PRELIMINARY REPORT TO
THE SPECIAL COMMITTEE OF GAS
A.G. EDWARDS & SONS, INC.
INVESTMENT BANKING
April 28, 1998
TABLE OF CONTENTS
Section
-------
Introduction.................................... I
Review of Events to Date........................ II
Summary of Transaction.......................... III
Summary Observations............................ IV
Preliminary Report to the Special Committee..... V
INTRODUCTION
TRANSACTION [_] During 1997, Gas ("Gas" or the "Company") and Oil ("Oil")
PROPOSAL discussed the idea of a possible business combination by
and between Gas and Oil. The series of proposed
transactions involved in such combination is referred to as
the "Transaction".
A.G. EDWARDS' [_] A.G. Edwards & Sons, Inc. ("A.G. Edwards") has been engaged
ENGAGEMENT by the Special Committee (the "Special Committee") of the
Board of Directors of Gas (the "Board") to act as its
financial advisor with respect to the Transaction and to
issue to the Board an opinion as to the fairness, from a
financial point of view, to the common unitholders of Gas
who are not affiliated with Oil (the "Common Unitholders"),
of the Transaction (the "Fairness Opinion").
[_] The preparation of a fairness opinion is not susceptible to
partial analyses or summary. In rendering its Fairness
Opinion, A.G. Edwards will apply its judgment to a variety
of complex analyses and assumptions. A.G. Edwards may give
various analyses more or less weight than other analyses,
and may deem various assumptions more or less probable than
other assumptions. The assumptions made and the judgments
applied by A.G. Edwards in rendering its opinion are not
readily susceptible to description beyond that set forth in
the written text of the Fairness Opinion itself.
Page 1
INTRODUCTION
(continued)
AS PART OF ITS [_] A review of the preliminary structure of the Transaction
ENGAGEMENT, (See Tab III -"Summary of Transaction");
A.G. EDWARDS'
ACTIVITIES [_] A review of Gas' and Oil's historical financial statements
INCLUDED, BUT and the financial projections of Gas and Oil (See
WERE NOT Appendices A and B -"Overview of Oil and Gas,"
LIMITED TO, THE respectively);
FOLLOWING:
[_] A review of certain market data of Gas' Common Units and
Oil's Common Stock (See Appendices A and B -"Overview of
Oil and Gas," respectively);
[_] An analysis of the pro forma financial statements of Gas
giving effect to the Transaction (as proposed) (See
Appendix C - "Pro Forma Ownership Analysis");
[_] Conversations with PaineWebber regarding the nature and
extent of development of the terms of the Transaction;
[_] An investigation regarding current operations and future
prospects of Gas and Oil, through interviews with members
of Gas' and Oil's management, respectively (See Appendices
A and B - "Overview of Oil and Gas," respectively);
[_] A review of the industries in which Gas and Oil operate;
[_] A review of the market data for stocks of public companies
in the same or similar lines of business to Gas (See
Appendix I - "Public Company Analysis");
[_] Analyses of the Transaction using various valuation
methodologies; and
[_] Other analyses which it deemed necessary.
Page 2
INTRODUCTION
(continued)
NATURE OF [_] A.G. Edwards relied upon and assumed, without independent
INFORMATION verification, the accuracy and completeness of all
REVIEWED AND financial and other information publicly available, or
PRESENTED furnished to, or otherwise discussed with A.G. Edwards
including financial statements and financial projections,
as provided by management of Gas and Oil and Oil's
financial advisor. With respect to financial projections
and other information provided to or otherwise discussed
with A.G. Edwards, A.G. Edwards assumed and was advised by
the senior management of Gas and Oil, respectively, that
such projections and other information were reasonably
prepared on a basis that reflects the best currently
available estimates and judgments of the senior management
of Gas and Oil, respectively, as to the expected future
financial performance of Gas and Oil, in each case on a
stand-alone basis and after giving effect to the
Transaction. A.G. Edwards was not engaged to, and did not,
independently verify the information provided and performed
no audit of assets or liabilities and no independent
appraisal of assets or liabilities of either Gas or Oil.
A.G. Edwards has relied upon the assurances of the
management of Gas and Oil that they are not aware of any
facts that would make such information inaccurate or
misleading.
[_] In performing its analyses, A.G. Edwards made numerous
assumptions with respect to the propane distribution
industry and the home heating oil distribution industry,
and general business and economic conditions which are
beyond the control of Gas and Oil. The analyses performed
by A.G. Edwards are not necessarily indicative of actual
values or actual future results, which may be significantly
more or less favorable than suggested by such analyses.
Such analyses were prepared solely as part of A.G. Edwards'
Preliminary Report to the Special Committee.
[_] This presentation is for the private use of the Special
Committee and may not be distributed to any other parties
without A.G. Edwards' written permission.
Page 3
REVIEW OF EVENTS TO DATE
FEBRUARY 11 [_] A.G. Edwards presents its qualifications to the Special
Committee and its legal counsel.
MARCH 23 [_] Special Committee engaged A.G. Edwards.
MARCH 23 [_] A.G. Edwards met with members of Gas' and Oil's management
and submitted preliminary data request list.
[_] A.G. Edwards began due diligence with management and other
representatives of Gas and Oil.
- Business
- Financial
- Accounting
- Other
MARCH 30 [_] A.G. Edwards received data related to its preliminary data
request list.
MARCH 30 - APRIL [_] A.G. Edwards continued the due diligence process with
27 respect to Gas and Oil.
APRIL 28 [_] Special Committee meeting to discuss the Transaction.
Page 4
SUMMARY OF TRANSACTION
PRO FORMA GAS UNITS OUTSTANDING
(IN THOUSANDS)
TO SIMPLIFY [_] There are currently 6,355 Gas units outstanding comprised
THE COMPLEXITY of 3,832 common units, 2,396 subordinated units and 127
OF THE STEPS general partner ("GP") units. The subordinated units and GP
IN THE units are assets of Oil.
TRANSACTION,
A.G. EDWARDS
PREPARED A
SUMMARY OF ITS
UNDERSTANDING.
[_] There are currently 26,563 shares of Oil common stock
outstanding, comprised of public shareholders and
"insiders." The public holds 17,160 Class A shares. The
"insiders" hold 9,404 shares which include 6,795 Class A
shares, 11 Class B shares and 2,598 Class C shares.
[_] Each shareholder of Oil will receive a certain number of
units in Gas such that the implied consideration paid for
each Oil share is $3.15.
[_] The publicly held 17,160 Class A shares will receive .1596
shares of newly created Senior Subordinated units (2,738
units in total) with an implied value of $19.74/unit. This
represents an implied purchase price of $3.15/share for an
implied total purchase price of $54.1 million.
[_] The "insiders" of Oil, who hold a total of 9,404 shares
(comprised of A, B and C shares) will also receive
$3.15/share for a total of $29.6 million. The consideration
received by these shareholders will be funded by:
- (1) the distribution of existing units of Gas which are
currently owned by Oil
[_] all of the 127 GP units owned by Oil will be
given as consideration at an implied value of
$21.28/unit, for a total of $2.7 million.
[_] 754 of the 2,396 Subordinated units owned by
Oil will be given as consideration at an
implied value of $16.33/unit, for a total of
$12.3 million.
- (2) the distribution of newly-created units of Gas
[_] to fund the remaining $14.6 million of the
$29.6 million due to the Oil "insiders", Gas
will issue 559 newly-created Senior
Subordinated units and 168 newly-created GP
units. The implied values for these new units
are $19.74 and $21.28, respectively.
Page 5
Merger Premiums to Market Value Analysis
Mergers with Target Price Equal to or Less than $5 per Share
Announced and Completed 1/1/96-10/9/98
- ------------------------------------------------------------------------------------------------------------------------------------
Date Date
Announced Effective Target Name Target Business Description Acquiror Name
- ------------------------------------------------------------------------------------------------------------------------------------
01/10/96 06/26/96 American Resource Corp Gold mining company REA Gold Corp
01/18/96 08/23/96 AMSERV Healthcare Inc Pvd temp nursing employment Star Multi Care Services Inc
01/23/96 05/09/96 Portage Industries Corp Mnfr extruded plastic sheets Spartech Corp
02/05/96 09/30/96 Customedix Corp Mnfr dental, medical products CUS Acquisitions Inc
02/13/96 07/12/96 Medical Innovations Inc Pvd home health care services Horizon/CMS Healthcare Corp
02/15/96 04/29/96 LDI Corp Computer equip leasing svcs NationsBank Corp, Charlotte, NC
02/28/96 07/11/96 Salton/Maxim Housewares Inc Mnfr electric housewares, fans Windmere Corp
03/13/96 09/27/96 DeSoto Inc Mnfr paints and detergents Keystone Consolidated Inds Inc
04/16/96 05/31/96 CIS Technologies Inc Manufacture computers National Data Corp
04/22/96 06/04/96 Cornerstone Natural Gas Co Natural gas distribution svcs El Paso Field Svcs(El Paso)
05/03/96 03/17/98 Homeowners Group Inc Real estate, insurance agency Cross Country Group Inc
05/06/96 09/03/96 Transcisco Industries Inc Mnfr, service railroad equip Trinity Industries Inc
05/07/96 09/03/96 NMR of America Inc Pvd. medical equip leasing svcs Medical Resources Inc
05/13/96 08/30/96 MDT Corp Mnfr sterility assurance equip Getinge Industries AB
05/15/96 09/10/96 Carlisle Plastics Inc Mnfr, whl plastic prods, resins Tyco International Ltd
06/03/96 01/09/97 Bio-Dental Technologies Corp Provide dental research svcs Zila Inc
06/10/96 07/22/96 SysteMed Inc Pvd medical services Merck-Medco Managed Care Inc
06/11/96 09/03/96 Computer Identics Corp Manufacture bar code scanners Robotic Vision Systems Inc
06/17/96 10/07/96 Scanforms Inc Mnfr business forms Big Flower Press Holdings Inc
06/21/96 08/23/96 Computer Identics Corp Information retrieval svcs United Communications Group
06/24/96 12/05/96 MEM Co Manufacture toiletries Renaissance Cosmetics Inc
07/31/96 11/13/96 Calgene Inc Own and operate greenhouse Monsanto Co
08/13/96 02/27/97 LaTex Resources Inc Oil and gas expln, prodn Alliance Resources PLC
09/10/96 01/03/97 GreenStone Industries Corp Manufacture stationery Louisiana-Pacific Corp
09/11/96 03/04/97 Chempower Inc Insulation, asbestos abatement American Eco Corp
09/16/96 12/06/96 Proler International Corp Whl scrap metals & metals Schnitzer Steel Industries Inc
09/26/96 01/24/97 General Physics Corp Provide training services National Patent Development
10/02/96 12/27/96 Software Publishing Corp Develop software Allegro New Media
10/03/96 11/12/97 Pittencrieff Communications Pvd radiotelephone commun svcs Nextel Communications Inc
10/04/96 12/31/96 Pet Food Warehouse Inc Own, op pet food stores Petco Animal Supplies Inc
10/30/96 12/20/96 Pacific Rehab & Sports Med Own, op rehab hospital Horizon/CMS Healthcare Corp
11/05/96 03/14/97 Panatech Research &
Development Manufacture semiconductors Harbour Group Ltd
11/25/96 02/28/97 American Studios Inc Pvd photography services PCA International Inc
12/06/96 03/18/97 MaxServ Inc (Sears Roebuck) Pvd technical info support svc Sears Roebuck & Co
12/09/96 02/28/97 Houston Biotechnology Inc Mnfr monoclonal antibodies Medarex Inc
01/24/97 07/02/97 INCSTAR Corp (Sorin
Biomedical) Mnfr diagnostic substances American Standard Inc
01/28/97 05/21/97 Calgene Inc (Monsanto Co) Own and operate greenhouse Monsanto Co
01/30/97 08/12/97 AST Research Inc Mnfr computers; dvlp software Samsung electronic Co Ltd
02/07/97 08/01/97 MS Financial (MS Diversified) Pvd financial credit services Search Financial Services Inc
02/11/97 07/31/97 Serv-Tech Inc Maintenance and cleaning svcs Philip Environmental Inc
03/04/97 06/27/97 Audio King Corp Own, op consumer electn stores Ultimate electronic Inc
04/15/97 06/30/97 Kurzweil Applied Intelligence Electronic computing equip Lernout & Hauspic speech
04/30/97 07/25/97 Arden Industrial Products Inc Whl fasteners Park-Ohio Industries Inc
05/01/97 08/01/97 Cryenco Sciences Inc Mnfr liquid gas storage tanks Chart Industries Inc
05/08/97 09/10/97 Imex Medical Systems Inc Mnfr fetal diagnostic instr Nicolet Biomedical Inc
06/16/97 09/30/97 Frederick's of Hollywood, Inc Women's clothing stores Investor Group
06/24/97 07/25/97 Jillians Entertainment Corp Own, op billiard clubs JW Childs Equity Partners LP
07/23/97 12/02/97 Rudy's Restaurant Group Own and operate restaurants Benihana Inc
08/01/97 09/26/97 Community Care of America Inc Own, op nursing homes Integrated Health Services Inc
08/07/97 12/02/97 Magnetic Technologies Corp Manufacture copiers, printers SPS Technologies Inc
08/14/97 12/31/97 Allied Capital Advisers Inc Investment advisory svcs Allied Capital Lending Corp
09/02/97 12/03/97 Ground Round Restaurants Own and operate restaurants GRR Holdings LLC
09/04/97 12/30/97 Cinergi Pictures Entertainment Pvd motion picture prodn svcs Investor Group
09/26/97 09/26/97 Laclede Steel Co Own, operate steel works Birmingham Steel Corp
10/10/97 01/07/98 Puro Water Group Inc Whl bottled water United States Filter Corp
10/13/97 03/19/98 Integrated Brands Inc Produce ice cream Yogen Fuz World-Wide Inc
11/03/97 02/25/98 Individual Inc Pvd on-line info retrieval svc Desktop Data Inc
11/04/97 01/12/98 ComputerVision Corp Mnfr computers, peripherals Parametric Technology Corp
11/12/97 03/03/98 PureTec Corp Manufacture plastic products Tekni-Plex Inc
11/24/97 01/07/98 General Host Corp Own, op specialty retail stores Cypress Group LLC
12/02/97 03/17/98 Staodyn Inc Mnfr electromedical equipment Rehabilicare Inc
12/12/97 02/13/98 Impact Systems Inc Paper prodn control systems Voith Sulzer Paper Technology
12/12/97 09/10/98 Timber Lodge Steakhouse Inc Own, op restaurants Santa Barbara Restaurant Group
12/15/97 02/24/98 MetroGolf Inc Own, op golf courses Family Golf Centers Inc
12/22/97 05/20/98 Artistic Greetings Inc Mnfr personalized stationery MDC Communications Corp
- ------------------------------------------------------------------------------------------------------------------------------------
Value of Enter-
Trans- prise
Date Date Acquiror action Value
Announced Effective Target Name Business Description ($ mil) ($ mil)
- ------------------------------------------------------------------------------------------------------------------------------------
01/10/96 06/26/96 American Resource Corp Gold mining company 77.5 76.353
01/18/96 08/23/96 AMSERV Healthcare Inc Pvd home health care services 9.2 7.895
01/23/96 05/09/96 Portage Industries Corp Manufacture Plastic products 15.8 17,540
02/05/96 09/30/96 Customedix Corp Investment company 3.6 15,103
02/13/96 07/12/96 Medical Innovations Inc Pvd nursing care services 30.3 41,725
02/15/96 04/29/96 LDI Corp Bank bldg co; pvd finl svcs 28.1 288,893
02/28/96 07/11/96 Salton/Maxim Housewares Inc Mnfr personal care appliances 21.1 53,442
03/13/96 09/27/96 DeSoto Inc Manufacture steel wire 36.1 40,529
04/16/96 05/31/96 CIS Technologies Inc Pvd homeowner membership svcs 99.3 112,471
04/22/96 06/04/96 Cornerstone Natural Gas Co Own, op diagnostic imaging ctrs 96.6 97,614
05/03/96 03/17/98 Homeowners Group Inc Pvd homeowner membership svcs 11.4 14,968
05/06/96 09/03/96 Transcisco Industries Inc Mnfr transp equip,parts 44.7 51,126
05/07/96 09/03/96 NMR of America Inc Own,op diagnostic imaging ctrs 40.4 57,369
05/13/96 08/30/96 MDT Corp Mnfr sterilizing equipment 70.3 69.457
05/15/96 09/10/96 Carlisle Plastics Inc Mnfr fire protection systems 122.4 273.282
06/03/96 01/09/97 Bio-Dental Technologies Corp Mnfr,whl pharmaceuticals 40.3 48.477
06/10/96 07/22/96 SysteMed Inc Health insurance company 64.8 60,646
06/11/96 09/03/96 Computer Identics Corp Mnfr 2-D,3-D vision-based sys 42.0 40,881
06/17/96 10/07/96 Scanforms Inc Pvd advertising,marketing svcs 27.5 15,661
06/21/96 08/23/96 Computer Identics Corp Publish newsletters 12.0 11,548
06/24/96 12/05/96 MEM Co Investor group 38.2 29.577
07/31/96 11/13/96 Calgene Inc Mnfr agro chems,manmade fibers 50.0 584,080
08/13/96 02/27/97 LaTex Resources Inc Oilo and gas exploration, prodn 27.1 44,759
09/10/96 01/03/97 GreenStone Industries Corp Mnfr lumber,plywood,pulp 29.2 40,823
09/11/96 03/04/97 Chempower Inc Pvd engineering services 50.0 36,189
09/16/96 12/06/96 Proler International Corp Manufacture steel products 42.5 68,146
09/26/96 01/24/97 General Physics Corp Mnfr contact lenses 261. 70,360
10/02/96 12/27/96 Software Publishing Corp Pvd software services 25.2 8,786
10/03/96 11/12/97 Pittencrieff Communications Pvd cellular telephone svcs 158.4 159,860
10/04/96 12/31/96 Pet Food Warehouse Inc Own and operate pet stores 60.7 55,986
10/30/96 12/20/96 Pacific Rehab & Sports Med Pvd nursing care services 72.7 75,706
11/05/96 03/14/97 Panatech Research &
Development Mnfr steel cutting tools 29.2 26,218
11/25/96 02/28/97 American Studios Inc Pvd photo processing services 66.3 67.650
12/06/96 03/18/97 MaxServ Inc (Sears Roebuck) Mnfr steel Department stores; finl svcs 46.0 87.263
12/09/96 02/28/97 Houston Biotechnology Inc Manufacture pharmaceutiCALS 8.6 8.700
01/24/97 07/02/97 INCSTAR Corp (Sorin
Biomedical) Transportation, building prod 106.3 102.865
01/28/97 05/21/97 Calgene Inc (Monsanto Co) Mnfr agro chems, manmade fibers 242.6 567.548
01/30/97 08/12/97 AST Research Inc Mnfr consumer electronics 495.8 558.108
02/07/97 08/01/97 MS Financial (MS Diversified) Pvd business credit services 17.2 102.602
02/11/97 07/31/97 Serv-Tech Inc Provide waste management svcs 73.4 54.956
03/04/97 06/27/97 Audio King Corp Own, op radio, TV, electn stores 6.0 12.363
04/15/97 06/30/97 Kurzweil Applied Intelligence Mnfr speech tech products 51.3 50.852
04/30/97 07/25/97 Arden Industrial Products Inc Mnfr forged and machined parts 42.0 44.995
05/01/97 08/01/97 Cryenco Sciences Inc Mnfr process control instmnts 19.2 27.904
05/08/97 09/10/97 Imex Medical Systems Inc Investment company 9.3 10.238
06/16/97 09/30/97 Frederick's of Hollywood, Inc Investor group 69.4 57.007
06/24/97 07/25/97 Jillians Entertainment Corp Investment company 4.7 7.007
07/23/97 12/02/97 Rudy's Restaurant Group Own and operate restaurants 18.8 18.936
08/01/97 09/26/97 Community Care of America Inc Pvd specialty healthcare svcs 94.0 89.996
08/07/97 12/02/97 Magnetic Technologies Corp Mnfr industrial fasteners 16.8 15.984
08/14/97 12/31/97 Allied Capital Advisers Inc Closed-end mgmt investment co 49.5 44.111
09/02/97 12/03/97 Ground Round Restaurants Investment company 17.5 56.945
09/04/97 12/30/97 Cinergi Pictures Entertainment Investor group 16.3 59.794
09/26/97 09/26/97 Laclede Steel Co Manufacture steel, steel prod 15.0 131.767
10/10/97 01/07/98 Puro Water Group Inc Mnfr water treatment equip 25.7 30.186
10/13/97 03/19/98 Integrated Brands Inc Produce frozen yogurt 46.8 51.274
11/03/97 02/25/98 Individual Inc Pvd info retrieval svcs 86.8 79.390
11/04/97 01/12/98 ComputerVision Corp Develop, wholesale software 250.3 460.128
11/12/97 03/03/98 PureTec Corp Mnfr plastic 324.6 281.484
11/24/97 01/07/98 General Host Corp Investment bank 326.2 278.128
12/02/97 03/17/98 Staodyn Inc Mnfr electromedical equip 22.5 22.867
12/12/97 02/13/98 Impact Systems Inc Provide paper tech dvlp svcs 28.6 28.467
12/12/97 09/10/98 Timber Lodge Steakhouse Inc Own, op fast food restaurants 30.4 30.925
12/15/97 02/24/98 MetroGolf Inc Own and operate golf courses 6.6 18.428
12/22/97 05/20/98 Artistic Greetings Inc Provide marketing services 33.6 35.618
- ------------------------------------------------------------------------------------------------------------------------------------
Premium
----------------------------------------------------------------------------------
Date Date 1 Day Prior 1 Week Prior 4 Weeks Prior 3 Months Prior 1 Year Prior
Announced Effective Target Name to Annc. Date to Annc. Date to Annc. Date to Annc. Date to Annc. Date
- ------------------------------------------------------------------------------------------------------------------------------------
01/10/96 06/26/96 American Resource Corp 30.77 23.50 27.03
01/18/96 08/23/96 AMSERV Healthcare Inc 14.56 27.29 20.59 (4.67) 20.42
01/23/96 05/09/96 Portage Industries Corp 46.67 78.98 78.98 134.67 193.33
02/05/96 09/30/96 Customedix Corp 22.58 26.67 5.56 19.00 (18.98)
02/13/96 07/12/96 Medical Innovations Inc 13.85 18.40 5.71 5.71 37.67
02/15/96 04/29/96 LDI Corp 31.20 21.48 49.09 26.15 5.81
02/28/96 07/11/96 Salton/Maxim Housewares Inc (0.19) 12.84 3.81 1.65 (9.05)
03/13/96 09/27/96 DeSoto Inc 65.41 53.00 80.00 118.57 53.00
04/16/96 05/31/96 CIS Technologies Inc 50.50 30.16 30.16 (5.57) 33.78
04/22/96 06/04/96 Cornerstone Natural Gas Co 28.00 29.73 100.00 134.15 182.35
05/03/96 03/17/98 Homeowners Group Inc 22.07 26.77 93.88 135.43 17.71
05/06/96 09/03/96 Transcisco Industries Inc 15.56 36.84 28.40 57.58 271.43
05/07/96 09/03/96 NMR of America Inc 41.43 86.79 90.39 98.08 37.56
05/13/96 08/30/96 MDT Corp 12.82 22.22 4.76 15.79 (6.38)
05/15/96 09/10/96 Carlisle Plastics Inc 38.20 38.20 41.83 73.94 31.51
06/03/96 01/09/97 Bio-Dental Technologies Corp 64.99 43.28 109.42 194.49 65.09
06/10/96 07/22/96 SysteMed Inc (4.00) 4.35 9.09 (23.81) (56.36)
06/11/96 09/03/96 Computer Identics Corp 63.11 54.53 54.53 72.71 19.84
06/17/96 10/07/96 Scanforms Inc 61.40 61.40 58.62 70.37 130.00
06/21/96 08/23/96 Computer Identics Corp 28.33 46.67 71.11 105.33 208.00
06/24/96 12/05/96 MEM Co 13.21 81.82 90.48 93.55 114.29
07/31/96 11/13/96 Calgene Inc 64.10 80.28 39.13 31.96 14.29
08/13/96 02/27/97 LaTex Resources Inc 181.14 202.77 181.14 228.00 107.16
09/10/96 01/03/97 GreenStone Industries Corp 33.33 52.73 58.49 42.37 50.00
09/11/96 03/04/97 Chempower Inc 48.06 48.06 45.88 50.30 65.33
09/16/96 12/06/96 Proler International Corp 132.26 125.00 148.28 33.33 9.09
09/26/96 01/24/97 General Physics Corp 16.57 31.61 36.00 23.64 45.71
10/02/96 12/27/96 Software Publishing Corp 14.86 10.90 60.80 (88.09)
10/03/96 11/12/97 Pittencrieff Communications 8.95 14.40 30.74 (13.08) 29.14
10/04/96 12/31/96 Pet Food Warehouse Inc 22.93 26.00 48.24 48.24 57.50
10/30/96 12/20/96 Pacific Rehab & Sports Med 67.74 62.50 48.57 60.00 6.12
11/05/96 03/14/97 Panatech Research &
Development 55.56 55.56 51.35
11/25/96 02/28/97 American Studios Inc 90.48 110.53 166.67 (65.28) (73.33)
12/06/96 03/18/97 MaxServ Inc (Sears Roebuck) 19.23 67.57 55.00 67.57 129.63
12/09/96 02/28/97 Houston Biotechnology Inc 52.00 62.13 52.00 (93.01) (92.05)
01/24/97 07/02/97 INCSTAR Corp (Sorin
Biomedical) 42.93 53.21 68.53
01/28/97 05/21/97 Calgene Inc (Monsanto Co) 62.03 60.00 60.00 60.00 42.22
01/30/97 08/12/97 AST Research Inc 16.76 8.00 20.00 23.43 (31.43)
02/07/97 08/01/97 MS Financial (MS Diversified) 20.00 46.67 10.00 1.54 (70.67)
02/11/97 07/31/97 Serv-Tech Inc 32.00 60.00 88.57 129.57 12.34
03/04/97 06/27/97 Audio King Corp 60.00 68.00 68.00 68.00 (18.05)
04/15/97 06/30/97 Kurzweil Applied Intelligence 83.83 69.69 66.49 84.00 63.56
04/30/97 07/25/97 Arden Industrial Products Inc 41.18 50.00 37.14 20.00 26.32
05/01/97 08/01/97 Cryenco Sciences Inc 69.23 76.00 72.55 41.94 (26.67)
05/08/97 09/10/97 Imex Medical Systems Inc 7.90 2.76 2.76 (30.32) (32.50)
06/16/97 09/30/97 Frederick's of Hollywood, Inc 48.85 44.47 25.95 93.75 85.07
06/24/97 07/25/97 Jillians Entertainment Corp 14.29 77.78 45.46 220.00 166.67
07/23/97 12/02/97 Rudy's Restaurant Group 50.94 70.21 72.04 60.00 5.26
08/01/97 09/26/97 Community Care of America Inc 23.08 18.52 88.24 68.42 (48.39)
08/07/97 12/02/97 Magnetic Technologies Corp 25.00 25.00 33.33 42.86 33.33
08/14/97 12/31/97 Allied Capital Advisers Inc 10.41 4.68 10.41 8.97 (28.00)
09/02/97 12/03/97 Ground Round Restaurants 10.00 10.00 (5.71) 14.78 (34.00)
09/04/97 12/30/97 Cinergi Pictures Entertainment 26.90 24.75 56.60 236.00 26.00
09/26/97 09/26/97 Laclede Steel Co 106.45 106.45 106.45 113.33 88.24
10/10/97 01/07/98 Puro Water Group Inc 33.95 47.69 44.00 44.00
10/13/97 03/19/98 Integrated Brands Inc 69.94 106.35 167.50 501.33 381.07
11/03/97 02/25/98 Individual Inc 0.92 14.93 (7.02) 47.71 (6.00)
11/04/97 01/12/98 ComputerVision Corp 28.31 69.92 18.63 14.33 (55.09)
11/12/97 03/03/98 PureTec Corp 28.74 34.94 31.77 143.48 69.70
11/24/97 01/07/98 General Host Corp 60.00 62.96 79.59 51.72 77.69
12/02/97 03/17/98 Staodyn Inc 47.38 47.38 89.49 100.45 152.95
12/12/97 02/13/98 Impact Systems Inc 57.14 49.15 44.26 69.23 109.52
12/12/97 09/10/98 Timber Lodge Steakhouse Inc 74.13 74.13 81.19 94.32 139.43
12/15/97 02/24/98 MetroGolf Inc 20.00 20.00 (11.11) (25.00) (75.51)
12/22/97 05/20/98 Artistic Greetings Inc 28.45 47.10 52.00 47.10 21.60
Page F-10
SUMMARY OF GAS UNITS OUTSTANDING
PRE-FINANCING ASSUMPTIONS
- -----------------------------------------------------------------------------------------------------------------------
Distributed to Oil Issued to Oil
-------------------- --------------------
Type of Units Current Public Insiders Public Insiders Retired Pro Forma
- -------------- ------- ------ -------- ------ -------- ------- ---------
Common 3,832 - - - - - 3,832
Senior Subordinated - - - 2,738 559 - 3,297
Subordinated 2,396 - 754 - - 1,642 754
General Partner (a) 127 - 127 - 168 - 295
-------- ---------
6,355 8,178
___________________________________
(a) The number of GP units issued reflect the assumption of a 6,587 common unit
equity offering to refinance certain of the assumed Oil debt. Hence, the
number of GP units reflected in the pro forma column do not equal 2% of the
pro forma outstanding units shown above but do equal exactly 2% of the pro
forma units outstanding on a post financing basis.
Page 7
EQUITY PURCHASE PRICE CALCULATION
IMPLIED EQUITY VALUE OF OIL'S ASSETS
(units in thousands, $ in millions, except per unit amounts)
- --------------------------------------------------------------------------------
Purchase Price of Oil's Equity Purchase Price of Oil's Equity
------------------------------ --------------------------------------------------------
Value of Securities Equity Value of Oil's Value of Oil's GP and
Event Paid to Oil Shareholders Heating Oil Assets Subordinated Units in Star
- ------------------ ------------------------------ ------------------------ --------------------------
Issuance of Senior Subordinated
Units to Public Oil Shareholders 2,738 x $19.74
------------------------------
$54.1 $54.1 -
Distribution of General Partner
Unit to Inside Oil Shareholders 127 x $21.28
------------------------------
$2.7 - $2.7
Distribution of Subordinated
Units to Inside Oil Shareholders 754 x $16.33
------------------------------
$12.3 - $12.3
Issuance of General Partner
Units to Inside Oil Shareholders 168 x $21.28 $3.6 -
------------------------------
$3.6
Issuance of Senior Subordinated
Units to Inside Oil Shareholders 559 x $19.74
------------------------------
$11.0 $11.0 -
Retire Subordinated Units 1,642 x $16.33
---------------------
($26.8) $26.8
$41.8 $41.8
----------- ------------------------------------
Total $83.7 $83.7
Divided by 26.563 shares of Oil's Common stock = $3.15 per share
Page 8
SUMMARY OBSERVATIONS
COMPARATIVE STOCK
PRICE PERFORMANCE [_] A.G. Edwards has compared the historical prices of Gas'
and Oil's common unit/stock to an index of selected
companies. (See Appendix E - "Exchange Ratio Analysis.")
[_] While Gas' unit price has remained relatively flat over
the last two years, in line with the comparable index,
Oil's stock price has declined significantly over this
period.
COMPARATIVE STOCK PRICE PERFORMANCE
----------------------------------------------------------------------------
Premium of Current Price to Price
-----------------------------------------------------------------------------
Current 2 Years 1 Year 180 Days 60 Days 30 Days
Price (b) Prior Prior Prior Prior Prior
-----------------------------------------------------------------------------
Gas 21.94 5.1% 1.4% -2.0% -6.2% -0.3%
Oil 1.63 -76.8% -45.8% -48.1% -35.0% -0.9%
Composite (a) 21.96 -2.2% 6.4% -5.4% -4.4% 1.3%
(a) Composite index includes the following companies: APU,
CNO, HPG, EGP, NPL, SPH.
(b) As of 4/22/98
[Gas Graph appears here] [Oil Graph appears here]
Page 9
SUMMARY OBSERVATIONS
(continued)
PREMIUM PAID ANALYSIS [_] A.G. Edwards calculated the implied equity
purchase price of Oil and compared the premium to
Oil's current and historical prices. These
premiums were compared to premiums paid in "Merger
of Equals" transactions. (See Appendix D -"Premium
Paid Analysis.")
-------------------------------------------------------------------------
Mergers of Equals
-------------------------
Oil Median Adj. Mean(a)
--- ------ -------------
Premium to stock price one day prior 93.8% 9.3% 10.1%
Premium to stock price one week prior 97.6% 10.0% 8.0%
Premium to stock price one month prior 101.6% 6.5% 6.5%
______________________
(a) Adjusted mean excludes highest and lowest data
points.
Page 10
SUMMARY OBSERVATIONS
(continued)
EXCHANGE RATIO ANALYSIS [_] A.G. Edwards reviewed the historical prices
of Gas' and Oil's common unit/stock and the
implied exchange ratio and compared them to
the proposed Exchange Ratio of 6.96x, which
represents the proposed Oil price of
$3.15/share and Gas price of $21.94/unit.
(See Appendix E - "Exchange Ratio Analysis.")
[_] Due to the price decline of Oil's common
stock over the past year, the current
exchange ratio, based upon the current
unit/share prices of Gas and Oil ($21.938
and $1.625, respectively, as of April 22,
1998), represents a premium of 93.8% to the
current market price of Oil.
[_] Relative to current prices, the exchange
ratio at $3.15 is low, however, it is in
line with the average prices of the
companies' equity over the past two years.
[GRAPH APPEARS HERE]
Page 11
SUMMARY OBSERVATIONS
(continued)
TRANSACTION MULTIPLE ANALYSIS [_] A.G. Edwards calculated the implied
transaction multiple paid for Oil on a
firm valuation basis, including costs
and certain adjustments associated with
the Transaction, and arrived at the
following multiples:
EBITDA Multiple
------ --------
1997 Adjusted 9.1x
Adjusted 1998 Budget 10.2x
1999 Projected 7.6x
(See Appendix F - "Transaction Multiple
Analysis.")
[_] A.G. Edwards calculated the implied
transaction multiple paid for Oil's
existing heating oil business, excluding
the valuation attributable to
consolidation opportunities, and arrived
at the following multiples:
EBITDA Multiple
------ --------
1997 Adjusted 6.1x
Adjusted 1998 Budget 6.9x
1999 Projected 5.1x
(See Appendix F - "Transaction Multiple
Analysis.")
[_] Oil has historically paid EBITDA
multiples averaging 4.5x, with a range
of 2.7x to 6.5x, for its acquisitions.
[_] Gas has historically paid EBITDA
multiples averaging 7.0x, with a range
of 5.1x to 7.3x, for its acquisitions.
Page 12
SUMMARY OBSERVATIONS
(continued)
RELATIVE CONTRIBUTION ANALYSIS [_] A.G. Edwards reviewed and compared the
relative contribution of Gas and Oil
to the pro forma combined equity based
upon 1996, 1997, 1998E and 1999E
EBITDA. (See Appendix G - "Relative
Contribution Analysis") Other measures
of relative contribution analysis were
non-meaningful.
[_] For Gas' contribution of approximately
34% of the combined entity's EBITDA(a),
it will receive approximately 37% of
the implied firm value.
[GRAPHS APPEAR HERE]
_____________________________________________
(a) For purposes of its analysis, A.G.
Edwards converted Oil's historical
December 31st fiscal year-end to a
September 30th fiscal year-end for
comparison purposes. Oil's projections
are based on a December 31st calendar
year end. Other measures of relative
contribution analysis are non-
meaningful.
(b) Includes only heating oil EBITDA for
Oil.
(c) Firm value for all of Oil.
(d) Implied firm value of only Oil's heating
oil assets.
Page 13
Summary Observations
(continued)
Accretion/Dilution Analysis
[_] A.G. Edwards reviewed the distributable cash
flow per unit and the related accretion, common
unit coverage and total unit coverage on a pro
forma basis (See Appendix H -
"Accretion/Dilution Analysis").
[_] For the purpose of this analysis, A.G. Edwards
had PaineWebber run its pro forma financial
model for six scenarios to determine the
sensitivity of certain assumptions.
Base Case
-----------------------------
4.1% Attrition
Gas $0.01 Margin growth
Stand-alone $30.0mm at 4.75x Acquisitions
----------- -----------------------------
DCF per unit
1998E (a) $1.270 $1.570
1998N (b) 1.930 2.190
1999P 2.250 3.200
Accretion/Dilution
1998E (a) 23.6%
1998N (b) 13.5%
1999P 42.2%
Common unit coverage
1998E (a) 0.94x 0.99x
1998N (b) 1.42 1.38
1999P 1.66 1.93
Total unit coverage
1998E (a) 0.58x 0.71x
1998N (b) 0.88 0.99
1999P 1.02 1.39
Sensitivity Cases
-----------------------------------------------------
Attrition Margin Growth Acquisitions
--------------- ---------------- -------------
6.00% 2.00% $0.000 $0.015 $50mm at 5.75
----- ----- ------ ------ -------------
DCF per unit
1998E (a) $1.570 $1.570 $1.570 $1.570 $1.570
1998N (b) 2.190 2.190 2.190 2.190 2.190
1999P 3.080 3.330 2.910 3.350 3.480
Aceration/Dilution
1998E (a) 23.6% 23.6% 23.6% 23.6% 23.6%
1998N (b) 13.5% 13.5% 13.5% 13.5% 13.5%
1999P 36.9% 48.0% 29.3% 48.9% 54.7%
Common Unit Coverage
1998E (a) 0.99x 0.99x 0.99x 0.99x 0.99x
1998N (b) 1.38 1.38 1.38 1.38 1.38
1999P 1.86 2.01 1.76 2.02 2.10
Total Unit Coverage
1998E (a) 0.71x 0.71x 0.71x 0.71x 0.71x
1998N (b) 0.99 0.99 0.99 0.99 0.99
1999P 1.34 1.45 1.26 1.45 1.51
High Case
----------------------------
4.1% Attrition
$0.015 Margin growth
$50mm at 5.75x Acquisitions
DCT per unit
1998E (a) $1.570
1998N (b) 2.190
1999P 3.640
Accretion/Dilution
1998E (a) 23.6%
1998N (b) 13.5%
1999P 61.8%
Common unit coverage
1998E (a) 0.99x
1998N (b) 1.38
1999P 2.20
Total unit coverage
1998E (a) 0.71x
1998N (b) 0.99
1999P 1.58
__________________
(a) 1998 estimate assumes no acquisitions for either
company, and is adjusted to reflect actual results
through 3/31/98 .
(b) 1998 budgeted.
Page 14
Summary Observations
(continued)
Public Company Analysis
[_] A.G. Edwards compared certain financial and market information of Gas on
both a stand-alone and pro forma basis to that of certain public master
limited partnerships (See Appendix I -- Public Company Analysis").
Public Comparable Companies (a)
- ---------------------------------------------------------------------------------------------------------------
Public Public
Pro forma Company Company
Gas Gas Medians Ranges
- ---------------------------------------------------------------------------------------------------------------
Yield 10.0% 10.5% 9.6% 8.5% to 10.6%
Firm value/LTM EBITDA 12.7x (b) 10.8x (b) 12.5x 9.8x to 16.7x
Firm value/1998 normalized EBITDA 8.7x (c) 7.9x (c) 11.5x 10.3x to 13.7x
Equity Market Cap/LTM DCF 18.0x (d) 14.0x (d) 15.7x 9.4x to 25.5x
Equity Market Cap/1998 normalized DCF 9.7x (e) 7.5x (e) 13.9x 11.6x to 16.9x
LTM common unit coverage 0.9x (f) 1.0x (f) 1.4x 0.6x to 1.5x
1998E common unit coverage 1.7x (g) 1.8x (g) 1.4x 0.9x to 1.9x
LTM total unit coverage 0.6x (h) 0.7x (h) 0.7x 0.4x to 1.0x
1998E total unit coverage 1.0x (i) 1.3x (i) 0.7x 0.7x to 1.0x
- ---------------------------------------------------------------------------------------------------------------
(a) Public comparable companies include: APU, CNO, FGP, HPG, CNL and SPH
(b) Firm value/adjusted 1998 budget EBITDA.
(c) Firm value/1999 estimated EBITDA.
(d) Equity market cup/adjusted 1998 budget EBITDA.
(e) Equity market cap/1999 estimated DCF.
(f) Adjusted 1998 budget.
(g) 1999 estimates.
(h) Adjusted 1998 budget.
(i) 1999 estimates.
Page 15
Summary Observations
(continued)
DISCOUNTED CASH
FLOW ANALYSIS [_] A.G. Edwards calculated the implied present value of
estimated unlevered free cash flows for Gas on both a
stand-alone and pro forma basis (See Appendix J --
"Discounted Cash Flow Analysis").
[_] Key assumptions used in the analysis were:
- Oil maintaining a flat 4.1% attrition rate;
relatively no margin improvement; and completing
$30 million in acquisitions each year at a 4.75x
EBITDA multiple.
- A 7.9% weighted average cost of capital for both
cases. (See Appendix B, page 24 and Appendix K,
page 57).
- A 10.2x terminal EBITDA multiple, representing the
current year normalized EBITDA.
DISCOUNTED CASH FLOW
--------------------------------------------------------------------------------------------
Net Present Original Equity value
Present Current Value Common units/ to Original
($ in thousands) Value Net Debt (a) of Equity Total units (b) Common Units (c)
--------------------------------------------------------------------------------------------
Pro Forma $970,827 ($297,334) $673,493 26.0% $174,793
Gas Stand-alone $329,620 ($102,956) $226,664 60.3% $136,669
----------
Increase in value to original common unit holders: $ 38,124
==========
____________________________________________________
(a) Represent total projected debt less cash as of 9/30/98.
(b) Total units include common, subordinated and GP units.
(c) Current market value of common units is $84,065.
Page 16
SUMMARY OBSERVATIONS
(continued)
POTENTIAL
QUALITATIVE
ADVANTAGES AND
DISADVANTAGES TO
GAS UNITHOLDERS
Advantages Disadvantages
---------- -------------
. Geographic diversification . Market perception of heating oil
. Product diversification . Impact of attrition on growth
. Critical mass . MQD reserves & coverage
-acquisition programs
-economies of scale . Institutional ownership
-investor profile
-cross marketing . Potential for NYSE listing
. Market liquidity
Page 17
PRELIMINARY REPORT TO GAS' SPECIAL COMMITTEE
[_] A.G. Edwards has initiated a full diligence review of
Oil and has updated its earlier reviews of Gas,
including: visits to corporate headquarters; meetings
with senior operations and financial officers; review
of financial statements, projections, documents and
information; evaluation and revision of alternative
modeling of the Transaction with Oil's financial
advisor; visit to Long Island calling center and
meeting with Oil's former consultant and now Vice
President; meeting with A.G. Edwards' equity research
analyst covering MLP's; and other relevant inquiries
regarding operations, acquisitions, financings and
other matters.
[_] A.G. Edwards preliminary diligence and work has
resulted in certain tentative conclusions and
observations regarding Oil and Gas which differ from
its original expectations and perceptions, including:
- the anemic heating season in first quarter of
calendar 1998 had a greater adverse impact on Gas
than on Oil;
- Oil has made strides to implement key portions of
Oil's plan and the McKinsey report, including
corporate identification, customer communications
and implementation of a service culture,
regionalization, cross marketing arrangements and
rationalization of the management team;
- although the El Nino affect distorted the first
quarter of 1998, Oil's attrition was moderated and
its pricing strategy was enhanced; and
- Gas has demonstrated an ability to make propane
acquisitions on a tuck-in and market expansion
basis, and has already agreed to acquire a heating
oil business.
Page 18
PRELIMINARY REPORT TO GAS' SPECIAL COMMITTEE
(continued)
[_] Although A.G. Edwards does not presently have an
adequate basis to form any opinion regarding the
Transaction, A.G. Edwards does recommend that the
Special Committee and its advisors proceed with its
careful consideration and evaluation of the proposed
Transaction.
[_] A.G. Edwards requests that Joel Swanson, Esq. and Baker
& Botts, LLP consult with Oil's attorneys regarding the
proposed resolution of the myriad of legal issues
involving tax, partnership and corporate compliance and
the timing of the documentation of the Transaction in
terms of definitive agreements, proxy statements and
the like.
[_] A.G. Edwards perceives Gas as taking appropriate steps
to assure procedural fairness of the Transaction
including the appointment of the Special Committee, the
engagement of counsel and financial advisor and the
approval of the Transaction by the majority of
Unitholders. The Special Committee should consider
whether Oil should be obligated to take parallel action
to assure procedural fairness.
Page 19
PRELIMINARY REPORT TO GAS' SPECIAL COMMITTEE
(continued)
[_] A.G. Edwards suggests that the Special Committee's
consideration of substantive fairness to the Common
Unitholders should include an evaluation by the Special
Committee and its advisors of:
- whether Gas' partnership agreement should be amended
to raise the future required minimum quarterly
distribution ("MQD") for common unitholders and, if
so, by how much and for what period(s);
- whether the $3.15 exchange ratio should be lowered
and, if so, by how much;
- whether the definitive agreements should be drafted
consistent with the PaineWebber models so that any
excess funds expended by Oil for debt refinancings
and the Transaction fees in general should
automatically reduce the aggregate consideration
paid by Gas for the acquisition of Oil by an equal
amount;
- whether cash balances should be set aside for (a)
the funding of any unearned MQD to be paid to the
new unitholders, (b) the funding of Gas' surplus
balance to account for the addition of new
outstanding units, and (c) the funding of any off-
balance sheet liabilities, such as pension or tax;
- whether cash payments should be required for the
issuance of new general partner interests and, if
so, by how much; and
- such other issues suggested by the members of the
Special Committee and its counsel.
[_] A.G. Edwards recommends that the Special Committee
communicate suggested revisions of the Transaction to
management of Oil for their consideration.
Page 20