U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES ACT OF 1934 (Fee Required)
For the Fiscal Year Ended August 31, 1996
( ) 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 No. 0-25660
HALSTEAD ENERGY CORP.
(Name of small business issuer in its charter)
Nevada 87-0446395
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
33 Hubbells Drive
Mt. Kisco, New York 10549
(Address of Principal Executive Offices) (Zip Code)
(914) 666-3200 (Issuer's Telephone Number,
Including Area Code)
Securities registered pursuant to
Section 12 (b) of the Exchange Act: None
Securities registered pursuant to
Section 12 (g) of the Exchange Act: Common Stock,$.001 Par Value
Check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
( ) Yes X) No
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in the
form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB.
( ) Yes (X) No
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The issuer's revenues for its most recent fiscal year were $15,312,260.
The aggregate market value of the voting stock held by non-affiliates of the
issuer as of January 1, 1997 was $1,014,525.56.
As of January 1, 1997, the issuer had 3,873,601 shares of its Common Stock
outstanding.
<PAGE>
PART I
ITEM 1. BUSINESS.
Background
Halstead Energy Corp. (the "Company") was originally incorporated in the
State of Utah on January 15, 1986 under the name of Technical Analysis, Inc. On
July 23, 1987, the Company changed its name to LMD Acquisitions, Inc. and
effective October 8, 1990, changed its corporate domicile to the State of
Nevada. On March 12, 1993, the Company changed its name to Castleview Corp. On
August 5, 1993 Castleview acquired Halstead Quinn Propane, Inc. ("HQ Propane")
in exchange for 2,170,000 shares of the Company's Common Stock. Simultaneous
with such acquisition the Company changed its name to Halstead Energy Corp.
The Company's operating entities are engaged in the wholesale and/or
retail distribution of, and the provision of services relating to, fuel oil,
liquid propane gas, gasoline and diesel fuel primarily in Westchester, Putnam,
Dutchess, Rockland and surrounding counties in New York State. The Company has
four principal operating divisions: HQ Propane, a wholly-owned subsidiary of the
Company; Halstead Quinn Terminal ("HQ Terminal") and HQ Gasoline ("HQ
Gasoline"), which are separate divisions of HQ Propane; and Rockland Fuel Oil,
Inc., a wholly-owned subsidiary of HQ Propane ("Rockland"). The business of
White Plains Fuel, Inc., a Hawthorne, New York- based retail distributor of fuel
oil and diesel fuel which was acquired by the Company in June 1995, is being
operated by a third party under the terms of a four (4) year lease.
Recent Developments
On July 17, 1996, HQ Propane acquired the customer list and other assets
of E. F. Osborn & Sons, a Pawling, New York-based retail propane distributor.
The acquisition has provided approximately 500 new customer accounts to HQ
Propane and additional storage facilities. It also marked the Company's
expansion into a marketing region (Dutchess County), where the company has been
trying to increase its market presence, and where there is currently significant
propane demand, which demand the Company expects will grow in the future.
In September 1996, the Company acquired certain assets of Dino Oil, Inc.,
a Bronx, New York-based commercial gasoline distributor. The addition of the
Company's Dino Oil division has provided the Company with new customer accounts,
including various service stations and fleet garages, located in the Bronx,
Queens, Brooklyn, Manhattan, as well as Nassau, Suffolk and Westchester
counties, thus adding new, and broadening existing, marketing regions.
<PAGE>
Retail Propane Distribution
HQ Propane (formerly Halstead Quinn Fuel Oil Co., Inc.), based in central
Westchester County in Mt. Kisco, New York, was established in 1946 and since
1958 has been a retail distributor of liquid propane gas and propane equipment
and also provides services related thereto. ATI acquired HQ Propane in 1975 and
subsequently spun it off to its shareholders in December 1992. In July 1996, HQ
Propane acquired the customer list and certain other assets of E. F. Osborn &
Sons, a Pawling, New York-based retail propane distributor.
HQ Propane has just under 7,000 accounts. Of these accounts, approximately
80% are Westchester County residents and businesses, and the remaining 20% are
located throughout the surrounding counties of Putnam and Dutchess in New York
State.
Westchester County harbors many affluent communities whose lifestyles
create an above average demand for energy-intensive applications and, the
Company believes, are also more resistant to recessionary pressures. This is
partly exemplified by the slow but steady growth in sales revenues over the last
three years. The Company believes that, in Westchester County, HQ Propane has a
market share of approximately 18%. In terms of accounts, the Company believes
that HQ Propane is the second largest propane distributor in Westchester County.
Although propane can be used for virtually all household and business
utility applications, of HQ Propane's customers, approximately 78% use propane
for hot water heating and cooking; approximately 16% use propane for pool
heating; and approximately 6% use propane for home heating. HQ Propane has
focused its marketing efforts on hot water heating and cooking applications
because these uses are relatively constant throughout the year, thereby reducing
seasonal fluctuations, and because its gross profit margins from hot water
heating use are significantly more than that of a residential propane heating or
commercial propane account.
The Company believes that propane has distinct advantages over alternative
energy sources, including efficiency, cost and availability. These attributes
result in the retail customer realizing reduced utility bills. With an increased
marketing effort, the Company believes that HQ Propane has the opportunity to
gain a larger share of the Westchester County energy market by converting
electricity and fuel oil users to propane and by having owners of newly
constructed buildings select propane as their energy source.
HQ Propane's base of operations is centrally located at the Company's
headquarters in Mount Kisco, New York. HQ Propane also maintains an inland fuel
oil storage terminal and a 30,000 gallon propane storage tank for its own
operations. The fuel oil facility is presently leased to a major independent
fuel oil distributor.
<PAGE>
Wholesale Distribution and Storage
HQ Terminal, with its terminal facility located in Yonkers, New York near
the New York City border, operates through A. Tarricone, Inc. (ATI) as a
wholesaler of fuel oil to third party resellers, and provides gasoline, fuel oil
and diesel storage facilities for other petroleum companies, such as Mobil Oil
Corporation. In addition, most of the Company's product supply for fuel oil and
gasoline originate from this terminal. HQ Propane will assume the operation of
the terminal from ATI upon the issuance of its licenses. See "BUSINESS - Certain
Licenses Relating to the Company's Business."
The terminal facility has 11 above ground tanks that provide an aggregate
storage capacity of 5,000,000 gallons for gasoline, diesel fuel and fuel oil.
These tanks feed three gasoline racks, five oil racks and two diesel fuel racks.
The terminal has been upgraded to comply with all governmental regulations.
The terminal facility has 2.439 acres of above-ground land and an
additional 3.511 acres of land underwater. The large amount of underwater
acreage has enabled the Company to extend the dock lines out to deep water. The
Company believes that the terminal is the only terminal on the east side of the
Hudson River between the Long Island Sound to the east, the Bronx, New York to
the south and Newburgh, New York to the north that has 17 feet of draft at low
tide. This provides a competitive advantage, particularly with regard to thruput
customers, because the high draft allows large seafaring vessels to dock
independent of tide schedules.
The Company believes that another competitive advantage is the terminal's
location. It is located in the most densely populated area in Westchester County
and it is the only terminal on the Hudson River south of Newburgh, New York
which distributes gasoline. All other gasoline distribution terminals are
located in the eastern part of Westchester County.
The terminal facility has been operated by ATI pending the approval of HQ
Propane's application with New York State for a Terminal Operator and Diesel
Motor Fuel License. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and
"BUSINESS - Certain Licenses Relating to the Company's
Business."
Gasoline
HQ Gasoline operates 21 retail gasoline stations throughout eastern New
York State under the trade names "ATI", "Gulf" and "BP." HQ Gasoline's ability
to market under different brand names provides the Company with an opportunity
to reach consumers at the low, middle and high end of the market, thereby
allowing greater flexibility in its marketing strategies. Because gasoline usage
is relatively constant throughout the year, the operation of gasoline stations
allows the Company to offset, in part, the seasonal fluctuations that affect the
Company's fuel oil distribution divisions. Most of the stations are situated in
high traffic areas at major intersections. Presently, 5 of the 21 facilities are
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combination convenience store/gasoline pumping facilities. The balance of the
outlets are combination automotive repair shop/gasoline pumping facilities.
Seven of the 21 gasoline stations are leased from ATI. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
In December 1996, the Company terminated its lease of 4 of its 21 stations
to an independent third party distributor, and simultaneously therewith, entered
into a master lease with another independent third party distributor. The master
lease has an initial term of ten (10) years, and the lessee thereunder has an
option to renew such lease for an additional ten (10) year term. The lease
requires that annual rental payments be made in advance, on the first day of
each year of the lease term. The lease is a triple net lease agreement which
requires the lessee to maintain, operate, and supply all gasoline to the station
outlets . The lessee must also make the necessary capital improvements to meet
applicable environmental laws by 1998.
The Company intends to focus its effort on changing the image of the HQ
Gasoline facilities. The industry has moved away from the "mom & pop" type
operation and into high volume, automated self-service operations, with a
particular focus on convenience. Repair shops, in particular, are becoming
increasingly less desirable. Accordingly, in order to optimize potential
earnings at a site, the Company intends to follow industry trends by upgrading
approximately 12 of these facilities with state-of-the-art pumping apparatus and
canopies and, where appropriate, converting them to multiple revenue sites by
combining the pumping facilities with convenience stores, snack shops and/or car
washes.
In most cases, canopies will be installed to improve lighting and provide
shelter in inclement weather. Industry experts estimate that up to a 20%
increase in volume is derived from this improvement alone. Management believes
that, in the Company's geographic region, canopies have contributed increased
revenues of between 15% and 25%. Electronic self-service pumping apparatus will
also be installed for the convenience of the public, and will afford tremendous
overhead savings to the station operator. The addition of a convenience store,
snack shop, or car wash, where applicable, will introduce new sources of revenue
and optimize overall station profitability.
The rebuilding program will require expenditures that range from $30,000
to $350,000 per facility, depending upon the individual station site. The
program is site specific, taking into consideration competition, lot size,
building dimensions, traffic count, community demographics, and area
development. By completing its rebuilding program, the Company believes it will
achieve increased cash flow from operations as a result of increased sales
revenues and rental income. In this regard, as part of the rebuilding program,
management intends to acquire certain station leaseholds from ATI at fair market
value since ATI's underlying leasehold interests extend by an average of 12
years beyond the Company's sublease with ATI. The acquisition of these leasehold
interests will protect the Company's investment in, and long term earnings
potential, from this revenue source. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
<PAGE>
Effective September 26, 1995, HQ Propane became a distributor of British
Petroleum ("BP") gasoline and diesel fuel pursuant to a Branded Jobber
Agreement. . Management believes that the internationally recognized BP name
will increase HQ Gasoline's existing retail gasoline customer base at selected
station sites. Management also believes that the BP partnership offers the
Company growth potential through station acquisitions, and allows the Company
even greater flexibility in its marketing strategies (particularly with HQ
Gasoline's added ability to brand under the BP, Gulf or ATI trademarks). Under
the terms of the BP Agreement, HQ Gasoline must convert selected stations to BP,
improve the stations to meet BP's image standards, and purchase all product
requirements from BP. BP offers various incentive programs including rebates,
credit cards and financial assistance in connection with this conversion.
Fuel Oil
The Company's fuel oil distribution business is conducted by HQ Propane's
subsidiary, Rockland Fuel Oil, Inc.
Rockland Fuel Oil, Inc., based in the northern Rockland County industrial
town of Haverstraw, New York, was established in 1947 as a retailer of heating
oil and commercial diesel fuel to residents and business throughout Rockland
County. It became a wholly-owned subsidiary of HQ Propane in December 1992.
Rockland operates through ATI pending approval of its New York State Diesel
Motor Fuel License. See "BUSINESS - Certain Licenses Relating to the Company's
Business." The Company believes that Rockland has a 20% share of the fuel oil
market and 4% share of the diesel fuel market in Rockland County.
Rockland also supplies, installs and services oil heating and hot water
equipment for its customers. The Company considers the provision of installation
and repair services to be an integral part of Rockland's basic fuel oil
business. The Company believes that Rockland is the only fuel oil company in
Rockland County that maintains an in-house service department offering 24 hour a
day service throughout the year. Except in isolated instances, Rockland does not
provide service to any person who is not a heating oil customer.
Rockland's account base totals approximately 1,300 customers. Of these
accounts, approximately 24% are diesel motor fuel customers and 76% are fuel oil
customers. Fuel oil volume sales are seasonal in nature, and are affected by
weather patterns from year to year. Since Rockland's diesel motor fuel account
base consists largely of construction companies, diesel fuel sales also have
seasonal aspects, tending to increase over the spring and summer months.
Rockland's diesel motor fuel customers are also affected by the economic
conditions of that industry.
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The Company believes that the fuel oil heating market in Rockland County
is not experiencing any new growth. However, neighboring Orange County, New York
is experiencing rapid growth and the Company believes that Rockland is
positioned to gain a share of this growing market. Based upon research, the
Company also believes that there is a large diesel motor fuel market in
Rockland's operating area. Rockland intends to attempt to increase its market
presence in these areas through competitive pricing and increased sales and
marketing efforts.
Rockland is supplied with both diesel and fuel oil by ATI from the HQ
Terminal. Rockland's base of operations is a Rockland owned facility in
Haverstraw, New York which houses a 2,432 square foot building and a terminal
situated on land fronting the Hudson River. The terminal is capable of storing
2,500,000 gallons of oil.
The Company acquired all of the stock of White Plains Fuel, Inc., a retail
distributor of fuel oil and diesel fuel, on June 8, 1995, in exchange for
168,020 shares of newly created Series A 7.5% Cumulative Convertible Redeemable
Preferred Stock of the Company. The Company has leased the White Plains Fuel
business to a third party under the terms of a four (4) year lease.
Fundamental Characteristics of the Company's Business
Unaffected by General Economy
The Company's business is relatively unaffected by business cycles. As
fuel oil, propane and gasoline are such basic necessities, variations in the
amount purchased as a result of general economic conditions are limited.
Customer Stability
HQ Propane and Rockland have a relatively stable customer base due to the
tendency of homeowners to remain with their traditional distributors. In
addition, a majority of the home buyers tend to remain with the previous owner's
distributor. As a result, HQ Propane's and Rockland's customer base each year
include most customers retained from the prior year or home buyers who have
purchased from such customers. Like many other companies in the industry, HQ
Propane and Rockland deliver fuel oil or propane to each of their customers an
average of approximately six times during the year, depending upon weather
conditions and historical consumption patterns. Most of HQ Propane's and
Rockland's customers receive their fuel oil and propane pursuant to an automatic
delivery system, without the customer having to make an affirmative purchase
decision each time oil or propane is needed. In addition, both HQ Propane and
Rockland provide home heating equipment repair service on a seven day a week, 52
weeks a year basis.
Retail gasoline customers are generally brand loyal or price shoppers who
generally factor appearance, convenience, and credit cards into their decision
<PAGE>
making process before making an affirmative purchase decision. HQ gasoline's
ability to market under the trademarks Gulf, BP, and ATI largely meet the
criteria exercised by customers in making their purchase decisions. However, the
Company must complete its station rebuilding program in order to ensure that the
standards which are particularly important to the motoring public, such as
appearance, are maintained.
No single customer accounts for 10% or more of the Company's consolidated
revenues.
Weather Stability
The weather patterns during the winter can have a material effect on the
Company's fuel oil related businesses. Although average temperatures over time
have varied to a very limited extent and the Company does not expect that
average temperatures will vary significantly in the future, winter temperatures
can very significantly from one year to the next. A warmer than usual winter
would reduce the number of gallons of fuel oil sold which would result in
reduced revenues from the Company's fuel oil regulated operations. Severe ice
and snow storms can also greatly effect consumers driving patterns, thereby
reducing the Company's gasoline revenues. Ice and snow can also greatly reduce
delivery productivity, thereby reducing the number of gallons which can
physically be delivered in a certain period of time. Such conditions would most
likely demand significant overtime hours resulting in increased payroll expense.
Effects of Oil Price Volatility
The price of crude oil remains volatile. While this has not materially
affected the Company's performance in the past (e.g., as a retailer, the Company
has been able to add an increasing gross margin onto its wholesale costs,
whatever their level, to offset the impact of inflation, account attrition and
weather), there can be no assurance that such performance will continue. For
instance, in recent months the Company has experienced difficulties maintaining
its gross margin on its sale of gasoline product (when its cost of same has
substantially increased) due primarily to strong competition for market share.
Petroleum Supply
Two major suppliers provide the Company with its propane product
requirements. One supplier provided approximately 65%, and the other
approximately 35%, of the Company's total propane requirements for the fiscal
year ended August 31, 1996.
The Company met substantially all of its gasoline product requirements
through Gulf Oil, BP and ATI for the fiscal year ended August 31, 1996. Gulf Oil
supplied approximately 30%, and ATI provided approximately 65% (through its
primary supplier, Warex Terminals), of such requirements during such period. All
of the Company's fuel oil and diesel fuel product requirements during such
period were met by ATI, through purchases of such requirements either from its
primary supplier, Warex Terminals, or on the spot market. Upon the issuance of
<PAGE>
its Terminal Operator and Motor Fuel Diesel Licenses from New York State, HQ
Propane will assume ATI's role in procuring the Company's petroleum product
requirements. See "CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS" and
"BUSINESS - Certain Licenses Relating to the Company's Business."
Management believes that if the Company's supply of any of the foregoing
products was interrupted, the Company would be able to secure adequate supplies
from other sources without a material disruption in its operations. However,
there can be no assurance that adequate supplies of such petroleum products will
be readily available in the future.
Expansion
The industries in which the Company's petroleum products division compete
are highly fragmented and characterized by numerous local and national fuel oil,
gasoline, diesel fuel and propane distributors. The Company intends to expand
its operating divisions through acquisitions and aggressive sales and marketing
efforts to generate new accounts and increase consumer awareness of the
Company's products and quality.
The Company's acquisition strategy is to grow through the acquisition and
integration of additional distributors in existing and new markets. The Company
believes that many of the proprietors of businesses competitive with the
Company's operating divisions are of retirement age and may be receptive to
selling their operations. Another potential source of acquisitions are companies
that are owned by individual entrepreneurs who find expansion within the
petroleum products industry difficult, either operationally or financially, or
who have other investment opportunities.
More specifically, HQ Propane and Rockland intend to acquire two types of
distributors. The first type are relatively small distributors which management
believes could be easily integrated into the Company's operations. Management
believes that such distributors could result in significant economies of scale
through the centralization of purchasing, marketing, credit, data processing and
other administrative functions of the acquired distributor. The second type
consists of larger, stand-alone businesses which could not be integrated, but
would, in all probability, be in new markets. The Company expects that
acquisitions of these businesses would provide not only attractive investment
returns, but also provide hubs for future expansion.
The Company also intends to expand HQ Gasoline by pursuing the acquisition
of single unit and chains of retail service stations. Such acquisitions would
provide deeper market penetration in the Company's existing marketing area, and
provide expansion into new marketing areas. Besides the benefits derived from
the economies of scale, the Company would expect to achieve greater buying power
for its petroleum products purchases, and possibly assume additional
distributorships with various major oil companies.
<PAGE>
Competition
The Company's business is highly competitive. The Company competes with
fuel oil, diesel fuel, propane and gasoline distributors and/or retailers
offering a broad range of services and prices, from full service distributors
similar to the Company, to those offering supply or retailing only. Competition
with other companies in the fuel oil and propane industries is based primarily
on customer service and price. Long-standing customer relationships are typical
in the retail fuel oil and propane industries. Many companies in the industry,
including the Company, deliver fuel oil and propane to their customers based
upon weather conditions and historical consumption patterns without the customer
having to make an affirmative purchase decision each time fuel oil or propane is
needed. In addition, most companies, including HQ Propane and Rockland, provide
equipment repair service on a 24-hour a day basis, which tends to build customer
loyalty. As of the date of this report , fuel oil and propane are less expensive
sources of energy than electricity. Natural gas, which is currently less
expensive than propane, is not readily available in upper Westchester and Putnam
Counties where all of the Company's propane operations are conducted.
Accordingly, the Company believes that an insignificant number of its customers
will switch from fuel oil or propane to alternative energy sources at this time.
HQ Gasoline's business operations are sensitive to price and brand
competition. In order to compete with branded competitors who benefit from name
recognition and customer loyalty, the "ATI" branded service stations may
maintain a lower price than these competitors. The Gulf and BP branded stations
are not as sensitive to price and therefore, typically maintain a price
consistent with other brand name competitors.
Certain Licenses Relating to the Company's Business
HQ Propane's principal terminal facility is currently operated by ATI
pending the approval of HQ Propane's application with the State of New York for
a terminal operator's and diesel motor fuel license and the applications of
Rockland Fuel Oil, Inc. and White Plains Fuel, Inc. for their respective diesel
motor fuel licenses. On October 6, 1995, New York State requested HQ Propane,
Rockland Fuel and White Plains Fuel to post certain bonds as a prerequisite to
obtaining the foregoing licenses. On October 25, 1995, these bonds were obtained
by the Company and the State approved the same. Management believed at the time
that the Company had thereby completed substantially all steps necessary to
receiving such licenses. However, these licenses have not as of yet been
granted, though the State recently discussed with management the possibility of
approving applications for certain (but not all) of such licenses (i.e., HQ
Propane's terminal operator's license and its diesel motor fuel license) pending
the completion of the licensing process with respect to the balance of the
licenses. Management is optimistic about the prospects of obtaining the approval
of such licenses, though there can be no assurance in this regard. The $.0025
per gallon fee charged by ATI for these services would be eliminated
<PAGE>
simultaneously with the issuance of HQ Propane's terminal operator's license and
its diesel motor fuel license. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
Environmental/Governmental Regulation
The Company's operating divisions are subject to various governmental
regulations. New regulations regarding underground storage tanks ("UST's"),
including those at service stations, have been issued by the United States
Environmental protection Agency (the "EPA"). The regulations cover the design,
construction and installation of new UST systems, and require that existing
systems meet certain EPA standards. The regulations require that owner/operators
of UST systems demonstrate financial responsibility for the cleanup of spills or
releases, and/or to compensate third parties for any resulting damages. The
Company has recently upgraded its HQ Terminal Facility and its other storage
facilities to conform with applicable law and the Company has an ongoing program
for maintenance, testing, retrofitting, or replacement of UST's. In addition,
the Company maintains Pollution Liability Coverage on 16 of the 18 Gasoline
Stations presently leased by the Company. (Three of the 21 stations operated by
the Company are Supply Contracts only, and therefore management does not believe
that the Company would be subject to any environmental exposure.) The Alexander
Street Terminal is also insured under a separate Pollution Legal Liability
Policy.
The Company believes that its operating divisions are in compliance with
all applicable regulatory requirements and have all governmental licenses and
permits (other than those described above in "BUSINESS - Certain Licenses
Relating to the Company's Business) required for their business operations,
except where the failure to be in compliance or maintain such licenses and
permits would not have a material adverse effect on the Company's business.
Management knows of no pending or threatened proceedings or investigations under
Federal or State Environmental Laws which would have a material adverse effect
on the Company's business. Management cannot predict the impact on the Company
and its operating divisions of new governmental regulations and requirements.
The Company will have to invest an estimated minimum of $400,000 over the
next two years in order to meet EPA and State regulations for underground
storage tanks by December, 1998.
Employees
As of January 2, 1997, the Company had a total of 33 employees, of which
20 are office, clerical and customer service personnel, 6 were drivers, 4 were
mechanics, and 3 were executive officers of the Company. Three of the Company's
employees are part-time and one is seasonally employed. Approximately 9 full
time employees and the one seasonal employee are represented by the
International Brotherhood of Teamster and Chauffeurs Union, Local 456 under a
<PAGE>
contract which expires on December 31, 1997. Management believes that its
relations with both its union and nonunion employees are satisfactory.
ITEM 2. PROPERTIES
The Company's principal place of business is located at 33 Hubbells Drive,
Mount Kisco, New York, where HQ Propane owns a block and brick building of
approximately 6,000
square feet situated on 1.03 acres.
The Company also owns the following facilities:
1. The HQ Terminal facility located in Yonkers, New York, which facility
is situated on 5.95 acres of land,with approximately 2.44 acres above
water and 3.51 acres are underwater.Four block and brick buildings of
3,000 square feet, 234 square feet, 225 square feet and 450 square
feet, respectively are situated on the property.The terminal also has
11 storage tanks with capacities ranging from 140,000 to 1,000,000
gallons, and an aggregate capacity of 5,083,000 gallons; a 300 foot
dock; three gasoline racks; five oil racks; and two diesel fuel racks.
2. A terminal facility located in Haverstraw, New York, which facility
is situated on 1.30 acres of land. The property houses one building
of 2,432 square feet. The terminal also has 14 storage tanks with
capacities ranging from 15,652 gallons to 508,000 gallons, and an
aggregate capacity of 2,509,545 gallons; and one loading rack.
3. A gasoline station facility in Hartsdale, New York which facility is
situated on 16,700 square feet of land. The property houses a one
story concrete building of 1,827 square feet with three bays and
office. The station is also improved with two islands, each with two
pumps.
As of August 31, 1996, HQ leased the following stations from ATI (See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"):
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Station Name and # Address
(1) Elmsford ATI #203 153-162 E. Main Street
Elmsford, NY 10523
(2) Wingdale ATI #405 Route 22-Box 684
Wingdale, NY 12594
(3) Salt Point #414 Route 44 & 82
Salt Point, NY 12578
(4) Congers ATI #112 21 South Route 303
Congers, NY 10920
(5) Mt. Vernon Lincoln Ave. #205 25 W. Lincoln Avenue
Mt. Vernon, NY 10550
(6) Lakeside P.P. #219 6 N. Lakeside Blvd.
Mahopac, NY 10541
(7) Raceway ATI #221 535 Central Park Avenue
Yonkers, NY 10704
Five of the above leases expire on August 31, 1998, with the other two
expiring on August 31, 2018. The aggregate annual rental amount under these
leases is $195,976 for the fiscal year ending August 31, 1996; $199,272 for each
of the fiscal years ending August 31, 1997 and August 31, 1998. For the two
leases expiring on August 31, 2018; the aggregate rental amount will range from
$54,000 in the fiscal year ending August 31, 1999 to $88,800 in the fiscal year
ending August 31, 2018.
ITEM 3. LEGAL PROCEEDINGS
In January 1994, HQ Propane was served with a complaint dated January 5,
1994 relating to an action entitled RAP Holding Corp. v. Halstead Quinn Fuel
Co., Inc. and A. Tarricone, Inc. in the Supreme Court of New York, County of
Westchester. The plaintiff is the owner of property in Westchester County, New
York which was leased by HQ Propane from June 1, 1979 to May 31, 1989. The
complaint alleges that, during the term of the lease, the Company discharged
petroleum products onto the property and seeks $106,173 damages for the costs of
clean up and removal of the contaminated soil and an additional $300,000 for
diminution of value. The Company has retained outside counsel and is vigorously
defending itself in this lawsuit. As of December 31, 1996, there has been no
further action in this case.
The Company is not a party to any other material litigation and is not
aware of any threatened litigation that would have a material adverse effect on
its business.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
On March 13, 1995, the Company's Common Stock became listed on the NASDAQ
Small Cap Stock Market under the symbol "HSNR". Prior to that date, the
Company's Common Stock was listed in the Nasdaq Bulletin Board under the symbol
"HSNR."
The following table sets forth the range of high and low closing bid
prices for the Company's Common Stock from March 13, 1995 through August 31,
1996, as reported by NASDAQ, which bid prices reflect inter-dealer prices,
without retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
Bid Prices
High Low
Fiscal 1995
Third Quarter (from March 13) 5 7/8 3 1/8
Fourth Quarter................. 5 7/8 3 1/8
Fiscal 1996
First Quarter.................. 6 15/16 5
Second Quarter................. 6 3/4 4 7/8
Third Quarter.................... 7 3/4 4 15/16
Fourth Quarter.................. 7 3/4 1 1/4
As of January 1, 1997, there were 150 holders of record of the Company's
Common Stock. However, those shares being held at various clearing houses
including the Depository Trust Company, and Cede & Company have not been broken
down. Accordingly, the Company believes there are numerous beneficial owners of
the Company's common stock whose shares are held in "street name", including the
Depository Trust Company and Cede and Company have not been broken down.
The Company does not currently pay dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Company's Common
Stock, but to retain earnings, if any, for the operation and expansion of the
Company's business. In any event, until such time as all accrued dividends on
the Company's Series A Preferred Stock and Series B Preferred Stock have been
paid, the Company is restricted, pursuant to the instruments/documents
authorizing the issuance of such preferred stock, from paying any dividends on
its Common Stock. Any dividends that may be declared in the future will be
determined by the Board of Directors based on the Company's financial condition,
results of operations, market conditions and other factors that the Board deems
relevant.
<PAGE>
The Company has been notified by NASDAQ of the failure of the Company's
common stock to maintain a closing inside bid price greater than or equal to
$1.00 for a period of ten consecutive trade dates, and that the Company will be
provided ninety calendar days (to February 14, 1997) in which to either regain
compliance with the minimum bid price requirement (i.e., that the shares of
common stock of the Company report a closing bid price of $1.00 or greater for
ten consecutive trading days prior to the end of such ninety day period) or the
alternative requirement (i.e., that the Company's capital and surplus equal or
exceed $2,000,000, and the market value of the public float of the Company's
common stock equal or exceed $1,000,000, for ten consecutive trading days prior
to the end of such ninety day period). NASDAQ has notified the Company that if
the Company is unable to demonstrate compliance with at least one of the
foregoing requirements prior to February 14, 1997, it must submit a proposal by
that same date for achieving compliance. If the Company fails by February 14,
1997 to either achieve compliance or to submit a proposal for achieving
compliance, NASDAQ would consider delisting the Company's common stock on The
Nasdaq Small Cap Market.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Results of Operations
Fiscal Year ended August 31, 1996 Compared to Fiscal Year
ended August 31, 1995.
Revenues increased from $15,174,559 for the fiscal year ended August 31,
1995 to $15,312,260 for the fiscal year ended August 31, 1996. The increase of
$137,701 is attributable to increase in sales totaling $1,251,018 primarily due
to increased sales revenues of #2 oil of $769,306, increased sales revenues of
propane of $245,626, increased thru-put revenues of $196,626 and increased
service and tank rental revenues totaling $39,460. These increased sales
revenues were reduced by $1,113,317 as a result of management's decision to
lease gasoline stations to an independent third party distributor.
Cost of Sales decreased from $11,059,346 for the fiscal year ended August
31, 1995 to $10,734,200 for the fiscal year ended August 31, 1996. The decrease
of $325,146 is primarily due to reduced gasoline purchases of $917,601 as a
result of leasing four gasoline stations to an independent third party
distributor. This decrease is partially offset by an increase in cost of goods
resulting primarily from increased purchases of propane, #2 oil and service
parts purchases totaling $592,455. The percentage of cost of sales to sales are
72.9% and 70.1% for fiscal 1995 and 1996, respectively. The increase of 2.8% is
primarily attributable to the increased #2 oil purchases characterized by high
volume and low gross profit.
Selling, General and Administrative Expenses increased from $2,916,401 for
the fiscal year ended August 31, 1995 to $3,278,968 for the fiscal year ended
August 31, 1996. The increase of $362,567 is comprised of an increase in real
<PAGE>
estate taxes of $71,956, increased advertising expenses of $57,318, increased
professional fees of $101,763, increased office expenses of $35,601, increased
other expenses of $31,314, increased equipment expenses of $27,537, increased
insurance expense of $18,446 and all other expenses totaling a net increase of
$18,632.
Depreciation and Amortization Expenses for the fiscal year ended August
31, 1996 increased by $228,291 to $679,842. The increase is due primarily to
depreciation and amortization expenses associated with the purchase of certain
leaseholds, the addition of fixed assets and the purchase of certain customer
lists (in connection with the purchase of White Plains Fuel, Inc. and the E. F.
Osborn transaction).
Interest Income for the year ended August 31, 1996 decreased by $145,465
to $101,987 from $247,452 for the year ended August 31, 1995. This decrease is
due to the Company acquiring, on November 1, 1995 and March 22, 1996, two
gasoline leaseholds from ATI, which acquisitions represented partial payment in
the amount of $450,000 and $915,000, respectively, of the outstanding note
receivable balance due from ATI.
Interest Expense for the year ended August 31, 1996 increased by $150,872
to $398,889 from $248,017 for the year ended August 31, 1995. The increase is
due primarily to the interest expense associated with certain bank indebtedness,
certain note payable indebtedness, and certain 8.5% interest bearing convertible
debentures.
Rental Income increased for the year ended August 31, 1996 by $228,530 to
$418,478 from $189,948 for the year ended August 31, 1995. The increase is due
primarily to rental income resulting from the lease by White Plains Fuel of its
customer list to an independent third party distributor.
Bad Debt Expense decreased from the year ended August 31, 1996 by $34,289
to $39,869 from $74,158 for the year ended August 31, 1995. The decrease is due
primarily to increased security deposits for gasoline and increased collection
efforts.
Royalty expense decreased for the year ended August 31, 1996 by $3,436 to
$96,102 from $99,538 for the year ended August 31, 1995. The reduction is
attributable to the Company entering into an agreement with ATI by which ATI was
granted warrants in exchange for the Company continuing to license the trade
name "ATI" for a period of five years. The Company no longer pays a royalty of
$.01 per gallon for gasoline station sales.
Other Income decreased for the year ended August 31, 1996 by $76,498 to
$38,935 from $115,433 for the year ended August 31, 1995. The decrease is due
primarily to a decrease in rebate refunds from a gasoline supplier.
Net Income for the fiscal year ended August 31, 1996 was $181,094 compared
to $256,648 for the fiscal year ended August 31, 1995. The decrease of $75,554
<PAGE>
is due to the net change resulting from an increase in gross profit of $462,847,
an increase in depreciation expense of $228,291, an increase in interest expense
of $150,872, a decrease in interest income of $145,465, a decrease in other
income of $76,498, an increase in rental income of $228,530, an increase in
selling, general and administrative expenses of $362,567, a decrease in royalty
expense of $3,436 and a decrease in bad debt expense of $34,289.
Liquidity and Capital Resources
Management believes that the Company's diversified business operations and
continued growth will result in increased sales revenues and gross profits and
result in greater amounts of working capital being generated from operations.
However, the Company's acquisition of the customer list and certain other assets
of Dino Oil subsequent to the year end has significantly increased the Company's
working capital requirements due to increased gasoline purchase requirements,
increases in accounts receivable, and operating expenses (including salary
expense) Recent rises in the cost of petroleum products by as much as 50% has
further increased the Company's working capital requirements. As a result,
without additional financing, there can be no assurance that the Company will be
able to meet its cash requirements for the next twelve months for such increased
supply requirements, and for its proposed capital improvements and mandated
capital improvements for underground storage tanks. In this regard, the Company
will continue to pursue additional financing from a lending facility or an
offering of its securities to enable the Company to meet such cash requirements
and to accomplish growth through acquisition which the Company is actively
pursuing. There can be no assurance that the financing will occur or that the
Company can find a suitable acquisition in the foreseeable future.
HQ Gasoline will have to invest $400,000 over the next two years in order
to meet Federal EPA and State Regulations for underground storage tanks by
December 1998. Through August 31, 1996, the mandatory requirements for two
locations have been initiated and $84,160 has been capitalized or expensed.
In addition the Company plans to rebuild 12 of 21 gasoline stations which
will require $35,000 to $350,000 per location for an aggregate of $2,600,000.
The rebuilds will be phased in over two years in order to minimize volume losses
due to "downtime" encountered while each station location is under construction.
The capital expenditures during fiscal 1996 were $557,013. Included in
this amount are expenditures for propane and other equipment of $266,564,
improvements to gas stations and the terminal facility of $99,225 and trucks and
auto of $191,224.
Another factor affecting the operating activities during Fiscal 1996 was
the additional depreciation expense associated with the acquisition of two
leasehold interests from ATI to the Company during November, 1995 and March,
1996. The depreciation expense associated with such leaseholds is $6,000 and
$12,300 respectively for the fiscal period ended August 31, 1996. In addition,
<PAGE>
the Company on March 5, 1996 issued warrants to ATI in exchange for the
exclusive use of the "ATI" trademark. The royalty expense associated with such
warrants is $50,405.42 for the fiscal year 1996.
HQ Propane, an operating subsidiary of the Company, has obtained from
lending institutions a $500,000 mortgage loan and a $500,000 line of credit
which the Company completed during May 1994. The mortgage loan has a term of
five years at a rate of interest equal to 8.5% per annum with principal and
interest payable monthly. The line of credit is available for a term of three
years at a floating rate of interest equal to 2.5% above the bank's prime rate
in effect from time to time with interest only payable monthly to the advances
outstanding on the line of credit. The loan and the line of credit are secured
by the Company's headquarters and the terminal facility at Alexander Street. HQ
Propane, Claire Tarricone, Anthony Tarricone and Joseph Tarricone are guarantors
on the loans.
On June 8, 1995 the Company acquired all of the capital stock of White
Plains Fuel, Inc. in an exchange of stock valued at $1,008,128. The shareholders
of White Plains Fuel, Inc. received 168,020 shares of newly created Series A -
7.5% Cumulative Convertible Redeemable preferred Stock of the Company. On
various dates throughout the fiscal year, the Company declared dividends on the
Series A Preferred for $.45 per share totaling $75,609. The fuel oil business of
White Plains Fuel, Inc. is conducted by a third party operator under the terms
of a four (4) year lease under which HQ Propane receives annual rental income of
$288,000.
On January 10, 1996, a total of 650,000 shares of the Company's common
stock was reserved for the 1996 stock incentive plan for officers, employees,
and consultants. The total options granted through August 31, 1996 are 200,000
leaving a balance of 450,000 shares in reserve as of August 31, 1996.
On March 5, 1996, the Company issued warrants to purchase 297,125 shares
of the Company's common stock to A. Tarricone, Inc. in exchange for the
Company's exclusive use of the "ATI" trademark. The exercise price is equal to
the lessor of $2.60 per share or a 40% discount from the average closing bid
price. The warrants provide that 59,425 are immediately vested, and the balance
become vested in four equal annual installments. The market price at issuance
was $4.30 per share.
In May 31, 1996 the Company issued 580,646 shares of Series B 8%
Cumulative Convertible Redeemable Preferred Stock with a stated value of $7.75
per share totaling $4,500,000 in a private placement pursuant to Regulation S.
The Company received proceeds, net of commissions, of $3,870,000. On July 23 and
November 20, 1996, the Private Placement Holder converted $65,100 (8,400 shares)
and $39,998 (5,161 shares) of the Series "B" Preferred Stock plus accrued
dividends of $756.23 and $1,472.79 respectively, into 18,816 and 162,261 shares
of the Company's common stock.
<PAGE>
On September 29, 1995, two short term demand notes of HQ Propane in the
amount of $300,000 and $200,000 from a financial institution were converted to a
5 year commercial mortgage at a prime commercial lending rate plus 1% and a five
year balloon payment with a 15 year amortization schedule. The commercial
mortgage is guaranteed by the Company, Claire E. Tarricone, Anthony J. Tarricone
and Joseph A. Tarricone, and is secured by certain commercial properties. In
addition, on December 20, 1995, HQ Propane obtained a 5 year mortgage loan in
the amount of $200,000 from the same financial institution at prime plus 1%. The
commercial mortgage is guaranteed by Claire E. Tarricone and secured by certain
commercial properties.
On October 19, 1995, the Company received $500,000 and issued $500,000 in
principal amount of 8.5% convertible debentures due on October 19, 1997. As of
May 31, 1996, $250,000 principal amount debentures remained outstanding. On
December 4, January 19, March 6, April 16, June 27 and August 14, 1996, the
subscriber converted a total of $350,000 of debentures for 104,647 common shares
of the Company. On August 20, 1996 the Company purchased the balance of the
outstanding convertible debentures for $150,000 plus accrued interest of
$10,793.84.
On November 1, 1995 and March 22, 1996, ATI transferred to HQ Propane two
(2) leaseholds is partial satisfaction of the note receivable due from ATI. The
appraised value of these leaseholds was $450,000 and $915,000 respectively. As
of August 31, 1996, the note receivable due from ATI was $1,355,576. The ATI
note is secured by certain gasoline leaseholds with an appraised value of
$2,330,000.
The Company had working capital of $3,226,040 and a ratio of current
assets to current liabilities of 2.85:1 as at August 31, 1996.
Inflation
There was no significant impact on the Company's operations as a result of
inflation during fiscal 1995 and fiscal 1996.
New Accounting Standards
In February, 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109 ("Statement No. 109"),
"Accounting for Income Taxes." Statement No. 109 will require the utilization,
if any exist, of the net operating loss carry forwards of the Company to be
recorded as part of the regular income tax provision and not as an extraordinary
item. The implementation of Statement No. 109 is not expected to have a material
impact on the results of operations of financial condition of the Company.
Statement No. 109 is effective for fiscal years beginning after December 15,
1992.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the notes
thereto, together with the report of independent certified public accountants
thereon, are presented beginning at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The information required by this item was reported by the Company in its
Annual Report on Form 10-KSB for the fiscal year ended December 31,1992 filed
with the SEC on March 31, 1993 and in the Company's Current Report on Form 8-K
filed with the SEC on November 26, 1993.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT.
MANAGEMENT
The names and ages of the directors and executive officers of the Company are as
follows:
Name Age Position with the Company
Claire E. Tarricone 40 President and Director
Anthony J. Tarricone 35 Vice President, Secretary
and Director
Joseph A. Tarricone 34 Vice President, Treasurer
and Director
Edwin Goldwasser 64 Director
Claire E. Tarricone has been the President and a Director of the Company
since July 27, 1993. Ms. Tarricone has also served as the President and a
Director of HQ Propane and Rockland Fuel since 1992. In June 1995 Ms. Tarricone
also became Director of White Plains Fuel, Inc. From 1991 until 1992, Ms.
Tarricone served as Vice President/General Manager of HQ Propane in charge of
its operating divisions. For the three years prior to 1991, she served as Vice
President of HQ Propane. Ms. Tarricone has been President and Director of ATI
since November 1992, and Vice President for at least three years prior thereto.
Anthony J. Tarricone has been Vice President, Secretary and a Director of
the Company since July 27, 1993. Mr. Tarricone has been Vice President,
Secretary and a Director of HQ Propane and Rockland Fuel since 1992. From 1991
until the present, Mr. Tarricone has served as ATI's gasoline division manager
and has served in similar capacity with HQ Gasoline since September 1993. From
1989 to 1991, Mr. Tarricone served as Marketing Representative/Properties
Manager for ATI's gasoline divisions.
Joseph A. Tarricone has been Vice President, Treasurer and a Director of
the Company since July 27, 1993. Mr. Tarricone has been Vice President,
Treasurer and a Director of HQ Propane and Rockland Fuel since November 1992.
From 1990 until 1992, Mr. Tarricone was sales manager for HQ Propane and ATI,
<PAGE>
responsible for the development of commercial gasoline and diesel fuel sales for
HQ Terminal and ATI. From 1988 to 1993, Mr. Tarricone served as President of
Energy Technology Services, Inc., an energy use and planning consulting firm.
Edwin Goldwasser has been a Director of the Company since July 27, 1993.
From April 1992 to the present, Mr. Goldwasser has served as a consultant to the
Company. For at least the five years prior to that, Mr. Goldwasser served as
Vice President of Administration and Finance in charge of all financial,
accounting and legal affairs for ATI.
Claire Tarricone, Anthony Tarricone and Joseph Tarricone are siblings.
All Directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors. Directors currently
receive no compensation for serving on the Board of Directors. No Director
received any cash compensation for serving as a Director of the Company during
the past fiscal year. Officers of the Company are appointed annually by the
Board of Directors.
As permitted under Nevada law, the Company's Articles of Incorporation
eliminates the personal liability of the Directors to the Company or any of its
shareholders for damages for breaches of their fiduciary duty as Directors. As a
result of such provision, shareholders may be unable to recover damages against
Directors for actions taken by them which constitute negligence or gross
negligence or that are in violation of their fiduciary duty. The inclusion of
this provision in the Company's Articles of Incorporation may reduce the
likelihood of derivative litigation against directors and other types of
shareholder litigation.
The directors and executive officers of the Company and the owners of more
than ten percent (10%) of the Company's outstanding Common Stock are required to
file reports with the Securities and Exchange Commission and with NASDAQ
reporting changes in the number of shares of the Company's Common Stock
beneficially owned by them. Such persons are required by Securities and Exchange
Commission regulation to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on its review of the copies of such forms
furnished to the Company and written representations from the executive officers
and directors, the Company believes that all Section 16(a) filing requirements
were met during fiscal 1996, except that each of Claire Tarricone, Anthony
Tarricone and Joseph Tarricone, all officers and directors of the Company, filed
one report after the applicable filing deadline.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table shows, as to the Chief Executive Officer and each of
the other executive officers whose salary plus bonus exceeded $100,000,
information concerning compensation paid for service to the Company in all
capacities during the fiscal year ended August 31, 1996, as well as total
compensation paid to each such individual for the Company's two previous fiscal
years (to the extent that such person was the Chief Executive officer and/or an
executive officer, as the case may be, during any part of such fiscal year):
<PAGE>
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
Name and Principal Fiscal Other Annual Restricted Options/
Position (1) Year Salary/Bonus Compensation(2) Stock Awards SARs (#)
Claire E. Tarricone 1996 $54,600 $15,034 100,000 (3)
President 1995 54,600 6,931
(1) The Company does not have any executive officers whose compensation
exceeded $100,000 during the applicable fiscal periods.
(2) Represents amounts payable under Ms. Tarricone's employment agreement with
the Company for certain insurance premiums and for taxes resulting from
such additional compensation.
(3) Reflects the grant of options under the Company's 1996 Stock Incentive
Plan, which options are not intended to qualify as "incentive stock
options" under Section 422 of the United States Internal Revenue Code of
1986, as amended, and which options are exercisable for a price of $4.50
per share of the Company's common stock, par value $.001 per share. The
100,000 options were canceled on November 14, 1996 in favor of the grant
of 400,000 new options to Ms. Tarricone, which options (a) were not
granted under the aforesaid plan, (b) are not intended to qualify as
"incentive stock options" under Section 422 of the United States Internal
Revenue Code of 1986, as amended, and (c) are exercisable for a price of
$.3125 per share of the Company's common stock, par value $.001 per share.
The Board of Directors of the Company voted to adopt the Company's 1996
Stock Incentive Plan (the "Plan") on January 10, 1996, subject to shareholder
approval. The shareholders of the Company approved of the Plan on April 22,
1996. The Plan gives the Company the flexibility to enable it to obtain and
retain the continued services of the personnel necessary for its growth and
development. The Plan provides, among other things, for the granting of options
to acquire up to 650,000 shares of the Company's common stock, $.001 par value
per share. Such options may qualify as "incentive stock options" under Section
422 of the Internal Revenue Code of 1986, as amended, or as non-qualified
options.
The Company does not presently maintain any other stock option or other
stock or long-term compensatory plans for its employees.
Employment Agreements
The Company has entered into five year Employment Agreements with each of
Claire E. Tarricone, Anthony Tarricone and Joseph Tarricone. The Employment
Agreements automatically extend for an additional one year at the end of each
<PAGE>
year of the term unless either party notifies the other of his, her or its
election not to so further extend the term. The employment contracts which
became effective on August 5, 1993, provide for annual salaries to such
individuals of (i) $100,000, $75,000 and $75,000 in years one and two,
respectively, (ii) $125,000, $100,000 and $100,000 in years three and four,
respectively, (iii) $150,000, $125,000 and $125,000 in year five, respectively.
Each of the Tarricones has waived her or his rights (as the case may be) to any
unpaid annual salary attributable to the fiscal years ending August 31, 1994,
August 31, 1995 and August 31, 1996. After the fifth year the Employment
Agreements provide that the base salary of such individuals will increase by an
amount equal to the greater of 15% or the annual percentage increase if any, in
the Consumer Price Index distributed by the United States Department of Labor.
Under such Employment Agreements, each of the foregoing persons must devote
substantially all of his or her time to the Company; provided, however, that
such person is entitled to be engaged as an employee by ATI. The Employment
Agreements are terminable by the Company on 60 days notice for "cause" or if any
of the Tarricone's have become so incapacitated that they are unable to resume,
within the ensuing 540 days, their respective employment with the Company by
reasons of physical or mental illness or injury, or if any shall not have
substantially performed their duties for 540 consecutive days by reason of any
such physical or mental illness.
Each of the Tarricones will be entitled to terminate his or her employment
and receive a severance payment equal to 2.99 times his or her base salary at
the time of termination upon (i) the acquisition of securities of the Company
representing 50% or more of the combined voting power of the Company's then
outstanding securities in a transaction to which any of the Tarricone's does not
consent, (ii) the future disposition by the Company of all or substantially all
of its business and/or assets in a transaction to which any of the Tarricone's
does not consent, (iii) the occurrence of any circumstance which, in the
reasonable judgment of any of the Tarricone's has the effect of significantly
reducing their duties or authority, (iv) the breach by the Company of its
material obligations under the Employment Agreement or (v) the termination of
the Employment Agreement by the Company for any reason other than for cause or
by mutual agreement of the Company and any of the Tarricones. Additionally, upon
termination, each of the Tarricones would receive (a) the estimated amount which
would have been payable to each pursuant to any bonus pool established by the
Company for the fiscal year during which such termination occurred; (b) health,
accident, life and disability insurance for the longer of one (1) year or the
balance of the Employment Agreement; and (c) immediate rights to exercise any
stock options granted, regardless of whether such options were exercisable at
the time of termination.
Each of the Employment Agreements contains a covenant not to compete with
the Company or solicit its customers or employees for a period of one (1) year
after the employment of any of the Tarricones is terminated, provided that such
person is entitled to be engaged as an employee by ATI.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Principal Stockholders
The following table sets forth information regarding ownership of the
Company's voting securities as of January 1, 1997 by (a) each person known by
the Company to beneficially own more than five percent (5%) of any class of the
Company's voting securities, (b) each Director of the Company and (c) all
Directors and Officers of the Company as a group. Except as otherwise indicated,
the named person has sole voting and investment power with respect to such
person's shares.
Name and Address of Title Of No. of Shares Percentage of General
Beneficial Owner Class Owned Class Owned(1) Voting Power(2)
Claire E. Tarricone Common Stock 1,142,184(3) 26.0%(3) 25.0%(3)
33 Hubbells Drive
Mt. Kisco, NY 10549
Anthony J. Tarricone Common Stock 1,142,183(4) 26.6%(4) 25.6%(4)
33 Hubbells Drive
Mt. Kisco, NY 10549
Joseph A. Tarricone Common Stock 1,142,183(5) 26.6%(5) 25.6%(5)
33 Hubbells Drive
Mt. Kisco, NY 10549
Alan Cianflone Series A 84,010 50.0% 2.1%
42 Virginia Lane Cumulative
Thornwood, NY 10594 Convertible
Redeemable
Preferred Stock
Jack Troccoli Series A 84,010 50.0% 2.1%
40 Reservoir Court Cumulative
Carmel, NY 10512 Convertible
Redeemable
Preferred Stock
Infinity Investors, Series B 572,246 100.0% 4.99%(6)
Ltd. Cumulative
27 Wellington Road Convertible
Cork, Ireland Redeemable
Preferred Stock
Edwin Goldwasser Common Stock -0- (7) (7)
7616 Mansfield Hollow
Drive
Delray Beach, Florida
33446
All Executive Officers and
Directors as a group
(4 persons) 3,188,850 64.87% 61.79%
--------- ------ ------
<PAGE>
(1) Based upon 3,873,601 common shares outstanding as of January 1, 1997.
(2) Based on 3,873,601 common and 168,020 Series A Cumulative Convertible
Redeemable Preferred Shares outstanding as of January 1, 1997. Each of the
168,020 shares of Series A Cumulative Convertible Redeemable Preferred
Stock presently carries (i.e., prior to conversion into Common Stock)
general voting power.
(3) Includes 400,000 shares of Common Stock that may be purchased pursuant to
presently exercisable stock options and 118,850 shares of Common Stock
that may be purchased by ATI pursuant to certain warrants held by ATI and
as to which Ms. Tarricone has an indirect beneficial interest through her
ownership of one third of ATI (59,425 of such shares may be purchased
pursuant to presently exercisable warrants, while another 59,425 shares
may be purchased within sixty days through the exercise of warrants). Ms.
Tarricone disclaims beneficial ownership as to two thirds of such 118,850
shares, which disclaimed amount correlates to the aggregate ownership
percentage in ATI held by Anthony J. Tarricone and Joseph A. Tarricone.
(4) Includes 300,000 shares of Common Stock that may be purchased pursuant to
presently exercisable stock options and 118,850 shares of Common Stock
that may be purchased by ATI pursuant to certain warrants held by ATI and
as to which Mr. Tarricone has an indirect beneficial interest through his
ownership of one third of ATI (59,425 of such shares may be purchased
pursuant to presently exercisable warrants, while another 59,425 shares
may be purchased within sixty days through the exercise of warrants). Mr.
Tarricone disclaims beneficial ownership as to two thirds of such 118,850
shares, which disclaimed amount correlates to the aggregate ownership
percentage in ATI held by Claire E. Tarricone and Joseph A. Tarricone.
(5) Includes 300,000 shares of Common Stock that may be purchased pursuant to
presently exercisable stock options and 118,850 shares of Common Stock
that may be purchased by ATI pursuant to certain warrants held by ATI and
as to which Mr. Tarricone has an indirect beneficial interest through his
ownership of one third of ATI (59,425 of such shares may be purchased
pursuant to presently exercisable warrants, while another 59,425 shares
may be purchased within sixty days through the exercise of warrants). Mr.
Tarricone disclaims beneficial ownership as to two thirds of such 118,850
shares, which disclaimed amount correlates to the aggregate ownership
percentage in ATI held by Anthony J. Tarricone and Claire E. Tarricone.
(6) The Series B Cumulative Convertible Redeemable Preferred Stock is
presently convertible by the holder thereof, provided that the maximum
amount of shares of Common Stock that may be held by such holder upon
conversion is 4.99% of the outstanding shares of Common Stock.
(7) Less than one percent.
As of January 1, 1997, 1,069,945 shares of Common Stock (approximately
27.6% of the outstanding Common Stock) were owned of record by Cede & Co., a
nominee of the Depository Trust Company. The Company has been advised by each of
the firms which Cede & Co. indicates own more than 5% of the Common Stock that,
except as set forth above, as of the most recent practical date it did not hold
more than 5% of the Company's outstanding voting securities for any single
person or, to its knowledge, any group.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 7, 1992, ATI distributed all of the capital stock of HQ
Propane to its sole shareholders, Claire E. Tarricone, Anthony Tarricone and
Joseph Tarricone. Simultaneously with the distribution, ATI transferred the
assets of the HQ Terminal division and all of the outstanding capital stock of
Rockland to HQ Propane in partial satisfaction of ATI's indebtedness to HQ
<PAGE>
Propane of $4,200,000 previously incurred by ATI in order to provide certain
capital improvements and additional working capital. The appraised fair market
value of the assets transferred by ATI to HQ Propane was $2,200,000. However,
the transaction was recorded at ATI's book value.
ATI's indebtedness to the Company is evidenced by a 6% Promissory Note,
dated August 31, 1993, with accrued interest and principal due on August 31,
1998 (the "ATI Note"), the balance of which aggregated $5,067,578 on August 31,
1994. On February 28, 1995 and July 31, 1995, ATI transferred 8 station
leaseholds and 1 fee property having an appraised fair market value of
$5,760,000 and 2 station leaseholds and 2 twenty year station leasehold
extensions for $985,000 respectively as partial satisfaction of the ATI note.
The fee property was transferred to the company subject to two mortgages payable
in the amounts of $140,999 and $496,177. A former director of one of the
entities holding a mortgage, Don Guarnieri, was formerly a director of the
Company. The balance of the ATI note currently aggregates $1,355,576 and is
secured by a security interest in the remaining 6 leasehold interest and
improvements underlying the 21 service stations currently operated by HQ
Gasoline.
In December 1992, HQ Propane entered into a management agreement with ATI
pursuant to which ATI furnishes clerical, administrative, accounting, payroll
and insurance services to HQ Propane. ATI receives a fee of $30,000 per month
for its services. The management agreement expires on August 31, 1998. Further,
HQ Propane entered into agreements with ATI under which it leased the 19 service
stations comprising its HQ Gasoline Division from ATI until August 31, 1998 and
pays rent for the service stations in the amount of $54,000 per month.
Additionally, until March 5, 1996 (see the immediately succeeding paragraph),
the Company was paying to ATI a license fee of $.01 per gallon of gasoline and
diesel fuel sold for the rights to use the "ATI" trademark. As a result of the
combined extension and transfer of 12 station leaseholds, and the conveyance of
1 fee property, the Company now leases 8 service stations from ATI at a reduced
rent payment of $18,850 per month.
On March 5, 1996, the Company issued warrants to purchase 297,125 shares
of the Company's common stock to ATI in exchange for the Company's exclusive
right to use the "ATI" trademark. The exercise price of the warrants is equal to
the lessor of $2.60 per share or a 40% discount from the average closing bid
price. The average closing bid price is calculated based on the average of the
closing bid prices of the Company's Common Stock as reported by the NASDAQ Small
Cap stock market for the five trading days immediately preceding the date of the
exercise of the warrant. The warrants provide that 59,425 vest immediately
(i.e., on March 5, 1996), with the balance becoming vested in four equal annual
installments. The market price at issuance was $4.30 per share. In consideration
of the issuance of such warrants, the Company is no longer required to pay the
license fee of $.01 per gallon for gasoline station sales.
HQ Propane cannot operate its principal terminal facility or Rockland Fuel
until such time as the pending applications for a terminal operator's license
and diesel license from the State of New York have been approved. Accordingly,
<PAGE>
ATI has continued to operate the terminal facility and Rockland for HQ Propane's
benefit. Upon the issuance of such licenses, HQ Propane and Rockland Fuel will
assume operations of their respective facilities directly. ATI also supplies the
Company's operating divisions with fuel oil, diesel fuel and gasoline at ATI's
cost plus one quarter of one cent ($.0025) per gallon purchased, which
aggregated $51,112 during the fiscal year ended August 31, 1994 and $42,494
during the fiscal year ended August 31, 1995, and $38,671 during the fiscal year
ended August 31, 1996.
The Company has outstanding certain promissory notes in the aggregate
principal amount of $321,426 issued in connection with a private placement of
165,000 shares of Common Stock of the Company ("Bridge Notes"). Interest on the
Bridge Notes is payable quarterly at a rate of 8% per annum, and payment of
principal thereof is tied to the exercise of the Company's 1,600,000 Class A and
1,600,000 Class B Redeemable Warrants (the "Warrants") which were issued, and
subsequently redeemed, by the Company. In light of the Company's redemption of
its outstanding Warrants, it is unclear when its obligation to make principal
payments on the outstanding Bridge Notes will come due. However, the Company
acknowledges an obligation to make principal payments on the Bridge Notes and
continues to maintain such obligation on its balance sheet. Don Guarnieri, a
former Director of the Company, purchased one unit in connection with such
private placement, which unit was comprised of a $25,000 promissory note from
the Company and 8,250 shares of the Company's common stock.
Claire, Anthony and Joseph Tarricone are also parties to a Buy/Sell
Agreement pursuant to which, upon the death or disability of any of them, the
non-deceased or non- disabled shareholders are required to purchase the shares
of the Company owned by the deceased or disabled shareholder for a price equal
to the fair market value of such shares. Each of the Tarricones holds a
$3,000,000 insurance policy on the life of the others to partially fund the
buyout of the shares upon death. In addition, the Tarricones have $1,000,000 of
disability buyout insurance which will fund the buyout of such shares in the
event of permanent disability. In the event that the proceeds of such insurance
policies are insufficient to pay the full price for such shares, the balance of
the purchase price for the shares will be paid over a ten year period.
On August 30, 1996, Claire Tarricone loaned to the Company $80,000, with
interest at 8% per annum, payable on demand.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE(S)
Halstead Energy Corp. and Subsidiaries:
Independent Auditors' Report.........................F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of
August 31, 1996 and 1995........................F-3, F-4
Consolidated Statements of Operations for
the years ended August 31, 1996 and 1995........F-5
Consolidated Statements of Stockholders'
Equity for the years ended August 31,
1996 and 1995...................................F-6
Consolidated Statements of Cash Flows for
the years ended August 31, 1996 and 1995........F-7
Notes to the Consolidated Financial Statements..F-8, F-31
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Halstead Energy Corp.
Mount Kisco, New York
We have audited the accompanying consolidated balance sheets of Halstead
Energy Corp. and subsidiaries as of August 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated 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 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.
The August 31, 1996 and 1995 financial statements have been restated
because errors were detected to August 31, 1995 and prior reports during the
course of this audit (see Note 17).
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Halstead
Energy Corp. and Subsidiaries as of August 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
GOLDMAN & MURPHY, LLP
Valley Stream, New York
January 16, 1997, except for Note 17, dated May 2, 1997
F-2
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31,
1996 1995
As Restated As Restated
A S S E T S
CURRENT ASSETS
Cash and Cash Equivalent......... $ 2,061,474 $ -0-
Accounts Receivable - Trade, Net
of Allowances for
Uncollectible Receivables of
$227,869 and $189,817
respectively (Note 2)............ 1,628,070 1,349,351
Rent Receivable.................. 122,497 85,543
Other Receivable................. 4,798 7,395
Inventory (Note 3)............... 251,450 192,238
Prepaid Expenses (Note 4)........ 195,361 136,498
Prepaid Income Taxes............. 6,558 -0-
--------- ----------
TOTAL CURRENT ASSETS............ 4,270,208 1,771,025
NET DEFERRED TAX ASSET (Note 17) 612,406 716,612
--------- ---------
PROPERTY, PLANT AND EQUIPMENT - NET (Note 5)
Land ............................ 894,000 894,000
Property, Plant and Equipment ... 10,952,437 9,624,042
---------- ---------
TOTAL PROPERTY, PLANT AND 11,846,437 10,518,042
EQUIPMENT - NET
OTHER ASSETS
Note Receivable.................. 80,000 -0-
Note Receivable - Related Party
(Note 7)........................... 1,355,516 1,192,386
Intangible Assets - Net (Note 6). 1,098,629 1,088,255
Deposits......................... 2,045 2,045
TOTAL OTHER ASSETS.............. 2,536,250 2,282,686
--------- ---------
TOTAL ASSETS (Note 17).......... $ 19,265,301 $ 15,287,915
============ ============
See Notes to Consolidated Financial Statements
F-3
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31,
1996 1995
As Restated As Restated
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts Payable - Trade................ 545,595 $ 706,832
Cash Overdraft.......................... -0- 66,351
Current Portion of Long-Term Debt (Note 8) 284,802 293,055
Customer Credit Balances Payable........ 105,791 128,906
Accrued Expenses........................ 171,740 90,865
Sales Tax Payable....................... 17,371 6,816
Deferred Revenue - Service Contracts
(Note 10) 13,760 14,204
Security Deposits Payable............... 259,558 219,200
Income Taxes Payable (Note 11).......... 10,454 167,587
Note Payable - Officer.................. 80,000 -0-
Pension Payable......................... 5,097 -0-
------ ------
TOTAL CURRENT LIABILITIES........... 1,494,168 1,693,816
LONG-TERM LIABILITIES
Private Placement Notes (Note 8)....... 321,426 462,637
Long-Term Debt (Note 8)................ 2,348,565 2,483,328
TOTAL LONG-TERM LIABILITIES......... 2,669,991 2,945,965
TOTAL LIABILITIES (Note 17)......... 4,164,159 4,639,781
Preferred Stock, $.001 Par Value,
168,020 Shares Authorized-Series A
7.5% Cumulative Convertible Redeemable
168,020 Shares Issued and
Outstanding ($1,008,120 aggregate
liquidation preference) 168 168
Paid In Capital: Preferred............ 1,064,001 1,064,001
.................................. 1,064,169 1,064,169
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 Par Value,
5,000,000 Shares Authorized
Preferred Stock, $.001 Par Value,
580,646 Shares Authorized-Series B
8.0% Cumulative Convertible 572,246
Shares Issued and Outstanding
($4,434,900 aggregate liquidation
preference) 572 -0-
Common Stock, $.001 Par Value,50,000,000
Shares Authorized, 3,491,340 and
3,338,117 Shares Issued and Outstanding
as of August 31, 1996 and August 31,
1995, 3,492 3,338
Paid in Capital: Preferred............ 3,815,328 -0-
Common (As restated in 1995) (Note 17). 4,896,947 4,364,721
Retained Earnings (Note 17)............ 5,320,634 5,215,906
TOTAL STOCKHOLDERS' EQUITY (Note 17) 14,036,973 9,583,965
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY (Note 17)....................$ 19,265,301 $ 15,287,915
See Notes to Consolidated Financial Statements
F-4
<PAGE>
F - 30
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
August 31,
1996 1995
As Restated As Restated
Sales.....................................$ 15,312,260 $ 15,174,559
Cost of Sales............................. 10,734,200 11,059,346
GROSS PROFIT.............................. 4,578,060 4,115,213
Selling, General & Administrative Expenses 3,278,968 2,916,401
Management Fee, Related Party (Note 12)... 360,000 360,000
Bad Debt Expense (Note 9)................. 39,869 74,158
Net Rental Expense (Income)............... (418,478) (189,948)
Royalty Fee (Note 12 E)................... 96,102 99,538
Depreciation & Amortization............... 679,842 451,551
-------- --------
INCOME FROM OPERATIONS................. 541,757 403,513
OTHER INCOME AND (EXPENSES)
Interest Income........................ 101,987 247,452
Interest Expense....................... (398,889) (248,017)
Other Income........................... 38,935 115,433
------- --------
NET INCOME BEFORE TAXES................ 283,790 518,381
PROVISION FOR INCOME TAXES:
(Notes 11 & 17)
Current (Note 17)...................... 14,160 268,246
Deferred............................... 88,536 (6,513)
---------- --------
NET INCOME (Note 17)................... $ 181,094 $ 256,648
======= =======
Net Income Per Share (Note 20)
Earnings Per Share..................... $ 0.00 $ .08
---- ---
Primary EPS............................ 0.00 $ .08
----- ---
Fully Diluted EPS...................... $ 0.00 $ .08
----- ---
Weighted Average Number of Common and Common
Equivalent Shares Outstanding.......... 3,416,473 3,061,418
---------- ----------
See Notes to Consolidated Financial Statements
F-5
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK TOTAL
$.001 PAR VALUE $.001 PAR VALUE PAID IN RETAINED STOCKHOLDERS'
ISSUED AMOUNT ISSUED AMOUNT CAPITAL EARNINGS EQUITY
Balances at
August 31,1994
(As previously
reported) 0 $ 0 2,779,050 $2,779 $ 2,484,741 $5,018,724 $7,506,244
Adjustment for
the omission of
paid in capital
( Note 17) 0 0 0 0 984,477 0 984,477
Adjustment for
the understatement
of deferred
income tax liability
(Note 17) 0 0 0 0 0 (46,865) (46,865)
-- -- -- -- -- ----------- ----------
Balances at August
31, 1994 (As
restated in 1995)
(Note 17) 0 0 2,779,050 2,779 3,469,218 4,971,859 8,443,856
October 1994,
Pursuant to Private
Placements, $1.75
per share 0 0 115,000 115 201,135 0 201,250
December 1994
through February
1995, Pursuant to
Private Placement,
$1.75 per share 0 0 90,000 90 157,410 0 157,500
March 1995 through
May 1995, Pursuant
to Private Placement,
$1.75 per share 0 0 352,142 352 615,897 0 616,249
Employee
Compensation
3/95, $2.50
per share 0 0 1,925 2 4,811 0 4,813
Private Placement
Costs 0 0 0 0 (83,750) 0 (83,750)
Net Income -
August 31, 1995
(As restated in
1995) (Note 17) 0 0 0 0 0 256,648 256,648
Cash Dividends
Declared:
Preferred,
Series A, $0.45
per share 0 0 0 0 0 (12,601) (12,601)
-- -- -- -- -- --------- ---------
Balances at
August 31, 1995
(As restated in
1995) (Note 17) 0 0 3,338,117 3,338 4,364,721 5,215,906 9,583,965
Cash Dividends
Declared:
Preferred,
Series A $0.45
per share 0 0 0 0 0 (75,610) (75,610)
Cash Dividends
Declared:
Preferred,
Series B 0 0 0 0 0 (756) (756)
Debentures
Converted at an
average price of
$3.48 per share 0 0 104,647 105 363,740 0 363,845
Employee
Compensation
March 1996,
$5.38 per share 0 0 2,250 2 12,092 0 12,094
Preferred Stock
Issued at $7.75
per share 580,646 580 0 0 4,499,420 0 4,500,000
Private
Placement Costs
- -Commissions 0 0 0 0 (625,246) 0 (625,246)
Conversion of
Preferred Shares
to Common (8,400) (8) 18,816 19 745 0 756
Conversion of
Note Payable to
Common Shares 0 0 27,510 28 46,398 0 46,426
Issuance of
Stock Warrants
for 297,125 Shares
March 1996 0 0 0 0 511,055 0 511,055
Deferred
Expense-Stock
Warrants 0 0 0 0 (460,650) 0 (460,650)
Net Income -
August 31,1996 0 0 0 0 0 181,094 181,094
-- -- -- -- -- --------- ----------
Balances at
August 31, 1996
(as restated in
1996) $740,266 $572 $3,491,340 $3,492 $8,712,275 $5,320,634 $14,036,973
======= ==== ========== ===== ========= ========= ==========
See Notes to Consolidated Financial Statements
F-6
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
August 31,
1996 1995
As Restated As Restated
Cash Flows from Operating Activities:
Net Income (Note 17).....................181,094 $256,648
Adjustments to Reconcile Net Income
to Net Cash used in Operating
Activities, Depreciation and
Amortization.............................667,479 451,551
Amortization of Deferred Expense
-Trademark............................... 50,405 -0-
Bad Debt Provision....................... 38,052 52,647
Deferred Income Tax Adjustments
(Note 17)................................103,756 3,550
(Increase) Decrease In Accounts
Receivable..............................(316,771) (61,811)
(Increase) Decrease In Rent Receivable...(36,954) (85,543)
(Increase) Decrease In Other Receivable.. 2,597 (7,395)
(Increase) Decrease In Inventory.........(59,212) 61,117
(Increase) Decrease In Prepaid Expenses..(58,863) (24,242)
(Increase) Decrease In Prepaid Income
Taxes................................... (6,558) -0-
(Increase) Decrease In Deposits.......... -0- 325
Increase (Decrease) In Accounts
Payable - Trade and Accrued
Expenses..................................(80,362) 280,518
Increase (Decrease) Sales Taxes........... 10,555 2,134
Increase (Decrease) In Customer Credit
Balances Payable..........................(23,115) 17,837
Increase (Decrease) In Pension Plan
Payable................................... 5,097 -0-
Increase (Decrease) In Deferred Revenue... (444) (57)
Increase (Decrease) In Income Taxes
Payable..................................(157,133) 111,455
(Increase) Decrease In Note Payable
- Officer................................ 80,000 -0-
(Increase) Decrease In Discount on Notes
Payable.................................. 12,363 125,337
(Increase) Decrease In Security Deposits
Payable.................................. 40,358 9,167
------- ------
TOTAL ADJUSTMENTS........................ 271,250 936,590
Net Cash Provided By Operations.......... 452,344 1,193,238
Cash Flows From Investing Activities:
Intangible Assets........................(84,235) (1,060,179)
Acquisition of Property and Equipment....(1,922,013)(7,548,434)
Advances in Note Receivable..............(80,000) -0-
Advances in Note Receivable - ATI........(1,888,190)(3,229,808)
Repayments in Note Receivable - ATI...... 1,725,000 7,105,000
Net Cash Provided (Used) By Investing
Activities...............................(2,249,438)(4,733,421)
Cash Flows From Financing Activities:
Proceeds from Capital Contribution.......4,297,875 1,960,231
Preferred Dividends......................(76,366) (12,601)
Increase (Decrease) in Long-Term Debt....(296,590) 1,498,754
Increase (Decrease) in Cash Overdraft.... (66,351) 66,351
-------- -------
Net Cash Provided (Used) by Financing
Activities...............................3,858,568 3,512,735
------------ ---------
Net Increase (Decrease) In Cash...........2,061,474 (27,448)
Cash and Cash Equivalents at Beginning
of Period................................ -0- 27,448
---- -------
Cash and Cash Equivalents at End
of Period................................2,061,474 $ -0-
============ ==========
Supplemental Disclosures - Cash Paid
During the Year for:
Interest Expense......................... 361,931 $ 227,862
Income Taxes............................. 162,631 $ 175,948
Acquisition of Property & Equipment...... 557,013 $ 679,435
Supplemental Schedule of Non-cash Investing and Financing Activities:
On March 1, 1996, the company granted ATI warrants for use of its trademark.
Amortization for 1996 was $50,405 (Note 12(E)). During 1996, the company
acquired two leaseholds with a total value of $1,365,000 from ATI as payment
on its note receivable (Note 14(D)).
On June 8, 1995 the company issued preferred stock to acquire White Plains Fuel
Inc., valued at $1,064,169 (Note 14(B)).
See Notes to Consolidated Financial Statements
F-7
<PAGE>
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Organization
Halstead Energy Corp. (the "Company") (formerly Castleview Capital Corp., a
Nevada Corporation) was incorporated in the state of Utah on January 15, 1986.
Effective October 8, 1990, the Company changed its domicile to the state of
Nevada. On August 5, 1993, the Company acquired Halstead Quinn Propane, Inc.
("HQP"). This transaction has been accounted for as a purchase, in which HQP was
the acquiring corporation, and the Company was the acquired corporation (reverse
acquisition). The financial statements account for the transaction as a
recapitalization of HQP, with the issuance of 2,170,000 shares of Common Stock
for the net assets of the company.
The Company is engaged in the retail sale of propane, propane equipment,
fuel oil, gasoline, and diesel fuel. Fuel oil, gasoline, and diesel fuel are
also distributed wholesale. Finally, the Company services propane and fuel oil
heating equipment.
(B) Principles of Consolidation
The consolidated financial statements include the accounts of Halstead
Energy Corp. and its wholly-owned subsidiaries White Plains Fuel, Inc., Halstead
Quinn Propane, Inc., and Rockland Fuel Oil Inc., a wholly owned subsidiary of
HQP. All inter-company accounts have been eliminated.
(C) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(D) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of 90 days or less to be cash equivalents for financial statement
purposes.
F-8
<PAGE>
(E) Inventories
All inventories are stated at the lower of cost or market. A monthly moving
average method is used for determining inventory costs.
(F) Depreciation and Amortization
Depreciation of property and equipment is computed by use of the
straight-line method for financial statement purposes over their estimated
useful lives. The rates are as follows:
Leaseholds 37.5 years
Buildings and improvements 10-30 years
Equipment 3-20 years
Furniture and fixtures 3-10 years
Vehicles 3-10 years
(G) Intangible Assets
The cost of intangible assets is amortized on a straight-line basis over
the period the Company expects to receive benefits. The periods used are as
follows:
Customer List 15 years
Goodwill 40 years
(H) 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.
(I) Revenue Recognition
Revenue is recognized at the time the products are shipped to and accepted
by the customer either directly from the Company or a vendor on drop shipments
or from pick-up company facilities. Retail revenue is recognized when delivered
to the customer (see Note 10).
F-9
<PAGE>
(J) Concentration of Credit Risk
1. Geographic Area
Substantially all of the Company's customers are located within the
Westchester, Rockland, Putnam, Orange, Dutchess and Bronx Counties.
2. Major Customers and Vendors
A. The Company has certain significant customers resulting from the storage
of fuel at its terminals. These customers represent 1.5%, 3.5% and 2.7%
respectively of total revenues, or an aggregate of 7.9% for fiscal 1995, and
2.5%, 3.5%, and 2.8%, or 8.8% aggregate for fiscal 1996.
B. The Company has certain significant vendors, which represent purchases
of propane, gasoline and oil for its operations. Those vendors represent
purchases for propane of 6% and gasoline and oil of 88% of total purchases for
fiscal 1995, and 8% and 93% for fiscal 1996.
3. Consideration of Credit Risk
The companies maintain their cash in bank deposit accounts at high credit
quality financial institutions. The balances, at times, may exceed federally
insured limits. At August 31, 1996, the Company exceeded the insured limit by
approximately $1,921,982.
(K) Environmental Costs
The Company expenses, on a current basis, costs associated with managing
hazardous substances and pollution in ongoing operations. The Company also
accrues for costs associated with the premediation of environmental pollution
when it becomes probable that a liability has been incurred and the amount can
be reasonably estimated.
(L) Earnings Per Share
Earnings per share are computed based on the weighted average number of
shares outstanding during the periods presented. Common stock equivalents are
included in the calculation when they are dilutive.
(M) New Authoritative Pronouncements
The Accounting Standard Executive Committee has issued Statement of
Position 93-7 "Reporting on Advertising Costs" ("SOP 93-7"). The Company has
adopted the provisions of SOP 93-7, and there is no effect on the income before
F-10
<PAGE>
extraordinary items, net income, and related per share amounts. The Company is
expending advertising costs as incurred. These expenditures are not for direct
response advertising.
The Company's advertising expenses are as follows:
August 31,
1996 1995
Advertising $ 64,435 $ 12,435
====== ======
Note 2 - ACCOUNTS RECEIVABLE - TRADE
The Company has accounts receivable in the normal course of business, net
of allowances for uncollectible receivables, of the following:
August 31,
1996 1995
Trade $ 1,855,939 $ 1,539,168
Less: Allowances (227,869) (189,817)
--------- ---------
NET $ 1,628,070 $ 1,349,351
========= =========
Note 3 - INVENTORY
Inventory consisted of the following:
August 31,
1996 1995
Propane $ 10,985 $ 5,393
Gasoline 110,769 88,372
Service Parts & Supplies 39,500 39,500
# 2 Fuel Oil 38,978 47,867
Diesel 51,218 11,106
------- -------
TOTAL $ 251,450 $ 192,238
======= =======
F-11
<PAGE>
Note 4 - PREPAID EXPENSES
Prepaid Expenses consisted of the following:
August 31,
1996 1995
Prepaid Real Estate Taxes$ 105,364 $ 106,019
Prepaid Insurance 65,014 -0-
Prepaid Financing Costs 24,983 28,924
Miscellaneous -0- 1,555
TOTAL $ 195,361 $ 136,498
======= =======
Note 5 - PROPERTY, PLANT & EQUIPMENT
Property, Plant & Equipment are stated at cost. The components of Property,
Plant & Equipment are summarized as follows at:
August 31,
1996 1995
Land $ 894,000 $ 894,000
Gas Station Leaseholds 8,110,000 6,745,000
Building and Improvements 2,312,731 2,227,660
Equipment 1,848,638 1,620,612
Furniture & Fixtures 81,790 29,099
Vehicles 1,119,285 928,061
TOTAL 14,366,444 12,444,432
Less:
Accumulated Depreciation (2,520,007) (1,926,390)
NET $ 11,846,437 $ 10,518,042
========== ==========
F-12
<PAGE>
Note 6 - INTANGIBLE ASSETS
Goodwill represents the excess of the cost of assets acquired over the fair
value of their net assets at dates of acquisition. Customer list represents the
fair value of the customer list purchased from White Plains Fuel, Inc. less a
deficiency of cost under the fair value of its net assets at the acquisition
date. Amortization expense charged to operations for 1996 and 1995 was $73,861
and $19,546, respectively.
The following is a summary of Intangible Assets.
August 31,
1996 1995
Customer List $ 1,144,414 $ 1,060,179
Goodwill 72,797 72,797
------- -------
TOTAL 1,217,211 1,132,976
Less:
Accumulated Amortization (118,582) (44,721)
NET $ 1,098,629 $ 1,088,255
========= =========
Note 7 - NOTE RECEIVABLE - RELATED PARTY
(A) The Company had advanced funds to A. Tarricone, Inc. ("ATI"), it's former
parent company. These advances, which originated approximately during
fiscal 1990, are evidenced by a demand promissory note with interest at
6%, due on August 3, 1998. The outstanding note receivable balance was
satisfied by ATI on February 28, 1995 (see Note 14).
(B) The Company has had transactions with ATI since February 28, 1995, the
balance of which is represented above (see Note 14). This debt is
evidenced by a promissory note with interest at 6% due on August 31, 2000.
The Company has not established an allowance for uncollectible amounts,
due to the fact that ATI has collateralized its note with certain real
estate having significant fair market value.
August 31,
1996 1995
Note Receivable - Related Party $ 1,355,576 $ 1,192,386
F-13
<PAGE>
Note 8 - DEBT
(A) Private Placements
The Company is indebted to certain investors for amounts in connection
with the Company's private placement (see Note 13(A)).
The private placement consisted of 20 units in the amount of $25,000 per
unit, each unit consisting of (i) a note payable in the amount of $25,000
with interest payable at a rate of 8%, and (ii) 8,250 shares of restricted
Common Stock of the Company. The value of such shares has been accounted
as $1.50 per share. Accordingly, the effective interest rate on such notes
is calculated at approximately 58%, taking into consideration the discount
on the notes. The following summarizes such notes payable:
August 31,
1996 1995
Face Amount of Note Payable $ 321,426 $ 475,000
Less:
Discount of Note Payable
Net of Amortization -0- (12,363)
Net $ 321,426 $ 462,637
======= =======
F-14
<PAGE>
(B) Notes Payable
August 31,
1996 1995
1. Bank commercial mortgage (i) due
12/20/99 with interest at 10.5%,
or 1% above prime.....................$ 134,000 $ 173,600
2. Bank commercial mortgage (i) due
10/01/00 with interest at 1%
above prime........................... 469,200 -0-
3. Bank demand note (ii) due 9/29/95
with interest at 1% above prime.
This note was paid off on September
29, 1995.............................. -0- 500,000
4. Bank commercial mortgage (iii) due
5/17/99 with interest at 8.5%......... 425,000 458,334
5. $500,000 revolving line of credit
(iii) with a bank due 5/17/97
with interest at 11.5% currently,
or 2.5% above prime................... 500,000 500,000
6. Bank commercial mortgage (iv) due
1/16/01 with interest at 9.25%........ 470,914 488,127
7. Commercial mortgage (iv) due
1/15/01 with interest at 12.5%........ 136,364 139,550
8. The company was indebted to bank
for a $35,000 line of credit
due 12/31/95 with interest at 2%
above prime........................... -0- 35,000
9. The company was indebted to an
individual for $50,000. This
is a demand note with interest at 0%.. -0- 50,000
10.Notes payable for certain equipment
financed through several
purchase money agreements. These
notes are payable in monthly
installments or principal and
interest, and collateralized by
such equipment........................ 497,889 431,772
Total.................................2,633,367 2,776,383
Current Portion....................... (284,802) (293,055)
--------- ---------
TOTAL................................$2,348,565$ 2,483,328
(i) is secured by second mortgage on the Alexander Street
Terminal.
(ii) is secured by a general security agreement on personal
property.
(iii) is secured by a first mortgage on both the company's
headquarters, and terminal facility at Alexander Street, and
further by an assignment of station leases. The commitment
calls for certain covenants relating to minimum cash
balances, rent deposits, and insurance. Certain officers of
the company have personally guaranteed the loan as well.
(iv) is secured the retail gas station acquired from A.
Tarricone, Inc. on February 28, 1995 (Note 7).
F-15
<PAGE>
Note 9 - BAD DEBT EXPENSE
The Company has established a reserve for uncollectible receivables
relating to trade activities from the normal course of business. During fiscal
1996 and 1995, the Company had bad debts in the amounts of $39,869 and $74,158,
respectively.
Note 10 - DEFERRED REVENUE
Deferred revenue represents the unamortized balance of annual unearned
service contract revenue for burner service. These amounts are being amortized
into income monthly during the heating season when the majority of the service
calls are made. Deferred revenue was summarized as follows at:
August 31,
1996 1995
Deferred Revenue $ 13,760 $ 14,204
====== ======
Note 11 - INCOME TAXES
The Company utilizes the Financial Accounting Standard Board issued
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("Statement No. 109"). Statement No. 109 requires companies to change
from the deferral method to the liability method of accounting for income taxes.
Statement No. 109 requires the utilization, if any, of the net operating loss
carry-forwards of the Company to be recorded as part of the regular income tax
provision and not as an extraordinary item. The Company has adopted Statement
No. 109 for periods after the fiscal year ended August 31, 1993.
The Company's ability to file a consolidated return and to use its net
operating loss carryovers from ATI and Castleview Capital Corp. to offset income
allocable to periods after a public offering is extremely limited. Under the Tax
Reform Act of 1986, the Company's taxable income in any tax year ending after a
more than 50 percentage point change in ownership that can be offset by a net
operating loss carryover before such ownership change cannot exceed a prescribed
rate of the value if the Company's stock on the date of ownership change. For
this purpose, except as may otherwise be provided in regulations, the holder of
a convertible stock or warrants to acquire stock is treated as owning the
underlying stock if such presumption would result in an ownership shift.
In such case, subsequent exercise of a convertible stock or warrants is
disregarded. Since the rule is applied on a warrant-by warrant basis, certain
convertible securities and warrants may be deemed exercised while others are
not. Similar rules apply to the contingent rights to acquire stock and other
similar interests.
F-16
<PAGE>
Deferred income taxes are provided for to reflect the difference in the
timing of deductions from earnings for financial statements and income tax
reporting and are primarily due to the use of accelerated depreciation methods
for income tax return purposes.
Income tax provision is summarized as follows for the years ended August
31, 1996 and 1995 (as restated, see Note 17).
August 31,
1996 1995
Current 14,160 $ 277,466
Deferred 88,536 (6,513)
------ -------
TOTAL $ 102,696 $ 270,953
======= =======
August 31,
1996 1995
Statutory Rates 34% 34%
Income Taxes at Statutory Rates $ 186,899 $ 298,287
Realization of Deferred Tax
Benefit (70,261) (75,759)
116,638 222,528
Income Tax Effects Related to the Following Items:
Benefit from Accelerated
Depreciation (42,928) (5,123)
Non-deductible Items 28,986 53,548
------- -------
TOTAL $ 102,696 $ 270,953
======= =======
Effective Rate of Income Tax 36.2% 50.0%
Components of Net Deferred Tax Asset:
Deferred Tax Asset $ 698,661 $ 768,922
Deferred Tax Liability 86,255 70,261
------- -------
Net Deferred Tax Asset $ 612,406 $ 698,661
======= =======
F-17
<PAGE>
(A) See Note 7.
(B) See Note 14.
(C) Management Agreement - A. Tarricone Inc.
The Company reimburses ATI, it's former parent and brother-sister
corporation with the same majority shareholders, for certain monthly expenses
relating to clerical, administrative, accounting, payroll, and insurance
expenses. This agreement is for fiscal years subsequent to the December 1992
spin off, commencing in December 1992, and expiring on August 31, 1998. The
agreement calls for the reimbursement of the approximate actual costs incurred
by ATI for such expenses in the amount of $30,000 per month. Such management fee
is accrued monthly, and recorded as a reduction of the loan due from ATI (see
Note 7). For the years ended August 31, 1996 and 1995, the Company accrued
$360,000 and $360,000, respectively, in connection with such expenses.
(D) Terminal Operations
The Company's Alexander Street Terminal and Rockland Fuel Oil, Inc., which
provides storage for retail and wholesale distribution of fuel oil, diesel and
gasoline, is operated by the Company's former parent, ATI, until such time that
the Company obtains its terminal operator's license from the State of New York
(see Note 13(C)). The cost of these services is incorporated in the cost of
product at $.0025 per gallon. For the fiscal years ended August 31, 1996 and
1995, the amounts paid to such related party were $38,671 and $51,112,
respectively.
(E) Royalty Agreement
The Company entered into an agreement on September 1, 1993, whereby it pays
a royalty fee of $0.01 per gallon of gasoline and diesel, sold at the nineteen
(19) retail gas stations it was previously leasing from ATI. The Company
purchased thirteen (13) of the station leaseholds from ATI (see Note 14), but
the royalty agreement is still in force on all nineteen (19) stations until
August 31, 1998. As of March 1, 1996, the Company granted warrants to ATI for
use of its trademark for 5 years, subject to limitations based on sales volume.
These warrants were valued at $511,055, which approximates the future value for
use of the trademark based on past compensation. Amortization for 1996 was
$50,405. The royalty fees incurred for the fiscal years ended August 31, 1996
and 1995, inclusive of amortization, were $96,102 and $99,538, respectively.
F-18
<PAGE>
(F) Leases
The Company had entered into a lease agreement with ATI, whereby the
Company was to lease and operate one (1) retail gas station for a period of five
(5) years. The agreement became effective September 1, 1993. Subsequently, on
February 28, 1995 and July 31, 1995 (see Note 14), the Company acquired the
underlying lease in partial satisfaction of the Company's outstanding Note
Receivable due from ATI (see Note 7).
Note 13 - COMMITMENTS AND CONTINGENCIES
(A) Private Placements
In June, 1993, the Company entered into a letter of intent with an
investment banker to provide financing in the amount of $500,000, in the form of
a private placement not requiring registration, pursuant to Section 2(3) of the
Securities Act of 1933, as amended, and SEC release #33-929, dated July 29,
1936. The private placement consists of 20 units in the amount of $25,000 per
unit, each unit consisting of (i) a note payable in the amount of $25,000 with
interest payable at 8% and (ii) 8,250 shares of restricted Common Stock issued
from the Company. Each note was to be repaid in full with accrued interest
within ten days of the Company effectuating a warrant conversion resulting in
gross proceeds of at least $1,000,000.
The Company has accounted for the shares issued in connection with the
private placement notes in accordance with APB 14, discounting the notes based
on the fair value at $1.50 per share. The amortized interest expense for
Discount on Notes Payable for the periods ended August 31, 1996 and 1995 was
$12,363 and $125,337, respectively.
Following is a summary of Private Placement activity from June 1993 through
August 31, 1996:
Year Ended Activity Amount
August 31, 1993 9 Units Sold $ 225,000
August 31, 1994 12 Units Sold 300,000
August 31, 1995 2 Units Repaid (50,000)
Aggregate value of August 31, 1995: 475,000
August 31, 1996 5 Units Repaid (125,000)
August 31, 1996 3 Units Converted(i) (75,000)
August 31, 1996 3 Units Amended(i) 46,462
Aggregate value of August 31, 1996: $ 321,462
------------------------
F-19
<PAGE>
(i) On August 23, 1996, the Company converted three (3)
Private Placement units valued at $92,852 ($75,000
principle plus $17,851.61 accrued interest) which was
split evenly with $46,426 converted to Common Stock and
$46,426 representing principle balance of amended
units, for a new aggregate amount of $321,462 as per
above (see Note 8).
------------------------
On April 11, 1994, the Company registered 3,200,000 shares of its Common
Stock for sale by the Company upon the exercise of its then outstanding
1,600,000 Class A and 1,600,000 Class B Redeemable Common Stock Purchase
Warrants (collectively, the "Warrants"). The Warrants were distributed by the
Company to all stockholders of record in connection with the Company's
acquisition of HQP. As of August 11, 1994, the Company redeemed all outstanding
Warrants at a price of .001 per Warrant redeemed.
In light of the Company's redemption of its outstanding Warrants, it is
unclear when its obligation to make principal payments on the Private Placement
notes will come due. However, the Company acknowledges an obligation to make
principal payments on the Private Placement notes and continues to maintain such
obligation on its balance sheet.
(B) Employment Agreements
The Company has entered into employment agreements with its President, Vice
President/Secretary, and Vice President/ Treasurer for five year terms. The
agreements provide for the following base compensation:
Years President VP/Secretary VP/Treasurer
8/5/93-8/4/95$ 100,000 $ 75,000 $ 75,000
8/5/95-8/4/97$ 125,000 $ 100,000 $ 100,000
8/5/97-8/4/98$ 150,000 $ 125,000 $ 125,000
Compensation paid to the officers from 9/1/93 to 8/31/96 was less than the
amounts stated above. However, the officers signed revised agreements at the
beginning of each fiscal year through 8/31/96, waiving their right to additional
compensation.
(C) Licenses Pending
HQP's principal terminal facility is currently operated by ATI pending
approvals of HQP's application with State of New York for a terminal operator's
and diesel motor fuel license, and the applications of Rockland Fuel Oil, Inc.
("Rockland") and White Plains Fuel, Inc. ("WPF") for their respective diesel
motor fuel licenses.
F-20
<PAGE>
On October 6, 1995, New York State requested that HQP, Rockland and WPF
post certain bonds as a prerequisite to obtaining the foregoing licenses. On
October 25, 1995, these bonds were obtained by the Company in compliance with
the State's request. At that time, management believed the Company had
substantially completed all steps necessary to receiving such licenses. However,
these licenses have not as yet been granted. Management is awaiting approval of
these licenses, although there can be no assurances in this regard.
(D) Litigation
The Company is not party to any litigation which individually or in the
aggregate could reasonably be expected to have a material adverse effect on the
Company.
Note 14 - ACQUISITIONS
(A) On February 28, 1995 the Company acquired eight gas station leaseholds
and one fee property from its related party ATI (see Note 12). These stations
are located throughout the operating area of Company.
The purchase price for the stations was as follows:
1.Eight leaseholds (average additional
years added to existing leases, 12 years) $ 5,010,000
2.One Fee Property 750,000
Less: Mortgages Assumed (637,176)
$ 5,122,824
This acquisition was in partial satisfaction of the existing note
receivable due from ATI.
(B) On June 8, 1995 the Company purchased the stock of White Plains Fuel,
Inc. ("WPF"), a diesel and fuel oil distributor located in Hawthorne, NY. The
aggregate purchase price for the stock of WPF was $ 1,064,169 payable as
follows:
168,020 shares of Series A 7.5% cumulative,
convertible, redeemable preferred stock,
$0.001 par value $1,064,169
Since the transaction was accounted for as a purchase, the purchase price
was allocated to the acquired assets based on their estimated fair market values
at acquisition, with $124,000 allocated to property and equipment, $167,342 to
accounts receivable, $17,204 to inventory, $1,060,179 to customer list, $1,555
to prepaid expenses, $1,702 to deferred income, and $307,813 to liabilities.
F-21
<PAGE>
(C) Effective July 31, 1995, the Company acquired two leaseholds and two
leasehold extensions from ATI, a related party (see Note 12). These leaseholds
were appraised by an independent appraiser for $985,000, on aggregate. In
consideration of the transfer of the two gasoline station leaseholds and the
additional twenty year extension of two other leaseholds, the company forgave
$985,000 of the note receivable due from ATI.
(D) The Company acquired two leaseholds from ATI, a related party, on March
22, 1996 and November 1, 1995. In consideration of the transfer of the two
gasoline station leaseholds, valued at $1,365,000 by an independent appraiser,
the Company forgave $1,365,000 of the note receivable due from ATI.
Note 15 - PREFERRED STOCK
(A) The Company has issued Series A 7.5% Cumulative Convertible Redeemable
Preferred Stock, $0.001 par value ("Series A Preferred Stock"). The holders of
outstanding shares Series A Preferred Stock should be entitled to the following:
The Preferred Stock at par value $0.001 per share, bears a cumulative cash
dividend rate of $0.45 per annum, payable quarterly, commencing June 8, 1995,
when, as and if declared by the board of directors of the Company. The Preferred
Stock becomes convertible after June 8, 1998 into shares of Common Stock at a
conversion rate of one share of Common Stock for each share of Preferred Stock,
subject to adjustment in certain events.
The Preferred Stock is redeemable at the option of the Company, in whole or
in part, at any time at a redemption price of $6.00 per share, plus accrued and
unpaid dividends.
Holders of Preferred Stock may request to have their shares redeemed by the
Company at $6.00 per share at any time commencing on June 8, 2000 and ending
June 7, 2004. As the Preferred Stock is mandatorily redeemable, it is properly
listed above the equity section of the balance sheet.
The Company shall not be required to redeem from any holder during any
twelve (12) month period a number of shares of Preferred Stock greater than
twenty percent (20%) of the shares of Preferred Stock then held by the
applicable holder and the Company shall not be required to redeem shares of
Preferred Stock from any holder more than once during any twelve (12) month
period.
Each share of Preferred Stock shall entitle its holder to a number of votes
equal to the number of shares of Common Stock (including fractional shares) that
such share would be converted into, if it were so converted, as of the close of
F-22
<PAGE>
business on the day immediately prior to the date of such vote, and with respect
to such votes, a holder of shares of Preferred Stock shall have full voting
rights and powers equal to the voting rights and powers of a holder of shares of
Common Stock, and shall be entitled to a notice of any stockholders' meeting in
accordance with the By-laws of the Company and shall be entitled to vote with
holders of Common Stock together as a single class.
(B) The Company has issued series B, 8.0% cumulative, convertible,
Preferred Stock, $0.001 par value ("Series B Preferred Stock"). The holders of
outstanding shares of Series B Preferred Stock should be entitled to the
following:
The Preferred Stock at par value $0.001 per share, bears a cumulative cash
dividend rate of $0.62 per annum, payable quarterly, commencing May 31, 1996,
when, as and if declared by the board of directors of the Company. The Preferred
Stock becomes convertible after July 15, 1996 into an unspecified number of
shares of Common Stock at a conversion rate formula based in part on the market
value of the Common Stock on the date of conversion.
The Preferred Stock is redeemable at the option of the Company, in whole or
in part, at any time at a redemption price of $10.00 per share, plus accrued and
unpaid dividends.
Except as required by applicable law, shares of Series B Preferred Stock
shall not entitle the holder to any voting rights, but such holder shall be
entitled to a notice of any stockholder meetings in accordance with the by-laws
of the Company.
Note 16 - OPERATING LEASES
The Company leases facilities under operating leases expiring at various
times.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of August 31, 1996 for each of the next
five years and in the aggregate are:
August 31 Amount
1997 577,517
1998 586,517
1999 577,566
2000 579,560
2001 578,588
--------
Total $ 2,899,748
=========
F-23
<PAGE>
Rent expense for 1996 and 1995 under various leases amounted to $568,052
and $607,578, respectively.
Note 17 - ERROR CORRECTION
(A) On December 7, 1992, ATI, HQP's former parent, transferred assets,
including HQP and Rockland customer lists and Rockland equipment and assets, in
partial satisfaction of its note due to the Company (see Notes 7 and 12(C)). In
accordance with Accounting Interpretations No. 27 and 39 of APB 16 for entities
under common control, the Company has accounted for this transaction as a
"similar to pooling" combination and properly recorded these assets at their
book values, totaling $84,676.
For tax purposes, however, these assets were recorded at their fair market
values totaling $2,479,998.
The future tax benefit from the difference between book and tax treatment
gives rise to a deferred tax asset calculated by multiplying this difference by
the tax rate to arrive at the deferred tax asset. This deferred tax asset arises
from a related party transaction and is therefore classified as Paid in Capital:
Common Stock.
Tax Basis of Assets Transferred $ 2,479,998
Less Book Basis of Assets Transferred 84,676
Additional Future Depreciation for Tax Purposes 2,395,322
Tax Rate 41.1%
Deferred Tax Asset/Paid in Capital: Common Stock $ 984,477
Previously the difference between the Book Basis and Tax Basis was only
taken into consideration in calculating Deferred Tax Liability.
This error, resulting in the misstatements of previously reported assets,
liabilities, equity, and income was discovered during the current year.
Correction of this error resulted in changes previously reported net income as
follows:
Year (Decrease)
---- ----------
8/31/93 $ (25,589)
8/31/94 (21,276)
------
Cumulative Effect (46,865)
8/31/95 (10,063)
Cumulative Effect$ (56,928)
F-24
<PAGE>
The August 31, 1995 consolidated statement of operations has been restated
for the effect of correcting this error. The following schedule details the
nature and amount of each error:
Omission of Deferred Tax Asset (Paid in Capital) $ 984,447
Reclassification of Deferred Income Tax Liability (211,387)
Understatement of Deferred Income Tax Liability
(See above for effects in prior period income) (56,928)
Net Deferred Tax Asset at 8/31/95 $ 716,162
(B) In accordance with comments received from the Securities and Exchange
Commission, the August 31, 1996 and 1995 financial statements have been
restated as follows:
1. The previously issued August 31, 1995 income statement improperly
included sales, cost of sales, and selling, general and administrative expenses
of newly acquired WPF from September 1, 1994 through June 8, 1995, the date of
acquisition. The net effect of this change after taxes, $13,829, was improperly
included in the calculation of acquired liabilities, which have been restated
(see Note 14(B)). Eliminations from the August 31, 1995 income statement, and
the related valuation adjustment to the WPF purchase are as follows:
Eliminations
Sales $ 1,598,406
Cost of Sales 914,224
Selling, General and
Administrative Expenses 661,133
Net Income Before Taxes 23,049
Provision for Taxes 9,220
Net Income 13,829
Valuation Adjustment
WPF Purchase Price as
previously reported 1,050,340
WPF Purchase Price as
Restated (see Note 14(B))$ 1,064,169
2. The value of redeemable preferred stock issued to acquire WPF has
been revalued as per above, and properly reclassified above the
F-25
<PAGE>
equity section of the balance sheet, and thus eliminated from the
Consolidated Statement of Stockholder's Equity.
3. An additional footnote has been provided (see Note 20) showing the
calculation of Earnings Per Share ("EPS"). The EPS amounts have been
restated because previously reported amounts had not been adjusted
for the effect of declared and undeclared dividends on cumulative
preferred stock.
4. The Statement of Cash Flows has been restated for the
following:
Proceeds from Capital Contribution and changes in Cash Overdraft are
now classified as financing activities.
The Supplemental Schedule of Non-cash Investing and Financing
Activities now includes a reference to the issuance of preferred
stock to acquire WPF.
5. Rental Income, previously listed with Other Income And (Expenses) in
the Consolidated Statement of Operations, has been renamed Net Rental
Expense (Income) and has been properly listed above Income From
Operations. Also moved above Income From Operations were Bad Debt
Expense and Royalty Fee.
6. A paragraph is added to Note 11 to disclose separately the asset and
liability components of Net Deferred Tax Asset.
7. The first sentence of Note 13(A) now includes a reference to the
specific exemption relied upon for this private placement.
8. The last sentence of Note 13(B) has been reworded to properly
indicate that the waiving of compensation under employment agreements
occurred at the beginning of each fiscal year.
9. The last sentences of Note 14 (C) and (D) now include information
showing the independent appraisals of leaseholds transferred from a
related party, to support subsequent reductions of the related
party's note receivable in the same amounts, with no gain or loss
recognized.
10. The first sentence of Note 15(B) describing "series B, 8.0%
cumulative, convertible, Preferred Stock", now properly omits the
word "redeemable" as this issue is only redeemable by the Company,
and not the
shareholders.
11. The segment information disclosed in Note 18 for August 31, 1995 has
been adjusted for the elimination of WPF sales and expenses (Note
17(B)(1)).
F-26
<PAGE>
Note 18 - SEGMENT INFORMATION
The Company's operations were classified into three business segments as
follows:
Year Ending August 31, 1996
Fuel Oil Propane Gasoline Consolidated
Net Sales $ 5,756,345 $ 2,577,093 $ 6,978,822 $ 15,312,260
========= ========= ========= ==========
Gross Profit 1,455,358 1,513,914 1,608,788 4,578,060
Operating Expenses 1,173,590 986,134 1,557,400 3,717,124
Depreciation and
Amortization 135,968 117,985 425,889 679,842
Operating Income $ 145,800 $ 409,795 $ (374,501) $ 181,094
Capital
Expenditures $ 132,550 $ 385,599 $ 1,403,864 $1,922,013
Assets $2,607,462 $1,841,191 $10,659,517 $15,108,170
Corporate Assets 4,157,131
Total Assets $ 19,265,301
Year Ending August 31, 1995
Fuel Oil Propane Gasoline Consolidated
Net Sales $ 4,861,869 $ 2,290,658 $ 8,022,032 $ 15,174,559
========= ========= ========= ==========
Gross Profit 1,026,274 1,397,289 1,691,650 4,115,213
Operating Expenses 795,222 953,147 1,658,645 3,407,014
Depreciation and
Amortization 90,310 45,155 316,086 451,551
Operating Income $ 140,742 $ 398,987 $ (283,081) $ 256,648
Capital
Expenditures $ 298,334 $ 330,765 $ 6,919,335 $ 7,548,434
Assets $ 2,448,098 $ 1,539,286 $ 9,362,638 $ 13,350,022
Corporate Assets 1,937,893
Total Assets $ 15,287,915
Sales by segment include sales to unaffiliated customers and inter-segment
sales. Retail prices are used to report inter-segment sales.
Operating income is total revenue less operating expenses, and excludes
general corporate expenses, interest expense and income taxes.
F-27
<PAGE>
Identifiable assets are those used by each segment of the Company's
operations. Corporate assets are primarily cash and note receivable from
related party (see Note 7).
Note 19 - DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL
INSTRUMENTS.
Cash, Accounts Receivable, Rent Receivable, Other
Receivables, Other Current Assets, Working Capital
Borrowings, Accounts Payable, and Accrued Expenses.
The carrying amount approximates fair value because of the short maturity
of these instruments.
Notes Receivable, Private Placement Notes, Long-Term Notes.
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 non-trading financial instruments
are summarized as follows:
Carrying Estimated
Amount Fair Value
At August 31, 1995
Note Receivable $ -0- $ -0-
Note Receivable - Related Party 1,192,386 1,150,652
Private Placement Notes 462,637 462,637
Long Term Debt 2,776,383 2,672,268
At August 31, 1996
Note Receivable $ 80,000 $ 78,800
Note Receivable - Related Party 1,355,576 1,308,131
Private Placement Notes 321,426 321,426
Long Term Debt 2,633,367 2,490,521
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.
F-28
<PAGE>
Note 20 - Earnings Per Share
The following table sets forth the computation of Net Income per common
share, as contained in the Consolidated Statements of Operations for the years
ended August 31, 1996 and 1995.
August 31,
1996 1995
Net Income 181,094 256,648
Preferred Stock Dividends:
Declared (76,366) (12,601)
Undeclared (cumulative) (87,942) -0-
Undeclared
Net Income applicable to
common shares 16,786 244,047
Divided by:
Weighted average of Common
Stock outstanding 3,416,473 3,061,418
Earnings Per Share $ 0.00 $ 0.08
==== ====
Note 21 - SUBSEQUENT EVENTS
(A) Acquisition:
On September 4, 1996, the Company acquired the assets of Dino Oil, Inc.,
in consideration for which it paid $100,000 and issued 200,00 shares of
its $.001 par value stock, restricted under Rule 144 of the Securities and
Exchange Act of 1933.
(B) Pending Delisting:
The Company has been notified by NASDAQ of the failure of the Company's
Common Stock to comply with its minimum bid price requirement, which is to
maintain a closing inside bid price greater than or equal to $1.00 for a
period of ten consecutive trade dates. The Company will be provided ninety
calendar days (to February 14, 1997) in which to either regain compliance
with the minimum bid price requirement or the alternative requirement
(i.e., that the Company's capital and surplus equal or exceed $2,000,000
and the market value of the public float of the Company's Common Stock
equal or exceed $1,000,000, for ten consecutive trading days prior to the
end of such ninety day period). If the Company is unable to demonstrate
compliance with at least one of the foregoing requirements prior to
February 14, 1997, it must submit a proposal by that same date for
achieving compliance. If the Company fails by February 14, 1997 to either
achieve compliance or fails to submit a proposal for achieving compliance,
NASDAQ would consider delisting the Company's Common Stock on NASDAQ Small
Cap Market.
F-29
<PAGE>
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles Of Incorporation of the Company, as amended.*
3.2 By-laws of the Company.*
3.3 Certificate to set forth Designations, Voting Powers,
Preferences, Limitations, Restrictions and Relative Rights
of series A 7.5% Cumulative Convertible Redeemable Preferred
Stock**
3.4 Certificate to Set Forth Designations, Voting Powers,
Preferences, Limitations, Restrictions, and Relative Rights
of Series B 8% Cumulative Convertible Redeemable Preferred
Stock, $.001 Par Value***
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Series A Preferred Stock Certificate**
4.3 Specimen Series B Preferred Stock Certificate
10.1 Agreement and Plan of Reorganization dated as of July 5,
1993 between Halstead Quinn Propane, Inc. and the Company.*
10.2 Lease Agreement between HQ Propane and ATI.*
10.5 Management Agreement by and between HQ Propane and ATI.*
10.6 Form of Employment Agreement by and between the Company and
Claire E. Tarricone.*
10.7 Form of Employment Agreement by and between the Company and
Anthony Tarricone.*
10.8 Form of Employment Agreement by and between the Company and
Joseph Tarricone.*
10.9 Promissory Note, dated August 31, 1993, of ATI in favor of
HQ Propane.*
10.10 ATI Purchase Agreements**
10.11 Agreement & Plan of Reorganization by and among Halstead
Energy Corp., Allan Cianflone and Jack Troccoli.**
21.1 Subsidiaries of the Small Business Issuer**
24.1 Consent of Goldman & Murphy, LLP
- ---------------------------
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 filed with the SEC on November 19, 1993.
** Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the SEC on December 14, 1996.
*** Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
filed with the SEC July 15, 1996.
--------------------------
(b) Reports on Form 8-K - None.
F-30
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: January 14, 1997 Halstead Energy Corp.
By: /s/ Claire E. Tarricone
President
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.
Signature Title Date
PRINCIPAL EXECUTIVE January 14, 1997
OFFICER:
/s/ Claire E. Tarricone President January 14, 1997
Claire E. Tarricone
PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER:
/s/ Joseph A. Tarricone Vice President and
Joseph A. Tarricone Treasurer January 14, 1997
DIRECTORS:
/s/ Claire E. Tarricone Director
Claire E. Tarricone January 14, 1997
/s/ Anthony J. Tarricone Director
Anthony J. Tarricone January 14, 1997
/s/ Joseph A. Tarricone Director
Joseph A. Tarricone January 14, 1997
/s/ Edwin Goldwasser Director
Edwin Goldwasser January 14, 1997
F-31
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Halstead Energy Corp.
We consent to the use of our report included herein and to the reference
to our firm under the heading "Experts" in the annual form 10KSB.
GOLDMAN & MURPHY, L.L.P.
/s/ Goldman & Murphy, LLP
Valley Stream, New York
October 10, 1997
F-32
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED
AUGUST 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-1-1995
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 0
<CASH> 2,061,474
<SECURITIES> 0
<RECEIVABLES> 1,855,939
<ALLOWANCES> 227,869
<INVENTORY> 251,450
<CURRENT-ASSETS> 4,270,208
<PP&E> 14,366,444
<DEPRECIATION> 2,520,007
<TOTAL-ASSETS> 19,265,301
<CURRENT-LIABILITIES> 1,494,168
<BONDS> 2,669,991
1,064,069
3,815,900
<COMMON> 4,900,439
<OTHER-SE> 5,320,634
<TOTAL-LIABILITY-AND-EQUITY> 19,265,301
<SALES> 15,312,260
<TOTAL-REVENUES> 15,871,660
<CGS> 10,734,200
<TOTAL-COSTS> 15,188,981
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 398,889
<INCOME-PRETAX> 283,790
<INCOME-TAX> 102,696
<INCOME-CONTINUING> 541,757
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 181,094
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
