UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993 Commission File No. 2-88526
----------------- -------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993 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
----------------------------------------------------
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 Identification No.)
incorporation or organization)
2187 Atlantic Street, Stamford, CT 06902
- --------------------------------------- ------------------------
(Address of principal executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 325-5400
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
Class B Common Stock AMERICAN STOCK EXCHANGE
-------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock
--------------------
(Title of Each Class)
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 and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 1, 1994 was approximately $59,246,784.
As of March 1, 1994 there were 18,992,579 shares of the Registrant's Class
A Common Stock, 216,901 shares of the Registrant's Class B Common Stock and
2,545,139 shares of the Registrant's Class C Common Stock outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The documents incorporated by reference into this Form 10-K and the
parts hereof into which such documents are incorporated are listed below:
Document Part
-------- ----
Those portions of the registrant's proxy III
statement for the registrant's 1994 Annual
Meeting (the "Proxy Statement") that are
specifically identified herein as incorporated
by reference into this Form 10-K
PART I
ITEM 1. BUSINESS
Petroleum Heat and Power Co., Inc. (the "Company" or "Petro") is the
largest retail distributor of home heating oil (#2 fuel oil) in the
United States, with sales of $538.5 million for the year ended December
31, 1993. Petro served approximately 415,000 customers in 26 markets in
the Northeast, as of December 31, 1993, including the metropolitan areas
of Boston, New York City, Baltimore, Providence and Washington, D.C.
Despite its leading market position, Petro estimates that its customer
base represents approximately 5% of the residential home heating oil
customers in the Northeast. For the year ended December 31, 1993, the
Company sold approximately 443.5 million gallons of home heating oil and
propane.
In addition to home heating oil and propane, the Company also
installs and repairs heating equipment and markets to commercial
customers, to a limited extent, other petroleum products, including #4
fuel oil, #6 fuel oil, diesel fuel, kerosene and gasoline.
Installation and repair of heating equipment is provided as a
service by the Company to its heating oil customers, and has represented
approximately 12% per year of the Company's net sales for the last three
fiscal years. The Company considers the provision of service and
installation services to be an integral part of its basic fuel oil
business. Accordingly, the Company regularly provides various service
incentives to obtain and retain fuel oil customers and such services are
not designed to generate profits. Except in isolated instances, the
Company does not provide service to any person who is not a heating oil
customer.
For the years ended December 31, 1991, 1992 and 1993, sales of home
heating oil and propane (not including related installation and service)
constituted approximately 82%, of the Company's net sales.
The Company's volume, cash flow and operating profits before
depreciation and amortization have increased significantly since 1980
primarily because of its acquisitions of other home heating oil
businesses. Since September 1979, the Company has completed 146
acquisitions including nine in 1993 and one in 1994. Large volume
2
<PAGE>
acquisitions are operated as separate branches while smaller volume
acquisitions are integrated into existing branches of the Company.
Operating Strategy
The Company currently operates from 30 branch locations and a
corporate office in Stamford, Connecticut. The accounting, data
processing, purchasing and credit functions are centralized, while branch
offices maintain autonomy over oil delivery, heating equipment service
and customer relations. The Company obtains its fuel oil in either barge
or truckload quantities. When purchasing in barge quantities, the
Company hires independent barging companies on an as needed basis to
transport the Company's oil from refineries and other bulk storage
facilities to third-party storage terminals. The Company has contracted
with 71 third party storage terminals for the right to temporarily store
its fuel oil at their facilities. The fuel oil is then transported by the
Company's fleet of approximately 725 delivery trucks to its customers.
Approximately 85% of the Company's customers receive their home
heating oil pursuant to an automatic delivery system in which individual
deliveries are scheduled by computer based upon each customer's
historical consumption patterns and prevailing weather conditions. The
Company delivers home heating oil approximately six times during the year
to the average customer. The Company's practice is to bill customers
promptly after delivery. In addition, approximately 30% of the Company's
customers are on the Company's budget payment plan whereby their
estimated annual oil purchases and service contract is paid for in a
series of equal monthly payments over an eleven or twelve month period.
Suppliers
The Company obtains home heating oil from numerous sources,
including integrated international oil companies, independent refiners
and independent wholesalers, many of which have been suppliers to the
Company for over 10 years. The Company's purchases are made pursuant to
supply contracts or on the spot market. The Company has market price
based contracts for substantially all its petroleum requirements with 14
different suppliers, all of which have significant domestic sources for
their product. The Company's current suppliers are (in alphabetical
order): Amerada Hess Corporation; Bayway Refining Co.; Citgo Petroleum
Corp.; Coastal New England and New York; Crown Central Petroleum; Exxon
Company USA; Global Petroleum Corp.; Kerr McGee Refining Corp.; MG
Refining and Marketing Co.; Mobil Oil Corporation; Northeast Petroleum, a
division of Cargill, Inc.; S & S Hartwell and Co., Inc. (a division of
Sprague Energy Co.); Stuart Petroleum Company and Sun Oil Company. The
Company's supply contracts each have terms of 12 months and typically
expire in May or June of each year. All of the supply contracts provide
for maximum quantities, but do not establish in advance the price at
which fuel oil is sold, which, like the Company's price to its customers,
is established from time to time. The Company believes that its policy
of contracting for substantially all its supply needs with diverse and
reliable sources will enable it to obtain sufficient product should
unforeseen shortages develop in the worldwide supply of crude oil. The
Company further believes that relations with its current suppliers are
satisfactory.
3
<PAGE>
Customers and Sales
As of December 31, 1993, the Company served approximately 415,000
customers in the following 26 markets through a sales force of
approximately 139 individuals based primarily in the Company's branch
offices:
New York Maryland/Virginia/D.C. Pennsylvania
Bronx, Queens and Baltimore (Metropolitan) Allentown
Kings Counties Washington, D.C. Berks County
Eastern Long Island (Metropolitan) (Centered in Reading)
Staten Island Lebanon County
Western Long Island Massachusetts (Centered in Palmyra)
Boston (Metropolitan)
Connecticut Northeastern Massachusetts New Jersey
Bridgeport--New Haven (Centered in Lawrence) Camden
Hartford (Metropolitan) Springfield Neptune
Litchfield County Worcester Newark (Metropolitan)
Southern Fairfield County North Brunswick
Rockaway
Rhode Island Trenton
Providence
New Hampshire
Milford
Portsmouth
Approximately 85% of the Company's sales of #2 fuel oil are made to
homeowners with the balance to industrial, commercial and institutional
customers. Historically, the Company has lost a portion of its customer
base each year for various reasons, including customer relocation, price
competition and conversions to natural gas.
Conversions to Natural Gas
The rate of conversion from the use of home heating oil to natural gas
is primarily affected by the relative prices of the two products and the
cost of replacing an oil fired heating system with one that uses natural
gas. The Company believes that approximately 1% of its customer base
annually converts from home heating oil to natural gas. Even when natural
gas had a significant price advantage over home heating oil, such as in
1980 and 1981 when there were government controls on natural gas prices or,
for a short time in 1990 and 1991, during the Persian Gulf crisis, the
Company's customers converted to natural gas at only a 2% annual rate.
During the latter part of 1991 and through 1993, natural gas conversions
have returned to their approximate 1% historical annual rate as the prices
for the two products have been at parity.
4
<PAGE>
Certain Industry Matters and Seasonality
The Company's business is directly related to the heating needs of
its customers and the weather can have a material effect on the Company's
sales in any particular year, such as in 1990 and 1991 which were the
first and third warmest years in the century. However, the temperatures
over the past 30 years have been relatively stable, and as a result have
not had a significant impact on the Company's performance except on a
short-term basis.
The Company's business is highly seasonal. Approximately 80% of its
revenues are generated during the heating season from October 1 through
March 31, the Company's fourth and first fiscal quarters.
Competition
The Company's business is highly competitive. The Company competes
with fuel oil distributors offering a broad range of services and prices,
from full service distributors, like the Company, to those offering
delivery only. Competition with other companies in the fuel oil industry
is based primarily on customer service and price. Long-standing customer
relationships are typical in the retail home heating oil industry. Many
companies in the industry, including Petro, deliver home heating oil to
their customers based upon weather conditions and historical consumption
patterns without the customer having to make an affirmative purchase
decision each time oil is needed. In addition, most companies, including
Petro, provide home heating equipment repair service on a 24-hour a day
basis, which tends to build customer loyalty.
Employees
As of December 31, 1993, the Company had 2,385 employees, of whom
759 were office, clerical and customer service personnel, 720 were
heating equipment repairmen, 572 were oil truck drivers and mechanics,
195 were management and staff and 139 were employed in sales.
Approximately 355 of those employees were seasonal, and management
expects to rehire the majority of them during the next heating season.
Approximately 718 full time employees and 235 seasonal employees are
represented by 17 different local chapters of labor unions. Management
believes that its relations with both its union and non-union employees
are satisfactory.
Investment in Star Gas Corporation
In December 1993, the Company acquired a 29.5% equity interest
(42.8% voting interest) in Star Gas Corporation ("Star Gas"), the tenth
largest propane distributorship in the United States, for $16.0 million
in cash. Certain other investors invested a total of $49.0 million of
additional equity in Star Gas, of which $11.0 million was in the form of
cash and $38.0 million resulted from the conversion of long-term debt and
preferred stock into equity. As a result of redemptions of a portion of
the equity in Star Gas held by certain of the other investors that the
Company expects will occur in connection with a Star Gas
recapitalization, the Company expects that its direct and indirect equity
5
<PAGE>
interest in Star Gas will increase to 36.7% without any additional
investment by the Company.
Star Gas is the tenth largest distributor of propane in the United
States, with sales of $154.2 million, representing over 169 million
gallons of propane, for its fiscal year ended September 30, 1993. Star
Gas served approximately 200,000 customers in the midwestern,
northeastern and southeastern regions of the United States as of
September 30, 1993.
The Company will manage Star Gas' business under a Management
Services Agreement which provides for an annual cash fee of $500,000 and
an annual bonus equal to 5% of the increase in Star Gas' operating income
before depreciation and amortization over its fiscal year ended September
30, 1993, payable in common stock of Star Gas pursuant to a formula set
forth in the Management Services Agreement. Star Gas also will reimburse
the Company for its expenses and the cost of certain Company personnel.
After giving effect to the Star Gas recapitalization on a pro forma
basis as of September 30, 1993, Star Gas would have had total long-term
debt of $70.3 million and stockholder's equity of $51.1 million. The
Company is not directly or contingently liable for any indebtedness of
Star Gas.
Star Gas distributes propane primarily for home heating as well as
for commercial uses from 89 locations employing a fleet of over 300
delivery trucks. Star Gas acquires propane from approximately 30
sources, including Ashland Petroleum Company, Amoco Canada Marathon
Corp., Enron Gas Liquids, Inc. and Texaco Exploration and Production,
Inc. Star Gas owns a storage facility in the Midwest in which it is able
to store approximately 22 million gallons of propane in an underground
cavern located approximately 400 feet below the surface.
6
<PAGE>
ITEM 2. PROPERTIES
The Company currently occupies 50 different facilities and
distributes fuel oil and provides service to its customers through
approximately 1,900 oil delivery tank trucks, service vans and other
vehicles.
The following table presents additional information concerning the
Company's facilities:
Owned/Lease Approx.
Expiration Square
Location Type of Facility Date Footage
- -------- ---------------- ----------- -------
New York
Astoria Office/Garage 12/31/95 25,600
Brooklyn Office Owned 6,500
Brooklyn Garage Owned 13,000
Brooklyn Office/Garage 10/31/00 25,500
Brooklyn Garage 10/31/05 33,500
Hicksville Office/Garage 7/14/01 16,000
Oyster Bay Office/Garage 8/31/96 22,800
Patchogue Office/Garage 10/03/96 26,500
Plainview Garage Owned 8,500
Plainview Office/Garage 10/31/00 23,800
Southampton Office/Storage 7/31/98 12,000
Staten Island Office/Garage 6/30/96 9,650
Westbury Office/Garage 10/31/95 17,400
New Jersey
Camden Office/Garage Owned 9,800
Clark Office 4/30/99 15,000
Hanover Office/Garage 5/31/96 6,000
Lakewood Office/Garage 9/30/95 4,500
Linden Office/Warehouse 6/30/94 8,100
Princeton Office/Garage/Storage Owned 7,300
Connecticut
Ansonia Office 11/20/94 800
Bristol Office 5/31/95 5,360
Canton Office/Garage/Storage Owned 4,900
East Hartford Office/Garage 2/01/00 18,000
East Hartford Office/Storage 3/31/94 4,070
Greenwich Storage 9/30/96 --
New Milford Office/Garage 8/31/98 5,800
North Haven Office/Garage 9/15/00 12,000
Norwalk Office 12/31/96 5,400
Norwalk Garage 12/31/96 2,400
Stamford Corporate Headquarters 8/31/03 19,000
Stamford Office/Garage 5/31/94 29,000
Waterbury Office 6/30/96 375
7
<PAGE>
Owned/Lease Approx.
Expiration Square
Location Type of Facility Date Footage
- -------- ---------------- ----------- -------
Massachusetts
Holden Office/Garage/Storage Owned 7,500
Lawrence Office/Garage Owned 8,500
Revere Office/Garage 8/31/96 12,800
Rochdale Office/Storage Owned 1,200
Springfield Office/Garage/Storage Owned 12,570
Westfield Office/Storage 12/22/94 500
Westwood Office 6/15/97 9,400
Pennsylvania
Allentown Office/Garage 5/31/98 4,600
East Stroudsbourg Office/Garage/Warehouse 8/11/95 1,700
Palmyra Office/Garage/Storage Owned 5,500
Reading Office/Garage Owned 20,600
New Hampshire
Amherst Storage Owned --
Milford Office/Garage 3/31/96 7,240
Portsmouth Office/Garage 9/01/95 6,100
Rhode Island
Providence Office/Garage 5/31/98 7,600
Maryland
Baltimore Office/Garage/Storage Owned 13,750
Forrestville Office/Garage 3/31/08 18,900
The Company believes its existing facilities are sufficient and that
there are numerous comparable facilities available at similar rentals in
each of its marketing areas should they be required.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceeding which
could have a material adverse effect on the results of operations or the
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Class A Common Stock
The Company's Class A Common Stock is traded on the National
Association of Securities Dealers Inc. NASDAQ National Market System
under the symbol "HEAT". The high and low per share price of the Class A
Common Stock and dividends declared on the Class A Common Stock since the
initial public offering of the Class A Common Stock on July 29, 1992 were
as follows:
1992 1993
------------------------- --------------------------
High Low Dividend High Low Dividend
------- ------- -------- ------ ------- --------
Quarter
1st $10 3/4 $ 8 1/4 $.1125
2nd 11 1/4 8 1/4 .1375
3rd $12 3/4 $10 1/2 $.0703 9 7 3/4 .1375
4th 12 5/8 10 1/4 .1125 10 7 .1375
The last sale price of the Class A Common Stock on March 1, 1994 was
$9.00 per share. As of March 1, the Company had 102 shareholders of
record of its Class A Common Stock. In addition, the Company declared a
dividend of $.1375 per share of Class A Common Stock which was paid on
January 3, 1994 to holders of records as of December 15, 1993. The
Company has declared a dividend of $.1375 per share of Class A Common
Stock payable on April 1, 1994 to holders of record on March 15, 1994.
Class B Common Stock
The Class B Common Stock has been listed on the American Stock
Exchange since December 1986 under the symbol "PHP". The high and low
per share price of the Class B Common Stock and dividends declared on the
Class B Common Stock in 1992 and 1993 were as follows:
1992 1993
------------------------- --------------------------
High Low Dividend High Low Dividend
------- ------- -------- ------ ------- --------
Quarter
1st $12 1/4 $ 9 7/8 $.2858 $19 1/4 $15 3/4 $.4700
2nd 16 1/4 10 1/4 .2858 22 1/2 17 3/8 .4700
3rd 17 1/2 14 1/2 .2858 20 3/4 19 3/4 .4700
4th 17 1/4 15 1/8 .2858 20 1/2 19 1/2 .4700
The last sale price of the Class B Common Stock on March 1, 1994 was
$23.50 per share. As of March 1, 1994, the Company had 60 shareholders
of record of its Class B Common Stock. In addition, the Company declared
a dividend of $.47 per share of Class B Common Stock which was paid on
January 3, 1994 to holders of record as of December 15, 1993. The
Company has declared a dividend of $.41 per share of Class B Common Stock
payable on April 1, 1994 to holders of record on March 21, 1994.
9
<PAGE>
Class C Common Stock
There is no established trading market for the Company's Class C
Common Stock, $.10 par value. The number of record holders of the
Company's Class C Common stock at March 1, 1994 was 29.
The Company declared cash dividends on its Class C Common Stock of
$.1828 per share in 1992 and declared cash dividends of $.525 per share
in 1993. In addition, the Company declared a dividend of $.1375 per
share of Class C Common Stock which was paid on January 3, 1994 to
holders of record as of December 15, 1993. The Company has declared a
dividend of $.1375 per share of Class C Common stock payable on April 1,
1994 to holders of record on March 15, 1994.
Under the terms of the Company's 11.85%, 12.17%, and 12.18%
Subordinated Notes due 1998 and 14.10% Subordinated Notes due 2001 the
Company may not pay any dividend nor make a distribution on its capital
stock if the amount expended for such purposes after December 31, 1987
exceeds the sum of (a) 50% of the aggregate Cash Flow of the Company
accrued on a cumulative basis for each of the fiscal years subsequent to
December 31, 1986 and (b) the aggregate net proceeds, including the fair
value and property other than cash, received by the Company from the
issue or sale of capital stock of the Company after July 1, 1987. The
terms of the Company's Credit Agreement, as restated and amended on
December 31, 1992 (Credit Agreement), along with the terms of its 10 1/8%
Subordinated Notes due 2003 and 9 3/8% Subordinated Debentures due 2006
include restrictions which limit the aggregate amount of dividends the
Company may pay. Under the most restrictive dividend limitations, at
December 31, 1993, $7.1 million was available for the payment of
dividends on all classes of Common Stock.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL AND OTHER DATA
The following table sets forth selected financial and other data
of the Company and should be read in conjunction with the more detailed
financial statements included elsewhere in this Report. Although EBITDA and
NIDA should not be considered as substitutes for net income (loss) as an
indicator of the Company's operating performance and NIDA is not a measure of
the Company's liquidity, they are included in the following table as they
are the bases upon which the Company assesses its financial performance,
compensates management and establishes dividends. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition."
<TABLE><CAPTION>
Year Ended December 31,
----------------------------------------------------
1989 1990 1991 1992 1993
-------- -------- -------- -------- ---------
(in thousands, except per share and per gallon data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $541,521 $567,414 $523,243 $512,430 $538,526
Cost of sales 402,178 435,031 378,772 350,941 366,809
-------- -------- -------- -------- --------
Gross profit 139,343 132,383 144,471 161,489 171,717
Operating expenses 99,267 106,076 104,435 110,165 123,280
Amortization of customer lists 24,604 25,571 24,840 23,496 23,183
Depreciation and amortization of
plant and equipment 5,127 5,796 5,550 5,534 5,933
Amortization of deferred charges 2,362 4,946 5,185 5,363 5,548
Provision for supplemental benefit -- -- -- 1,974 264
-------- ------- -------- -------- --------
Operating income (loss) 7,983 (10,006) 4,461 14,957 13,509
Interest expense--net 17,915 20,900 20,728 18,622 20,508
Other income (expense)--net 2,568 (228) (45) (324) (165)
-------- -------- -------- -------- --------
Loss before income
taxes and extraordinary item (7,364) (31,134) (16,312) (3,989) (7,164)
Income taxes (benefit) (3,077) (1,867) 250 400 400
-------- -------- -------- -------- --------
Loss before
extraordinary item (4,287) (29,267) (16,562) (4,389) (7,564)
Extraordinary item -- -- -- -- (867)
-------- -------- -------- -------- --------
Net loss $ (4,287) $(29,267) $(16,562) $ (4,389) $ (8,431)
======== ======== ======== ======== ========
Net loss applicable to
Common Stock $ (4,287) $(30,624) $(19,855) $ (8,842) $(11,798)
Net Income (loss) per common share
Class A Common Stock $ (0.77) $ (2.81) $ (1.64) $ (.81) $ (.57)
Class B Common Stock 1.83 1.70 .31 1.14 1.88
Class C Common Stock (0.77) (2.81) (1.64) (.81) (.57)
Other Data:
EBITDA(2) $ 40,076 $ 26,307 $ 40,036 $ 51,325 $ 48,437
NIDA(3) $ 27,573 $ 4,639 $ 15,744 $ 27,721 $ 23,176
Gallons of home heating oil
and propane sold 449,040 398,989 385,557 423,354 443,487
Cash Dividends declared per
common share(1):
Class A Common Stock $0.16 $0.08 $ -- $0.18 $0.525
Class B Common Stock 1.83 1.70 0.31 1.14 1.88
Class C Common Stock 0.16 0.08 -- 0.18 0.525
Weighted average number of
common shares outstanding:
Class A Common Stock 10,181 10,181 10,181 12,854 18,993
Class B Common Stock 3,034 3,034 3,034 2,447 217
Class C Common Stock 2,545 2,545 2,545 2,545 2,545
</TABLE>
(Footnotes on next page)
11
<PAGE>
<TABLE><CAPTION>
At December 31,
--------------------------------------------------------------------
1989 1990 1991 1992 1993
-------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficiency) $ 13,544 $ (5,520) $(12,038) $ (6,744) $ 16,694
Total assets 286,435 260,665 220,010 252,783 256,589
Long-term debt and capital
lease obligations (before escrow
deposit)(4) (long-term portion) 51,570 50,847 50,217 50,080 50,047
Subordinated notes
(long-term portion) 92,418 95,346 91,613 84,978 135,264
Redeemable preferred stock 10,000 25,000 30,023 37,718 20,833
(long-term portion)
Stockholders' deficiency (3,287) (40,087) (61,444) (33,917) (61,964)
</TABLE>
------------------------------------
(1) On July 29, 1992, the holders of Class A Common Stock exchanged 20% of
their shares (2,545,139 shares) for an equal number of the newly
created Class C Common Stock. All per share amounts for Class A and
Class C Common Stock have been retroactively adjusted to reflect such
exchange.
(2) EBITDA is defined as operating income before depreciation and
amortization and non-cash expenses associated with key employees'
deferred compensation plans.
(3) 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 plans, 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.
(4) The Company has escrowed certain amounts to secure the repayment of
certain long-term debt. The amounts on deposit at the dates indicated
were as follows: $-0- at December 31, 1989, $-0- at December 31, 1990,
$5,000,000 at December 31, 1991, $15,000,000 at December 31, 1992 and
$20,000,000 at December 31, 1993.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Overview
In analyzing the Company's results, one should consider the
Company's active acquisition program, the rapid rate of amortization of
customer lists purchased in acquisitions, the seasonal nature of the
heating oil business and the general ability of heating oil distributors
to pass on variations in wholesale heating oil costs to their customers.
Therefore, although a company's net income (loss) calculated in
accordance with generally accepted accounting principles is generally
considered by investors to be an indicator of a company's operating
performance, management believes that in evaluating the Company's
results, two additional measures should be considered to supplement the
net income (loss) analysis. The first such measure is operating income
before depreciation and amortization and non-cash expenses associated
with key employees' Deferred Compensation Plans (referred to herein as
EBITDA) and the second such measure is NIDA, defined as the sum of (i)
consolidated net income (loss), plus (ii) 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 plans 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 from the
Company. Although EBITDA and NIDA should not be considered as
substitutes for net income (loss) as an indicator of the Company's
operating performance and NIDA should not be considered as a measure of
the Company's liquidity, it is important for an investor to understand
these concepts since management's strategy is to maximize EBITDA and
NIDA, rather than net income. The computations of EBITDA and NIDA are
derived from the Company's financial statements as a supplement to the
Company's traditional financial statements. Because of management's
acquisition and other strategies, it believes that EBITDA is an important
indicator as a measure of earnings derived from operations before
non-cash expenses and non-operating expenses, such as interest expense,
other expenses and income taxes. The following expands on the above and
enumerates other factors that one should consider.
First, the financial results of a given year do not reflect the full
impact of that year's acquisitions. Most acquisitions are made during the
non-heating season because many sellers desire to retain winter profits
but avoid summer losses. Therefore, the effect of acquisitions made
after the heating season are not fully reflected in the Company's sales
volume and operating and financial results until the following calendar
year.
Second, as stated above, the Company's objective is to maximize NIDA
and EBITDA, rather than net income. The large disparity between NIDA and
net income (loss) is primarily attributable to the substantial
amortization of customer lists and other intangibles in connection with
acquisitions. Customer lists and other intangibles acquired in
connection with acquisitions represent the allocation of acquisition
costs which are amortized over the future periods benefitted by such
acquisitions. In general, costs are allocated to assets based upon the
13
<PAGE>
fair market value of the assets purchased, as determined by arms' length
negotiations between the Company and the seller. Substantially all
purchased intangibles are comprised of customer lists and covenants not
to compete. Amortization of customer lists is a non-cash expense which
represents the write-off of the amount paid for customers acquired in
connection with acquisitions who later terminate their relationship with
the Company. Based on the Company's analysis of historical purchased
customer attrition rates, these lists have been amortized 90% over a six
year period (on average, 15% per annum) and the balance over a 25 year
period. However, the Company's annual net loss of customers has only
averaged approximately 3.5% over the past five years, as the loss of
purchased accounts has been partially offset by new customers obtained
through internal marketing. The covenants not to compete are amortized
over the lives of the covenants, which generally range from five to
seven years. The Company periodically reviews the appropriate allocation
of purchase price among the intangible assets acquired and their
amortization lives.
Third, the seasonal nature of the Company's business results in the
sale by the Company of approximately 50% of its volume in the first
quarter and 30% in the fourth quarter of each year. The Company generally
realizes positive NIDA in both of these quarters and negative NIDA during
the warmer quarters ending June and September. As a result, acquisitions
made during the spring and summer months generally have a negative effect
on earnings and a limited impact on NIDA in the calendar year in which
they are made. Most of the costs associated with an acquired distributor
are incurred evenly throughout the remainder of the year, whereas a
smaller percentage of the purchased company's annual volume and gross
profit is realized during the same period.
Finally, changes in total dollar sales do not necessarily affect the
Company's gross profit, EBITDA, net income or NIDA. Since the Company
adds a per gallon margin onto its wholesale costs, variability in
wholesale oil prices will affect net sales but generally do not affect
EBITDA, net income, NIDA or any other measure of earnings. As a result,
the Company's margins are most meaningfully measured on a per gallon
basis and not as a percentage of sales. While fluctuations in wholesale
prices have not significantly affected demand to date, it is possible
that significant wholesale price increases over an extended period of
time could have the effect of encouraging conservation. If demand were
reduced and the Company was unable to increase its gross profit margin or
reduce its operating expenses, the effect of the decrease in volume would
be to reduce EBITDA, net income, NIDA or any other measure of earnings.
Given the Company's operating strategy to maximize EBITDA and NIDA
as described above, one should also be aware of certain risks that are
inherent in such a strategy. Although an increased level of acquisitions
(which in turn adds to the Company's plant and equipment and customer
lists) is expected to have a positive impact on the long term viability
of the business, the near term effect of acquisitions would be to
increase EBITDA and NIDA by a significantly greater amount than would be
the increase, if any, of net income because of the substantial impact of
depreciation and amortization expense, items which generally do not
impact EBITDA or NIDA, but which do materially impact net income. A
reduced level of acquisitions, which would be expected to have an adverse
impact on the long term growth of the business, could have the short term
14
<PAGE>
effect of decreasing EBITDA and NIDA, while possibly increasing net
income.
In the year of an acquisition, depending on the month it is
consummated, it is possible that EBITDA and NIDA would not be affected,
while net income could be negatively impacted.
To the extent future acquisitions are financed with debt, the
interest expense associated with such debt would not impact EBITDA, but
would reduce NIDA and net income. If the Company were to finance future
acquisitions by issuing new preferred stock, the preferred stock
dividends associated with the new preferred stock would not affect EBITDA
or net income, but would reduce NIDA and increase the Company's
stockholders' deficiency.
Since EBITDA and NIDA are not affected by depreciation and
amortization, the Company's failure to replace long lived assets or its
decision to delay needed capital expenditures, could have the short term
effect of improving net income (by minimizing depreciation and
amortization expense), but could have a negative impact on the long term
viability of the business. Because management is concerned with the
Company's long term viability, and measures its operating performance by
EBITDA and NIDA, it intends to continue making capital improvements as
required.
Factors that impact the Company's ability to continue following its
current operating strategy in the foreseeable future include its ability
to continue to grow through acquisitions, while continuing to replace
lost customers through internal marketing.
15
<PAGE>
Results of Operations and Other Data
1993 Compared to 1992
Net sales increased in 1993 to $538.5 million from $512.4 million in
1992. This $26.1 million increase was attributable to volume growth and
related service revenues associated with acquisitions ($55.4 million or
10.8%), offset by attrition in the Company's customer base and slightly
warmer weather (2.6% warmer than in the prior period).
In 1993 home heating oil volume, including propane increased to
443.5 million gallons, 4.8% greater than the 423.4 million gallons
delivered in 1992 due to the impact of the nine acquisitions completed in
1992 whose annual volume was fully reflected for the first time in 1993,
and to a lesser extent, the nine acquisitions completed in 1993. The
positive impact of the acquisitions was offset by the slightly warmer
weather and attrition in the Company's customer base.
Gross profit increased $10.2 million, (6.3%), from $161.5 million
(38.1 cents per gallon) for 1992 to $171.7 million (38.7 cents per
gallon) for 1993. Home heating oil margins increased 2.0 cents per
gallon, which was partially offset by the higher cost of providing
heating equipment repair and maintenance service to a larger customer
base and the utilization of this service as part of the Company's
internal marketing program.
Operating expenses increased $13.1 million (11.9%) from $110.2
million in 1992 to $123.2 million in 1993, primarily due to the
acquisitions, the severe weather conditions experienced in March 1993
that temporarily increased delivery expenses during that month and the
expansion of the Company's marketing program. On a per gallon basis
these expenses increased 6.9% from 26.0 cents in 1992 to 27.8 cents in
1993. However, after adjustment for the warmer weather in 1993, the
increase was only 4.2% per gallon which was attributable entirely to
above mentioned severe March weather and the Company's marketing program.
The provision for supplemental benefits, representing the present
value of such benefits, returned to the more normal level of $0.3 million
compared to the accelerated accrual of $2.0 million in 1992.
Amortization of customer lists and deferred charges were $28.7
million approximately the same as in 1992. While volume increased 4.8%
these non cash expenses remained equal as certain customer lists and
capitalized expenses became fully amortized. Depreciation and
amortization of plant and equipment increased 7.2%, or $0.4 million, to
$5.9 million for 1993 due to the acquisitions.
Operating income was $13.5 million for 1993 compared to $15.0
million in 1992, as the 4.8% increase in volume and the increase in home
heating oil margins were offset by higher residential service related
costs, increased delivery and marketing expenses.
Net interest expense increased $1.9 million, 10.1%, to $20.5
million. A reduction in the average borrowing rate was offset by a $31.1
million increase in long-term borrowings from $148.5 million, at an
average interest rate of 11.9%, to $179.6 million, at an average interest
rate of 11.4%. This increase in long-term borrowings was due to the
16
<PAGE>
conversion in March 1993 of $12.8 million of Redeemable Preferred Stock
into Subordinated Notes due in 2000 and the issuance in April 1993 of
$50.0 million of 10 1/8% Notes due in 2003. The proceeds of this public
issue were used to repay $25.0 million of long-term obligations maturing
in 1993 and 1995 with the balance being used to fund, in part, the
Company's acquisition program. Offsetting the increase in long-term
borrowings was a decline in short-term borrowings from $17.9 million, at
an average interest rate of 5.9%, to $11.2 million, at an average
interest rate of 5.4%. In addition, the Company reduced bank fees and
generated interest income on higher cash balances in 1993 compared to
1992.
The loss before income taxes and extraordinary items was $7.2
million, $3.2 million (79%) greater than in 1993 due to the reduction in
operating income and the increase in interest expense. Income taxes of
$0.4 million were the same for both periods and represent certain state
income taxes applicable to profitable subsidiaries that are not included
in consolidated state returns. The Company had losses for federal income
tax purposes in each of these periods.
In May 1993, the Company recorded an extraordinary charge against
earnings of $0.9 million. This represented the cash premium paid of $0.4
million to retire $25.0 million of the Company's long-term obligations
maturing in 1993 and 1995 and the write off of $0.5 million in debt
discount and deferred charges associated with these obligations.
The net loss increased from $4.4 million in 1992 to $8.4 million in
1993 due to the decline in operating income, the increase in interest
expense and the extraordinary charge. EBITDA was $48.4 million compared
to $51.3 million in 1992 as the 4.8% increase in volume, the increase in
home heating oil margins were offset by higher residential service
related costs and increased marketing expenses.
1992 Compared to 1991
Net sales decreased in 1992 to $512.4 million from $523.2 million in
1991. This $10.8 million decrease was due to lower home heating oil
prices ($37.9 million or 7.2%) as a result of lower per gallon wholesale
costs, as well as to reductions in sales of products other than #2 fuel
oil to commercial accounts ($17.0 million or 3.3%), which were partially
offset by an increase in home heating oil volume ($41.0 million or 7.8%).
The average price of home heating oil in 1992 was approximately 14.8%
below the 1991 levels, when prices were affected by the Persian Gulf
crisis.
In 1992, home heating oil volume increased to 423.1 million gallons,
9.7% greater than the 385.6 million gallons delivered in 1991 due to
colder temperatures (45.3 million gallons) and the impact of the nine
acquisitions completed in 1991 whose full annual volume was realized for
the first time in 1992 and from a portion of the annual volume associated
with the nine additional acquisitions completed in 1992 (19.2 million
gallons). The impact of the acquisitions was offset in part by attrition
in the Company's customer base, as well as the loss of certain of its
high volume, low margin commercial accounts, as the Company continued to
focus its marketing efforts on smaller, higher margin, more service
sensitive residential customers.
17
<PAGE>
Gross profit increased $17.0 million (11.8%), or 1.9% per gallon,
from $144.5 million in 1991 (37.5 cents per gallon) to $161.5 million in
1992 (38.2 cents per gallon). This increase exceeded the percentage
increase in home heating oil volume due to improved per gallon gross
profit margins, attributable to the Company's ability to add an
increasing gross margin onto its wholesale costs, designed to offset the
impact of inflation, account attrition and weather.
Operating expenses increased 5.5% compared to the 9.7% increase in
volume and declined 3.9% on a per gallon basis from 27.1 cents in 1991
to 26.1 cents in 1992. The per gallon reduction in operating expenses
reflects the savings from the Company's cost reduction program which
was begun in April 1991 and economies of scale realized from the
Company's acquisition program.
Amortization of customer lists declined 5.4%, or $1.3 million, to
$23.5 million in 1992 as certain customer lists became fully amortized
and a greater portion of the purchase price in more recent acquisitions
was allocated to restrictive covenants and included in deferred charges.
As a result of this allocation, amortization of deferred charges
increased 3.5% to $5.4 million in 1992. On a combined basis,
amortization of customer lists and deferred charges declined 3.9% as the
annual amortization associated with assets that became fully amortized
was greater than the amount associated with the limited number of
acquisitions in 1991 and the impact of the 1992 acquisitions was not
fully realized in the current year.
Depreciation and amortization of plant and equipment was $5.5
million for 1992, approximately the same as in 1991, as reductions
related to assets that became fully depreciated were offset by increases
associated with assets purchased in 1991 and 1992.
Provision for supplemental benefit in 1992 represents the present
value of a supplemental retirement benefit ($2.0 million) which is being
paid over 10 years.
Operating income increased to $15.0 million, from $4.5 million in
1991. This improvement was due to an increase in home heating oil volume
and an improvement in per gallon operating income associated with higher
gross profit margins, lower per gallon operating expenses and the decline
in the non-cash expenses, partially offset by the provision for the
supplemental benefit in 1992.
Net interest expense in 1992 decreased $2.1 million, 10.2% below
1991, due to a decline in average outstanding borrowings from 1991 to
1992 of $15.6 million, which caused a reduction of $1.7 million in
interest expense and to an increase in interest income ($0.4 million),
generated primarily by a higher average balance in U.S. Treasury Notes
held in the Cash Collateral Account. The Company's average borrowing
rate increased from 11.2% in 1991 to 11.3% in 1992. Average working
capital borrowings dropped from $35.0 million in 1991 at an average
interest rate of 8.2% to $17.9 million in 1992, at an average interest
rate of 5.9%. Average fixed rate borrowings increased from $147.0
million in 1991 to $148.5 million in 1992 with an average interest rate
of 11.9% for both years.
18
<PAGE>
Pretax loss decreased $12.3 million in 1992 from 1991 due to the
increase in operating income and the reduction in interest expense,
partially offset by the increase in other expenses. Taxes increased from
$0.3 million in 1991 to $0.4 million in 1992. Despite the pretax loss,
the Company was required to pay certain state income taxes in 1992 and
1991 on profitable subsidiaries that are not included in consolidated
state returns. The 1992 loss, while not providing any Federal tax
benefits in 1992, will increase the Company's tax loss carryforwards to
approximately $43.0 million as of December 31, 1992.
Net loss decreased to $4.4 million in 1992, a $12.2 million
improvement over the $16.6 million net loss in 1991.
EBITDA increased 28.2% to $51.3 million in 1992 from $40.0 million
in 1991. This improvement was primarily the result of the 9.7% home
heating oil volume increase and a 1.7 cents per gallon EBITDA margin
improvement.
Liquidity and Financial Condition
One of the Company's primary financial strategies has been to
finance its growth through a combination of internally generated capital,
the sale of Common Stock, and the issuance of Redeemable Preferred Stock
and debt. As indicated in the table below, this strategy has been
pursued by financing acquisitions and other asset requirements made in
the last five years, 62.6% with internally generated cash and funds from
the 1992 offering of 4.3 million shares of Class A Common Stock, 13.3%
with Redeemable Preferred Stock and 24.1% with long-term debt and working
capital. As a result of this strategy, for the year ended December 31,
1993, EBITDA was 2.4 times net interest expense.
Funding Sources
---------------------------------------------------
Acquisitions Internally
and Fixed Generated Funds Long-Term Debt
Asset and Additional Redeemable and Net Working
Year Purchases Equity(1) Preferred Stock Capital(2)
- ---- ------------ ---------------- --------------- ----------------
(dollars in thousands)
1989 $ 42,900 $ 20,643 48.1% $ 9,140 21.3% $ 13,117 30.6%
1990 33,077 (544) (1.6) 15,000 45.3 18,621 56.3
1991 16,399 13,834 84.4 4,449 27.1 (1,884) (11.5)
1992 48,478 64,431 132.9 7,500 15.5 (23,453) (48.4)
1993 34,654 11,461 33.1 (12,764) (36.8) 35,957 103.7
-------- -------- -------- --------
Total $175,508 $109,825 62.6% $23,325 13.3% $ 42,358 24.1%
======== ======== ======= ========
(1) Internally generated funds consist of net income plus depreciation
and amortization less dividends. Additional equity consisted of
$42.7 million from the sale of Class A Common Stock in 1992.
(2) Net working capital was used for other than acquisition and fixed
asset purchases. This column reflects only that portion of net
working capital utilized for the purpose indicated.
19
<PAGE>
Net cash provided by operating activities of $36.6 million for the
year ended December 31, 1993, net of repayments of working capital
borrowings of $4.0 million, along with the $48.1 million of net proceeds
from the April 1993 public offering of the 10 1/8% Notes amounted to
$80.7 million. These funds were utilized in investing activities for
acquisitions, purchase of fixed assets and the investment in Star Gas all
of which totalled $34.7 million and in financing activities to pay
dividends of $14.6 million, to repurchase subordinated debt, including
premium, of $25.4 million, to deposit $5.0 million into a cash collateral
account to partially secure the Maxwhale Notes, and to make principal
payments on other long-term obligations of $0.3 million.
In February 1994, the Company completed a public offering of $75.0
million of its 9 3/8% Debentures due in 2006 ("Debentures"). A portion of
the net proceeds from the sale of the Debentures was used to repurchase
$50.0 million of the Company's 9% Notes (Maxwhale Notes) due June 1, 1994
at a purchase price equal to 101.33% of the principal amount thereof.
The Company will record an extraordinary loss of approximately $0.7
million as a result of the early payment of such debt in 1994. As a
result of the repayment of the Maxwhale Notes, the $20.0 million cash
collateral account which had partially secured these notes was released
to the Company. Pending application for general corporate purposes
including the Company's ongoing acquisition program, the balance of the
proceeds from the offering and the proceeds from the release of the cash
collateral account were applied to reduce working capital borrowings.
A consortium of banks has historically provided the Company with
credit facilities, currently consisting of a $75 million credit line
pursuant to an amended and restated credit agreement dated as of December
31, 1992 (the "Credit Agreement"). As of December 31, 1993, $28 million
of borrowings were outstanding under the Credit Agreement, however;
primarily due to the application of the proceeds from the February 1994
offering and to a lesser extent the cash provided from operations in
January and February 1994, there were no borrowings outstanding at March
1, 1994.
For 1994, the Company's financing obligations include redeeming $4.2
million of Redeemable Preferred Stock, Redeemable Preferred Stock
Dividends of approximately $3.6 million, principal payments on other
long-term obligations of $0.3 million and paying Common Stock dividends,
anticipated to be approximately $12.2 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.
New Accounting Pronouncements
During the first quarter of 1993, the Company adopted Statement of
Financial Accounting Standard No. 106 ("SFAS No. 106"), "Employer's
Accounting for Post Retirement Benefits Other Than Pensions." This
statement requires that the expected cost of post retirement benefits be
fully accrued by the first date of full benefit eligibility, rather than
expensing the benefit when payment is made. As the Company generally
does not provide for post-retirement benefits, other than pensions, the
adoption of the new statement did not have any material effect on the
Company's financial condition or results of operations.
During the first quarter of 1993, the Company also adopted Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). This statement requires that deferred income taxes be
recorded following the liability method of accounting and adjusted
periodically when income tax rates change. Adoption of the new statement
did not have any effect on the Company's financial condition or results
of operations since the Company did not carry any deferred tax accounts
on its balance sheet at December 31, 1992 and any net deferred tax asset
set up as a result of applying SFAS No. 109 has been fully reserved.
20
<PAGE>
Tax Matters
Federal tax legislation, passed on August 10, 1993, will affect for
Federal income tax purposes the manner in which the Company amortizes
intangible assets, primarily customer lists and restrictive covenants
associated with acquisitions. For financial reporting purposes, the
Company historically has amortized 90% of acquired customer lists over a
six year period and the balance over a 25 year period, and has followed
substantially the same policy for Federal income tax reporting purposes.
The new legislation will require amortization of all intangible
assets on a straight line basis over 15 years for Federal income tax
reporting purposes, beginning with acquisitions made after the date of
enactment. The legislation has no effect on the Company's historic
results for financial reporting nor does it affect the Company's Federal
income tax reporting up through the date of enactment. For financial
reporting purposes, the Company periodically reviews the appropriate
allocation of purchase price among the assets acquired. No changes are
currently contemplated in the various amortization lives for the
intangible assets acquired; however the Company periodically reviews such
periods from time to time. The legislation will reduce the Company's
annual Federal income tax deduction attributable to future acquisitions
by requiring the amortization of such intangibles for Federal income tax
purposes over a longer period than the Company currently utilizes. This
could cause the Company to pay income taxes in advance of recording
financial statement income in the future after utilization of the
Company's available net operating loss carryforwards.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
and Financial Statement Schedules
Consolidated Financial Statements of Petroleum Heat and Power Co.,
Inc. and Subsidiaries:
Independent Auditors' Report F-2
Consolidated Balance Sheets, December 31, 1992 and 1993 F-3
Consolidated Statements of Operations, Years ended
December 31, 1991, 1992 and 1993 F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) Years ended December 31, 1991, 1992 and 1993 F-5
Consolidated Statements of Cash Flows, Years ended
December 31, 1991, 1992 and 1993 F-6
Notes to Consolidated Financial Statements F-7
Consolidated Financial Statements of Star Gas Corporation and
Subsidiaries:
Independent Auditors' Reports F-31
Consolidated Balance Sheets, September 30, 1992 and 1993 F-33
Consolidated Statements of Operations, years ended
September 30, 1991, 1992 and 1993 F-34
Consolidated Statements of Shareholders' Equity (Deficiency),
years ended September 30, 1991, 1992 and 1993 F-35
Consolidated Statements of Cash Flows, years ended
September 30, 1991, 1992 and 1993 F-36
Notes to Consolidated Financial Statements F-37
Schedules for the years ended December 31, 1991, 1992 and 1993
VIII - Valuation and Qualifying Accounts F-51
IX - Short-term Borrowings F-52
All other schedules are omitted because the required information
is either inapplicable or included in the consolidated financial
statements or the notes thereto.
F-1
<PAGE>
Independent Auditors' Report
The Stockholders and Board of Directors of
Petroleum Heat and Power Co., Inc.:
We have audited the accompanying consolidated balance sheets of
Petroleum Heat and Power Co., Inc. and subsidiaries as of
December 31, 1992 and 1993, and the related consolidated
statements of operations, changes in stockholders' equity
(deficiency) and cash flows for each of the years in the
three-year period ended December 31, 1993. In connection with
our audit of the consolidated financial statements, we also have
audited the financial statement schedules as listed in the
accompanying index. These consolidated financial statements and
financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Petroleum Heat and Power Co., Inc. and subsidiaries
as of December 31, 1992 and 1993, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 1993 in conformity with
generally accepted accounting principles. Also in our opinion,
the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in the notes to the consolidated financial
statements, the Company adopted the provisions of the Financial
Accounting Standard Board's Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, in 1993.
KPMG Peat Marwick
New York, New York
February 28, 1994
F-2
<PAGE>
<TABLE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
December 31,
-----------------------------
Assets 1992 1993
---- ----
<S> <C> <C>
Current assets:
Cash $ 3,859,557 $ 4,613,546
U.S. Treasury Notes held in a Cash Collateral Account -- 20,000,000
Accounts receivable (net of allowance of $1,270,754 and $1,026,202) 78,358,514 74,818,503
Inventories 15,729,305 13,992,928
Prepaid expenses 4,623,433 5,230,865
Notes receivable and other current assets 1,680,633 1,715,329
--------- ---------
Total current assets 104,251,442 120,371,171
----------- -----------
Property, plant and equipment 61,092,297 62,643,562
Less accumulated depreciation and amortization 28,342,302 31,103,032
---------- ----------
32,749,995 31,540,530
---------- ----------
Intangible assets (net of accumulated amortization of $188,459,167 and $217,190,143)
Customer lists 86,093,145 73,177,198
Deferred charges 14,128,629 13,717,281
Deferred pension costs -- 1,332,616
---------- ---------
100,221,774 88,227,095
----------- ----------
Investment in Star Gas Corporation -- 16,000,000
---------- ----------
U.S. Treasury Notes held in a Cash Collateral Account 15,000,000 --
---------- -----------
Other assets 560,000 450,000
---------- -----------
$252,783,211 $256,588,796
=========== ===========
Liabilities And Stockholders' Equity (Deficiency)
Current liabilities:
Working capital borrowings $ 32,000,000 $ 28,000,000
Current maturities of other long-term debt 33,345 33,345
Current installments of capital lease obligations 103,595 --
Current maturities of cumulative redeemable exchangeable preferred stock -- 4,166,667
Subordinated notes payable 12,400,373 --
Accounts payable 15,289,518 16,664,026
Customer credit balances 19,317,863 22,324,023
Unearned service contract revenue 13,180,431 13,018,983
Accrued expenses:
Wages and bonuses 5,030,100 6,392,559
Taxes other than income taxes 1,856,074 1,564,822
Pension 2,373,188 1,465,905
Other 9,410,757 10,046,589
--------- ----------
Total current liabilities 110,995,244 103,676,919
----------- -----------
Long-term notes payable 50,000,000 50,000,000
---------- ----------
Other long-term debt 80,404 47,059
---------- ----------
Supplemental benefits payable 1,688,728 1,652,314
---------- ----------
Pension plan obligation 1,239,250 7,079,494
---------- ----------
Subordinated notes payable 84,978,349 135,263,663
---------- -----------
Cumulative redeemable exchangeable preferred stock, par value $.10 per share,
409,722 shares authorized, 408,884 and 250,000 shares outstanding of which
41,667 at December 31, 1993 are reflected as current 37,717,790 20,833,333
---------- ----------
Commitments and contingencies
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,
216,901 shares outstanding (liquidation preference - $1,236,336) 21,690 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 54,462,132 54,416,259
Deficit (89,274,148) (112,741,672)
Minimum pension liability adjustment -- (4,534,035)
---------- ----------
(32,636,554) (60,683,986)
Note receivable from stockholder (1,280,000) (1,280,000)
---------- ----------
Total stockholders' equity (deficiency) (33,916,554) (61,963,986)
---------- ----------
$252,783,211 $256,588,796
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1991, 1992 and 1993
<CAPTION>
1991 1992 1993
---- ---- ----
<S> <C> <C> <C>
Net sales $ 523,243,243 $ 512,430,194 $ 538,526,317
Cost of sales 378,771,961 350,941,386 366,809,517
----------- ----------- -----------
Gross profit 144,471,282 161,488,808 171,716,800
Selling, general and administrative expenses 79,427,873 83,407,680 93,378,666
Direct delivery expense 25,007,204 26,756,585 29,901,565
Amortization of customer lists 24,839,983 23,496,438 23,182,730
Depreciation and amortization of
plant and equipment 5,550,381 5,534,205 5,933,100
Amortization of deferred charges 5,185,113 5,363,321 5,548,246
Provision for supplemental benefits -- 1,973,728 263,586
----------- ----------- -----------
Operating income 4,460,728 14,956,851 13,508,907
Other income (expense):
Interest expense (21,916,205) (20,204,808) (22,155,840)
Interest income 1,187,676 1,582,885 1,647,435
Gains (losses) on sales of fixed assets (104,911) 8,297 (164,686)
Other 60,147 (332,590) --
----------- ----------- -----------
Loss before income taxes and
extraordinary item (16,312,565) (3,989,365) (7,164,184)
Income taxes 250,000 400,000 400,000
----------- ----------- -----------
Loss before extraordinary item (16,562,565) (4,389,365) (7,564,184)
----------- ----------- -----------
Extraordinary item - loss on early
extinguishment of debt -- -- (867,110)
----------- ----------- -----------
Net loss $ (16,562,565) $ (4,389,365) $ (8,431,294)
============ =========== ===========
Net loss applicable to common stock $ (19,854,648) $ (8,842,105) $ (11,798,320)
Income (loss) before extraordinary item per common share:
Class A Common Stock $ (1.64) $ (.81) $ (.53)
Class B Common Stock .31 1.14 1.88
Class C Common Stock (1.64) (.81) (.53)
Extraordinary loss per common share:
Class A Common Stock $ -- $ -- $ (.04)
Class B Common Stock -- -- --
Class C Common Stock -- -- (.04)
Net income (loss) per common share:
Class A Common Stock $ (1.64) $ (.81) $ (.57)
Class B Common Stock .31 1.14 1.88
Class C Common Stock (1.64) (.81) (.57)
Weighted average number of
common shares outstanding:
Class A Common Stock 10,180,558 12,854,266 18,992,579
Class B Common Stock 3,034,060 2,447,473 216,901
Class C Common Stock 2,545,139 2,545,139 2,545,139
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
Years ended December 31, 1991, 1992 and 1993
<CAPTION>
Minimum Note
Common Stock Additional pension receivable
---------------------------- paid-in liability from
Class A Class B Class C capital Deficit adjustment stockholder Total
------- ------- ------- ------- ------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1990 $1,018,056 $303,406 $254,514 $13,124,567 $ (53,507,701) $ -- $(1,280,000) $ (40,087,158)
Net loss (16,562,565) (16,562,565)
Cash dividends declared
and paid (3,927,446) (3,927,446)
Cash dividends payable (292,610) (292,610)
Redeemable preferred stock
issuance costs (550,962) (550,962)
Accretion of redeemable
preferred stock (23,083) (23,083)
---------- -------- -------- ----------- ------------- ----------- ----------- -------------
Balance at December 31,
1991 1,018,056 303,406 254,514 12,550,522 (74,290,322) -- (1,280,000) (61,443,824)
Net loss (4,389,365) (4,389,365)
Cash dividends declared
and paid (7,987,026) (7,987,026)
Cash dividends payable (2,607,435) (2,607,435)
Accretion of redeemable
preferred stock (194,740) (194,740)
Class A Common Stock
issued (4,330,000 shares) 433,000 47,197,000 47,630,000
Class A Common Stock
(4,482,021 shares)
exchanged for Class B
Common Stock
(2,817,159 shares) 448,202 (281,716) (166,486) --
Class A Common Stock
issuance and exchange
offer costs (4,924,164) (4,924,164)
---------- -------- -------- ----------- ------------- ----------- ----------- -------------
Balance at December 31,
1992 1,899,258 21,690 254,514 54,462,132 (89,274,148) -- (1,280,000) (33,916,554)
Net loss (8,431,294) (8,431,294)
Cash dividends declared
and paid (11,972,850) (11,972,850)
Cash dividends payable (3,063,380) (3,063,380)
Accretion of redeemable
preferred stock (45,873) (45,873)
Minimum pension liability
adjustment (4,534,035) (4,534,035)
---------- -------- -------- ----------- ------------- ----------- ----------- -------------
$1,899,258 $ 21,690 $254,514 $54,416,259 $(112,741,672) $(4,534,035) $(1,280,000) $ (61,963,986)
========== ======== ======== =========== ============= =========== =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1991, 1992 and 1993
<CAPTION>
1991 1992 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (16,562,565) $ (4,389,365) $ (8,431,294)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Amortization of customer lists 24,839,983 23,496,438 23,182,730
Depreciation and amortization of
plant and equipment 5,550,381 5,534,205 5,933,100
Amortization of deferred charges
and debt discount 5,223,354 5,394,397 5,548,246
Provision for losses on accounts receivable 2,156,320 2,444,581 1,836,113
Provision for supplemental benefits -- 1,973,728 263,586
Loss (gain) on bond redemptions (60,147) 332,590 867,110
Loss (gain) on sales of fixed assets 104,911 (8,297) 164,686
Amortization of acquired pension
plan obligation (23,328) (24,785) (26,407)
Decrease (increase) in accounts receivable 8,217,612 (6,994,519) 1,703,898
Decrease (increase) in inventory 12,509,679 (2,438,308) 1,736,377
Decrease in income taxes receivable 668,000 -- --
Decrease (increase) in prepaid expenses,
notes receivable and other current assets 279,716 (12,823) (642,128)
Decrease (increase) in other assets (100,000) (200,000) 110,000
Increase (decrease) in accounts payable (6,133,548) 2,360,312 1,374,508
Increase (decrease) in customer
credit balances 2,378,664 (822,574) 3,006,160
Increase (decrease) in unearned service contract
revenue 104,643 823,902 (161,448)
Increase (decrease) in accrued expenses 461,857 (756,093) 171,555
---------- ---------- ----------
Net cash provided by operating activities 39,615,532 26,713,389 36,636,792
---------- ---------- ----------
Cash flows used in investing activities:
Acquisition of customer lists (10,127,482) (33,361,262) (10,266,783)
Increase in deferred charges (2,570,234) (1,800,647) (3,581,798)
Capital expenditures (4,146,765) (14,509,037) (5,182,335)
Net proceeds from sales of fixed assets 261,333 528,376 294,014
Investment in Star Gas Corporation -- -- (16,000,000)
---------- ---------- ----------
Net cash used in investing activities (16,583,148) (49,142,570) (34,736,902)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 47,630,000 --
Costs of issuing and exchanging common stocks -- (4,924,164) --
Net proceeds from issuance of redeemable exchangeable
preferred stock 4,449,055 7,499,950 --
Net proceeds from issuance of subordinated notes 5,700,000 6,800,000 48,067,642
Repurchase of subordinated notes (5,616,508) (6,964,693) (25,368,574)
Net reductions of working capital borrowings (19,250,000) (7,750,000) (4,000,000)
Increase in Cash Collateral Account (5,000,000) (10,000,000) (5,000,000)
Decrease in other obligations (33,345) (33,346) (161,089)
Principal payments under capital lease obligations (686,577) (596,833) (103,595)
Cash dividends paid (5,216,921) (8,279,636) (14,580,285)
---------- ---------- ----------
Net cash provided by (used in) financing activities (25,654,296) 23,381,278 (1,145,901)
---------- ---------- ----------
Net increase (decrease) in cash (2,621,912) 952,097 753,989
Cash at beginning of year 5,529,372 2,907,460 3,859,557
--------- --------- ---------
Cash at end of year $ 2,907,460 $ 3,859,557 $ 4,613,546
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of
Petroleum Heat and Power Co., Inc. (Petro) and its
subsidiaries (the Company), each of which is wholly owned
and, like Petro, is engaged in the retail distribution of
home heating oil and propane in the Northeast. The Company
currently operates in 26 major markets in the Northeast,
including the metropolitan areas of Boston, New York City,
Baltimore, Providence and Washington, D.C., serving
approximately 415,000 customers in those areas. Credit is
granted to substantially all of these customers with no
individual account comprising a concentrated credit risk.
Investment in Star Gas Corporation
The Company's investment in Star Gas Corporation (see note
11) is accounted for following the equity method.
Inventories
Inventories are stated at the lower of cost or market using
the first-in, first-out method. The components of
inventories were as follows at the dates indicated:
December 31,
-----------------------
1992 1993
---- ----
Fuel oil $ 8,151,053 $ 6,289,676
Parts 7,578,252 7,703,252
--------- ---------
$15,729,305 $13,992,928
========== ==========
Property, Plant and Equipment
Property, plant and equipment are carried at cost.
Depreciation is computed using the straight-line method over
the estimated useful lives of the assets.
Customer Lists and Deferred Charges
Customer lists are recorded at cost less accumulated
amortization. Amortization is computed using the
straight-line method with 90% of the cost amortized over six
years and 10% of the cost amortized over 25 years.
Deferred charges include goodwill, acquisition costs and
payments related to covenants not to compete. The covenants
are amortized using the straight-line method over the terms
of the related contracts; acquisition costs are amortized
using the straight-line method over a six-year period; while
goodwill is amortized using the straight-line method over a
twenty-five year period. Also included as deferred charges
are the costs associated with the issuance of the Company's
subordinated notes. Such costs are being amortized using the
interest method over the lives of the notes.
(Continued)
F-7
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1), Continued
The Company assesses the recoverability of intangible assets
by comparing the carrying values of such intangibles to
market values, where a market exists, supplemented by cash
flow analyses to determine that the carrying values are
recoverable over the remaining estimated lives of the
intangibles through undiscounted future operating cash flows.
When an intangible asset is deemed to be impaired, the amount
of intangible impairment is measured based on market values,
as available, or by projected operating cash flows, using a
discount rate reflecting the Company's assumed average cost
of funds.
Unearned Service Contract Revenue
Payments received from customers for burner service contracts
are deferred and amortized into income over the terms of the
respective service contracts, which generally do not exceed
one year.
Customer Credit Balances
Customer credit balances represent payments received from
customers pursuant to a budget payment plan (whereby
customers pay their estimated annual fuel charges on a fixed
monthly basis) in excess of actual deliveries billed.
Income Taxes
The Company files a consolidated Federal income tax return
with its subsidiaries. When appropriate, deferred income
taxes were provided to reflect the tax effects of timing
differences between financial and tax reporting. Effective
January 1, 1993 the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109) (see note 9).
Pensions
The Company funds accrued pension costs currently on its
pension plans, all of which are noncontributory.
Common Stock
In July 1992, the holders of Class A Common Stock exchanged
2,545,139 shares of Class A Common Stock for 2,545,139 shares
of Class C Common Stock (see note 6). All numbers of Class A
and Class C Common Stock and related amounts have been
retroactively adjusted in the accompanying consolidated
financial statements to reflect such exchange.
(Continued)
F-8
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1), Continued
Earnings per Common Share
Earnings per common share 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 the net loss for
preferred dividends declared and the accretion of 1991
Redeemable Preferred Stock, aggregating $3,292,000,
$4,452,000, and $3,367,000 for the years ended 1991, 1992 and
1993, respectively. Fully diluted earnings per common share
are not presented because the effect is not material or is
antidilutive.
(2) Property, Plant and Equipment
The components of property, plant and equipment and their
estimated useful lives were as follows at the indicated
dates:
December 31,
----------------- Estimated
1992 1993 useful lives
---- ---- ------------
Land $ 1,469,065 $ 1,519,065
Buildings 7,151,142 7,420,171 20-45 years
Fleet and other equipment 38,507,056 38,412,619 3-17 years
Furniture and fixtures 10,784,419 11,861,514 5-7 years
Leasehold improvements 3,180,615 3,430,193 Terms of leases
--------- ----------
61,092,297 62,643,562
Less accumulated depreciation
and amortization 28,342,302 31,103,032
---------- ----------
$32,749,995 $31,540,530
========== ==========
(Continued)
F-9
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Notes Payable, Other Long-Term Debt and Working Capital
Borrowings
Notes payable and other long-term debt, including working
capital borrowings and current maturities of long-term debt,
consisted of the following at the indicated dates:
December 31,
-----------------
1992 1993
---- ----
Notes payable to banks under working capital
borrowing arrangements(a)(c). $32,000,000 $28,000,000
Notes payable in connection with the
acquisition of Whale Oil Corp., refinanced
on February 3, 1994 and paid on February 4,
1994, with interest at the rate of 9% per
annum(b)(c) 50,000,000 50,000,000
Amounts payable in connection with the
purchase of a fuel oil dealer, due in
monthly installments with interest at 6% per
annum, through June 1, 1996 (see note 10) 113,749 80,404
---------- ----------
82,113,749 78,080,404
Less current maturities, including working
capital borrowings 32,033,345 28,033,345
---------- ----------
$50,080,404 $50,047,059
========== ==========
____________
(a) Pursuant to a Credit Agreement dated December 31, 1992,
as restated and amended (Credit Agreement), the Company
may borrow up to $75 million under a revolving credit
facility with a sublimit under a borrowing base
established each month. Amounts borrowed under the
revolving credit facility are subject to a 45 day
clean-up requirement prior to September 30 of each year
and the facility terminates on June 30, 1996. As
collateral for the financing arrangement, the Company
granted to the lenders a security interest in the
customer lists trademarks and trade names owned by the
Company, including the proceeds therefrom. Under certain
circumstances, the Company would have to further secure
its obligations under the credit agreement with a lien on
accounts receivable and material inventories.
Interest on borrowings is payable monthly and is based
upon the floating rate selected at the option of the
Company of either the Eurodollar Rate (as defined below)
or the Alternate Base Rate (as defined below), plus 125
to 175 basis points on Eurodollar Loans or 0 to 50 basis
points on Alternative Base Rate Loans, based upon the
ratio of Consolidated Operating Profit to Interest
Expense (as defined in the Credit Agreement). The
Eurodollar Rate is the prevailing rate in the Interbank
Eurodollar Market adjusted for reserve requirements. The
Alternate Base Rate is the greater of (i) the prime rate
or base rate of Chemical Bank in effect or (ii) the
Federal Funds Rate in effect plus 1/2 of 1%. At
December 31, 1993, the rate on the working capital
borrowings was 4.9%. The Company pays a facility fee of
0.375% on the unused portion of the revolving credit
facility. Compensating balances equal to 5.0% of the
average amount outstanding during the relevant period are
also required under the agreement.
(Continued)
F-10
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3), Continued
(b) On July 22, 1987, Maxwhale Corp. (Maxwhale), a wholly
owned subsidiary of Petro, acquired certain assets of
Whale Oil Corp. for $50.0 million. The purchase price was
paid by the issuance of $50.0 million of 9% notes due June
1, 1994. The notes were nonrecourse to Petro, but were
secured by letters of credit issued by certain banks
pursuant to the Credit Agreement. Maxwhale paid a fee on
these letters of credit, calculated at a range of 1.75%
to 2.25% on $50.0 million less the balance maintained in a
Cash Collateral Account, plus 0.25% on the Cash
Collateral Account balance. Petro had fully guaranteed
these letters of credit. The Maxwhale customer list was
pledged pursuant to a security agreement in favor of the
banks.
On February 4, 1994, the Company repaid the $50.0 million
of Maxwhale notes at a purchase price of 101.33% of the
principal amount thereof, with a portion of the proceeds
of its $75.0 million 9-3/8% public subordinated debenture
offering completed on February 3, 1994 (see note 5). The
Company will record an extraordinary loss in 1994 of
approximately $0.7 million as a result of the early
payment on such debt. Since the Maxwhale notes were
refinanced with the proceeds of new long term debt, such
notes have been classified as long term at December 31,
1993.
Under the Credit Agreement, the Company was required to
make annual deposits into a Cash Collateral Account to
secure the outstanding letters of credit. The first such
deposit of $5 million was made on June 15, 1991 with
additional deposits of $10 million occurring on April 1,
1992 and $5 million on May 15, 1993. As a result of the
repayment of the Maxwhale notes, the $20 million in the
cash collateral account was released for general
corporate purposes on February 4, 1994.
(c) The customer lists, trademarks and trade names pledged
to the banks under the Credit Agreement are carried on
the December 31, 1993 balance sheet at $73,177,198.
Under the terms of the Credit Agreement, the Company is
required, among other things, to maintain certain minimum
levels of cash flow, as well as certain ratios on
consolidated debt. In the event of noncompliance with
certain of the covenants, the banks have the right to
declare all amounts outstanding under the loans to be due
and payable immediately.
With the refinancing of the Maxwhale notes with a portion
of the Company's 9-3/8% subordinated debentures, there
are no other annual maturities of long-term debt for each
of the next five years as of December 31, 1993, except
for the required repayments of the acquisition related
payable of approximately $80,000 due in equal monthly
installments of approximately $3,300 through June 30,
1996.
(Continued)
F-11
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Leases and Capital Lease Obligations
The Company is obligated under various capital leases entered
into during 1988 and 1989 for service vans. The leases
expired in 1993 and were renewed on a month to month basis
thereafter. The gross amounts of fleet and other equipment
and related accumulated amortization recorded under the
capital leases were as follows at the dates indicated:
December 31,
------------------
1992 1993
---- ----
Fleet and other equipment $2,701,658 2,701,658
Less accumulated amortization 2,598,063 2,701,658
---------- ---------
$ 103,595 --
========== =========
Amortization of assets held under capital leases is included
with depreciation expense.
The Company also leases real property and equipment under
noncancelable operating leases which expire at various times
through 2008. Certain of the real property leases contain
renewal options and require the Company to pay property
taxes.
Future minimum lease payments for all operating leases (with
initial or remaining terms in excess of one year) are as
follows:
Year ending Operating
December 31, leases
------------ ------
1994 $ 3,260,000
1995 2,974,000
1996 2,128,000
1997 1,507,000
1998 1,392,000
Thereafter 5,046,000
---------
Total minimum lease payments $16,307,000
==========
Rental expense under operating leases for the years ended
December 31, 1991, 1992 and 1993 was $4,916,000, $4,448,000,
and $5,346,000, respectively.
(Continued)
F-12
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Subordinated Notes Payable
Subordinated notes payable, net of unamortized original
discounts, at the dates indicated, consisted of:
December 31,
---------------------
1992 1993
---- ----
11.40% Subordinated Notes due July 1,
1993(a)(b) $12,400,373 $ --
14.275% Subordinated Notes due October
1, 1995(b) 12,478,349 --
11.85%, 12.17%, and 12.18% Subordinated
Notes due October 1, 1998(c) 60,000,000 60,000,000
14.10% Subordinated Notes due January
15, 2001(d) 12,500,000 12,500,000
Subordinated Notes due March 1, 2000(e) -- 12,763,663
10-1/8% Subordinated Notes due April 1,
2003(f) -- 50,000,000
---------- -----------
97,378,722 135,263,663
Less current maturities 12,400,373 --
---------- ----------
$84,978,349 $135,263,663
========== ===========
(a) On July 2, 1984, the Company sold $20,000,000 of
subordinated notes at an original discount of
approximately $150,000. These notes (11.40% Notes) bore
interest at 11.40% and were redeemable at the Company's
option in whole, at any time, or in part, from time to
time, at a redemption price of 101.5% of principal amount
through June 30, 1993. Interest was payable quarterly.
(b) On October 8, 1985, the Company sold $25,000,000 of
subordinated fixed rate notes at an original discount of
approximately $330,000. These notes (14.275% Notes) bore
interest at 14.275% and were redeemable at the option of
the Company, in whole or in part, from time to time, upon
payment of a premium rate of approximately 3.7%, which
declined on October 1, 1992 to approximately 2.0% until
October 1, 1993, when the 14.275% Notes were redeemable
at par.
In April 1991, the Company purchased $5,519,000 and
$376,000 face value of its 11.40% Notes and 14.275%
Notes, respectively, for an aggregate of $5,617,000.
Unamortized deferred charges and bond discounts of
$218,000 associated with the issuances of the 11.40%
Notes and the 14.275% Notes were written off upon the
repurchase of the debt. The Company included a gain of
$60,000 in 1991 on these repurchases and included such
gain in other income. In March 1992, the Company
purchased $2,445,000 of the 14.275% notes at par.
Unamortized deferred charges and bond discounts of
$62,000 associated with the issuance of these notes were
written off on the repurchase of the debt in March 1992.
On May 15, 1992, the Company purchased $4,355,000 of the
14.275% Notes at a premium of 3.7%.
(Continued)
F-13
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5), Continued
(b), continued
Unamortized deferred charges and bond discounts of
$106,000 associated with the issuance of these notes were
written off on the repurchase of the debt in May 1992.
The Company included a loss of $333,000 in 1992 on these
repurchases and included such loss in other expenses. In
May 1993, the Company repurchased the remaining
outstanding amounts of its 11.40% Subordinated Notes due
July 1, 1993 having a face amount of $12,430,000, at a
redemption price of 101.5% of face value, for an
aggregate of approximately $12.6 million and its
outstanding 14.275% Subordinated Notes due October 1,
1995, having a face amount of $12,524,000, at a
redemption price of 102.0% of face value, for an
aggregate of approximately $12.8 million. Unamortized
deferred charges and bond discounts of $447,000
associated with the issuance of these Notes were written
off on the repurchase of the debt in May 1993. The
Company recorded an extraordinary loss of $867,000 as a
result of the early retirement of these notes.
(c) On September 1, 1988, the Company authorized the
issuance of $60,000,000 of Subordinated Notes due
October 1, 1998 bearing interest payable semiannually on
the first day of April and October. The Company issued
$40,000,000 of such notes on October 14, 1988 bearing
interest at the rate of 11.85% per annum, $15,000,000 of
such notes on March 31, 1989 bearing interest at the rate
of 12.17% per annum and $5,000,000 of such notes on
May 1, 1990 bearing interest at the rate of 12.18% per
annum. All such notes are redeemable at the option of
the Company, in whole or in part, from time to time, upon
payment of a premium rate as defined.
(d) On January 15, 1991, the Company authorized the
issuance of $12,500,000 of 14.10% Subordinated Notes due
January 15, 2001 bearing interest payable quarterly on
the fifteenth day of January, April, July and October.
The Company issued $5,700,000 of such notes in April 1991
and $6,800,000 in March 1992. The notes are redeemable
at the option of the Company, in whole or in part, from
time to time, upon payment of a premium rate as defined.
On each January 15, commencing in 1996 and ending on
January 15, 2000, the Company is required to repay
$2,100,000 of the Notes. The remaining principal of
$2,000,000 is due on January 15, 2001. No premium is
payable in connection with these required payments.
(e) In March 1993, the Company issued $12,764,000 of
Subordinated Notes due March 1, 2000 in exchange for an
equal amount of 1991 Redeemable Preferred Stock (see note
7). The Company issued the 1991 Redeemable Preferred
Stock under an agreement which required the Company to
redeem the 1991 Redeemable Preferred Stock as soon as,
and to the extent that, it was permitted to incur Funded
Debt. Under the applicable provisions of the Company's
debt agreements, the Company was allowed to incur Funded
Debt in the first quarter of 1993, and as such, was
required to enter into the exchange. These notes call
for interest payable monthly based on the sum of LIBOR
plus 9.28%. At December 31, 1993, LIBOR was 3.25%.
(Continued)
F-14
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5), Continued
(f) On April 6, 1993, the Company issued $50.0 million of
10-1/8% Subordinated Notes due April 1, 2003. These
Notes are redeemable at the Company's option, in whole or
in part, at any time on or after April 1, 1998 upon
payment of a premium rate as defined. Interest is
payable semiannually on the first day of April and
October.
Expenses connected with the above six offerings, and
amendments thereto, amounted to approximately $8,057,000. At
December 31, 1992 and 1993, the unamortized balances
relating to notes still outstanding amounted to approximately
$1,675,000 and $2,762,000, respectively, and such balances
are included in deferred charges.
Aggregate annual maturities for each of the next five years,
are as follows as of December 31, 1993:
Year ended
December 31,
------------
1994 $ --
1995 --
1996 2,100,000
1997 2,100,000
1998 62,100,000
On February 3, 1994, the Company issued $75.0 million of
9-3/8% public subordinated debentures due February 1, 2006.
These debentures are redeemable at the Company's option, in
whole or in part, at any time on or after February 1, 1997
upon payment of a premium rate as defined. Interest is
payable semiannually on the first day of February and August.
In connection with the offering of its 9-3/8% subordinated
debentures, the Company solicited and received consents of
the holders of at least a majority in aggregate principal
amount of each class of subordinated debt and redeemable
preferred stock (see note 7) to certain amendments to the
respective agreements under which the subordinated debt and
the redeemable preferred stock were issued. In consideration
for the consents, the Company paid to the holders of the
subordinated debt due in 1998, 2000 and 2003 a cash payment
aggregating $0.6 million and caused approximately $42.6 million
of the aggregate principal amount of such subordinated debt to
be ranked as senior debt. In addition, the Company has agreed
to increase dividends on the redeemable preferred stock by
$2.00 per share per annum. The Company also paid approximately
$1.5 million in fees and expenses to obtain such consents (see
Note 7).
(Continued)
F-15
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Common Stock and Common Stock Dividends
The Company's outstanding Common Stock consists of Class A
Common Stock, Class B Common Stock and Class C Common Stock,
each with various designations, rights and preferences. In
1992, the Company restated and amended its Articles of
Incorporation increasing the authorized shares of Class A
Common Stock to 40,000,000 and authorizing 5,000,000 shares
of Class C Common Stock, $.10 par value. On July 29, 1992,
the holders of Class A Common Stock exchanged, pro rata,
2,545,139 shares of Class A Common Stock for 2,545,139 shares
of Class C Common Stock. The financial statements, as well
as the table on the following page, give retroactive effect
to this exchange.
Holders of Class A Common Stock and Class C Common Stock have
identical rights, except that holders of Class A Common Stock
are entitled to one vote per share and holders of Class C
Common Stock are entitled to ten votes per share. Holders of
Class B Common Stock do not have voting rights, except as
required by law, or in certain limited circumstances.
Holders of Class B Common Stock are entitled to receive, as
and when declared by the Board of Directors, Special
Dividends equal to .000001666% per share per quarter of the
Company's Cash Flow, as defined, for its prior fiscal year.
For purposes of computing Special Dividends, Cash Flow
represents the sum of (i) consolidated net income, plus (ii)
depreciation and amortization of plant and equipment, and
(iii) amortization of customer lists and restrictive
covenants, (iv) 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.
Special Dividends are cumulative and are payable quarterly.
If not paid, dividends on any other class of stock may not be
paid until all Special Dividends in arrears are declared and
paid.
The Company may, in its sole discretion, terminate the
payment of the Special Dividends if all Special Dividends
have then been paid or duly provided for. If the Company
exercises its right to terminate the Special Dividends, it
must give notice to the holders of Class B Common Stock not
less than 30 days nor more than 60 days prior to the date
fixed for termination. In such event, the Special Dividends
will terminate on the date specified in the notice (the
Parity Date). Each holder of Class B Common Stock will then
have a period of 60 days from the date of the notice to elect
to require the Company to purchase all or part of such
holder's Class B Common Stock at a price of $17.50 per share,
as adjusted for stock splits, reclassifications and the like,
plus all accrued and unpaid Special Dividends to the date of
purchase, or to elect to retain such holder's Class B Common
Stock. After the Parity Date, no dividends will be paid to
the holders of Class B Common Stock until the holders of
Class A Common Stock and Class C Common Stock receive
dividends equal to the Common Stock Allocation, as defined.
(Continued)
F-16
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6), Continued
On July 29, 1992 and September 2, 1992, the Company sold an
aggregate of 4,330,000 shares of its Class A Common Stock in
a Public Offering (the "Offering") at an initial offering
price of $11.00 per share.
On September 17, 1992 the Company commenced an Exchange Offer
(Exchange Offer) for all of the outstanding shares of its
Class B Common Stock pursuant to which each holder of Class B
Common Stock who validly tendered a share of Class B Common
Stock for exchange was entitled to receive 1.591 shares of
Class A Common Stock. The Exchange Offer expired on October
16, 1992 and, as a result, 2,817,159 shares of Class B Common
Stock (92.8% of the total then outstanding) were exchanged
for 4,482,021 shares of Class A Common Stock.
The following table summarizes the cash dividends declared on
Common Stock and the cash dividends declared per common share
for the years indicated:
Year Ended December 31,
------------------------------
1991 1992 1993
---- ---- ----
Cash dividends declared
Class A $ -- $ 3,157,000 $ 9,971,000
Class B 952,000 2,715,000 408,000
Class C -- 465,000 1,336,000
Cash dividends declared per share
Class A $ -- $ 0.18 $ 0.525
Class B 0.31 1.14 1.88
Class C -- 0.18 0.525
Under the Company's most restrictive dividend limitation,
$7.1 million was available at December 31, 1993 for the
payment of dividends on all classes of Common Stock. The
amount available for dividends is increased each quarter by
50% of the cash flow, as defined, for the previous fiscal
quarter.
In the event of liquidation of the Company, each outstanding
share of Class B Common Stock would be entitled to a
distribution equal to its share of all accrued and unpaid
Special Dividends, without interest, plus $5.70 per share,
before any distribution is made with respect to the Class A
or Class C Common Stock. Thereafter, each share of Class B
Common Stock and each share of Class A and Class C Common
Stock would participate equally in all liquidating
distributions, subject to the rights of the holders of the
Cumulative Redeemable Exchangeable Preferred Stock. The
aggregate liquidation preference on the Class B Common Stock
at December 31, 1993 amounted to an aggregate of $1,236,336.
(Continued)
F-17
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Cumulative Redeemable Exchangeable Preferred Stock
The Company entered into agreements dated as of August 1,
1989 with John Hancock Mutual Life Insurance Company and
Northwestern Mutual Life Insurance Company to sell up to
250,000 shares of its Redeemable Preferred Stock, par value
$. 10 per share, at a price of $100 per share, which shares
are exchangeable into Subordinated Notes due August 1, 1999
(1999 Notes). The Company sold 50,000 shares of the
Redeemable Preferred Stock in August 1989, 50,000 shares in
December 1989 and 150,000 shares in May 1990. The Redeemable
Preferred Stock issued in August 1989 calls for dividends of
$12 per share, while the stock issued in December 1989 and
May 1990 calls for dividends of $11.84 and $12.61 per share,
respectively. In connection with receiving the consents in
1994 to modify certain covenants under which the Redeemable
Preferred Stock was issued, the Company has agreed to
increase dividends on the Redeemable Preferred Stock by $2.00
per share per annum beginning February 1994. The shares of
the Redeemable Preferred Stock are exchangeable in whole, or
in part, at the option of the Company, for 1999 Notes of the
Company.
On August 1, 1994, and on August 1 of each year thereafter,
so long as any of the shares of Redeemable Preferred Stock
remain outstanding, one-sixth of the number of originally
issued shares of each series of Redeemable Preferred Stock
outstanding less the number of shares of such series
previously exchanged for 1999 Notes, are to be redeemed, with
the final redemption of remaining outstanding shares
occurring on August 1, 1999. The redemption price is $100
per share plus all accrued and unpaid dividends to such
August 1.
The Company entered into an agreement dated September 1, 1991
with United States Leasing International Inc. to sell up to
159,722 shares of its 1991 Redeemable Preferred Stock, par
value $.10 per share, at an initial price of $78.261 per
share, which shares were exchangeable into Subordinated Notes
due March 1, 2000 (2000 Notes). The Company sold 63,889
shares of the Redeemable Preferred Stock in September 1991 at
$78.261 per share and 94,995 shares in March 1992 at $78.951
per share, the accreted value of the initial price. The
holders of the shares of 1991 Preferred Stock were entitled
to receive monthly dividends based on the annual rate of the
sum of LIBOR plus 4.7%.
The Company issued the 1991 Redeemable Preferred Stock under
an agreement which required the Company to redeem the 1991
Redeemable Preferred Stock as soon as, and to the extent that
it was permitted to incur Funded Debt. Under the applicable
provisions of the Company's debt agreements, the Company was
allowed to incur Funded Debt in the first quarter of 1993 and
as such, was required to enter into the exchange. In March
1993, the Company issued $12,763,663 of 2000 Notes in
exchange for all of the 1991 Redeemable Preferred Stock (see
note 5).
Preferred dividends of $3,269,000, $4,258,000 and $3,321,000
were declared on all classes of preferred stock in 1991, 1992
and 1993, respectively.
(Continued)
F-18
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7), Continued
Aggregate annual maturities of Redeemable Preferred Stock are
as follows as of December 31, 1993:
Year ended
December 31,
------------
1994 $ 4,167,000
1995 4,166,000
1996 4,167,000
1997 4,167,000
1998 4,167,000
1999 4,166,000
---------
$ 25,000,000
==========
(8) Pension Plans
The Company has several noncontributory defined contribution
and defined benefit pension plans covering substantially all
of its nonunion employees. Benefits under the defined
benefit plans are generally based on years of service and
each employee's compensation, while benefits under the
defined contribution plans are based solely on compensation.
Pension expense under all plans for the years ended December
31, 1991, 1992 and 1993 was $2,774,000, $2,447,000 and
$3,342,000, respectively, net of amortization of the pension
obligation acquired.
The following table sets forth the defined benefit plans'
funded status and amounts recognized in the Company's balance
sheets at the indicated dates:
December 31,
--------------------------
1992 1993
---- ----
Actuarial present value of benefit obligations:
Accumulated benefit obligations including
vested benefits of $18,409,871 and
$23,566,465 $ 18,790,759 $ 23,848,149
========== ==========
Projected benefit obligation $(21,715,790) $(26,458,728)
Plan assets at fair value (primarily listed
stocks and bonds) 16,581,099 17,252,490
---------- ----------
Projected benefit obligation in excess of
plan assets (5,134,691) (9,206,238)
Unrecognized net loss from past experience
different from the assumed and effects of
changes in assumptions 3,645,967 7,538,164
Unrecognized net transitional obligation 606,394 546,784
Unrecognized prior service cost due to plan
amendments 674,044 785,832
Additional liability (2,133,731) (6,260,201)
---------- ----------
Accrued pension cost for defined benefit plans $(2,342,017) $(6,595,659)
========== ==========
(Continued)
F-19
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8), Continued
Net pension cost for defined benefit plans for the periods
indicated included the following components:
Year Ended December 31,
-------------------------------------
1991 1992 1993
---- ---- ----
Service cost-benefits earned during
the period $ 1,154,607 $ 1,162,736 $1,391,564
Interest cost on projected benefit
obligation 1,665,229 1,781,444 1,778,401
Actual return on assets (2,515,808) (1,248,604) (994,937)
Net amortization and deferral of
gains and losses 1,471,819 (71,885) 207,465
--------- --------- ---------
Net periodic pension cost
for defined benefit plans $ 1,775,847 $ 1,623,691 $2,382,493
========= ========= =========
Assumptions used in the above accounting were:
Discount rate 8.5% 8.5% 7.0%
Rates of increase in compensation level 6.0% 6.0% 4.0%
Expected long-term rate of return on
assets 10.0% 10.0% 8.5%
In addition to the above, the Company made contributions to
union-administered pension plans during the years ended
December 31, 1991, 1992 and 1993 of $2,365,000, $2,442,000
and $2,867,000, respectively.
The Company has recorded an additional minimum pension
liability for underfunded plans of $5,866,651 at December 31,
1993, representing the excess of unfunded accumulated benefit
obligations over plan assets. A corresponding amount is
recognized as an intangible asset except to the extent that
these additional liabilities exceed the related unrecognized
prior service costs and net transition obligation, in which
case the increase in liabilities is charged as a reduction of
stockholders' equity. The Company has recorded intangible
assets of $1,332,616 and a reduction in stockholders' equity
of $4,534,035 as of December 31, 1993.
In connection with the purchase of shares of a predecessor
company as of January 1, 1979 by a majority of the Company's
present holders of Class C Common Stock, the Company assumed
a pension liability in the aggregate amount of $1,512,000, as
adjusted, representing the excess of the actuarially computed
present value of accumulated vested plan benefits over the
net assets available for such benefits. Such liability,
which amounted to $1,212,843 at December 31, 1993, is being
amortized over 40 years.
Under a 1992 supplemental benefit agreement, Malvin P. Sevin,
the Company's chairman and co-chief executive officer, was
entitled to receive $25,000 per month for a period of 120
months following his retirement. In the event of his death,
his designated beneficiary is entitled to receive such
benefit. The expense related to this benefit was being
accrued over the estimated remaining period of Mr. Sevin's
employment. Mr. Sevin passed away in
(Continued)
F-20
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8), Continued
December 1992, prior to his retirement. The accrual for such
benefit payable was accelerated at December 31, 1992 to
$1,973,000, the present value (using a discount rate of 9%)
of the payments now payable to his beneficiary, which
payments commenced in January 1993.
During the first quarter of 1993, the Company adopted
Statement of Financial Accounting Standards No. 106 (SFAS
No. 106) "Employers' Accounting for Post Retirement Benefits
Other Than Pensions." This Statement requires that the
expected cost of postretirement benefits be fully accrued by
the first date of full benefit eligibility, rather than
expensing the benefit when payment is made. As the Company
generally does not provide for postretirement benefits, other
than pensions, the adoption of the new Statement did not have
any material effect on the Company's consolidated financial
condition or results of operations.
(9) Income Taxes
Income tax expense was comprised of the following for the
indicated years:
Year Ended December 31,
------------------------
1991 1992 1993
---- ---- ----
Current:
Federal $ -- $ -- $ --
State 250,000 400,000 400,000
------- ------- -------
$250,000 $400,000 $400,000
======= ======= =======
Deferred income tax expense results from temporary
differences in the recognition of revenue and expense for tax
and financial statement purposes. The sources of these
differences and the tax effects of each were as follows:
Year Ended December 31,
----------------------------
1991 1992 1993
---- ---- ----
Excess of tax over book (book over tax)
depreciation $(114,000) $ (11,000) $ 242,000
Excess of book over tax vacation expense (223,000) (3,000) (93,000)
(Excess of book over tax) tax over book
bad debt expense (74,000) (165,000) 92,000
(Excess of book over tax) tax over book
supplemental benefit expense -- (671,000) 12,000
Deferred service contracts 66,000 66,000 18,000
Other, net 36,000 50,000 (60,000)
Recognition of tax benefit of net
operating loss to the extent of
current and previously recognized
temporary differences -- -- (211,000)
Deferred tax assets not recognized 309,000 734,000 --
------- ------- -------
$ -- $ -- $ --
======= ======= =======
(Continued)
F-21
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9), Continued
As of December 31, 1993, the Company has for Federal tax
reporting purposes, a net operating loss (NOL) carryforward
of approximately $51.3 million. Total income tax expense
amounted to $250,000 for 1991, $400,000 for 1992, and
$400,000 for 1993. The following reconciles the effective
tax rates to the "expected" statutory rates for the years
indicated:
Year Ended December 31,
----------------------
1991 1992 1993
---- ---- ----
Computed "expected" tax (benefit) rate (34.0)% (34.0)% (34.0)%
Reduction of income tax benefit resulting from:
Net operating loss carryback limitation 34.0 34.0 34.0
State income taxes, net of Federal income tax
benefit 1.5 10.0 5.6
---- ---- ----
1.5% 10.0% 5.6%
=== ==== ====
During the first quarter of 1993, the Company adopted
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). 'This
Statement requires that deferred income taxes be recorded
following the liability method of accounting and adjusted
periodically when income tax rates change. Adoption of the
new Statement did not have any effect on the Company's
consolidated financial condition or results of operations
since the Company did not carry any deferred tax accounts on
its balance sheet at December 31, 1992 and any net deferred
assets set up as a result of applying SFAS 109 have been
fully reserved.
Under SFAS No. 109, as of January 1, 1993, the Company had
net deferred tax assets of approximately $14.1 million
subject to a valuation allowance of approximately $14.1
million. The components of and changes in the net deferred
tax assets and the changes in the related valuation allowance
for 1993 using current rates were as follows (in thousands):
<TABLE><CAPTION>
Deferred
January 1, Expense December 31,
1993 (Benefit) 1993
---- --------- ----
<S> <C> <C> <C>
Federal book net operating loss carryforwards $ 14,389 $ 2,606 $ 16,995
Excess of tax over book depreciation (2,472) (242) (2,714)
Excess of book over tax vacation expense 1,042 93 1,135
Excess of book over tax (tax over book)
supplemental benefit expense 671 (12) 659
Excess of book over tax (tax over book)
bad debt expense 440 (92) 348
Other, net 76 42 118
-------- ------- -------
14,146 2,395 16,541
Valuation allowance (14,146) (2,395) (16,541)
-------- ------- -------
$ -- $ -- $ --
======== ======= =======
</TABLE>
(Continued)
F-22
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9), Continued
A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax asset will not be
realized. The Company has determined, based on the Company's
recent history of annual net losses, that a full valuation
allowance is appropriate.
At December 31, 1993, the Company had the following income
tax carryforwards for Federal income tax reporting purposes
(in thousands):
Expiration
Date Amount
---- ------
2005 $26,651
2006 15,012
2007 1,367
2008 8,286
-------
$51,316
======
(10) Related Party Transactions
In connection with the acquisition of customer lists,
equipment and other assets of previously unaffiliated fuel
oil businesses, the Company entered into lease agreements
covering certain vehicles with individuals, including certain
stockholders, directors and executive officers. These leases
are currently on a month-to-month basis, on terms comparable
with leases from unrelated parties. Annual rentals under
these leases are approximately $150,000.
During 1981, the Company acquired the customer list,
equipment and accounts receivable of a fuel oil business from
two individuals, one of whom is, and the other of whom was,
prior to his death, stockholders, directors and executive
officers of the Company. The purchase price was
approximately $1,233,000, of which $733,000 was paid at the
closing and the balance was financed through the issuance of
a $500,000, 6%, 15-year term note secured by property of the
Company. The unpaid balance of this note at December 31,
1993 was $80,404 (see note 3).
On November 6, 1985, the Company sold a building to certain
related parties for $660,000, the same price the Company
originally paid for the property in June 1984 and which was
also the facility's independently appraised fair market
value. The parties then leased the facility back to the
Company pursuant to a ten-year agreement providing for
rentals of $90,000 per annum plus escalation and taxes.
(Continued)
F-23
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10), Continued
Until 1985, the Company occupied a certain building under a
lease agreement with an unaffiliated lessor. The lease was
accounted for as a capital lease and, as such, the
capitalized leased asset and obligation were included on the
Company's balance sheet. In November 1985, pursuant to a
competitive bidding process, the Company purchased the
building from the landlord for $1,500,000. The building was
resold for $1,500,000 in December 1985 to certain related
parties, some of whom are stockholders, directors and
executive officers of the Company. These related parties are
leasing the building to the Company under a lease agreement
which calls for rentals of $315,000 per annum (which was the
independently appraised lease rental) plus escalations and
which expires in 1995.
In October 1986, Irik P. Sevin purchased 161,313 shares of
Class A Common Stock and 40,328 shares of Class C Common
Stock (after giving retroactive effect to the exchange of
Class C Common Stock for Class A Common Stock in July 1992)
of the Company for $1,280,000 (which was the fair market
value as established by the Pricing Committee pursuant to the
Stockholders' Agreement described below). The purchase price
was financed by a note originally due December 31, 1989, but
which has been extended to December 31, 1994. The note was
amended in 1991 to increase the principal amount by $152,841,
the amount of interest due from October 22, 1990 through
December 31, 1991 and to change the interest rate on the note
effective January 1, 1992 from 10% per annum to the LIBOR
rate in effect for each month plus 0.75%. The note was
amended again in 1992 to increase the principal amount by
$66,537, the amount of interest due from January 1, 1992
through December 31, 1992. The note was amended in 1993 to
increase the principal amount by $60,449, the amount of
interest due from January 1, 1993 through December 31, 1993.
At any time prior to the due date of the note, Mr. Sevin has
the right to require the Company to repurchase all or any of
these shares (as adjusted for stock splits, dividends and the
like) for $6.35 per share (the Put Price), provided, however,
that Mr. Sevin retain all shares of Class B Common Stock
issued as stock dividends on the shares without adjustments
to the Put Price. In December 1986, 50,410 shares of Class B
Common Stock were issued as a stock dividend with respect to
these shares, which shares were exchanged in October 1992 for
80,202 Class A Common Shares pursuant to the Exchange Offer
discussed in Note 6. Upon the repurchase of the shares, the
Company has agreed to issue an eight-year option to Mr. Sevin
to purchase a like number of shares at the Put Price. Mr.
Sevin has entered into an agreement with the Company that he
will not sell or otherwise transfer to a third party any of
the shares of Class A Common Stock or Class C Common Stock
received pursuant to this transaction until the note has been
paid in full.
In November 1986, the Company issued stock options to
purchase 30,000 shares and 20,000 shares, of the Class A
Common Stock of the Company to Irik P. Sevin and Malvin P.
Sevin, respectively, subject to adjustment for stock splits,
stock dividends, and the like, upon the successful completion
of a public offering of at least 10% of the common stock of
the Company. Such a public offering was completed in
December 1986. The option price for the shares of Class A
Common Stock was $20 per share. The options, which expire on
November 30, 1994, are nontransferable. As a result of stock
dividends in the form of Class A Common Stock and Class B
Common Stock declared by the Company in
(Continued)
F-24
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10), Continued
December 1986, the exchange of Class C Common Stock for Class
A Common Stock in July 1992, and special antidilution
adjustments, the options held by Irik P. Sevin now apply to
89,794 shares of Class A Common Stock and 22,448 shares of
Class C Common Stock and the options held by Malvin P. Sevin
now apply to 59,862 shares of Class A Common Stock and 14,966
shares of Class C Common Stock. The adjusted option price
for each such share is $4.10.
On December 28, 1987, the Company issued stock options to
purchase 24,000 shares of Class A Common Stock and 6,000
shares of Class C Common Stock (after giving retroactive
effect to the exchange of' Class C Common Stock for Class A
Common Stock in July, 1992) to Irik P. Sevin. The option
price for each such share is $7.50. These options are not
transferable and expire on January 1, 1996.
On March 3, 1989, the Company issued stock options to
purchase 72,000 shares of Class A Common Stock and 18,000
shares of Class C Common Stock (after giving retroactive
effect to the exchange of Class C Common Stock for Class A
Common Stock in July 1992) to Irik P. Sevin and 48,000 shares
of Class A Common Stock and 12,000 shares of Class C Common
Stock (after giving retroactive effect to the exchange of
Class C Common Stock for Class A Common Stock in July 1992)
to Malvin P. Sevin. The option price for each such share is
$11.25. These options are nontransferable, Malvin P. Sevin's
option expired unexercised while Irik P. Sevin's options
expire on March 3, 1999.
On November 1, 1992, the Company issued stock options to an
officer of the Company to purchase 25,000 shares of Class A
Common Stock and issued another 25,000 stock options to this
officer in June 1993. The option price for each such share
is $11.00. Twenty percent of the options become exercisable
on each of the next five anniversary dates of the grants.
In December 1992, Malvin P. Sevin passed away. All options
previously owned by him are exercisable by his estate up
until the original expiration date of such options.
During the first quarter of 1991, the Company contemplated
the acquisition of a business engaged in the distribution of
packaged industrial gases for other than heating purposes
("Packaged Industrial Gas Business"). As the Company was
prohibited from making this acquisition because of
restrictions under the Credit Agreement from which the
Company was unable to obtain a waiver, the acquisition was
consummated by certain of the principal holders of the Class
C Common Stock. The Company entered into an agreement with
the Packaged Industrial Gas Business to provide management
services on request for a fee equal to the allocable cost of
Company personnel devoted to the business with a minimum fee
of $50,000 per annum plus an incentive bonus equal to 10% of
the cash flow above budget. The fee received under such
management contract for the seven months ended December 31,
1991 was $29,000 and for the years ended December 31, 1992
and 1993 was $50,000 and $4,000, respectively.
Simultaneously with this acquisition, the Company entered
into an option agreement expiring May 31, 1996 pursuant to
which the Company had the right, exercisable at any time, to
acquire the Packaged Industrial Gas Business for its fair
market value, as determined by an independent appraisal. In
January 1993, the Packaged Industrial Gas Business was sold
by its owners to an unrelated third party and the Company's
option agreement and management services agreement were
cancelled.
(Continued)
F-25
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10), Continued
On August 1, 1991, the Company agreed to purchase certain
assets of a fuel oil distributor for approximately $17
million, however, certain restrictions under the Company's
lending arrangements made the cost of the acquisition unduly
burdensome. Accordingly, in October 1991, certain
shareholders of the Company, owning approximately 9% of the
Class C Common Stock and certain unaffiliated investors,
organized RAC Fuel Oil Corp. (RAC) to acquire such business,
but gave Petro a five year option, which Petro was required
to exercise when permitted by its lending arrangements, to
purchase RAC for the same price, as adjusted for operations
while the business was owned by RAC. Pending exercise of its
option, the Company had been managing RAC's business at an
annual fee of $161,000, which was designed to compensate the
Company for its estimated costs and for supplying fuel oil to
RAC at the Company's cost. In August 1992, the Company was
able to and did exercise its option to buy RAC. The
acquisition price was approximately $17 million.
The existing holders of Class C Common Stock of the Company
have entered into a Shareholders' Agreement which provides
that, in accordance with certain agreed-upon procedures, each
will vote his shares to elect certain designated directors.
The Shareholders' Agreement also provides for first refusal
rights to the Company if a holder of Class C Common Stock
receives a bona fide written offer from a third party to buy
such holder's Class C Common Stock.
(11) Investment in Star Gas
In December 1993, the Company acquired an approximate 29.5%
equity interest (42.8% voting interest) in Star Gas for $16.0
million in cash. Of such $16.0 million investment, $14.0
million was invested directly in Star Gas through the
purchase of Series A 8% pay-in-kind Cumulative Convertible
Preferred Stock of Star Gas, which is convertible into common
stock of Star Gas, and $2.0 million was invested through Star
Gas Holdings, Inc. ("Holdings"), a newly formed corporation.
Certain other investors (including Holdings) invested a total
of $49.0 million of additional equity in Star Gas, of which
$11.0 million was in the form of cash and $38.0 million
resulted from the conversion of long-term debt and preferred
stock into equity. As a result of redemptions of a portion
of the equity in Star Gas held by certain of the other
investors that the Company expects will occur in connection
with a Star Gas recapitalization, the Company expects that
its direct and indirect equity interest in Star Gas will
increase to 36.7% without any additional investment by the
Company.
Star Gas has granted to the Company an option, exercisable
through December 20, 1998, to purchase 500,000 shares of
common stock of Star Gas for an aggregate purchase price of
approximately $5.0 million. In addition, each of the other
investors in Star Gas (including each such investor whose
investment is held through Holdings) has granted to the
Company an option, exercisable for the period beginning on
the date that Star Gas' audited financial statements for its
fiscal year ended September 30, 1994 are first delivered to
such investors and ending on December 31, 1998, to purchase
such investor's interest in Star Gas
(Continued)
F-26
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11), Continued
(or, in the case of Holdings, to purchase such investor's
interest in Holdings). In addition, each such investor has
an unconditional option, exercisable beginning January 1,
1999 and ending on December 31, 1999, to require the Company
to purchase such investor's interest in Star Gas (or
Holdings). The purchase prices upon exercise of any such
options are calculated based upon specified multiples of Star
Gas' earnings before interest, taxes, depreciation and
amortization (EBITDA), subject to certain minimum prices, and
are payable in cash or Class A common stock of the Company
or, in the case of the Holdings' options, in cash,
subordinated debt of the Company or, if the Company is not
then permitted to issue such debt, preferred stock of the
Company.
The investors in Star Gas have entered into a shareholders'
agreement, which provides that the Company is entitled to
nominate for election up to three persons to serve as
directors of Star Gas, Holdings is entitled to nominate up to
two persons, and the other investors (as a group) are
entitled to nominate up to three persons. In addition, the
shareholders' agreement provides that each investor in Star
Gas, prior to selling any of its equity interests in Star Gas
to any purchaser other than another investor in Star Gas,
must first offer to sell such equity interests to Star Gas
and then to the other investors.
The Company is managing Star Gas' business under a Management
Services Agreement which provides for an annual cash fee of
$500,000 and an annual bonus equal to 5% of the increase in
Star Gas' EBITDA over the fiscal year ended September 30,
1993, payable in common stock of Star Gas pursuant to a
formula set forth in the Management Services Agreement. Star
Gas also reimburses the Company for its expenses and the cost
of certain Company personnel.
(12) Acquisitions
During 1991, the Company acquired the customer lists and
equipment of nine unaffiliated fuel oil dealers. The
aggregate consideration for these acquisitions, accounted for
by the purchase method, was approximately $12,500,000.
During 1992, the Company acquired the customer lists and
equipment of nine unaffiliated fuel oil dealers. The
aggregate consideration for these acquisitions, accounted for
by the purchase method, was approximately $41,500,000.
During 1993, the Company acquired the customer lists and
equipment of nine unaffiliated fuel oil dealers. The
aggregate consideration for these acquisitions, accounted for
by the purchase method, was approximately $13,600,000. In
addition, during 1993, the Company acquired a 29.5% interest
in Star Gas Corporation for $16,000,000.
Sales and net income of the acquired companies are included
in the consolidated statements of operations from the
respective dates of acquisition. Star Gas will be accounted
for following the equity method of accounting beginning
January 1994.
(Continued)
F-27
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12), Continued
Unaudited pro forma data giving effect to the purchased
businesses and to the Star Gas investment as if they had been
acquired on January 1 of the year preceding the year of
purchase, with adjustments, primarily for amortization of
intangibles, are as follows:
Year Ended December 31,
-----------------------
1991 1992 1993
---- ---- ----
(in thousands, except per share data)
Net sales $ 593,876 $604,491 $557,843
========= ======== ========
Equity in (share of loss of)
Star Gas Corporation -- 167 (11,923)
========= ======== ========
Net loss (15,547) (3,012) (19,570)
========= ======== ========
Earnings (loss) per common share:
Class A Common Stock $ (1.62) $ (.81) $ (1.09)
Class B Common Stock .57 1.77 2.47
Class C Common Stock (1.62) (.81) (1.09)
========= ======== ========
(13) Supplemental Disclosure of Cash Flow Information
Year Ended December 31,
----------------------
1991 1992 1993
---- ---- ----
Cash paid during the year for:
Interest $ 21,928,724 $20,238,486 $21,705,736
Income taxes 202,650 319,487 495,739
Noncash financing activities:
Redemption of preferred stock -- -- (12,763,663)
Issuance of subordinated notes
payable -- -- 12,763,663
Minimum pension liability -- -- 5,866,651
Deferred pension costs -- -- (1,332,616)
Minimum pension liability
adjustment -- -- (4,534,035)
(Continued)
F-28
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Disclosures About the Fair Value of Financial Instruments
Cash, Accounts Receivable, Notes Receivable and Other Current
Assets, U.S. Treasury Notes held in a Cash Collateral
Account, Working Capital Borrowings, Accounts Payable and
Accrued Expenses
The carrying amount approximates fair value because of the
short maturity of these instruments.
Long-Term Debt, Subordinated Notes Payable and Cumulative
Redeemable Exchangeable Preferred Stock
The fair values of each of the Company's long-term financing
instruments, including current maturities, are based on the
amount of future cash flows associated with each instrument,
discounted using the Company's current borrowing rate for
similar instruments of comparable maturity.
The estimated fair value of the Company's financial
instruments are summarized as follows:
At December 31, 1993
--------------------
Carrying Estimated
Amount Fair Value
------ ----------
(amounts in thousands)
Long-term debt $ 50,080 $ 50,076
Subordinated notes payable 135,264 148,644
Cumulative Redeemable Exchangeable
Preferred Stock 25,000 27,170
Limitations
Fair value estimates are made at a specific point in time,
based on relevant market information and information about
the financial instrument. These estimates are subjective in
nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the
estimates.
(Continued)
F-29
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Selected Quarterly Financial Data (Unaudited)
(in thousands, except per share data)
<TABLE><CAPTION>
Three Months Ended
---------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31
1992 1992 1992 1992 Total
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales $ 219,975 $ 74,006 $ 46,912 $ 171,537 $ 512,430
Gross profit 84,098 17,660 6,800 52,931 161,489
Income (loss)
before taxes 39,268 (20,020) (28,553) 5,316 (3,989)
Net income (loss) $ 38,937 $ (19,990) $(28,470) $ 5,134 $ (4,389)
=========== ========= ======== ========= =========
Earnings (loss) per
common share
Class A Common Stock $ 2.86 $ (1.67) $ (2.04) $ .22 $ (.81)
Class B Common Stock .29 .29 .29 .29 1.14
Class C Common Stock $ 2.86 $ (1.67) $ (2.04) $ .22 $ (.81)
=========== ========= ======== ========= =========
</TABLE>
<TABLE><CAPTION>
Three Months Ended
---------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31
1993 1993 1993 1993 Total
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales $ 251,271 $ 71,978 $ 54,135 $ 161,142 $ 538,526
Gross profit 89,595 15,817 9,604 56,701 171,717
Income (loss)
before taxes and
extraordinary item 39,269 (25,972) (29,571) 9,110 (7,164)
Net income (loss) $ 38,938 $ (26,809) $(29,488) $ 8,928 $ (8,431)
=========== ========= ======== ========= =========
Earnings (loss) per
common share
Class A Common Stock $ 1.72 $ (1.25) $ (1.45) $ .41 $ (.57)
Class B Common Stock .47 .47 .47 .47 1.88
Class C Common Stock $ 1.72 $ (1.25) $ (1.45) $ .41 $ (.57)
=========== ========= ======== ========= =========
</TABLE>
F-30
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Shareholders of
Star Gas Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Star Gas
Corporation and subsidiaries as of September 30, 1993 and the related
consolidated statements of operations, shareholders' equity (deficiency), and
cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Star Gas
Corporation and subsidiaries at September 30, 1993 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick
New York, New York
December 28, 1993
F-31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Star Gas Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Star Gas
Corporation and subsidiaries as of September 30, 1992 and the related
consolidated statements of operations, shareholders' equity (deficiency) and
cash flows for each of the two years in the period ended September 30, 1992.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Star Gas
Corporation and subsidiaries at September 30, 1992, and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended September 30, 1992 in conformity with generally accepted accounting
principles.
ERNST & YOUNG
New York, New York
December 3, 1992,
except for Notes 5 and 9, as to which the date is
April 1, 1993
F-32
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE> <CAPTION>
SEPTEMBER 30,
---------------------------
1993 1992
------------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash.............................................................................. $ 730,256 1,301,882
Receivables:
Trade........................................................................... 9,408,107 13,336,058
Other........................................................................... 342,886 394,969
Allowance for doubtful accounts................................................. (716,105) (700,000)
Inventories:
Propane......................................................................... 4,982,284 6,986,544
Appliances and equipment........................................................ 1,463,009 2,264,347
Prepaid expenses.................................................................. 1,005,002 1,189,419
Other current assets.............................................................. 591,455 1,195,726
Assets held for sale (note 1)..................................................... 7,378,126 --
------------- ------------
Total current assets....................................................... 25,185,020 25,968,945
------------- ------------
Property, plant and equipment, at cost:
Land.............................................................................. 3,329,314 4,732,441
Buildings......................................................................... 6,589,431 7,823,785
Customer equipment and machinery.................................................. 128,056,431 146,928,612
Construction in progress.......................................................... -- 36,617
------------- ------------
137,975,176 159,521,455
Less accumulated depreciation.............................................. 30,306,574 26,803,620
------------- ------------
107,668,602 132,717,835
------------- ------------
Other assets:
Excess of cost over net assets acquired, net of accumulated amortization of
$3,527,340 and $1,862,456........................................................... 5,496,847 18,317,613
Other intangible assets:
Covenants not to compete and capitalized consulting costs, net of accumulated
amortization of $17,301,712 and $13,723,866................................... 1,166,089 8,567,108
Customer contracts and lists, net of accumulated amortization of $10,526,491 and
$8,429,154.................................................................... 10,629,476 12,919,084
Deferred charges.................................................................. 1,154,357 1,652,362
Other............................................................................. 1,083,204 1,955,891
------------- ------------
19,529,973 43,412,058
------------- ------------
Total assets............................................................... $ 152,383,595 202,098,838
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of long-term debt and working capital borrowings (note 5)...... $ 7,485,774 6,077,873
Accounts payable.................................................................. 9,433,402 9,684,768
Accrued interest.................................................................. 7,833,308 6,000,014
Other accrued expenses............................................................ 2,720,074 2,286,988
Customer credit balances.......................................................... 2,733,000 1,280,000
Other current liabilities (note 9)................................................ 880,478 3,941,644
------------- ------------
Total current liabilities.................................................. 31,086,036 29,271,287
------------- ------------
Long-term debt and obligations under capital leases (notes 5 and 8)................. 118,425,184 124,570,257
Other long-term liabilities (note 9)................................................ 6,162,343 5,865,557
Deferred income taxes (note 6)...................................................... 221,400 235,100
------------- ------------
Total long-term liabilities................................................ 124,808,927 130,670,914
------------- ------------
Shareholders' equity (deficiency) (notes 1, 2, 5 and 9):
Common stock, $1 par value--20,000 shares authorized; 266.43 shares issued........ 266 266
Series A Preferred stock, no par value--48,000 and 300,000 shares authorized in
1993 and 1992, respectively; 40,309.5 shares issued............................. 40,309 40,309
Preferred stock--8% cumulative convertible, no par value--1,420 shares authorized;
1,420 shares issued at September 30, 1993....................................... 1,420 --
Capital in excess of par value.................................................... 58,471,501 57,052,921
Deficit........................................................................... (59,836,948) (12,748,943)
Treasury stock, at cost (15.12 common shares)..................................... (2,187,916) (2,187,916)
------------- ------------
Total shareholders' equity (deficiency).................................... (3,511,368) 42,156,637
------------- ------------
Total liabilities and shareholders' equity................................. $ 152,383,595 202,098,838
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE> <CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------------------
1993 1992 1991
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Net sales................................................. $ 132,194,740 117,877,556 127,688,470
Hauling revenue........................................... 16,220,657 16,225,561 14,190,015
Other revenue, net........................................ 5,780,581 6,636,627 6,101,663
---------------- ---------------- ----------------
154,195,978 140,739,744 147,980,148
---------------- ---------------- ----------------
Costs and expenses:
Cost of sales............................................. 74,716,501 63,452,403 71,076,004
Operating................................................. 57,063,237 52,044,642 49,599,117
Depreciation and amortization............................. 16,092,452 14,128,104 13,576,609
General and administrative................................ 3,772,546 3,002,555 2,623,264
---------------- ---------------- ----------------
151,644,736 132,627,704 136,874,994
---------------- ---------------- ----------------
Impairment of long-lived assets (note 10) 33,047,065 -- --
---------------- ---------------- ----------------
Income (loss) before interest expense and income taxes...... (30,495,823) 8,112,040 11,105,154
Interest expense............................................ 16,335,155 16,665,525 18,056,685
---------------- ---------------- ----------------
Loss before income taxes............................... (46,830,978) (8,553,485) (6,951,531)
Income tax expense (benefit)................................ 257,027 (1,294,003) (1,603,012)
---------------- ---------------- ----------------
Net loss............................................... $ (47,088,005) (7,259,482) (5,348,519)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED SEPTEMBER 30, 1993, 1992 AND 1991
<TABLE> <CAPTION>
8%
CUMULATIVE
SERIES A CONVERTIBLE CAPITAL IN
COMMON PREFERRED PREFERRED EXCESS OF TREASURY
STOCK STOCK STOCK PAR VALUE DEFICIT STOCK
----------- ----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of September 30, 1990............. $ 225 31,191 -- 41,069,581 (140,942) (2,187,916)
Conversion of subordinated debt into
preferred stock............................ -- 3,992 -- 3,988,507 -- --
Issuance of common stock..................... 31 -- -- 4,873,869 -- --
Issuance of Series A preferred stock......... -- 5,126 -- 5,120,974 -- --
Net loss..................................... -- -- -- -- (5,348,519) --
----- ----------- ------ ----------- ------------ -----------
Balance as of September 30, 1991............. 256 40,309 -- 55,052,931 (5,489,461) (2,187,916)
Issuance of common stock..................... 10 -- -- 1,999,990 -- --
Net loss..................................... -- -- -- -- (7,259,482) --
----- ----------- ------ ----------- ------------ -----------
Balance as of September 30, 1992............. 266 40,309 -- 57,052,921 (12,748,943) (2,187,916)
Conversion of junior subordinated debt into
preferred stock............................ -- -- 1,420 1,418,580 -- --
Net loss..................................... -- -- -- -- (47,088,005) --
----- ----------- ------ ----------- ------------ -----------
Balance as of September 30, 1993............. $ 266 40,309 1,420 58,471,501 (59,836,948) (2,187,916)
----- ----------- ------ ----------- ------------ -----------
----- ----------- ------ ----------- ------------ -----------
<CAPTION>
SHAREHOLDERS'
EQUITY
(DEFICIENCY)
------------
<S> <C>
Balance as of September 30, 1990............. 38,772,139
Conversion of subordinated debt into
preferred stock............................ 3,992,499
Issuance of common stock..................... 4,873,900
Issuance of Series A preferred stock......... 5,126,100
Net loss..................................... (5,348,519)
------------
Balance as of September 30, 1991............. 47,416,119
Issuance of common stock..................... 2,000,000
Net loss..................................... (7,259,482)
------------
Balance as of September 30, 1992............. 42,156,637
Conversion of junior subordinated debt into
preferred stock............................ 1,420,000
Net loss..................................... (47,088,005)
------------
Balance as of September 30, 1993............. (3,511,368)
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE> <CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1993 1992 1991
--------------- ------------ --------------
<S> <C> <C> <C>
Operating activities:
Net loss........................................................ $ (47,088,005) (7,259,482) (5,348,519)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Impairment of long-lived assets............................ 33,047,065 -- --
Depreciation and amortization.............................. 16,092,452 14,128,104 13,576,609
Deferred income taxes...................................... (13,700) (1,497,840) (1,813,291)
Loss on sale of fixed assets............................... -- -- 514,590
Amortization of accrued pension costs...................... -- (2,300) (27,600)
Changes in operating assets and liabilities:
Decrease in receivables, net.................................. 2,439,982 1,545,617 2,296,277
Decrease (increase) in inventories............................ 2,170,477 (770,937) 1,295,444
Decrease (increase) in other current and prepaid assets....... 205,475 1,197,019 (1,832,701)
Increase in other long-term assets............................ (199,610) (743,085) (1,261,870)
Increase (decrease) in accounts payable....................... 131,132 (105,714) 1,667,450
Increase (decrease) in accrued interest and other accrued
expenses.................................................... 2,524,004 3,074,016 (1,857,965)
Increase (decrease)in other current and long-term
liabilities................................................. 482,931 (1,330,070) (3,374,412)
--------------- ------------ --------------
Net cash provided by operating activities................ 9,792,203 8,235,328 3,834,012
--------------- ------------ --------------
Investing activities:
Purchase of companies, net of cash acquired:
Net working capital........................................... (2,035) (155,771) (147,812)
Noncurrent tangible assets.................................... (58,474) (984,852) (1,546,120)
Intangible assets............................................. (600) (66,058) (198,749)
Acquisition of property, plant and equipment.................... (4,787,637) (6,730,179) (3,682,230)
Disposals of fixed assets....................................... 937,575 901,774 534,061
--------------- ------------ --------------
Net cash used in investing activities.................... (3,911,171) (7,035,086) (5,040,850)
--------------- ------------ --------------
Financing activities:
Proceeds from issuance of debt.................................. 123,955,184 37,124,588 84,279,454
Repayment of debt and liability obligations..................... (130,407,842) (50,484,387) (84,095,969)
Proceeds from issuance of common stock.......................... -- 6,873,900 --
Proceeds from issuance of preferred stock....................... -- 5,126,100 --
--------------- ------------ --------------
Net cash (used in) provided by financing activities...... (6,452,658) (1,359,799) 183,485
--------------- ------------ --------------
Net decrease in cash..................................... (571,626) (159,557) (1,023,353)
Cash at beginning of year......................................... 1,301,882 1,461,439 2,484,792
--------------- ------------ --------------
Cash at end of year............................................... $ 730,256 1,301,882 1,461,439
--------------- ------------ --------------
--------------- ------------ --------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes.................................................. $ 296,372 276,097 159,968
--------------- ------------ --------------
--------------- ------------ --------------
Interest...................................................... $ 15,145,124 14,257,459 18,896,319
--------------- ------------ --------------
--------------- ------------ --------------
Other non-cash transactions:
Conversion of subordinated debt into preferred stock.......... $ 1,420,000 -- 3,992,499
--------------- ------------ --------------
--------------- ------------ --------------
Reclassification to assets held for sale:
Property, plant and equipment, net......................... $ 4,399,914 -- --
Net operating assets....................................... 2,978,212 -- --
--------------- ------------ --------------
$ 7,378,126 -- --
--------------- ------------ --------------
--------------- ------------ --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
Star Gas Corporation (the "Company") primarily sells and distributes
propane gas and related appliances to retail and wholesale customers through its
branch offices located principally in the Northeastern, Southeastern and
Midwestern United States. The Company had been owned 45% by Star Energy Inc.,
("SEI"), a wholly owned subsidiary of The Brooklyn Union Gas Company, and 55% by
a group of limited partnerships--American Gas and Oil Investors, AmGO II, AmGO
III, and First Reserve Secured Energy Assets Fund, L.P. These limited
partnerships are managed by the First Reserve Corporation (and are collectively
referred to herein as "FRC").
In September 1989, the Company purchased 15.12 shares of common stock owned
by an officer for a 10% Junior Subordinated Promissory Note in the amount of
$2,187,916 (see note 5). These shares were held in treasury at September 30,
1993 and 1992.
In June 1991, the Company converted $1,796,500 and $2,196,000 of Junior
Subordinated Debt owed to SEI and FRC into 1,796.5 shares and 2,196 shares of
Series A Preferred Stock, respectively. The conversion rate was one share of
Series A Preferred Stock for every $1,000 of Junior Subordinated Debt.
In September 1991, the Company sold 13.77 shares of common stock to SEI and
16.83 shares of common stock to FRC for $2,193,300 and $2,680,600, respectively,
and sold 2,306.7 shares of Series A Preferred Stock to SEI and 2,819.4 shares of
Series A Preferred Stock to FRC for $2,306,700 and $2,819,400, respectively.
In August 1992, the Company sold 4.81 shares of common stock to SEI and
5.88 shares of common stock to FRC for $900,000 and $1,100,000, respectively.
In March 1993, the Company and the shareholders signed a Cancellation of
Indebtedness and Deferral Agreement (the "Cancellation Agreement"). Under the
terms of the Cancellation Agreement, SEI and FRC agreed to cancel $639,000 and
$781,000, respectively, of long-term liabilities acquired from a third party
(see note 9) in consideration of 639 and 781 shares, respectively, of newly
issued 8% Cumulative Convertible Preferred Stock.
As a result of the above mentioned transactions, SEI and FRC continued to
own 45% and 55%, respectively, of the common, Series A Preferred and 8%
Cumulative Convertible Preferred Stock of the Company at September 30, 1993 and
1992.
On December 2, 1993, the Company sold the branches of its wholly owned
subsidiary, Federal Petroleum Company ("Federal"), for $1,650,000 in cash and a
note receivable of $500,000. At September 30, 1993, the Company adjusted the
carrying value of the net assets sold to equal the sales price, $2,150,000. The
Company is also negotiating to sell the branches of its wholly owned subsidiary,
Highway Pipeline Trucking Co. ("Highway"), and has adjusted the carrying value
of Highway's net assets to equal the value of a recent offer received,
$5,228,126. The net assets of Federal and Highway have been reflected in the
1993 Consolidated Balance Sheet as assets held for sale in the aggregate amount
of $7,378,126. (See note 10)
On December 23, 1993, the Company was recapitalized and, as a part of the
recapitalization, issued 269,750 shares of 8% Cumulative Convertible Preferred
Stock (see note 2) for $26,975,000 in the indicated amounts to the following
investors: Petroleum Heat and Power Co., Inc. ("Petro") ($14,000,000), FRC
($1,975,000) and Star Gas Holdings Inc. ("Holdings") ($11, 000,000). Holdings is
a corporation recently formed for the purpose of investing in the Company.
Holdings was formed by a group of investors, including Petro who contributed
$2,000,000 of the $11,000,000 invested by
F-37
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) ORGANIZATION AND BUSINESS--(CONTINUED)
Holdings. The cash proceeds received by the Company from the issuance of the
preferred stock were used to repay $14,325,000 of its outstanding 11.56% Senior
Notes, to repay $2,800,000 of its outstanding Term Loan, and to pay interest in
arrears of $7,957,000. The Company estimates that the expenses relating to the
recapitalization will approximate $1 million. Also on that date, the Company
issued 250,000 shares of its 8% Cumulative Convertible Preferred Stock and
75,000 shares of its 12.625% Cumulative Redeemable Preferred Stock to The
Prudential Insurance Company of America ("Prudential") in exchange for
$32,500,000 of its 12.625% Senior Subordinated Participating Notes. (See note 5)
The Company simultaneously entered into a management services agreement
with Petro under which Petro will provide executive, financial, and managerial
oversight services to the Company. In full consideration and compensation for
its services, Petro will receive $500,000 per year plus expenses, plus an annual
bonus fee to be paid in the Company's Class A Common Stock equal in value to 5%
of the increase in operating income before depreciation and amortization, as
defined, over the amount generated for the year ended September 30, 1993.
Petro has an option to buy all of the shares of common stock and the 8%
Cumulative Convertible Preferred Stock owned by FRC, Prudential, and Holdings.
This option commences after the receipt of the audited financial statements for
the year ended September 30, 1994 and ends on December 31, 1998. In addition,
FRC, Prudential and Holdings have the option, beginning on January 1, 1999 and
ending on December 31, 1999, to require Petro to purchase all of their shares of
the Company's common stock and 8% Cumulative Convertible Preferred Stock. Under
the terms of the put/call agreements with FRC and Prudential, Petro has the
right to purchase these shares with either cash or shares of Petro's Class A
Common Stock. Under the terms of the put/call agreement with Holdings, Petro has
the right to purchase these shares for cash, notes or Petro preferred stock.
In addition, Petro and FRC have each been granted an option to purchase
500,000 shares of the Company's Class A Common Stock for $9.9031 and $14.8546
per share, respectively. These options expire on December 20, 1998.
(2) RECAPITALIZATION
On December 21, 1993, the Company amended its Articles of Incorporation and
authorized the issuance of three new classes of common stock, Class A, Class B,
and Class C, each with identical rights and preferences, except that Class A has
one vote per share, Class B is nonvoting and Class C has 10 votes per share, and
two new classes of preferred stock, a new 8% Cumulative Convertible Preferred
Stock and a 12.625% Cumulative Redeemable Preferred Stock.
The Company is authorized to issue the indicated number of shares in the
following classes of its common stock:
<TABLE> <CAPTION>
AUTHORIZED
NO. OF SHARES
-------------
<S> <C>
Class A Common Stock.......................................................... 30,000,000
Class B Common Stock.......................................................... 5,000,000
Class C Common Stock.......................................................... 3,000,000
-------------
Total.................................................................. 38,000,000
-------------
-------------
</TABLE>
F-38
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
The Company is authorized to issue the indicated number of shares in the
following series of its 8% Cumulative Convertible Preferred Stock:
<TABLE> <CAPTION>
AUTHORIZED
NO. OF SHARES
-------------
<S> <C>
Series A...................................................................... 530,000
Series B...................................................................... 300,000
Series C...................................................................... 160,000
Series D...................................................................... 500,000
Series E...................................................................... 10,000
-------------
Total 1,500,000
-------------
-------------
</TABLE>
The Company is authorized to issue the indicated number of shares in the
following series of its 12.625% Cumulative Redeemable Preferred Stock:
<TABLE> <CAPTION>
AUTHORIZED
NO. OF SHARES
-------------
<S> <C>
Series A...................................................................... 30,000
Series B...................................................................... 120,000
-------------
Total.................................................................. 150,000
-------------
-------------
</TABLE>
All dividends on the Series A, B, D and E 8% Cumulative Convertible
Preferred Stock and on the Series A and B 12.625% Cumulative Redeemable
Preferred Stock are to be paid in additional shares of the same preferred stock
series. The holders of the Series C 8% Cumulative Convertible Preferred Stock
have the option, upon delivering proper notice, to be paid in cash or in
additional shares of Series C 8% Cumulative Convertible Preferred Stock.
Each share of Series A, C and E 8% Cumulative Convertible Preferred Stock
is convertible into 9.2278 shares of Class A Common Stock and the shareholders
are entitled to one vote for each as-if-converted common share. Each share of
Series B 8% Cumulative Convertible Preferred Stock is convertible into 7.0746
shares of nonvoting Class B Common Stock and each share of Series D 8%
Cumulative Convertible Preferred Stock is convertible into 9.2278 shares of
nonvoting Class B Common Stock.
The holders of Series A, C and E 8% Cumulative Convertible Preferred Stock
are entitled to vote together, with the holders of shares of common stock, as a
single class, with each as-if-converted common share of such 8% Cumulative
Convertible Preferred Stock entitled to one vote. The holders of shares of the
Series B and D 8% Cumulative Convertible Preferred Stock and the Series A and B
12.625% Cumulative Redeemable Preferred Stock are not entitled to vote on any
matters, except as required by law or as specified in the Company's Articles of
Incorporation.
Upon the occurrence of any liquidating event, each holder of shares of
Series A, B, C and D 8% Cumulative Convertible Preferred Stock and Series A
12.625% Cumulative Redeemable Preferred Stock is entitled, before any
distribution or payment is made upon any shares of common stock or any other
junior security, to a pro rata amount of each series' liquidation value per
share. In the event of liquidation, the remaining order of liquidation is as
follows: Series B 12.625% Cumulative Redeemable Preferred Stock, Series E 8%
Cumulative Convertible Preferred Stock and finally, the common stock of the
Company, with each share of Class A, B, and C Common Stock sharing ratably.
F-39
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
As part of the recapitalization, the Company issued the following shares of
8% Cumulative Convertible Preferred Stock for $100 per share, $26,975,000 in the
aggregate:
8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
<TABLE>
<S> <C>
Series A.......................................................................... 179,750
Series C.......................................................................... 90,000
---------
269,750
---------
---------
</TABLE>
In addition, the Company exchanged $32,500,000 of its 12.625% Senior
Subordinated Participating Notes held by Prudential for the following shares of
preferred stock at $100 per share:
8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
<TABLE>
<S> <C>
Series B.......................................................................... 150,000
Series D.......................................................................... 100,000
---------
250,000
---------
---------
12.625% CUMULATIVE REDEEMABLE PREFERRED STOCK
Series A.......................................................................... 15,000
Series B.......................................................................... 60,000
---------
75,000
---------
---------
</TABLE>
The Company, simultaneously with the issuance of the 8% Cumulative
Convertible Preferred Stock and the 12.625% Cumulative Redeemable Preferred
Stock, redeemed $4,080,000 plus accrued interest in certain notes held by FRC,
$1,420,000 in previously outstanding 8% Cumulative Convertible Preferred Stock,
the previously outstanding Series A Preferred Stock and all previously
outstanding shares of common stock in exchange for 5,000 shares of Series E 8%
Cumulative Convertible Preferred Stock and 480,695 shares of Class A Common
Stock. In addition, prior to the recapitalization, all shares previously held by
SEI were acquired by FRC.
Upon the sale of Highway and Federal, the Company is required to apply the
net proceeds from the sales to repurchase, at $100 per share plus an additional
amount sufficient to generate a yield equal to 12.625% compounded semiannually
from December 21, 1993, the Series D 8% Cumulative Convertible Preferred Stock
from Prudential. The Company also has an option, which expires on December 31,
1995, to repurchase the balance of the Series D shares at the same formula
price. As the Company redeems shares of its Series D 8% Cumulative Convertible
Preferred Stock, FRC has agreed to return, as a contribution to the capital of
the Company, a number of shares of Class A Common Stock of the Company owned by
FRC, determined by multiplying 48,569 by a fraction, the numerator of which is
the face value of the Series D 8% Cumulative Convertible Preferred Stock
redeemed and the denominator of which is $10 million. On December 2, 1993, the
Company sold Federal for an aggregate price of $2.15 million, consisting of
$1.65 million in cash and a $500,000 note. The cash from the sale was held in
escrow until the recapitalization was completed. On December 23, 1993, such cash
was used to repurchase a portion of the Series D 8% Cumulative Convertible
Preferred Stock as described above. The Company is currently negotiating to sell
Highway. (See note 1).
F-40
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
The 12.625% Cumulative Redeemable Preferred Stock must be exchanged into
subordinated notes once the Company meets certain financial ratios; to the
extent not previously exchanged, the Company is required to apply up to $2
million on January 10, 2000 to redeem 12.625% Cumulative Redeemable Preferred
Stock plus an amount sufficient to redeem any 12.625% Cumulative Redeemable
Preferred Stock received as dividends thereon, and to the extent shares still
remain outstanding, the Company is required to redeem the remaining shares on
January 10, 2001.
As of December 23, 1993, after giving effect to the recapitalization of the
Company, assuming conversion of all of the 8% Cumulative Convertible Preferred
Stock into common stock and assuming no issuance of any option shares, the
investors would have the following equity interests and voting percentages on
most matters, except for certain voting rights for the Series B and D 8%
Cumulative Convertible Preferred Stock and the Series A and B 12.625% Cumulative
Redeemable Preferred Stock designated by law or as specified in the Company's
Articles of Incorporation:
<TABLE> <CAPTION>
EQUITY VOTING
PERCENTAGE PERCENTAGE
----------- -----------
<S> <C> <C>
Petro............................................................... 25.8% 42.8%
Holdings............................................................ 20.3 33.7
FRC................................................................. 14.2 23.5
Prudential.......................................................... 39.7 --
----------- -----------
100.0% 100.0%
----------- -----------
----------- -----------
</TABLE>
Combining Petro's interest with its ownership interest in Holdings, Petro's
equity interest would increase to 29.5%, but its voting interest would remain at
42.8%.
Assuming further that the Series D 8% Cumulative Convertible Preferred
Stock is repurchased from Prudential and FRC contributes the full 48,569 common
shares back to the Company, the investors would then have the following
interests:
<TABLE> <CAPTION>
EQUITY VOTING
PERCENTAGE PERCENTAGE
----------- -----------
<S> <C> <C>
Petro............................................................... 32.1% 43.5%
Holdings............................................................ 25.2 34.2
FRC................................................................. 16.4 22.3
Prudential.......................................................... 26.3 --
----------- -----------
100.0% 100.0%
----------- -----------
----------- -----------
</TABLE>
Combining Petro's interest with its ownership interest in Holdings, Petro's
equity interest would increase to 36.7%, but its voting interest would remain at
43.5%.
F-41
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
The following represents the capitalization of the Company as of September
30, 1993 and as adjusted to give effect to the recapitalization as discussed
above, as if such recapitalization had occurred on September 30, 1993:
<TABLE> <CAPTION>
SEPTEMBER 30, 1993
----------------------------------
AS ADJUSTED HISTORICAL
---------------- ----------------
<S> <C> <C>
Long-term debt and working capital borrowings (including current portion) (see
note 5)..................................................................... $ 76,285,958 125,910,958
---------------- ----------------
Obligations under consulting and covenant not-to-compete contracts (including
current portion) (see note 9)............................................... 2,232,322 6,278,259
---------------- ----------------
Preferred stock--12.625% Cumulative Redeemable................................ 7,500,000 --
---------------- ----------------
Shareholders' equity (deficiency):
Common stock--266 shares, $1 par value...................................... -- 266
Class A Common Stock--480,695 shares, $.10 par value........................ 48,070 --
Class B Common Stock........................................................ -- --
Class C Common Stock........................................................ -- --
Series A Preferred Stock.................................................... -- 40,309
Preferred Stock--8% Cumulative Convertible--No par.......................... -- 1,420
Preferred Stock--8% Cumulative Convertible--$1 par value
Series A--179,750 shares.................................................... 179,750 --
Series B--150,000 shares.................................................... 150,000 --
Series C-- 90,000 shares.................................................... 90,000 --
Series D--100,000 shares.................................................... 100,000 --
Series E-- 5,000 shares.................................................... 5,000 --
Capital in excess of par value.............................................. 110,403,205 58,471,501
Deficit..................................................................... (59,836,948) (59,836,948)
Treasury stock.............................................................. -- (2,187,916)
---------------- ----------------
Total shareholders' equity (deficiency)................................ 51,139,077 (3,511,368)
---------------- ----------------
Total capitalization................................................... $ 137,157,357 128,677,849
---------------- ----------------
---------------- ----------------
</TABLE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost or market following the moving
weighted average method, which approximates first-in, first-out cost.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the depreciable assets (generally thirty
years for buildings and seven to thirty years for equipment) using the
straight-line method. Gain or loss on property retired, sold or otherwise
disposed
F-42
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
of is included in operations. Expenditures for renewals and improvements are
capitalized, while maintenance and repairs are expensed.
Intangible Assets
Beginning on October 1, 1992, the excess of cost over the fair value of net
assets acquired is being amortized using the straight-line method over 10 years.
Prior to October 1, 1992, such assets were being amortized over 40 years. The
effect of the change in 1993 was to increase amortization expense by $1,160,000.
Other intangible assets, principally covenants not to compete, capitalized
consulting costs and customer contracts and lists are being amortized over their
estimated useful lives, ranging from one to ten years. Deferred charges,
representing costs associated with the issuance of the Company's debt, are being
amortized over the lives of the related debt.
The Company assesses the recoverability of intangible assets by comparing
the carrying values of such intangibles to market values, where a market exists,
supplemented by cash flow analyses to determine that the carrying values are
recoverable over the remaining estimated lives of the intangibles through
undiscounted future operating cash flows. Where an intangible asset is deemed to
be impaired, the amount of intangible impairment, is measured based on market
values, as available, or by projected cash flows.
Customer Credit Balances
Customer credit balances represent payments received from customers
pursuant to a budget payment plan (whereby customers pay their estimated annual
propane gas charges on a fixed monthly basis) in excess of actual deliveries
billed.
Cash Equivalents
For the purpose of determining cash equivalents used in the preparation of
the Statements of Cash Flows, the Company considers all highly liquid
investments with a maturity of three months or less when purchased, to be cash
equivalents.
Basis of Presentation
Certain reclassifications have been made to the 1992 and 1991 financial
statements to conform to the 1993 presentation.
(4) ACQUISITIONS
The Company expanded its operations in the retail and wholesale propane gas
businesses by making several acquisitions during the fiscal years ended
September 30, 1991, 1992 and 1993 as described below. The acquisitions were
accounted for under the purchase method of accounting and, therefore, the
purchase prices have been allocated to the assets and liabilities acquired based
on their respective fair market values at the dates of acquisition. The purchase
prices in excess of the fair values of net assets acquired were classified as
excess of cost over net assets acquired in the Consolidated Balance Sheets. The
results of operations of the respective acquired companies have been included in
the Consolidated Statements of Operations from the dates of acquisition.
During fiscal 1991, the Company acquired certain assets of six unaffiliated
liquified petroleum gas businesses. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately
$1,420,000.
F-43
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) ACQUISITIONS--(CONTINUED)
During fiscal 1991, the Company also entered into an operating lease for
certain assets of a water treatment company. Annual payments on the lease are
$47,760 per year for three years. The Company has an irrevocable option at the
end of the lease to purchase these assets for $60,000.
During fiscal 1992, the Company acquired certain assets of five
unaffiliated liquified petroleum gas businesses. The aggregate consideration for
these acquisitions, accounted for by the purchase method, was approximately
$1,047,000.
During fiscal 1993, the Company acquired certain assets of one unaffiliated
liquified petroleum gas business. The aggregate consideration for this
acquisition, accounted for by the purchase method, was approximately $60,000.
(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt and obligations under capital leases consist of the
following:
<TABLE> <CAPTION>
SEPTEMBER 30, 1993* SEPTEMBER 30,
-------------------- ------------------------------
(AS ADJUSTED) 1993 1992
-------------- --------------
<S> <C> <C> <C>
Revolving and line of credit loans payable to bank(a)...... $ 6,808,704 6,808,704 5,227,996
11.56% Senior Notes (b).................................... 30,675,000 45,000,000 45,000,000
12.625% Senior Subordinated Participating Notes (b)........ 7,500,000 40,000,000 40,000,000
11.77% Senior Reset Term Notes (c)......................... 20,000,000 20,000,000 20,000,000
Term loan agreement (d).................................... 9,325,000 12,125,000 15,625,000
10% Junior Subordinated Promissory Note payable to former
shareholder, prepaid in 1993(e)............................ -- -- 1,593,090
Senior subordinated promissory notes, net of discount of
$8,934, $8,934 and $17,641................................. 701,535 701,535 1,507,197
11% Note payable in $60,000 annual installments to 2004,
net of discount of $48,200, $48,200 and $55,300.......... 611,800 611,800 664,700
Other debt, net of discount $0, $0 and $4,658.............. 20,585 20,585 76,513
Obligations under capital leases (see note 8).............. 643,334 643,334 953,634
-------------------- -------------- --------------
76,285,958 125,910,958 130,648,130
Less current maturities.......................... 7,485,774 7,485,774 6,077,873
-------------------- -------------- --------------
$ 68,800,184 118,425,184 124,570,257
-------------------- -------------- --------------
-------------------- -------------- --------------
</TABLE>
- ---------------
* As adjusted gives effect to the recapitalization discussed in notes 1 and 2
and in (b) and (d) below, as if such recapitalization had occurred on
September 30, 1993.
(a) On July 2, 1993, the Company entered into a $20,000,000 Amended and
Restated Revolving Credit Agreement (the "Credit Agreement") with The
First National Bank of Boston. The Credit Agreement matured on October 15,
1993, was renewed to December 22, 1993, and bore interest at the higher of
the annual rate of interest announced as the base rate of the bank making
the loan plus 2% or 2.5% above the overnight federal funds rate.
(Footnotes continued on following page)
F-44
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)
(Footnotes continued from preceding page)
As of September 30, 1993 and 1992, outstanding revolving loans and letters
of credit aggregated $9,457,520 (including $2,648,816 for letters of
credit), and $9,257,522 (including $4,029,526 for letters of credit),
respectively.
The Credit Agreement was again restated and amended as of December 21,
1993. Under the terms of the restated and amended Credit Agreement, the
Company may borrow up to $25 million to finance working capital needs
under a revolving credit facility which expires on June 30, 1996. Amounts
borrowed under the revolving credit facility are subject to a 30 day clean
up requirement each year. Interest on borrowings is payable monthly and is
based upon either the Eurodollar Rate (as defined below) or the Alternate
Base Rate (as defined below), plus 2 1/4% on Eurodollar loans or 1/4% on
Alternative Base Rate Loans, at the Company's option. The Eurodollar Rate
is the prevailing rate in the Interbank Eurodollar Market adjusted for
reserve requirements, if any. The Alternate Base Rate is the higher of
(i) the prime rate or base rate of The First National Bank of Boston in
effect or (ii) the Federal Funds Rate in effect plus 1/2%.
The Credit Agreement also provides for a revolving credit acquisition
facility under which the Company may borrow up to $20 million to fund
acquisitions of propane companies. This acquisition facility expires on
June 30, 1996 and the Company has the option to convert this facility
into a term loan, payable in 36 consecutive monthly installments
commencing on July 1, 1996. Interest on the borrowings is payable monthly
and is based upon either the Eurodollar Rate plus 2 1/2% on loans made
before the acquisition loan conversion date and 3% after the acquisition
loan conversion date or the Alternate Base Rate plus 1/2% on loans made
before the acquisition loan conversion date and 1% on loans made after
the acquisition loan conversion date, at the Company's option.
The Company pays a commitment fee equal to 1/2% of the unused portion of
the bank facilities with a reduction, through June 30, 1994, on the
Acquisition Facility to 1/4% annually if it is not used through that
date.
Under the terms of the Credit Agreement, as amended, the Company is
restricted as to the declaration and distribution of dividends and is
also required to maintain certain financial and operational ratios. The
amounts borrowed under the Credit Agreement are secured by substantially
all of the Company's assets.
(b) On January 10, 1989, the Company issued $85,000,000 of notes (the "Note
Agreements") to Prudential for cash. The Note Agreements consisted of
$45,000,000 of 11.56% Senior Notes due in six consecutive annual
installments of $7,500,000 commencing January 10, 1994; $30,000,000 of
12.625% Senior Subordinated Participating Notes, Series A, due in six
consecutive annual installments of $4,250,000 commencing January 10, 1995,
with a final installment of $4,500,000 due on January 10, 2001; and
$10,000,000 of 12.625% Senior Subordinated Participating Notes, Series B,
due in six consecutive annual installments of $1,500,000 commencing
January 10, 1995, with a final installment of $1,000,000 due on January
10, 2001.
The Series A and Series B Senior Subordinated Participating Notes bore
additional interest aggregating to the greater of (a) $487,500 or 2.5% of
the first $33,500,000 of the Company's operating profit (as defined) for
each of the fiscal years ended September 30, 1991 through 1999 and (b)
$622,400 or 3.19% of the first $33,500,000 of the Company's operating
profit (as defined) for the fiscal year ended September 30, 2000.
(Footnotes continued on following page)
F-45
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)
(Footnotes continued from preceding page)
As part of the recapitalization (see notes 1 and 2), the Company exchanged
in direct order of maturity, $15,000,000 of Series A 12.625% Senior
Subordinated Participating Notes for 150,000 shares of Series B 8%
Cumulative Convertible Preferred Stock, the entire $10,000,000 of Series
B 12.625% Senior Subordinated Participating Notes for 100,000 shares of
Series D 8% Cumulative Convertible Preferred Stock, and in inverse order
of maturity, $1,500,000 of Series A 12.625% Senior Subordinated
Participating Notes for 15,000 shares of Series A 12.625% Cumulative
Redeemable Preferred Stock and $6,000,000 of Series A 12.625% Senior
Subordinated Participating Notes for 60,000 shares of Series B 12.625%
Cumulative Redeemable Preferred Stock. In addition, the participating
interest feature on the Series A and B 12.625% Senior Subordinated
Participating Notes was eliminated.
Additionally, the Company was also allowed to prepay $14,325,000 of the
11.56% Senior Notes in direct order of their maturity. The remaining 1995
payment of $675,000 and part of the 1996 payment of $1,325,000 were
deferred such that the 1997, 1998 and 1999 payments were increased from
$7,500,000 per year to $8,166,667 per year.
Under the terms of the Note Agreements, as amended at various dates
through December 23, 1993, the Company is restricted as to the declaration
and distribution of dividends and is also required to maintain certain
financial and operational ratios. The amounts borrowed under the 11.56%
Senior Notes and the 12.625% Senior Subordinated Participating Notes are
secured by substantially all of the Company's assets.
(c) On February 28, 1991, the Company issued $20,000,000 in Senior Reset Term
Notes (the "Notes") to Prudential for cash. The Notes were due in
consecutive semi-annual installments of $2,500,000 commencing August 28,
1994. The Notes bore interest at 10.72% until February 28, 1994.
Thereafter, until maturity, the Notes would have borne interest at the
2.25 year Treasury Rate on February 28, 1994 plus 3.75%.
The Company amended the Notes at various dates through November 30, 1993.
The required prepayments under the amended terms of the Notes are
$2,500,000 on August 28, 1999, $5,000,000 on each of February 28, 2000,
August 28, 2000 and February 28, 2001 and $2,500,000 on August 28, 2001.
As part of the recapitalization, the Notes were amended such that the
interest rate on the Notes became the 6.5 year Treasury Rate plus 3.3%.
Under the terms of the Notes, as amended, the Company is restricted as to
the declaration and distribution of dividends and is also required to
maintain certain financial and operational ratios. The amounts outstanding
under the Notes are secured by substantially all of the Company's assets.
(d) On March 7, 1991, the Company entered into a Term Loan Agreement (the
"Term Loan") with PruSupply, Inc. which provided a $20,000,000 facility.
The Company amended the Term Loan at various dates through November 30,
1993. The Term Loan was to be repaid in nineteen consecutive quarterly
installments of $875,000, which commenced in May 1991, with a final
payment of $3,375,000 due at maturity in February 1996. The Term Loan
bears interest at the one month London Interbank Offered Rate ("LIBOR")
plus 2.7%.
As part of the recapitalization, the Term Loan was amended to allow for
the prepayment of $1,925,000 on December 23, 1993. In addition, the
Company paid $875,000 that had been deferred. This agreement was further
amended such that the required payments on these notes will be $4,325,000
in 1996 and $5,000,000 in 1997.
Under the terms of the Term Loan, as amended, the Company is restricted as
to the declaration and distribution of dividends and is also required to
maintain certain financial and operational ratios. The amounts outstanding
under the Term Loan are secured by substantially all of the Company's
assets.
(Footnotes continued on following page)
F-46
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)
(Footnotes continued from preceding page)
(e) On March 30, 1993, the Company and a former shareholder reached an
agreement whereby the former shareholder received payments in settlement
of all amounts owed under a 10% Junior Subordinated Promissory Note and a
Consulting Agreement. The Company recognized a gain of $178,415 on the
settlement. (See note 9)
As of September 30, 1993, the Company was not in compliance with certain
financial covenants contained in the Credit Agreement, the Note Agreements, the
Notes and the Term Loan. All appropriate covenants have been amended or waivers
have been obtained, where necessary.
As of September 30, 1993, annual maturities of long-term debt and
obligations under capital leases, after giving effect to the recapitalization,
are set forth in the following table:
<TABLE>
<S> <C>
1994.............................................. $ 7,485,774
1995.............................................. 209,852
1996.............................................. 10,708,138
1997.............................................. 13,270,354
1998.............................................. 10,253,745
Remaining......................................... 34,358,095
--------------
$ 76,285,958
--------------
--------------
</TABLE>
(6) INCOME TAXES
The income tax provision (benefit) shown in the accompanying Consolidated
Statements of Operations consists of the components set forth below:
<TABLE> <CAPTION>
1993 1992 1991
----------- ------------ ------------
<S> <C> <C> <C>
Federal:
Deferred..................................... $ -- (1,489,055) (1,748,266)
State:
Current...................................... 270,727 203,837 210,279
Deferred..................................... (13,700) (8,785) (65,025)
----------- ------------ ------------
257,027 195,052 145,254
----------- ------------ ------------
$ 257,027 (1,294,003) (1,603,012)
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
F-47
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) INCOME TAXES--(CONTINUED)
The following is a reconciliation between reported income tax (benefit)
expense and tax (benefit) expense computed at the statutory rate:
<TABLE> <CAPTION>
1993 1992 1991
--------------- ------------ ------------
<S> <C> <C> <C>
Computed at Federal statutory rate (fiscal 1993, 1992 and
1991--34%)....................................................... $ (15,922,533) (2,908,185) (2,363,521)
Tax effect of:
Losses for which no tax benefit was recognized................... 15,435,673 909,532 --
Depreciation on excess of book cost over tax basis of plant and
equipment and amortization of excess of cost over net assets
acquired...................................................... 434,080 476,192 495,863
Gain on sale of equipment resulting from book cost over tax basis
of equipment.................................................. 118,039 76,155 130,036
State income taxes, net of Federal benefit....................... 169,638 128,734 95,868
Other............................................................ 22,130 23,569 38,742
--------------- ------------ ------------
$ 257,027 (1,294,003) (1,603,012)
--------------- ------------ ------------
--------------- ------------ ------------
</TABLE>
The (benefit) provision for income taxes is based upon pretax book income.
Deferred income taxes result primarily from the difference in depreciation
expense as a result of the use of accelerated methods in determining
depreciation for income tax purposes in excess of the straight-line basis used
for financial statement purposes.
At September 30, 1993, the Company had approximately $84,000,000 of Federal
and state net operating loss (NOL) carryforwards available to offset future
taxable income. Such NOLs expire in the years 2004 through 2008.
Effective with the recapitalization on December 23, 1993 (see note 2), the
Company's NOL's were substantially limited for purposes of general carryforward
availability and otherwise limited for specified carryforward purposes since the
recapitalization constitutes a change in control for income tax reporting
purposes.
In February 1992, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("FASB 109"). The Company is not required to adopt the new method of
accounting for income taxes until fiscal 1994. Because the Company was not
carrying substantial deferred taxes on its Consolidated Balance Sheet,
management believes that the adoption of FASB 109 will not have a material
effect on financial position or results of operations. However, as a result of
the recapitalization and change in control, the Company is in the process of
determining what effect, if any, the limitation on the use of the NOLs will have
on financial position and results of operations, and what tax planning
strategies are available to retain the maximum benefit thereof.
(7) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan which provides benefits for all eligible
employees except those covered by union plans and employees of Highway. Subject
to IRS limitations, the 401(k) plan provides for employees to contribute from 1%
to 15% of compensation with the Company contributing a matching amount of the
employees' contribution up to a maximum of 3% of compensation. The Company may
also contribute an additional amount on behalf of each employee in an amount
equal to
F-48
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) EMPLOYEE BENEFIT PLANS--(CONTINUED)
3% of each employee's compensation. Effective, March 1, 1992, an amendment to
the plan eliminated the ability to make this additional contribution.
Aggregate Company contributions made to the 401(k) plan during 1993, 1992
and 1991 were $313,652, $537,703 and $627,447, respectively.
The Company makes monthly contributions to a union defined benefit pension
plan for all union employees. The amount charged to expense was $198,206,
$202,545 and $186,871 in fiscal 1993, 1992 and 1991, respectively.
(8) LEASE COMMITMENTS
The Company has entered into noncancellable capital lease agreements with
former owners of acquired businesses for certain premises and related equipment.
All leases contain bargain purchase options, exercisable on the lease
termination dates.
The premises and equipment under capital leases are carried at $828,725 and
$2,023,660 on the Consolidated Balance Sheets with accumulated depreciation of
$79,234 and $141,426 at September 30, 1993 and 1992, respectively. Depreciation
of premises and equipment under capital leases is included in depreciation
expense.
The Company has entered into operating leases for office space, trucks and
other equipment. The future minimum rental commitments at September 30, 1993
under leases having an initial or remaining noncancellable term of one year or
more are as follows:
<TABLE> <CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------- -------------
<S> <C> <C>
1994........................................................ $ 157,476 $ 2,700,000
1995........................................................ 157,476 2,400,000
1996........................................................ 144,726 1,600,000
1997........................................................ 80,976 900,000
1998........................................................ 80,976 200,000
Thereafter.................................................. 506,097 100,000
------------- -------------
Total minimum lease payments................................ 1,127,727 $ 7,900,000
-------------
-------------
Less amount representing interest........................... 484,393
-------------
Present value of net minimum rentals........................ $ 643,334
-------------
-------------
</TABLE>
The Company incurred rent expense of $4,150,765, $3,586,450 and $3,437,423
in 1993, 1992 and 1991, respectively.
(9) OTHER CURRENT AND LONG-TERM LIABILITIES
As a result of various acquisition agreements, the Company was required to
pay an aggregate of $6,278,259 and $9,268,487 (net of discounts of $406,596 and
$1,155,492), as of September 30, 1993 and 1992, respectively, pursuant to
certain consulting and covenant not-to-compete agreements. These obligations are
included in other current liabilities and long-term liabilities in the amounts
of $712,179 and $3,812,670 and $5,566,080 and $5,455,817 as of September 30,
1993 and 1992, respectively.
On December 4, 1992, the Company and its shareholders entered into a
Purchase Agreement with a third party for the shareholders to purchase from the
third party $5,500,000 of consulting and non-competition payments (the
"Purchased Payments") owed to the third party by the Company. This
F-49
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) OTHER CURRENT AND LONG-TERM LIABILITIES--(CONTINUED)
amount due was $2,750,000 on November 17, 1992 and $2,750,000 on November 17,
1993. The shareholders deferred the $2,750,000 installment payment (the
"Deferred Amount") due on November 17, 1992 under the original agreement to June
1, 1993. This Deferred Amount bore interest at 13.76% per annum.
On March 30, 1993, the Company and its shareholders signed a Cancellation
of Indebtedness and Deferral Agreement (the "Cancellation Agreement"). Under the
terms of the Cancellation Agreement, the shareholders agreed to cancel
$1,420,000 of the Deferred Amount in consideration of 1,420 of newly issued
shares of 8% Cumulative Convertible Preferred Shares of the Company. The balance
of the Deferred Amount, after giving effect to such cancellation, plus interest
accrued through March 30, 1993, aggregated $1,470,848 (the "New Deferred
Amount"). The shareholders agreed to the deferral of the New Deferred Amount to
December 31, 1994 and to the deferral of the remainder of the Purchased Payments
from November 17, 1993 to December 31, 1994. The New Deferred Amount bore
interest at the rate of 13.75% per annum from March 30, 1993. The remainder of
the Purchased Payments bore interest at the rate of 13.76% per annum from
November 17, 1993 (See note 1).
On December 23, 1993, as part of the recapitalization (see note 2), the
Company exchanged the 1,420 8% Cumulative Convertible Preferred Shares plus the
New Deferred Amount and the balance of the Purchased Payments plus accrued
interest for 5,000 shares of Series E 8% Cumulative Convertible Preferred Stock
and 230,695 shares of Class A Common Stock.
On March 30, 1993, the Company and a former shareholder reached an
agreement whereby the former shareholder received payments in settlement of all
amounts owed to him under a 10% Junior Subordinated Promissory Note and a
Consulting Agreement. The Company recognized a gain of $178,415 on the
settlement (See note 5).
At September 30, 1993, annual maturities of amounts payable in connection
with certain covenants not to compete and consulting agreements, after giving
effect to the recapitalization, are as follows:
1994................................................. $ 712,179
1995................................................. 637,346
1996................................................. 412,994
1997................................................. 379,504
1998................................................. 90,299
(10) IMPAIRMENT OF LONG-LIVED ASSETS
During fiscal 1993, in connection with the recapitalization (see note 2)
and the sale of certain of the Company's branches (see note 1), the Company
reviewed the carrying values of its long-lived assets and identifiable
intangible assets for possible impairment. The Company determined, based on
expected future cash flows and the estimated fair values of certain branches,
that it would not be able to recover the carrying values of some of these
assets. Accordingly, as of September 30, 1993 the Company recorded a write-off
of approximately $33 million representing the estimated impairment to its long
lived assets.
F-50
<PAGE>
SCHEDULE VIII
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1991, 1992 and 1993
<TABLE><CAPTION>
Additions
-----------------------
Balance at Charged to Charged Other
Beginning Costs and to Other Changes Balance at
Year Description of Year Expenses Account Add (Deduct) End of Year
- ---- ----------- --------- ---------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
1991 Accumulated amortization:
Customer lists $117,844,644 $24,839,983 $142,684,627
Deferred charges 11,729,668 5,185,113 16,914,781
------------ ----------- ------------
$239,574,312 $30,025,096 $159,599,408
Allowance for doubtful
accounts $ 592,672 $ 2,156,320 $620,185 (1) $(2,599,463)(2) $ 809,714
------------ ----------- ------------ --------------- ------------
1992 Accumulated amortization:
Customer lists $142,684,627 $23,496,438 $166,181,065
Deferred charges 16,914,781 5,363,321 22,278,102
------------ ----------- ------------
$159,599,408 $28,859,759 $188,459,167
Allowance for doubtful
accounts $ 809,714 $ 2,444,581 $610,230 (1) $(2,593,771)(2) $ 1,270,754
------------ ----------- ------------ --------------- ------------
1993 Accumulated amortization:
Customer lists $166,181,065 $23,182,730 $189,363,795
Deferred charges 22,278,102 5,548,246 27,826,348
------------ ----------- ------------
$188,459,167 $28,730,976 $217,190,143
Allowance for doubtful
accounts $ 1,270,754 $ 1,836,113 $713,773 (1) $(2,794,438)(2) $ 1,026,202
------------ ----------- ------------ --------------- ------------
</TABLE>
_______________
(1) Recoveries
(2) Bad debts written off
F-51
<PAGE>
SCHEDULE IX
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
SHORT-TERM BORROWINGS
Years Ended December 31, 1991, 1992 and 1993
Weighted
Maximum Average Average
Weighted Amount Amount Interest
Average Outstanding Outstanding Rate
Balance at Interest During the During the During
End of Year Rate Year Year the Year
----------- -------- ----------- ----------- --------
1991 $ 39,750,000 6.2% $ 73,000,000 $34,944,000 8.2%
============ ==== ============ =========== ====
1992 $ 32,000,000 5.4% $ 42,750,000 $17,906,000 5.9%
============ ==== ============ =========== ====
1993 $ 28,000,000 4.9% $ 37,000,000 $11,233,000 5.4%
============ ==== ============ =========== ====
The short-term borrowings represent obligations payable under credit agreements
to various banks.
The average amount outstanding during the year represents the average daily
principal balances outstanding during the year.
The weighted average interest rates during the year were computed by dividing
the actual interest incurred on short-term borrowings by the weighted average
short-term borrowings.
F-52
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- --------------------------------------------------
The information appearing in the Proxy Statement under the caption
ELECTION OF DIRECTORS and under the caption EXECUTIVE OFFICERS, is
incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- ----------------------
The information appearing in the Proxy Statement under the caption
EXECUTIVE COMPENSATION, is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- --------------------------------------------------------------
The information appearing in the Proxy Statement under the caption
ELECTION OF DIRECTORS -- Ownership of Equity Securities in the Company,
is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- ----------------------------------------------
The information appearing in the Proxy Statement under the caption
ELECTION OF DIRECTORS -- Certain Transactions, is incorporated herein by
this reference.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(a) The following documents are filed as part of this report:
1. The following consolidated financial statements are included in
Part II, Item 8:
Consolidated Financial Statements of Petroleum Heat and Power
Co., Inc. and Subsidiaries:
Independent Auditors' Reports
Consolidated Balance Sheets, December 31, 1992 and 1993
Consolidated Statements of Operations, years ended
December 31, 1991, 1992 and 1993
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) years ended December 31, 1991, 1992 and 1993
Consolidated Statements of Cash Flows, years ended December 31,
1991, 1992 and 1993
Notes to Consolidated Financial Statements
Consolidated Financial Statements of Star Gas Corporation and
Subsidiaries:
Independent Auditors' Reports
Consolidated Balance Sheets, September 30, 1992 and 1993
Consolidated Statements of Operations, years ended September
30, 1991, 1992 and 1993
Consolidated Statements of Shareholders' Equity (Deficiency),
years ended September 30, 1991, 1992 and 1993
Consolidated Statements of Cash Flows, years ended September
30, 1991, 1992 and 1993
Notes to Consolidated Financial Statements
23
<PAGE>
2. The following financial schedules are submitted herewith:
Schedule VIII - Valuation and Qualifying Accounts -
Years Ended December 31, 1991, 1992 and 1993
Schedule IX - Short-term Borrowings -
December 31, 1992 and 1993
All other schedules are omitted because they are not applicable
or the required information is shown in the financial
statements or notes thereto.
3. (a) Exhibits
The Exhibits, which are listed on the Exhibit Index attached
hereto.
(b) Reports on Form 8-K
Registrant filed a report on Form 8-K on January 4, 1994 to
report under item 2, "Acquisition or Disposition of Assets",
the investment made by the Company in Star Gas Corporation.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
March 9, 1994
PETROLEUM HEAT AND POWER CO., INC.
(Registrant)
By: /s/ Irik P. Sevin
--------------------------------
Irik P. Sevin
President, Chairman of the Board,
Chief Executive Officer and Chief
Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ Irik P. Sevin President, Chairman of the March 9, 1994
- ------------------------ Board, Chief Executive Officer,
Irik P. Sevin and Chief Financial and Accounting
Officer and Director
/s/ Audrey L. Sevin Secretary and Director March 9, 1994
- ------------------------
Audrey L. Sevin
/s/ Phillip E. Cohen Director March 9, 1994
- ------------------------
Phillip E. Cohen
/s/ Thomas J. Edelman Director March 9, 1994
- ------------------------
Thomas J. Edelman
25
<PAGE>
List of Exhibits
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.1 -- Restated and Amended Articles of Incorporation, as amended, and
Articles of Amendment thereto.(2)
3.2 -- Restated By-Laws of the Registrant.(2)
4.1 -- Indenture, dated as of April 1, 1993, between the Company and
Chemical Bank, as trustee, including Form of Notes.(1)
4.2 -- Form of Indenture, dated as of October 1, 1985 between the
Company and Manufacturers Hanover Trust Company, as trustee,
including Form of Notes.(3)
4.3 -- Restated and Amended Articles of Incorporation and Articles of
Amendment thereto.(3)
4.4 -- Certificate of Designation creating a series of preferred stock
designated as Cumulative Redeemable Exchangeable 1991 Preferred
Stock and Certificate of Amendment relating thereto.(6)
4.5 -- Certificate of Designation creating a series of preferred stock
designated as Cumulative Redeemable 1991 Preferred Stock.(3)
4.6 -- Form of Indenture between the Company and Chemical Bank, as
trustee, including Form of Debentures.(8)
4.7 -- Certificate of Designation creating a series of Preferred Stock
designated as Cumulative Redeemable Exchangeable 1993 Preferred
stock.(8)
9.1 -- Shareholders' Agreement dated as of July 1992, among the
Company and certain of its stockholders.(2)
10.1 -- Amended and Restated Credit Agreement dated as of December 31,
1992 among the Company, Maxwhale Corp., certain banks party
thereto and Chemical Bank. (1)
10.2 -- Pension Plan, as amended, of Petroleum Heat and Power Co., Inc.
(2)
10.3 -- Savings Plan, as amended of Petroleum Heat and Power Co.,
Inc.(2)
10.4 -- Supplemental Executive Retirement Plan of Petroleum Heat and
Power Co., Inc.(2)
10.5 -- Lease dated July 15, 1981 with respect to offices and garage
located at 477 West John Street and 5 Alpha Plaza, Hicksville,
New York.(4)
10.6 -- Lease dated February 15, 1982,(5) First Amendment dated
February 14, 1986, and Second Amendment dated July 1, 1989,
26
<PAGE>
with respect to offices, garage and terminal located at 818
Michigan Avenue, N.E., Washington, D.C.(2)
10.7 -- Lease dated June 26, 1989 with respect to offices and garage
located at 40 Lee Burbank Highway, Revere, Massachusetts.(2)
10.8 -- Lease dated December 1, 1985 with respect to office and garage
located at 3600-3620 19th Avenue, Astoria, New York.(3)
10.9 -- Lease dated November 1, 1985 with respect to office and garage
located at 522 Grand Blvd., Westbury, New York.(5)
10.10 -- Lease dated June 5, 1986 with respect to office and garage
located at 2541 Richmond Terrace Co., Staten Island, New
York.(5)
10.11 -- Lease dated July 31, 1986 with respect to office and garage
located at 71 Day Street, Norwalk, Connecticut.(5)
10.12 -- Lease dated July 9, 1984 with respect to office located at 1245
Westfield Avenue, Clark, New Jersey.(5)
10.13 -- Lease dated April 5, 1991 with respect to office and garage
located at 10 Spring Street, New Milford, Connecticut.(2)
10.14 -- Lease dated October 26, 1990 with respect to office and garage
located at 1 Coffey Street, Brooklyn, New York.(2)
10.15 -- Lease dated February 6, 1990 with respect to office and garage
located at 62 Oakland Avenue and 64 Oakland Avenue, East
Hartford, Connecticut.(2)
10.16 -- Lease dated July 29, 1988 and Addendum to lease dated August 1,
1988 with respect to office, garage and terminal located at 224
North Main Street, Southampton, New York.(2)
10.17 -- Lease dated April 1, 1988 with respect to office and garage
located at 171 Ames Court, Plainview, New York.(2)
10.18 -- Lease dated August 12, 1988 with respect to office and garage
located at 326 South Second Street, Emmaus, Pennsylvania.(2)
10.19 -- Lease dated July 15, 1990, Addendum to lease dated July 27,
1990 and Second Addendum to lease dated November 30, 1990, with
respect to office and garage located at 212 Elm Street, North
Haven, Connecticut.(2)
10.20 -- Lease dated August 14, 1989 with respect to office and garage
located at foot of South Street, Oyster Bay, New York.(2)
10.21 -- Lease and Addendum to lease dated September 26, 1990 with
respect to office and garage located at 930 Park Avenue,
Lakewood, New Jersey.(2)
10.22 -- Lease dated December 1, 1990 with respect to garage located at
10 Coffey Street, Brooklyn, New York.(2)
27
<PAGE>
10.23 -- Lease dated May 9, 1991 with respect to office and garage
located at 260 Route 10 East, Whippany, New Jersey.(2)
10.24 -- Lease dated June 1, 1987 with respect to garage located at 817
Pennsylvania Avenue, Linden, New Jersey.(2)
10.25 -- Lease dated June 1, 1989 with respect to office and garage
located at 2 Selleck Street, Stamford, Connecticut.(2)
10.26 -- Lease dated April 28, 1992 with respect to office and garage
located at 8087-8107 Parston Drive, Forestville, Maryland.(1)
10.27 -- Demand Promissory Notes of Thomas J. Edelman in favor of Petro,
Inc. in the amounts of $500,000 and $100,000 dated April 15,
1985 and May 17, 1985, respectively, and Pledge and Security
Agreement, as amended, made by Thomas J. Edelman in favor of
Petro, Inc. dated April 15, 1986.(5)
10.28 -- Letter dated June 5, 1985 with respect to redemption of 55,250
shares of common stock of Petroleum Heat and Power Co., Inc.
from Thomas J. Edelman and promissory note of Petroleum Heat
and Power Co., Inc. in the amount of $884,000 in favor of
Thomas J. Edelman, dated June 6, 1985.(3)
10.29 -- Option dated October 18, 1984 granted to Irik P. Sevin to
purchase 64,000 shares of common stock of Petroleum Heat and
Power Co., Inc.(3)
10.30 -- Form of Equipment Lease and related documentation dated as of
October 21, 1983 relating to vehicle leasing transaction
between Atlas Oil Corporation and various equipment lessors.(3)
10.31 -- Form of Equipment Lease and related documentation dated as of
March 2, 1985 relating to vehicle leasing transaction between
Petro, Inc. and various equipment lessors.(3)
10.32 -- Agreement dated October 22, 1986 relating to purchase of 64,000
shares of Class A Common Stock by Irik P. Sevin.(5)
10.33 -- Agreement dated December 2, 1986 relating to stock options
granted to Malvin P. Sevin.(5)
10.34 -- Agreement dated December 2, 1986 relating to stock options
granted to Irik P. Sevin.(5)
10.35 -- Agreements dated December 28, 1987 and March 6, 1989 relating
to stock options granted to Irik P. Sevin and Malvin P.
Sevin.(2)
10.36 -- Form of Note dated December 31, 1992, in the amount of
$1,499,378, due December 31, 1993, from Irik P. Sevin to the
Company.(1)
10.37 -- Subordinated Note Agreement relating to $60 million
Subordinated Notes due October 1, 1998 issued to John Hancock
Mutual Life Insurance Company and other Investors.(2)
28
<PAGE>
10.38 -- Note Agreement, dated as of January 15, 1991, relating to $12.5
million Subordinated Notes due January 15, 2001, between the
Company and Connecticut General Life Insurance Company.(2)
10.39 -- Purchase Agreement, dated as of September 1, 1991, between the
Company and United States Leasing International, relating to
purchase of 159,722 shares of the 1991 Preferred Stock.(2)
10.40 -- Purchase Agreement, dated as of August 1, 1989, between the
Company and John Hancock Mutual Life Insurance Company and The
Northwestern Mutual Life Insurance Company, relating to the
purchase of the 1989 Preferred Stock.(2)
10.41 -- Agreement dated as of November 1, 1992 relating to stock
options granted to George Leibowitz.(1)
10.42 -- Letter Agreement dated March 15, 1993 relating to the Credit
Agreement.(1)
10.43 -- Lease dated June 17, 1993 with respect to office facilities
located at 2187 Atlantic Street in Stamford, Connecticut. (8)
10.44 -- Form of Note dated December 31, 1993, in the amount of
$1,559,827, due December 31, 1994, from Irik P. Sevin to the
Company.(8)
10.45 -- Agreement dated December 1993 relating to stock options granted
to Malvin P. Sevin.(8)
10.46 -- Purchase Agreement, dated as of December 21, 1993, among Star
Gas Holdings, Inc., First Reserve Secured Energy Assets Fund,
L.P., American Gas & Oil Investors, AmGo II, AmGo III, FRC Star
Gas, Inc., Star Gas and the Company.(9)
10.47 -- Option from Star Gas to the Company, dated as of December 21,
1993.(9)
10.48 -- Shareholder Put/Call Agreement, dated as of December 21, 1993,
among the Company, the Other Investors and Prudential.(9)
10.49 -- Shareholders' Agreement, dated as of December 21, 1993, among
the Company, the Other Investors and Prudential.(9)
10.50 -- Management Services Agreement, dated as of December 21, 1993,
between the Company and Star Gas.(9)
10.51 -- First Amendment to the Company's 10 1/8% Subordinated Notes
Indenture dated as of January 12, 1994.(8)
10.52 -- Form of First Amendment to the US Leasing Purchase
Agreement.(8)
29
<PAGE>
10.53 -- Form of Third Amendment to the Connecticut General Note
Agreement.(8)
10.54 -- Form of Second Amendment to the Hancock Note Agreement.(8)
10.55 -- Form of First Amendment to the Hancock/Northwestern Purchase
Agreement.(8)
10.56 -- Form of Fourth Amendment dated January 21, 1994 to the Second
Amended and Restated Credit Agreement(8)
11.0 -- Computation of Per Share Earnings.(10)
21.0 -- Subsidiaries of Registrant.(10)
27.0 -- Financial Data Schedule.(10)
(1) Filed as Exhibits to Registration Statement on Form S-2, File No.
33-58034.
(2) Filed as Exhibits to Registration Statement on Form S-1, File No.
33-48051, and incorporated herein by reference.
(3) Filed as Exhibits to Registration Statement on Form S-1, File No.
2-99794, and incorporated herein by reference.
(4) Filed as Exhibits to Registration Statement on Form S-1, File No.
2-88526, and incorporated herein by reference.
(5) Filed as Exhibits to Registration Statement on Form S-1, File No.
33-9088, and incorporated herein by reference.
(6) Filed as Exhibits to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991, File No. 2-88526, and incorporated
herein by reference.
(7) Filed as Exhibits to the Company's Annual Report on Form 10-K for
the year ended December 31, 1988, File No. 2-88526, and incorporated
herein by reference.
(8) Filed as Exhibits to the Registration Statement on Form S-2, File
No. 33-72354, and incorporated herein by reference.
(9) Filed as Exhibits to the Company's Periodic Report on Form 8-K
filed on January 4, 1994, File No. 2-88526 and incorporated herein by
reference.
(10) Filed herein.
30
EXHIBIT 11
----------
PETROLEUM HEAT AND POWER CO., INC.
Computation of Net Income (Loss) Per Share
Year Ended December 31,
----------------------------------------
1991 1992 1993
------------ ------------ ------------
Net Loss $(16,562,565) $ (4,389,365) $ (8,431,294)
Preferred Dividends (3,269,000) (4,258,000) (3,321,153)
Accretion of Redeemable
Preferred Stock (23,083) (194,740) (45,873)
------------ ------------ ------------
Net loss applicable to common
stock (19,854,648) (8,842,105) (11,798,320)
------------ ------------ ------------
Common stock dividends
Class A Common Stock - 3,156,707 9,971,104
Class B Common Stock 951,501 2,714,946 407,772
Class C Common Stock - 465,251 1,336,198
------------ ------------ ------------
951,501 6,336,904 11,715,074
------------ ------------ ------------
Undistributed net loss(1) $(20,806,149) $(15,179,009) $(23,513,394)
============ ============ ============
Weighted average number of
common shares outstanding
Class A Common Stock 10,180,558 12,854,266 18,992,579
Class B Common Stock 3,034,060 2,447,473 216,901
Class C Common Stock 2,545,139 2,545,139 2,545,139
------------ ------------ ------------
15,759,757 17,846,878 21,754,619
============ ============ ============
Earnings (loss) per common
share
Class A Common stock
Distributed $ - $ 0.18 $ 0.52
Undistributed(1) (1.64) (0.99) (1.09)
------------ ------------ ------------
$ (1.64) $ (0.81) $ (0.57)
============ ============ ============
Class B Common Stock
Distributed $ 0.31 $ 1.14 $ 1.88
============ ============ ============
Class C Common Stock
Distributed $ - $ 0.18 $ 0.52
Undistributed (1.64) (0.99) (1.09)
------------ ------------ ------------
$ (1.64) $ (0.81) $ (0.57)
============ ============ ============
--------------
(1) All of the undistributed net loss has been allocated to the Class A
Common Stock and Class C Common Stock since the Class B Common Stock
cannot participate in any additional dividends until the aggregate
amount of dividends paid on Class A Common Stock and Class C Common
Stock exceeds the Common stock Allocation (as defined in the Company's
Restated Articles of Incorporation to mean the Company's cash flow for
each fiscal year after December 31, 1985, on a cumulative basis, minus
all Class B dividends paid or accrued). As of December 31, 1993, an
additional $101.6 million would be required to be paid as dividends on
the Class A Common Stock and Class C Common stock to reach the Common
Stock Allocation.
EXHIBIT 21
Ortep of New Jersey, Inc. - New Jersey
Ortep of Staten Island - New York
Ortep of Pennsylvania, Inc. - Pennsylvania
Ortep of Connecticut, Inc. - Connecticut
Petro/Crystal Corp. - New York
Maxwhale Corp. - Minnesota
Petro, Inc. - Delaware
Reliance Utilities Corp. - New York
Public Fuel Services Co., Inc. - New York
CBW Realty Corp. of New York - New York
CBW Realty Corp. of Connecticut - Connecticut
CBW Realty Corp. of Pennsylvania - Pennsylvania
CBW Realty Corp. of Massachusetts
Miller Fuel Oil Co. - Pennsylvania
D.J.W. Gasoline Co. - Pennsylvania
Marex Corporation - Maryland
Ocennet Fuel Oil Corp. - Connecticut
A.P. Woodson Co. - District of Columbia
EXHIBIT 27
Petroleum Heat and Power Co., Inc.
and Subsidiaries
----------------
Financial Data Schedule
Year Ended December 31, 1993
This schedule contains summary financial information extracted from
Petroleum Heat and Power Co., Inc. and Subsidiaries financial statements as
of December 31, 1993 and is qualified in its entirety by reference to such
financial statements.
Item Number Item Description Amount
----------- ---------------- ------------
5.02(1) Cash and cash items $ 24,613,546
5.02(2) Marketable securities None
5.02(3)(a)(1) Notes and accounts receivable-trade 75,844,705
5.02(4) Allowance for doubtful accounts 1,026,202
5.02(6) Inventory 13,992,928
5.02(9) Total current assets 120,371,171
5.02(13) Property, plant and equipment 62,643,562
5.02(14) Accumulated depreciation 31,103,032
5.02(18) Total assets 256,588,796
5.02(21) Total current liabilities 103,676,919
5.02(22) Bonds, mortgages and similar debt 185,310,722
5.02(28) Preferred stock - mandatory redemption 25,000,000
5.02(29) Preferred stock - no mandatory redemption None
5.02(30) Common stock 2,175,462
5.02(31) Other stockholders' equity (64,139,448)
5.02(32) Total liabilities and stockholder's equity 256,588,796
5.03(b)1(a) Net sales of tangible products 502,473,163
5.03(b)1 Total revenues 538,526,317
5.03(b)2(a) Cost of tangible goods sold 296,514,517
5.03(b)2 Total costs and expenses applicable to sales
and revenues 366,809,517
5.03(b)3 Other costs and expenses 156,051,573
5.03(b)5 Provision for doubtful accounts and notes 2,156,320
5.03(b)(8) Interest and amortization of debt discount 22,155,840
5.03(b)(10) Income before taxes and other items (7,164,184)
5.03(b)(11) Income tax expense 400,000
5.03(b)(14) Income/loss continuing operations (7,564,184)
5.03(b)(15) Discontinued operations None
5.03(b)(17) Extraordinary items (867,110)
5.03(b)(18) Cumulative effect - change in accounting
principles None
5.03(b)(19) Net income or loss (8,431,294)
5.03(b)(20) Earnings per share - primary (.57)
5.03(b)(20) Earnings per share - fully diluted (.57)
