<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _________ to _________
Commission File Number: 33-98490
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STAR GAS PARTNERS, L.P.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1437793
- ------------------------------------ --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2187 Atlantic Street, Stamford, Connecticut 06902
- -------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(203) 328-7300
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 6, 1998:
Star Gas Partners, L.P. 3,831,727 Common Units
2,396,078 Subordinated Units
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
INDEX TO FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION:
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 1997
and March 31, 1998 3
Consolidated Statements of Operations for the three
months ended March 31, 1997 and for the three months
ended March 31, 1998 4
Consolidated Statements of Operations for the six
months ended March 31, 1997 and for the six months
ended March 31, 1998 5
Consolidated Statements of Cash Flows for the six
months ended March 31, 1997 and for the six months
ended March 31, 1998 6
Consolidated Statement of Partners' Capital for the
six months ended March 31, 1998 7
Notes to Consolidated Financial Statements 8-10
Item 2 - Management's Discussion and Analysis of
Financial Conditions and Results of
Operations 11-16
PART II OTHER INFORMATION:
Item 6 - Exhibits and Reports on Form 8-K 17
Signature 18
2
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STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
SEPTEMBER 30, 1998
1997 (UNAUDITED)
------------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 889 $ 8,250
Receivables, net of allowance of $273 and
$330, respectively 5,720 9,698
Inventories 6,597 3,659
Prepaid expenses and other current assets 959 707
-------- --------
Total current assets 14,165 22,314
-------- --------
Property and equipment, net 95,282 107,626
Intangibles and other assets, net 38,022 48,368
-------- --------
Total assets $147,469 $178,308
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 3,178 $ 2,608
Accrued expenses 3,004 3,229
Accrued interest 321 313
Customer credit balances 4,343 1,323
-------- --------
Total current liabilities 10,846 7,473
-------- --------
Long-term debt 85,000 96,000
Other long-term liabilities 45 84
Partners' Capital:
Common unitholders 47,573 68,952
Subordinated unitholder 4,034 5,344
General partner (29) 455
-------- --------
Total Partners' Capital 51,578 74,751
-------- --------
Total Liabilities and Partners' Capital $147,469 $178,308
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------------------
1997 1998
------------------- -------------------
<S> <C> <C>
Sales $46,442 $37,884
Cost of sales 24,919 15,558
------- -------
Gross profit 21,523 22,326
Delivery and branch 9,504 9,590
Depreciation and amortization 2,630 2,906
General and administrative 2,294 1,449
Net gain (loss) on sales of assets 8 (136)
------- -------
Operating income 7,103 8,245
Interest expense, net 1,771 1,875
------- -------
Income before income taxes 5,332 6,370
Income tax expense 7 7
------- -------
Net income $ 5,325 $ 6,363
======= =======
General Partner's interest in net income $ 107 $ 127
------ ------
Limited Partners' interest in net income $5,218 $6,236
====== ======
Basic and diluted net income per Limited
Partner unit $ 0.99 $ 1.00
====== ======
Weighted average number of Limited Partner
units outstanding 5,271 6,228
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
--------------------------------------------
1997 1998
------------------- -------------------
<S> <C> <C>
Sales $97,318 $79,728
Cost of sales 53,946 37,208
------- -------
Gross profit 43,372 42,520
Delivery and branch 19,352 19,743
Depreciation and amortization 5,216 5,731
General and administrative 3,893 2,818
Net loss on sales of assets (62) (184)
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Operating income 14,849 14,044
Interest expense, net 3,619 3,961
------- -------
Income before income taxes 11,230 10,083
Income tax expense 13 13
------- -------
Net income $11,217 $10,070
======= =======
General Partner's interest in net income $ 225 $ 201
------- -------
Limited Partners' interest in net income $10,992 $ 9,869
======= =======
Basic and diluted net income per Limited
Partner unit $ 2.09 $ 1.69
======= =======
Weighted average number of Limited Partner
units outstanding 5,271 5,834
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
------------------------------------------
1997 1998
----------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $11,217 $ 10,070
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,216 5,731
Provision for losses on accounts receivable 204 126
Loss on sales of assets 62 184
Changes in operating assets and liabilities:
Increase in receivables (4,961) (3,964)
Decrease in inventories 4,942 3,244
Decrease (increase) in other assets (309) 174
Increase (decrease) in accounts payable 687 (673)
Decrease in other current and long-term liabilities (1,873) (3,024)
------- --------
Net cash provided by operating activities 15,185 11,868
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,788) (3,028)
Proceeds from sales of fixed assets 176 159
Cash acquired in conveyance -- 1,825
Acquisition related costs -- (922)
------- --------
Net cash used in investing activities (3,612) (1,966)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facility borrowings 5,000 11,060
Credit facility repayments (7,350) (11,060)
Acquisition facility borrowings 3,350 21,000
Acquisition facility repayments (3,350) (21,000)
Distributions (5,916) (6,453)
Increase in deferred charges (94) (177)
Proceeds from issuance of Common Units, net -- 16,089
Repayment of debt -- (23,000)
Proceeds from issuance of debt -- 11,000
------- --------
Net cash used in financing activities (8,360) (2,541)
------- --------
Net increase in cash 3,213 7,361
Cash at beginning of period 1,106 889
------- --------
Cash at end of period $ 4,319 $ 8,250
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,417 $ 4,014
======= ========
Non-cash investing activities:
Acquisitions $ 26,467
Assumption of note payable $(23,000)
Non-cash financing activities:
Issuance of Common Units $ (3,399)
Additional General Partner interest $ (68)
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF UNITS TOTAL
------------------------ GENERAL PARTNERS'
COMMON SUBORDINATED COMMON SUBORDINATED PARTNER CAPITAL
--------- ------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of September 30, 1997 2,875 2,396 $47,573 $ 4,034 $ (29) $51,578
Issuance of Common Units, net 809 -- 15,745 -- 344 16,089
Conveyance of Assets, net 148 -- 3,399 -- 68 3,467
Net Income -- -- 5,925 3,944 201 10,070
Distributions ($1.10 per unit) -- -- (3,690) (2,634) (129) (6,453)
----- ----- ------- ------- ----- -------
Balance as of March 31, 1998 3,832 2,396 $68,952 $ 5,344 $ 455 $74,751
===== ===== ======= ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1) BASIS OF PRESENTATION
The unaudited consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of the interim periods presented. All adjustments to the
financial statements were of a normal recurring nature.
The propane industry is seasonal in nature because propane is used
primarily for heating in residential and commercial buildings. Therefore,
the results of operations for the periods ended March 31, 1997 and March
31, 1998 are not necessarily indicative of the results to be expected for a
full year.
Inventories
Inventories are stated at the lower of cost or market and are computed
on a first-in, first-out basis. At the dates indicated, the components of
inventory were as follows:
SEPTEMBER 30, MARCH 31,
1997 1998
------------- ---------
Propane gas $4,805 $1,817
Appliances and equipment 1,792 1,842
------ ------
$6,597 $3,659
====== ======
2) BASIC AND DILUTED NET INCOME PER LIMITED PARTNER UNIT
Basic net income per Limited Partner Unit is computed by dividing net
income, after deducting the General Partner's 2.0% interest, by the
weighted average number of Common Units and Subordinated Units outstanding.
Diluted net income per Limited Partner Unit, reflects the dilutive effect
of the unit option plan.
3) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Partnership is threatened
with, or is named in, various lawsuits. The Partnership is not a party to
any litigation which individually or in the aggregate could reasonably be
expected to have a material adverse effect on the company.
4) RELATED PARTY TRANSACTIONS
The Partnership has no employees, except for certain employees of
its corporate subsidiary, Stellar Propane Service Corporation, and is
managed and controlled by Petroleum Heat and Power Co., Inc. ("Petro").
Pursuant to the Partnership Agreement, the General Partner is entitled to
reimbursement
8
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4) RELATED PARTY TRANSACTIONS (CONTINUED)
for all direct and indirect expenses incurred or payments it makes on
behalf of the Partnership, and all other necessary or appropriate expenses
allocable to the Partnership or otherwise reasonably incurred by the
General Partner in connection with operating the Partnership's business.
For the six months ended March 31, 1998, the Partnership reimbursed the
General Partner and Petro $10.0 million representing salary, payroll tax
and other compensation paid to the employees of the General Partner and to
Petro for certain corporate functions such as finance and compliance. In
addition, the Partnership reimbursed Petro $0.3 million relating to the
Partnership's share of the costs incurred by Petro in conducting the
operations of a certain shared branch location which includes managerial
services.
5) ACQUISITIONS
On October 22, 1997, pursuant to a purchase agreement ("Stock Purchase
Agreement") dated as of October 20, 1997, Star Gas Corporation ("General
Partner") purchased 240 shares of Common Stock ($100 par value) of Pearl
Gas Co. ("Pearl"), an Ohio Corporation, representing all of the issued and
outstanding capital stock of Pearl.
The purchase price for said stock was $22.6 million and was paid in
cash. The assets purchased included working capital of $1.9 million.
Funding for the stock purchase and related transaction expenses of $0.4
million was provided by a $23.0 million bank acquisition facility.
Subsequent to the acquisition of the common stock of Pearl, Pearl was
merged into the General Partner in a tax-free liquidation.
Immediately following the merger, a Conveyance and Contribution
Agreement was entered into by, and among, the Partnership, the OLP and the
General Partner. The General Partner contributed to the OLP all of the
Pearl assets it obtained in the merger of Pearl into the General Partner.
In exchange, the General Partner received a 2.7% limited partnership
interest in the OLP and a 0.00028% general partnership interest in the OLP.
In addition, the OLP assumed all of the liabilities associated with the
Pearl stock purchase prior and subsequent to the merger, including the
$23.0 million of bank debt. The aggregate value of the Partnership's
interests transferred to the General Partner from the OLP was $3.5 million.
The issuance of the partnership interests to the General Partner is
intended to compensate the General Partner for additional significant
income tax liabilities which would be reflected in the consolidated federal
income tax return of Star Gas' parent corporation, Petro. The issuance of
such partnership interests was approved by the Audit Committee of the
General Partner and the Executive Committee of Petro.
The General Partner then exchanged the above described interest in the
OLP for a 0.00027% general partnership interest in the Partnership and 148
common units in the Partnership, at a per unit price based upon the average
closing price of the Partnership's common units ten days prior to the
execution of the Stock Purchase Agreement. The OLP then repaid the $23.0
million acquisition facility with $2.0 million of available cash and $21.0
million borrowed under the OLP's own acquisition facility.
9
<PAGE>
5) ACQUISITIONS (CONTINUED)
Pearl markets and distributes propane in Ohio and Michigan through a
storage and distribution system consisting of five offices, fifteen bulk
storage plants, fifty employees and over forty-five vehicles. For the
twelve months ended September 30, 1997, Pearl sold approximately 14.3
million gallons of propane, primarily to residential customers. Pearl
currently serves over 12,000 active customers.
Sales and net income have been included in the Consolidated Statements
of Operations from October 22, 1997.
On February 20, 1998, the Partnership acquired the propane operations
and assets of Tri-County Propane, which is based in Williamstown, Kentucky.
The aggregate consideration for this acquisition, accounted for under the
purchase method was approximately $0.6 million.
Unaudited pro forma data giving effect to the acquisitions as if they
had been acquired on October 1 of the year preceding the year of purchase
is as follows:
SIX MONTHS ENDED
------------------------------
MARCH 31,
------------------------------
1997 1998
-------------- --------------
Sales $108,855 $80,319
======== =======
Net income $ 13,805 $10,208
======== =======
Basic and diluted net income
per limited partner unit $ 2.17 $ 1.61
======== =======
6) PUBLIC OFFERING
On December 16, 1997, the Partnership completed a public offering of
809,000 Common Units, representing Limited Partner interests, at a price of
$21.25 a unit. The net proceeds received of $15.7 million, after deducting
underwriting discounts, commissions and expenses, were used to repay $10.0
million borrowed under the Partnership's bank acquisition facility and $5.7
million borrowed under its working capital facility. In connection with
the issuance of the Common Units, the General Partner made a capital
contribution of $0.3 million.
7) FIRST MORTGAGE NOTES
In January 1998, the Operating Partnership issued $11.0 million of
First Mortgage Notes with an annual interest rate of 7.17%. The proceeds
from these notes were used to repay $11.0 million borrowed under the
Operating Partnership's acquisition facility. These First Mortgage Notes
will mature on September 15, 2010, and will require a prepayment of $5.5
million on March 15, 2010. Interest is payable semi-annually on March 15
and September 15.
8) SUBSEQUENT EVENT - CASH DISTRIBUTION
On April 21, 1998 the Partnership announced that it would pay a cash
distribution of $0.55 per Limited Partner Unit for the three months ended
March 31, 1998. The distribution is payable on May 14, 1998 to holders of
record as of May 1, 1998.
10
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
- ---------------------------------
COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
- ---------------------------------------------
OVERVIEW
In analyzing the financial results of the Partnership, the following matters
should be considered.
Propane's primary use is for heating in residential and commercial applications.
As a result, weather conditions have a significant impact on financial
performance and should be considered when analyzing changes in financial
performance.
In addition, gross profit margins vary according to the customer mix. For
example, sales to residential customers generate higher gross profit margins
than sales to other customer groups, such as agricultural customers.
Accordingly, a change in customer mix can affect gross profit without
necessarily impacting total sales.
Lastly, the propane industry is seasonal in nature with peak activity occurring
during the winter months. Accordingly, results of operations for the periods
presented are not necessarily indicative of the results to be expected for a
full year.
This quarterly report on form 10-Q contains forward-looking information that is
subject to risks and uncertainties. The factors that could cause actual results
to differ materially include the effects of weather, competitive and propane
pricing pressure and other factors impacting the propane distribution industry.
Readers are cautioned not to place undue reliance on this forward-looking
information, which generally speak only as of the date of this report on form
10-Q.
VOLUME
For the three months ended March 31, 1998, retail propane volume increased 1.1
million gallons, or 3.3%, to 34.0 million gallons, as compared to 32.9 million
for the three months ended March 31, 1997. The increase was due to the
additional volume provided by the october 1997 acquisition of pearl gas, which
was mostly offset by the impact of temperatures, as measured on a degree day
basis, that were 14.3% warmer than the previous year's comparable period. In
addition, for the three months ended March 31, 1998, temperatures were 21.1%
warmer than normal.
For the three months ended March 31, 1998, wholesale propane volume declined by
3.3 million gallons, or 34.6%, to 6.3 million gallons, as compared to 9.6
million gallons for the three months ended March 31, 1997. This decline was due
in part to the abnormally warm winter weather and a reduction in spot sales to
certain customers.
11
<PAGE>
SALES
For the three months ended March 31, 1998, sales declined $8.6 million, or
18.4%, to $37.9 million, as compared to $46.4 million for the three months ended
March 31, 1997. This decline was primarily due to weather-related reductions in
volume and lower retail and wholesale selling prices. Retail and wholesale
selling prices declined versus the prior year's comparable period in response to
the lower propane supply costs. To a certain extent, the additional sales
provided by the Pearl operations mitigated the effects of the warm winter
weather.
COST OF SALES
For the three months ended March 31, 1998, cost of sales decreased $9.4 million,
or 37.6%, to $15.6 million, as compared to $24.9 million for the three months
ended March 31, 1997. Cost of sales declined from the prior period due to lower
wholesale propane supply costs and a decline in wholesale volume sold. This
decline was partially offset by the cost of sales attributable to the Pearl
operations.
GROSS PROFIT
For the three months ended March 31, 1998, gross profit increased $0.8 million,
or 3.7%, to $22.3 million, as compared to $21.5 million for the three months
ended March 31, 1997. This increase in gross profit was attributable to higher
retail and wholesale per gallon margins and the increase in retail volume
associated with the Pearl acquisition. This increase in gross profit was less
than expected due to the impact on volume of the abnormally warm temperatures.
DELIVERY AND BRANCH EXPENSES
For the three months ended March 31, 1998, delivery and branch expenses
increased $0.1 million, or 0.9%, to $9.6 million, as compared to $9.5 million
for the three months ended March 31, 1997. This increase was primarily due to
expenses of $0.8 million relating to the Pearl operations. Excluding the costs
of the Pearl operations, delivery and branch expenses declined $0.7 million, as
the Partnership was able to reduce branch costs in response to the warm winter
weather.
DEPRECIATION AND AMORTIZATION EXPENSE
For the three months ended March 31, 1998, depreciation and amortization expense
increased $0.3 million, or 10.5%, to $2.9 million, as compared to $2.6 million
for the three months ended March 31, 1997. This increase was due to the impact
of the Pearl acquisition.
GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended March 31, 1998, general and administrative expenses
declined $0.9 million, or 36.8%, to $1.4 million, as compared to $2.3 million
for the three months ended March 31, 1997. The decline was primarily due to the
recognition of expenses relating to the strategic initiative, which was
concluded during March 1997.
12
<PAGE>
INTEREST EXPENSE, NET
For the three months ended March 31, 1998, interest expense, net increased $0.1
million, or 5.9%, to $1.9 million, as compared to $1.8 million for the three
months ended March 31, 1997. This change was primarily due to an increase in
long-term debt associated with the Pearl acquisition.
NET INCOME
For the three months ended March 31, 1998, net income increased $1.1 million, or
19.5% to $6.4 million, as compared to $5.3 million for the three months ended
March 31, 1997. The increase in net income was primarily attributable to the
impact of the Pearl acquisition. During the three months ended March 31, 1998,
the Partnership, excluding the Pearl operations, was able to achieve
approximately the same level of net income as the prior year's comparable
period, despite the effect of temperatures that were 14.3% warmer.
EBITDA
For the three months ended March 31, 1998, EBITDA (defined as operating income
plus depreciation and amortization less net gain (loss) on sales of assets)
increased $1.6 million, or 16.1%, to $11.3 million, as compared to $9.7 million
for the three months ended March 31, 1997. The increase in EBITDA exceeded the
increase in both retail volume and gross profit, primarily through a reduction
in delivery and branch expenses in response to the warm temperatures and a lower
level of general and administrative expenses. EBITDA should not be considered
as an alternative to net income (as an indicator of operating performance) or as
an alternative to cash flow (as a measure of liquidity or ability to service
debt obligations) but provides additional information for evaluating the
Partnership's ability to make the Minimum Quarterly Distribution.
13
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998
- -------------------------------
COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
- -------------------------------------------
VOLUME
For the six months ended March 31, 1998, retail propane volume increased 5.3
million gallons, or 7.8%, to 72.6 million gallons, as compared to 67.3 million
gallons for the six months ended March 31, 1997. The increase was entirely due
to the October 22, 1997 acquisition of Pearl Gas, which provided 9.0 million
gallons of additional volume. The positive impact of the Pearl acquisition was
partially offset by the effect of temperatures which were 6.9% warmer than the
prior year's comparable period and 11.4% warmer than normal.
For the six months ended March 31, 1998, wholesale propane volume declined by
7.9 million gallons, or 33.3%, to 15.9 million gallons, as compared to 23.8
million gallons for the six months ended March 31, 1997. This decline was due
in part to the abnormally warm winter weather and a reduction in spot sales to
certain customers.
SALES
For the six months ended March 31, 1998, sales declined $17.6 million, or 18.1%,
to $79.7 million, as compared to $97.3 million for the six months ended March
31, 1997. This decline was due to weather-related reductions in retail and
wholesale volume, the reduction in wholesale spot sales and lower retail and
wholesale selling prices, partially offset by the additional sales provided by
the Pearl operations. During the six months ended March 31, 1998, retail and
wholesale selling prices declined versus the prior year's comparable period in
response to lower propane supply costs.
COST OF SALES
For the six months ended March 31, 1998, cost of sales declined $16.7 million,
or 31.0%, to $37.2 million, as compared to $53.9 million for the six months
ended March 31, 1997. This decline was largely due to lower propane supply
costs and lower wholesale sales volume, partially offset by the cost of sales
attributable to the Pearl operations.
GROSS PROFIT
For the six months ended March 31, 1998, gross profit declined $0.9 million, or
2.0%, to $42.5 million, as compared to $43.4 million for the six months ended
March 31, 1997. This change was attributable to lower wholesale volume and a
decline in wholesale and retail margins. As expected, per gallon margins were
lower than the prior year's comparable period when the Partnership benefited
from unusual supply and wholesale market conditions.
14
<PAGE>
GROSS PROFIT (CONTINUED)
While retail margins for the six months ended March 31, 1998 were lower than the
comparable 1997 period, these margins compare favorably with those achieved
during the six month periods ending March 31, 1996 and March 31, 1995.
DELIVERY AND BRANCH EXPENSES
For the six months ended March 31, 1998, delivery and branch expenses increased
$0.4 million, or 2.0%, to $19.7 million, as compared to $19.4 million for the
six months ended March 31, 1997. This increase was solely due to the additional
operating costs associated with the Pearl operations. Excluding the Pearl
operations, delivery and branch expenses were $1.0 million less than the prior
year's comparable period due to lower insurance costs and management's ability
to reduce operating costs in response to the warm winter weather.
DEPRECIATION AND AMORTIZATION
For the six months ended March 31, 1998, depreciation and amortization expense
increased $0.5 million, or 9.9%, to $5.7 million, as compared to $5.2 million
for the six months ended March 31, 1997, primarily due to additional
depreciation expense associated with the Pearl acquisition.
GENERAL AND ADMINISTRATIVE EXPENSES
For the six months ended March 31, 1998, general and administrative expenses
decreased $1.1 million, or 27.6%, to $2.8 million, as compared to $3.9 million
for the six months ended March 31, 1997. This decline was primarily due to the
recognition of expenses relating to the strategic initiative, which was
concluded during March 1997.
INTEREST EXPENSE, NET
For the six months ended March 31, 1998, interest expense, net increased $0.3
million, or 9.5%, to $4.0 million, as compared to $3.7 million for the six
months ended March 31, 1997. This change was primarily due to the additional
long-term borrowing associated with the Pearl Gas acquisition.
INCOME TAX EXPENSE
Income tax expense primarily represents certain state income taxes related to
the partnership's wholly-owned corporation which conducts non-qualifying master
limited partnership business.
NET INCOME
For the six months ended March 31, 1998, net income decreased $1.1 million, or
10.2%, to $10.1 million, as compared to $11.2 million for the six months ended
March 31, 1997. This decline was primarily due to lower wholesale gross profit
and increases in depreciation and amortization expenses, as well as interest
costs relating to the financing of the Pearl Gas acquisition.
15
<PAGE>
EBITDA
For the six months ended March 31, 1998, EBITDA (defined as operating income
plus depreciation and amortization less net gain (loss) on sales of assets)
declined only $0.2 million to $20.0 million. This slight reduction was achieved
in a period which was impacted by 11.4% warmer than normal temperatures, as the
effects of the abnormally warm winter weather were mostly offset by the
additional EBITDA provided from the Pearl acquisition and reductions in total
operating expenses. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to cash
flow (as a measure of liquidity or ability to service debt obligations) but
provides additional information for evaluating the Partnership's ability to make
the Minimum Quarterly Distribution.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended March 31, 1998, net cash provided by operating
activities decreased $3.3 million, to $11.9 million, as compared to $15.2
million for the six months ended March 31, 1997. This decrease was primarily
due to the additional cash requirements of inventory and accounts payable and
lower cash flow due to lower net income.
Net cash used in investing activities decreased $1.6 million to $2.0 million for
the six months ended March 31, 1998, as compared to $3.6 million for the six
months ended March 31, 1997. The decline was primarily due to the receipt of
$1.8 million in cash from the October 1997 Pearl Gas Conveyance.
Net cash flows used in financing activities declined $5.8 million to $2.5
million for the six months ended March 31, 1998, as compared to $8.4 million for
the six months ended March 31, 1997. Additional capital was raised during the
six months ended March 31, 1998 to finance the Partnership's acquisition
program. The Partnership raised $27.1 million in capital through the offering
of additional Common Units, $16.1 million in net proceeds, including a General
Partner contribution of $0.3 million, and the private placement of $11.0 million
of 7.17% First Mortgage Notes due 2010. These proceeds were used to repay $23.0
million of long-term debt conveyed in the Pearl Gas acquisition. For the six
months ended March 31, 1998, unitholder distributions of $6.5 million were paid.
The Partnership's cash requirements for the remainder of fiscal 1998 include
maintenance capital expenditures of approximately $1.0 million and interest
payments of $3.8 million on its First Mortgage Notes. In addition, the
Partnership plans to pay $7.0 million of Limited and General Partner
distributions. Based on its current cash position, bank credit availability and
expected net cash from operating activities, the partnership expects to be able
to meet all of these obligations for fiscal 1998, as well as all of its other
current obligations as they become due.
The Partnership has a number of information system improvement initiatives under
way that will require increased expenditures during the next several years.
These initiatives include the modification of certain computer software and
hardware systems to be Year 2000 compliant. Although the final estimates to
modify current systems have not yet been determined, the Partnership does not
expect that such costs will have a material effect on the Partnership's results
of operations or financial position.
16
<PAGE>
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits Included Within:
------------------------
(10.12) THIRD AMENDMENT dated as of April 15, 1998 (this "Third
Amendment"), to the Credit Agreement dated as of December
13, 1995 (as amended prior to the date hereof, the "Credit
Agreement"), among Star Gas Propane, L.P., a Delaware
limited partnership (the "Borrower"), the lenders party
thereto, The First National Bank of Boston (now known as
BankBoston, N.A.), as Administrative Agent (the
"Administrative Agent"), and NationsBank, N.A., as
Documentation Agent (the "Documentation Agent", and together
with the Administrative Agent, the "Agents").
(27) Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K have been filed during this quarter for which
this report is filed.
17
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf of the undersigned
thereunto duly authorized:
Star Gas Partners, L.P.
By: Star Gas Corporation (General Partner)
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Joseph P. Cavanaugh President May 7, 1998
------------------- Star Gas Corporation
Joseph P. Cavanaugh (Principal Executive Officer)
/s/ Richard F. Ambury Vice President Finance May 7, 1998
------------------- Star Gas Corporation
Richard F. Ambury (Principal Financial
& Accounting Officer)
18
<PAGE>
EXHIBIT 10.12
THIRD AMENDMENT
THIRD AMENDMENT dated as of April 15, 1998 (this "Third
Amendment"), to the Credit Agreement dated as of December 13, 1995 (as
amended prior to the date hereof, the "Credit Agreement"), among Star
Gas Propane, L.P., a Delaware limited partnership (the "Borrower"),
the lenders party thereto, The First National Bank of Boston (now
known as BankBoston, N.A.), as Administrative Agent (the
"Administrative Agent"), and NationsBank, N.A., as Documentation Agent
(the "Documentation Agent", and together with the Administrative
Agent, the "Agents").
The Borrower has requested the Agents and the Lenders to make various changes
to the Credit Agreement. The parties hereto have agreed, subject to the terms
and conditions hereof, to amend the Credit Agreement as provided herein.
Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to such terms in the Credit Agreement (the Credit Agreement,
as amended by, and together with, this Third Amendment, and as hereinafter
amended, modified, extended or restated from time to time, being called the
"Amended Agreement").
- ------------------
Accordingly, the parties hereto hereby agree as follows:
SECTION 1.01. Amendments to Section 1.01. (a) The following definitions are
--------------------------
hereby added to Section 1.01 of the Credit Agreement in the appropriate
alphabetical order:
""Como Acquisition" shall mean the acquisition by the Borrower of
----------------
substantially all of the propane and home heating oil assets of Como Gas
and Oil Company pursuant to the Purchase Agreement."
""Purchase Agreement" shall mean the agreement pursuant to which the
------------------
Como Acquisition is consummated, the terms of which shall be acceptable to
the Lenders in all respects."
(b) The definition of "Eligible Propane Acquisition" in Section 1.01 of the
Credit Agreement is hereby amended by adding the following sentence to the
end of such definition:
"Notwithstanding the foregoing, the Como Acquisition shall be deemed
an Eligible Propane Acquisition; provided that the following conditions
--------
have been met: (a) ten days prior to the consummation of the Como
Acquisition, the Agents shall have received from the Borrower satisfactory
evidence that the purchase price to be paid pursuant to the Purchase
Agreement shall not exceed $16,000,000 plus amounts paid for working
capital (including Inventory, Accounts Receivable (each as defined in the
Security Agreement) and prepaid items) and that the terms and conditions
set forth in the Purchase Agreement are consistent with the information
provided to the Agents on April 14, 1998 regarding the Como Acquisition;
(b) upon the consummation of the Como Acquisition (i)
<PAGE>
the Agents shall have received (A) an opinion of counsel to the Borrower in
form and substance satisfactory to the Agents and their counsel and (B)
such other documents, instruments and certificates relating to the Como
Acquisition as they shall reasonably request (which shall be satisfactory
in form and substance to the Agents) and (ii) the Borrower shall have taken
such actions as are necessary to accomplish the following: (A) all UCC-1
financing statements required to be filed in appropriate jurisdictions in
order to perfect the liens and security interests of the Trustee (on behalf
of the holders of the Mortgage Notes and the Lenders hereunder) in and to
all personal property acquired pursuant to the Purchase Agreement that is
of the type in which a security interest can be perfected under Article 8
or Article 9 of the UCC, shall have been filed in the appropriate
jurisdictions; (B) Lockbox Accounts in favor of the Trustee covering any
new Deposit Accounts of the Borrower resulting from the Como Acquisition
shall have been executed and delivered to the Trustee within 60 days of the
consummation of the Como Acquisition, and the liens and security interest
of the Trustee perfected in such Deposit Accounts; (C) Mortgages covering
all real property acquired in the Como Acquisition shall be recorded in the
appropriate jurisdictions, the liens and security interests created
pursuant thereto shall be perfected pursuant to the terms of Section 6.22,
and the terms of Section 6.22 shall be, in all respects, satisfied with
respect to such real properties, within 30 days of the consummation of the
Como Acquisition; (D) landlord's lien waivers, bailee agreements and
similar instruments, in form and substance acceptable to the Agents,
covering Equipment or Inventory acquired in the Como Acquisition shall have
been obtained with respect to such acquired Equipment or Inventory that is
located on properties not owned by Como Gas and Oil Company, or that is in
the possession of third parties (except that nothing in this clause (D)
shall require the Borrower to perfect security interests in propane tanks
that are commonly referred to as "customer tanks") and (E) Motor Vehicle
titles covering all Motor Vehicles acquired in the Como Acquisition, and
issued to indicate the existence of liens and security interests in favor
of the Trustee in accordance with applicable law, shall have been delivered
to the Trustee within 60 days of the consummation of the Como Acquisition."
(c) The definition of "Funded Debt" in Section 1.01 of the Credit Agreement is
hereby amended by inserting the following phrase immediately before the
period at the end of such definition:
"provided, further, that Funded Debt shall not include Intercompany
-------- -------
Indebtedness permitted pursuant to Section 6.01(d)"
(d) The definition of "Tranche A Maturity Date" in Section 1.01 of the Credit
Agreement is hereby deleted in its entirety and the following is
substituted in lieu thereof:
"Tranche A Maturity Date" shall mean June 30, 2000."
-----------------------
(e) The definition of "Tranche B Conversion Date" in Section 1.01 of the Credit
Agreement is hereby deleted in its entirety and the following is
substituted in lieu thereof:
"Tranche B Conversion Date" shall mean June 30, 1999."
-------------------------
<PAGE>
(f) The definition of "Tranche B Maturity Date" in Section 1.01 of the Credit
Agreement is hereby deleted in its entirety and the following is
substituted in lieu thereof:
""Tranche B Maturity Date" shall mean September 30, 2002."
-----------------------
SECTION 1.02. Amendment to Section 4.03. Section 4.03(a) of the Credit
-------------------------
Agreement is hereby deleted in its entirety and the following is substituted in
lieu thereof:
"(a) At the time of and immediately after any Tranche B Revolving
Credit Borrowing made or any Tranche B Letter of Credit issued (i) on or
before December 31, 1998, the Leverage Ratio as of the date of such
Borrowing or issuance (after giving affect to the acquisition or Growth-
Related Capital Expenditure for which such Borrowing or Letter of Credit is
being used) shall be no greater than 5.00:1.00 and (ii) after December 31,
1998, the Leverage Ratio as of the date of such Borrowing or issuance
(after giving affect to the acquisition or Growth-Related Capital
Expenditure for which such Borrowing or Letter of Credit is being used)
shall be no greater than 4.50:1.00; and, in the case of each such Borrowing
or issuance of each such Letter of Credit, the Borrower shall have prepared
and furnished to the Agents prior to such Borrowing or issuance pro forma
financial statements demonstrating the fulfillment of such condition to the
satisfaction of the Agents. For purposes of calculating the Leverage Ratio
as required by this Section 4.03(a), Consolidated Cash Flow for the
Reference Period shall mean the greater of (A) Consolidated Cash Flow for
the most recent period of four consecutive fiscal quarters prior to the
date of determination and (B) 50% of Consolidated Cash Flow for the most
recent period of eight consecutive fiscal quarters prior to the date of
determination."
SECTION 1.03. Amendment to Section 6.31. (a) Section 6.31(a) of the Credit
-------------------------
Agreement is hereby deleted in its entirety and the following is hereby
substituted in lieu thereof:
"(a) The Borrower will not permit the ratio on any day (the "date of
determination") of (i) Total Funded Debt as of the last day of the
Reference Period with respect to such date of determination to (ii)
Consolidated Cash Flow for such Reference Period to be greater than the
ratio set forth below opposite the calendar period during which such date
of determination occurs:
Calendar Period Ratio
- ------------------------- ---------
January 1, 1996 through 5.00:1.00
June 30, 1997
July 1, 1997 through 4.75:1.00
September 30, 1997
October 1, 1997 through 4.95:1.00
December 31, 1997
January 1, 1998 through 5.00:1.00
December 31, 1998
After December 31, 1998 4.50:1.00"
<PAGE>
(b) Section 6.31(b) of the Credit Agreement is hereby deleted in its entirety
and the following is hereby substituted in lieu thereof:
"Notwithstanding the foregoing, the Borrower shall not be required to
comply with the foregoing covenant on any date of determination when (after
giving effect to any borrowings, repayments or other credit events on such
day) there are no outstanding Tranche B Revolving Loans or Tranche B Term
Loans and there is no outstanding Tranche B Letter of Credit Exposure.
Furthermore, for purposes of (i) this Section 6.31 only, but not (except as
otherwise expressly provided in clause (ii) below) for purposes of
determining the Applicable Margin or any other purpose and (ii) calculating
the Leverage Ratio as required by Section 4.03(a), Consolidated Cash Flow
for the Reference Period shall mean the greater of (A) Consolidated Cash
Flow for the most recent period of four consecutive fiscal quarters prior
to the date of determination and (B) 50% of Consolidated Cash Flow for the
most recent period of eight consecutive fiscal quarters prior to the date
of determination. In addition, it is understood and agreed that, when and
to the extent that another provision of this Agreement expressly provides
otherwise, the Borrower shall not be required to calculate Consolidated
Cash Flow on a pro forma basis as of any date of determination other than
the last day of each fiscal quarter of the Borrower."
SECTION 1.04. Amendment to Intercompany Note. The Intercompany Note made by
------------------------------
the Borrower and the Restricted Subsidiaries and payable to the General Partner
and the Public Partnership in the principal amount of up to $10,000,000 is
hereby amended in its entirety as attached hereto as Annex I.
SECTION 1.05. Representations and Warranties. The Borrower hereby represents
------------------------------
and warrants to each of the Agents and the Lenders, as follows:
(a) The representations and warranties set forth in Article III of the
Agreement, and in each other Loan Document, are true and correct in all
material respects on and as of the date hereof and on and as of the Third
Amendment Effective Date (as hereinafter defined) with the same effect as
if made on and as of the date hereof or the Third Amendment Effective Date,
as the case may be, except to the extent such representations and
warranties expressly relate solely to an earlier date.
(b) Each of the Borrower and the Subsidiaries is in compliance with all the
terms and conditions of the Agreement and the other Loan Documents on its
part to be observed or performed and no Default or Event of Default has
occurred or is continuing.
(c) The execution, delivery and performance by the Borrower of this Third
Amendment, the Purchase Agreement and the transactions contemplated thereby
have been duly authorized by the Borrower.
(d) This Third Amendment constitutes the legal, valid and binding obligation of
the Borrower, enforceable against it in accordance with its terms.
<PAGE>
(e) The execution, delivery and performance by the Borrower of this Third
Amendment (i) will not violate (A) any provision of law, statute, rule or
regulation, or of the agreement of limited partnership of the Borrower, (B)
any order of any Governmental Authority or (C) any provision of any
indenture, agreement or other instrument to which the Borrower is a party
or by which it or any of its property may be bound and (ii) do not require
any consents under, result in a breach of or constitute (with notice or
lapse of time or both) a default or give rise to increased, additional,
accelerated or guaranteed rights of any Person under any such indenture,
agreement or other instrument.
SECTION 1.06. Effectiveness. This Third Amendment shall become effective
-------------
only upon satisfaction of the following conditions precedent (the first date
upon which each such condition has been satisfied being herein called the "Third
-----
Amendment Effective Date"):
- ------------------------
(a) the Administrative Agent shall have received duly executed counterparts of
this Third Amendment which, when taken together, bear the authorized
signatures of the Borrower and the Lenders.
(b) The Agents shall be satisfied that the representations and warranties set
forth in Section 1.05 are true and correct on and as of the Third Amendment
Effective Date.
(c) There shall not be any action pending or any judgment, order or decree in
effect which, in the judgment of the Agents or the Lenders, is likely to
restrain, prevent or impose materially adverse conditions upon performance
by the Borrower of its obligations under the Amended Agreement.
(d) The Agents shall have received such other documents, legal opinions,
instruments and certificates relating to this Third Amendment as they shall
reasonably request and such other documents, legal opinions, instruments
and certificates shall be satisfactory in form and substance to the Agents
and the Lenders. All corporate and other proceedings taken or to be taken
in connection with this Third Amendment and all documents incidental
thereto, whether or not referred to herein, shall be satisfactory in form
and substance to the Agents and the Lenders.
(e) The Agents and the Lenders shall be satisfied with the proposed terms and
conditions of the Purchase Agreement.
(f) The Trustee, on behalf of the Secured Parties, shall have received an
Intercompany Note in the form attached hereto as Annex I, duly executed by
the Borrower, accompanied by an undated assignment executed in blank.
SECTION 1.07. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
--------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE
EXTENT THAT THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA MAY APPLY.
SECTION 1.08. Expenses. The Borrower shall pay all reasonable out-of-pocket
--------
expenses incurred by the Agents and the Lenders in connection with the
preparation, negotiations execution, delivery and enforcement of this Third
Amendment, including, but not limited to, the reasonable fees and disbursements
of counsel.
<PAGE>
SECTION 1.09. Counterparts. This Third Amendment may be executed in any
------------
number of counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one agreement.
SECTION 1.10. Loan Documents. Except as expressly set forth herein, the
--------------
amendments provided herein shall not by implication or otherwise limit,
constitute a waiver of, or otherwise affect the rights and remedies of the
Lenders, the Agents, the Trustee or the other Secured Parties under the Amended
Agreement or any other Loan Document, nor shall they constitute a waiver of any
Default or Event of Default, nor shall they alter, modify, amend or in any way
affect any of the terms, conditions, obligations, covenants or agreements
contained in the Amended Agreement or any other Loan Document. Each of the
amendments provided herein shall apply and be effective only with respect to the
provisions of the Amended Agreement specifically referred to by such amendments.
Except as expressly amended herein, the Amended Agreement and the other Loan
Documents shall continue in full force and effect in accordance with the
provisions thereof. As used in the Amended Agreement, the terms "Agreement",
"herein", "hereinafter", "hereunder", "hereto" and words of similar import shall
mean, from and after the date hereof, the Amended Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be
duly executed by duly authorized officers, all as of the date first above
written.
STAR GAS PROPANE, L.P., as Borrower
By: Star Gas Corporation, its General Partner
by
-------------------------------------
Name:
Title:
BANKBOSTON, N.A.,
as Administrative Agent and as a Lender
by
-------------------------------------
Name:
Title:
NATIONSBANK, N.A., as Documentation Agent
and as a Lender
by
-------------------------------------
Name:
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STAR GAS
PARTNERS, L.P. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998
AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE INTERIM PERIOD OCTOBER 1, 1997
THROUGH MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002590
<NAME> STAR GAS PARTNERS, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 8,250
<SECURITIES> 0
<RECEIVABLES> 10,028
<ALLOWANCES> 330
<INVENTORY> 3,659
<CURRENT-ASSETS> 22,314
<PP&E> 130,693
<DEPRECIATION> 23,067
<TOTAL-ASSETS> 178,308
<CURRENT-LIABILITIES> 7,473
<BONDS> 96,000
0
0
<COMMON> 74,296<F1>
<OTHER-SE> 455<F2>
<TOTAL-LIABILITY-AND-EQUITY> 178,308
<SALES> 77,283
<TOTAL-REVENUES> 79,728
<CGS> 37,208
<TOTAL-COSTS> 22,433
<OTHER-EXPENSES> 5,853
<LOSS-PROVISION> 127
<INTEREST-EXPENSE> 4,024
<INCOME-PRETAX> 10,083
<INCOME-TAX> 13
<INCOME-CONTINUING> 10,070
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,070
<EPS-PRIMARY> 1.69
<EPS-DILUTED> 1.69
<FN>
<F1>COMMON STOCK - REPRESENTS LIMITED PARTNER INTERESTS WHICH CONSIST OF COMMON AND
SUBORDINATED UNITS. THESE UNITS ARE CONSIDERED TO POSSESS THE CHARACTERISTICS
OF COMMON STOCK AND ARE BOTH INCLUDED IN THE DETERMINATION OF EPS.
<F2>OTHER SE - REPRESENTS THE GENERAL PARTNER'S INTEREST IN THE PARTNERSHIP AND IS
CLASSIFIED HERE SINCE IT DOES NOT POSSESS THE RELEVANT CHARACTERISTICS OF
EITHER COMMON OR PREFERRED STOCK.
</FN>
</TABLE>
