchangeable Stock nor Redeemable Stock).
"FOREIGN ASSET SALE" means an Asset Sale in respect of the Capital Stock or
assets of a Foreign Subsidiary or a Restricted Subsidiary of the type described
in Section 936 of the Code to the extent that the proceeds of such Asset Sale
are received by a Person subject in respect of such proceeds to the tax laws of
a jurisdiction other than the United States of America or any State thereof or
the District of Columbia.
"FOREIGN SUBSIDIARY" means a Restricted Subsidiary that is incorporated in a
jurisdiction other than the United States of America or a State thereof or the
District of Columbia.
"FULLY DILUTED BASIS" means after giving effect to the exercise of any
outstanding options, warrants or rights to purchase Voting Shares and the
conversion or exchange of any securities convertible into or exchangeable for
Voting Shares.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect and, to the extent optional, adopted by the Company on
the Issue Date, consistently applied, including, without limitation, those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board.
"GUARANTEE" means, as applied to any obligation, contingent or otherwise, of
any Person, (i) a guarantee, direct or indirect, in any manner, of any part or
all of such obligation (other than by endorsement of negotiable instruments for
collection in the ordinary course of business) and (ii) an agreement, direct or
indirect, contingent or otherwise, the practical effect of which is to insure in
any way the payment or performance (or payment of damages in the event of
nonperformance) of any part or all of such obligation, including the payment of
amounts drawn down under letters of credit.
"HOLDER" or "SECURITYHOLDER" means the Person in whose name a Senior Secured
Note is registered on the Registrar's books.
"INCUR" means, as applied to any obligation, to create, incur, issue,
assume, guarantee or in any other manner become liable with respect to,
contingently or otherwise, such obligation, and "INCURRED," "INCURRENCE" and
"INCURRING" shall each have a correlative meaning; provided, however, that any
Indebtedness or Capital Stock of a Person existing at the time such Person
becomes (after the Issue Date) a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary; and PROVIDED, FURTHER, that any amendment,
modification or waiver of any provision of any document pursuant to which
Indebtedness was previously Incurred shall not
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be deemed to be an Incurrence of Indebtedness as long as (i) such amendment,
modification or waiver does not (A) increase the principal or premium thereof or
interest rate thereon, (B) change to an earlier date the Stated Maturity thereof
or the date of any scheduled or required principal payment thereon or the time
or circumstances under which such Indebtedness may or shall be redeemed, (C) if
such Indebtedness is contractually subordinated in right of payment to the
Senior Secured Notes, modify or affect, in any manner adverse to the Holders,
such subordination, (D) if the Company is the obligor thereon, provide that a
Restricted Subsidiary shall be an obligor, or (E) violate, or cause the
Indebtedness to violate, the provisions described under "-- Covenants --
Limitation on Payment Restrictions Affecting Subsidiaries" and "-- Limitation on
Liens" and (ii) such Indebtedness would, after giving effect to such amendment,
modification or waiver as if it were an Incurrence, comply with clause (i) of
the first proviso to the definition of "Refinancing Indebtedness."
"INDEBTEDNESS" of any Person means, without duplication, (i) the principal
of and premium (if any such premium is then due and owing) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable; (ii) all Capitalized Lease Obligations of
such Person; (iii) all obligations of such Person Incurred as the deferred
purchase price of property, all conditional sale obligations of such Person and
all obligations of such Person under any title retention agreement; (iv) all
obligations of such Person for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in (i) through (iii) above) entered into in the ordinary
course of business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the tenth Business Day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit); (v) the amount of
all obligations of such Person with respect to the scheduled redemption,
repayment or other repurchase of any Redeemable Stock and, in the case of any
Subsidiary, with respect to any other Preferred Stock (but excluding in each
case any accrued dividends); (vi) all obligations of other Persons and all
dividends of other Persons for the payment of which, in either case, such Person
is responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, including by means of any guarantee; (vii) all liabilities or other
obligations, contingent or otherwise, purchased, assumed or with respect to
which such Person shall otherwise become liable or responsible in connection
with the purchase, acquisition or assumption of property, services or business
operations to the extent reflected on the balance sheet of such Person in
accordance with GAAP; (viii) contractual obligations to repurchase goods sold or
distributed; (ix) all obligations of such Person in respect of Interest Rate
Agreements and Currency Agreements; and (x) all obligations of the type referred
to in clauses (i) through (ix) of other Persons secured by any Lien on any
property or asset of such Person (whether or not such obligation is assumed by
such Person), the amount of such obligation being deemed to be the lesser of the
value of such property or assets or the amount of the obligation so secured;
PROVIDED, HOWEVER, that Indebtedness shall not include trade accounts payable
arising in the ordinary course of business. The amount of Indebtedness of any
Person at any date shall be, with respect to unconditional obligations, the
outstanding balance at such date of all such obligations as described above and,
with respect to any contingent obligations (other than pursuant to clause (vii)
above, which shall be included to the extent reflected on the balance sheet of
such Person in accordance with GAAP) at such date, the maximum liability
determined by such Person's board of directors, in good faith, as, in light of
the facts and circumstances existing at the time, reasonably likely to be
Incurred upon the occurrence of the contingency giving rise to such obligation.
"INTERCOMPANY NOTES" means the notes issued to the Company by its
Subsidiaries pursuant to the Master Revolving Credit Note dated as of June 29,
1994, among the Company and each of the Subsidiaries pursuant to which the
Company shall make certain loans to finance the working capital needs of the
Subsidiaries incurred pursuant to the New Credit Facility, or any substantially
similar master intercompany note pursuant to any credit facility Incurred
pursuant to clause (iv) of the second paragraph under "-- Limitation on
Incurrence of Indebtedness" refinancing the New Credit Facility as such
Intercompany Notes may be amended or otherwise modified from time to time.
"INTEREST PAYMENT DATE" means the stated maturity of an installment of
interest on the Senior Secured Notes.
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"INTEREST RATE AGREEMENT" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement or other similar agreement or arrangement designed
to protect against fluctuations in interest rates to or under which the Company
or any of its Restricted Subsidiaries is a party or beneficiary on the Issue
Date or becomes a party or beneficiary thereunder.
"INVESTMENT" means, with respect to any Person, any direct or indirect
advance, loan (other than advances to customers who are not Affiliates in the
ordinary course of business that are recorded as accounts receivable on the
balance sheet of such Person or its Subsidiaries) or other extension of credit
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any other investment in any other Person, or any purchase or
acquisition by such Person of any Capital Stock, bonds, notes, debentures or
other securities or assets issued or owned by any other Person (whether by
merger, consolidation, amalgamation, sale of assets or otherwise). For purposes
of the definition of "Unrestricted Subsidiary" and the provisions set forth
under "-- Covenants -- Limitation on Restricted Payments", (i) "Investment"
shall include the portion (proportionate to the Company's equity interest in
such Subsidiary) of the fair market value of the net assets of any Restricted
Subsidiary at the time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary and shall exclude the fair market value of the net
assets of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined by the
Board of Directors in good faith and evidenced by a board resolution, PROVIDED
that if such market value as determined by the Board of Directors exceeds
$2,500,000 then the Company shall also receive the written opinion of an
independent nationally recognized investment banking firm that such valuation of
the Board of Directors is fair from a financial point of view.
"ISSUE DATE" means the date on which the Senior Secured Notes are originally
issued under the Indenture.
"LIEN" means any mortgage, lien, pledge, charge, or other security interest
or encumbrance of any kind (including any conditional sale or other title
retention agreement and any lease in the nature thereof).
"LINDSEY ENTITY" means Paul S. Lindsey, Jr., Kristen L. Lindsey, any member
of their family and any Person of which any of the foregoing Persons are
Affiliates.
"LINE OF BUSINESS" means the sale and distribution of propane gas and
operations related thereto.
"MANAGEMENT GROUP" means, collectively, those individuals who beneficially
own, directly or indirectly, Voting Shares of the Company or any successor
thereto immediately following the consummation of the Offering and the
transactions related thereto and are members of management of the Company or any
of its Subsidiaries (or the estate or any beneficiary of any such individual or
any immediate family member of any such individual or any trust established for
the benefit of any such individual or immediate family member).
"NET AVAILABLE CASH" means, with respect to any Asset Sale or Collateral
Sale, the cash or cash equivalent payments received by the Company or a
Subsidiary in connection with such Asset Sale or Collateral Sale (including any
cash received by way of deferred payment of principal pursuant to a note or
installment receivable or otherwise, but only as or when received and also
including the proceeds of other property received when converted to cash or cash
equivalents) net of the sum of, without duplication, (i) all reasonable legal,
title and recording tax expenses, reasonable commissions, and other reasonable
fees and expenses incurred directly relating to such Asset Sale or Collateral
Sale, (ii) provision for all local, state, federal and foreign taxes expected to
be paid (whether or not such taxes are actually be paid or payable) as a
consequence of such Asset Sale or Collateral Sale, without regard to the
consolidated results of the Company and its Subsidiaries, (iii) payments made to
repay Indebtedness which is secured by any assets subject to such Asset Sale or
Collateral Sale in accordance with the terms of any Lien upon or other security
agreement of any kind with respect to such assets, or which must by its terms,
or by applicable law, be repaid out of the proceeds from such Asset Sale or
Collateral Sale, and (iv) reasonable amounts reserved by the Company or any
Subsidiary of the Company receiving proceeds of such Asset Sale or Collateral
Sale against
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any liabilities associated with such Asset Sale or Collateral Sale, including
without limitation, indemnification obligations, PROVIDED that such amounts
shall not exceed 10% of the payments received by the Company or a Subsidiary in
connection with such Asset Sale or Collateral Sale, and PROVIDED FURTHER that
such amounts will be applied as described under "-- Covenants -- Sales of
Assets" or "Collateral and Security," as the case may be, no later than the
fifth anniversary of such Asset Sale or Collateral Sale if not previously paid
to satisfy such liabilities.
"NET CASH PROCEEDS" means, with respect to any issuance or sale of Capital
Stock by any Person, the cash proceeds to such Person of such issuance or sale
net of attorneys' fees, accountants' fees, underwriters' or placement agents'
fees, discounts or commissions and brokerage, consultancy and other fees
actually incurred by such Person in connection with such issuance or sale and
net of taxes paid or payable by such Person as a result thereof.
"NEW CREDIT FACILITY" means the credit facility provided pursuant to the
credit agreement, dated as of June 29, 1994, between the Company and Continental
Bank, N.A.
"NON-CONVERTIBLE CAPITAL STOCK" means, with respect to any corporation, any
Capital Stock of such corporation which is not convertible into another security
other than non-convertible common stock of such corporation; PROVIDED, HOWEVER,
that Non-Convertible Capital Stock shall not include any Redeemable Stock or
Exchangeable Stock.
"OFFERING" means the public offering and sale of the Senior Secured Notes.
"OFFICER" means the Chairman, the President, any Vice President, the Chief
Operating Officer, the Chief Financial Officer, the Treasurer, the Secretary,
any Assistant Treasurer, any Assistant Secretary or the Controller of the
Company.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers, one of
whom must be the President, the Treasurer or a Vice President of the Company.
Each Officers' Certificate (other than certificates provided pursuant to TIA
Section 314(a)(4)) shall include the statements provided for in TIA Section
314(e).
"OPERATING LEASE OBLIGATIONS" means any obligation of the Company and its
Restricted Subsidiaries on a Consolidated basis incurred or assumed under or in
connection with any lease of real or personal property which, in accordance with
GAAP, is not required to be classified and accounted for as a capital lease.
"OPINION OF COUNSEL" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel, if so acceptable, may be an employee of
or counsel to the Company or the Trustee. Each such Opinion of Counsel shall
include the statements provided for in TIA Section 314(e).
"OUTSIDE DIRECTOR" means any Person who is a member of the Board of
Directors who is not (i) an employee or Affiliate of the Company, any Subsidiary
of the Company or Energy, (ii) an employee or Affiliate of Holding Capital
Group, Inc., (iii) a Plaster Entity or a Lindsey Entity, or (iv) a Person who
has engaged in a transaction with the Company or any Subsidiary of the Company
that would be required to be disclosed under Item 13 of Form 10-K if such Person
were a director of a registrant under the Securities Exchange Act of 1934, as
amended.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"PLASTER ENTITY" means Robert W. Plaster, Stephen R. Plaster, any member of
each of such individual's family, and any Person of which any of the foregoing
Persons are Affiliates.
"PLEDGE AGREEMENT" means that certain Pledge Agreement, dated as of the date
of the Indenture, by the Company in favor of the Trustee, in the form attached
to the Indenture.
"PREFERRED STOCK", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
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"PUBLIC EQUITY OFFERING" means an underwritten primary public offering of
equity securities of the Company pursuant to an effective registration statement
under the Securities Act.
"PUBLIC MARKET" shall be deemed to have occurred if (x) a Public Equity
Offering has been consummated and (y) at least 25% (for purposes of the
definition of "Change of Control") or 20% (for purposes of the provisions
described under "-- Optional Redemption") of the total issued and outstanding
common stock of the Company has been distributed by means of an effective
registration statement under the
Securities Act or sales pursuant to Rule 144 under the Securities Act.
"REDEEMABLE STOCK" means any class or series of Capital Stock of any Person
that (a) by its terms, by the terms of any security into which it is convertible
or exchangeable or otherwise is, or upon the happening of an event or passage of
time would be, required to be redeemed (in whole or in part) on or prior to the
first anniversary of the Stated Maturity of the Senior Secured Notes, (b) is
redeemable at the option of the holder thereof at any time on or prior to the
first anniversary of the Stated Maturity of the Senior Secured Notes or (c) is
convertible into or exchangeable for Capital Stock referred to in clause (a) or
clause (b) above or debt securities at any time prior to the first anniversary
of the Stated Maturity of the Senior Secured Notes.
"REFINANCING INDEBTEDNESS" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness of the Company or a Restricted Subsidiary
existing on the Issue Date or Incurred in compliance with the Indenture
(including Indebtedness of the Company that refinances Indebtedness of any
Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of another Restricted Subsidiary) including Indebtedness
that refinances Refinancing Indebtedness; PROVIDED, HOWEVER, that (i) the
Refinancing Indebtedness shall be contractually subordinated in right of payment
to the Senior Secured Notes on terms at least as favorable to the Holders of
Senior Secured Notes as the terms set forth in the form of subordination
provisions attached to the Indenture, (ii) the Refinancing Indebtedness is
scheduled to mature either (a) no earlier than the Indebtedness being refinanced
or (b) after the Stated Maturity of the Senior Secured Notes, (iii) the
Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being refinanced and (iv) such Refinancing Indebtedness is in
an aggregate principal amount (or if issued with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal
amount (or if issued with original issue discount, the aggregate accreted value)
then outstanding (plus fees and expenses, including any premium and defeasance
costs) under the Indebtedness being refinanced; and PROVIDED, FURTHER, that
Refinancing Indebtedness shall not include (x) Indebtedness of a Subsidiary of
the Company that refinances Indebtedness of the Company or (y) Indebtedness of
the Company or a Restricted Subsidiary that refinances Indebtedness of an
Unrestricted Subsidiary.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that is not
designated an Unrestricted Subsidiary by the Board of Directors.
"SALE/LEASEBACK TRANSACTION" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Subsidiary transfers such
property to a Person and leases it back from such Person, other than leases for
a term of not more than 36 months or between the Company and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries.
"SEASONAL OVERADVANCE" has the meaning ascribed to it in that certain Credit
Agreement dated as of the date of the Indenture, between the Company and
Continental Bank, N.A., which such Seasonal Overadvance shall not exceed
$3,000,000.
"SECURITIES" means all series of the Senior Secured Notes Due 2004 that are
issued under and pursuant to the terms of the Indenture, as amended or
supplemented from time to time.
"SENIOR INDEBTEDNESS" means (i) all obligations consisting of the principal
of and premium, if any, and accrued and unpaid interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company whether or not post-filing interest is
allowed in such proceeding),
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whether existing on the Issue Date or thereafter Incurred, in respect of (A)
Indebtedness of the Company for money borrowed and (B) Indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
the Company is responsible or liable; (ii) all Capitalized Lease Obligations of
the Company; (iii) all obligations of the Company (A) for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (B) under Interest Rate Agreements and Currency Agreements entered
into in respect of any obligations described in clauses (i) and (ii) or (C)
issued or assumed as the deferred purchase price of property, and all
conditional sale obligations of the Company and all obligations of the Company
under any title retention agreement; (iv) all guarantees of the Company with
respect to obligations of other persons of the type referred to in clauses (ii)
and (iii) and with respect to the payment of dividends of other Persons; and (v)
all obligations of the Company consisting of modifications, renewals,
extensions, replacements and refundings of any obligations described in clauses
(i), (ii), (iii) or (iv); unless, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is provided that such
obligations are subordinated in right of payment to the Senior Secured Notes, or
any other Indebtedness or obligation of the Company; PROVIDED, HOWEVER, that
Senior Indebtedness shall not be deemed to include (1) any obligation of the
Company to any Subsidiary, (2) any liability for Federal, state, local or other
taxes or (3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including guarantees thereof or instruments
evidencing such liabilities).
"SIGNIFICANT SUBSIDIARY" means any Subsidiary (other than an Unrestricted
Subsidiary) that would be a "Significant Subsidiary" of the Company within the
meaning of Rule 1-02 under Regulations S-X promulgated by the SEC.
"STATED MATURITY" means, with respect to any security, the date specified in
such security as the fixed date on which the principal of such security is due
and payable, including pursuant to any mandatory redemption provision (but
excluding any provision providing for the repurchase of such security at the
option of the holder thereof upon the happening of any contingency).
"SUBORDINATED INDEBTEDNESS" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is contractually
subordinated or junior in right of payment to the Senior Secured Notes or any
other Indebtedness of the Company.
"SUBSIDIARY" means, as applied to any Person, (i) a corporation at least a
majority of whose Capital Stock with voting power, under ordinary circumstances,
to elect a majority of the Board of Directors of such corporation is at the
time, directly or indirectly, owned or controlled by such Person, by a
Subsidiary or Subsidiaries of such Person, or by such Person and a Subsidiary or
Subsidiaries of such Person or (ii) any other Person (other than a corporation)
in which such Person, a Subsidiary or Subsidiaries of such Person, or such
Person and a Subsidiary or Subsidiaries of such Person, directly or indirectly,
at the date of determination, has at least a majority ownership interest. As of
the date of the Indenture, the Subsidiaries of the Company will include, without
limitation, PSNC Propane Corporation.
"SUBSIDIARY GUARANTEES" means the unconditional guarantees by the respective
Subsidiary Guarantors of the due and punctual payment of principal, premium, if
any, and interest on the Senior Secured Notes when and as the same shall become
due and payable and in the coin or currency in which the same are payable,
whether at Stated Maturity, by declaration of acceleration, call for redemption,
purchase or otherwise.
"SUBSIDIARY GUARANTOR" means each of the Persons listed on Schedule I
attached to the Indenture, each Person that becomes a Restricted Subsidiary of
the Company after the Issue Date and each other Person that becomes a Subsidiary
Guarantor under the Indenture pursuant to which such Person jointly and
severally unconditionally guarantees the Securities on a senior basis.
"UNRELATED BUSINESS" means any business other than the Line of Business.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary that at the time of
determination shall be designated an Unrestricted Subsidiary by the Board of
Directors in the manner provided below and (ii) any subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
(including any newly
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acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, the Company or any other Subsidiary that is not a Subsidiary of the
Subsidiary to be so designated; PROVIDED, that either (A) the Subsidiary to be
so designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, that such designation would be permitted pursuant to
the provisions under "Covenants -- Limitation on Restricted Payments". The Board
of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary of the Company; PROVIDED, HOWEVER, that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness pursuant to the first paragraph of "Covenants -- Limitation on
Incurrence of Indebtedness" and (y) no Default or Event of Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be evidenced to the respective Trustee by promptly filing with the respective
Trustee a copy of the board resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. GOVERNMENT OBLIGATIONS" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case under
clauses (i) or (ii) are not callable or redeemable before the maturity thereof.
"VOTING SHARES", with respect to any corporation, means the Capital Stock
having the general voting power under ordinary circumstances to elect at least a
majority of the board of directors of such corporation (irrespective of whether
or not at the time stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
"WHOLLY OWNED SUBSIDIARY" means a Subsidiary (other than an Unrestricted
Subsidiary) all the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or another Wholly Owned Subsidiary.
COVENANTS
The Indentures contains covenants including, among others, the following:
LIMITATION ON RESTRICTED PAYMENTS. Under the terms of the Indenture, so
long as any of the Senior Secured Notes are outstanding, the Company shall not,
and shall not permit any Restricted Subsidiary to, directly or indirectly, (i)
declare or pay any dividend on or make any distribution or similar payment of
any sort in respect of its Capital Stock (including any payment in connection
with any merger or consolidation involving the Company) to the direct or
indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Non-Convertible Capital Stock or rights to acquire its
Non-Convertible Capital Stock and dividends or distributions payable solely to
the Company or a Restricted Subsidiary), (ii) purchase, redeem, defease or
otherwise acquire or retire for value any Capital Stock of the Company or of any
direct or indirect parent of the Company, or, with respect to the Company,
exercise any option to exchange any Capital Stock that by its terms is
exchangeable solely at the option of the Company (other than into Capital Stock
of the Company which is neither Exchangeable Stock nor Redeemable Stock), (iii)
purchase, repurchase, redeem, defease or otherwise acquire or retire for value,
prior to scheduled maturity or scheduled repayment thereof or scheduled sinking
fund payment thereon, any Subordinated Indebtedness (other than the purchase,
repurchase, or other acquisition of Subordinated Indebtedness purchased in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of acquisition) or
(iv) make any Investment in any Unrestricted Subsidiary or any Affiliate of the
Company other than a Restricted Subsidiary or a Person which will become a
Restricted Subsidiary as a result of any such Investment (each such payment
described in clauses (i)-(iv) of this paragraph, a "Restricted Payment"), unless
at the time of and after giving effect to the proposed Restricted Payment: (1)
no Default or Event of Default shall have occurred and be continuing (or would
result therefrom); (2) the Company would be permitted to Incur an additional $1
of Indebtedness pursuant to the provisions described in the first paragraph
under "-- Limitation on Incurrence of Indebtedness", and
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(3) the aggregate amount of all such Restricted Payments subsequent to the Issue
Date shall not exceed the sum of (A) 50% of aggregate Consolidated Net Income
(or if such Consolidated Net Income is a deficit, minus 100% of such deficit),
and minus 100% of the amount of any write-downs, write-offs, other negative
reevaluations and other negative extraordinary charges not otherwise reflected
in Consolidated Net Income during such period; (B) the aggregate Net Cash
Proceeds received by the Company after the Issue Date from a sale by the Company
of Capital Stock (other than Redeemable Stock or Exchangeable Stock) of the
Company or from the issuance of any options or warrants or other rights to
acquire Capital Stock (other than Redeemable Stock or Exchangeable Stock); (C)
the amount by which the principal amount of Indebtedness of the Company or its
Restricted Subsidiaries is reduced on the Company's Consolidated balance sheet
upon the conversion or exchange (other than by a Subsidiary) subsequent to the
Issue Date of any Indebtedness of the Company or any Restricted Subsidiary
converted or exchanged for Capital Stock (other than Redeemable Stock or
Exchangeable Stock) of the Company (less the amount of any cash, or the value of
any other property, distributed by the Company or any Restricted Subsidiary upon
such conversion or exchange); (D) an amount equal to the net reduction in
Investments in Unrestricted Subsidiaries resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other transfers of
assets, in each case to the Company or any Restricted Subsidiary from
Unrestricted Subsidiaries, or from redesignations of Unrestricted Subsidiaries
as Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed in the case of any Unrestricted Subsidiary the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary; and (E) $1,000,000 million, less the
aggregate of all Excess Payments made during such period.
The failure to satisfy the conditions set forth in clauses (2) and (3) of
the first paragraph under "Covenants -- Limitation on Restricted Payments" shall
not prohibit any of the following as long as the condition set forth in clause
(1) of such paragraph is satisfied (except as set forth below): (i) dividends
paid within 60 days after the date of declaration thereof if at such date of
declaration such dividend would have complied with the provisions described in
the first paragraph under "Covenants -- Limitation on Restricted Payments"; (ii)
any purchase, redemption, defeasance, or other acquisition or retirement for
value of Capital Stock or Subordinated Indebtedness of the Company made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Capital Stock of the Company (other than Redeemable Stock or Exchangeable Stock
and other than stock issued or sold to a Subsidiary or to an employee stock
ownership plan), PROVIDED, HOWEVER, that notwithstanding clause (1) of the
immediately preceding paragraph, the occurrence or existence of a Default or
Event of Default shall not prohibit the making of such purchase, redemption,
defeasance or other acquisition or retirement, and PROVIDED, FURTHER, such
purchase, redemption, defeasance or other acquisition or retirement shall not be
included in the calculation of Restricted Payments made for purposes of clause
(3) of the immediately preceding paragraph and PROVIDED, FURTHER, that the Net
Cash Proceeds from such sale shall be excluded from sub-clause (B) of clause (3)
of the immediately preceding paragraph; (iii) any purchase, redemption,
defeasance or other acquisition or retirement for value of Subordinated
Indebtedness of the Company made by exchange for, or out of the proceeds of the
substantially concurrent Incurrence of for cash (other than to a Subsidiary),
new Indebtedness of the Company, PROVIDED, HOWEVER, that (A) such new
Indebtedness shall be contractually subordinated in right of payment to the
Senior Secured Notes on terms at least as favorable to the Holders of Senior
Secured Notes as the terms set forth in the form of subordination provisions
attached to the Indenture, (B) such new Indebtedness has a Stated Maturity
either (1) no earlier than the Stated Maturity of the Indebtedness redeemed,
repurchased, defeased, acquired or retired or (2) after the Stated Maturity of
the Senior Secured Notes and (C) such Indebtedness has an Average Life equal to
or greater than the Average Life of the Indebtedness redeemed, repurchased,
defeased, acquired or retired, and PROVIDED, FURTHER, that such purchase,
redemption, defeasance or other acquisition or retirement, shall not be included
in the calculation of Restricted Payments made for purposes of clause (3) of the
immediately preceding paragraph; (iv) any purchase, redemption, defeasance or
other acquisition or retirement for value of Subordinated Indebtedness upon a
Change of Control or an Asset Sale to the extent required by the indenture or
other agreement pursuant to which such Subordinated Indebtedness was issued, but
only if the Company (A) in the case of a Change of Control, has made an offer to
repurchase the Senior Secured Notes as described under "-- Covenants -- Change
of Control" or (B) in the case of an Asset Sale, has applied the Net Available
Cash from such Asset Sale in
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accordance with the provisions described under "-- Covenants -- Sales of Assets"
and certain provisions related to the release of collateral, if applicable; (v)
pro rata dividends paid by a Subsidiary with respect to a series or class of its
Capital Stock the majority of which is held by the Company or a Wholly Owned
Subsidiary; (vi) the payment of dividends on the Capital Stock of the Company
following an initial Public Equity Offering of such Capital Stock of up to an
amount per annum of 6% of the Net Cash Proceeds received by the Company in such
Public Equity Offering; (vii) the purchase, redemption, acquisition,
cancellation, or other retirement for value of shares of Capital Stock of the
Company, options on any such shares or related phantom stock, or stock
appreciation rights or similar securities held by officers or employees or
former officers or employees (or their estates or beneficiaries under their
estates), upon the death, disability, retirement or termination of employment of
such employee or former employee, pursuant to the terms of an employee benefit
plan or any other agreement under which such shares of stock or related rights
were issued, provided that the aggregate cash consideration paid, or
distributions made, pursuant to this clause (vii) after the date of the
Indenture does not exceed an aggregate amount of $1,000,000 plus the cash
proceeds received by or contributed to the Company from any reissuance of
Capital Stock by the Company to members of management and employees of the
Company and its Subsidiaries; and (viii) Investments in Unrestricted
Subsidiaries of up to $3,000,000 at any one time outstanding.
LIMITATION ON INCURRENCE OF INDEBTEDNESS. Under the terms of the Indenture,
the Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, Incur any Indebtedness, except that the Company may
Incur Indebtedness if, after giving effect thereto, the Consolidated Coverage
Ratio would be greater than 1.75:1, if such Incurrence takes place on or prior
to July 15, 1998, or 2.0:1, if such Incurrence takes place thereafter.
The foregoing provision will not limit the ability of the Company or any
Restricted Subsidiary to Incur the following Indebtedness: (i) Refinancing
Indebtedness (except with respect to Indebtedness referred to in clause (ii),
(iii) or (iv) below); (ii) Acquisition Indebtedness at any one time outstanding
in an aggregate principal amount not to exceed $15,000,000, PROVIDED that not
more than an aggregate of $6,000,000 of such Acquisition Indebtedness may be
incurred in any twelve month period; (iii) Indebtedness of the Company which is
owed to and held by a Wholly Owned Subsidiary and Indebtedness of a Wholly Owned
Subsidiary which is owed to and held by the Company or a Wholly Owned
Subsidiary, including without limitation, the Indebtedness evidenced by the
Intercompany Notes; PROVIDED, HOWEVER, that any subsequent issuance or transfer
of any Capital Stock which results in any such Wholly Owned Subsidiary ceasing
to be a Wholly Owned Subsidiary or any transfer of such Indebtedness (other than
to the Company or a Wholly Owned Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the Company or by a Wholly
Owned Subsidiary, as the case may be; (iv) Indebtedness of the Company (whether
under the New Credit Facility or otherwise) Incurred for the purpose of
financing the working capital needs of the Company and its Restricted
Subsidiaries, PROVIDED, HOWEVER, that after giving effect to the Incurrence of
such Indebtedness and any substantially simultaneous use of the proceeds
thereof, the aggregate principal amount of all such Indebtedness Incurred
pursuant to this clause (iv) and then outstanding immediately after such
Incurrence and such use of proceeds shall not exceed the sum of 60% of the book
value of the inventory and 90% of the book value of the receivables of the
Company and the Restricted Subsidiaries on a consolidated basis at such time
plus the amount of the Seasonal Overadvance, and PROVIDED FURTHER, that the
aggregate amount of Indebtedness pursuant to this clause (iv) shall not exceed
$15,000,000 at any time prior to July 15, 1997 and PROVIDED FURTHER, that the
Company's Subsidiaries shall be permitted to guarantee Indebtedness incurred by
the Company pursuant to the New Credit Facility or pursuant to a credit facility
Incurred pursuant to this clause (iv) refinancing the New Credit Facility; (v)
Acquired Indebtedness; PROVIDED, HOWEVER, that the Company would have been able
to Incur such Indebtedness at the time of the Incurrence thereof pursuant to the
immediately preceding paragraph; and (vi) Indebtedness of the Company or a
Restricted Subsidiary outstanding on the Issue Date (other than Indebtedness
referred to in clause (iv) above and Indebtedness being repaid or retired with
the proceeds of the Offering.
Notwithstanding the provisions of this covenant described in the first two
paragraphs above, the Indenture provides that the Company shall not Incur any
Indebtedness if the proceeds thereof are used, directly or indirectly, to repay,
prepay, redeem, defease, retire, refund or refinance any Subordinated
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Indebtedness unless such repayment, prepayment, redemption, defeasance,
retirement, refunding or refinancing is not prohibited under "-- Limitation on
Restricted Payments" or unless such Indebtedness shall be contractually
subordinated to the Senior Secured Notes at least to the same extent as such
Subordinated Indebtedness.
LIMITATION ON PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. Under the terms
of the Indenture, the Company shall not, and shall not permit any Subsidiary, to
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (i)
pay dividends to or make any other distributions on its Capital Stock, or pay
any Indebtedness or other obligations owed to the Company or any other
Restricted Subsidiary, (ii) make any Investments in the Company or any other
Restricted Subsidiary or (iii) transfer any of its property or assets to the
Company or any other Restricted Subsidiary; PROVIDED, HOWEVER, that the
foregoing shall not apply to (a) any encumbrance or restriction existing
pursuant to the Indenture or any other agreement or instrument as in effect or
entered into on the Issue Date (including the New Credit Facility as in effect
on the Issue Date); (b) any encumbrance or restriction with respect to a
Subsidiary pursuant to an agreement relating to any Acquired Indebtedness of
such Subsidiary; PROVIDED, HOWEVER, that such encumbrance or restriction was not
Incurred in connection with or in contemplation of such Subsidiary becoming a
Subsidiary; (c) any encumbrance or restriction pursuant to an agreement
effecting a refinancing, renewal, extension or replacement of Indebtedness
referred to in clause (a) or (b) above or contained in any amendment or
modification with respect to such Indebtedness; PROVIDED, HOWEVER, that the
encumbrances and restrictions contained in any such agreement, amendment or
modification are no less favorable in any material respect with respect to the
matters referred to in clauses (i), (ii) and (iii) above than the encumbrances
and restrictions with respect to the Indebtedness being refinanced, renewed,
extended, replaced, amended or modified; (d) in the case of clause (iii) above,
customary non-assignment provisions of any leases governing a leasehold interest
or of any supply, license or other agreement entered into in the ordinary course
of business of the Company or any Subsidiary; (e) any restrictions with respect
to a Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Subsidiary pending the closing of such sale or disposition or (f) any
encumbrance or restriction existing by reason of applicable law. Nothing
contained in the covenant described in this paragraph prevents the sale of
assets that secure Indebtedness of the Company or its Subsidiaries.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS. Under the terms of the
Indenture, the Company shall not, and shall not permit any Restricted Subsidiary
to, enter into any Sale/Leaseback Transaction unless (i) the Company or such
Subsidiary would be entitled to create a Lien on such property securing
Indebtedness in an amount equal to the Attributable Debt with respect to such
transaction without equally and ratably securing the Securities pursuant to the
covenant entitled "Limitation on Liens" or (ii) the net proceeds of such sale
are at least equal to the fair value (as determined by the Board of Directors)
of such property and the Company or such Subsidiary shall apply or cause to be
applied an amount in cash equal to the net proceeds of such sale to the
retirement, within 30 days of the effective date of any such arrangement, of
Senior Indebtedness or Indebtedness of a Restricted Subsidiary, PROVIDED,
HOWEVER, that the Company or any Restricted Subsidiary may enter into a
Sale/Leaseback Transaction as long as the sum of (x) the Attributable Debt with
respect to such Sale/Leaseback Transaction and all other Sale/Leaseback
Transactions entered into pursuant to this proviso, plus (y) the amount of
outstanding Indebtedness secured by Liens Incurred pursuant to the proviso to
the covenant described under "-- Limitation on Liens" below, does not exceed 5%
of Consolidated Net Tangible Assets as determined based on the consolidated
balance sheet of the Company as of the end of the most recent fiscal quarter for
which financial statements are available.
LIMITATION ON LIENS. Under the terms of the Indenture, except as described
under "-- Security," the Company shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, incur or permit to exist any Lien of any
nature whatsoever on any of its properties (including, without limitation,
Capital Stock), whether owned at the date of such Indenture or thereafter
acquired, other than (a) pledges or deposits made by such Person under workers'
compensation, unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than for payment of
Indebtedness) or leases to which such Person is a party, or deposits to secure
statutory or regulatory
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obligations of such Person or deposits of cash of United States Government bonds
to secure surety, appeal or performance bonds to which such Person is a party,
or deposits as security for contested taxes or import duties or for the payment
of rent, in each case Incurred in the ordinary course of business; (b) Liens
imposed by law such as carriers', warehousemen's and mechanics' Liens, in each
case, arising in the ordinary course of business and with respect to amounts not
yet due or being contested in good faith by appropriate legal proceedings
promptly instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made; or other Liens arising out of judgments or awards against
such Person with respect to which such Person shall then be diligently
prosecuting appeal or other proceedings for review; (c) Liens for property taxes
not yet subject to penalties for non-payment or which are being contested in
good faith and by appropriate legal proceedings promptly instituted and
diligently conducted and for which a reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have been made; (d)
Liens in favor of issuers or surety bonds or letters of credit issued pursuant
to the request of and for the account of such Person in the ordinary course of
its business; PROVIDED, HOWEVER, that such letters of credit may not constitute
Indebtedness; (e) minor survey exceptions, minor encumbrances, easements or
reservations of, or rights of others for, rights of way, sewers, electric lines,
telegraph and telephone lines and other similar purposes, or zoning or other
restrictions as to the use of real properties or liens incidental to the conduct
of the business of such Person or to the ownership of its properties which were
not Incurred in connection with Indebtedness or other extensions of credit and
which do not in the aggregate materially adversely affect the value of said
properties or materially impair their use in the operation of the business of
such Person; (f) Liens securing Indebtedness Incurred to finance the
construction of, purchase of, or repairs, improvements or additions to, property
(including Acquisition Indebtedness Incurred pursuant to clause (ii) of the
penultimate paragraph under "-- Limitation on the Incurrence of Indebtedness");
PROVIDED, HOWEVER, that the Lien may not extend to any other property owned by
the Company or any Restricted Subsidiary at the time the Lien is incurred, and
the Indebtedness secured by the Lien may not be issued more than 180 days after
the later of the acquisition, completion of construction, repair, improvement,
addition or commencement of full operation of the property subject to the Lien;
(g) Liens existing on the Issue Date (other than Liens relating to Indebtedness
or other obligations being repaid or Liens that are otherwise extinguished with
the proceeds of the Offering), (h) Liens on property of a Person (excluding
Capital Stock) of such Person at the time such Person becomes a Subsidiary;
PROVIDED, HOWEVER, that any Lien may not extend to any other property owned by
the Company or any Restricted Subsidiary; (i) Liens on property at the time the
Company or a Subsidiary acquires the property, including any acquisition by
means of a merger or consolidation with or into the Company or a Subsidiary;
PROVIDED, HOWEVER, that such Liens are not incurred in connection with, or in
contemplation of, such merger or consolidation; and PROVIDED, FURTHER, that the
Lien may not extend to any other property owned by the Company or any Restricted
Subsidiary; (j) Liens securing Indebtedness or other obligations of a Subsidiary
owing to the Company or a Wholly Owned Subsidiary, including without limitation,
the Indebtedness Incurred under the Intercompany Notes, PROVIDED that any Lien
securing Indebtedness pursuant to any Intercompany Notes shall be limited to the
inventory and accounts receivable of the Subsidiary of the Company issuing such
Intercompany Note; (k) Liens incurred by a Person other than the Company or any
Subsidiary on assets that are the subject of a Capitalized Lease Obligation to
which the Company or a Subsidiary is a party; PROVIDED, HOWEVER, that any such
Lien may not secure Indebtedness of the Company or any Subsidiary (except by
virtue of clause (x) of the definition of "Indebtedness") and may not extend to
any other property owned by the Company or any Restricted Subsidiary; (l) Liens
on inventory and accounts receivable of the Company and its subsidiaries and
Liens on Intercompany Notes, in any case securing Indebtedness permitted to be
Incurred under the provision described in clause (iv) of the second paragraph
under "-- Limitation on the Incurrence of Indebtedness"; (m) Liens to secure any
refinancing, refunding, extension, renewal or replacement (or successive
refinancings, refundings, extensions, renewals or replacements) as a whole, or
in part, of any Indebtedness secured by any Lien referred to in the foregoing
clauses (f), (g), (h), (i) and (m), PROVIDED, HOWEVER, that (x) such new Lien
shall be limited to all or part of the same property that secured the original
Lien (plus improvements on such property) and (y) the Indebtedness secured by
such Lien at such time is not increased (other than by an amount necessary to
pay fees and expenses, including premiums, related to the refinancing,
refunding, extension, renewal or replacement of such Indebtedness); and (n)
Liens by which the Senior Secured Notes are secured equally and ratably with
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other Indebtedness of the Company pursuant to this paragraph, without
effectively providing that the Senior Secured Notes shall be secured equally and
ratably with (or prior to) the obligations so secured for so long as such
obligations are so secured; PROVIDED, HOWEVER, that the Company may incur other
Liens other than on the Collateral to secure Indebtedness as long as the sum of
(x) the amount of outstanding Indebtedness secured by Liens incurred pursuant to
this proviso plus (y) the Attributable Debt with respect to all outstanding
leases in connection with Sale/Leaseback Transactions entered into pursuant to
the proviso under "-- Limitation on Sale/Leaseback Transactions," does not
exceed 5% of Consolidated Net Tangible Assets as determined with respect to the
Company as of the end of the most recent fiscal quarter for which financial
statements are available.
CHANGE OF CONTROL. Under the terms of the Indenture, in the event of a
Change of Control, the Company shall make an offer to purchase (the "Change of
Control Offer") the Senior Secured Notes then outstanding at the time at a
purchase price equal to 101% of the Accreted Value thereof plus accrued interest
to the Change of Control Purchase Date (as defined below) on the terms set forth
in this provision. The date on which the Company shall purchase the Securities
pursuant to this provision (the "Change of Control Purchase Date") shall be no
earlier than 30 days, nor later than 60 days, after the notice referred to below
is mailed, unless a longer period shall be required by law. The Company shall
notify the Trustee in writing promptly after the occurrence of any Change of
Control of the Company's obligation to purchase the Senior Secured Notes.
Notice of a Change of Control Offer shall be mailed by the Company to the
Holders of the Senior Secured Notes at their last registered address (with a
copy to the Trustee and the Paying Agent) within thirty (30) days after a Change
in Control has occurred. The Change of Control Offer shall remain open from the
time of mailing until five (5) Business Days before the Change of Control
Purchase Date. The notice shall contain all instructions and materials necessary
to enable such Holders to tender (in whole or in part) the Senior Secured Notes
pursuant to the Change of Control Offer. The notice, which shall govern the
terms of the Change of Control Offer, shall state: (a) that the Change of
Control Offer is being made pursuant to the Indenture; (b) the purchase price
and the Change of Control Purchase Date; (c) that any Senior Secured Note not
surrendered or accepted for payment will continue to accrue interest; (d) that
any Senior Secured Note accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest after the Change of Control Purchase Date
if payment is made; (e) that any Holder electing to have a Senior Secured Note
purchased (in whole or in part) pursuant to a Change of Control Offer will be
required to surrender the Senior Secured Note, with the form entitled "Option of
Holder to Elect Purchase" on the reverse of the Senior Secured Note completed,
to the Paying Agent at the address specified in the notice (or otherwise make
effective delivery of the Senior Secured Note pursuant to book-entry procedures
and the related rules of the applicable depositories) at least five Business
Days before the Change of Control Purchase Date; and (f) that any Holder will be
entitled to withdraw his or her election if the Paying Agent receives, not later
than three Business Days prior to the Change of Control Purchase Date, a
telegram, telex, facsimile transmission or letter setting forth the name of the
Holder, the principal amount of the Senior Secured Note the Holder delivered for
purchase and a statement that such Holder is withdrawing his or her election to
have the Senior Secured Note purchased.
On the Change of Control Purchase Date, the Company shall (i) accept for
payment the Senior Secured Notes, or portions thereof, surrendered and properly
tendered and not withdrawn, pursuant to the Change of Control Offer, (ii)
deposit with the Paying Agent money sufficient to pay the purchase price plus
accrued interest of all the Senior Secured Notes or portions thereof, so
accepted and (iii) deliver to the Trustee the Senior Secured Notes so accepted
together with an Officers' Certificate stating that such securities have been
accepted for payment by the Company. The Paying Agent shall promptly mail or
deliver to Holders of securities so accepted payment in an amount equal to the
purchase price. Holders whose Securities are purchased only in part will be
issued new Securities equal in principal amount to the unpurchased portion of
the Securities surrendered.
TRANSACTIONS WITH AFFILIATES. Under the terms of the Indenture, the Company
shall not, and shall not permit any Restricted Subsidiary to, directly or
indirectly, enter into, permit to exist, renew or extend any transaction or
series of transactions (including, without limitation, the sale, purchase,
exchange or lease of
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any assets or property or the rendering of any services) with any Affiliate of
the Company, any Plaster Entity, any Lindsey Entity or Energy unless (i) the
terms of such transaction or series of transactions are (A) no less favorable to
the Company or such Restricted Subsidiary, as the case may be, than would be
obtainable in a comparable transaction or series of related transactions in
arm's-length dealings with an unrelated third party and, in the case of a
transaction or series of transactions involving payments or consideration in
excess of $100,000, approved by a majority of the Outside Directors, and (B) set
forth in writing, if such transaction or series of transactions involves
aggregate payments or consideration in excess of $250,000, and (ii) with respect
to a transaction or series of transactions involving aggregate payments or
consideration in excess of $1 million, such transaction or series of
transactions has been determined, in the written opinion of an independent
nationally recognized investment banking firm, to be fair, from a financial
point of view, to the Company or such Restricted Subsidiary. The foregoing
provisions do not prohibit (i) the payment of reasonable fees to directors of
the Company and its subsidiaries, (ii) scheduled payments made pursuant to the
terms of any of the Basic Agreements, as the terms of each such agreement are in
effect on the Issue Date, or (iii) any transaction between the Company and a
Wholly Owned Subsidiary or between Wholly Owned Subsidiaries otherwise permitted
by the terms of the Indenture. Any transaction which has been determined, in the
written opinion of an independent nationally recognized investment banking firm,
to be fair, from a financial point of view, to the Company or the applicable
Restricted Subsidiary shall be deemed to be in compliance with this provision.
SALES OF ASSETS. Under the terms of the Indenture, neither the Company nor
any Restricted Subsidiary shall consummate any Asset Sale unless (i) the Company
or such Restricted Subsidiary receives consideration at the time of such Asset
Sale at least equal to the fair market value, as determined in good faith by the
Board of Directors, of the shares or assets subject to such Asset Sale, (ii) at
least 85% of the consideration thereof received by the Company or such
Restricted Subsidiary is in the form of Additional Assets or cash or cash
equivalents which cash equivalents are promptly converted into cash by the
Person receiving such payment and (iii) an amount equal to 100% of the Net
Available Cash is applied by the Company (or such Subsidiary, as the case may
be) as set forth herein. Under the terms of the Indenture, the Company shall not
permit any Unrestricted Subsidiary to make any Asset Sale unless such
Unrestricted Subsidiary receives consideration at the time of such Asset Sale at
least equal to the fair market value of the shares or assets so disposed of as
determined in good faith by the Board of Directors.
Under the terms of the Indenture, within 360 days (such period being the
"Application Period") following the consummation of an Asset Sale, the Company
or such Restricted Subsidiary shall apply the Net Available Cash from such Asset
Sale as follows: (i) FIRST, to the extent the Company or such Restricted
Subsidiary elects, to reinvest in Additional Assets; (ii) SECOND, to the extent
of the balance of such Net Available Cash after application in accordance with
clause (i), and to the extent the Company or such Restricted Subsidiary elects
(or is required by the terms of any Senior Indebtedness or any Indebtedness of
such Restricted Subsidiary), to prepay, repay or purchase (A) secured Senior
Indebtedness or (B) Indebtedness (other than any Preferred Stock) of a
Restricted Subsidiary in either case other than Indebtedness owed to the Company
(except to the extent that the proceeds of any such repayment received by the
Company are used to repay secured Senior Indebtedness of the Company or an
Affiliate of the Company), (iii) THIRD, to the extent of the balance of such Net
Available Cash after application in accordance with clauses (i) and (ii), to
make an offer to purchase the Senior Secured Notes at not less than 100% of
their Accreted Value, plus accrued interest (if any) pursuant to and subject to
the conditions set forth in the Indenture; PROVIDED, HOWEVER that in connection
with any prepayment, repayment or purchase of Indebtedness pursuant to clause
(ii) or (iii) above, the Company or Restricted Subsidiary shall retire such
Indebtedness and cause the related loan commitment (if any) to be permanently
reduced in an amount equal to the principal amount so prepaid, repaid or
purchased; and PROVIDED FURTHER that in the case of any prepayment or repayment
of Indebtedness under the New Credit Facility or Indebtedness Incurred pursuant
to clause (iv) of the second paragraph under "-- Limitation on Incurrence of
Indebtedness" refinancing the New Credit Facility, such related loan commitment
shall not be required to be permanently reduced. To the extent that any Net
Available Cash from Asset Sales remains after the application of such Net
Available Cash in accordance with this paragraph, the Company or such Restricted
Subsidiary may utilize such remaining Net Available Cash in any manner set forth
in clause (i) or clause (ii) above.
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To the extent that any or all of the Net Available Cash of any Foreign Asset
Sale is prohibited or delayed by applicable local law from being repatriated to
the United States, the portion of such Net Available Cash so affected shall not
be required to be applied at the time provided above, but may be retained by the
applicable Restricted Subsidiary so long, but only so long, as the applicable
local law will not permit repatriation to the United States (the Company hereby
agreeing to promptly take or cause the applicable Restricted Subsidiary to
promptly take all actions required by the applicable local law to permit such
repatriation). Once such repatriation of any of such affected Net Available Cash
is permitted under the applicable local law, such repatriation shall be
immediately effected and such repatriated Net Available Cash will be applied in
the manner set forth in this provision as if such Asset Sale had occurred on the
date of such repatriation.
To the extent that the Board of Directors determines, in good faith, that
repatriation of any or all of the Net Available Cash of any Foreign Asset Sale
would have a material adverse tax consequence to the Company, the Net Available
Cash so affected may be retained outside of the United States by the applicable
Restricted Subsidiary for so long as such material adverse tax consequence would
continue.
Under the Indenture, the Company shall not be required to make an offer to
purchase the Senior Secured Notes if the Net Available Cash available from an
Asset Sale (after application of the proceeds as provided in clauses (i) and
(ii) of the second paragraph of this covenant above) is less than $1,000,000 for
any particular Asset Sale (which lesser amounts shall not be carried forward for
purposes of determining whether an offer is required with respect to the Net
Available Cash from any subsequent Asset Sale).
Notwithstanding the foregoing, this provision shall not apply to, or prevent
any sale of assets, property, or Capital Stock of Subsidiaries to the extent
that the fair market value (as determined in good faith by the Board of
Directors) of such asset, property or Capital Stock, together with the fair
market value of all other assets, property, or Capital Stock of Subsidiaries
sold, transferred or otherwise disposed of in Asset Sales during the twelve
month period preceding the date of such sale, does not exceed 5% of Consolidated
Net Tangible Assets as determined as of the end of the most recent fiscal
quarter, and no violation of this provision shall be deemed to have occurred as
a consequence thereof.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company as an entirety to a Person in a transaction
permitted under the covenant described under "-- Merger and Consolidation", the
Successor Corporation shall be deemed to have sold the properties and assets of
the Company not so transferred for purposes of this covenant, and shall comply
with the provisions of this covenant with respect to such deemed sale as if it
were an Asset Sale.
LIMITATION ON THE ISSUANCE OF CAPITAL STOCK AND THE INCURRENCE OF
INDEBTEDNESS OF RESTRICTED SUBSIDIARIES. Pursuant to the terms of the Indenture,
the Company shall not permit any Restricted Subsidiary, directly or indirectly,
to issue or sell, and shall not permit any Person other than the Company or a
Wholly Owned Subsidiary to own (except to the extent that any such Person may
own on the Issue Date), any shares of such Restricted Subsidiary's Capital Stock
(including options, warrants or other rights to purchase shares of Capital
Stock) except, to the extent otherwise permitted by the Indenture, (i) to the
Company or another Restricted Subsidiary that is a Wholly Owned Subsidiary of
the Company, or (ii) if, immediately after giving effect to such issuance and
sale, such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary for purposes of the Indenture. The Company shall not permit any
Restricted Subsidiary, directly or indirectly, to Incur Indebtedness other than
pursuant to the second paragraph under "-- Limitation on Indebtedness."
LIMITATION ON CHANGES IN THE NATURE OF BUSINESS. The Indenture provides
that the Company and its Subsidiaries shall not engage in any line of business
other than the business of the sale and distribution of propane gas and
operations related thereto for any period of time in excess of 270 consecutive
days for any such unrelated line of business.
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MERGER AND CONSOLIDATION. Under the terms of the Indenture, the Company
shall not, in a single transaction or through a series of related transactions,
consolidate with or merge with or into any other corporation or sell, assign,
convey, transfer or lease or otherwise dispose of a majority of its properties
and assets to any Person or group of affiliated Persons unless: (a) either the
Company shall be the continuing Person, or the Person (if other than the
Company) formed by such consolidation or into which the Company is merged or to
which the properties and assets of the Company as an entirety are transferred
(the "Successor Corporation"), shall be a corporation organized and existing
under the laws of the United States or any State thereof or the District of
Columbia and shall expressly assume, by an indenture supplemental to the
Indenture, executed and delivered to the Trustee, in form and substance
reasonably satisfactory to the Trustee, all the obligations of the Company under
the Indenture and the Senior Secured Notes; (b) immediately before and
immediately after giving effect to such transaction on a pro forma basis (and
treating any Indebtedness which becomes an obligation of the Company (or the
Successor Corporation if the Company is not the continuing obligor under the
Indenture) or any Restricted Subsidiary as a result of such transaction as
having been Incurred by such Person at the time of such transaction), no Default
shall have occurred and be continuing; (c) the Company shall have delivered, or
caused to be delivered, to the respective Trustee an Officers' Certificate and,
as to legal matters, an Opinion of Counsel, each in form and substance
reasonably satisfactory to the respective Trustee, each stating that such
consolidation, merger or transfer and such supplemental indenture comply with
this provision and that all conditions precedent herein provided for relating to
such transaction have been complied with; (d) immediately after giving effect to
such transaction on a pro forma basis (and treating any Indebtedness which
becomes an obligation of the Company (or the Successor Corporation if the
Company is not the continuing obligor under the Indenture) or a Restricted
Subsidiary in connection with or as a result of such transaction as having been
Incurred by such Person at the time of such transaction, the Consolidated
Coverage Ratio of the Company (or the Successor Corporation if the Company is
not the continuing obligor under the Indenture) is at least 1:1, PROVIDED that,
if the Consolidated Coverage Ratio before giving effect to such transaction is
within the range set forth in column (A) below, then the pro forma Consolidated
Coverage Ratio of the Company or the Successor Corporation shall be at least
equal to the lessor of (1) the ratio determined by multiplying the percentage
set forth in column (B) below by the Consolidated Coverage Ratio of the Company
prior to such transaction and (2) the ratio set forth in column (C) below:
<TABLE>
<CAPTION>
(A) (B) (C)
- -------------------- ---- --------
<S> <C> <C>
1.11:1 to 1.99:1 90% 1.50:1
2.00:1 to 2.99:1 80% 2.10:1
3.00:1 to 3.99:1 70% 2.40:1
4.00:1 or more 60% 2.50:1;
</TABLE>
and (e) immediately after giving effect to such transaction on a pro forma basis
(and treating any Indebtedness which becomes an obligation of the Company (or
the Successor Corporation if the Company is not the continuing obligor under the
Indenture) or a Restricted Subsidiary in connection with or as a result of such
transaction as having been Incurred by such Person at the time of such
transaction), the Company (or the Successor Corporation if the Company is not
the continuing obligor under the Indenture) shall have Consolidated Net Worth in
an amount which is not less than the Consolidated Net Worth immediately prior to
such transaction. Notwithstanding the foregoing clauses (b), (d) and (e), any
Restricted Subsidiary may consolidate with, merge into or transfer all or part
of its properties and assets to the Company or any Wholly Owned Subsidiary or
Wholly Owned Subsidiaries and no violation of this provision will be deemed to
have occurred as a consequence thereof, as long as the requirements of clauses
(a) and (c) are satisfied in connection therewith.
Upon any such assumption by the Successor Corporation, except in the case of
a lease, the Successor Corporation shall succeed to and be substituted for the
Company under the Indenture and the Senior Secured Notes and the Company shall
thereupon be released from all obligations under the Indenture and under the
Senior Secured Notes and the Company as the predecessor corporation may
thereupon or at any time thereafter be dissolved, wound up or liquidated. The
Successor Corporation thereupon may cause to be signed, and may issue either in
its own name or in the name of the Company, all or any of the Senior Secured
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Notes issuable under the Indenture which theretofore shall not have been signed
by the Company and delivered to the Trustee; and, upon the order of the
Successor Corporation instead of the Company and subject to all the terms,
conditions and limitations prescribed in the Indenture, the Trustee shall
authenticate and shall deliver any Senior Secured Notes which the Successor
Corporation thereafter shall cause to be signed and delivered to the Trustee for
that purpose. All the Senior Secured Notes so issued shall in all respects have
the same legal rank and benefit under the Indenture as the Senior Secured Notes
theretofore or thereafter issued in accordance with the terms of the Indenture
as though all such Senior Secured Notes had been issued at the date of the
execution of the Indenture. In the case of any such consolidation, merger or
transfer, such changes in form (but not in substance) may be made in the Senior
Secured Notes thereafter to be issued as may be appropriate.
EVENTS OF DEFAULT
"EVENTS OF DEFAULT" are defined in the Indenture as (i) default for 30 days
in payment of any interest installment due and payable on the Senior Secured
Notes, (ii) default in payment of the principal when due on the Senior Secured
Notes, or failure to redeem or purchase the Senior Secured Notes when required
pursuant to the respective Indenture, (iii) default in performance of any other
covenants or agreements in the Indenture, the Senior Secured Notes or the Pledge
Agreement and the default continues for 30 days after written notice to the
Company by the Trustee or the Collateral Agent or to the Company and the Trustee
by the holders of at least 25% in principal amount of the outstanding Senior
Secured Notes; PROVIDED that the failure to commence a Change of Control Offer
following a Change of Control pursuant to clause (vi) of the definition of
"Change of Control" shall not constitute an Event of Default if, during such 30
day period, the Company takes the necessary actions with respect to the Board of
Directors to comply with the requirements of clauses (vi)(A), (vi)(B) and
(vi)(C) of the definition of "Change of Control", (iv) there shall have occurred
either (a) a default by the Company or any Subsidiary under any instrument under
which there is or may be secured or evidenced any Indebtedness of the Company or
any Subsidiary of the Company (other than the Securities) having an outstanding
principal amount of $2,000,000 (or its foreign currency equivalent) or more
individually or $5,000,000 (or its foreign currency equivalent) or more in the
aggregate that has caused the holders thereof to declare such Indebtedness to be
due and payable prior to its Stated Maturity or (b) a default by the Company or
any Subsidiary in the payment when due of any portion of the principal under any
such instrument, and such unpaid portion exceeds $2,000,000 (or its foreign
currency equivalent) individually or $5,000,000 (or its foreign currency
equivalent) in the aggregate and is not paid, or such default is not cured or
waived, within any grace period applicable thereto; (v) any final judgment or
order (not covered by insurance) for the payment of money shall be rendered
against the Company or any Subsidiary in an amount in excess of $2,000,000 (or
its foreign currency equivalent) individually or $5,000,000 (or its foreign
currency equivalent) in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) and shall not be discharged, and there shall be any period of
30 consecutive days following entry of the final judgment or order in excess of
$2,000,000 individually or that causes the aggregate amount for all such final
judgments or orders outstanding against all such Persons to exceed $5,000,000
during which a stay of enforcement of such final judgment or order, by reason of
a pending appeal or otherwise, shall not be in effect; (vi) certain events of
bankruptcy, insolvency and reorganization of the Company; (vii) except as
permitted by the Indenture, the Trustee fails to have a first priority perfected
security interest in the Collateral; and (viii) except as permitted by the
Indenture and the Senior Secured Notes, the cessation of effectiveness of any
Subsidiary Guarantee as against any Subsidiary Guarantor, or the finding by any
judicial proceeding that any such Subsidiary Guarantee is, as to any Subsidiary
Guarantor, unenforceable or invalid, or the written denial or disaffirmation by
any Subsidiary Guarantor of its obligations under its Subsidiary Guarantee.
If any Event of Default (other than an Event of Default described in clause
(vi) with respect to the Company) has occurred and is continuing, the Indenture
provides that the Trustee may by notice to the Company, or the Holders of not
less than 25% in principal amount of the Senior Secured Notes may by notice to
the Company and the Trustee, declare the principal amount of the Senior Secured
Notes and any accrued and unpaid interest to be due and payable immediately. If
an Event of Default described in
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clause (vi) with respect to the Company occurs, the principal of and interest on
all the Senior Secured Notes shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holders of Senior Secured Notes. The Holders of a majority in principal amount
of the Senior Secured Notes by notice to the Trustee may rescind any such
declaration and its consequences (if the rescission would not conflict with' any
judgment or decree) if all existing Events of Default (other than the
non-payment of principal of or interest on the Senior Secured Notes which shall
have become due by such declaration) shall have been cured or waived.
The Company must file annually with the Trustee a certificate describing any
Default by the Company in the performance of any conditions or covenants that
has occurred under the Indenture and its status. The Company must give the
Trustee written notice within 30 days of any Default under the Indenture that
could mature into an Event of Default described in clause (iii), (iv), (v),
(vi), (vii) or (viii) of the second preceding paragraph.
The Trustee is entitled, subject to the duty of the Trustee during a Default
to act with the required standard of care, to be indemnified before proceeding
to exercise any right or power under the Indenture at the direction of the
Holders of the Senior Secured Notes or which requires the Trustee to expend or
risk its own funds or otherwise incur any financial liability. The Indenture
also provides that the Holders of a majority in principal amount of the Senior
Secured Notes issued under the Indenture may direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee; however, the Trustee may
refuse to follow any such direction that conflicts with law or the Indenture, is
unduly prejudicial to the rights of other Holders of the Senior Secured Notes,
or would involve the Trustee in personal liability.
The Indenture provides that while the Trustee generally must mail notice of
a Default or Event of Default to the holders of the Senior Secured Notes within
90 days of occurrence, the Trustee may withhold notice to the Holders of the
Senior Secured Notes of any Default or Event of Default (except in payment on
the Senior Secured Notes) if the Trustee in good faith determines that the
withholding of such notice is in the interest of the Holders of the Senior
Secured Notes.
MODIFICATION OF THE INDENTURE
Under the terms of the Indenture, the Company, the Subsidiary Guarantors and
the Trustee may, with the consent of the Holders of a majority in principal
amount of the outstanding Senior Secured Notes amend or supplement the
Indenture, the Pledge Agreement or the Senior Secured Notes except that no
amendment or supplement may, without the consent of each affected Holder, (i)
reduce the principal of or change the Stated Maturity of any Senior Secured
Note, (ii) reduce the rate of or change the time of payment of interest on any
Senior Secured Note, (iii) change the currency of payment of the Senior Secured
Notes, (iv) reduce the premium payable upon the redemption of any Senior Secured
Note, or change the time at which any such Senior Secured Note may or shall be
redeemed, (v) reduce the amount of Senior Secured Notes, the holders of which
must consent to an amendment or supplement, (vi) change the provisions of the
Indenture relating to Waiver of past defaults, rights of Holders of the Senior
Secured Notes to receive payments or the provisions relating to amendments of
the Indenture that require the consent of Holders of each affected Senior
Secured Note, (vii) directly or indirectly release the Liens on all or
substantially all of the collateral securing the Senior Secured Notes or (viii)
modify or affect in any manner adverse to the Holders the terms and conditions
of the obligation of any Subsidiary Guarantor for the due and punctual payment
of the principal of premium, if any, or interest on the Senior Secured Notes. In
addition, certain amendments or supplements may be adopted without the consent
of Holders.
ACTIONS BY NOTEHOLDERS
Under the terms of the Indenture, a Holder of Senior Secured Notes may not
pursue any remedy with respect to the Indenture or the Senior Secured Notes
(except actions for payment of overdue principal or interest), unless (i) the
Holder has given notice to the Trustee of a continuing Event of Default, (ii)
Holders of at least 25% in principal amount of the Senior Secured Notes have
made a written request to the Trustee to pursue such remedy, (iii) such Holder
or Holders have offered the Trustee security or indemnity
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<PAGE>
reasonably satisfactory to it against any loss, liability or expense, (iv) the
Trustee has not complied with such request within 60 days of such request and
offer and (v) the Holders of a majority in principal amount of the Senior
Secured Notes have not given the Trustee an inconsistent direction during such
60-day period.
DEFEASANCE, DISCHARGE AND TERMINATION
DEFEASANCE AND DISCHARGE. The Indenture provides that the Company will be
discharged from any and all obligations in respect of the Senior Secured Notes,
and the provisions of the Indenture will no longer be in effect with respect to
such Senior Secured Notes (except for, among other matters, certain obligations
to register the transfer or exchange of such Senior Secured Notes, to replace
stolen, lost or mutilated Senior Secured Notes, to maintain paying agencies and
to hold monies for payment in trust, and the rights of holders to receive
payments of principal and interest thereon), on the 123rd day after the date of
the deposit with the appropriate Trustee, in trust, of money or U.S. Government
Obligations that, through the payment of interest and principal in respect
thereof in accordance with their terms, will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on
such Senior Secured Notes, when due in accordance with the terms of the
Indenture and such Senior Secured Notes. Such a trust may only be established
if, among other things, (i) the Company has delivered to the Trustee either (a)
an Opinion of Counsel (who must not be employed by the Company) to the effect
that holders will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit, defeasance and discharge and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must refer to and be based
upon a ruling of the Internal Revenue Service or a change in applicable federal
income tax law occurring after the date of the Indentures or (b) a ruling of the
Internal Revenue Service to such effect and (ii) no Default under the Indenture
shall have occurred and be continuing on the date of such deposit or during the
period ending on the 123rd day after such date of deposit and such deposit shall
not result in or constitute a Default or result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Company is a party or by which the Company is bound.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to the provisions described in clauses (d) and (e)
under "-- Merger and Consolidation," and all the covenants described herein
under "-- Covenants," clause (iii) under "-- Events of Default" with respect to
such covenants and clauses (d) and (e) under "-- Merger and Consolidation," and
clauses (v) and (vi) under "-- Events of Default" shall be deemed not to be
Events of Default under the Indenture, and the provisions described herein under
"-- Ranking" shall not apply, upon the deposit with the Trustee, in trust, of
money or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Senior Secured Notes issued thereunder when due in accordance
with the terms of the Indenture. Such a trust may only be established if, among
other things, the provisions described in clause (ii) of the immediately
preceding paragraph have been satisfied and the Company has delivered to the
Trustee an Opinion of Counsel (who must not be an employee of the Company) to
the effect that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such deposit and defeasance of certain
covenants and Events of Default and will be subject to federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Senior Secured Notes, as described in the
immediately preceding paragraph and such Senior Secured Notes are declared due
and payable because of the occurrence of an Event of Default that remains
applicable, the amount of money or U.S. Government Obligations on deposit with
the relevant Trustee will be sufficient to pay principal of and interest on
Senior Secured Notes on the respective dates on which such amounts are due but
may not be sufficient to pay amounts due on such Senior Secured Notes, at the
time of the acceleration resulting from such Event of Default. However, the
Company shall remain liable for such payments.
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TERMINATION OF COMPANY'S OBLIGATIONS IN CERTAIN CIRCUMSTANCES. The
Indenture further provides that the Company will be discharged from any and all
obligations in respect of the Senior Secured Notes and the provisions of such
Indenture will no longer be in effect with respect to the Senior Secured Notes
(except to the extent provided under "-- Defeasance and Discharge"), if such
Senior Secured Notes mature within one year or all of them are to be called for
redemption within one year under arrangements satisfactory to the Trustee for
giving the notice of redemption, and the Company deposits with the appropriate
Trustee, in trust, money or U.S. Government Obligations that, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of,
premium if any and accrued interest on such Senior Secured Notes when due in
accordance with the terms of the applicable Indenture and such Senior Secured
Notes. Such a trust may only be established if, among other things, (i) no
Default under the Indenture shall have occurred and be continuing on the date of
such deposit, (ii) such deposit will not result in or constitute a Default or
result in a breach or violation of, or constitute a Default under, any other
agreement or instrument to which the Company is a party or by which it is bound
and (iii) the Company has delivered to the Trustee an Opinion of Counsel stating
that such conditions have been complied with. Pursuant to this provision, the
Company is not required to deliver an Opinion of Counsel to the effect that
Holders will not recognize income, gain or loss for U.S. federal income tax
purposes as a result of such deposit and termination, and there is no assurance
that Holders would not recognize income, gain or loss for U.S. federal income
tax purposes as a result thereof or that Holders would be subject to U.S.
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and termination had not
occurred.
UNCLAIMED MONEY
Under the terms of the Indenture, subject to any applicable abandoned
property law, the Trustee will pay to the Company upon request any money held by
it for the payment of principal or interest that remains unclaimed for two
years. After payment to the Company, Noteholders entitled to such money must
look to the Company for payment as general creditors.
CONCERNING THE TRUSTEES AND PAYING AGENTS
Shawmut Bank Connecticut, National Association will act as Trustee under the
Indenture and the Pledge Agreement and will initially be Paying Agent and
Registrar for the Senior Secured Notes. The Company has had, from time to time,
and may have in the future, other relationships with such bank. Notices to the
Trustee, Paying Agent and Registrar under the Indenture should be directed to
Shawmut Bank Connecticut, National Association, 777 Main Street -- MSN 238,
Hartford, Connecticut 06115, Attention: Corporate Trust Administration.
GOVERNING LAW
Under the terms of the Indenture the laws of the State of New York govern
the Indenture and the Senior Secured Notes.
DESCRIPTION OF THE WARRANTS
GENERAL
The Company will issue an aggregate of 175,536 Warrants to the purchasers of
the Senior Secured Notes. The Warrants will be issued pursuant to a Warrant
Agreement (the "Warrant Agreement") to be entered into between the Company and
Shawmut Bank Connecticut, National Association, as the Warrant Agent. The
following summary of certain provisions of the Warrant Agreement does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Warrant Agreement, including the
definitions of certain terms therein.
Each Warrant is evidenced by a Warrant Certificate which entitles the holder
thereof, at any time, to purchase one share of Common Stock from the Company at
a price (the "Exercise Price") of $.01 per share, subject to adjustment as
provided in the Warrant Agreement. The Warrants will be separately transferable
from the Notes and may be exercised on or after January 15, 1995 and prior to
July 15, 2004. Warrants that are not exercised by such date will expire.
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The aggregate number of shares of Common Stock issuable upon exercise of the
Warrants is equal to 10% of the outstanding shares of Common Stock, on a fully
diluted basis, subject to certain exceptions described in the Warrant Agreement.
The Company has authorized and reserved for issuance such number of shares of
Common Stock as shall be issuable upon the exercise of all outstanding Warrants.
Such shares of Common Stock, when issued, will be duly and validly issued and
fully paid and nonassessable. The issuance of Common Stock upon the exercise of
the Warrants has been registered with the Securities and Exchange Commission
pursuant to the Registration Statement of which this Prospectus forms a part.
The Warrants will be issued in the form of a fully registered Global
Certificate and will be deposited with, or on behalf of, the Depositary and
registered in the name of a nominee of the Depositary. Except as set forth in
"Description of the Units -- Form, Denomination and Registration," owners of
beneficial interest in such Global Certificate will not be entitled to have
Warrants registered in their names, will not receive or be entitled to receive
physical delivery of Warrants in definitive form and will not be considered the
owners or holders thereof under the Warrant Agreement. No service charge will be
made for any registration of transfer or exchange of Warrants, but the Company
may require payment of a sum sufficient to cover any transfer tax or other
similar governmental charge payable in connection therewith. See "Description of
the Units."
Upon the occurrence of a merger in connection with which all of the
consideration to shareholders of the Company is not cash, the Company or its
successor by merger will be required, upon the expiration of the time periods
discussed below, to offer to repurchase the Warrants. This feature of the
Warrants may have the effect of increasing the cost of purchasing the Company to
any acquiror (including an acquiror in an unsolicited merger or similar
transaction).
CERTAIN DEFINITIONS
The Warrant Agreement contains, among others, the following definitions:
A "Repurchase Event" is defined to occur if at any time prior to July 15,
2004, the Company consolidates with, merges into or with (where holders of the
Common Stock receive consideration in exchange for all or part of such shares of
Common Stock), or sells all or substantially all of its assets to another person
which has a class of equity securities registered under the Exchange Act or a
wholly owned subsidiary of such person, if the consideration for the transaction
does not consist solely of cash or if such merger or consolidation is not
effected solely for the purpose of changing the Company's state of incorporation
or is effected with a Plaster Entity or a Lindsey Entity.
A "Financial Expert" is a nationally recognized investment banking firm.
An "Independent Financial Expert" is a Financial Expert which does not (or
whose directors, executive officers or 5% stockholders do not) have a direct or
indirect financial interest in the Company or any of its subsidiaries, which has
not been for at least five years, and, at the time that it is called upon to
give independent financial advice to the Company, is not (and none of its
directors, executive officers or 5% stockholders is) a promoter, director or
officer of the Company or any of its subsidiaries.
CERTAIN TERMS
REPURCHASE
Following the occurrence of a Repurchase Event, the Company must make an
offer to repurchase for cash all outstanding Warrants (a "Repurchase Offer").
The holders of the Warrants may, until 5:00 p.m. (New York City time) on the
date at least 30 but not more than 60 calendar days following the date on which
the Company gives notice of such Repurchase Offer (the "Final Surrender Date"),
surrender all or part of their Warrants for repurchase by the Company. Except as
otherwise provided in the Warrant Agreement, Warrants received by the Warrant
Agent in proper form for purchase during a Repurchase Offer prior to the Final
Surrender Date are to be repurchased by the Company at a price in cash (the
"Repurchase Price") equal to the value (the "Relevant Value"), on the date five
business days prior to notice of such Repurchase Offer (the "Valuation Date")
relating thereto, of the Common Stock issuable, and other securities of the
Company which would have been delivered, upon
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exercise of the Warrants had the Warrants been exercised, less the Exercise
Price therefor. The Relevant Value of the Common Stock and other securities,
assuming exercise of all Warrants, on any Valuation Date shall be (i) if the
Common Stock (or other securities) is registered under the Exchange Act, deemed
to be the average of the closing sales prices of the Common Stock (or other
securities) for the 20 consecutive trading days immediately preceding such
Valuation Date or, if the Common Stock (or other securities) has been registered
under the Exchange Act for less than 20 consecutive trading days before such
date, then the average of the closing sales prices for all of the trading days
before such date for which closing sales prices are available or (ii) if the
Common Stock (or other securities) is not registered under the Exchange Act or
if the value cannot be computed under clause (i) above, the value determined
(without giving effect to any discount for lack of liquidity, the fact that the
Company has no class of equity securities registered under the Exchange Act, or
the fact that the shares of Common Stock and other securities issuable upon
exercise of the Warrants represent a minority interest in the Company) by an
Independent Financial Expert.
In the case of clause (ii) of the preceding paragraph, the Board of
Directors of the Company is required to select an Independent Financial Expert
not less than five business days following any Repurchase Event. Within two
calendar days after its selection of the Independent Financial Expert, the
Company must deliver to the Warrant Agent a notice setting forth the name of
such Independent Financial Expert. The Company also must cause the Independent
Financial Expert to deliver to the Company, with a copy to the Warrant Agent, a
value report (the "Value Report") which states the Relevant Value of the Common
Stock and other securities of the Company, if any, being valued as of the
Valuation Date and contains a brief statement as to the nature and scope of the
examination of investigation upon which the determination was made. The Warrant
Agent will have no duty with respect to the Value Report, except to keep it on
file available for inspection by the holders of the Warrants. The determination
of the Independent Financial Expert as to Relevant Value in accordance with the
provisions of the Warrant Agreement shall be conclusive on all persons.
EXERCISE
In order to exercise all or any of the Warrants represented by a Warrant
Certificate, the holder thereof is required to surrender to the Warrant Agent
the Warrant Certificate, a duly executed copy of the subscription form set forth
as part of the Warrant Certificate, and payment in full of the Exercise Price
for each share of Common Stock or other securities issuable upon exercise of the
Warrants as to which a Warrant Certificate is exercised, which payment may be
made in cash or by certified or official bank or bank cashier's check payable to
the order of the Company. Upon the exercise of any Warrants in accordance with
the Warrant Agreement, the Warrant Agent will cause the Company to transfer
promptly to or upon the written order of the holder of such Warrant Certificate
appropriate evidence of ownership of any shares of Common Stock or other
securities or property to which it is entitled, registered or otherwise placed
in such name or names as it may direct in writing, and will deliver such
evidence of ownership to the person or persons entitled to receive the same and
fractional shares, if any, or an amount in cash, in lieu of any fractional
shares, if any.
NO RIGHTS AS STOCKHOLDERS
The holders of unexercised Warrants are not entitled, as such, to receive
dividends or other distributions, receive notice of or vote at any meeting of
the stockholders, consent to any action of the stockholders, receive notice of
any other proceedings of the Company, or any other rights as stockholders of the
Company.
MERGERS, CONSOLIDATIONS, ETC.
Except as provided below, in the event that the Company consolidates with,
merges with or into, or sells all or substantially all of its property and
assets to another person, each Warrant thereafter shall entitle the holder
thereof to receive upon exercise thereof the number of shares of capital stock
or other securities or property which the holder of a share of Common Stock is
entitled to receive upon completion of such consolidation, merger or sale of
assets. If the Company merges or consolidates with, or sells all or
substantially all of the property and assets of the Company to, another person
(other than an Affiliate of the Company) and, in connection therewith,
consideration to the holders of Common Stock in exchange for their shares is
payable solely in cash, or in the event of the dissolution, liquidation or
winding-up of the Company, then the holders of the Warrants will be entitled to
receive distributions on an equal basis with the
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holders of Common Stock or other securities issuable upon exercise of the
Warrants, as if the Warrants had been exercised immediately prior to such event,
less the Exercise Price. Upon receipt of such payment, if any, the Warrants will
expire and the rights of the holders thereof will cease. If the Company has made
a Repurchase Offer that has not expired at the time of such transaction, the
holders of the Warrants will be entitled to receive the higher of (1) the amount
payable to the holders of the Warrants described above or (2) the Repurchase
Price payable to the holders of the Warrants pursuant to such Repurchase Offer.
In case of any such merger, consolidation or sale of assets, the surviving or
acquiring person and, in the event of any dissolution, liquidation or winding-up
of the Company, the Company must deposit promptly with the Warrant Agent the
funds, if any, necessary to pay the holders of the Warrants. After such funds
and the surrendered Warrant Certificates are received, the Warrant Agent must
make payment by delivering a check in such amount as is appropriate (or, in the
case of consideration other than cash, such other consideration as is
appropriate) to such person or persons as it may be directed in writing by the
holders surrendering such Warrants.
ADJUSTMENT
The number of shares of Common Stock issuable upon the exercise of each
Warrant and the Exercise Price are subject to adjustment in certain events,
including (a) a dividend or distribution on the Company's Common Stock in shares
of its capital stock, or a subdivision, combination, or reclassification of
Common Stock, (b) the issuance of rights, options, warrants or convertible or
exchangeable securities to all holders of Common Stock entitling them to
subscribe for or purchase Common Stock at a price which is lower than the
Current Market Value (as defined in the Warrant Agreement) per share of Common
Stock, (c) the sale and issuance of shares of Common Stock, or rights, options,
warrants or convertible or exchangeable securities containing the right to
subscribe for or purchase shares of Common Stock at a price per share lower than
the Current Market Value per share of the Common Stock in effect immediately
prior to such sale or issuance, (taking into account the consideration received
for the issuance of such right, warrant, or option plus any consideration to be
received upon the exercise thereof) and (d) a distribution of the Common Stock
of evidence of indebtedness, assets, cash dividends or distributions (excluding
distributions in connection with the dissolution, liquidation or winding up of
the Company). Upon the expiration of any rights, options, warrants or conversion
or exchange privileges that have previously resulted in an adjustment, if any
thereof shall not have been exercised, the Exercise Price and the number of
shares of Common Stock issuable upon the exercise of each Warrant shall, upon
such expiration, be readjusted. Notwithstanding the foregoing, no adjustment in
the Exercise Price or the number of shares of Common Stock issuable upon
exercise or Warrants will be required until cumulative adjustments would result
in an adjustment of at least one percent in the number of shares of Common Stock
purchasable on exercise of the Warrant.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, par value $.001 per share. As of June 1, 1994, there were
13,832,270 shares of Common Stock outstanding; 129,250 shares of Common Stock
subject to options issued but not exercised; and 329,500 shares of Treasury
Stock. Immediately following consummation of the Transaction there will be
1,579,225 shares of Common Stock outstanding.
GENERAL
Each outstanding share of Common Stock will entitle the holder to one vote
on all matters presented to stockholders for a vote and have cumulative voting
rights. In all elections for directors, each stockholder shall have the right to
cast as many votes in the aggregate as shall equal the number of shares held by
such stockholder multiplied by the number of directors to be elected at the
election, and each shareholder may cast the whole number of votes, either in
person or by proxy, for one candidate or distribute them among two or more
candidates. Consequently, persons holding less than a majority of shares may by
themselves be able to elect one or more directors. The holders of a majority of
the Common Stock entitled to vote constitute a quorum at any meeting of
stockholders. The By-Laws provide that whenever the vote of stockholders at a
meeting thereof is required or permitted to be taken, the meeting and vote of
shareholders may be dispensed
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with, if all the stockholders who would have been entitled to vote upon the
action if such meeting were held shall consent in writing to such corporate
action being taken. Holders of the Common Stock will have no preemptive rights.
MISSOURI LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Under the General and Business Corporation Law of Missouri, stockholders are
generally not liable for the Company's debts or obligations.
Pursuant to the General and Business Corporation Law of Missouri, the
Company cannot merge with or sell all or substantially all of the assets of the
Company, except upon the affirmative vote of the holders of at least two-thirds
of the outstanding shares entitled to vote on the proposed merger or sale.
Under the General and Business Corporation Law of Missouri, the certain
shares acquired in a control share acquisition (as defined in the statute) have
the same voting rights as were accorded the shares before the control share
acquisition only to the extent granted by resolution approved by the
shareholders of the issuing public corporation, UNLESS the corporation's
articles of incorporation or bylaws provide that this section does not apply to
control share acquisitions of the shares of the corporation. The Company's
Certificate of Incorporation provides that Missouri's control share acquisition
statute shall not apply to control share acquisitions of shares of the Company.
The Company's By-Laws provide that dividends upon the capital stock of the
Company may be declared by the Board of Directors at any regular or special
meeting. Before payment of any dividend, there may be set aside out of any funds
of the Company available for dividends such sum or sums as the Directors from
time to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Company, or for such other purpose as the
Directors shall think conducive to the interest of the Company, and the
Directors may modify or abolish any such reserve in the manner in which it was
created.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain Federal income tax consequences
associated with the acquisition, ownership, and disposition of the Senior
Secured Notes and the Warrants by holders who acquire the Units on original
issue for cash. Wilmer, Cutler & Pickering, tax counsel to the Company, is of
the opinion that the material federal income tax consequences of an investment
in Units are as described by the following discussion. The following summary
does not discuss all of the aspects of Federal income taxation that may be
relevant to a prospective holder of the Units in light of his or her particular
circumstances or to certain types of holders (including insurance companies,
tax-exempt entities, financial institutions or broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States)
which are subject to special treatment under the Federal income tax laws. In
addition, this summary does not describe any tax consequences under state,
local, or foreign tax laws.
The discussion is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations, Internal Revenue Service ("IRS") rulings and
pronouncements and judicial decisions now in effect, all of which are subject to
change at any time by legislative, judicial or administrative action. Any such
changes may be applied retroactively in a manner that could adversely affect a
holder of the Units. In the opinion of Wilmer, Cutler & Pickering, the Senior
Secured Notes will be treated as indebtedness for federal income tax purposes.
The Company has not sought and will not seek any rulings from the IRS with
respect to the matters discussed below. There can be no assurance that the IRS
will not take positions concerning the tax consequences of the purchase,
ownership or disposition of the Senior Secured Notes and the Warrants which are
different from those discussed herein.
PROSPECTIVE PURCHASERS OF UNITS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES THAT MAY BE SPECIFIC TO THEM
OF ACQUIRING, OWNING AND DISPOSING OF SENIOR SECURED NOTES AND THE WARRANTS, AS
WELL AS THE APPLICATION OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS
ALLOCATION OF ISSUE PRICE BETWEEN THE SENIOR SECURED NOTES AND THE WARRANTS.
Each Unit is comprised of ten Senior Secured Notes and 13.8 Warrants.
Consequently, the issue price of a Unit must be allocated between the Senior
Secured Notes and the Warrants. The "issue price" of a Senior Secured Note will
equal the first price at which a substantial amount of Units is sold for money
(excluding for such purposes sales to bond houses, brokers, or similar persons
or organizations acting in the capacity of underwriters, placement agents, or
wholesalers) less the amount allocable to the Warrants (based on the
relationship of the fair market value of each of the Senior Secured Notes and
the Warrants to the fair market value of the Senior Secured Notes and Warrants
taken together as a Unit). Based on the foregoing, the Company intends to treat
each Senior Secured Note as having been issued with an issue price of $777.11
per $1,000 principal amount, and each Warrant as having been issued with an
issue price of $6.99. No assurance can be given, however, that the IRS will not
challenge the Company's allocation of the issue price. If the IRS were to
challenge successfully the Company's allocation of the issue price between the
Senior Secured Notes and the Warrants, the Senior Secured Notes will have more
or less original issue discount. If, as a result of any such reallocation, the
Senior Secured Notes were to have more original issue discount than they would
have under the Company's allocation, holders of Senior Secured Notes would be
required to include in gross income a correspondingly greater amount of original
issue discount (see below).
The Company's allocation of the issue price of the Units will be binding on
a holder, unless such holder discloses the use of a different allocation on the
applicable form attached to such holder's timely filed Federal income tax return
for the year of acquisition of such Unit. Holders intending to use an issue
price allocation different from that used by the Company should consult their
tax advisors as to the consequences to them of their particular allocation of
the issue price of the Unit.
AMOUNT OF ORIGINAL ISSUE DISCOUNT ON THE SENIOR SECURED NOTES
The Senior Secured Notes will be issued with original issue discount for
federal income tax purposes, and holders of the Senior Secured Notes will be
required to recognize such original issue discount as ordinary interest income
as it accrues on the Senior Secured Notes (regardless of whether the holder is a
cash or accrual basis taxpayer). As a result, in certain accrual periods the
holder will be required to recognize gross income in excess of the amount of
cash payments received.
The amount of original issue discount with respect to each Senior Secured
Note will be equal to the excess of the "stated redemption price at maturity" of
such Senior Secured Note over its issue price, as defined above. The "stated
redemption price at maturity" of each Senior Secured Note will include all cash
payments (other than stated interest to the extent that it is unconditionally
payable at least annually at a single fixed rate ("qualified stated interest"))
required to be made thereunder until maturity. Qualified stated interest on the
Senior Secured Notes is 7% per annum. To the extent that the stated interest of
12 7/8% that accrues beginning July 15, 1999 exceeds qualified stated interest,
such excess will be included in the Senior Secured Notes' stated redemption
price at maturity.
TAXATION OF ORIGINAL ISSUE DISCOUNT ON THE SENIOR SECURED NOTES
Each holder of a Senior Secured Note will be required to include in gross
income (as interest) an amount equal to the sum of the "daily portions" of the
original issue discount on the Senior Secured Notes for each day such holder
holds a Senior Secured Note. The daily portions of original issue discount
required to be included in a holder's gross income will be determined on a
constant yield basis by allocating to each day during the taxable year in which
the holder holds the Senior Secured Notes a pro rata portion of the original
issue discount thereon which is attributable to the "accrual period." The amount
of the original issue discount attributable to each accrual period will be the
product of the "adjusted issue price" of the Senior Secured Notes at the
beginning of such accrual period multiplied by the "yield to maturity" of the
Senior Secured Notes, less the amount of any qualified stated interest allocable
to the accrual period. Appropriate adjustments will be made in computing the
amount of original issue discount attributable to the initial accrual period.
The adjusted issue price of the Senior Secured Notes at the beginning of the
first accrual period is the issue price. Thereafter, the adjusted issue price of
a Senior Secured Note is the issue price of the Senior Secured Note plus the
aggregate amount of original issue discount that accrued in all prior accrual
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periods, and less any payments (other than payments of qualified stated
interest) on the Senior Secured Note. The yield to maturity of a Senior Secured
Note will be the discount rate that, when used to compute the present value (on
a semi-annual compounded basis) of all principal and interest payments to be
made under a Senior Secured Note, produces a present value equal to the issue
price of the Senior Secured Note.
The "accrual periods" of a Senior Secured Note (other than the initial
accrual period) are each of the six-month periods during the term of the Senior
Secured Note that end on January 15 and July 15 of each year.
TAXATION OF QUALIFIED STATED INTEREST ON THE SENIOR SECURED NOTES
Absent some special circumstance that may be particular to a holder,
qualified stated interest paid on a Senior Secured Note will be taxable to a
holder as ordinary interest income at the time it accrues or is received, in
accordance with the holder's regular method of accounting for Federal income tax
purposes.
The Company will furnish annually to certain record holders of the Senior
Secured Notes and to the IRS information with respect to original issue discount
accruing during the calendar year (as well as qualified stated interest paid
during that year) as may be required under applicable regulations.
EFFECT OF MANDATORY REPURCHASE AND OPTIONAL REDEMPTION ON ORIGINAL ISSUE
DISCOUNT OF THE SENIOR SECURED NOTES
In the event the Company is required to make a Change of Control Offer, each
holder may require the Company to repurchase such holder's Senior Secured Notes
in accordance with such Offer. In addition, in the event of an Asset Sale the
Company may be required to make an offer (the "Asset Sale Offer") to purchase
the Senior Secured Notes. Treasury Regulations contain special rules for
calculating the yield to maturity and maturity on a note in the event the debt
instrument provides for a contingency that could result in the acceleration or
deferral of one or more payments. Further, Treasury Regulations contain special
rules for determining the yield to maturity or maturity of a debt instrument if
either the holder or the issuer has an option to defer or accelerate payments.
Because neither of these rules apply by reason of a Change of Control Offer or
an Asset Sale Offer, the Company has no present intention of treating such
repurchase provisions of the Senior Secured Notes as affecting the computation
of the yield to maturity or maturity date of any Senior Secured Notes.
The Company may redeem the Senior Secured Notes, in whole or part, at any
time on or after July 15, 1999. The Company may also redeem a limited portion of
the Senior Secured Notes (up to $44.52 million principal amount at maturity)
prior to July 15, 1997, in connection with one or more Public Equity Offerings
following which there is a Public Market. Treasury Regulations set forth special
rules, relating to the determination of yield to maturity and maturity, for a
debt instrument that may be redeemed prior to its stated maturity date at the
option of the issuer. These rules should not apply to a debt instrument, and,
hence, should not affect the determination of the yield to maturity or the
maturity date of such debt instrument, unless the issuer's exercise of its
redemption rights would reduce the yield to maturity on such instrument. The
Company's exercise of either of these redemption rights would not reduce the
yield to maturity on the Senior Secured Notes; therefore the special option
rules will not apply to the Senior Secured Notes.
SALE OR OTHER TAXABLE DISPOSITION OF THE SENIOR SECURED NOTES
The sale or other taxable disposition of a Senior Secured Note will result
in the recognition of gain or loss to the holder in an amount equal to the
difference between (a) the amount of cash and fair market value of property
received (except to the extent attributable to the payment of accrued qualified
stated interest) in exchange therefor and (b) the holder's adjusted tax basis in
such Senior Secured Note.
A holder's initial tax basis in a Senior Secured Note purchased by such
holder will be equal to the portion of the issue price of the Units allocable to
the Senior Secured Notes, as discussed above. The holder's initial tax basis in
a Senior Secured Note will be increased by the amount of original issue discount
included in gross income with respect to such Senior Secured Note to the date of
disposition and decreased by the amount of payments (other than payments of
qualified stated interest) with respect to such Senior Secured Note.
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Any gain or loss on the sale or other taxable disposition of a Senior
Secured Note will be capital gain or loss, assuming a purchaser of the Senior
Secured Note holds such security as a "capital asset" (generally property held
for investment) within the meaning of Section 1221 of the Code. Any capital gain
or loss will be long-term capital gain or loss if the Senior Secured Note had
been held for more than one year and otherwise will be short-term capital gain
or loss. Payments on such disposition for accrued qualified stated interest not
previously included in income will be treated as ordinary interest income.
SALE OR OTHER TAXABLE DISPOSITION OF WARRANTS
The sale or other taxable disposition of a Warrant (other than as a result
of a Repurchase Event, as discussed below) will result in the recognition of
gain or loss to the holder in an amount equal to the difference between (a) the
amount of cash and fair market value of property received in exchange therefor
and (b) the holder's adjusted tax basis in the Warrant, which will equal the
amount of the issue price of the Units that is properly allocable to the
Warrants as described above. Any gain or loss from the sale or other disposition
of a Warrant will be a capital gain or loss if the Warrant is held as a capital
asset within the meaning of Section 1221 of the Code. Any such capital gain or
loss will be long-term capital gain or loss if the Warrant had been held for
more than one year and otherwise will be short-term capital gain or loss. A
purchase by the Company of a Warrant pursuant to a Repurchase Event in which the
Company elects to repurchase the Warrant may give rise to ordinary income,
depending on the application of certain rules under the Code relating to whether
stock redemptions result in dividend/ordinary income treatment.
As a general rule, no gain or loss will be recognized to a holder upon the
exercise of a Warrant. The tax basis of a share of Common Stock so acquired will
be equal to the sum of the holder's adjusted tax basis in the exercised Warrant
and the exercise price, but the holding period of such share will not include
the holding period of the Warrant exercised.
Under Section 305 of the Code, adjustments to the exercise price of the
Warrants which occur under certain circumstances, or the failure to make such
adjustments, may result in a deemed dividend to holders of Common Stock, which
will be taxable to holders to the same extent as would an actual dividend.
Upon expiration of a Warrant, a holder will recognize a loss equal to such
holder's adjusted tax basis in the Warrant. If the Common Stock issuable upon
exercise of the Warrant would have been a capital asset of the holder if
acquired by the holder, such loss will be a capital loss.
PURCHASERS OF SENIOR SECURED NOTES AT OTHER THAN ORIGINAL ISSUANCE PRICE OR DATE
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquire Senior Secured Notes either (a) other than at the
time of original issuance or (b) at the time of original issuance other than at
the issue price, including those provisions of the Code relating to the
treatment of "market discount", "acquisition premium" and "amortizable bond
premium." Such purchasers should consult their tax advisors as to the
consequences to them of the acquisition, ownership, and disposition of the
Senior Secured Notes and the Warrants.
BACKUP WITHHOLDING
The backup withholding rules require a payor to deduct and withhold a tax if
(a) the payee fails to furnish a taxpayer identification number ("TIN") to the
payor, (b) the IRS notifies the payor that the TIN furnished by the payee is
incorrect, (c) the payee has failed to report properly the receipt of
"reportable payments" and the IRS has notified the payor that withholding is
required, or (d) there has been a failure of the payee to certify under the
penalty of perjury that a payee is not subject to withholding under section 3406
of the Code. As a result, if any one of the events discussed above occurs with
respect to a holder of Senior Secured Notes, the Company, its paying agent or
other withholding agent will be required to withhold a tax equal to 31% of any
"reportable payment" made in connection with the Senior Secured Notes of such
holder. A "reportable payment" includes, among other things, amounts paid in
respect of interest or original issue discount and amounts paid through brokers
in retirement of securities. Any amounts withheld from a payment to a holder
under the backup withholding rules will be allowed as a refund or credit against
such
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holder's federal income tax, provided that the required information is furnished
to the IRS. Certain holders (including, among others, corporations and certain
tax-exempt organizations) are not subject to the backup withholding and, as
discussed above, information reporting requirements.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND TO CORPORATE HOLDERS
OF SENIOR SECURED NOTES
The Senior Secured Notes constitute "applicable high yield discount
obligations" ("AHYDOs") because (i) the yield to maturity of such Senior Secured
Notes is equal to or greater than the sum of the relevant applicable federal
rate (the "AFR") plus five percentage points, and (ii) such notes have
"significant original discount." The relevant AFR for debt instruments issued in
June 1994 is 7.38%. Because the Senior Secured Notes constitute AHYDOs, the
Company will not be entitled to deduct original issue discount that accrues with
respect to such Senior Secured Notes until amounts attributable to original
issue discount are paid, although the tax consequences to holders will not be
affected.
DESCRIPTION OF OTHER INDEBTEDNESS
NEW CREDIT FACILITY
The Company expects to enter into a New Credit Facility contemporaneously
with the consummation of this Offering. The following is a brief description of
certain terms the Company expects the New Credit Facility will contain, based on
the commitment letter it has received from its lender. This summary is qualified
in its entirety by reference to the credit agreement governing the New Credit
Facility (the "Credit Agreement"). Capitalized terms used in this section and
not otherwise defined have the meanings ascribed thereto in the Credit
Agreement.
The New Credit Facility will be provided by Continental Bank, N.A. ("CBNA")
as agent. The Credit Agreement will provide for maximum borrowings under a
revolving credit line of $15 million, with available borrowings determined as
follows: (i) up to 85% of eligible accounts receivable with eligibility
determined by CBNA; plus (ii) the least of (a) $8,000,000, (b) 150% of Accounts
Receivable Availability (as defined in the Credit Agreement) and (c) up to 60%
of eligible inventory; plus (iii) (a) for the months of August 1994 through
January 1995, an additional seasonal overadvance of $3.0 million, and (b) for
the months of August 1995 through January 1996, an additional seasonal
overadvance of $1.5 million. All current assets of the Company (i.e., inventory
and receivables) and a negative pledge on fixed assets will secure the Company's
obligations under the New Credit Facility.
INTEREST AND FEES. Amounts borrowed under the revolving credit line will
bear interest at either (i) 1.0% over CBNA's Reference Rate per annum (as
defined), or, at the Company's option, (ii) 2.5% over the LIBOR rate.
The Company will be required to pay a commitment fee of .375% per annum on
the unused portion of the New Credit Facility. The Company will be required to
pay a fee of 1% of the total New Credit Facility payable at the closing.
PRINCIPAL REPAYMENTS. The New Credit Facility will mature on or about July
1, 1997.
FINANCIAL COVENANTS. Under the Credit Agreement, the Company will be
subject to certain financial covenants, including financial covenants related to
(i) interest coverage, (ii) minimum tangible net worth, (iii) the ratio of
liabilities to net worth, and (iv) maximum capital expenditures. In addition,
the Credit Agreement will provide a number of other affirmative and negative
covenants.
EVENTS OF DEFAULT. The Credit Agreement will contain usual and customary
provisions specifying various events that shall be events of default and will
include cross default and cross acceleration provisions to all material
indebtedness of the Company, including the Senior Secured Notes.
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2007 9% SUBORDINATED DEBENTURES
The following is a brief description of certain terms contained in the
Company's indenture, as such indenture has been amended, for the 2007 9%
Subordinated Debentures and is qualified in its entirety by reference to the
indenture, as amended. Capitalized terms used in this section and not otherwise
defined have the meanings ascribed thereto in the indenture, as amended
Pursuant to an indenture dated June 7, 1983, as amended by the First
Supplemental Indenture dated December 13, 1989, the Company is indebted to the
holders of $25.9 principal amount of debentures due in 2007. The Company will
repurchase approximately $16.5 million principal amount of these debentures,
$4.7 million of which will be repurchased from Mr. Plaster, with the proceeds of
this Offering. See "Use of Proceeds" and "Certain Relationships and Related
Transactions." The 2007 9% Subordinated Debentures represent general unsecured
obligations of the Company and rank junior in right of payment to all Senior
Indebtedness (as defined) of the Company, including the Senior Secured Notes.
The 2007 9% Subordinated Debentures mature on December 31, 2007, unless
redeemed before such date. The 2007 9% Subordinated Debentures bear interest at
the rate of 9% per annum payable semi-annually on December 31 and June 30 of
each year.
The 2007 9% Subordinated Debentures are subject to redemption at any time,
in whole or in part, at the option of the Company, at a redemption price,
beginning January 1, 1993, of 100% of the principal amount thereof, plus accrued
and unpaid interest. The Company is required to redeem $1.37 million principal
amount 2007 9% Subordinated Debentures commencing December 31, 1993 and on each
December 31 thereafter, at 100% of the principal amount thereof plus accrued and
unpaid interest. The repurchase of $16.5 million principal amount of these
debentures will satisfy the Company's sinking fund obligation through 2004.
The 2007 9% Subordinated Debenture indenture contains a number of covenants,
including affirmative covenants relating to maintenances of offices or agency,
maintenance of corporate existence, and other matters.
Events of default under the indenture for the 2007 9% Subordinated
Debentures include: (i) failure to pay any interest on any debenture when due
and the continuance of such failure for a period of 30 days; (ii) failure to pay
the principal or any premium, on any debenture when due whether at maturity or
upon redemption by declaration or otherwise, including any Sinking Fund (as
defined) payment; (iii) failure to perform or breach of the covenants or
agreements on the part of the Company contained in the debenture or in the
indenture and the continuance of such failure for a period of 60 days following
written notice of such failure; or (iv) certain events of bankruptcy or
insolvency.
THE UNDERWRITER
Under the terms and subject to the conditions in an Underwriting Agreement
dated the date hereof, Morgan Stanley & Co. Incorporated (the "Underwriter") has
agreed to purchase, and the Company has agreed to sell to the Underwriter, the
Units.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the Units is subject to the approval of
certain legal matters by its counsel and to certain other conditions. The
Underwriter is obligated to take and pay for all the Units if any are taken.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Underwriter proposes to offer part of the Units directly to the public
initially at the public offering price set forth on the cover page hereof and
part to certain dealers at a price that represents a concession not in excess of
.50% of the principal amount at maturity of the Units. The Underwriter may
allow, and such dealers may reallow, a concession not in excess of .25% of the
principal amount at maturity of the Units to certain other dealers.
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The Company does not intend to apply for listing of the Units, the Senior
Secured Notes, the Warrants or the Common Stock on a national securities
exchange, but has been advised by the Underwriter that it presently intends to
make a market in the Units, the Senior Secured Notes, and the Warrants, as
permitted by applicable laws and regulations. The Underwriter is not obligated,
however, to make a market in the Units, the Senior Secured Notes or the Warrants
and any such market making may be discontinued at any time at the sole
discretion of the Underwriter. Accordingly, no assurance can be given as to the
liquidity of, or trading markets for, the Units, the Senior Secured Notes and
the Warrants. See "Risk Factors -- Absence of Public Market."
LEGAL MATTERS
The validity of the issuance of the Units offered hereby will be passed upon
for the Company by Wilmer, Cutler & Pickering, Washington, D.C. Certain legal
matters with respect to the Offering will be passed upon for the Underwriter by
Skadden, Arps, Slate, Meagher & Flom, New York, New York.
EXPERTS
The consolidated financial statements and the related schedules of Empire
Gas included in this Prospectus and the Registration Statement have been
examined by Baird, Kurtz, & Dobson, independent public accountants, for the
periods indicated in its reports thereon which appear elsewhere herein and in
the Registration Statement. The consolidated financial statements and schedules
examined by Baird, Kurtz & Dobson have been included in reliance on its reports
given on its authority as experts in accounting and auditing.
AVAILABLE INFORMATION
Empire Gas and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission") in Washington, D.C. a Registration Statement on
Form S-1 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Units offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement as permitted by the
rules and regulations of the Commission. For further information pertaining to
the Company and the Units offered hereby, reference is made to the Registration
Statement and the exhibits and schedules filed as a part thereof. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and, with respect to any
contract or other document filed as an exhibit to the Registration Statement,
each such statement is qualified in all respects by reference to such exhibit.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934 (the "Exchange Act"). As a result of the
Offering, the Company will become subject to such requirements, and in
accordance therewith will file periodic reports and other information with the
Commission. Empire Gas Operating Corporation (formerly Empire Gas Corporation),
a subsidiary of the Company, is currently subject to the informational
requirements of the Exchange Act, and in accordance therewith, files periodic
reports and other information with the Commission and with the Pacific Stock
Exchange. The Registration Statement and the exhibits and schedules thereto,
filed by Empire Gas Operating Corporation as well as the reports and information
filed by the Company under the Exchange Act, may be inspected and copied at the
public reference facilities of the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, or at its regional offices located at Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2511 and Suite
1300, 7 World Trade Center, New York, New York 10048. Copies of such material
can be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports and
other information concerning the Company can also be inspected at the Pacific
Stock Exchange, 301 Pine Street, San Francisco, California.
The Indenture requires the Company to file with the Commission annual
reports containing consolidated financial statements and the related report of
independent public accountants and quarterly reports containing unaudited
consolidated financial statements for the first three quarters of each fiscal
year for so long as any Senior Secured Notes are outstanding.
93
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
EMPIRE GAS CORPORATION
HISTORICAL:
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets as of June 30, 1992 and 1993 and
as of March 31, 1994 (unaudited).......................................... F-3
Consolidated Statements of Operations for the Years Ended
June 30, 1991, 1992, and 1993 and for the Nine Months Ended
March 31, 1993 and 1994 (unaudited)....................................... F-4
Consolidated Statements of Stockholders' Equity for the Years
June 30, 1991, 1992, and 1993 and for the Nine Months
Ended March 31, 1994 (unaudited).......................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1991, 1992, and 1993 and for the
Nine Months Ended March 31, 1993 and 1994 (unaudited)..................... F-6
Notes to Consolidated Financial Statements................................. F-7
PSNC PROPANE CORPORATION
Report of Independent Accountants.......................................... F-17
Balance Sheets as of June 30, 1993
and as of March 31, 1994 (unaudited)...................................... F-18
Statements of Income for the Year Ended June 30, 1993
and for the Nine Months Ended March 31, 1994 (unaudited).................. F-19
Statements of Stockholder's Equity for the Year Ended June 30, 1993
and for the Nine Months Ended March 31, 1994 (unaudited).................. F-20
Statements of Cash Flows for the Year Ended June 30, 1993
and for the Nine Months Ended March 31, 1994 (unaudited).................. F-21
Notes to Financial Statements.............................................. F-22
PRO FORMA:
Unaudited Pro Forma Income Statements of PSNC Propane
Corporation (PSNC) for the Year Ended June 30,
1993, Nine Months Ended March 31, 1994, and
Twelve Months Ended March 31, 1994........................................ P-1
Unaudited Pro Forma Balance Sheet of PSNC Propane
Corporation (PSNC) as of March 31, 1994................................... P-7
</TABLE>
F-1
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Empire Gas Corporation
Lebanon, Missouri
We have audited the accompanying consolidated balance sheets of EMPIRE GAS
CORPORATION (FORMERLY EMPIRE GAS ACQUISITION CORPORATION) as of June 30, 1993
and 1992, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1993. 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 the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
EMPIRE GAS CORPORATION as of June 30, 1993 and 1992, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1993, in conformity with generally accepted accounting
principles.
BAIRD KURTZ & DOBSON
Springfield, Missouri
July 30, 1993
F-2
<PAGE>
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1992 1993
--------- --------- MARCH 31,
------------
1994
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash............................................................. $ 216 $ 362 $ 183
Trade receivables, less allowance for doubtful accounts; June 30,
1992 - $2,720, June 30, 1993 - $2,657, March 31, 1994 - $2,953
(NOTE 3)........................................................ 6,508 8,199 15,072
Inventories (NOTE 3)............................................. 7,913 9,691 9,313
Prepaid expenses................................................. 629 305 299
Deferred income taxes (NOTE 4)................................... -- -- 408
--------- --------- ------------
Total Current Assets........................................... 15,266 18,557 25,275
--------- --------- ------------
PROPERTY AND EQUIPMENT, At Cost (NOTE 3)
Land and buildings............................................... 11,821 12,215 12,626
Storage and consumer service facilities.......................... 113,450 113,821 114,973
Transportation, office and other equipment....................... 24,245 25,550 27,668
--------- --------- ------------
149,516 151,586 155,267
Less accumulated depreciation.................................... 34,055 41,906 47,429
--------- --------- ------------
115,461 109,680 107,838
--------- --------- ------------
OTHER ASSETS
Debt acquisition costs, net of amortization...................... -- 475 446
Excess of cost over fair value of net assets acquired, at
amortized cost.................................................. 20,212 18,834 17,870
Other............................................................ 532 474 764
--------- --------- ------------
20,744 19,783 19,080
--------- --------- ------------
$ 151,471 $ 148,020 $ 152,193
--------- --------- ------------
--------- --------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (NOTE 3).................... $ 16,590 $ 5,181 $ 6,135
Accounts payable................................................. 5,341 4,485 3,823
Accrued salaries................................................. 1,574 1,573 2,970
Accrued expenses................................................. 2,612 2,193 3,792
Income taxes payable (NOTE 9).................................... 3,094 165 3,822
--------- --------- ------------
Total Current Liabilities.................................... 29,211 13,597 20,542
--------- --------- ------------
LONG-TERM DEBT (NOTE 3)............................................ 59,372 74,068 66,696
--------- --------- ------------
DUE TO RELATED PARTY (NOTES 2 AND 3)............................... 2,996 -- --
--------- --------- ------------
DEFERRED INCOME TAXES (NOTE 4)..................................... 33,428 32,568 31,214
--------- --------- ------------
ACCRUED SELF INSURANCE LIABILITY (NOTE 8).......................... 1,563 1,874 2,039
--------- --------- ------------
STOCKHOLDERS' EQUITY...............................................
Common; $.001 par value; authorized 20,000,000 shares; issued
and outstanding June 30, 1992 - 13,921,458 shares, June 30,
1993 and March 31, 1994 - 13,832,270 shares................... 14 14 14
Additional paid-in capital..................................... 27,133 27,088 27,088
Retained earnings (deficit).................................... (2,118) 110 5,899
--------- --------- ------------
25,029 27,212 33,001
Treasury stock, at cost June 30, 1992 - 39,367 shares, June 30,
1993 and March 31, 1994 - 329,500 shares...................... (128) (1,299) (1,299)
--------- --------- ------------
24,901 25,913 31,702
--------- --------- ------------
$ 151,471 $ 148,020 $ 152,193
--------- --------- ------------
--------- --------- ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------- ----------------------
1991 1992 1993 1993 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE.................................... $ 121,758 $ 112,080 $ 128,401 $ 111,332 $ 110,108
COST OF PRODUCT SOLD................................. 59,971 50,973 60,202 52,807 50,770
---------- ---------- ---------- ---------- ----------
GROSS PROFIT......................................... 61,787 61,107 68,199 58,525 59,338
---------- ---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts.................... 2,828 214 958 298 413
General and administrative......................... 41,594 39,463 40,437 31,351 32,359
Rent expense to related party (NOTE 2)............. 350 375 450 337 337
Depreciation and amortization...................... 9,552 10,062 10,351 7,672 7,494
---------- ---------- ---------- ---------- ----------
54,324 50,114 52,196 39,658 40,603
---------- ---------- ---------- ---------- ----------
OPERATING INCOME..................................... 7,463 10,993 16,003 18,867 18,735
---------- ---------- ---------- ---------- ----------
OTHER EXPENSE
Interest expense................................... (11,455) (10,406) (8,877) (6,873) (6,446)
Interest expense to related party
(NOTES 2 AND 3).................................. (583) (315) (949) (668) --
Amortization of debt discount and expense.......... (890) (1,006) (1,686) (1,167) (1,396)
Crested Butte litigation (NOTE 8).................. (702) -- -- -- --
Merger proposal costs (NOTE 5)..................... -- (450) -- -- --
Restructuring proposal costs (NOTE 6).............. -- -- (223) -- (674)
---------- ---------- ---------- ---------- ----------
(13,630) (12,177) (11,735) (8,708) (8,516)
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................... (6,167) (1,184) 4,268 10,159 10,219
PROVISION (CREDIT) FOR INCOME TAXES (NOTE 4)......... (1,610) 290 2,040 4,230 4,430
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS).................................... $ (4,557) $ (1,474) $ 2,228 $ 5,929 $ 5,789
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) PER COMMON SHARE (NOTE 1).............. $ (.33) $ (.11) $ .16 $ .41 $ .40
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
PAID-IN EARNINGS TREASURY STOCKHOLDERS'
COMMON STOCK CAPITAL (DEFICIT) STOCK EQUITY
------------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1990................................. $ 14 $ 27,105 $ 3,913 $ (50) $ 30,982
STOCK OPTIONS EXERCISED................................ -- 13 -- -- 13
NET LOSS............................................... -- -- (4,557) -- (4,557)
--- ----------- ----------- --------- ------------
BALANCE, JUNE 30, 1991................................. 14 27,118 (644) (50) 26,438
STOCK OPTIONS EXERCISED................................ -- 15 -- -- 15
PURCHASE OF TREASURY STOCK............................. -- -- -- (78) (78)
NET LOSS............................................... -- -- (1,474) -- (1,474)
--- ----------- ----------- --------- ------------
BALANCE, JUNE 30, 1992................................. 14 27,133 (2,118) (128) 24,901
STOCK OPTIONS EXERCISED................................ -- 225 -- -- 225
NET INCOME............................................. -- -- 2,228 -- 2,228
SALE OF TREASURY STOCK................................. -- (270) -- 270 --
PURCHASE OF TREASURY STOCK............................. -- -- -- (1,441) (1,441)
--- ----------- ----------- --------- ------------
BALANCE, JUNE 30, 1993................................. 14 27,088 110 (1,299) 25,913
NET INCOME (UNAUDITED)................................. -- -- 5,789 -- 5,789
--- ----------- ----------- --------- ------------
BALANCE, MARCH 31, 1994 (UNAUDITED).................... $ 14 $ 27,088 $ 5,899 $ (1,299) $ 31,702
--- ----------- ----------- --------- ------------
--- ----------- ----------- --------- ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
--------------------------------- --------------------
1991 1992 1993 1993 1994
--------- --------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................... $ (4,557) $ (1,474) $ 2,228 $ 5,929 $ 5,789
Items not requiring (providing) cash:
Depreciation....................................... 8,263 8,789 9,004 6,663 6,496
Amortization....................................... 2,179 2,279 3,033 2,107 2,394
(Gain) loss on sale of assets...................... 252 (758) 155 (162) 3
Deferred income taxes.............................. (2,210) (810) (860) (571) (1,762)
Changes in:
Bank overdraft..................................... (872) -- -- -- --
Trade receivables.................................. 1,360 32 (1,691) (9,393) (6,873)
Inventories........................................ (1,074) (300) (1,886) (1,251) 378
Accounts payable................................... 1,418 246 (856) (247) (662)
Accrued expenses and self insurance................ (560) 1,772 (3,158) 1,828 6,768
Prepaid expenses and other......................... 348 224 272 (350) (218)
--------- --------- ----------- --------- ---------
Net cash provided by operating activities........ 4,547 10,000 6,241 4,553 12,313
--------- --------- ----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets......................... 497 3,062 1,088 360 153
Purchases of property and equipment.................. (8,629) (6,601) (4,358) (3,098) (4,721)
--------- --------- ----------- --------- ---------
Net cash used in investing activities............ (8,132) (3,539) (3,270) (2,738) (4,568)
--------- --------- ----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in working capital financing..... 3,500 3,400 (1,875) (200) (3,800)
Increase in notes payable to related party........... 1,498 554 -- 45 --
Principal payments on notes payable to related
party............................................... (1,116) (3,310) (2,996) -- --
Principal payments on acquisition credit facility.... -- (6,750) (13,250) -- --
Principal payments on other long-term debt........... (195) (191) (182) (134) (162)
Debenture sinking fund payments...................... -- -- (528) (528) (2,012)
Purchase of debentures from employee benefit plan.... -- -- (778) -- --
Proceeds from issuance of term credit facility....... -- -- 18,000 -- --
Principal payments on term credit facility........... -- -- -- -- (1,950)
Stock options exercised.............................. 13 15 173 163 --
Purchase of treasury stock........................... -- (78) (1,441) (142) --
Sale of treasury stock............................... -- -- 52 52 --
--------- --------- ----------- --------- ---------
Net cash provided by (used in) financing
activities...................................... $ 3,700 $ (6,360) $ (2,825) $ (744) $ (7,924)
--------- --------- ----------- --------- ---------
INCREASE (DECREASE) IN CASH............................ $ 115 $ 101 $ 146 $ 1,071 $ (179)
CASH, BEGINNING OF PERIOD.............................. -- 115 216 216 362
--------- --------- ----------- --------- ---------
CASH, END OF PERIOD.................................... $ 115 $ 216 $ 362 $ 1,287 $ 183
--------- --------- ----------- --------- ---------
--------- --------- ----------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
EMPIRE GAS CORPORATION
(Formerly Empire Gas Acquisition Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended June 30, 1991, 1992 and 1993
and for the Nine Months Ended March 31, 1993 and 1994 (Unaudited)
NOTE 1 : ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company's principal operations are the sale of LP gas at retail and
wholesale. Most of the Company's customers are owners of residential single or
multi-family dwellings who make periodic purchases on credit. Such customers are
located throughout the United States with the larger number concentrated in the
central and southeastern states and along the Pacific coast. The Company was
formed in September 1988 to acquire 100% of the stock of Empire Gas Operating
Corporation (formerly Empire Gas Corporation) in a transaction which was
accounted for by the purchase method of accounting. At acquisition date, asset
and liability values were recorded at their market values with respect to the
purchase price.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Empire Gas
Corporation and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly Empire
Gas Corporation's consolidated financial position as of December 31, 1993, and
the related consolidated results of its operations and cash flows for the
six-month periods ended December 31, 1992 and 1993. All such adjustments are of
a normal recurring nature.
The results of operations for the nine-month period ended March 31, 1994,
are not necessarily indicative of the results to be expected for the full year
due to the seasonal nature of the Company's business.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of the
product or service.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method for retail operations and specific identification
method for wholesale operations. At June 30 the inventories were:
<TABLE>
<CAPTION>
1992 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Gas and other petroleum products................ $ 3,199 $ 4,279
Gas distribution parts, appliances and
equipment...................................... 4,714 5,412
--------- ---------
$ 7,913 $ 9,691
--------- ---------
--------- ---------
</TABLE>
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment on the straight-line
method over estimated useful lives of 5 to 33 years.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
F-7
<PAGE>
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 1991, 1992 AND 1993
AND FOR THE NINE MONTHS ENDED MARCH 31, 1993 AND 1994 (UNAUDITED)
NOTE 1 : ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RECLASSIFICATION
Certain reclassifications have been made to the 1992 and 1991 financial
statements to conform to the 1993 financial statement presentation. These
reclassifications had no effect on net earnings.
AMORTIZATION
The debt acquisition costs related to the revolving credit facility and term
credit facility (originally $525,000) are being amortized over five years.
Amortization of discounts on debentures (Note 3) is on the effective
interest, bonds outstanding method.
The excess of cost over fair value of net assets acquired (originally
$25,600,000) is being amortized on the straight-line basis over 20 years.
INCOME PER COMMON SHARE
Income per common share is computed by dividing net income by the weighted
average number of common shares and, except where anti-dilutive, common share
equivalents outstanding, if any. The weighted average number of common shares
outstanding used in the computation of earnings per share was 13,881,091,
13,885,087, and 14,055,407 for each of the fiscal years ended June 30, 1991,
1992, and 1993, respectively.
NOTE 2 : RELATED PARTY TRANSACTIONS
During each of the last three years, the Company has periodically borrowed
funds from an officer of the Company who is also a principal shareholder (the
"Shareholder") of the Company and from individuals and corporations related to
the Shareholder. The Company had no outstanding borrowings from this related
party at June 30, 1993. The amounts of outstanding borrowings from this related
party at June 30, 1991 and 1992, were $5,753,000 and $2,996,000, respectively.
The maximum amounts borrowed from this related party except for the November
1992 agreement described below during the years ended June 30, 1991, 1992 and
1993, were $5,928,000, $5,753,000 and $3,000,000, respectively. The interest
rate on these borrowings was equal to or below the rates available through the
working capital facility. Interest expense incurred on these related party
borrowings was $583,000, $315,000 and $200,000, for the years ended June 30,
1991, 1992 and 1993, respectively. During November 1992 the Shareholder loaned
under a separate agreement $13.25 million to the Company to repay the
acquisition credit facility (see Note 3). Interest expense incurred on this
related party borrowing for the year ended June 30, 1993, was $749,000. In June
1993, all outstanding borrowings from the Shareholder were repaid using the
proceeds from the new term credit facility.
The Company provides data processing, office rent and other clerical
services to two corporations principally owned by certain officers and
shareholders of the Company and is currently being reimbursed $7,000 per month
for these services.
The Company leases a jet aircraft and an airport hanger from a corporation
owned by the Shareholder. The lease requires annual rent payments of $100,000
beginning April 1, 1992, for a period of eight years. In addition to direct
lease payments, the Company is also responsible for the operating costs of the
aircraft and the hanger. During the years ended June 30, 1992 and 1993, the
Company paid direct rent of $25,000 and $100,000, respectively.
F-8
<PAGE>
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 1991, 1992 AND 1993
AND FOR THE NINE MONTHS ENDED MARCH 31, 1993 AND 1994 (UNAUDITED)
NOTE 2 : RELATED PARTY TRANSACTIONS (CONTINUED)
The Company paid $150,000 in each of the three years ended June 30, 1993, to
a corporation owned by the Shareholder pursuant to an agreement providing the
Company the right to use business guest facilities owned by the corporation.
The Company has entered into a lease agreement with a corporation which is
principally owned by the Shareholder for the corporate home office, land,
buildings and equipment. The lease was extended in 1991 for a term of ten years,
with two three-year renewal options. The Company paid $200,000 during each of
the three years ended June 30, 1993, related to this lease.
NOTE 3 : LONG-TERM DEBT
Long-term debt (in thousands) consisted of:
<TABLE>
<CAPTION>
JUNE 30,
-------------------- MARCH 31,
1992 1993 1994
--------- --------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Acquisition credit facility (A)......................... $ 13,250 $ -- $ --
Working capital facility (B)............................ 8,700 -- --
Term credit facility (C)................................ -- 18,000 16,050
Revolving credit facility (C)........................... -- 7,300 3,500
9% Convertible Subordinated Debentures,
due 1998 (D)........................................... 17,539 17,767 17,125
9% Subordinated Debentures, due 2007 (E)................ 16,040 15,691 16,097
12% Senior Subordinated Debentures,
due 2002 (F)........................................... 19,121 19,361 18,891
Purchase contract obligations (G)....................... 1,312 1,130 1,168
--------- --------- ------------
75,962 79,249 72,831
Less current maturities................................. 16,590 5,181 6,135
--------- --------- ------------
$ 59,372 $ 74,068 $ 66,696
--------- --------- ------------
--------- --------- ------------
<FN>
- ---------
(A) The acquisition credit agreement to which substantially all the Company's
assets were pledged bore interest at 14 1/2%.
In November 1992 the principal shareholder of the Company, referred to in
Note 2 as the Shareholder, loaned $13.25 million to the Company. The
proceeds were used by the Company to repay the acquisition credit facility.
The loan was secured by substantially all of the assets of the Company on
an equal basis with the working capital facility. The loan had interest at
10% per annum. This loan was repaid in June 1993, with the proceeds from
the new term credit facility.
(B) The Company's working capital facility, under which substantially all the
Company's assets were pledged, provided for borrowings up to $20 million
and bore interest at 1% over prime. The agreement provided for a commitment
fee of 1/2% per annum of the unadvanced portion of the commitment. This
loan was repaid in June 1993 with the proceeds from the new term and
revolving credit facilities.
</TABLE>
F-9
<PAGE>
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 1991, 1992 AND 1993
AND FOR THE NINE MONTHS ENDED MARCH 31, 1993 AND 1994 (UNAUDITED)
NOTE 3 : LONG-TERM DEBT (CONTINUED)
<TABLE>
<S> <C>
At June 30, 1992, the Company was in default of the working capital ratio
covenant and a covenant
requiring minimum consolidated operating cash flow. The lenders waived the
noncompliance with these covenants.
(C) The term credit facility and revolving credit facility are provided to the
Company by the same lender under one agreement. In June 1993 the proceeds
from these new loans were used to repay the $13.25 million loan from
Shareholder, working capital facility and other outstanding borrowings to
Shareholder. Substantially all of the Company's assets are pledged to the
agreement which contains working capital, debt and certain dividend
restrictions. These dividend restrictions prohibit the Company from paying
common stock cash dividends. The term credit facility bears interest at
either 1.125% over prime or 2.625% over the Eurodollar rate. The effective
interest rates at June 30, 1993 and March 31, 1994, are approximately 6.2%
and 6.1% respectively. The agreement requires quarterly principal payments
of $650,000.
The revolving credit facility provides for borrowings up to $22 million and
bears interest at either 1 % over prime or 2.5 % over the Eurodollar rate.
The effective interest rates at June 30, 1993 and March 31, 1994 are
approximately 6.2% and 7.0% respectively. The agreement provides for a
commitment fee of .5% per annum of the unadvanced portion of the
commitment. The Company's unused revolving credit line amounted to
$13,448,000 at June 30, 1993, after considering $1,252,000 of letters of
credit. At December 31, 1993, the Company was in default of the
consolidated working capital covenant. The lender waived the noncompliance
with this covenant.
(D) The convertible debentures issued in January 1981 were convertible into
common stock at a rate equal to $10.31 of principal amount for each share
of common stock through December 1989. In December 1989 the Company
executed a supplemental indenture for the convertible debentures. The
supplemental indenture provides that the holder of each convertible
debenture now has, in lieu of the right to convert each debenture into
common stock, the right to convert each debenture into the right to receive
$3.75 cash for each $10.31 face amount of debentures. The debentures mature
in 1998, and at maturity an 8% premium of the outstanding principal amount
will be paid. Such premium is being accrued over the term to maturity. The
debentures are redeemable at the Company's option, as a whole or in part,
at 100% of the principal amount plus accrued interest to the redemption
date, on any date prior to maturity. A sinking fund payment sufficient to
retire $1,250,000 of principal is required annually on each December 31.
The original principal amount of debentures outstanding ($21,854,000) was
adjusted to market value (effective interest rate of 14.5%) in October
1988, in accordance with the purchase method of accounting. The discount on
these debentures is being amortized over the remaining life of the
debentures using the effective interest, bonds outstanding method. The face
value of debentures outstanding at June 30, 1993, is $21,230,000.
(E) The debentures, issued June 1983, are redeemable at the Company's option,
as a whole or in part, at par value. Annual sinking fund payments
sufficient to retire $1,366,000 of principal outstanding are required on
each December 31.
The original principal amount of debentures issued ($27,313,000) was
adjusted to market value (effective interest rate of 16.5%) in October
1988, in accordance with the purchase method of accounting.
</TABLE>
F-10
<PAGE>
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 1991, 1992 AND 1993
AND FOR THE NINE MONTHS ENDED MARCH 31, 1993 AND 1994 (UNAUDITED)
NOTE 3 : LONG-TERM DEBT (CONTINUED)
<TABLE>
<S> <C>
The discount on these debentures is being amortized over the remaining life
of the debentures using the effective interest, bonds outstanding method.
The face value of debentures outstanding at June 30, 1993, is $26,037,000.
(F) The debentures, issued April 1986, are redeemable at the Company's option,
as a whole or in part, at 100% of the principal amount plus accrued
interest to the redemption date, on any date prior to maturity. Annual
sinking fund payments sufficient to retire $690,000 of principal
outstanding, are required beginning March 31, 1994.
The original principal amount of debentures issued ($23,000,000) was
adjusted to market value (effective interest rate of 15.0%) in October
1988, in accordance with the purchase method of accounting. The discount on
the debentures is being amortized over the remaining life of the debentures
using the effective interest, bonds outstanding method. The face value of
debentures outstanding at June 30, 1993, is $22,998,000.
(G) Purchase contract obligations arise from the purchase of operating
businesses and are collateralized by the equipment and real estate acquired
in the respective acquisitions. At June 30, 1992 and 1993, these
obligations carried interest rates from 7.5% to 10% and are due
periodically through 1999.
</TABLE>
Aggregate annual maturities and sinking fund requirements (in thousands) of
the long-term debt outstanding at June 30, 1993, are:
<TABLE>
<S> <C>
1994............................................................ $ 5,181
1995............................................................ 6,027
1996............................................................ 6,025
1997............................................................ 5,973
1998............................................................ 18,469
Thereafter...................................................... 37,574
---------
$ 79,249
---------
---------
</TABLE>
F-11
<PAGE>
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 1991, 1992 AND 1993
AND FOR THE NINE MONTHS ENDED MARCH 31, 1993 AND 1994 (UNAUDITED)
NOTE 4 : INCOME TAXES
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
YEAR ENDED JUNE 30, 1991
Tax expense (benefit) before application of tax credits $ 241 $ (1,851)
Alternative minimum tax 359 (359)
----------- ---------
Tax expense (benefit) $ 600 $ (2,210)
----------- ---------
----------- ---------
YEAR ENDED JUNE 30, 1992
Tax expense (benefit) before application of tax credits $ 954 $ (664)
Alternative minimum tax 146 (146)
----------- ---------
Tax expense (benefit) $ 1,100 $ (810)
----------- ---------
----------- ---------
YEAR ENDED JUNE 30, 1993
Tax expense (benefit) before application of tax credits $ 3,548 $ (1,508)
Alternative minimum tax credit (648) 648
----------- ---------
Tax expense (benefit) $ 2,900 $ (860)
----------- ---------
----------- ---------
</TABLE>
Principal items making up the deferred income tax provisions are as follows:
<TABLE>
<CAPTION>
1991 1992 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and asset dispositions................................... $ (942) $ (1,332) $ (1,439)
Amortization of 1981 debenture costs.................................. (130) (190) (284)
Allowance for doubtful accounts....................................... (564) -- 23
Accrued expenses...................................................... (201) 936 147
Alternative minimum tax............................................... (359) (146) 648
Other................................................................. (14) (78) 45
--------- --------- ---------
$ (2,210) $ (810) $ (860)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Reconciliation of the statutory federal income tax rate to the effective tax
rate as a percent of pretax financial income is as follows:
<TABLE>
<CAPTION>
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Statutory tax rate................................................... (34.0)% (34.0)% 34.0%
State income taxes, net of federal income tax benefits............... 2.1 13.9 4.8
Amortization of excess of cost over fair value of net assets
acquired............................................................ 6.3 32.5 9.0
Unamortized excess of cost over fair value of assets sold............ -- 5.7 .9
Other tax accruals................................................... (.5) 6.4 (.9)
----------- ----------- ---
Effective tax rate............................................. (26.1)% 24.5 % 47.8%
----------- ----------- ---
----------- ----------- ---
</TABLE>
F-12
<PAGE>
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 1991, 1992 AND 1993
AND FOR THE NINE MONTHS ENDED MARCH 31, 1993 AND 1994 (UNAUDITED)
NOTE 4 : INCOME TAXES (CONTINUED)
CHANGE IN ACCOUNTING PRINCIPLE
Effective July 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). As a result of the change, there was no effect on income tax expense and
the effect on current-noncurrent classification of deferred assets and
liabilities was not material.
SFAS 109 requires recognition of deferred tax liabilities and assets for the
difference between the financial statement and tax basis of assets and
liabilities. Under this new standard, a valuation allowance is established to
reduce deferred tax assets if it is more likely than not that a deferred tax
asset will not be realized.
Prior to July 1, 1993, deferred taxes were determined using the Statement of
Financial Accounting Standards No. 96.
Deferred tax balances at July 1, 1993, consisted of:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Deferred Tax Assets
Allowance for doubtful accounts............................................................... $ 1,016
Accounts receivable advance collections....................................................... 182
Self insurance liabilities and contingencies.................................................. 1,474
1981 debenture premium........................................................................ 403
--------------
3,075
--------------
Deferred Tax Liabilities
Accumulated depreciation...................................................................... (33,975)
1981 debenture discount....................................................................... (1,668)
--------------
(35,643)
--------------
Net Deferred Tax Liability.................................................................... $ (32,568)
--------------
--------------
</TABLE>
NOTE 5 : MERGER PROPOSAL COSTS
During the year ended June 30, 1992, the Company submitted a proposal to
acquire a large competitor in the propane business after incurring due diligence
costs including professional fees and out-of-pocket expenses in connection with
the proposed acquisition. The Company abandoned the proposal and expensed the
related $450,000 of costs in 1992.
NOTE 6 : RESTRUCTURING PROPOSAL COSTS
During the year ended June 30, 1993, the Company was considering proposals
to restructure the debt and equity of the Company. The Company abandoned the
proposal and expensed the related $223,000 of costs in 1993.
NOTE 7 : EMPLOYEE BENEFIT PLANS
The Company had a qualified profit-sharing plan which covered substantially
all full-time employees under which annual Company contributions were determined
by the Board of Directors. No contributions to the plan were made in the past
six fiscal years.
F-13
<PAGE>
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 1991, 1992 AND 1993
AND FOR THE NINE MONTHS ENDED MARCH 31, 1993 AND 1994 (UNAUDITED)
NOTE 7 : EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company had an employee stock bonus plan which covered substantially all
full-time employees under which no contributions to the plan were made in fiscal
years ended June 30, 1992 and 1993. The annual Company contribution was $100,000
in the year ended June 30, 1991, as determined by the Board of Directors.
In April 1992 the Company's Board of Directors voted to terminate both
employee benefit plans effective June 30, 1992. Applications for a Determination
Upon Plan Termination were filed with the Internal Revenue Service (IRS) and
were approved in December 1992. The Company liquidated the plans' assets and
paid out the plans' funds to participants on March 31, 1993. The Company
purchased from the plans the Company's common stock for $1.3 million and Company
debentures for $.8 million.
NOTE 8 : SELF INSURANCE AND RELATED CONTINGENCIES
Under the Company's current insurance program, coverage for comprehensive
general liability and vehicle liability is obtained for catastrophic exposures
as well as those risks required to be insured by law or contract. The Company
retains a significant portion of certain expected losses related primarily to
comprehensive general liability and vehicle liability. Under these current
insurance programs, the Company self-insures the first $500,000 of coverage (per
incident). The Company obtains excess coverage from carriers for these programs
on claims-made basis policies. The excess coverage for comprehensive general
liability provides a loss limitation that limits the Company's aggregate of
self-insured losses to $1 million per policy period. The aggregate cost of
obtaining this excess coverage from carriers for the years ended June 30, 1991,
1992 and 1993, was $961,000, $1,222,000 and $1,441,000, respectively.
For the policy periods July 1, 1989 through December 30, 1989, and December
31, 1989 through June 30, 1991, the Company has incurred aggregate comprehensive
general liability losses in excess of the policies' $1 million loss limit.
Additional losses (except for punitive damages), if any, are insured by the
excess carrier and should not result in additional expense to the Company. As of
June 30, 1993, the Company has not exceeded the $1 million loss limit for the
comprehensive general liability policy periods July 1, 1991 through June 30,
1992, and July l, 1992 through June 30, 1993.
Provisions for self-insured losses are recorded based upon the Company's
estimates of the aggregate self-insured liability for claims incurred. A summary
of the self-insurance liability, general and vehicle liability (in thousands)
for the years ended June 30, 1991, 1992 and 1993, are:
<TABLE>
<CAPTION>
BEGINNING SELF
SELF SELF INSURED ENDING SELF
INSURANCE INSURANCE CLAIMS INSURANCE
LIABILITY EXPENSES PAID LIABILITY
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
June 30, 1991........... $ 2,070 $ 2,701 $ 2,533 $ 2,238
June 30, 1992........... $ 2,238 $ 1,764 $ 1,336 $ 2,666
June 30, 1993........... $ 2,666 $ 1,148 $ 1,480 $ 2,334
</TABLE>
The ending accrued liability for each period includes $500,000 for incurred
but not reported claims. The current portion of the ending liability of
$350,000, $1,103,000 and $460,000 at June 30, 1991, 1992 and 1993, respectively,
is included in accrued expenses in the consolidated balance sheets. The
noncurrent portion at the end of each period is included in accrued
self-insurance liability.
In November 1991 and February 1992, jury verdicts including compensatory and
punitive damages were returned in favor of numerous plaintiffs in claims filed
against the Company resulting from an explosion in
F-14
<PAGE>
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 1991, 1992 AND 1993
AND FOR THE NINE MONTHS ENDED MARCH 31, 1993 AND 1994 (UNAUDITED)
NOTE 8 : SELF INSURANCE AND RELATED CONTINGENCIES (CONTINUED)
Crested Butte, Colorado, during 1990. All of the compensatory damage awards were
settled by the Company's insurance carrier in 1992. The Company paid $300,000 in
October 1992 to settle all the remaining punitive damage awards which were
accrued at June 30, 1991.
The Company and its subsidiaries are also defendants in various other
lawsuits related to the self-insurance program which are not expected to have a
material adverse effect on the Company's financial position or results of
operations.
During the years ended June 30, 1991, 1992 and 1993, the Company had
obtained workers' compensation coverage from carriers and state insurance pools
at annual costs of $810,000, $733,000 and $1,743,000, respectively. Effective
July 1, 1993, the Company changed its policy so that it will self-insure the
first $500,000 of workers' compensation coverage (per incident). The Company
will purchase excess coverage from carriers for workers' compensation claims in
excess of the self-insured coverage. Provisions for losses expected under this
program will be recorded based upon the Company's estimates of the aggregate
liability for claims incurred. The Company will provide letters of credit
aggregating approximately $2.3 million in connection with this program of which
$582,000 was already provided at June 30, 1993.
Interim accruals for the costs of excess coverages, general liability,
vehicle liability and workers' compensation are based on an estimate of the
related annual costs compared to the estimated total gallons of propane to be
sold during the same period. Presently, the resulting accrual rate of expense
recognizing these costs is 3.5 cents per gallon sold.
The Company currently self insures health benefits provided to the employees
of the Company and its subsidiaries. Provisions for losses expected under this
program are recorded based upon the Company's estimate of the aggregate
liability for claims incurred. The aggregate cost of providing the health
benefits was $1,151,000, $1,011,000 and $873,000 for the years ended June 30,
1991, 1992 and 1993, respectively.
NOTE 9 : LITIGATION CONTINGENCIES
The Company's federal income tax returns for the fiscal years 1979 and 1980
were audited by the Internal Revenue Service (IRS). Income tax due as a result
of these audits was initially assessed at approximately $2,030,000. Because of
subsequent reversals of the timing differences created by the IRS audits and net
operating loss carrybacks, the tax assessed was reduced to approximately
$640,000 at June 30, 1983, which was paid during the year ended June 30, 1989.
At June 30, 1983, the amount of compounded accrued interest on the unpaid
income tax assessments was approximately $850,000. The total unpaid assessments,
which included income taxes and accrued interest, continued to accrue additional
compounding interest at approximate average interest rates of 11% until June 30,
1989. When the income taxes were paid in 1989, the amount of interest accrued
was approximately $2,050,000. The Company continued to accrue compounding
interest during settlement discussions with the IRS until $2.4 million in
interest was paid during August 1992 to settle all outstanding federal tax
audits.
The last federal income tax return audited by the IRS was for fiscal year
1987. The Company has no federal income tax audits in process at June 30, 1993.
The Company and its subsidiaries are also defendants in various state income
tax audits and other business-related lawsuits which are not expected to have a
material adverse effect on the Company's financial position or results of
operations.
F-15
<PAGE>
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 1991, 1992 AND 1993
AND FOR THE NINE MONTHS ENDED MARCH 31, 1993 AND 1994 (UNAUDITED)
NOTE 10 : STOCK OPTIONS
The table below summarizes transactions under the Company's stock option
plan:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OPTION PRICE
----------- ----------------
<S> <C> <C>
Balance June 30, 1990.................................... 495,737 $ .377 - $1.50
Exercised.............................................. (11,858) .377 - 1.50
-----------
Balance June 30, 1991.................................... 483,879 .377 - 1.50
Exercised.............................................. (15,950) .377 - 1.50
-----------
Balance June 30, 1992.................................... 467,929 .377 - 1.50
Exercised.............................................. (338,679) .377 - 1.50
-----------
Balance June 30, 1993.................................... 129,250 1.12 - 1.50
-----------
-----------
</TABLE>
NOTE 11 : SUBSEQUENT EVENT
The Company is considering an exchange of assets and liabilities of
approximately 133 retail subsidiaries plus other non-retail assets for
12,004,430 shares of Company Common Stock, at a fair value of $84,031,000. The
proposed shares of stock being redeemed are principally held by the Shareholder
described in Note 2. In connection with this transaction, the Company will issue
approximately $122 million of new debentures (with expected proceeds before
expenses of approximately $100 million) which will be used to retire
approximately $72 million of existing debt. The remaining net proceeds will be
used to finance an acquisition, repurchase common shares for cash and for
working capital.
NOTE 12 : ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
------------------------------- --------------------
1991 1992 1993 1993 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES
Mortgage obligations incurred on property and
equipment purchases.................................. $ 184 $ 102 -- -- $ 200
Short-term note payable issued for the repurchase of
debentures from the employee benefit plan............ -- -- -- $ 778 --
Short-term note payable issued for the purchase of
Company stock from the employee benefit plan......... -- -- -- $ 1,299 --
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid......................................... $ 11,880 $ 11,213 $ 12,185 $ 9,543 $ 6,043
Income taxes paid (net of refunds).................... $ 1,328 $ (441) $ 3,434 $ 2,384 $ 2,529
</TABLE>
F-16
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
PSNC Propane Corporation
Gastonia, North Carolina
We have audited the accompanying balance sheet of PSNC PROPANE CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INC.) as
of June 30, 1993, and the related statements of income, stockholder's equity and
cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 PSNC PROPANE CORPORATION as
of June 30, 1993, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
May 27, 1994
F-17
<PAGE>
PSNC PROPANE CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1993
--------- MARCH 31,
1994
-----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................................................... $ 1,466 $ 1,094
Trade receivables, less allowance for doubtful accounts; June 30, 1993 -- $160, March
31, 1994 -- $184....................................................................... 512 1,180
Inventories............................................................................. 1,322 700
Prepaid expenses........................................................................ 147 119
Refundable income taxes................................................................. 100 --
Deferred income taxes (NOTE 3).......................................................... 434 434
--------- -----------
Total Current Assets.................................................................. 3,981 3,527
--------- -----------
PROPERTY AND EQUIPMENT, At Cost
Land and buildings...................................................................... 1,123 1,109
Storage and consumer service facilities................................................. 9,292 9,255
Transportation, office and other equipment.............................................. 2,354 2,419
--------- -----------
12,769 12,783
Less accumulated depreciation........................................................... 3,443 3,904
--------- -----------
9,326 8,879
--------- -----------
OTHER ASSETS.............................................................................. 432 296
--------- -----------
$ 13,739 $ 12,702
--------- -----------
--------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable........................................................................ $ 570 $ 329
Accrued expenses........................................................................ 292 149
Income taxes payable.................................................................... -- 328
Due to related party (NOTE 2)........................................................... 375 462
Advances from related party (NOTE 2).................................................... 9,063 6,813
Cash deposit (NOTE 6)................................................................... -- 250
--------- -----------
Total Current Liabilities............................................................. 10,300 8,331
--------- -----------
DEFERRED INCOME TAXES (NOTE 3)............................................................ 2,188 2,289
--------- -----------
STOCKHOLDER'S EQUITY
Common stock; $1 par value; authorized 100,000 shares; issued and outstanding 500
shares................................................................................. 1 1
Retained earnings....................................................................... 1,250 2,081
--------- -----------
1,251 2,082
--------- -----------
$ 13,739 $ 12,702
--------- -----------
--------- -----------
</TABLE>
See Notes to Financial Statements
F-18
<PAGE>
PSNC PROPANE CORPORATION
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR
ENDED
JUNE 30,
1993
--------- NINE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1993 1994
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING REVENUE......................................................... $ 9,587 $ 8,515 $ 9,526
COST OF PRODUCTS SOLD..................................................... 4,643 4,136 4,663
--------- ------------ ------------
GROSS PROFIT.............................................................. 4,944 4,379 4,863
--------- ------------ ------------
OPERATING EXPENSES
Provision for doubtful accounts......................................... 30 24 34
General and administrative.............................................. 3,770 2,869 2,752
Rent expense to related party (NOTE 2).................................. 68 51 53
Depreciation and amortization........................................... 975 724 692
--------- ------------ ------------
4,843 3,668 3,531
--------- ------------ ------------
OPERATING INCOME.......................................................... 101 711 1,332
INTEREST INCOME........................................................... 61 46 27
--------- ------------ ------------
INCOME BEFORE INCOME TAXES................................................ 162 757 1,359
PROVISION FOR INCOME TAXES (NOTE 3)....................................... 63 301 528
--------- ------------ ------------
NET INCOME................................................................ $ 99 $ 456 $ 831
--------- ------------ ------------
--------- ------------ ------------
INCOME PER COMMON SHARE (NOTE 1).......................................... $ 198 $ 912 $ 1,662
--------- ------------ ------------
--------- ------------ ------------
</TABLE>
See Notes to Financial Statements
F-19
<PAGE>
PSNC PROPANE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
RETAINED STOCKHOLDER'S
COMMON STOCK EARNINGS EQUITY
--------------- ----------------- -------------
<S> <C> <C> <C>
BALANCE,
JUNE 30, 1992................................................. $ 1 $ 1,151 $ 1,152
NET INCOME...................................................... 99 99
------ ------ ------
BALANCE,
JUNE 30, 1993................................................. 1 1,250 1,251
NET INCOME (UNAUDITED).......................................... 831 831
------ ------ ------
BALANCE,
MARCH 31, 1994 (UNAUDITED).................................... $ 1 $ 2,081 $ 2,082
------ ------ ------
------ ------ ------
</TABLE>
See Notes to Financial Statements
F-20
<PAGE>
PSNC PROPANE CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR
ENDED
JUNE 30,
1993
----------- NINE NINE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1993 MARCH 31, 1994
--------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................ $ 99 $ 456 $ 831
Items not requiring cash:
Depreciation........................................................ 778 586 568
Amortization........................................................ 197 138 124
Deferred income taxes............................................... 166 (192) 101
Loss on sale of assets.............................................. 26 -- 20
Changes in:
Trade receivables................................................... (60) (949) (668)
Inventories......................................................... (971) (92) 622
Accounts payable.................................................... 455 (8) (241)
Accrued expenses.................................................... 174 510 372
Prepaid expenses and other.......................................... (89) (10) 290
----------- ------ ------
Net cash provided by operating activities......................... 775 439 2,019
----------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets.......................................... 384 297 145
Purchases of property and equipment................................... (722) (554) (286)
----------- ------ ------
Net cash used in investing activities............................. (338) (257) (141)
----------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of related party advances.................................. (1,222) (1,001) (2,250)
----------- ------ ------
Net cash used in financing activities............................. (1,222) (1,001) (2,250)
----------- ------ ------
DECREASE IN CASH AND CASH EQUIVALENTS................................... (785) (819) (372)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................... 2,251 2,251 1,466
----------- ------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................ $ 1,466 $ 1,432 $ 1,094
----------- ------ ------
----------- ------ ------
</TABLE>
See Notes to Financial Statements
F-21
<PAGE>
PSNC PROPANE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1993 AND
NINE MONTHS ENDED MARCH 31, 1994 (UNAUDITED)
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company's principal operations are the sale of LP gas at retail and
wholesale. Most of the Company's customers are owners of residential single or
multi-family dwellings who make periodic purchases on credit. Such customers are
located mainly in North Carolina and South Carolina with the larger number
concentrated in North Carolina. The Company is wholly-owned by Public Service
Company of North Carolina, Inc. (PSC).
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly PSNC Propane
Corporation's financial position as of March 31, 1994, and the related results
of its operations and cash flows for the nine-month period ended March 31, 1994.
All such adjustments are of a normal recurring nature.
The results of operations for the nine-month period ended March 31, 1994,
are not necessarily indicative of the results to be expected for the full year
due to the seasonal nature of the Company's business.
REVENUE RECOGNITION
Sales and related cost of products sold are recognized upon delivery of the
product or service.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method. At June 30, 1993, the inventories (in thousands)
were:
<TABLE>
<S> <C>
Gas and other petroleum products............................ $ 1,074
Gas distribution parts, appliances and equipment............ 248
---------
$ 1,322
---------
---------
</TABLE>
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment on the straight-line
method over estimated useful lives of 4 to 30 years.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that deferred tax asset will not be realized.
The Company files consolidated income tax returns with its parent, PSC.
Income taxes resulting from the consolidated returns are allocated to PSNC
Propane Corporation and subsidiaries based upon the separate-return method.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income by the
weighted average number of common shares and, except where anti-dilutive, common
share equivalents outstanding, if any. The weighted average number of common
shares outstanding used in the computation of earnings per share was 500 for the
fiscal year ended June 30, 1993.
F-22
<PAGE>
PSNC PROPANE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1993 AND
NINE MONTHS ENDED MARCH 31, 1994 (UNAUDITED)
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AMORTIZATION
Noncompete agreements, included in other assets, are amortized on a
straight-line basis over the life of the agreement, which is generally 60
months.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. At June 30, 1993, cash equivalents
consisted primarily of a repuchase account.
NOTE 2: RELATED PARTY TRANSACTIONS
The Company rents three of its offices under operating leases with PSC. The
leases required aggregate monthly rent payments of $5,900. During the year ended
June 30, 1993, the Company paid direct rents of $67,880.
At June 30, 1993, the Company had outstanding amounts due to PSC of $375,000
for Company payroll and other expenses paid by the parent which are generally
repaid within 60 days. The Company also had at June 30, 1993, outstanding
advances of $9,063,000 which were used to finance acquisitions and working
capital needs of the Company. Payment of advances are subject to a subordination
agreement for the holders of certain PSC debentures.
PSC provides payroll processing services to the Company and is currently
being reimbursed $4 per employee per month for these services. Included in 1993
PSC payroll charges are $26,000 allocated to the Company for payroll paid to PSC
administrative staff.
NOTE 3: INCOME TAXES
The provision for income taxes includes these components:
<TABLE>
<S> <C>
Taxes currently refundable............................... $(103,000)
Deferred income taxes.................................... 166,000
---------
$ 63,000
---------
---------
</TABLE>
The tax effects of temporary differences related to deferred taxes shown on
the balance sheet were:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts...................... $ 65,000
Inventory overhead costs capitalized for tax
purposes............................................ 151,000
Pension costs paid deductible in the future.......... 218,000
------------
434,000
Deferred tax liabilities:
Accumulated depreciation............................. (2,188,000)
------------
Net deferred tax liability......................... $ (1,754,000)
------------
------------
</TABLE>
The above net deferred tax liability is presented on the balance sheet as
follows:
<TABLE>
<S> <C>
Deferred tax asset -- current.......................... $ 434,000
Deferred tax liability -- long term.................... (2,188,000)
------------
Net deferred tax liability......................... $ (1,754,000)
------------
------------
</TABLE>
F-23
<PAGE>
PSNC PROPANE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1993 AND
NINE MONTHS ENDED MARCH 31, 1994 (UNAUDITED)
NOTE 3: INCOME TAXES (CONTINUED)
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
<TABLE>
<S> <C>
Computed at the statutory rate 34%......................... $ 55,000
Increase resulting from:
Nondeductible travel costs............................... 1,000
State income taxes -- net of federal tax benefit......... 7,000
---------
Actual tax provision....................................... $ 63,000
---------
---------
</TABLE>
NOTE 4: PENSION AND 401(K) SAVINGS PLAN
PENSION PLAN
The Company participates in the noncontributory defined benefit pension plan
provided by PSC. The plan covers all employees of the Company who meet the
eligibility requirements. To be eligible, an employee must be 21 years of age
and have completed one year of continuous service. The plan provides benefits
based upon the career earnings of each participant, subject to certain
reductions if the employee retires before reaching age 65.
401(K) SAVINGS PLAN
The Company participates in the Savings Plan provided by PSC. The Plan
covers all employees of the Company who meet certain eligibility requirements.
To be eligible, an employee must be 21 years of age and have one year of
continuous service. The Company matches a portion of employee contributions made
to the Plan, subject to certain limitations.
Net pension and 401(k) savings plan expense for the Company's employees
participating in the plans, as allocated by PSC to the Company, was $164,000 for
the year ended June 30, 1993.
NOTE 5: SELF-INSURANCE AND LITIGATION CONTINGENCIES
Under the Company's current insurance program, coverage for comprehensive
general liability, workers' compensation and vehicle liability is obtained for
catastrophic exposures as well as those risks required to be insured by law or
contract. The Company retains a significant portion of certain expected losses
related primarily to comprehensive general liability, workers' compensation and
vehicle liability. Under these current insurance programs, the Company
self-insures the first $200,000 of coverage (per incident). The Company obtains
excess coverage from carriers for these programs on claims-made basis policies.
The aggregate cost of obtaining this excess coverage as a subsidiary under PSC's
insurance policies for the year ended June 30, 1993, was approximately $51,000.
The Company is a defendant in various lawsuits related to the self-insurance
program and other business-related lawsuits which are not expected to have a
material adverse effect on the Company's financial position or results of
operations.
The last PSC consolidated federal income tax audit, which included the
Company as a subsidiary, was for 1991. There are no federal income tax audits in
process at June 30, 1993.
NOTE 6: SUBSEQUENT EVENT
SALE OF COMPANY
In January 1994 the Company entered into an agreement with Empire Gas
Corporation (EGC) to sell the Company's entire operations to EGC. The agreement
provides for the sale of all property and equipment for $12 million plus the
respective values for inventory and accounts receivable at closing. EGC paid a
F-24
<PAGE>
PSNC PROPANE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1993 AND
NINE MONTHS ENDED MARCH 31, 1994 (UNAUDITED)
NOTE 6: SUBSEQUENT EVENT (CONTINUED)
nonrefundable cash deposit of $250,000 in February 1994 under the agreement. In
May 1994, EGC obtained an extension of the closing date which can be no later
than June 30, 1994. For this extension, EGC paid an additional nonrefundable
cash deposit of $250,000.
NOTE 7: ADDITIONAL CASH FLOW INFORMATION
ADDITIONAL CASH PAYMENT INFORMATION
<TABLE>
<CAPTION>
JUNE 30,
1993
----------- MARCH 31,
1994
---------------
(UNAUDITED)
<S> <C> <C>
Income taxes paid (net of refunds).................... $ (222,000) $ --
</TABLE>
F-25
<PAGE>
UNAUDITED PRO FORMA INCOME STATEMENTS OF PSNC PROPANE CORPORATION (PSNC)
FOR THE YEAR ENDED JUNE 30, 1993, NINE MONTHS ENDED
MARCH 31, 1994, AND TWELVE MONTHS ENDED MARCH 31, 1994
The following unaudited income statements show the results of PSNC and the
pro forma effects of purchase accounting adjustments in connection with the
acquisition of PSNC by EGC as if the acquisition had been consummated as of July
1, 1992. The unaudited pro forma results are not necessarily indicative of the
actual results that would have occurred had the acquisition been consummated as
of July 1, 1992, or of the future operations of the Company.
The pro forma statements of operations reflect reductions in salaries and
other expenses related to the corporate headquarters of PSNC. EGC intends to
eliminate all employees of the corporate headquarters because it currently is
providing these services to its other subsidiaries through its existing home
office. In addition to eliminating salaries and other expenses related to the
corporate headquarters, EGC intends to eliminate certain guaranteed overtime
policies, courier services, answering services, dedicated computer lines,
vehicle expenses and advertising costs which will not be necessary to operate
PSNC as a subsidiary of EGC. No adjustments were made for any increases in cost
required by the addition of PSNC.
P-1
<PAGE>
PSNC PROPANE CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1993
-------------------------------------
PURCHASE
PSNC ACCOUNTING
PROPANE ADJUSTMENTS PRO FORMA
CORPORATION ------------- ---------
-----------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING REVENUE.......................................................... $ 9,587 $ $ 9,587
COST OF PRODUCT SOLD....................................................... 4,643 4,643
----------- ---------
GROSS PROFIT............................................................... 4,944 4,944
----------- ---------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts.......................................... 30 30
General and administrative............................................... 3,838 (1,219)(1) 2,619
Depreciation and amortization............................................ 975 83(2) 1,058
----------- ------------- ---------
4,843 (1,136) 3,707
----------- ------------- ---------
OPERATING INCOME........................................................... 101 1,136 1,237
----------- ------------- ---------
OTHER INCOME (EXPENSE)
Interest income (expense)................................................ 61 (1,163)(3) (1,102)
Amortization of debt discount and expense................................ -- (501)(4) (501)
----------- ------------- ---------
61 (1,664) (1,603)
----------- ------------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.......................................... 162 (528) (366)
PROVISION (CREDIT) FOR INCOME TAXES........................................ 63 (203)(5) (140)
----------- ------------- ---------
NET INCOME (LOSS).......................................................... $ 99 $ (325) $ (226)
----------- ------------- ---------
----------- ------------- ---------
</TABLE>
P-2
<PAGE>
PSNC PROPANE CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 1994
-------------------------------------
PURCHASE
PSNC ACCOUNTING
PROPANE ADJUSTMENTS PRO FORMA
CORPORATION ------------- ---------
-----------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING REVENUE.......................................................... $ 9,526 $ $ 9,526
COST OF PRODUCT SOLD....................................................... 4,663 4,663
----------- ---------
GROSS PROFIT............................................................... 4,863 4,863
----------- ---------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts.......................................... 34 34
General and administrative............................................... 2,805 (911)(1) 1,894
Depreciation and amortization............................................ 692 86(2) 778
----------- ------------- ---------
3,531 (825) 2,706
----------- ------------- ---------
OPERATING INCOME........................................................... 1,332 825 2,157
----------- ------------- ---------
OTHER INCOME (EXPENSE)
Interest income (expense)................................................ 27 (858)(3) (831)
Amortization of debt discount and expense................................ -- (422)(4) (422)
----------- ------------- ---------
27 (1,280) (1,253)
----------- ------------- ---------
INCOME BEFORE INCOME TAXES................................................. 1,359 (455) 904
PROVISION FOR INCOME TAXES................................................. 528 (178)(5) 350
----------- ------------- ---------
NET INCOME................................................................. $ 831 $ (277) $ 554
----------- ------------- ---------
----------- ------------- ---------
</TABLE>
P-3
<PAGE>
PSNC PROPANE CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
MARCH 31, 1994
-------------------------------------
PURCHASE
ACCOUNTING
PSNC ADJUSTMENTS PRO FORMA
PROPANE ------------- ---------
CORPORATION
-----------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING REVENUE........................................................ $ 10,605 $ $ 10,605
COST OF PRODUCT SOLD..................................................... 5,164 5,164
----------- ---------
GROSS PROFIT............................................................. 5,441 5,441
----------- ---------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts........................................ 40 40
General and administrative............................................. 3,685 (1,194)(1) 2,491
Depreciation and amortization.......................................... 933 106(2) 1,039
----------- ------------- ---------
4,658 (1,088) 3,570
----------- ------------- ---------
OPERATING INCOME......................................................... 783 1,088 1,871
----------- ------------- ---------
OTHER INCOME (EXPENSE)
Interest income (expense).............................................. 42 (1,142)(3) (1,100)
Amortization of debt discount and expense.............................. -- (552)(4) (552)
----------- ------------- ---------
42 (1,694) (1,652)
----------- ------------- ---------
INCOME BEFORE INCOME TAXES............................................... 825 (606) 219
PROVISION FOR INCOME TAXES............................................... 291 (206)(5) 85
----------- ------------- ---------
NET INCOME............................................................... $ 534 $ (400) $ 134
----------- ------------- ---------
----------- ------------- ---------
</TABLE>
P-4
<PAGE>
PSNC PROPANE CORPORATION
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1993,
THE NINE MONTHS ENDED MARCH 31, 1994 AND
THE TWELVE MONTHS ENDED MARCH 31, 1994
(1) To record the effect of (a) elimination of salaries of executive and
administrative personnel and related costs, (b) elimination of auto and
travel expenses related to executive and administrative personnel being
terminated, (c) elimination of newspaper, radio, and magazine advertising,
(d) elimination of dedicated computer telephone lines and cellular
telephones, (e) elimination of temporary service personnel and overtime
wages, (f) elimination of payroll taxes related to salaries eliminated and
(g) elimination of courier service, credit bureau fees, answering service
expense and office supplies.
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JUNE 30, 1993 MARCH 31, 1994 MARCH 31, 1994
------------- ----------------- -----------------
<S> <C> <C> <C>
Executive and administrative salaries............. $ 695,000 $ 521,000 $ 694,000
Auto and travel expenses.......................... 29,000 18,000 25,000
Advertising expenses.............................. 18,000 7,000 12,000
Telephone expenses................................ 56,000 39,000 52,000
Temporary personnel and overtime wages............ 241,000 213,000 254,000
Payroll taxes..................................... 67,000 51,000 67,000
Other expenses.................................... 113,000 62,000 90,000
------------- -------- -----------------
Total General and Administrative Expense
Reduction...................................... $ 1,219,000 $ 911,000 $ 1,194,000
------------- -------- -----------------
------------- -------- -----------------
</TABLE>
(2) To (a) record additional depreciation based upon the purchase price of
PSNC's property and equipment, (b) record amortization on the new
non-compete agreement being amortized over five years and (c) eliminate
amortization on pre-acquisition non-compete agreements.
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JUNE 30, 1993 MARCH 31, 1994 MARCH 31, 1994
------------- ----------------- -----------------
<S> <C> <C> <C>
Depreciation...................................... $ 180,000 $ 135,000 $ 180,000
New non-compete amortization...................... 100,000 75,000 100,000
Old non-compete amortization...................... (197,000) (124,000) (174,000)
------------- ----------------- -----------------
$ 83,000 $ 86,000 $ 106,000
------------- ----------------- -----------------
------------- ----------------- -----------------
</TABLE>
(3) To (a) record additional interest expense assuming interest paid at 7% on
face value $15,264,000 of new Senior Secured Note borrowings, (b) recognize
additional interest expense on the revolving credit facility to reflect the
purchase of PSNC's working capital assets and the effect of operational
changes and (c) eliminate interest income earned on excess PSNC cash.
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JUNE 30, 1993 MARCH 31, 1994 MARCH 31, 1994
------------- ----------------- -----------------
<S> <C> <C> <C>
Senior Notes, due 2004............................ $ 1,068,000 $ 801,000 $ 1,068,000
Revolving Credit Facility......................... 34,000 27,000 29,000
Interest Income eliminated........................ 61,000 28,000 43,000
------------- -------- -----------------
$ 1,163,000 $ 856,000 $ 1,140,000
------------- -------- -----------------
------------- -------- -----------------
</TABLE>
P-5
<PAGE>
PSNC PROPANE CORPORATION
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1993,
THE NINE MONTHS ENDED MARCH 31, 1994 AND
THE TWELVE MONTHS ENDED MARCH 31, 1994
(4) To recognize amortization of the original discount on face value $15,264,000
of new Senior Secured Notes to bring the effective rate of the new debt to
13.1% using the effective interest method.
<TABLE>
<S> <C>
Year Ended June 30, 1993.......................................... $ 501,000
Nine Months Ended March 31, 1994.................................. $ 422,000
Twelve Months Ended March 31, 1994................................ $ 552,000
</TABLE>
(5) To record the estimated income tax reduction, computed at an effective rate
of 39%, associated with the additional deductible expense as a result of the
acquired operations.
P-6
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET OF PSNC PROPANE CORPORATION (PSNC)
AS OF MARCH 31, 1994
The following unaudited balance sheet shows the balance sheet of PSNC and
the pro forma effects of purchase accounting adjustments in connection with the
acquisition of PSNC by EGC as if the acquisition had been completed on March 31,
1994.
PSNC PROPANE CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1994
-----------------------------------------
EFFECTS OF
PSNC PSNC PSNC
PROPANE ADJUSTMENTS ACQUISITION
CORPORATION --------------- -----------
-----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................................ $ 1,094 $ (1,094)(1) $
Trade receivables.................................................... 1,180 1,180
Inventories.......................................................... 700 700
Prepaid expenses..................................................... 119 (119)(1)
Deferred Income taxes................................................ 434 (434)(5)
----------- ------- -----------
Total current assets............................................... 3,527 (1,647) 1,880
----------- ------- -----------
PROPERTY AND EQUIPMENT,
At Cost, net of accumulated depreciation............................. 8,879 3,121(2) 12,000
----------- ------- -----------
OTHER ASSETS........................................................... 296 204(3) 500
----------- ------- -----------
TOTAL ASSETS......................................................... $ 12,702 $ 1,678 $ 14,380
----------- ------- -----------
----------- ------- -----------
CURRENT LIABILITIES
Current maturities of long-term debt................................. $ $ 100(4) $ 100
Accounts payable and accrued expenses................................ 1,056 (806)(1) 250
Advances from and due to related party............................... 7,275 (7,275)(4)
----------- ------- -----------
8,331 (7,981) 350
----------- ------- -----------
LONG-TERM DEBT......................................................... 14,030(4) 14,030
------- -----------
DEFERRED INCOME TAXES.................................................. 2,289 (2,289)(5)
----------- -------
STOCKHOLDER'S EQUITY
Common stock......................................................... 1 (1)(5)
Retained earnings.................................................... 2,081 (2,081)(5)
----------- -------
2,082 (2,082)
----------- ------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $ 12,702 $ 1,678 $ 14,380
----------- ------- -----------
----------- ------- -----------
<FN>
- ---------
(1) To eliminate working capital assets and liabilities not acquired under the
acquisition agreement.
(2) To adjust the property and equipment to the acquisition price which is the
fair value.
(3) To (a) eliminate pre-acquisition deferred charges, intangibles and
non-compete agreements and (b) record a $500,000 non-compete agreement
issued as part of the PSNC acquisition by EGC.
(4) To (a) eliminate advances from and amounts due to PSNC's parent of
$7,275,000 not assumed under the acquisition agreement, (b) record the
estimated net proceeds ($12,000,000) of Senior Secured Notes issued to
acquire the fixed assets, (c) record a revolver advance of $1,630,000 to
purchase the accounts receivable and inventory under the acquisition
agreement (net of the $250,000 deposit made under the agreement) and (d)
record a liability to PSNC's parent of $500,000 for the non-compete
agreement issued.
(5) To eliminate pre-acquisition equity and deferred income taxes.
</TABLE>
P-7
<PAGE>
EMPIRE GAS CORPORATION
