SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
-------------------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- ----------
Commission file number 2-88526
PETROLEUM HEAT AND POWER CO., INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 06-1183025
- - ---------------------------------- --------------------
(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)
Registrant's telephone number,
including area code: (203) 325-5400
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 Sections 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) had been subject to such filing
requirements for the past 90 days.
Yes X No
--- --
As of September 30, 1994 there were 18,992,579 shares of the Registrant's Class
A Common Stock, 25,963 shares of the Registrant's Class B Common Stock and
2,545,139 shares of the Registrant's Class C Common Stock outstanding.
This Report contains a total of 16 pages.
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Petroleum Heat and Power Co., Inc.
Index to Form 10-Q
Page
------
Part 1 - Financial Information:
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1994 and December 31, 1993 3
Consolidated Statements of Operations for the
Third Quarter Ended
September 30, 1994 and September 30, 1993
and the Nine Months Ended
September 30, 1994 and September 30, 1993 4
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1994 and
September 30, 1993 5-6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2 - Management's Discussion and Analysis of
Financial Conditions and Results
of Operations 9-14
Part 2 - Other Information:
Item 6 - Exhibits and Reports on Form 8-K 15
Signature 16
<PAGE>
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<TABLE><CAPTION>
Petroleum Heat and Power Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
Assets
------
September 30, December 31,
1994 1993
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 17,054,782 $ 4,613,546
U.S. Treasury Notes held in a Cash Collateral Account - 20,000,000
Accounts receivable (net of allowance of $2,609,280
and $1,026,202) 43,687,417 74,818,503
Inventories 14,198,175 13,992,928
Prepaid expenses 6,239,369 5,230,865
Notes receivable and other current assets 1,436,187 1,715,329
------------ ------------
Total current assets 82,615,930 120,371,171
------------ ------------
Property, plant and equipment 67,838,103 62,643,562
Less accumulated depreciation and amortization 34,191,071 31,103,032
------------ ------------
33,647,032 31,540,530
------------ ------------
Intangible assets (net of accumulated amortization
of $236,656,477 and $217,190,143)
Customer lists 79,066,572 73,177,198
Deferred charges and pension costs 23,626,411 15,049,897
------------ ------------
102,692,983 88,227,095
------------ ------------
Investment in Star Gas Corporation and other assets 15,182,000 16,450,000
------------ ------------
$234,137,945 $256,588,796
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Working capital borrowings $ - $ 28,000,000
Current maturities of cumulative redeemable exchangeable
preferred stock and long term debt 4,200,012 4,200,012
Accounts payable 8,550,814 16,664,026
Customer credit balances 27,090,937 22,324,023
Unearned service contract revenue 13,171,375 13,018,983
Accrued expenses and other liabilities 21,245,408 19,469,875
------------ ------------
Total current liabilities 74,258,546 103,676,919
------------ ------------
Long-term notes payable 42,631,832 50,000,000
------------ ------------
Other long-term debt 8,820,800 47,059
------------ ------------
Supplemental benefits payable 1,636,919 1,652,314
------------ ------------
Pension plan obligation 7,059,730 7,079,494
------------ ------------
Subordinated notes payable 167,631,831 135,263,663
------------ ------------
Cumulative redeemable exchangeable preferred stock, par
value $.10 per share; 409,722 shares authorized, 208,332
and 250,000 shares outstanding of which 41,667 are
reflected as current 16,666,533 20,833,333
------------ ------------
Stockholders' equity (deficiency):
Preferred stock - par value $.10 per share; 5,000,000 shares
authorized, none outstanding
Class A common stock - par value $.10 per share; 40,000,000
shares authorized, 18,992,579 shares outstanding 1,899,258 1,899,258
Class B common stock - par value $.10 per share; 6,500,000
shares authorized, 25,963 and 216,901 shares outstanding 2,596 21,690
Class C common stock - par value $.10 per share; 5,000,000
shares authorized, 2,545,139 shares outstanding 254,514 254,514
Additional paid-in capital 51,093,938 54,416,259
Deficit (132,004,517) (112,741,672)
Minimum pension liability adjustment (4,534,035) (4,534,035)
------------ ------------
(83,288,246) (60,683,986)
Note receivable from stockholder (1,280,000) (1,280,000)
------------ ------------
Total stockholders' equity (deficiency) (84,568,246) (61,963,986)
------------ ------------
$234,137,945 $256,588,796
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
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<TABLE><CAPTION>
Petroleum Heat and Power Co., Inc.
and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1994 1993 1994 1993
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 49,230,745 $ 54,134,159 $385,290,895 $377,383,609
Cost of sales 42,326,019 44,530,481 257,239,663 262,367,466
------------ ------------ ------------ ------------
Gross profit 6,904,726 9,603,678 128,051,232 115,016,143
Selling, general and
administrative expenses 21,932,663 22,049,496 68,570,797 68,270,664
Direct delivery expense 3,527,685 3,622,172 23,336,788 20,909,602
Amortization of customer lists 5,116,996 5,473,151 14,801,779 18,236,229
Depreciation and amortization
of plant and equipment 1,539,873 1,441,554 4,307,857 4,368,314
Amortization of deferred charges 1,611,949 1,375,004 4,664,555 4,136,435
Provision for supplemental benefits 69,867 70,464 209,601 193,122
------------ ------------ ------------ ------------
Operating income (loss) (26,894,307) (24,428,163) 12,159,855 (1,098,223)
Other income (expense):
Interest expense (6,191,220) (5,535,170) (18,055,514) (16,501,218)
Interest income 396,687 401,698 1,334,718 1,354,068
Gain (loss) on sales of fixed assets 10,946 (9,283) 83,141 (28,817)
------------ ------------ ------------ ------------
Loss before income
taxes, equity interest
and extraordinary item (32,677,894) (29,570,918) (4,477,800) (16,274,190)
Income taxes (benefit) (125,000) (83,000) 425,000 218,000
----------- ------------ ------------ ------------
Loss before equity
interest and extraordinary item (32,552,894) (29,487,918) (4,902,800) (16,492,190)
Equity in earnings (losses) of Star
Gas Corporation (1,911,000) - (1,243,000) -
------------ ------------ ------------ ------------
Loss before
extraordinary item (34,463,894) (29,487,918) (6,145,800) (16,492,190)
------------ ------------ ------------ ------------
Extraordinary item - loss on early
extinguishment of debt - - (654,500) (867,110)
------------ ------------- ----------- ------------
Net Loss $(34,463,894) $(29,487,918) $ (6,800,300) $(17,359,300)
============ ============ ============ ============
Net income (loss) applicable to
common stock $(36,005,644) $(31,029,668) $(10,140,746) $(20,726,296)
Income (loss) before extraordinary
item per common share
Class A Common Stock $(1.67) $(1.45) $(.45) $(.94)
Class B Common Stock .28 .47 1.10 1.41
Class C Common Stock (1.67) (1.45) (.45) (.94)
Extraordinary loss per common share
Class A Common Stock $ - $ - $(.03) $(.04)
Class B Common Stock - - - -
Class C Common Stock - - $(.03) (.04)
Net income (loss) per common share
Class A Common Stock $(1.67) $(1.45) $(.48) $(.98)
Class B Common Stock .28 .47 1.10 1.41
Class C Common Stock (1.67) (1.45) $(.48) (.98)
Cash dividends declared per
common stock
Class A Common Stock $ .14 $ .14 $ .41 $ .39
Class B Common Stock .28 .47 1.10 1.41
Class C Common Stock .14 .14 .41 .39
Weighted average number of
common stock outstanding
Class A Common Stock 18,992,579 18,992,579 18,992,579 18,992,579
Class B Common Stock 154,639 216,901 195,919 216,901
Class C Common Stock 2,545,139 2,545,139 2,545,139 2,545,139
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
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<TABLE><CAPTION>
Petroleum Heat and Power Co., Inc.
and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
---------------------------------
1994 1993
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,800,300) (17,359,300)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Amortization of customer lists 14,801,779 18,236,229
Depreciation and amortization of
plant and equipment 4,307,857 4,368,314
Amortization of deferred charges
and debt discount 4,664,555 4,148,045
Equity in loss of Star Gas Corporation 1,243,000 -
Provision for losses on accounts
receivable 1,491,498 1,649,988
Provision for supplemental benefit 209,601 193,122
Loss on bond redemption 654,500 867,110
(Gain) loss on sales of fixed assets (83,141) 28,817
Amortization of acquired pension
plan obligation (19,764) (19,819)
Decrease in accounts receivable 29,639,588 33,522,017
Decrease (Increase) in inventory (205,247) 2,941,246
Increase in prepaid expenses,notes
receivable and other current assets (729,362) (1,465,990)
Decrease in other assets 25,000 10,000
Decrease in accounts payable (8,113,212) (6,115,613)
Increase in customer credit balances 4,766,914 7,168,515
Increase (decrease) in unearned service
contract revenue 152,392 (845,939)
Increase (decrease) in accrued expenses 1,877,476 (150,670)
--------- ---------
Net cash provided by
operating activities 47,883,134 47,176,072
---------- ----------
Cash flows from (used for) investing
activities:
Acquisitions (24,451,171) (14,797,082)
Capital expenditures (2,042,423) (2,359,837)
Proceeds from sales of fixed assets 291,403 129,638
---------- ----------
Net cash used for investing
activities (26,202,191) (17,027,281)
----------- -----------
</TABLE>
<PAGE>
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<TABLE><CAPTION>
Petroleum Heat and Power Co., Inc.
and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------------------------
1994 1993
------------ -----------
<S> <C> <C>
Cash flows from (used for) financing
activities:
Net reductions under a financing
arrangement $ (28,000,000) $ (32,000,000)
Net proceeds from issuance of
subordinated notes 71,087,500 48,067,642
Repayment of notes payable (50,654,500) -
Repurchase of subordinated notes - (25,368,574)
Decrease (increase) in U.S.
Treasury Notes 20,000,000 (5,000,000)
Repurchase of preferred stock (4,166,800) -
Repurchase of common stock-Class B (3,341,415) -
Increase in deferred financing costs (1,350,000) (400,000)
Decrease in other debt and
supplemental benefits (250,004) (250,009)
Principal payments under capital
lease obligation - (103,595)
Cash dividends paid (12,564,488) (11,516,905)
----------- -------------
Net cash used for
financing activities (9,239,707) (26,571,441)
----------- -------------
Net increase in cash 12,441,236 3,577,350
Cash at beginning of year 4,613,546 3,859,557
----------- -------------
Cash at the end of period $ 17,054,782 $ 7,436,907
============ =============
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 14,934,390 $ 13,062,177
Income taxes 296,508 280,655
Non-cash investing activity:
Acquisition of customer lists and
deferred charges (8,798,750) -
Non-cash financing activity:
Issuance of note payable 8,798,750 -
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
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Petroleum Heat and Power Co., Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1- Basis of Presentation
---------------------
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for the fair
statement of results for the interim periods.
The results of operations for the nine months ended September 30, 1994
are not necessarily indicative of the results to be expected for the full
year. The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes included
in the Company's December 31, 1993 Annual Report on Form 10K.
2- Per Share Data
--------------
Earnings per common shares are computed utilizing the three class
method based upon the weighted average number of shares of Class A Common
Stock, Class B Common Stock and Class C Common Stock outstanding after
adjusting net income (loss) for preferred dividends declared and preferred
stock accretion of $3,341,000 and $3,367,000 for the nine months ended
September 30, 1994 and 1993, respectively and for preferred dividends
declared of $1,542,000 for each of the three months ended September 30,
1994 and 1993. Fully diluted earnings per common shares are not presented
because the effect is not material.
3- Acquisitions
------------
During the nine month period ending September 30, 1994, the Company
acquired the customer lists and equipment of seven unaffiliated fuel oil
dealers. The aggregate consideration for these acquisitions, accounted for
by the purchase method, was approximately $31.0 million.
Sales and net income of the acquired companies is included in the
consolidated statement of income from the respective dates of acquisition.
Had these acquisitions occurred at the beginning of the period, the
pro forma unaudited results of operations for the nine months ended
September 30, 1994, would have been as follows:
(Thousands, Except Per Share)
-----------------------------
Net Sales $ 414,124
Net Loss $ (4,879)
Earnings Per Share:
Class A Common Stock $ (.39)
Class B Common Stock $ 1.10
Class C Common Stock $ (.39)
<PAGE>
-8-
4- Termination of Special Dividends on Class B Common Stock
--------------------------------------------------------
During July 1994, the Company exercised its right to terminate the
Special Dividends on the Class B Common Stock, effective August 31, 1994,
"the expiration date". The Company's restated and amended articles of
incorporation provides that when the Company terminates the Special
Dividends, the holders of Class B Common Stock have the right to require
the Company to purchase their shares at $17.50 per share plus all accrued
and unpaid Special Dividends through the expiration date ($0.2763 per share
for the period July 1, 1994 through August 31, 1994).
As of the expiration date of August 31, 1994, 190,938 shares of Class B
Common Stock were repurchased for approximately $3.3 million. The
remaining Class B Common Stockholders will not be paid any dividends until
the aggregate amount of dividends paid on all other classes of stock
exceeds the Common Stock Allocation (defined as the Company's cash flow for
each fiscal year after December 31, 1985, on a cumulative basis, minus all
Special Dividends paid or accrued). At December 31, 1993 the Common Stock
Allocation amounted to approximately $100.2 million. After the Common
Stock Allocation has been satisfied each share of Class B Common Stock will
participate equally with each share of Class A Common Stock and Class C
Common Stock with respect to all dividends.
5 - Changes in Credit Agreement
---------------------------
On August 1, 1994, the Company further amended its amended and restated
credit agreement to include a $50 million two-year revolving credit
acquisition facility, convertible into a three-year self amortizing term
loan. Assuming the refinancing of the Company's 11.85%, 12.17% and 12.18%
Senior and Subordinated Notes due in 1998, repayments and/or sinking fund
deposits equal to 1/3 of the outstanding balance of the facility on June
30, 1996 would be payable annually with the final payment due May 30, 1999.
If the assumed refinancing does not occur on or prior to June 30, 1998, the
final payment due on May 30, 1999 would be accelerated to June 30, 1998.
The Company has additionally pledged its accounts receivable and inventory
as security under the revised and amended credit agreement.
6 - Subsequent Event
----------------
On November 1, 1994, the Company announced its intention to exercise
certain of its options to purchase a portion of the outstanding equity
securities of Star Gas Corporation, subject to regulatory approvals as well as
certain other matters. Should these options be exercised, Petro's equity
ownership of Star would increase from 33% to 84%.
<PAGE>
-9-
Petroleum Heat and Power Co., Inc.
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
-------------------------
Nine Months Ended September 30, 1994
Compared to Nine Months Ended September 30, 1993
- - ------------------------------------------------
For the nine months ended September 30, 1994, results improved
significantly as the Company achieved record levels of home heating oil volume
and EBITDA*. The Company's EBITDA increased 39.9% from $25.8 million to $36.1
million, the net loss decreased by $10.6 million from $17.4 million to $6.8
million and home heating oil volume increased 4.9% from 307.2 million gallons to
322.3 million gallons. Included in the net loss for the nine months ended
September 30, 1994 was the Company's proportionate share ($1.2 million) of the
net loss of Star Gas. However, as the Company's investment in Star is accounted
for under the equity method of accounting, Star's volume, sales and EBITDA are
not reflected in the Company's financial statements.
Net sales increased for the first nine months of 1994 to $385.3 million
from $377.4 million for the same period in 1993. This $7.9 million increase was
attributable to volume growth associated with acquisitions and to colder weather
partially offset by the Company's delivery efficiency program which resulted in
the shifting of Summertime deliveries to the more productive Fall and Winter
months. Also offsetting the effects of acquisitions and colder weather were
lower selling prices, reflecting a lower wholesale cost of product, and
attrition in the Company's customer base.
During the first nine months of 1994, home heating oil volume increased to
322.3 million gallons from 307.2 million gallons for the same period in 1993.
This 15.1 million gallon increase was due to 7.3% colder temperatures for the
first nine months of 1994 compared to the prior period and the impact of the
nine acquisitions (with annual volumes of 25.8 million gallons) completed in
1993 whose entire nine month volume is first reflected in 1994. The increase in
volume associated with the Company's acquisition program was not significantly
effected by the seven 1994 acquisitions (with annual volumes of 43.3 million
gallons) since the majority of these acquisitions were completed after the
heating season. The acquisition growth and the increase in volume due to colder
temperatures were partially offset by the Company's delivery efficiency program
which began in the Spring of 1994 and resulted in fewer discretionary deliveries
during the Summer months in favor of increased deliveries during the more
efficient Fall and Winter delivery periods. Also offsetting the volume
increases noted above was attrition in the Company's customer base, especially
in the low margin bid and commercial segments of the Company's business.
Gross profit increased $13.0 million (11.3%) from $115.0 million (37.4
cents per gallon) for the nine months ended 1993 to $128.1 million (39.7 cents
per gallon) for the nine months ended 1994. This $13.0 million increase in
gross profit was attributable to the increase in volume and
*EBITDA is defined as operating income before depreciation and amortization and
non-cash expenses associated with key employees' Deferred Compensation Plan.
<PAGE>
-10-
improved home heating oil margins. The increase in heating oil gross profit was
partially offset by the higher cost of providing heating equipment repair and
maintenance services to customers in response to the severe Northeast winter
weather experienced during the first quarter of 1994.
Direct delivery expense increased $2.4 million from $20.9 million for the
first nine months of 1993 to $23.3 million for the first nine months of 1994.
This increase of 11.6% was greater than expected due primarily to the additional
costs associated with temporary delivery inefficiencies experienced during the
first quarter of 1994 created by the severe winter weather conditions. The first
quarter increase in delivery expense was partially offset by the impact of the
Company's Summertime delivery efficiency program.
Selling, general and administrative expenses increased slightly from $68.3
million in the first nine months of 1993 to $68.6 million for the first nine
months of 1994. On a per gallon basis, these expenses declined by 4.3% from
22.2 cents to 21.3 cents, due to economies of scale associated with
acquisitions, a reduction in marketing expenses, the Company's on going
commitment of monitoring its operating expenses and the weather related volume
increase.
Depreciation of fixed assets and amortization of customer lists and
deferred charges decreased $3.0 million, (11.1%) to $23.8 million for the nine
months of 1994. These non-cash expenses declined as certain customer lists and
deferred charges have become fully amortized.
Operating income increased to $12.2 million for the first nine months of
1994 compared with a loss of $1.1 million for the first nine months of 1993.
This significant improvement was due to the volume growth and to improved home
heating oil margins which was partially offset by weather related increases in
service, delivery and operating expenses. The decline in depreciation and
amortization expense also contributed to the increase in operating income.
Net interest expense increased by $1.6 million to $16.7 million for the
nine months ended September 30, 1994 due primarily to an increase in the average
long-term borrowings offset by a reduction in the average long-term borrowing
rate. Average long-term borrowings increased due to the issuance in April 1993
of $50 million in public subordinated debt and the issuance in February 1994 of
$75 million 9 3/8% subordinated debentures. The proceeds of these issues were
used to refinance $75 million in long-term debt and to finance the Company's
ongoing acquisition program. Short-term borrowings were also reduced on average
by $6.9 million as part of the proceeds of the public issues were used to reduce
working capital borrowings, pending application for the Company's acquisition
program.
<PAGE>
-11-
The loss before income taxes, extraordinary item, and equity in earnings of
Star Gas Corporation was significantly reduced from $16.3 million for the first
nine months of 1993 to $4.5 million for the first nine months of 1994 as the
$13.3 million increase in operating income was reduced by the $1.6 million
increase in net interest expense.
Income taxes were approximately $0.4 million for the nine months ended
September 30, 1994 compared to $0.2 million for the first nine months of 1993.
These taxes represent certain State income taxes since the Company has not
provided for any Federal income taxes for the nine months ended September 30,
1994 due to the availability and expected utilization of Federal income tax net
operating loss carryforwards.
In December 1993, the Company invested $16.0 million in Star Gas
Corporation ("Star"), the nation's tenth largest retail distributor of propane
gas and acquired an approximate 30% equity interest. With this investment, the
Company assumed operating management of Star's business under a ten year
agreement and obtained options to acquire the remaining Star equity. On
November 1, 1994 Petro announced its intention to exercise certain options to
purchase the Star equity held by Prudential Insurance Company of America and a
group of limited partnerships managed by First Reserve Corporation. The purchase
of these shares by Petro will increase its ownership percentage of Star to
approximately 81%. While the Company expects it will exercise its option to
purchase the remaining equity in Star, no exact time has been set for that
transaction. To concentrate on its core operations and to increase
profitability, Star sold its Texas propane operations in December 1993 and a
non-propane related business in August 1994. The results for Star, exclusive of
the operations that were sold, for the nine months ended September 30, 1994 have
approximated expectations with retail propane volume of 66.9 million gallons,
EBITDA of $10.6 million, depreciation and amortization of $8.9 million and a
seasonally related net loss of $3.9 million. Based on Petro's ownership
percentage at September 30, 1994, $1.2 million was recorded as a loss in Star
under the equity method of accounting.
The extraordinary loss of $0.7 million for the nine months ended September
30, 1994 represents the cash premium paid in connection with the refinancing in
February 1994 of $50.0 million in long-term notes scheduled to mature in June
1994 with the proceeds of the $75 million 93/8% Subordinated Debenture issue. In
a similar transaction for the nine months ended September 30, 1993, the Company
recorded an extraordinary charge of $0.9 million representing a cash premium of
$0.4 million and the write off of $0.5 million in debt discount and related
deferred charges when $25.0 million of subordinated debt scheduled to mature in
1993 and 1995 was refinanced.
The net loss for the first nine months of 1994 decreased $10.6 million to
$6.8 million, due to the $13.3 million increase in operating income offset by
the $1.6 million increase in net interest and the $1.2 million of equity loss in
Star.
EBITDA increased 39.9% to $36.1 million in 1994 from $25.8 million for
1993. This significant improvement was due to an increase in home heating oil
volume and gross profit margins, and a reduction in marketing expenses partially
offset by weather related increases in service, delivery and operating expenses.
<PAGE>
-12-
Three Months Ended September 30, 1994
Compared to Three Months Ended September 30, 1993
- - -------------------------------------------------
As expected, during the Summer months of the third quarter of 1994, EBITDA
declined and the seasonally related net loss increased when compared to the
results for the third quarter of 1993. This was primarily due to a decline in
home heating volume from 33.8 million gallons for the third quarter of 1993 to
29.2 million gallons for the third quarter of 1994 resulting from the Company's
delivery efficiency program which shifted certain Summer deliveries to the
upcoming Fall and Winter months. In effect, certain discretionary deliveries
that were made in the third quarter of 1993 were not scheduled for the third
quarter of 1994. The quarter to quarter volume comparison was positively
impacted, however, by the volume growth associated with acquisitions offset by
attrition in the Company's customer base.
Net sales declined 9.1% to $49.2 million for the third quarter of 1994 from
$54.1 million for the third quarter of 1993 due to the decline in home heating
oil volume noted above and to lower selling prices.
Gross profit declined $2.7 million from $9.6 million for the third quarter
of 1993 to $6.9 million for the third quarter of 1994. The decline in gross
profit was primarily the result of the intentional volume decline noted above
and to an anticipated decline in gross profit margins as heating equipment
repair and maintenance services, while decreasing in absolute terms, increased
on a per gallon basis due to the volume shift. Also impacting gross profit
margins was an expected decrease in home heating oil margins from the unusually
high levels achieved in the third quarter of 1993. While the home heating oil
margins obtained in the third quarter of 1994 were lower than those of the prior
period, they are representative of normal expected margin increases when
compared to historic levels.
Despite an increase in the Company's size and the effects of inflation on
operating costs, these expenses declined to $25.5 million in the third quarter
of 1994, slightly less than the third quarter of 1993. A significant reduction
in marketing expenses, the impact of the Company's delivery efficiency program
and the Company's ongoing commitment of monitoring its operating expenses
resulted in a stabilization of these costs versus the prior year.
Depreciation and amortization of customer lists and deferred charges were
approximately $8.3 million for both periods as the capitalized costs associated
with the 1994 acquisitions replaced certain fixed assets, customer lists and
deferred charges relating to earlier acquisitions.
The non-heating period operating loss for the third quarter of 1994 was
$26.9 million, $2.5 million greater than experienced in the third quarter of
1993 due primarily to the decline in home heating oil volume in an effort to
obtain maximum delivery efficiency.
Net interest expense increased $0.6 million to $5.8 million due primarily
to a $25.0 million increase in long-term borrowing resulting
<PAGE>
-13-
from the refinancing in February 1994 of $50.0 million in long-term debt
maturing in June 1994 with the proceeds of a $75.0 million 9 3/8% Subordinated
Debenture issue maturing in 2006.
The loss before income taxes and equity in earnings of Star increased to
$32.7 million in the third quarter of 1994. While this increase was primarily
due to the volume shift noted above and the increase in interest expense, this
non-heating season loss was less than anticipated.
The equity loss in Star for the three months ended September 30, 1994
represents Petro's share of that Company's seasonal net loss. While Star's
propane business is less seasonal than Petro's home heating oil business,
operating and net losses were anticipated for Star in the third calendar
quarter. For the three months ended September 30, 1994 Star results included
retail propane volume of 15.4 million gallons, a seasonal EBITDA loss of $1.2
million, depreciation and amortization of $3.1 million and a net loss of $5.8
million. Based on Petro's equity percentage, the Company recorded a $1.9
million loss as equity in loss of Star for the quarter ending September 30,
1994.
Income taxes were a benefit of $0.1 million for the third quarter of 1994,
as the Company expects its effective annual Federal income tax rate to be zero,
as it was in 1993.
The net loss for the third quarter of 1994 increased to $34.5 million, due
primarily to the shift in volume, to the recording of Star's seasonal equity
loss and to increased interest expense.
The seasonally related EBIDTA loss was approximately $18.6 million for
the third quarter of 1994. While this loss was greater than the prior period
due to the reasons discussed above, it was less than anticipated due to the
Company's successful efforts in controlling marketing, delivery and other
operating expenses.
<PAGE>
-14-
Liquidity and Financial Condition
- - ---------------------------------
In February 1994, the Company completed a public offering of $75.0 million
of 9 3/8% Subordinated Debentures due 2006. The proceeds from the sale of the
debentures were used to repay $50.0 million of the Company's 9% Notes due June
1, 1994, pay expenses in connection with the offering of $3.9 million and pay a
premium of $0.7 million for the early retirement of the Notes. The remaining
$20.4 million of the proceeds became available to finance the Company's ongoing
acquisition program. As a result of the repayment of the Notes, the $20.0
million cash collateral account securing these notes was released to the
Company, increasing the amount available for acquisitions to $40.4 million.
Net cash provided by operating activities of $47.9 million, along with the
$40.4 million of net proceeds from the issuance and refinancing of debt in
February 1994 as mentioned above, amounted to $88.3 million for the nine months
ended September 30, 1994. These funds were utilized in investing activities for
acquisitions and the purchase of fixed assets totalling $26.2 million and in
financing activities to repay $28.0 million of working capital borrowings, to
pay dividends of $12.6 million, to repurchase mandatorily redeemable preferred
stock of $4.2 million, to repurchase Class B Common Stock for $3.3 million, for
the payment of deferred financing costs of $1.4 million and to make principal
payments on other long-term obligations of $0.2 million. In addition, the
Company partially financed its acquisitions with notes payable of $8.8 million.
As a result of the above activity, the Company's cash balance increased by $12.4
million.
A consortium of banks has historically provided the Company with credit
facilities pursuant to an amended and restated credit agreement. As of
September 30, 1994, there were no borrowings outstanding under the credit
agreement, primarily due to the cash provided from operations in the first nine
months of 1994. At September 30, 1994, the Company had $8.4 million of net
working capital.
For the remainder of 1994, the Company's financing obligations include
principal payments on other long-term obligations of $0.1 million and paying
Common Stock dividends of approximately $3.0 million. Based on the Company's
current cash position, bank credit availability and expected net cash to be
provided by operations during 1994, the Company expects to be able to meet all
of the above-mentioned obligations in 1994, as well as meet all of its other
current obligations as they become due.
Supplemental Financial Information
- - ----------------------------------
During the first nine months of 1994, the company generated $15.9 million
in NIDA* compared to $7.0 million for the first nine months of 1993. This $8.9
million increase (126.1%) was primarily due to the volume increase and improved
home heating oil gross profit margins offset by weather related operating
expenses and additional interest expense.
*NIDA is defined as the sum of consolidated net income (loss), plus depreciation
and amortization of plant and equipment and amortization of customer lists and
deferred charges, plus non-cash expenses associated with key employees' deferred
compensation plan, less dividends accrued on preferred stock, excluding net
income (loss) derived from investments accounted for by the equity method,
except to the extent of any cash dividends received by the Company.
<PAGE>
-15-
PART II OTHER INFORMATION
-------------------------
Item 6. Exhibits and Reports on Form 8-K
- - -----------------------------------------
(A) Exhibits Included Within:
-------------------------
(1) Employment Agreement - Tom Isola, Chief Operating Officer
(2) Stock-Option Agreement - Tom Isola, Chief Operating Officer
(27) Financial Data Schedule
(B) Reports on Form 8-K:
--------------------
A report on Form 8-K under item 2, "Acquisition of Assets" was filed on
July 13, 1994, reporting the Company's acquisition of the home heating business
operations and assets of DeBlois Oil Company based in Rhode Island.
<PAGE>
-16-
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 by the undersigned
thereunto duly authorized:
Signature Title Date
- - --------- ----- ----
Irik P. Sevin President, Chairman of the Board, November 10, 1994
- - -------------- Chief Executive Officer, and
Irik P. Sevin Chief Financial and Accounting
Officer and Director
EXHIBIT 1
July 21, 1994
CONFIDENTIAL
------------
Mr. Thomas M. Isola
1145 St. Finegan
West Chester, PA 19382
Dear Tom:
I am pleased to confirm in writing our understanding concerning your
employment as Chief Operating Officer for Petroleum Heat and Power Co. Inc.,
reporting directly to me, based on the following.
* * * *
Base Salary:
Your Base salary will be $285,000 per annum for the first year.
Bonus:
Participation in our annual incentive plan for the first year will be at
the rate of 75% of your base salary and perhaps increased beyond this
number if all of our agreed upon objectives are met.
First Year's Annual Guaranteed Compensation:
Total guaranteed compensation for the first year will be $450,000;
termed as twelve calendar months.
Company Car:
You will be provided with the company car of your choice not to exceed
$45,000; preferably an American car.
Employee Benefits:
You will be accorded full 100% coverage of the medical, dental,
disability and life insurance programs afforded to all Petro senior
executives, as well as participation in the executive pension and
investment plans.
<PAGE>
Mr. Thomas M. Isola
July 21, 1994
Page 2
Relocation Expenses:
Petro will pay all reasonable moving costs, including sales commissions,
taxes, appropriate transportation, house hunting and re-settling
expenses incurred by you. Additionally, if your full faith efforts to
sell your existing home at the fair market value are not successful
within a four to six month period, we will purchase your home at its
fair market value and accept responsibility for its sale. Should your
moving expenses be treated as taxable income, they will be of such gross
amount as to cover related taxes.
Sign-On Bonus:
To cover incidental expenses in re-settling, you will receive a one time
sign-on bonus of $15,000.
Stock Options:
On date of employment, we will grant you 50,000 shares of common stock
at market value.
Termination Agreement:
While your employment will continue so long as both of us are satisfied
with the relationship, should you be dismissed for any reason other than
cause within the first three years of employment, you will receive the
amount of $285,000 severance income, the equivalent of your first year's
base salary.
Confidentiality:
I expect you realize that you will be made aware of certain confidential
information regarding Petro, and it is expected that you will not
furnish such information to anyone, including the identity of customers
or prospective customers, the details of marketing or advertising
programs nor take any action detrimental to the company at any time
during the term of this agreement or thereafter.
Commencement of Employment:
We anticipate that you will begin your employment August 22, 1994 and
that such employment does not violate any other agreements or
obligations you may have.
* * * *
<PAGE>
Mr. Thomas M. Isola
July 21, 1994
Page 3
Tom, I am very excited about your joining Petro and look forward to seeing
you soon.
With warmest regards,
/s/ Irik Sevin
Irik Sevin
Chief Executive Officer
Agreed:
/s/ Tom Isola
------------------------
Tom Isola 7/29/94
IS:sk
EXHIBIT 2
PETROLEUM HEAT AND POWER CO., INC.
STOCK OPTION AGREEMENT
(INCENTIVE STOCK OPTION)
THIS AGREEMENT, made as of this 23rd day of August 1994 by
PETROLEUM HEAT AND POWER CO., INC., a Minnesota Corporation (hereinafter
called the "Company"), with THOMAS M. ISOLA (hereinafter call the "Holder"):
The Company has adopted a 1993 Stock Option Plan (the "Plan"). Said
Plan, as it may hereafter be amended and continued, is incorporated herein by
reference and made part of this Agreement.
The Committee, which is charged, with the administration of the
Plan pursuant to Section 3 thereof, has determined that it would be to the
advantage and interest of the Company to grant the option provided for herein
to the Holder as an inducement to remain in the service of the Company or one
of its subsidiaries, and as an incentive for increased efforts during such
service.
NOW, THEREFORE, pursuant to the Plan, the Company with the approval
of the Committee hereby grants to the Holder as of the date hereof an option
(the "Option") to purchase all or any part of 50,000 shares of Common Stock
of the Company, par value $0.10 per share, at a price per share of $7.50,
which price is not less than the fair market value of a share of Common Stock
on the date hereof (or 110% of the fair market value of a share of Common
Stock if the Holder is a 10% Holder (as defined in the Plan)), and upon the
following terms and conditions:
1. The Option shall continue in force through August 22, 1999
(the "Expiration Date"), unless sooner terminated as provided herein and in
the Plan. Subject to the provisions of the Plan, the Option shall become
exercisable as to 20% of the number of shares originally covered thereby upon
the first anniversary of the date of grant of the Option, and as to 20% of
the number of shares originally covered thereby upon the second, third and
fourth anniversaries of the date of grant of the Option, and on the fifth
anniversary, the Option shall become fully exercisable. Such installments
shall be cumulative, subject to the following:
a. Except as provided hereinbelow, the Option may not be
exercised unless the Holder is then an employee (including officers who are
employees), of the Company or any subsidiary of the Company or any
combination thereof and unless
<PAGE>
the Holder has remained in the continuous employ or service thereof from the
date of grant.
b. This Option is designated as an incentive stock option
("ISO") pursuant to the Internal Revenue Code of 1986, as amended (the
"Code") and the regulations promulgated thereunder.
2. In the event that the employment or service of the Holder
shall be terminated prior to the Expiration Date (otherwise than by reason of
death or disability), the Option may, subject to the provisions of the Plan,
be exercised (to the extent that the Holder was entitled to do so at the
termination of this employment or service) at any time within three months
after such termination, but not after the Expiration Date, provided, however,
that if such termination shall have been for cause or voluntarily by the
Holder and without the consent of the Company or any subsidiary corporation
thereof, as the case may be (which consent shall be presumed in the case of
normal retirement), the Option and all rights of the Holder hereunder, to the
extent not theretofore exercised, shall forthwith terminate immediately upon
such termination. Nothing in this Agreement shall confer upon the Holder any
right to continue in the employ or service of the Company or any subsidiary
of the Company or affect the right of the Company or any subsidiary to
terminate his employment or service at any time.
3. If the Holder shall (a) die while he is employed by or serving
the Company or a corporation which is a subsidiary thereof or within three
months after the termination of such position (other than termination for
cause, or voluntarily on his part and without the consent of the Company or
subsidiary corporation thereof, as the case may be, which consent shall be
presumed in the case of normal retirement), or (b) become permanently and
totally disabled within the meaning of Section 22 (e) (3) of the Internal
Revenue Code of 1986, as amended (the "Code"), while employed by or serving
any such company, and if the Option was otherwise exercisable, immediately
prior to the occurrence of such event, then such Option may be exercised as
set forth herein by the Holder or by the person or persons to whom the
Holder's rights under the Option pass by will or applicable law, or if no
such person has such right, by his executors or administrators, at any time
within one year after the date of death of the original Holder, or one year
after the date of permanent or total disability, but in either case, not
later than the Expiration Date.
4. a. The Holder may exercise the Option with respect to all or
any part of the shares then purchasable hereunder by giving the Company
written notice in the form annexed, as provided in paragraph 8 hereof, of
such exercise. Such notice shall specify the number of shares as to which
the
2
<PAGE>
Option is being exercised and shall be accompanied by payment in full in cash
of an amount equal to the exercise price of such shares multiplied by the
number of shares as to which the Option is being exercised; provided that, if
permitted by the Board, the purchase price may be paid, in whole or in part,
by surrender or delivery to the Company of securities of the Company having a
fair market value on the date of the exercise equal to the portion of the
purchase price being so paid. In such event fair market value should be
determined pursuant to paragraph 5 of the Plan.
b. Prior to or concurrently with delivery by the Company to
the Holder of a certificate(s) representing such shares, the Holder shall,
upon notification of the amount due, pay promptly any amount necessary to
satisfy applicable federal, state or local tax requirements. In the event
such amount is not paid promptly, the Company shall have the right to apply
from the purchase price paid any taxes required by law to be withheld by the
Company with respect to such payment and the number of shares to be issued by
the Company will be reduced accordingly.
5. Notwithstanding any other provision of the Plan, in the event
of a change in the outstanding Common Stock of the Company by reason of a
stock dividend, split-up, split-down, reverse split, recapitalization,
merger, consolidation, combination or exchange of shares, spin-off,
reorganization, liquidation or the like, then the aggregate number of shares
and price per share subject to the Option shall be appropriately adjusted by
the Board, whose determination shall be conclusive.
6. This Option shall, during the Holder's lifetime, be
exercisable only by him, and neither this Option nor any right hereunder
shall be transferable by him, by operation of law or otherwise, except by
will or by the laws of descent and distribution. In the event of any attempt
by the Holder to transfer, assign, pledge, hypothecate or otherwise dispose
of this Option or of any right hereunder, except as provided for herein, or
in the event of the levy or any attachment, execution or similar process upon
the rights or interest hereby conferred, the Company may terminate this
Option by notice to the Holder and it shall thereupon become null and void.
7. Neither the Holder nor in the event of his death, any person
entitled to exercise his rights, shall have any of the rights of a
stockholder with respect to the shares subject to the Option until share
certificates have been issued and registered in the name of the Holder or his
estate, as the case may be.
8. Any notice to the Company provided for in this Agreement shall
be addressed to the Company in care of its Secretary, 2187 Atlantic Street,
Stamford, Connecticut 06902 and any notice to the Holder shall be addressed
to him at his address
3
<PAGE>
now on file with the Company, or to such other address as either may last
have designated to the other by notice as provided herein. Any notice so
addressed shall be deemed to be given on the second business day after
mailing, by registered or certified mail, at a post office or branch post
office within the United States.
9. In the event that any question or controversy shall arise with
respect to the nature, scope or extent of any one or more rights conferred by
this Option, the determination by the Committee (as constituted at the time
of such determination) of the rights of the Holder shall be conclusive, final
and binding upon the Holder and upon any other person who shall assert any
right pursuant to this Option.
PETROLEUM HEAT AND POWER CO., INC.
By: /s/ Irik P. Sevin
------------------------------
Name: Irik P. Sevin
Title: Chief Executive Officer
ACCEPTED AND AGREED
/s/ Thomas M. Isola
------------------------
Thomas M. Isola
4
<PAGE>
FORM OF NOTICE OF EXERCISE
TO: PETROLEUM HEAT AND POWER CO., INC.
2187 Atlantic Street
Stamford, Connecticut 06902
The undersigned hereby exercises his/her option to purchase _____
shares of Common Stock of Petroleum Heat and Power Co., Inc. (the "Company"),
as provided in the Stock Option Agreement dated as of _______, 1994 at $
_______ per share, a total of $ _____________, and makes payment therefor as
follows:
(a) To the extent of $_______ of the purchase price, the
undersigned hereby surrenders to the Company certificates for shares of its
Common Stock, which, valued at $__________________ per share, the fair market
value thereof, equals such portion of the purchase price.
(b) To the extent of the balance of the purchase price, the
undersigned has enclosed a certificate or bank check payable to the order of
the Company for $________________.
A stock certificate or certificate for the shares should be
delivered in person or mailed to the undersigned at the address shown below.
The undersigned hereby represents and warrants that it is his (her)
present intention to acquire and hold the aforesaid shares of Common Stock of
the Company for his (her) own account for investment, and not with a view to
the distribution of any thereof, and agrees that he (she) will make no sale,
thereof, except in compliance with the applicable provisions of the
Securities Act of 1933, as amended.
Signature: ________________________
Address: _________________________
________________________
Dated:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 17,054,782
<SECURITIES> 0
<RECEIVABLES> 46,296,697
<ALLOWANCES> 2,609,280
<INVENTORY> 14,198,175
<CURRENT-ASSETS> 82,615,930
<PP&E> 67,838,103
<DEPRECIATION> 34,191,071
<TOTAL-ASSETS> 234,137,945
<CURRENT-LIABILITIES> 74,258,546
<BONDS> 219,084,463
<COMMON> 2,156,368
20,833,200
0
<OTHER-SE> (86,724,614)
<TOTAL-LIABILITY-AND-EQUITY> 234,137,945
<SALES> 359,852,872
<TOTAL-REVENUES> 385,290,895
<CGS> 203,139,220
<TOTAL-COSTS> 257,239,663
<OTHER-EXPENSES> 114,399,879
<LOSS-PROVISION> 1,491,498
<INTEREST-EXPENSE> 18,055,514
<INCOME-PRETAX> (4,477,800)
<INCOME-TAX> 425,000
<INCOME-CONTINUING> (6,145,800)
<DISCONTINUED> 0
<EXTRAORDINARY> (654,500)
<CHANGES> 0
<NET-INCOME> (6,800,300)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
