AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1994
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EMPIRE GAS CORPORATION
(Exact name of Registrant as specified in its charter)
MISSOURI 5984 43-1494323
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification
incorporation or Code Number) Number)
organization)
P.O. BOX 303
(1700 SOUTH JEFFERSON STREET)
LEBANON, MISSOURI 65536
(417) 532-3101
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------
Paul S. Lindsey, Jr.
Chief Operating Officer
Empire Gas Corporation
P.O. Box 303
Lebanon, Missouri 65536
(417) 532-3101
(Name and address, including zip code, and telephone number, including area
code,
of agent for service)
------------------------
COPIES TO:
Richard W. Cass, Esq. Joseph A. Coco, Esq.
Wilmer, Cutler & Pickering Skadden, Arps Slate, Meagher & Flom
2445 M Street, N.W. 919 Third Avenue
Washington, D.C. 20037-1420 New York, New York 10022
(202) 663-6000 (212) 735-3000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS POSSIBLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: / /
------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING PRICE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER NOTE (1) (2) FEE
% Senior Secured Notes due 2004................ $120,700,000 82.85% $100,000,000 $34,483
<FN>
(1) The amount to be registered and proposed maximum offering price of the
Senior Secured Notes will be calculated to result in a maximum aggregate
offering price to the public of $100,000,000.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457.
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
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- --------------------------------------------------------------------------------
EMPIRE GAS CORPORATION
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
REGISTRATION STATEMENT ITEM AND HEADING PROSPECTUS CAPTION
- ------------------------------------------------------------- --------------------------------------------------------
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus................... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page of
Prospectus....................................... Inside Front and Outside Back Cover Pages of Prospectus;
Available Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors; Pro Forma Consolidated
Financial and Other Data; Selected Consolidated
Financial and Other Data
4. Use of Proceeds................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price................... Not Applicable
6. Dilution.......................................... Not Applicable
7. Selling Security Holders.......................... Not Applicable
8. Plan of Distribution.............................. Outside Front Cover Page of Prospectus; The Underwriter
9. Description of Securities to be Registered........ Outside Front Cover Page of Prospectus; Description of
Senior Secured Notes
10. Interests of Named Experts and Counsel............ Legal Matters; Experts
11. Information with Respect to the Registrant........ Outside and Inside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors; The Transaction;
Capitalization; Pro Forma Consolidated Financial and
Other Data; Selected Consolidated Financial and Other
Data; Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Relationships and Related
Transactions; Description of Senior Secured Notes;
Description of Other Indebtedness; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED , 1994
$120,700,000
EMPIRE GAS CORPORATION
% SENIOR SECURED NOTES DUE 2004
---------------------
INTEREST PAYABLE AND
------------------------
CASH INTEREST ON THE SENIOR SECURED NOTES WILL BE PAYABLE AT THE RATE OF
% PER ANNUM OF THEIR PRINCIPAL AMOUNT AT MATURITY THROUGH AND
INCLUDING , 1999, AND AFTER SUCH DATE WILL BE PAYABLE AT THE
RATE OF % 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 % 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 ,
1999, INITIALLY AT % OF THEIR ACCRETED VALUE, PLUS ACCRUED
INTEREST, DECLINING TO 100% OF THEIR ACCRETED VALUE PLUS ACCRUED
INTEREST, ON OR AFTER , 2001. IN ADDITION, UP TO $
MILLION AGGREGATE PRINCIPAL AMOUNT AT MATURITY 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.
------------------------
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. THE SENIOR SECURED NOTES WILL RANK PARI PASSU WITH ALL EXISTING
AND FUTURE SENIOR INDEBTEDNESS OF THE COMPANY. ON A PRO FORMA BASIS, AS OF
DECEMBER 31, 1993, AFTER GIVING EFFECT TO THE TRANSACTION (AS DEFINED HEREIN),
THE OFFERING AND THE APPLICATION OF THE NET PROCEEDS THEREFROM, THE COMPANY
WOULD HAVE HAD APPROXIMATELY $4.6 MILLION OF SENIOR INDEBTEDNESS OUTSTANDING,
EXCLUDING THE SENIOR SECURED NOTES, ALL OF WHICH WOULD HAVE BEEN SECURED. 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. ON A PRO FORMA BASIS, AS OF DECEMBER 31, 1993, AFTER GIVING EFFECT
TO THE TRANSACTION, THE OFFERING AND THE APPLICATION OF THE NET PROCEEDS
THEREFROM, THE COMPANY'S SUBSIDIARIES WOULD HAVE HAD APPROXIMATELY $480,000 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 % AND ACCRUED INTEREST
------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC (1) COMMISSIONS (2) COMPANY (1)(3)
----------------------- ----------------------- -----------------------
PER SENIOR SECURED NOTE.................. % % %
TOTAL.................................... $ $ $
<FN>
------------
(1) PLUS ACCRUED INTEREST FROM , 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 $ .
THE SENIOR SECURED NOTES 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 SENIOR SECURED NOTES WILL BE MADE ON OR ABOUT
, 1994, AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK,
NEW YORK, AGAINST PAYMENT THEREFOR IN NEW YORK FUNDS.
------------------------
MORGAN STANLEY & CO.
INCORPORATED
, 1994
[GRAPHIC]
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 SENIOR SECURED
NOTES 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 , 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
PAGE
---------
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 10
The Transaction............................................................................................ 15
Use of Proceeds............................................................................................ 16
Capitalization............................................................................................. 17
Selected Consolidated Financial and Other Data For the Company Prior to the Transaction.................... 18
Pro Forma Consolidated Financial and Other Data............................................................ 20
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 27
Business................................................................................................... 35
Management................................................................................................. 41
Principal Shareholders..................................................................................... 47
Certain Relationships and Related Transactions............................................................. 48
Description of the Senior Secured Notes.................................................................... 51
Certain Federal Income Tax Considerations.................................................................. 79
Description of Other Indebtedness.......................................................................... 82
The Underwriter............................................................................................ 83
Legal Matters.............................................................................................. 84
Experts.................................................................................................... 84
Available Information...................................................................................... 84
Index to Financial Statements.............................................................................. F-1
-------------------
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
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. 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 157 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 84.9 million gallons of propane to approximately 112,000
customers in 20 states. The Company's operations after the Transaction will have
substantial geographic diversification reducing the impact of weather
fluctuations in a particular region.
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. The propane industry has grown, as measured by the gallons of propane
sold, at the rate of 2.6% per annum over the ten-year period ending December 31,
1992.
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,
4
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 96% of its customers. Empire Gas' residential
customer base is relatively stable, because (i) fire safety regulations in most
states 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, (iii) geographic rationalization, and (iv) 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 and continuing to develop
Empire Gas' reputation for providing high quality service. 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
Notes Offered..................... $120,700,000 estimated aggregate principal amount
($100,000,000 initial accreted value) of % Senior
Secured Notes due 2004 (the "Senior Secured Notes").
Maturity Date..................... , 2004
Interest.......................... Cash interest on the Senior Secured Notes will be
payable at the rate of % per annum of their principal
amount at maturity through and including , 1999,
and after such date will be payable at the rate of %
per annum of their principal amount at maturity. See
"Original Issue Discount" below. Interest on the notes
is payable semiannually on and
, commencing , 1994. The
price to the public of the Senior Secured Notes
represents a yield to maturity of % per annum,
computed on the basis of semiannual compounding.
5
Optional Redemption............... The Senior Secured Notes will be redeemable at the
option of the Company, in whole or in part, on or after
, 1999 at the redemption prices set forth
herein, plus accrued interest. In addition, up to
$ million aggregate principal amount at maturity 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.
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 December 31,
1993, after giving effect to the application of the net
proceeds of the Offering and the Transaction, the Compa-
ny would have had $4.6 million of senior indebtedness
outstanding, excluding the Senior Secured Notes, all of
which would have been secured. In addition, 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. On a
pro forma basis as of December 31, 1993, 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 $480,000, including trade
payables, accrued expenses, and taxes payable.
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 indebt-
edness 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.
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."
6
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.
RISK FACTORS
An investment in the Senior Secured Notes involves a high degree of risk.
Each prospective purchaser of the Senior Secured Notes 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 Senior Secured
Notes offered by this Prospectus.
7
SUMMARY PRO FORMA FINANCIAL AND OTHER DATA
The following table presents selected summary financial 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") as of
and for each of the four years ended June 30, 1992. The table also presents
selected summary pro forma financial data of the Company for the year ended June
30, 1993, and for the twelve months ended December 31, 1993. The pro forma
financial operating and other data for the year ended June 30, 1993 and for the
twelve months ended December 31, 1993 give effect to the Offering and the
Transaction, as if these transactions had occurred on July 1, 1992. Information
other than operating revenue, gross profit, retail gallons sold and weighted
average gross profit per gallon are not presented because the Company expects
new management to conduct its operations, including the PSNC Operations, on a
substantially different basis than current management. Accordingly, the Company
believes that presentation of such additional information would not be
appropriate. 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.
PRO FORMA FOR
THE
PRO FORMA FOR TRANSACTION AND
THE TRANSACTION OFFERING(1)
---------------------------------- ----------------
TWELVE
YEAR MONTHS
ENDED ENDED
JUNE DECEMBER
30, 31,
------- -------
1989 1990 1991 1992 1993 1993
------- ------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS, DEGREE DAYS AND GROSS
PROFIT PER GALLON DATA)
OPERATING DATA:
Operating revenue........... $65,469 $75,342 $75,250 $69,216 $76,931 $78,582
Gross profit (2)............ 36,838 39,455 37,799 38,031 41,243 41,874
Operating expenses.......... -- -- -- -- 23,825 24,160
EBITDA (3).................. -- -- -- -- 17,418 17,714
Depreciation and
amortization............... 5,560 5,863 6,022 6,531 6,722 6,675
Operating income............ -- -- -- -- 10,696 11,039
Interest expense:
Cash interest............. -- -- -- -- 8,808 8,503
Amortization of debt
discount and expense..... -- -- -- -- 4,162 4,316
Total interest
expense................ -- -- -- -- 12,970 12,819
Net loss.................... -- -- -- -- (1,792 ) (1,659 )
8
PRO FORMA FOR
THE
PRO FORMA FOR TRANSACTION AND
THE TRANSACTION OFFERING(1)
---------------------------------- ----------------
TWELVE
YEAR MONTHS
ENDED ENDED
JUNE DECEMBER
30, 31,
------- -------
1989 1990 1991 1992 1993 1993
------- ------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS, DEGREE DAYS AND GROSS
PROFIT PER GALLON DATA)
OTHER OPERATING DATA AND
FINANCIAL RATIOS:
Capital expenditures:
Existing operations....... $ $
Start-up of new retail
service centers..........
Acquisitions..............
------- -------
Total capital
expenditures...........
Cash from sale of retail
service centers and other
assets..................... -- -- -- --
EBITDA (3) to interest
expense.................... -- -- -- -- 1.34 x 1.38 x
EBITDA (3) to cash
interest................... -- -- -- -- 1.98 x 2.08 x
Retail gallons sold......... 90,571 84,860 76,591 77,856 84,859 84,224
Weighted average gross
profit per gallon.......... .360 .418 .441 .426 .429 .438
Actual weighted average
heating degree days (4).... -- -- -- --
Deviation from normal
weighted average heating
degree days (4)............ -- -- -- --
Percent deviation from
normal average heating
degree days................ -- -- -- -- -- --
<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 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).
(4) Actual weighted average heating degree days represent 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.
9
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
PURCHASERS OF THE SENIOR SECURED NOTES SHOULD CONSIDER CAREFULLY THE FOLLOWING
FACTORS IN EVALUATING AN INVESTMENT IN THE SENIOR SECURED NOTES.
HIGH LEVERAGE AND ABILITY TO SERVICE DEBT
As of December 31, 1993, 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 $111.8 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 $31.4 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 $2.6 million for fiscal year 1993 and by $2.3 million for
the twelve months ended December 31, 1993. 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.
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. 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 % 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 normal winter weather, that it will be able to fund these debt service
obligations from funds generated from operations and other available sources of
cash. 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 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 (as defined in the
Indenture), to make an offer to purchase the Senior Secured Notes. 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.
10
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.
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 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 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 December 31, 1993, 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 New Credit Facility, would have consisted of total payables of
approximately $480,000 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."
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. 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.
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.
11
TAX CONSEQUENCES OF THE OFFERING
The Senior Secured Notes will be issued at a substantial discount from their
principal amount. Consequently, purchasers of Senior Secured Notes 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. If 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 and possibly, in part, disallowed. 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 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 fulfil 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 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, although it currently enjoys 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.
12
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 cannot predict the impact of future conservation
measures. Nor is the Company able to predict 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 liability
insurance coverage substantially exceeds any liability Empire Gas has previously
incurred. 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."
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, including opportunities to acquire
assets for the development of new retail service centers, or to the extent such
opportunities are identified, that the Company will be able to consummate the
acquisitions or will be able to obtain financing for any such acquisitions. In
addition, the Company's ability to undertake acquisitions will be limited 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 and certain territories in five states (the "Energy Territories")
for a period of three years from the date the Stock Purchase is consummated (the
"Effective Date"). See "The Transaction" and "Certain Relationships and Related
Transactions -- The Transaction." No assurance can be given as to the extent to
which such 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
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
Senior Secured Notes. In case of such a conflict of interests, there can be no
assurance that the Company will not take actions that the holders of the Senior
Secured Notes do not believe to be in their best interests.
13
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 the company (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 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) $13.7
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 thereon. 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 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 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 Senior Secured
Notes and the Company does not intend to have the Senior Secured Notes 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 Senior Secured Notes, but the Underwriter is not obligated
to make a market in the
14
Senior Secured Notes 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 trading markets for, the Senior
Secured Notes. The liquidity of any market for the Senior Secured Notes will
depend upon the number of holders of Senior Secured Notes, the interest of
securities dealers in making a market in the Senior Secured Notes and other
factors. The absence of an active market for the Senior Secured Notes would
adversely affect the liquidity of the Senior Secured Notes. 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. 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 346,220 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 151 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 Company's Common Stock 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."
15
The Company has requested a private letter ruling from the Internal Revenue
Service concerning the federal income tax consequences of the Stock Purchase.
The consummation of the Transaction is conditioned upon the receipt of rulings
from the IRS that provide, among other things, that, based on certain
representations contained in the rulings, neither income nor gain for federal
income tax purposes will be recognized as a result of the Stock Purchase.
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 Senior
Secured Notes offered hereby will be approximately $95.0 million. The Company
intends to use approximately $73.4 million of the net proceeds to retire
existing indebtedness. Approximately $23.0 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 $16.7 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 $13.7 million will be used
to repurchase $13.7 million principal amount 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. 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 346,220 shares of Common Stock held by the departing directors,
officers and employees, and approximately 31,640 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
$ ) will be used by the Company for general corporate purposes.
16
CAPITALIZATION
The following table sets forth, as of December 31, 1993, 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.
AS OF DECEMBER 31, 1993
-----------------------------
HISTORICAL AS ADJUSTED
------------- -------------
(UNAUDITED)
(IN THOUSANDS)
Short-term debt:
Current maturities of
long-term debt............. $ 6,242 $ 360
------------- -------------
------------- -------------
Long-term debt (excluding
current portion of long-term
debt):
Existing Credit Facility:
Term Loan................. $ 14,100 $ --
$22 million revolving
credit facility.......... 11,800 --
New Credit Facility:
$15 million revolving
credit facility.......... -- 4,573
% Senior Secured Notes due
2004..................... -- 100,000
9% Convertible Subordinated
Debentures due 1998........ 15,682 --
9% Subordinated Debentures
due 2007................... 14,550 6,388 (1)
12% Senior Subordinated
Debentures due 2002........ 18,817 --
Purchase contract
obligations................ 664 883
------------- -------------
Total long-term debt...... 75,613 111,844
------------- -------------
Stockholders' equity
(deficit):
Common stock................ 14 14
Additional paid-in
capital.................... 27,088 27,088
Retained earnings........... 928 29,501
------------- -------------
28,030 56,603
Less: Treasury stock........ (1,299) (87,975)
------------- -------------
Total stockholders' equity
(deficit)................ 26,731 (31,372)
------------- -------------
Total capitalization.... $ 102,344 $ 80,472
------------- -------------
------------- -------------
<FN>
- ---------
(1) Face amount $12,287.
17
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 six months ended December 31, 1992 and 1993, and for the twelve months
ended December 31, 1993. 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 six months ended December 31, 1992 and 1993, 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 six months ended December 31,
1993 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." 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.
EMPIRE GAS BEFORE THE TRANSACTION AND OFFERING
------------------------------------------------------------------------------------
TWELVE MONTHS
SIX MONTHS ENDED ENDED DECEMBER
YEAR ENDED JUNE 30, DECEMBER 31, 31,
------------------------------------------------ ------------------ --------------
1989 (1) 1990 1991 1992 1993 1992 1993 1993
-------- -------- -------- -------- -------- -------- -------- --------------
Operating data:
Operating
revenue.......... $108,389 $123,153 $121,758 $112,080 $128,401 $ 62,344 $ 63,986 $130,043
Gross
profit (2)....... 61,995 64,962 61,787 61,107 68,199 33,233 33,333 68,299
Operating
expenses......... 36,438 39,563 44,772 40,052 41,665 20,392 21,001 42,454
EBITDA (3)........ 25,557 25,399 17,015 21,055 26,354 12,841 12,332 25,845
Depreciation and
amortization..... 8,194 9,334 9,552 10,062 10,351 5,109 4,940 10,182
Operating income
(loss)........... 17,363 16,566 7,463 10,993 16,003 7,732 7,392 15,663
Interest expense:
Cash interest... 12,288 11,437 12,038 10,721 9,826 5,161 4,364 9,529
Amortization of
debt discount
and expenses... 1,469 1,147 890 1,006 1,686 595 992 2,083
-------- -------- -------- -------- -------- -------- -------- --------------
Total interest
expense...... 13,757 12,584 12,928 11,727 11,512 5,756 5,356 11,612
Net income
(loss) (4)....... 857 1,216 (4,557) (1,474) 2,228 1,056 818 1,940
Ratio of earnings
to fixed
charges (5)...... 1.15x 1.21x -- -- 1.33x 1.31x 1.28x 1.31x
Deficiency in
earnings
available to
cover fixed
charges (5)...... -- -- (6,426) (1,414) -- -- -- --
18
AS OF JUNE 30, AS OF
---------------------------------------------------------------------------------- DECEMBER 31,
1989 1990 1991 1992 1993 1993
-------------- -------------- -------------- -------------- -------------- --------------
(IN THOUSANDS) (UNAUDITED)
Balance sheet data:
Total assets................ $ 161,727 $ 157,858 $156,613 $ 150,946 $ 147,445 $157,026
Long-term debt (including
current maturities)........ 77,775 79,666 84,289 78,958 79,249 81,855
Stockholders' equity........ 29,418 29,960 25,416 23,879 24,891 26,731
<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) EBITDA consists of earnings before depreciation, amortization, interest,
income taxes, and other non-recurring expenses. 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).
(4) Empire Gas did not declare or pay dividends on its common stock during the
five-year period ending June 30, 1993 or during the six-month period
ending December 31, 1993.
(5) 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.
19
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 six months and twelve months ended December 31, 1993 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 December 31, 1993. 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 December 31, 1993, or to project the Company's results of
operations or financial position at any future date or for any future period.
20
EMPIRE GAS CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
YEAR ENDED JUNE 30, 1993
----------------------------------------------------------------
ADJUSTMENTS EFFECTS OF
EMPIRE TO EXCLUDE PSNC EFFECTS OF
GAS ENERGY ACQUISITION* OFFERING PRO FORMA
-------- ------------ ------------ ----------- ---------
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) (901) 699(6) (8,808)
Interest expense to related party..... (949) 94(4) 855(6)
Amortization of debt discount and
expense.............................. (1,686) (401) (2,075)(7) (4,162)
Restructuring proposal costs.......... (223) 105(2) (118)
-------- ------------ ------------ ----------- ---------
(11,735) 470 (1,302) (521) (13,088)
-------- ------------ ------------ ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES....... 4,268 (6,074) (65) (521) (2,392)
PROVISION (CREDIT) FOR INCOME TAXES 2,040 (2,433)(5) (25) (182)(8) (600)
-------- ------------ ------------ ----------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM................................... $ 2,228 $ (3,641) $ (40) $ (339)(9) $ (1,792)
-------- ------------ ------------ ----------- ---------
-------- ------------ ------------ ----------- ---------
EARNINGS (LOSS) PER SHARE BEFORE
EXTRAORDINARY ITEM..................... $ .16 -- -- -- $ (1.07)
-------- ---------
-------- ---------
OTHER OPERATING DATA AND FINANCIAL
RATIOS
Ratio of earnings to fixed charges.... 1.33x -- -- -- --
--------
--------
Deficiency in earnings to cover fixed
charges.............................. -- -- -- -- $ (2,556)
---------
---------
EBITDA.................................. $ 26,354 -- -- -- $ 17,418
EBITDA to total interest expense........ 2.29x -- -- -- 1.34x
EBITDA to cash interest................. 2.68x -- -- -- 1.98x
<FN>
- ------------
* For adjustments from actual PSNC results see Pro Forma Financial
Statements of PSNC elsewhere in this Prospectus.
21
EMPIRE GAS CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, 1993
----------------------------------------------------------------
ADJUSTMENTS EFFECTS OF
EMPIRE TO EXCLUDE PSNC EFFECTS OF
GAS ENERGY ACQUISITION* OFFERING PRO FORMA
-------- ------------ ------------ ----------- ---------
OPERATING REVENUE....................... $ 63,986 $(31,010)(1) $ 4,388 $ $ 37,364
COST OF PRODUCT SOLD.................... 30,653 (14,930)(1) 2,076 17,799
-------- ------------
GROSS PROFIT............................ 33,333 (16,080) 2,312 19,565
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts 603 (283)(1) 20 340
General and administrative............ 20,173 (9,922)(1) 1,133 11,384
Rent expense to related party 225 (188)(2) 37
Depreciation and amortization......... 4,940 (2,189)(3) 517 3,268
-------- ------------ ------------ ---------
25,941 (12,582) 1,670 15,029
-------- ------------ ------------ ---------
OPERATING INCOME........................ 7,392 (3,498) 642 4,536
-------- ------------ ------------ ---------
OTHER EXPENSE
Interest expense...................... (4,364) 96(4) (446) 483(6) (4,231)
Amortization of debt discount and
expense.............................. (992) (216) (918)(7) (2,126)
Restructuring proposal costs.......... (398) 187(2) (211)
-------- ------------ ------------ ----------- ---------
(5,754) 283 (662) (435) (6,568)
-------- ------------ ------------ ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES....... 1,638 (3,215) (20) (435) (2,032)
PROVISION (CREDIT) FOR INCOME TAXES 820 (1,267)(5) (25) (128)(8) (600)
-------- ------------ ------------ ----------- ---------
NET INCOME (LOSS)....................... $ 818 $ (1,948) $ 5 $ (317) $ (1,432)
-------- ------------ ------------ ----------- ---------
-------- ------------ ------------ ----------- ---------
EARNINGS (LOSS) PER SHARE............... $ .06 -- -- -- $ (.80)
-------- ---------
-------- ---------
OTHER OPERATING DATA AND FINANCIAL
RATIOS
Ratio of earnings to fixed charges.... 1.28x -- -- -- --
--------
--------
Deficiency in earnings to cover fixed
charges.............................. -- -- -- -- $ (2,116)
---------
---------
EBITDA................................ $ 12,332 -- -- -- $ 7,804
EBITDA to total interest expense...... 2.30x -- -- -- 1.23x
EBITDA to cash interest............... 2.83x -- -- -- 1.84x
<FN>
- ------------
* For adjustments from actual PSNC results see Pro Forma Financial Statements
of PSNC elsewhere in this Prospectus.
22
EMPIRE GAS CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
TWELVE MONTHS ENDED DECEMBER 31, 1993
------------------------------------------------------------
ADJUSTMENTS
TO EFFECTS OF EFFECTS
EMPIRE EXCLUDE PSNC OF
GAS ENERGY ACQUISITION* OFFERING PRO FORMA
--------- --------- ------------ --------- ---------
OPERATING REVENUE....................... $ 130,043 $(61,445)(1) $ 9,984 $ $ 78,582
COST OF PRODUCT SOLD.................... 61,744 (29,654)(1) 4,618 36,708
--------- --------- ------------ ---------
GROSS PROFIT............................ 68,299 (31,791) 5,366 41,874
--------- --------- ------------ ---------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts....... 1,044 (475)(1) 12 581
General and administrative............ 40,960 (19,997)(2) 2,541 23,504
Rent expense to related party......... 450 (375)(2) 75
Depreciation and amortization......... 10,182 (4,544)(3) 1,037 6,675
--------- --------- ------------ ---------
52,636 (25,391) 3,590 30,835
--------- --------- ------------ ---------
OPERATING INCOME........................ 15,663 (6,400) 1,776 11,039
--------- --------- ------------ ---------
OTHER EXPENSE
Interest expense...................... (8,363) 277(4) (874) 457(6) (8,503)
Interest expense to related party..... (666) 43(4) 623(6)
Amortization of debt discount and
expense.............................. (2,083) (422) (1,811)(7) (4,316)
Restructuring proposal costs.......... (621) 292(2) (329)
--------- --------- ------------ --------- ---------
(11,733) 612 (1,296) (731) (13,148)
--------- --------- ------------ --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES....... 3,930 (5,788) 480 (731) (2,109)
PROVISION (CREDIT) FOR INCOME TAXES..... 1,940 (2,383)(5) 147 (154)(8) (450)
--------- --------- ------------ --------- ---------
NET INCOME (LOSS)....................... $ 1,990 $ (3,405) $ 333 $ (577) $ (1,659)
--------- --------- ------------ --------- ---------
--------- --------- ------------ --------- ---------
EARNINGS (LOSS) PER SHARE............... $ .14 -- -- -- $ (.93)
--------- ---------
--------- ---------
OTHER OPERATING DATA AND FINANCIAL
RATIOS
Ratio of earnings to fixed charges.... 1.31x -- -- -- --
--------- ---------
--------- ---------
Deficiency in earnings to cover fixed
charges.............................. -- -- -- -- $ (2,256)
---------
---------
EBITDA................................ $ 25,845 -- -- -- 17,714
EBITDA to total interest expense...... 2.32x -- -- -- 1.38x
EBITDA to cash interest............... 2.86x -- -- -- 2.08x
Total Long-term debt (including
current portion) to EBITDA........... 3.17x -- -- -- 6.33x
<FN>
- ------------
* For adjustments from actual PSNC results see Pro Forma Financial
Statements of PSNC elsewhere in this Prospectus.
23
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS OF EMPIRE GAS
CORPORATION (EGC)
FOR THE YEAR ENDED JUNE 30, 1993, SIX MONTHS ENDED DECEMBER 31, 1993,
AND TWELVE MONTHS ENDED DECEMBER 31, 1993.
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 allocation of
income and expenses between the Company and Energy is based on the allocation of
assets in the Stock Redemption Agreement. The actual consolidated income
statement amounts may differ substantially because of changes in the
consolidated balance sheet effects at 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:
Year Ended June 30, 1993....................... $2,556,100
Six Months Ended December 31, 1993............. $1,173,000
Twelve Months Ended December 31, 1993.......... $2,494,500
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 6% on
face value $106,235,000 of Senior Secured Note borrowings, (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 10.5% using the effective interest method, (c) eliminate amortization of
the discount on the 9% Convertable 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.
(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 $36.8 million resulting from the excess of the
fair value of Energy over its book value to be recognized upon the exchange
of Energy for Company common stock and the extraordinary expense of $8.6
million (net of estimated income tax effect) for the remaining unamortized
debt discount related to the 9% Convertible Subordinated Deventures 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
use of proceeds of the Offering. The gain on disposition of Energy assets
has been assumed to be non-taxable. If any portion of the gain is deemed to
be taxable, such liablility would be accrued and payable by the Company.
24
EMPIRE GAS CORPORATION
PRO FORMA BALANCE SHEET
DECEMBER 31, 1993
(IN THOUSANDS)
(UNAUDITED)
ADJUSTMENTS EFFECTS OF
EMPIRE TO EXCLUDE PSNC EFFECTS OF
GAS ENERGY ACQUISITION* OFFERING PRO FORMA
--------- ------------ ------------ ------------ ---------
CURRENT ASSETS
Cash.................................. $ 1,667 $ (592)(1) $ $ $ 1,075
Trade Receivables..................... 16,985 (8,068)(1) 892 9,809
Inventories........................... 9,744 (4,705)(1) 1,173 6,212
Prepaid Expenses...................... 299 (106)(1) 193
Due from Energy....................... 3,121(2) (3,121)(5)
Deferred Income taxes................. 593 (434)(1) 275(6) 434
--------- ------------ ------------ ------------ ---------
Total current assets................ 29,288 10,784 2,065 (2,846) 17,723
--------- ------------ ------------ ------------ ---------
PROPERTY AND EQUIPMENT
At cost, net of accumulated
depreciation......................... 108,633 (51,765)(1) 12,000 68,868
--------- ------------ ------------ ---------
OTHER ASSETS
Debt acquisition, costs, net of
amortization......................... 473 4,527(7) 5,000
Excess of cost over fair value of net
assets acquired, at amortized cost... 18,193 (3,646)(3) 14,547
Other................................. 439 (288)(1) 500 651
--------- ------------ ------------ ------------ ---------
19,105 (3,934) 500 4,527 20,198
--------- ------------ ------------ ------------ ---------
$ 157,026 $(66,483) $ 14,565 $ 1,681 $106,789
--------- ------------ ------------ ------------ ---------
--------- ------------ ------------ ------------ ---------
CURRENT LIABILITIES
Current maturities of long-term
debt................................. $ 6,242 $ (76)(1) $ 100 $ (5,906)(10) $ 360
Accounts payable and accrued
expenses............................. 14,743 (3,008)(1) (846)(10) 10,889
--------- ------------ ------------ ---------
Total current liabilities........... 20,985 (3,084) 100 (6,752) 11,249
--------- ------------ ------------ ------------ ---------
LONG-TERM DEBT.......................... 75,613 (181)(1) 14,465 88,000(9)
(76,248)(10)
(3,121)(5)
2,645(8)
10,671(6) 111,844
--------- ------------ ------------ ------------ ---------
DEFERRED INCOME TAXES................... 31,865 (14,243)(1) (3,525)(6) 14,097
--------- ------------ ------------ ---------
ACCRUED SELF INSURANCE LIABILITY........ 1,832 (861)(1) 971
--------- ------------ ---------
STOCKHOLDERS' EQUITY
Capital stock
Common stock.......................... 14 14
Additional paid-in capital............ 27,088 27,088
Retained earnings..................... 928 35,917(4) (7,344)(6) 29,501
--------- ------------ ------------ ---------
28,030 35,917(4) (7,344) 56,603
Treasury Stock at cost................ (1,299) (84,031)(4) (2,645)(8) (87,975)
--------- ------------ ------------ ---------
26,731 (48,114) (9,989) (31,372)
--------- ------------ ------------ ---------
$ 157,026 $(66,483) $ 14,565 $ 1,681 $106,789
--------- ------------ ------------ ------------ ---------
--------- ------------ ------------ ------------ ---------
<FN>
- ------------
* For adjustments from actual PSNC results see Pro Forma Financial
Statements of PSNC elsewhere in this Prospectus.
25
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF EMPIRE GAS
CORPORATION (EGC) AS OF DECEMBER 31, 1993
The pro forma consolidated balance sheet amounts assume the transactions
described below were consummated on December 31, 1993. 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 $3,121,000 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.
(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 12,004,430 shares of EGC common stock
received in exchange for Energy was charged to Treasury Stock and the
resulting gain on the exchange of $35,917,000 was credited to retained
earnings. The gain on disposition of Energy assets 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 payment due from Energy at the closing date of the
transaction based on the respective levels of certain non-retail assets
retained and liabilities assumed by the Company.
(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 $473,000 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 31,640 shares of
Common Stock from employees who are remaining with the Company.
(9) To record the proceeds of the new Senior Secured Notes.
(10) To (a) record repayment of $56,638,000 face value of existing debentures,
(b) record repayment of $16,700,000 of the term credit facility, (c)
record reduction of $8,816,000 of the revolving credit facility and (d)
payment of $846,000 of accrued interest.
26
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. 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 the proceeds of this Offering to repay all of its existing indebtedness
except its revolving credit line under its Existing Credit Facility (the
"Revolver") and a portion of its 2007 9% Subordinated Debentures, 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. See "-- Liquidity and Capital Resources."
27
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 from the exclusion of the sales from the retail service centers that are
being transferred in the Transaction. This decrease will be partially offset by
an increase from the inclusion of sales from service centers acquired in the
Acquisition.
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 $8.8 million less for the six months ended December 31,
1993, and $17.2 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 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 $6.2 million and $12.6 million for the six months
ended December 31, 1993 and the fiscal year ended June 30, 1993, respectively,
an increase of approximately 16% over the actual amounts. The overall increase
results from a $30.3 million increase in total indebtedness of the Company
offset by a reduction in the weighted average effective interest rate from 12.0%
(as of December 31, 1993) to 10.6%. The reduction in the effective interest rate
results from the repayment of all of the Company's currently outstanding debt
(other than approximately $12.3 million principal amount of the 2007 9%
Subordinated Indentures) in connection with the Offering, and the replacement of
that indebtedness with the Notes and the New Credit Facility, which will carry a
lower effective interest rate.
PRO FORMA OPERATING DATA FOR FISCAL YEARS ENDED JUNE 30, 1993 AND JUNE 30,
1992. Operating revenue of the Company on a pro forma basis for the fiscal year
ended June 30, 1993 and for the fiscal year ended June 30, 1992 was $76.9
million and $69.2 million, respectively. Cost of products sold of the Company on
a pro forma basis for the fiscal year ended June 30, 1993 and for the fiscal
year ended June 30, 1992 was $41.2 million and $38.0 million, respectively. The
Company's gross profit on a pro forma basis for the fiscal year ended June 30,
1993 and for the fiscal year ended June 30, 1992 was $35.7 million and $31.2
million, respectively. The Company's gross profit per gallon was $.429 for the
fiscal year ending June 30, 1993 and $.426 for the fiscal year ended June 30,
1992. The increase in operating revenue, cost of products sold and gross profits
was due primarily to an increase in gallons sold resulting from an increase in
weighted average degree days between the two periods.
SIX MONTHS ENDED DECEMBER 31, 1993 AND DECEMBER 31, 1992
OPERATING REVENUE. Operating revenue increased by approximately $1.6
million, or 2.6%, from $62.3 million for the six months ended December 31, 1992
to $63.9 million for the six months ended December 31, 1993. This increase was
due to an increase in propane sales of approximately $1.2 million and an
increase in parts and appliances sales of approximately $400,000. The increase
in propane sales was due to an approximate $.02 increase in the average net
sales price per gallon while the number of gallons sold remained relatively
constant. The increase in parts and appliance sales was due to increased sales
efforts by the Company.
28
COST OF PRODUCTS SOLD. Cost of products sold increased by approximately
$1.5 million, or 5.2%, from $29.1 million for the six months ended December 31,
1992 to $30.6 million for the six months ended December 31, 1993. This increase
was due to an increase of approximately $1.2 million in the cost of propane and
an increase of approximately $300,000 in the cost of parts and appliances. The
increase in the cost of propane was due to a $.017 increase in the average net
cost per gallon. The increase in the cost of parts and appliances was due to the
increased sales activity.
GROSS PROFIT. The Company's gross profit remained relatively constant,
increasing by approximately $100,000 (or less than 1%) from $33.2 million for
the six months ended December 31, 1992 to $33.3 million for the six months ended
December 31, 1993. The Company's gross profit per gallon also remained
relatively constant at $.401 for the six months ended Decmeber 31, 1992 and
$.403 for the six months ended December 31, 1993.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased approximately $600,000, or 2.9%, from $20.4 million for the six months
ended December 31, 1992 to $21.0 million for the six months ended December 31,
1993. This increase was due to increases of approximately $700,000 in insurance
and liability claims expense, approximately $200,000 in salaries and
commissions, and approximately $100,000 in office expenses. These increases were
offset by decreases of approximately $100,000 each in vehicle fuel and
maintenance, rent and maintenance, travel and entertainment, and professional
fees. 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 offset slightly by an overall average reduction in the total number of
employees. The increase in office expenses was due primarily to increased
postage costs as the result of more informational and advertising mailings to
customers. The decrease in vehicle fuel and maintenance was due to reduced
vehicle maintenance as a result of the purchase of new vehicles to replace some
of the older vehicles. The decrease in rent and maintenance was due to reduced
building maintenance. The decrease in travel and entertainment was due to
reduced travel by retail employees for training, as most Company-wide training
was performed in May and June 1993. The decrease in professional fees was due to
reduced fees incurred for tax and business planning.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization remained
relatively constant, decreasing by approximately $200,000 or 4% from $5.1
million for the six months ended December 31, 1993 to $4.9 million for the six
months ended December 31, 1992.
INTEREST EXPENSE. Interest expense and amortization of debt discount and
expense decreased approximately $400,000 or 7.4%, from $5.8 million for the six
months ended December 31, 1992 to $5.4 million for the six months ended December
31, 1993. This decrease was the result of lower interest rates and reduced
borrowing levels as compared to the comparable period for the prior year.
TRANSACTION PROPOSAL COSTS. Transaction proposal costs of $398,000 for the
six months ended December 31, 1993 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.
29
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.
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.
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
30
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.
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
31
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.
The cash flow of the Company on a pro forma basis is lower than historical
levels as a result of the disposition of service centers in the Stock Purchase,
partially offset by an increase resulting from cash flow contributed by the
centers acquired in the Acquisition. The Company intends to increase its cash
flow from operations 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 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, 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 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 will
be approximately $1.0 million per year, and that capital expenditures for the
start-up of new retail service centers will not exceed $2.0 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
32
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 does not currently have any material commitments for any capital
expenditures other than the agreements for the pending acquisitions discussed
above. 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"; "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
other than the Revolver (which will be paid off with borrowings under the New
Credit Facility) and approximately $13.7 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
$8.4 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."
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 %. 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 it will have
sufficient capitalization and cash flow
33
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 Company will experience
normal winter weather. 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.
34
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. 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 157 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 84.9 million gallons of propane to approximately 112,000
customers in 20 states. The Company's operations after the Transaction will have
substantial geographic diversification reducing the impact of weather
fluctuations in a particular region.
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. The propane industry has grown, as measured by the gallons of propane
sold, at the rate of 2.6% per annum over the ten-year period ending December 31,
1992.
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.
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.
35
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 96% of its customers. Empire Gas' residential
customer base is relatively stable, because (i) fire safety regulations in most
states 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, (iii) geographic rationalization, and (iv) 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 converting customers
currently using electricity for heating to propane and continuing to develop
Empire Gas' reputation for providing high quality service. 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 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.
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 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. Empire Gas believes it will be
able to improve PSNC
36
Propane Corporation's operating results 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 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."
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 and four in fiscal year
1993 that will remain with the Company after the Transaction, and, to date, has
started three new retail service centers during fiscal year 1994.
The Company continues to look for opportunities to purchase land and assets
to start new retail service centers. Because minimal capital expenditures are
required to start up 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
minimize 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 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."
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."
37
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.
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.
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 occasionally 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.
38
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. 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.
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.
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.
39
Empire Gas also competes with suppliers of other energy sources. The Company
competes with suppliers of electricity for sales to residential and commercial
customers, although the Company currently enjoys 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.
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 per
occurrence 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.
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 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 February 28, 1994, the Company had approximately 1,085 employees, none
of whom was represented by unions. Upon consummation of the Transaction, the
Company will have approximately 623 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.
40
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Upon consummation of the Transaction, the directors and executive officers
of the Company will be as follows:
NAME AGE POSITION
- ------------------------ --- ---------------------------------------------
Paul S. Lindsey, Jr. 48 Chairman of the Board, Chief Executive
Officer, and President
Douglas A. Brown 33 Director
Kristin L. Lindsey 46 Director/Vice President
James E. Acreman 66 Vice President/Treasurer
Mark W. Buettner 51 Divisional Vice President
Kenneth J. DePrinzio 46 Divisional Vice President
Robert C. Heagerty 46 Divisional Vice President
Valeria Schall 39 Vice President/Corporate Secretary
Willis D. Green 56 Controller
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 and two additional independent directors, who will serve as the audit
committee, will become members of the Board of Directors. See "Description of
the Senior Secured Notes."
BOARD OF DIRECTORS
Upon consummation of the Offering, the Company's directors will be as
follows:
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.
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, an equity investment
group specializing in the acquisition 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.
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 11 years.
41
PAUL S. LINDSEY, JR. Chairman of the Board, Chief Executive Officer and
President. See description under "Board of Directors."
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.
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 1991 to
1992, he owned and operated a restaurant. 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. 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.
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.
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 12 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.
42
The individuals currently serving as directors and executive officers of
Empire Gas are as follows:
NAME AGE POSITION
- -------------------------- --- ----------------------------------------------------------------
Robert W. Plaster* 63 Chairman of the Board and Chief Executive Officer (1)
Paul S. Lindsey, Jr. 48 Vice Chairman of the Board and Chief Operating Officer
Stephen R. Plaster* 35 Director and President (2)
Robert L. Wooldridge* 63 Executive Vice President -- Marketing (3)
Joseph L. Schaefer* 38 Vice President and Treasurer (4)
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.
(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.
(4) Mr. Schaefer has served as Vice President and Treasurer of the Company
since 1988. Mr. Schaefer is the son-in-law of Mr. Robert W. Plaster.
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.
43
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
----------------------------------- ALL
OTHER OTHER
FISCAL ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) (1) (2)
- ------------------------------ --------- --------- --------- ------------- -----------
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 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."
44
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
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
- --------------------------- --------- ----------- ---------- ----------------- ---------- -----------------
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.
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
45
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.
46
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.
AS OF APRIL 1, 1994 PRO FORMA FOR THE TRANSACTION
------------------------------ ------------------------------
NUMBER OF SHARES NUMBER OF SHARES
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER(1) OWNED PERCENT OWNED PERCENT
- -------------------------------------------------------- ----------------- ----------- ----------------- -----------
Robert W. Plaster(2).................................... 10,765,103 77.8% -- --
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........................................ -- -- -- --
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 250,000 shares owned by two trusts for the benefit of two of Mr.
Plaster's daughters, the Tammy Jane Plaster Trust established July 30,
1984 and the Dolly Francine Plaster Trust established 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 -- 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.
47
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 Mr. Joseph L. Schaefer
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 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:
NUMBER OF SHARES
NUMBER OF SHARES OF ENERGY COMMON
NAME OF COMMON STOCK STOCK CASH
- ---------------------------------------- ----------------- ----------------- ----------
Mr. Robert W. Plaster................... 10,765,103(1) 10,765,103 --
Mr. Stephen R. Plaster.................. 619,888(2) 619,888 --
Mr. Wooldridge.......................... 260,500 (3) 163,686 $ 677,698
Mr. Schaefer............................ 209,000 (4) 209,000 --
Mr. S.A. Spencer........................ 125,000 100,000 175,000
<FN>
- ---------
(1) Includes 250,000 shares held in two 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.
(4) Consists of shares held in trusts for Mr. Schaefer's wife.
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, Schaefer, and Spencer will also resign from their positions with the
Company and its subsidiaries. Energy and Messrs. Plaster, S. Plaster, and
Schaefer 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, S.
Plaster, and Schaefer 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, 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.
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
48
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 $8.7 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 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,
49
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.
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 $13.25 million during 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, 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.
50
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 , 1994, among the Company 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 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 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 (the "Global Note") and will be deposited with, or on behalf of, The
Depositary Trust Company (the "Depositary") and registered in the name of a
nominee of the Depositary. Except as set forth in "-- Form, Denomination and
Registration" below, 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 "-- 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.
TERMS OF THE SENIOR SECURED NOTES
The Senior Secured Notes will be senior obligations of the Company. The
Senior Secured Notes will mature on , 2004. Prior to , 1999,
interest will accrue on the Senior Secured Notes from , 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 % per annum of
the principal amount at maturity of the Senior Secured Notes (to Holders of
record at the close of business on the or immediately preceding
the Interest Payment Date) on and of each year, commencing
, 1994. In addition, prior to , 1999, original issue discount will
accrete on the Senior Secured Notes such that the yield to maturity will be %
per annum, compounded on the basis of semiannual compounding. From and after
, 1999, interest on the Senior Secured Notes will accrue
51
and be payable in cash semiannually at the rate of % per annum of the
principal amount at maturity of the Senior Secured Notes (to Holders of record
at the close of business on the or immediately preceding the
Interest Payment Date) on and of each year, commencing ,
1999.
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 , 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 :
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
1999........................................................................ %
2000........................................................................ %
2001 and thereafter......................................................... %
The Company may redeem up to $ million principal amount at maturity 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 % if redeemed at any
time prior to , 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.
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. 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. 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
52
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 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.
53
"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:
ACCRETED
ACCRUAL DATE VALUE
- ---------------------- -------------
, 1994.... --
, 1994.... --
, 1995.... --
, 1995.... --
, 1996.... --
, 1996.... --
, 1997.... --
, 1997.... --
, 1998.... --
, 1998.... --
, 1999.... 1,000.00;
(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 (or, if the immediately
following accrual date is , 1999, ); and
(iii) if the specified date occurs after , 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.
"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 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
54
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 April ,
1994, among the Company, Energy, Mr. Lindsey, Mr. Robert Plaster, and the other
parties named therein; (ii) the Services Agreement, dated April , 1994,
between the Company and Empire Service Corporation; (iii) the Lease Agreement,
dated April , 1994, between the Company and Evergreen National Corporation;
(iv) and the Non-Competition Agreement, dated April , 1994, among the Company,
Energy, Paul Lindsey, Robert Plaster, Stephen Plaster and Joseph Schaefer.
"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 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
55
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) all or substantially all 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 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
56
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, 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.
57
"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 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, or other payments or contributions to any
employee benefit, severance, retirement, stock ownership or stock
58
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 , 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 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."
59
"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.
"INTEREST PAYMENT DATE" means the stated maturity of an installment of
interest on the Senior Secured Notes.
"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
60
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.
"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, (i) 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 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 , 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.
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"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, (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.
"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
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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.
"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), 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.
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"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.
"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 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.
"U.S. SUBSIDIARY" means a Subsidiary organized under the laws of any
jurisdiction in the United States of America.
"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:
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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, call 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 (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 "-- 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 "-- 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
65
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 accordance with the provisions described under "--
Covenants -- Sales of Assets"; (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 , 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 $12,000,000, PROVIDED that not
more than an aggregate of $5,000,000 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; 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
66
Indebtedness by the Company or by a Wholly Owned Subsidiary, as the case may be;
(iv) Indebtedness (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,
and PROVIDED FURTHER, that such Incurrence shall not exceed $15,000,000 at any
time prior to , 1997; (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
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); (b) any
encumbrance or restriction with respect to a Subsidiary pursuant to an agreement
relating to any Acquired Indebtedness; 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,
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
67
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 10%
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 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 such 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; (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
68
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 securing
Indebtedness permitted to be Incurred under the provision described in clause
(iv) of the penultimate 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 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;
(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.
69
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 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 80% 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 secured Senior
Indebtedness or Indebtedness (other than any Preferred Stock) of a Restricted
Subsidiary (in each case other than Indebtedness owed to 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 clause (i) and (ii), to make
an offer to purchase the Senior Secured
70
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. To the extent that any Net
Available Cash of 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.
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."
71
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.
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 all or substantially all 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:
(A) (B) (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;
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.
72
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
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 respective Indenture or in the Senior Secured
Notes, for 30 days after written notice to the Company by the Trustee 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; and (vii) except as permitted by the Indenture, the Trustee
fails to have a first priority perfected security interest in the Collateral.
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
73
accrued and unpaid interest to be due and payable immediately. If an Event of
Default described in 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 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 or (vii) directly or
indirectly release the Liens on all or substantially all of the collateral
securing the Senior Secured Notes..
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 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.
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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), (e) and
(f) 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), (e) and (f) 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.
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
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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 -- MSN238,
Hartford, Connecticut 06115, Attention: Corporate Trust Department.
GOVERNING LAW
Under the terms of the Indenture the laws of the State of New York govern
the Indenture and the Senior Secured Notes.
FORM, DENOMINATION AND REGISTRATION
The Senior Secured Notes will be issued in the form of a fully registered
Global Note which will be deposited with, or on behalf of, 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 Note. The
Global Note will be issued as a fully-registered security 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
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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 under the Depositary system must be made
by or through Direct Participants, which will receive a credit for the Senior
Secured Notes on the Depositary's records. The ownership interest of each actual
purchaser of each Senior Secured Note (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 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, except in the event that use of the book-entry system for the Senior
Secured Notes is discontinued.
To facilitate subsequent transfers, all Senior Secured Notes 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 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. The Depositary's records reflect only the
identity of the Direct Participants to whose accounts such Senior Secured Notes
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 payable 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 payable 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 Note, the Depositary or its nominee, as the case may be, will be
considered the sole owner or Holder of the Senior Secured Notes represented by
the Global Note for all purposes under the Indenture governing such Senior
Secured Notes. Except as set forth below, owners of beneficial interests in such
Global Note will not be entitled to have Senior Secured Notes represented by
such Global Note 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
77
owners or Holders thereof under the Indenture. Accordingly, each person owning a
beneficial interest in a Global Note 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 such Senior Secured Note.
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, 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 entitled
to give or take under the Indenture, 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 exercise any rights
available to Cede & Co., as the holder of record of the Senior Secured Notes,
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 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 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 a Global
Note.
Principal, premium, if any, and interest payments on Senior Secured Notes
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 Note representing such Senior Secured Notes. 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 Note 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 or if an Event of Default under the
Indenture has occurred and is continuing, the Company will issue Senior Secured
Notes in definitive registered form, without coupons, in denominations of $1,000
of principal amount at maturity and any integral multiple thereof, in exchange
for the Global Note representing such Senior Secured Notes. In addition, the
Company may at any time and in its sole discretion determine not to have any
Senior Secured Notes in registered form represented by the Global Note and, in
such event, will issue Senior Secured Notes in definitive registered form in
exchange for the Global Note representing such Senior Secured Notes. In any such
instance, an owner of a beneficial interest in a Global Note will be entitled to
physical delivery in definitive form of Senior Secured Notes represented by such
Global Note equal in principal amount to such beneficial interest and to have
such Senior Secured Notes 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.
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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 by holders who acquire the Senior Secured Notes on original issue
for cash. The following summary does not discuss all of the aspects of Federal
income taxation that may be relevant to a prospective holder of the Senior
Secured Notes 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 Senior Secured Notes. The Company will treat the Senior Secured
Notes as indebtedness for federal income tax purposes, and the balance of the
discussion is based on the assumption that such treatment will be respected. 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 which are different from those discussed
herein.
PROSPECTIVE PURCHASERS OF SENIOR SECURED NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF ACQUIRING,
OWNING AND DISPOSING OF THE SENIOR SECURED NOTES, AS WELL AS THE APPLICATION OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO NOTEHOLDERS
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 Notes over its "issue price." The "issue price" of a Senior
Secured Note will equal the first price at which a substantial amount of the
Senior Secured Notes 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). 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 % per annum. To the extent that the stated interest of % that
accrues beginning , 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
79
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 Notes plus the aggregate amount of original issue discount that accrued
in all prior accrual periods, and less any payments (other than payments of
qualified stated interest) on the Senior Secured Notes. 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 Notes.
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 Notes that end on and of each year.
TAXATION OF QUALIFIED STATED INTEREST ON THE SENIOR SECURED NOTES
Qualified stated interest paid on a Senior Secured Note will generally 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 Sales of Assets, the
Company may be required to make an offer ("Sale of Assets 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 a
Sale of Assets 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 1999. The Company may also redeem a limited portion of
the Senior Secured Notes (up to $ million) prior to 19 , 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
In general, the holder of a Senior Secured Note will recognize gain or loss
upon the sale or other taxable disposition of such Senior Secured Note measured
by 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.
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A holder's initial tax basis in a Senior Secured Notes purchased by such
holder will be equal to the price paid by such holder for the Senior Secured
Note. 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.
Any gain or loss on the sale or other taxable disposition of a Senior
Secured Note will be capital gain or loss, assuming purchasers of the Senior
Secured Notes will hold such securities as "capital assets" (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.
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." For example, the market discount provisions of the Code may require a
subsequent purchaser of a Senior Secured Note at a market discount to treat all
or a portion of any gain recognized upon sale or other disposition of the Senior
Secured Note as ordinary income and to defer a portion of any interest expense
that would otherwise be deductible on any indebtedness incurred or maintained to
purchase or carry such Senior Secured Note until the holder disposes of the
Senior Secured Note in a taxable transaction.
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 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
The Senior Secured Notes will constitute "applicable high yield discount
obligations" ("AHYDOs") if (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
1994 is %. If 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. In addition, if the yield to maturity of the Senior Secured Notes
exceeds the sum of the relevant AFR plus six percentage points (the "Excess
Yield"), the "disqualified portion" of the original issue discount accruing on
the Senior Secured Notes will be characterized as a non-deductible dividend with
respect to the Company and also may be treated as a dividend distribution solely
for purposes of the dividends received deduction of Sections 243, 246 and 246A
of the Code with respect to holders which are corporations. In general, the
"disqualified portion" of original issue discount for any accrual period will be
equal to the product of (i) a percentage determined by dividing
81
the Excess Yield by the yield to maturity, and (ii) the original issue discount
for the accrual period. Assuming a corporate holder satisfies the requirements
of Sections 243, 246 and 246A of the Code (which include a holding period
requirement and a debt financing limitation), such a holder will be entitled to
a dividends received deduction (generally at a 70% rate) with respect to the
disqualified portion of the accrued original issue discount if the Company has
sufficient current or accumulated "earnings and profits". To the extent that the
Company's earnings and profits are insufficient, any portion of the original
issue discount that otherwise would have been recharacterized as a dividend for
purposes of the dividends received deduction will continue to be taxed as
ordinary original issue discount income in accordance with the rules described
above in "Certain Federal Income Tax Considerations -- Amount of Original Issue
Discount in the Senior Secured Notes -- Taxation of Original Issue Discount on
the Senior Secured Notes."
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 ("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; (ii) up to 60% of eligible inventory; (iii) for the months
of August through January, an additional seasonal overadvance of $3.0 million,
but with inventory advances plus the seasonal overadvance not to exceed 80% of
eligible inventory. All current assets of the Company 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) 2.75% 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) liabilities to net
worth, and (iv) maximum capital expenditures.
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.
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 $13.7 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
82
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 $13.7 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 Holdings has agreed to sell to the Underwriter,
$120,700,000 estimated aggregate principal amount at maturity ($100 million
initial accreted value) of the Senior Secured Notes.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the Senior Secured Notes 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 Senior
Secured Notes 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 Senior Secured Notes 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 % of the initial accreted value of the Senior Secured Notes. The
Underwriter may allow, and such dealers may reallow, a concession not in excess
of % of the initial accreted value of the Senior Secured Notes to certain
other dealers.
The Company does not intend to apply for listing of the Senior Secured Notes
on a national securities exchange, but has been advised by the Underwriter that
it presently intends to make a market in the Senior Secured Notes, as permitted
by applicable laws and regulations. The Underwriter is not obligated, however,
to make a market in the Senior Secured Notes 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
Senior Secured Notes. See "Risk Factors -- Absence of Public Market."
83
LEGAL MATTERS
The validity of the issuance of the Senior Secured Notes 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 has 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
Senior Secured Notes 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 Senior Secured Notes 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.
84
INDEX TO FINANCIAL STATEMENTS
HISTORICAL:
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets as of June 30, 1992 and 1993 and
as of December 31, 1993 (unaudited).................................................. F-3
Consolidated Statements of Operations for the Years Ended
June 30, 1991, 1992, and 1993 and for the Six Months Ended
December 31, 1992 and 1993 (unaudited)............................................... F-4
Consolidated Statements of Stockholders' Equity for the Years
June 30, 1991, 1992, and 1993 for the Six Months
Ended December 31, 1993 (unaudited).................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1991, 1992, and 1993 and for the
Six Months Ended December 31, 1992 and 1993 (unaudited).............................. F-6
Notes to Consolidated Financial Statements............................................ F-8
PRO FORMA:
Unaudited Pro Forma Income Statements of PSNC Propane
Corporation (PSNC) for the Year Ended June 30,
1993, Six Months Ended December 31, 1993, and
Twelve Months Ended December 31, 1993................................................ P-1
Unaudited Pro Forma Balance Sheet of PSNC Propane
Corporation (PSNC) as of December 31, 1993........................................... P-7
F-1
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. These 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 at 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.
Springfield, Missouri
July 30, 1993
F-2
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
JUNE 30,
--------------------
1992 1993
--------- --------- DECEMBER 31,
------------
1993
------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash............................................................. $ 216 $ 362 $ 1,667
Trade receivables, less allowance for doubtful accounts; June 30,
1992 - $2,720, June 30, 1993 - $2,657, December 31, 1993 -
$3,169 (NOTE 3)................................................. 6,508 8,199 16,985
Inventories (NOTE 3)............................................. 7,913 9,691 9,744
Prepaid expenses................................................. 629 305 299
Deferred income taxes (NOTE 4)................................... -- -- 593
--------- --------- ------------
Total Current Assets........................................... 15,266 18,557 29,288
--------- --------- ------------
PROPERTY AND EQUIPMENT, At Cost (NOTE 3)
Land and buildings............................................... 11,821 12,215 12,453
Storage and consumer service facilities.......................... 113,450 113,821 114,476
Transportation, office and other equipment....................... 24,245 25,550 27,101
--------- --------- ------------
149,516 151,586 154,030
Less accumulated depreciation.................................... 34,055 41,906 45,397
--------- --------- ------------
115,461 109,680 108,633
--------- --------- ------------
OTHER ASSETS
Debt acquisition costs, net of amortization...................... -- 475 473
Excess of cost over fair value of net assets acquired, at
amortized cost.................................................. 20,212 18,834 18,193
Other............................................................ 532 474 439
--------- --------- ------------
20,744 19,783 19,105
--------- --------- ------------
$ 151,471 $ 148,020 $ 157,026
--------- --------- ------------
--------- --------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (NOTE 3).................... $ 16,590 $ 5,181 $ 6,242
Accounts payable................................................. 5,341 4,485 6,140
Accrued salaries................................................. 1,574 1,573 2,050
Accrued expenses................................................. 2,612 2,193 4,220
Income taxes payable (NOTE 9).................................... 3,094 165 2,333
--------- --------- ------------
Total Current Liabilities.................................... 29,211 13,597 20,985
--------- --------- ------------
LONG-TERM DEBT (NOTE 3)............................................ 59,372 74,068 75,613
--------- --------- ------------
DUE TO RELATED PARTY (NOTES 2 AND 3)............................... 2,996 -- --
--------- --------- ------------
DEFERRED INCOME TAXES (NOTE 4)..................................... 33,428 32,568 31,865
--------- --------- ------------
ACCRUED SELF INSURANCE LIABILITY (NOTE 8).......................... 1,563 1,874 1,832
--------- --------- ------------
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 December 31, 1993 - 13,832,270 shares................ 14 14 14
Additional paid-in capital..................................... 27,133 27,088 27,088
Retained earnings (deficit).................................... (2,118) 110 928
--------- --------- ------------
25,029 27,212 28,030
Treasury stock, at cost June 30, 1992 - 39,367 shares, June 30,
1993 and December 31, 1993 - 329,500 shares................... (128) (1,299) (1,299)
--------- --------- ------------
24,901 25,913 26,731
--------- --------- ------------
$ 151,471 $ 148,020 $ 157,026
--------- --------- ------------
--------- --------- ------------
See Notes to Consolidated Financial Statements
F-3
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------- ----------------------
1991 1992 1993 1992 1993
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
OPERATING REVENUE.................................... $ 121,758 $ 112,080 $ 128,401 $ 62,344 $ 63,986
COST OF PRODUCT SOLD................................. 59,971 50,973 60,202 29,111 30,653
---------- ---------- ---------- ---------- ----------
GROSS PROFIT......................................... 61,787 61,107 68,199 33,233 33,333
---------- ---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts.................... 2,828 214 958 517 603
General and administrative......................... 41,594 39,463 40,437 19,650 20,173
Rent expense to related party (NOTE 2)............. 350 375 450 225 225
Depreciation and amortization...................... 9,552 10,062 10,351 5,109 4,940
---------- ---------- ---------- ---------- ----------
54,324 50,114 52,196 25,501 25,941
---------- ---------- ---------- ---------- ----------
OPERATING INCOME..................................... 7,463 10,993 16,003 7,732 7,392
---------- ---------- ---------- ---------- ----------
OTHER EXPENSE
Interest expense................................... (11,455) (10,406) (8,877) (4,878) (4,364)
Interest expense to related party
(NOTES 2 AND 3).................................. (583) (315) (949) (283) --
Amortization of debt discount and expense.......... (890) (1,006) (1,686) (595) (992)
Crested Butte litigation (NOTE 8).................. (702) -- -- -- --
Merger proposal costs (NOTE 5)..................... -- (450) -- -- --
Restructuring proposal costs (NOTE 6).............. -- -- (223) -- (398)
---------- ---------- ---------- ---------- ----------
(13,630) (12,177) (11,735) (5,756) (5,754)
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................... (6,167) (1,184) 4,268 1,976 1,638
PROVISION (CREDIT) FOR INCOME TAXES (NOTE 4)......... (1,610) 290 2,040 920 820
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS).................................... $ (4,557) $ (1,474) $ 2,228 $ 1,056 $ 818
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) PER COMMON SHARE (NOTE 1).............. $ (.33) $ (.11) $ .16 $ .07 $ .06
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See Notes to Consolidated Financial Statements
F-4
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL RETAINED TOTAL
PAID-IN EARNINGS TREASURY STOCKHOLDERS'
COMMON STOCK CAPITAL (DEFICIT) STOCK EQUITY
------------- ----------- ----------- --------- ------------
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)................................. -- -- 818 -- 818
--- ----------- ----------- --------- ------------
BALANCE, DECEMBER 31, 1993 (UNAUDITED)................. $ 14 $ 27,088 $ 928 $ (1,299) $ 26,731
--- ----------- ----------- --------- ------------
--- ----------- ----------- --------- ------------
See Notes to Consolidated Financial Statements
F-5
EMPIRE GAS CORPORATION
(FORMERLY EMPIRE GAS ACQUISITION CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
--------------------------------- --------------------
1991 1992 1993 1992 1993
--------- --------- ----------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................... $ (4,557) $ (1,474) $ 2,228 $ 1,056 $ 818
Items not requiring (providing) cash:
Depreciation....................................... 8,263 8,789 9,004 4,480 4,335
Amortization....................................... 2,179 2,279 3,033 1,224 1,597
(Gain) loss on sale of assets...................... 252 (758) 155 (99) (4)
Deferred income taxes.............................. (2,210) (810) (860) (880) (1,296)
Changes in:
Bank overdraft..................................... (872) -- -- -- --
Trade receivables.................................. 1,360 32 (1,691) (8,461) (8,786)
Inventories........................................ (1,074) (300) (1,886) (2,998) (53)
Accounts payable................................... 1,418 246 (856) 3,173 1,655
Accrued expenses and self insurance................ (560) 1,772 (3,158) 161 4,630
Prepaid expenses and other......................... 348 224 272 (1,281) (44)
--------- --------- ----------- --------- ---------
Net cash provided by (used in) operating
activities...................................... 4,547 10,000 6,241 (3,625) 2,852
--------- --------- ----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets......................... 497 3,062 1,088 374 129
Purchases of property and equipment.................. (8,629) (6,601) (4,358) (2,414) (3,424)
--------- --------- ----------- --------- ---------
Net cash used in investing activities............ (8,132) (3,539) (3,270) (2,040) (3,295)
--------- --------- ----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in working capital financing..... 3,500 3,400 (1,875) 7,100 4,500
Increase (decrease) in notes payable to related
party............................................... 382 (2,756) (2,996) 4 --
Principal payments on acquisition credit facility.... -- (6,750) (13,250) -- --
Principal payments on other long-term debt........... (195) (191) (182) (97) (130)
Debenture sinking fund payments...................... -- -- (528) (537) (1,322)
Purchase of debentures from employee benefit plan.... -- -- (778) -- --
Proceeds from issuance of term credit facility....... -- -- 18,000 -- --
Principal payments on term credit facility........... -- -- -- -- (1,300)
Stock options exercised.............................. 13 15 173 161 --
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) $ 6,541 $ 1,748
--------- --------- ----------- --------- ---------
INCREASE IN CASH....................................... $ 115 $ 101 $ 146 $ 876 $ 1,305
CASH, BEGINNING OF PERIOD.............................. -- 115 216 216 362
--------- --------- ----------- --------- ---------
CASH, END OF PERIOD.................................... $ 115 $ 216 $ 362 $ 1,092 $ 1,667
--------- --------- ----------- --------- ---------
--------- --------- ----------- --------- ---------
See Notes to Consolidated Financial Statements
F-6
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 Six Months Ended December 31, 1992 and 1993 (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 six-month period ended December 31, 1993,
are not necessarily indicative of the results to be expected for the full year
due to the seasonal nature of the Company's business.
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:
1992 1993
--------- ---------
(IN THOUSANDS)
Gas and other petroleum products................ $ 3,199 $ 4,279
Gas distribution parts, appliances and
equipment...................................... 4,714 5,412
--------- ---------
$ 7,913 $ 9,691
--------- ---------
--------- ---------
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.
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.
F-7
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 SIX MONTHS ENDED DECEMBER 31, 1992 AND 1993 (UNAUDITED)
NOTE 1 : ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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
$25,000,000) is being amortized on the straight-line basis over 20 years.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income, after
deduction for annual preferred dividend requirements, 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.
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.
F-8
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 SIX MONTHS ENDED DECEMBER 31, 1992 AND 1993 (UNAUDITED)
NOTE 2 : RELATED PARTY TRANSACTIONS (CONTINUED)
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:
JUNE 30,
-------------------- DECEMBER 31,
1992 1993 1993
--------- --------- ------------
(UNAUDITED)
Acquisition credit facility (A)......................... $ 13,250 $ -- $ --
Working capital facility (B)............................ 8,700 -- --
Term credit facility (C)................................ -- 18,000 16,700
Revolving credit facility (C)........................... -- 7,300 11,800
9% Convertible Subordinated Debentures,
due 1998 (D)........................................... 17,539 17,767 16,932
9% Subordinated Debentures, due 2007 (E)................ 16,040 15,691 15,916
12% Senior Subordinated Debentures,
due 2002 (F)........................................... 19,121 19,361 19,507
Purchase contract obligations (G)....................... 1,312 1,130 1,000
--------- --------- ------------
75,962 79,249 81,855
Less current maturities................................. 16,590 5,181 6,242
--------- --------- ------------
$ 59,372 $ 74,068 $ 75,613
--------- --------- ------------
--------- --------- ------------
<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 bore 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.
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
F-9
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 SIX MONTHS ENDED DECEMBER 31, 1992 AND 1993 (UNAUDITED)
NOTE 3 : LONG-TERM DEBT (CONTINUED)
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 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 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
beginning December 31, 1993.
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. 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.
F-10
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 SIX MONTHS ENDED DECEMBER 31, 1992 AND 1993 (UNAUDITED)
NOTE 3 : LONG-TERM DEBT (CONTINUED)
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. Aggregate annual maturities and sinking fund
requirements (in thousands) of the long-term debt outstanding at June 30,
1993, are:
1994... $ 5,181
1995............................................................ 6,027
1996............................................................ 6,025
1997............................................................ 5,973
1998............................................................ 18,469
Thereafter...................................................... 37,574
---------
$ 79,249
---------
---------
NOTE 4 : INCOME TAXES
Components of income tax expense (benefit) are as follows:
CURRENT DEFERRED
----------- ---------
(IN THOUSANDS)
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)
----------- ---------
----------- ---------
F-11
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 SIX MONTHS ENDED DECEMBER 31, 1992 AND 1993 (UNAUDITED)
NOTE 4 : INCOME TAXES (CONTINUED)
Principal items making up the deferred income tax provisions are as follows:
1991 1992 1993
--------- --------- ---------
(IN THOUSANDS)
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)
--------- --------- ---------
--------- --------- ---------
Reconciliation of the statutory federal income tax rate to the effective tax
rate as a percent of pretax financial income is as follows:
1991 1992 1993
----------- ----------- -----------
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 cost over fair value of net assets acquired... 6.3 32.5 9.0
Unamortized excess 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%
----------- ----------- ---
----------- ----------- ---
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.
F-12
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 SIX MONTHS ENDED DECEMBER 31, 1992 AND 1993 (UNAUDITED)
NOTE 4 : INCOME TAXES (CONTINUED)
Deferred tax balances at July 1, 1993, consisted of:
(IN THOUSANDS)
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)
-----------
-----------
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.
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
F-13
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 SIX MONTHS ENDED DECEMBER 31, 1992 AND 1993 (UNAUDITED)
NOTE 8 : SELF INSURANCE AND RELATED CONTINGENCIES (CONTINUED)
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:
BEGINNING SELF
SELF SELF INSURED ENDING SELF
INSURANCE INSURANCE CLAIMS INSURANCE
LIABILITY EXPENSES PAID LIABILITY
----------- ----------- --------- -----------
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
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 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 retain $500,000 of
expected losses related to workers' compensation. Provisions for losses expected
under this program will be recorded
F-14
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 SIX MONTHS ENDED DECEMBER 31, 1992 AND 1993 (UNAUDITED)
NOTE 8 : SELF INSURANCE AND RELATED CONTINGENCIES (CONTINUED)
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 declined in the year ended June 30, 1993, as a result of employees
paying a larger percentage of their insurance premiums.
NOTE 9 : LITIGATION CONTINGENCIES
The Company's federal income tax returns for the fiscal years 1979 and 1980
were audited by the IRS. During August 1992, the Company paid $2.4 million which
represented interest on previously paid income taxes. This payment settled 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.
NOTE 10 : STOCK OPTIONS
The table below summarizes transactions under the Company's stock option
plan:
NUMBER OF
SHARES OPTION PRICE
----------- ----------------
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
-----------
-----------
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 $120 million of new
F-15
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 SIX MONTHS ENDED DECEMBER 31, 1992 AND 1993 (UNAUDITED)
NOTE 11 : SUBSEQUENT EVENT (CONTINUED)
debentures (with expected proceeds before expenses of approximately $100
million) which will be used to retire approximately $73 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)
JUNE 30, DECEMBER 31,
------------------------------- --------------------
1991 1992 1993 1992 1993
--------- --------- --------- --------- ---------
(UNAUDITED)
NONCASH INVESTING AND FINANCING ACTIVITIES
Mortgage obligations incurred on property and
equipment purchases.................................. $ 184 $ 102 -- -- --
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 $ 7,592 $ 4,182
Income taxes paid (net of refunds).................... $ 1,328 $ (441) $ 3,434 $ 437 $ (52)
F-16
UNAUDITED PRO FORMA INCOME STATEMENTS OF PSNC PROPANE CORPORATION (PSNC)
FOR THE YEAR ENDED JUNE 30, 1993, SIX MONTHS ENDED
DECEMBER 31, 1993, AND TWELVE MONTHS ENDED DECEMBER 31, 1993
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.
P-1
PSNC PROPANE CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED JUNE 30, 1993
-------------------------------------
PURCHASE
PSNC ACCOUNTING
PROPANE ADJUSTMENTS PRO FORMA
CORPORATION ------------- ---------
-----------
(UNAUDITED)
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 (962)(3) (901)
Amortization of debt discount and expense................................ -- (401)(4) (401)
----------- ------------- ---------
61 (1,363) (1,302)
----------- ------------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.......................................... 162 (227) (65)
PROVISION (CREDIT) FOR INCOME TAXES........................................ 63 (88)(5) (25)
----------- ------------- ---------
NET INCOME (LOSS).......................................................... $ 99 $ (139) $ (40)
----------- ------------- ---------
----------- ------------- ---------
P-2
PSNC PROPANE CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS)
SIX MONTHS ENDED DECEMBER 31, 1993
--------------------------------------
PURCHASE
PSNC ACCOUNTING
PROPANE ADJUSTMENTS PRO FORMA
CORPORATION -------------- ---------
-----------
(UNAUDITED)
OPERATING REVENUE............................................................ $ 4,388 $ $ 4,388
COST OF PRODUCT SOLD......................................................... 2,076 2,076
----------- ---------
GROSS PROFIT................................................................. 2,312 2,312
----------- ---------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts............................................ 20 20
General and administrative................................................. 1,695 (562)(1) 1,133
Depreciation and amortization.............................................. 464 53(2) 517
----------- ----- ---------
2,179 (509) 1,670
----------- ----- ---------
OPERATING INCOME............................................................. 133 (509) 642
----------- ----- ---------
OTHER INCOME (EXPENSE)
Interest income (expense).................................................. 16 (462)(3) (446)
Amortization of debt discount and expense.................................. -- (216)(4) (216)
----------- ----- ---------
16 (678) (662)
----------- ----- ---------
INCOME (LOSS) BEFORE INCOME TAXES............................................ 149 (169) (20)
PROVISION (CREDIT) FOR INCOME TAXES.......................................... 41 (66)(5) (25)
----------- ----- ---------
NET INCOME (LOSS)............................................................ $ 108 $ (103) $ (5)
----------- ----- ---------
----------- ----- ---------
P-3
PSNC PROPANE CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS)
TWELVE MONTHS ENDED
DECEMBER 31, 1993
-------------------------------------
PURCHASE
ACCOUNTING
PSNC ADJUSTMENTS PRO FORMA
PROPANE ------------- ---------
CORPORATION
-----------
(UNAUDITED)
OPERATING REVENUE.......................................................... $ 9,984 $ $ 9,984
COST OF PRODUCT SOLD....................................................... 4,618 4,618
----------- ---------
GROSS PROFIT............................................................... 5,366 5,366
----------- ---------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts.......................................... 12 12
General and administrative............................................... 3,705 (1,164)(1) 2,541
Depreciation and amortization............................................ 942 95(2) 1,037
----------- ------------- ---------
4,659 (1,069) 3,590
----------- ------------- ---------
OPERATING INCOME........................................................... 707 (1,069) 1,776
----------- ------------- ---------
OTHER INCOME (EXPENSE)
Interest income (expense)................................................ 42 (916)(3) (874)
Amortization of debt discount and expense................................ -- (422)(4) (422)
----------- ------------- ---------
42 (1,338) (1,296)
----------- ------------- ---------
INCOME BEFORE INCOME TAXES................................................. 749 (269) 480
PROVISION FOR INCOME TAXES................................................. 252 (105)(5) 147
----------- ------------- ---------
NET INCOME................................................................. $ 497 $ (164) $ 333
----------- ------------- ---------
----------- ------------- ---------
P-4
PSNC PROPANE CORPORATION
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1993,
THE SIX MONTHS ENDED DECEMBER 31, 1993 AND
THE TWELVE MONTHS ENDED DECEMBER 31, 1993
(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.
SIX MONTHS TWELVE MONTHS
YEAR ENDED ENDED DECEMBER ENDED DECEMBER
JUNE 30, 1993 31, 1993 31, 1993
------------- ----------------- -----------------
Executive and administrative salaries............. $ 695,000 $ 347,000 $ 695,000
Auto and travel expenses.......................... 29,000 12,000 27,000
Advertising expenses.............................. 18,000 5,000 12,000
Telephone expenses................................ 56,000 26,000 53,000
Temporary personnel and overtime wages............ 241,000 101,000 217,000
Payroll taxes..................................... 67,000 32,000 65,000
Other expenses.................................... 113,000 39,000 95,000
------------- -------- -----------------
Total General and Administrative Expense
Reduction...................................... $ 1,219,000 $ 562,000 $ 1,164,000
------------- -------- -----------------
------------- -------- -----------------
(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.
SIX MONTHS TWELVE MONTHS
YEAR ENDED ENDED DECEMBER ENDED
JUNE 30, 1993 31, 1993 DECEMBER 31, 1993
------------- ----------------- -----------------
Depreciation...................................... $ 180,000 $ 90,000 $ 180,000
New non-compete amortization...................... 100,000 50,000 100,000
Old non-compete amortization...................... (197,000) (87,000) (185,000)
------------- -------- -----------------
$ 83,000 $ 53,000 $ 95,000
------------- -------- -----------------
------------- -------- -----------------
(3) To (a) record additional interest expense assuming interest paid at 6% on
face value $14,487,000 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.
SIX MONTHS TWELVE MONTHS
YEAR ENDED ENDED DECEMBER ENDED DECEMBER
JUNE 30, 1993 31, 1993 31, 1993
------------- ----------------- -----------------
Senior Notes, due 2004............................ $ 870,000 $ 435,000 $ 870,000
Revolving Credit Facility......................... 31,000 11,000 2,000
Interest Income eliminated........................ 61,000 16,000 44,000
------------- -------- --------
$ 962,000 $ 462,000 $ 916,000
------------- -------- --------
------------- -------- --------
P-5
PSNC PROPANE CORPORATION
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1993,
THE SIX MONTHS ENDED DECEMBER 31, 1993 AND
THE TWELVE MONTHS ENDED DECEMBER 31, 1993
(4) To recognize amortization of the original discount on face value $14,487,000
of new Senior Secured Notes to bring the effective rate of the new debt to
10.5% using the effective interest method.
Year Ended June 30,1993........................................... $ 401,000
Six Months Ended December 31, 1993................................ $ 216,000
Twelve Months Ended December 31, 1993............................. $ 422,000
(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
UNAUDITED PRO FORMA BALANCE SHEET OF PSNC PROPANE CORPORATION (PSNC)
AS OF DECEMBER 31, 1993
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 December
31, 1993.
PSNC PROPANE CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31, 1993
-----------------------------------------
EFFECTS OF
PSNC PSNC PSNC
PROPANE ADJUSTMENTS ACQUISITION
CORPORATION --------------- -----------
-----------
(UNAUDITED)
CURRENT ASSETS
Cash................................................................. $ 527 $ (527)(1) $ 0
Trade receivables.................................................... 892 892
Inventories.......................................................... 1,173 1,173
Prepaid expenses..................................................... 139 (139)(1) 0
----------- ------- -----------
Total current assets............................................... 2,731 (666) 2,065
----------- ------- -----------
PROPERTY AND EQUIPMENT,
At Cost, net of accumulated depreciation............................. 8,969 3,031(2) 12,000
----------- ------- -----------
OTHER ASSETS
Other................................................................ 345 155(3) 500
----------- ------- -----------
345 155 500
----------- ------- -----------
TOTAL ASSETS......................................................... $ 12,045 $ 2,520 $ 14,565
----------- ------- -----------
----------- ------- -----------
CURRENT LIABILITIES
Current maturities of long-term debt................................. $ 100(4) $ 100
Accounts payable and accrued expenses................................ $ 788 (788)(1) 0
----------- ------- -----------
Total current liabilities.......................................... 788 (688) 100
----------- ------- -----------
LONG-TERM DEBT......................................................... 8,363 6,102(4) 14,465
----------- ------- -----------
DEFERRED INCOME TAXES.................................................. 1,724 (1,724)(5) 0
----------- ------- -----------
STOCKHOLDER'S EQUITY
Common stock......................................................... 1 (1)(5) 0
Retained earnings.................................................... 1,169 (1,169)(5) 0
----------- ------- -----------
1,170 (1,170) 0
----------- ------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $ 12,045 $ 2,520 $ 14,565
----------- ------- -----------
----------- ------- -----------
<FN>
- ---------
(1) To eliminate working capital assets and liabilities not acquired under the
acquisition agreement.
(2) To increase the property and equipment to purchase price which does not
exceed 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 a payable of $8,363,000 to PSNC's parent not assumed
under the acquisition agreement, (b) record the net proceeds ($12,000,000)
of Senior Secured Notes issued to acquire the fixed assets, (c) record a
revolver advance of $2,065,000 to purchase the accounts receivable and
inventory under the acquisition 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.
P-7
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with the Offering described in this Registration Statement. All of
such amounts (except the Commission Registration Fee and the NASD Filing Fee)
are estimates.
Commission Registration Fee................................................ $ 34,483
NASD Filing Fee............................................................ 10,500
Blue Sky Fees and Expenses (excluding legal fees).......................... *
Printing and Engraving Costs............................................... *
Legal Fees and Expenses.................................................... *
Accounting Fees and Expenses............................................... *
Trustee's Fees and Expenses................................................ *
Miscellaneous.............................................................. *
---------
Total...................................................................... $ *
---------
---------
<FN>
- ---------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Article 9 of the Company's Articles of Incorporation, included as Exhibit
3.1 to this Registration Statement to this Registration Statement, provide for
the indemnification of the directors, officers and employees of the Company. The
effect of these provisions is to indemnify the directors, officers and employees
for all expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by them in connection with any
threatened, pending or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, in which they are involved by reason
of their affiliation with the Company if they acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
Company and, with respect to any criminal action, with no reasonable cause to
believe their actions unlawful, to the full extent allowed by The General and
Business Corporation Law of Missouri; except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person's conduct
shall have been adjudged to be knowingly fraudulent or deliberately dishonest or
willful misconduct.
Article VII, Section 7, of the Company's By-Laws, included as Exhibit 3.2 to
this Registration Statement, provides that the Company may purchase liability
insurance that indemnifies directors, officers, employees and agents against any
liability and any expense asserted against or incurred by them in their capacity
as such and also may establish a separate fund alone or with other companies to
provide and maintain such insurance. At the present time, the Company has not
purchased any such insurance, or established or contributed to any such fund.
Section 351.355 of The General and Business Corporation Law of Missouri
requires a corporation to indemnify a director, officer, employee, or agent of
the corporation who has been successful on the merits or otherwise in defense of
any action for all expenses, including attorneys' fees, actually and reasonably
incurred in connection with the action. The Section also permits indemnification
for expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred in connection with actions, suits or
proceedings in which a corporate director, officer, employee, or agent, if he is
a party by reason of the fact that he is or was such a director, officer,
employee, or agent, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. Indemnification in connection with actions by
or in the right of the corporation is permitted only for expenses, including
attorneys' fees, and amounts paid in settlement actually and reasonably incurred
by him in connection with the defense or settlement of the action or suit and
only if the officer, director, or
II-1
employee acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and is not adjudged liable
for negligence or misconduct in the performance of his duty to the corporation,
unless the court otherwise provides.
The employment agreement between the Company and Robert W. Plaster provides
that Mr. Plaster, his heirs, executors and administrators shall be indemnified
by the Company against fines, judgments, amounts paid in settlement and
reasonable expenses, including attorneys' fees, incurred by him in connection
with any pending, threatened or completed action, suit or proceeding against him
arising by reason of his being or having been a director or officer of the
Company, any parent company, or any subsidiary, except in relation to any matter
in which his conduct has been finally adjudged to have been knowingly
fraudulent, deliberately dishonest or willful misconduct. The obligation of the
Company to provide indemnification to Mr. Plaster shall continue after
termination of the employment agreement with respect to any matter against Mr.
Plaster arising by reason of his having been a director or officer of the
Company or of any parent or subsidiary of the Company prior to such termination,
or by reason of any action taken by him as such director or officer prior to the
date of such termination.
The Company has entered into agreements with directors and certain of its
officers whereby the Company shall indemnify such persons for all damages,
judgments, settlements and costs, cost of investigation, and cost of defense of
legal actions (other than fines or other obligations which it is prohibited by
applicable law from paying for any reason), because of any claim or claims made
against such persons of any act or omission or neglect or breach of duty
including any actual or alleged error or misstatement committed or suffered
while acting in the capacity and solely because of such capacity as officer and
director.
Reference is made to Section 7 of the form of Underwriting Agreement filed
as Exhibit 1.1 to the Registration Statement for additional indemnification
provisions.
See Item 17 for the Registrants' undertakings with respect to
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities of the Company issued or
sold within the past three years that were not registered under the Securities
Act.
The purchases described below were made upon exercise of options issued
pursuant to the Company's Incentive Stock Option Plan.
On July 16, 1991, Mr. Alan Simer, an employee of the Company, purchased
2,010 shares of the Company's common stock, $.001 par value, at $.377 per share
and 8,000 shares at $1.50 per share for an aggregate purchase price of $12,758.
On August 20, 1991, Mr. Larry Bisig, an employee of the Company, purchased
8,000 shares of the Company's common stock at $1.50 per share and 7,950 shares
at $.377 per share, for an aggregate purchase price of $14,997.
On October 29, 1992, Joseph L. Schaefer, an executive officer of the
Company, purchased 39,750 shares of the Company's common stock at $.377 per
share, 20,250 shares at $1.125 per share, and 20,000 shares at $1.50 per share,
for an aggregate purchase price of $67,767.
On October 30, 1992, Mr. Stephen R. Plaster, a director and executive
officer of the Company, purchased 13,500 shares of the Company's common stock,
$.001 par value, at $1.125 per share and 6,000 shares at $1.50 per share, for an
aggregate purchase price of $24,188.
On November 27, 1992, Mr. Dwight Gilpin, an officer of the Company,
purchased 26,500 shares of the Company's common stock at $.377 per share, 20,000
shares at $1.50 per share, and 3,500 shares at $1.125 per share, for an
aggregate purchase price of $43,929.
On December 10, 1992, Ms. Gwendolyn B. VanDerhoef, an officer of the
Company, purchased 26,500 shares of the Company's common stock at $.377 per
share, 8,000 shares at $1.50 per share, and 5,500 shares at $1.125 per share,
for an aggregate purchase price of $28,178.
II-2
On December 21, 1992, Mr. Robert L. Wooldridge, an executive officer of the
Company, purchased 72,467 shares of the Company's common stock at $.377 per
share, for an aggregate purchase price of $27,320.
On December 31, 1992, Floyd Waterman, an officer of the Company, purchased
5,000 shares of the Company's common stock at $1.125 per share, for an aggregate
purchase price of $5,625, and Earl L. Noe, an executive officer of the Company,
purchased 26,500 shares of the Company's common stock at $.377 per share for an
aggregate purchase price of $9,991.
On February 17, 1993, Mr. Paul Stahlman, an officer of the Company,
purchased 18,712 shares of the Company's common stock at $.377 per share, for an
aggregate purchase price of $7,054.
On April 15, 1993, Mr. Charles Jones, an officer of the Company, purchased
13,250 shares of the Company's common stock at $.377 per share, for an aggregate
purchase price of $4,995.
On June 18, 1993, Mr. James E. Acreman, an executive officer of the Company,
purchased 13,250 shares of the Company's common stock at $.377 per share, for an
aggregate purchase price of $4,995.
These transactions were completed without registration under the Securities
Act in reliance on Section 4(2) of the Act. In relying on this exemption, the
Company relied on representations from these purchasers that each purchaser was
an accredited investor, that each was acquiring the shares for investment
purposes, and that each had received adequate opportunity to obtain information
regarding the Company. The shares issued contained a legend restricting transfer
of the shares absent registration under the Securities Act or the availability
of an exemption therefrom.
II-3
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------
1.1* Form of Underwriting Agreement
3.1* Articles of Incorporation of the Company
3.2* By-laws of the Company
4.1* Form of Indenture between EGOC and IBJ Schroder Bank & Trust Company, Trustee, relating to the 9%
Subordinated Debentures due December 31, 2007, including amendments thereto and the form of 9%
Subordinated Debentures due December 31, 2007.
4.2 Form of Proposed Indenture between the Company and Shawmut Bank Connecticut, National Association,
Trustee, relating to the % Senior Secured Notes due 2004, including the form of % Senior
Secured Notes due 2004.
4.3* Form of Stock Redemption Agreement, dated , 1994, between the Company, EGOC, Energy,
Robert W. Plaster, Paul S. Lindsey, Jr., Stephen R. Plaster, Joseph L. Schaefer, the Robert W.
Plaster Trust dated December 13, 1988, the Dolly Francine Plaster 7/30/84 Trust, the Tammy Jane
Plaster 7/30/84 Trust, the Stephen Robert Plaster 10/30/88 Trust, the Stephen Robert Plaster
7/30/84 Trust, the Cheryl Jean Plaster Schaefer 10/30/88 Trust, the Cheryl Jean Plaster Schaefer
7/30/84 Trust, Empire Ranch, Inc., Empire Airlines, Inc., and Evergreen National Corporation).
5.1* Opinion of Wilmer, Cutler & Pickering as to the validity of the issuance of the Senior Secured
Notes
10.1* 1989 Incentive Stock Option Plan
10.2* Form of Credit Agreement between the Company and Continental Bank, as agent
10.3* Lease Agreement dated , 1994 between the Company and Evergreen National Corporation
10.4* Services Agreement dated , 1994 between the Company and Empire Service Corporation
10.5* Non-Competition Agreement dated , 1994 by and among the Company, Energy, Robert W.
Plaster, Stephen R. Plaster, Joseph L. Schaefer, Paul S. Lindsey, Jr.
10.6* Employment Agreement dated , 1994 between the Company and Paul S. Lindsey, Jr.
10.7* Acquisition Agreement dated , 1994 between the Company, PSNC Propane Corporation, and
Public Service of North Carolina
12.1* Statement regarding computation of ratio of earnings to fixed charges
15.1* Letter regarding unaudited interim financial information
21.1* Subsidiaries of the Company.
23.1 Consent of Baird, Kurtz & Dobson
23.2* Consent of Wilmer, Cutler & Pickering, included in the opinion filed as Exhibit 5.1.
23.3 Consent of Douglas A. Brown to being named as a director
24.1 Power of Attorney, located on signature page
25.1 Statement of Eligibility and Qualification of Trustee on Form T-1
<FN>
- ---------
* To be supplied by amendment.
II-4
(b) Financial Statement Schedules
SCHEDULE DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------
V. Property and Equipment
VI. Accumulated Depreciation
VIII. Valuation and Qualifying Accounts
X. Supplementary Income Statement Information
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertake as follows:
(1) insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described under Item 14 hereof, or otherwise,
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by the director, officer, or controlling person thereof in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(2) for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrants pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(3) for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the District of Columbia on the 29th
day of April, 1994.
EMPIRE GAS CORPORATION
By: _______/s/_Robert W. Plaster______
CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
hereby authorizes and constitutes Paul S. Lindsey, Jr., his true and lawful
attorney with full power to sign for him and in his name in the capacities
indicated below and file any and all amendments (including post-effective
amendments) to this Registration Statement, and he hereby ratifies and confirms
his signature as it may be signed by said attorney to any and all such
amendments.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------------------------------------ --------------------------------------- ----------------
Chief Executive Officer and Chairman of
/s/Robert W. Plaster the Board (principal executive April 29, 1994
Robert W. Plaster officer)
/s/Willis D. Green Vice President/Controller(principal
Willis D. Green financial and accounting officer) April 29, 1994
/s/Paul S. Lindsey, Jr.
Paul S. Lindsey, Jr. Director April 29, 1994
/s/Stephen R. Plaster
Stephen R. Plaster Director April 29, 1994
II-6
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
Board of Directors and Stockholders
Empire Gas Corporation
Lebanon, Missouri
In connection with our audit of the financial statements of EMPIRE GAS
CORPORATION (FORMERLY EMPIRE GAS ACQUISITION CORPORATION) for each of the three
years in the period ended June 30, 1993, we have also audited the following
financial statement schedules. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion of these financial statement schedules based on our audits of the basic
financial statements. The schedules are presented for purposes of complying with
the Securities and Exchange Commission's rules and regulations and are not a
required part of the consolidated financial statements.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
July 30, 1993
S-1
EMPIRE GAS CORPORATION AND SUBSIDIARIES
SCHEDULE V -- PROPERTY AND EQUIPMENT
YEARS ENDED JUNE 30, 1993, 1992 AND 1991
(IN THOUSANDS)
COL. B COL. F
---------- COL. C ----------
COL. A BALANCE AT ----------- COL. D COL. E BALANCE AT
- ------------------------------------------------------- BEGINNING ADDITIONS ----------- --------- END OF
CLASSIFICATION OF YEAR AT COST RETIREMENTS OTHER YEAR
- ------------------------------------------------------- ---------- ----------- ----------- --------- ----------
Year Ended June 30, 1993:
Land and buildings................................... $ 11,821 $ 884 $ 490 $ 12,215
Storage and consumer service facilities.............. 113,450 1,520 1,149 113,821
Transportation, office and other equipment........... 24,245 1,954 649 25,550
---------- ----------- ----------- ----------
$ 149,516 $ 4,358 $ 2,288 $ 151,586
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Year Ended June 30, 1992:
Land and buildings................................... $ 10,781 $ 1,381 $ 341 $ 11,821
Storage and consumer service facilities.............. 113,343 2,058 1,951 113,450
Transportation, office and other equipment........... 22,765 3,264 1,784 24,245
---------- ----------- ----------- ----------
$ 146,889 $ 6,703 $ 4,076 $ 149,516
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Year Ended June 30, 1991:
Land and buildings................................... $ 9,457 $ 1,439 $ 115 $ 10,781
Storage and consumer service facilities.............. 111,646 2,651 954 113,343
Transportation, office and other equipment........... 20,150 4,723 2,108 22,765
---------- ----------- ----------- ----------
$ 141,253 $ 8,813 $ 3,177 $ 146,889
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
S-2
EMPIRE GAS CORPORATION AND SUBSIDIARIES
SCHEDULE VI -- ACCUMULATED DEPRECIATION
YEARS ENDED JUNE 30, 1993, 1992 AND 1991
(IN THOUSANDS)
COL. C
COL. B ----------- COL. F
----------- ADDITIONS -----------
COL. A BALANCE AT CHARGED TO COL. D COL. E BALANCE AT
- ------------------------------------------------------ BEGINNING COSTS AND ----------- --------- END OF
CLASSIFICATION OF YEAR EXPENSES RETIREMENTS OTHER YEAR
- ------------------------------------------------------ ----------- ----------- ----------- --------- -----------
Year Ended June 30, 1993:
Buildings........................................... $ 1,444 $ 332 $ 73 $ 1,703
Storage and consumer service facilities............. 19,536 5,529 631 24,434
Transportation, office and other equipment.......... 13,075 3,143 449 15,769
----------- ----------- ----------- -----------
$ 34,055 $ 9,004 $ 1,153 $ 41,906
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Year Ended June 30, 1992:
Buildings........................................... $ 1,172 $ 302 $ 30 $ 1,444
Storage and consumer service facilities............. 14,751 5,473 688 19,536
Transportation, office and other equipment.......... 11,378 3,014 1,317 13,075
----------- ----------- ----------- -----------
$ 27,301 $ 8,789 $ 2,035 $ 34,055
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Year Ended June 30, 1991:
Buildings........................................... $ 928 $ 260 $ 16 $ 1,172
Storage and consumer service facilities............. 9,710 5,316 275 14,751
Transportation, office and other equipment.......... 10,828 2,687 2,137 11,378
----------- ----------- ----------- -----------
$ 21,466 $ 8,263 $ 2,428 $ 27,301
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
S-3
EMPIRE GAS CORPORATION AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1993, 1992 AND 1991
(IN THOUSANDS)
BALANCE AT CHARGED TO AMOUNT BALANCE AT
BEGINNING COSTS AND WRITTEN END OF
DESCRIPTION OF YEAR EXPENSES OFF YEAR
- ------------------------------------------------------------------- ----------- ----------- --------- -----------
Valuation accounts deducted from assets to which they apply -- for
doubtful accounts receivable:
June 30, 1993.................................................... $ 2,720 $ 958 $ 1,021 $ 2,657
June 30, 1992.................................................... 2,719 214 213 2,720
June 30, 1991.................................................... 1,648 2,828 1,757 2,719
S-4
EMPIRE GAS CORPORATION AND SUBSIDIARIES
SCHEDULE X -- SUPPLEMENTARY INFORMATION
YEARS ENDED JUNE 30, 1993, 1992 AND 1991
(IN THOUSANDS)
COL. B
-----------
COL. A CHARGED TO
- ------------------------------------------------------------------------------------------------------ COSTS AND
ITEM EXPENSES
- ------------------------------------------------------------------------------------------------------ -----------
June 30, 1993:
Maintenance and repairs............................................................................. $ 2,963
June 30, 1992:
Maintenance and repairs............................................................................. $ 3,070
June 30, 1991:
Maintenance and repairs............................................................................. $ 3,806
S-5
EXHIBIT INDEX
EXHIBITS PAGE
- ----------- ---------
4.2 Form of Proposed Indenture between the Company and Shawmut Bank Connecticut, National
Association, Trustee, relating to the % Senior Secured Notes due 2004, including the form
of % Senior Secured Notes due 2004.........................................................
23.1 Consent of Baird, Kurtz & Dobson................................................................
23.3 Consent of Douglas A. Brown to being named as a director........................................
24.1 Power of Attorney, located on signature page....................................................
25.1 Statement of Eligibility and Qualification of Trustee on Form T-1...............................
DESCRIPTION OF GRAPHIC:
Inside front cover
Map of the United States showing the locations of retail service centers, bulk
storage facilities, transport terminals, rail terminals, underground storage,
pipeline terminals and home office (on a pro form basis for the Transaction).
Page 39
Illustration showing movement of propane from refinery or gas processing plant
to retail distriubtion center by rail, pipeline or truck, and then on to
residential, commercial and agricultural users.