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As filed with the Securities and Exchange Commission on October 15, 1997
Registration No.
33-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
Registration Statement
Under The
Securities Act of 1933
HALSTEAD ENERGY CORP.
(Name of Small Business Issuer in its Charter)
Nevada 4925 87-0446395
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or
Organization)
33 Hubbells Drive
Mt. Kisco, New York 10549
(914) 666-3200
(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)
Ms. Claire E. Tarricone
President
33 Hubbells Drive
Mt. Kisco, New York 10549
(914) 666-3200
(Name, Address and Telephone Number of
Agent For Service)
With a copy to:
Paul J. Pollock, Esq.
Piper & Marbury L.L.P.
1251 Avenue of the Americas
New York, New York 10020-1104
(212) 835-6280
Approximate Date of Proposed Sale to the Public: From time to time
after the effective date of this registration statement.
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_| ________
If this form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------
Title of Each Proposed Proposed
Class of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered Per Unit(1) Price Fee
- -------------------------------------------------------------------------------
Common Stock 2,170,488 $2.25 $4,883,598 1,479.88
- -------------------------------------------------------------------------------
TOTAL REGISTRATION FEE 1,479.88
- -----------------------===============----------------------------==============
(1) Represents the average of the closing bid and asked prices of the Common
Stock of the Registrant on October 13, 1997.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED OCTOBER 15, 1997
HALSTEAD ENERGY CORP.
2,170,488 Shares of Common Stock
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The 2,170,488 shares (the "Shares") of Common Stock, par value $.001
per share (the "Common Stock"), of Halstead Energy Corp. (the "Company") to
which this Prospectus relates are being offered, from time to time, on behalf
of and for the account of Infinity Investors Ltd. ("Infinity"), as more fully
described herein under "Selling Stockholders." The Shares have been or will
be acquired by Infinity upon the conversion of certain shares of the Series B
Cumulative Convertible Redeemable Preferred Stock of the Company (the "Series
B Preferred Stock") acquired by Infinity in a private placement. The
distribution of the Shares by Infinity, or by pledgees, donees, distributees,
transferees or other successors in interest, may be affected from time to
time by underwriters who may be selected by Infinity and/or broker-dealers in
one or more transactions (which may involve crosses and block transactions)
on the NASDAQ SmallCap Stock Market or other over-the-counter markets or, in
special offerings, exchange distributions or secondary distributions pursuant
to and in accordance with rules of such over-the-counter markets or
exchanges, in negotiated transactions or otherwise, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. In connection with the distribution of the
Shares or otherwise, Infinity may enter into hedging or option transactions
with broker-dealers and may sell Shares short and deliver the Shares to close
out such short positions. The Company has agreed to indemnify Infinity,
underwriters who may be selected by Infinity and certain other persons
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended (the "Securities Act"). See "Plan of Distribution" and
"Selling Stockholders."
The Company has agreed to pay all expenses of registration in
connection with this offering but will not receive any of the proceeds from
the sale of the Shares being offered hereby. All brokerage commissions and
other similar expenses incurred by Infinity will be borne by it. The
aggregate proceeds to Infinity from the sale of the Shares will be the
purchase price of the Shares sold, less the aggregate brokerage commissions
and underwriters' discounts, if any, and other expenses of issuance and
distribution not borne by the Company.
-------------------
See "Risk Factors," beginning on Page 4, for information and a discussion of
certain factors that should be considered by prospective investors.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
The date of this Prospectus is October 15, 1997.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission") (file no. 000-25660). Such
reports, proxy and information statements and other information filed by the
Company can be inspected and copied at the public reference facility
maintained by the Commission in Washington, D.C. at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 and at the Commission's regional offices in
New York (7 World Trade Center, Suite 1300, New York New York 10048) and
Chicago (Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60611). Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information on the operation of the public
reference rooms. The Company's Exchange Act filings are also available to
the public on the Commission's Internet site (http://www.sec.gov).
This Prospectus, which constitutes part of a registration statement on
Form SB-2 filed with the Commission under the Securities Act by the Company,
omits certain of the information contained in the registration statement.
Reference is hereby made to the registration statement and to the exhibits to
the registration statement for further information about the Company and the
Common Stock. Statements in this Prospectus concerning provisions of
documents are summaries of such documents, and each statement is qualified by
reference to the copy of the applicable document filed with the Commission.
Copies of such material, including the complete registration statement and
the exhibits, can be inspected, without charge at the offices of the
Commission, or obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, (i) all dollar amounts in this Prospectus are stated in
the lawful currency of the United States, (ii) all information in this
Prospectus assumes no exercise of any outstanding option or warrant to
acquire shares of the Company's Common Stock, and (iii) all references herein
to the Company include the subsidiaries and divisions of the Company.
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THE COMPANY
Halstead Energy Corp. (the "Company") was originally incorporated in
the State of Utah on January 15, 1986 under the name of Technical Analysis,
Inc. Effective October 8, 1990, the Company changed its corporate domicile
to the State of Nevada. On August 5, 1993 the Company acquired Halstead
Quinn Propane, Inc. ("HQ Propane") in exchange for 2,170,000 shares of the
Company's Common Stock. Simultaneously with such acquisition, the Company
changed its name to Halstead Energy Corp. The address of the Company's
principal executive office is 33 Hubbells Drive, Mt. Kisco, New York 10549,
and its telephone number is (914) 666-3200.
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, and Halstead Quinn Terminal ("HQ Terminal"), HQ
Gasoline ("HQ Gasoline") and Dino Oil ("Dino"), which are separate divisions
of HQ Propane. The business of White Plains Fuel, Inc. ("WPF"), 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.
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. A. Tarricone,
Inc. ("ATI") acquired HQ Propane in 1975 and subsequently spun it off to its
stockholders 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. Approximately 80% of HQ Propane's
customers are Westchester County residents and businesses, and the remaining
20% are located throughout the surrounding counties of Putnam and Dutchess in
New York State. 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. Because hot
water heating and cooking use is relatively constant throughout the year, HQ
Propane's business is not subject to significant seasonal variation.
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 broadened the Company's marketing
region by providing the Company with customer accounts (including various
service stations and fleet garages) located in the Bronx, Queens, Brooklyn,
and Manhattan, as well as Nassau, Suffolk and Westchester counties.
HQ Terminal owns and operates a deep water terminal in Yonkers, New
York near the New York City border. The five million gallon terminaling
facility allows for the wholesale distribution of fuel oil, gasoline and
diesel fuel, and also provides storage facilities for other petroleum
companies through warehousing agreements know as thru-puts. The Company's
own product requirements are often supplied through this facility. Pending
the approval of HQ Propane's application with New York State for a terminal
operator's license, the facility is being operated on its behalf by ATI.
HQ Gasoline operates 25 retail gasoline stations throughout eastern New
York State under the trade names "ATI" and "Gulf." The operation of gasoline
stations allows the Company to offset, in part, the seasonal fluctuations
that affect the Company's wholesale fuel oil distribution division. Each
station is combined with either a convenience store and/or an automotive
repair shop. Nine of the 25 gasoline stations are leased from ATI.
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a
high degree of risk and is speculative in nature. Prospective investors
should carefully consider the following risk factors, as well as others
described elsewhere in this Prospectus, relating to the business of the
Company and this offering. The discussion below highlights some of the more
important risks regarding the Company and this offering. The risks
highlighted below should not be assumed to be the only factors that could
affect future performance. In addition, the discussion in this Prospectus
regarding the Company and its business and operations contains
"forward-looking statements." Such statements consist of any statement other
than a recitation of a historical fact and can be identified by the use of
forward-looking terminology such as "may," "expect," "anticipate," "estimate"
or "continue" or the negative of any thereof or other variations thereon or
comparable terminology. Prospective investors are cautioned that all
forward-looking statements are necessarily speculative and there are certain
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in such forward-looking statements. The
Company does not have a policy of updating or revising forward-looking
statements, and thus it should not be assumed that silence by management of
the Company over time means that actual events or results are occurring as
estimated in such forward-looking statements.
ATI Bankruptcy
On June 10, 1997, ATI, the former parent of the Company's operating
subsidiaries and divisions which is wholly-owned by Claire E. Tarricone,
Anthony J. Tarricone and Joseph A. Tarricone, the Company's directors and
principal executive officers, filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has
continued in possession of its property and in the management of its affairs
as a debtor-in-possession under the applicable provisions of the Code. In
connection with the bankruptcy proceeding, the Company has asserted (and ATI
has acknowledged) pre-petition claims arising under the note receivable from
ATI in the approximate amount of $2,963,563 and pre-petition liens on certain
leasehold interests. The proceeding is before the United States Bankruptcy
Court, Southern District of New York, and is referenced as "A. TARRICONE,
INC., 97B21488." As the voluntary petition was only recently filed by ATI,
and as the proceeding is in an early stage, it would be difficult to
determine at this time the likelihood of recovery by the Company of such
indebtedness. In any event, there can be no assurance that the indebtedness
and the liens asserted by the Company in this proceeding will be recognized
or given full effect, that the same will not be challenged, modified or
reduced, or that all or any portion of such indebtedness will be repaid to
the Company. Furthermore, the Company has determined that its asserted
pre-petition liens may not have been properly "perfected," in which case the
Company would be deemed an unsecured creditor (rather than a secured
creditor) in the proceeding. The Company intends to pursue all appropriate
avenues (if any) to protect its interests in this regard. If it were
ultimately determined by the court that the Company's status in the
proceeding is that of an unsecured creditor, the Company's legal basis for
recovery would be materially, adversely affected. Additionally, all
executory contracts between ATI and the Company are susceptible to rejection,
at the election of ATI, under the applicable provisions of the Code.
Furthermore, any transfers from ATI to the Company on account of antecedent
debt (of ATI to the Company) during the one-year period prior to the date of
filing of ATI's voluntary petition may be subject to avoidance under the
applicable provisions of the Code. The occurrence of any such circumstances
may have a material adverse effect on the Company.
Licensing
The Company's principal terminal facility is currently being operated
by ATI pending the approval of the Company's application with the State of
New York for a terminal operator's and diesel motor fuel license. There can
be no assurance about the prospect of obtaining the approval of such
licenses. The Company has been advised by counsel that, pending the
conclusion of ATI's bankruptcy proceeding, ATI will continue to maintain such
licenses, and thus that ATI will be able to continue operating the Company's
terminal and diesel motor fuel businesses. However, there can be no
assurance that at the conclusion of such proceeding, if the result were a
liquidation of ATI (and therefore a termination of such licenses), that the
Company would by that time have received its own licenses or would have been
able to contract with another entity to operate such businesses. The
occurrence of any of these circumstances could have a material and adverse
effect on these businesses and on the Company.
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Seasonal Factors
The Company's retail gasoline business, while not seasonal, is subject
to use patterns that vary based on the time of the year. The Company's
wholesale fuel oil business is seasonal, as a substantial portion of its
business is conducted during the fall and winter months. As this is the
case, weather patterns during the winter months can have a material adverse
impact on its fuel oil revenues. Although temperature levels for the heating
season have been relatively stable over time, variations can occur from time
to time, and warmer than normal winter weather will adversely affect the
results of the Company's fuel oil operations.
Competition from Alternate Energy Sources
The Company competes for customers in its wholesale fuel oil and retail
propane distribution businesses with suppliers of alternate energy products,
principally natural gas and electricity. Over the past few years, a small
percentage of HQ Propane's customers have converted to other sources,
primarily natural gas. In addition, the Company may lose additional
customers due to conversions during periods in which the cost of its products
exceeds the cost of such alternative energy sources.
Competition for New Customers
The Company's business is highly competitive. In addition to
competition from alternative energy sources, HQ Propane competes with propane
distributors offering a broad range of services and prices, from full service
distributors similar to HQ Propane, to those offering delivery only.
Competition with other companies in the propane industry is based primarily
on customer service and price. Longstanding customer relationships are
typical in the retail propane industry. Many companies in the industry,
including HQ Propane, deliver propane to their customers based upon weather
conditions and historical consumption patterns without the customers having
to make an affirmative purchase decision each time propane is needed. In
addition, most companies, including HQ Propane, provide propane equipment
repair service on a 24 hour a day basis, which tends to build customer
loyalty. As a result, HQ Propane may experience difficulty in acquiring new
retail customers due to existing relationships between potential customers
and other propane distributors.
Competition in the retail gasoline business is based on price,
appearance, location and value added services. Many of HQ Gasoline's
competitors are large multinational oil companies and have greater resources
and/or a longer track record for their operations and can offer the
convenience of their own credit cards. There can be no assurance that future
actions by such competitors will not have a material adverse effect on the
Company's business operations.
Insurance
Companies engaged in the petroleum products distribution and storage
business may be sued for substantial damages in the event of an actual or
alleged accident or environmental contamination. The Company maintains
$1,000,000 of liability insurance and $5,000,000 of excess liability
insurance. There can be no assurance that the Company will be able to
continue to maintain liability insurance at a reasonable cost in the future,
or that a potential liability will not exceed the coverage limits. Nor can
there be any assurance that the amount of insurance carried by the Company
will enable it to satisfy any claims for which it might be held liable
resulting from the conduct of its business operations.
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Environmental/Governmental Regulation
Regulations regarding underground storage tanks ("USTs") including
those at service stations, have been issued by the U.S. 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 by December 1998. 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. In January 1994, HQ Propane was served with a complaint
alleging that the Company discharged petroleum products onto certain leased
property and seeking $106,173 damages for the costs of clean up and removal
of the contaminated soil and an additional $300,000 for diminution of value.
Although the Company has retained outside counsel and is vigorously defending
itself in this lawsuit, there can be no assurance that such defense will be
successful or that such litigation will not have a material adverse effect on
the Company. See "Legal Proceedings." Although the Company has an ongoing
program for maintenance, testing, retrofitting, or replacement of USTs, there
can be no assurance that potential problems will be discovered before a spill
or release occurs. Although the Company believes that adequate pollution
insurance is being maintained to cover its primary environmental-related loss
contingencies, there can be no assurance that such insurance will be
maintained at current levels or that even if so maintained will cover all
loss contingencies.
Growth Dependent Upon Acquisitions
Management of the Company believes that future growth will require
acquisitions of other petroleum product businesses. There can be no
assurance, however, that the Company will be able to identify new acquisition
candidates or, even if a candidate is identified, that it will have access to
the capital necessary to consummate such acquisitions.
Possible Need for Financing
The Company's ability to meet its future capital requirements will
depend on many factors, including, but not limited to, the success of the
Company's expansion efforts and the response of competitors to the Company's
efforts. If the Company's cash flow is not sufficient to support its
operations and expansion plans, the Company may curtail its expansion and
gasoline station renovation plans, or the Company may seek to sell additional
shares of its Common Stock or other securities or to borrow funds. There can
be no assurance that any such financing will be available to the Company or,
if available, that such financing will be available on favorable or
affordable terms. The inability of the Company to obtain necessary
additional financing would adversely affect the Company's operations.
Supply of Petroleum Products
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 nine
months ended May 31, 1997. The loss of either supplier could have a material
adverse effect on the Company.
The Company met substantially all of its gasoline product requirements
through Gulf Oil, BP and ATI for the nine months ended May 31, 1997. Gulf
Oil supplied approximately 30%, and ATI provided approximately 65%, of such
requirements during such period. All of the fuel oil and diesel fuel product
requirements of the Company's customers during such period were met by ATI.
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.
Dependence on Management and Key Personnel
The success of the Company will depend to a considerable degree on the
continued services of Claire E. Tarricone, the Company's President, Anthony
J. Tarricone, the Company's Vice President and Secretary, and Joseph A.
Tarricone, the Company' s Vice President and Treasurer. The loss of the
services of any such person could have a material adverse effect on the
Company. The Company does not maintain any key-man insurance on the life of
any of the Tarricones. In addition, the success of the Company will depend,
among other factors, upon the successful recruitment and retention of
additional highly-skilled and experienced management and technical
personnel. The inability to attract and retain qualified employees could
adversely affect the Company's business.
Control by Members of the Tarricone Family
Claire E. Tarricone, Anthony J. Tarricone and Joseph A. Tarricone are
siblings and jointly beneficially own approximately 48% of the Company's
outstanding Common Stock prior to the conversion of any shares of Preferred
Stock or the exercise of any options or warrants. Further, the Tarricones
collectively beneficially own options and warrants to purchase an additional
1,178,850 shares of Common Stock. If all of such options and warrants were
exercised (but no other options or warrants were exercised or preferred stock
converted), the Tarricones would jointly beneficially own approximately 60.11%
of the outstanding Common Stock. In addition, the Tarricones are parties to
a buy/sell agreement pursuant to which, upon the death or disability of any
of them, the others are required to buy out such deceased or disabled
stockholder. Since the Company's Articles of Incorporation do not provide
for cumulative voting, the Tarricone family, by virtue of their beneficial
stock ownership and the buy/sell agreement, may be in a position to elect,
and continue to elect, all of the Company's directors and continue to control
the Company's affairs and operations.
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Conflicts of Interest
Claire E. Tarricone, Anthony J. Tarricone and Joseph A. Tarricone are
also the sole officers, sole stockholders and represent a majority of the
directors of ATI. HQ Propane has entered into agreements with ATI under
which it (i) leases 9 of the 25 service stations comprising its HQ Gasoline
division from ATI and pays rent for the service stations in the amount of
approximately $19,000 per month; (ii) pays a monthly management and royalty
fee to ATI for various services provided to HQ Propane by ATI in the amount
of $30,000 per month; and (iii) is supplied with substantially all of its
fuel oil and diesel fuel supplies by ATI at ATI's cost plus one quarter of
one cent ($.0025) per gallon purchased. While the Company believes that such
transactions were on terms no more favorable than that which could have been
obtained from an unrelated party, there can be no assurance that the Company
is correct in such belief.
ATI also operates retail gasoline service stations in addition to those
that are leased to HQ Gasoline. Accordingly, service stations that are owned
by ATI may compete with HQ Gasoline, and conflicts may arise over whether
prospective service station acquisition opportunities are to be taken by the
Company or ATI.
As a result of the foregoing, both present and future conflicts of
interest may exist with respect to matters involving ATI which are brought
before the Tarricones as officers or directors by virtue of their positions
with and ownership of ATI.
Concentration of Voting Power; Anti-Takeover Provisions
The Company's board of directors has the authority to issue shares of
Preferred Stock and to determine the price, rights, preferences and
privileges, including voting rights, of those shares without any further
action by the Company's stockholders. The rights of holders of the Company's
Common Stock will be subject to and may be adversely affected by the rights
of the holders of any Preferred Stock. The board of directors has already
designated and issued Series A 7.5% Cumulative Convertible Redeemable
Preferred Stock of the Company (the "Series A Preferred Stock") and the
Series B Preferred Stock. Any future designation and issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire control of the Company. The Company is also subject to the
provisions of the Nevada General Corporation Law regulating business
combinations, takeovers and control share acquisitions, which also might
hinder or delay a change in control of the Company. Anti-takeover provisions
that could be included in the Preferred Stock when designated and issued and
the Nevada statutes can have a depressive effect on the market price of the
Company's Common Stock and can prevent the Company's stockholders from
realizing a premium on the sale of their shares by discouraging takeover and
tender offer bids.
Possible Volatility of Stock Price
The market price of the Common Stock has been highly volatile.
Quarterly operating results of the Company, changes in general conditions in
the economy, the financial markets, or the energy industry, changes in
financial estimates by securities analysts or failure by the Company to meet
such estimates, litigation involving the Company, actions by governmental
agencies or other developments affecting the Company or its competitors could
cause the market price of the Common Stock to fluctuate substantially. In
particular, the stock market may experience significant price and volume
fluctuations which may affect the market price of the Common Stock for
reasons that are unrelated to the Company's operating performance and that
are beyond the Company's control.
Outstanding Warrants, Options and Convertible Securities
As of October 10, 1997, the Company had outstanding options and
warrants to purchase an aggregate of 2,182,850 shares of Common Stock. The
Company has also reserved up to an additional 216,000 shares of Common Stock
for issuance upon exercise of options which have not yet been granted under
the Company's stock option plan. In addition, the shares of Series A
Preferred Stock and Series B Preferred Stock are currently convertible into
2,338,508 shares of Common Stock. Holders of such warrants and options are
likely to exercise them, and holders of such convertible securities may
convert them, when in all likelihood the Company could obtain additional
capital on terms more favorable than those provided by such options, warrants
or convertible securities. Further, while its warrants, options and
convertible securities are outstanding, the Company's ability to obtain
additional financing on favorable terms may be adversely affected.
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Possible Future Dilution
The Company has authorized capital stock of 50,000,000 shares of Common
Stock and 5,000,000 shares of Preferred Stock, par value $.001 per share (the
"Preferred Stock"). Insofar as the Company's Articles of Incorporation
permit the Company to issue authorized but unissued shares of Common Stock
and Preferred Stock without stockholder approval in order to acquire
businesses, to obtain additional financing or for other corporate purposes,
there may be further dilution of the stockholders' interests.
Possible Delisting of Securities From The Nasdaq SmallCap Market
The Company's Common Stock is listed on The Nasdaq SmallCap Market.
In August 1997, the Nasdaq Stock Market, Inc. ("Nasdaq") adopted new
requirements that the Company must meet for continued listing of its Common
Stock, including (i) maintaining a bid price of the Company's Common Stock of
at least $1.00, (ii) having at least $2,000,000 in net tangible assets, (iii)
maintaining a public float of at least 500,000 shares of Common Stock having
a market value of at least $1,000,000, and (iv) complying with certain
corporate governance requirements, such as electing at least two independent
directors. The Company must meet the new requirements within six months of
their adoption. If the Company does not meet Nasdaq's continuing listing
criteria, the Common Stock will be subject to delisting. As a result of
delisting, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, the Common Stock. Additional sales
practice requirements would be imposed on broker-dealers who sell such
securities to persons other than established customers and accredited
investors. Consequently, the rule affects the ability of holders of the
Common Stock, including purchasers in this offering, to sell their Common
Stock in the secondary market. Delisting from The Nasdaq SmallCap Market may
also cause a decline in share price, loss of news coverage of the Company and
difficulty in obtaining subsequent financing.
Dividends on Common Stock
The Company has not paid any dividends on shares of its Common Stock,
and the Company has no plans to pay any dividends. For the foreseeable
future, it is anticipated that earnings, if any, which may be generated from
the Company's operations will be used to finance the growth of the Company
and that cash dividends will not be paid to holders of Common Stock.
Possible Preferred Stock Issuance
The Preferred Stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the Board of Directors
without further action by the Company's stockholders, and may include voting
rights (including the right to vote as a class on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions. As of October 10, 1997, 168,020 shares of
Series A Preferred Stock and 560,125 shares of Series B Preferred Stock are
outstanding. The issuance of any additional Preferred Stock could affect the
rights of the holders of the Common Stock and, therefore, reduce the value of
the Common Stock and make it less likely that holders of Common Stock would
receive a premium for the sale of their shares. In particular, specific
rights granted to future holders of Preferred Stock could be issued to
restrict the Company's ability to merge with or sell its assets to a third
party, thereby preserving control of the Company by present owners and
preventing a takeover of the Company. Any such issuance could adversely
affect holders of the Company's Common Stock who might want to vote in favor
of a proposed merger, asset sale or other transaction.
USE OF PROCEEDS
All of the Shares offered hereby are being offered by Infinity. The
Company will not receive any of the proceeds from the sale of the Shares.
See "Selling Stockholders."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Nine Months Ended May 31, 1997 Compared to Nine Months Ended May 31,
1996.
Sales for the nine months ended May 31, 1997, increased by $2,578,549
to $14,610,917 from $12,032,368 for the nine months ended May 31, 1996. The
increase was due to additional gasoline sales revenue totaling $4,204,596
resulting primarily from the Dino Oil acquisition, and increased propane
sales revenue totaling $224,181. These increases in revenues were partially
offset by a decrease in home heating oil sales in the amount of $1,850,228
primarily due to a 20% warmer winter as compared to the nine months ended May
31, 1996.
Cost of sales for the nine months ended May 31, 1997 increased by
$2,820,354 to $11,315,668 from $8,495,314 for the nine months ended May 31,
1996. This increase was due to additional gasoline product purchase
requirements primarily relating to the Dino Oil acquisition of $4,186,467 and
increased propane costs of $95,408. These cost increases were partially
off-set by lower product purchases for home heating oil in the amount of
$1,461,521 primarily attributable to the warmer winter as compared to last
year. The percentage of cost of sales to sales for the nine month periods
ending May 31, 1997 and 1996 were 77.4% and 70.6%, respectively. The
increase in the percentage cost of sales to sales of 6.8% was due, in part,
to the Dino Oil acquisition, the commercial business of which is
characterized by high volume and low gross profit. In addition, 7 year
record price increases in the cost of product sharply reduced gross profit,
particularly in the Company's non-residential markets.
Selling, General and Administrative Expenses for the nine months ended
May 31, 1997 increased by $586,212 to $2,646,056 from $2,059,844 for the nine
months ended May 31, 1996. The increase is primarily due to increased
salaries of $355,562, increased equipment leases of $100,870, increased
insurance of $50,310, increased real estate taxes of $107,131 and all other
expense totaling a net decrease of $27,661 as compared to the same period in
the previous year.
Depreciation and Amortization for the nine months ended May 31, 1997
increased by $113,440 to $575,432 from $461,992 for the nine months ended May
31, 1996. The increase is attributable to fixed asset additions of $571,921,
leasehold additions of $690,000 and customer lists totaling $627,960 for
fiscal 1997.
Interest Income for the nine months ended May 31, 1997 increased by
$41,612 to $85,446 from $43,834 for the nine months ended May 31, 1996. This
increase is primarily due to the increased note receivable from ATI, in
addition to interest income resulting from invested funds.
Interest Expense for the nine months ended May 31, 1997 decreased by
$22,691 to $272,742 from $295,433 for the nine months ended May 31, 1996.
This decrease was primarily due to the repayment of certain indebtedness of
the Company.
Rental Income for the nine months ended May 31, 1997 increased by
$122,458 to $431,801 from $309,343 for the nine months ended May 31, 1996.
The increase was due to increased gasoline station and other rent income of
$52,458 and the collection of additional rents due under a third party lease
agreement of $70,000.
Royalty Expense for the nine months ended May 31, 1997 increased by
$14,226 to $78,750 from $64,524 for the nine months ended May 31, 1996. The
increase is primarily due to the expense associated with the warrants issued
to ATI in exchange for use of the trademark "ATI".
Other Income for the nine months ended May 31, 1997 decreased $4,832 to
$13,513 from $18,345 for the nine months ended May 31, 1996. This decrease
is due to no earned rebates under those available programs.
Extraordinary income for the nine months ended May 31, 1997 increased
by $113,815. The increase was due to the sale of the retail fuel oil
customer list of Rockland Fuel Oil, Inc., a wholly-owned subsidiary of HQ
Propane ("Rockland"), to an independent third party distributor.
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Net Income for the nine months ended May 31, 1997 decreased by $395,647
to $96,845 from $492,492 for the period ended May 31, 1996. The decrease was
due to a reduction in gross profit of $241,805 resulting from lower gross
profits in the Company's non-residential markets and decreased home heating
oil sales due to a 20% warmer winter as compared to last year. Selling,
general and administrative expenses also increased by $586,212 primarily as a
result of additional expenses incurred in connection with the Dino Oil
acquisition and equipment leases made in connection with the upgrade of 2
gasoline stations, increases in depreciation and amortization of $113,440,
increases in royalty expense of $14,226 and a reduction in other income of
$4,831, all totaling $960,514. These increases in total expenses were
partially reduced by a decrease in income tax expense of $264,291, an
extraordinary gain on the sale of the retail fuel oil customer list of
$113,815 (net of taxes), an increase in rental income of $122,458, an
increase in interest income of $41,612 and a reduction in interest expense of
$22,691, all totaling $564,867.
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 was attributable to an 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 was 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 was 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 were 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 was comprised of an increase
in real 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 was 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 was 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 was 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
was 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 was due primarily to increased security deposits for gasoline and
increased collection efforts.
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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
was 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 was
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 was 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 (subject, of course, to the effects of price increases which are not
sufficiently passed through to the customers as referenced below) 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 has significantly increased the Company's working capital
requirements due to increased gasoline purchase requirements, increases in
accounts receivable, and increased operating expenses (including salary).
Additionally, recent rises in the cost of petroleum products by as much as
50%, as well as recent expenditures relating to the rebuilding of certain of
the Company's gasoline stations and certain other capital expenditures, have
further increased the Company's working capital requirements and have
adversely affected the Company's ability to meet the same. Though management
is starting to see indications that the cost of petroleum products is
declining, there can be no assurance as to the extent to which this will
continue. 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. If it cannot do so, the Company will be forced to scale
back its operations. 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 approximately $325,000 over the next
fourteen months in order to meet Federal EPA and State Regulations for
underground storage tanks by December 1998. Through May 31, 1997, the
mandatory requirements for six locations of the Company's 25 locations have
been completed.
In addition the Company plans to rebuild 10 of 25 gasoline stations
which will generally require $20,000 to $550,000 per location for an
aggregate of $1,600,000 (inclusive of the environmental upgrades referenced
above). 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.
Capital expenditures for the nine months ended May 31, 1997 were
$1,261,921. Included in this amount were expenditures for propane and other
equipment, improvements to gas stations and the terminal facility, and
improvements and/or purchases of trucks and auto totaling $571,921, and
leaseholds totaling $690,000.
On June 9, 1997, the Company obtained a one-year revolving credit
facility in the maximum principal amount of $1,000,000. Interest accrues on
outstanding balances at the prime rate plus 10% per annum, subject to a
minimum of 17% per annum. The credit facility is secured by a security
interest in all of the Company's accounts, general intangibles, contract
rights and inventory, as well as by the guarantees of Claire E. Tarricone,
Joseph A. Tarricone and Anthony J. Tarricone. As of September 30, 1997, the
outstanding principal balance was $815,000.
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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 was available for drawing until
September 15, 1997 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 on the advances outstanding under 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
stockholders of White Plains Fuel, Inc. received 168,020 shares of
newly-created Series A 7.5% Cumulative Convertible Redeemable Preferred Stock
of the Company (the "Series A Preferred Stock"). On various dates throughout
the 1996 fiscal year, the Company declared dividends on the Series A
Preferred Stock for $.45 per share totaling $75,609. Through the nine months
ended May 31, 1997, the Company declared dividends on the Series A Preferred
Stock of $.3375 per share totaling $56,706. 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 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 May 31, 1996 the Company issued 580,646 shares of Series B 8%
Cumulative Convertible Redeemable Preferred Stock (the "Series B 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 plus accrued dividends of $756.23 and
$1,472.79 respectively, into 18,815 and 162,261 shares of the Company's
Common Stock. Through May 31, 1997, there were no further conversions. The
terms of the Series B Preferred Stock have subsequently been amended. See
"Description of Business--Recent Developments."
On August 30, 1996, Claire Tarricone loaned to the Company $80,000,
with interest at 8% per annum, payable on demand.
On September 5, 1996, the Company acquired the customer list of Dino
Oil, Inc. in exchange for 200,000 shares of the Company's Common Stock at
$1.9375 per share, $100,000 cash and certain costs of $56,957. The
acquisition was accounted for as a purchase and resulted in the recognition
of a customer list in the amount of $544,457. Subsequent to the September 5,
1996 acquisition, the Company acquired 4 trucks of Dino Oil at a fair market
value of $166,226. This amount was financed through a capital lease.
On November 29, 1996 and February 28,1997, ATI transferred to HQ
Propane four (4) leaseholds in partial satisfaction of the note receivable
due from ATI. The appraised value of these leaseholds was $160,000,
$175,000, $210,000, and $145,000 respectively. As of May 31, 1997, the note
receivable due from ATI was $2,963,563. On June 10, 1997, ATI filed a
voluntary petition for reorganization pursuant to Chapter 11 of the
Bankruptcy Code (the "Code"). ATI has continued in possession of its
property and in the management of its affairs as a debtor-in-possession under
the applicable provisions of the Code. In connection with the bankruptcy
proceeding, the Company has asserted (and ATI has acknowledged) pre-petition
claims arising under the note receivable from ATI in the approximate amount
of $2,963,563 and pre-petition liens on certain leasehold interests. The
proceeding is before the United States Bankruptcy Court, Southern District of
New York, and is referenced as "A. TARRICONE, INC., 97B21488." As the
voluntary petition was only recently filed by ATI, and as the proceeding is
in an early stage, it would be difficult to determine at this time the
likelihood of recovery by the Company of such indebtedness. In any event,
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there can be no assurance that the indebtedness and the liens asserted by the
Company in this proceeding will be recognized or given full effect, that the
same will not be challenged, modified or reduced, or that all or any portion
of such indebtedness will be repaid to the Company. Furthermore, the Company
has determined that its asserted pre-petition liens may not have been
properly "perfected," in which case the Company would be deemed an unsecured
creditor (rather than a secured creditor) in the proceeding. The Company
intends to pursue all appropriate avenues (if any) to protect its interests
in this regard. If it were ultimately determined by the court that the
Company's status in the proceeding is that of an unsecured creditor, the
Company's legal basis for recovery would be materially, adversely affected.
Additionally, all executory contracts between ATI and the Company are
susceptible to rejection, at the election of ATI, under the applicable
provisions of the Code. Furthermore, any transfers from ATI to the Company
on account of antecedent debt (of ATI to the Company) during the one-year
period prior to the date of filing of ATI's voluntary petition may be subject
to avoidance under the applicable provisions of the Code. The occurrence of
any such circumstances may have a material adverse effect on the Company.
On December 31, 1996, the Company entered into an agreement with a
third party distributor to lease four (4) gasoline stations for a period of
10 years with an option for renewal. The distributor prepaid the Company
$149,080 for the first year of rental expense and the Company is carrying
$125,500 as deferred income. Simultaneously, the Company terminated the
previous third party agreement for $192,497 which resulted in a note
receivable and additional rental income of approximately $70,000.
On May 16, 1997, the Company entered into an agreement for the sale of
the retail fuel oil customer list of Rockland to an independent third party
distributor. The terms of the sale were $200,000 at closing, $200,000 on the
first anniversary, and $127,000 on the second anniversary, with interest on
outstanding amounts at a rate of 6% per annum. As a result, the Company has
recognized extraordinary income to the extent of $113,815 (net of applicable
income taxes of $61,852). During the quarter ended February 28, 1997, the
Company issued for certain consulting services 400,000 five (5) year warrants
dated 2/27/97 at $.41 per warrant exercise price, 100,000 five (5) year
warrants (10,000 dated 11/04/96, and 90,000 dated 2/18/97) at $.3125 per
warrant exercise price, and 15,000 five (5) year warrants dated 11/05/96 at
$1.00 per warrant exercise price.
On June 9, 1997, the Company obtained a one-year revolving credit
facility in the maximum principal amount of $1,000,000. Interest accrues on
outstanding balances at the prime rate plus 10% per annum, subject to a
minimum of 17% per annum. The credit facility is secured by a security
interest in all of the Company's accounts, general intangibles, contract
rights and inventory, as well as by the guarantees of Claire E. Tarricone,
Joseph A. Tarricone and Anthony J. Tarricone.
The Company had working capital of $2,776,040 and a ratio of current
assets to current liabilities of 2.86:1 as at August 31, 1996, and the
Company had working capital of $155,163 and a ratio of current assets to
current liabilities of 1.06:1 as at May 31, 1997.
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.
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DESCRIPTION OF BUSINESS
Background
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 the
Company acquired Halstead Quinn Propane, Inc. in exchange for 2,170,000
shares of the Company's Common Stock. Simultaneously 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, and Halstead Quinn Terminal ("HQ Terminal"), HQ
Gasoline ("HQ Gasoline") and Dino Oil ("Dino"), 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. ("WPF"), 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 September 24, 1997, the Company, Claire E. Tarricone, Anthony J.
Tarricone and Joseph A. Tarricone and Infinity Investors Limited ("Infinity")
entered into a certain Restructuring Agreement (the "Restructuring
Agreement). Under the terms of the Restructuring Agreement, Infinity agreed
to exchange 77,419 shares of Series B Preferred Stock and all accrued and
unpaid dividends on the outstanding shares of Series B Preferred Stock for
the Company's Subordinated Promissory Note in the principal amount of
$600,000 (the "Note"). The Note accrues interest at 12% per annum compounded
quarterly through September 24, 1999 and accrues simple interest at 12% per
annum after September 24, 1999. The Note matures on September 24, 2002,
although the Company is required to make mandatory prepayments upon the
occurrence of certain events.
The terms of the balance of the 560,126 shares of Series B Preferred
Stock owned by Infinity were amended to provide, among other things, for (i)
a fixed conversion price of $2.00 per share of Series B Preferred Stock, (ii)
the removal of certain limitations on the rights of holders of the Series B
Preferred Stock to convert those shares into the Company's Common Stock, and
(iii) an increase in the dividend rate of the Series B Preferred Stock to 12%
from 8% per annum. The Company also agreed to register the shares of Common
Stock of the Company to which this prospectus relates.
In connection with the execution and delivery of the Restructuring
Agreement, Infinity granted to Elizabeth Mandel ("Mandel") an option to
purchase all of the Shares. Under the terms of the option, Mandel has the
option to acquire all of the shares for a price of $2.00 per share until the
18-month anniversary of the effective date of the registration statement of
which this prospectus forms a part (the "Effective Date"), subject to earlier
termination in the event that Mandel fails to purchase at least an aggregate
of 250,000 Shares on or prior to the 90th day following the Effective Date
and an aggregate of 400,000 Shares on or prior to the last day of each
succeeding 90-day period commencing 90 days after the Effective Date.
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On June 10, 1997, ATI filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has
continued in possession of its property and in the management of its affairs
as a debtor-in-possession under the applicable provisions of the Code. In
connection with the bankruptcy proceeding, the Company has asserted (and ATI
has acknowledged) pre-petition claims arising under the note receivable from
ATI in the approximate amount of $2,963,563 and pre-petition liens on certain
leasehold interests. The proceeding is before the United States Bankruptcy
Court, Southern District of New York, and is referenced as "A. TARRICONE,
INC., 97B21488." As the voluntary petition was only recently filed by ATI,
and as the proceeding is in an early stage, it would be difficult to
determine at this time the likelihood of recovery by the Company of such
indebtedness. In any event, there can be no assurance that the indebtedness
and the liens asserted by the Company in this proceeding will be recognized
or given full effect, that the same will not be challenged, modified or
reduced, or that all or any portion of such indebtedness will be repaid to
the Company. Furthermore, the Company has determined that its asserted
pre-petition liens may not have been properly "perfected," in which case the
Company would be deemed an unsecured creditor (rather than a secured
creditor) in the proceeding. The Company intends to pursue all appropriate
avenues (if any) to protect its interests in this regard. If it were
ultimately determined by the court that the Company's status in the
proceeding is that of an unsecured creditor, the Company's legal basis for
recovery would be materially, adversely affected. Additionally, all
executory contracts between ATI and the Company are susceptible to rejection,
at the election of ATI, under the applicable provisions of the Code.
Furthermore, any transfers from ATI to the Company on account of antecedent
debt (of ATI to the Company) during the one-year period prior to the date of
filing of ATI's voluntary petition may be subject to avoidance under the
applicable provisions of the Code. The occurrence of any such circumstances
may have a material adverse effect on the Company.
The Company's principal terminal facility is currently being operated
by ATI pending the approval of the Company's application with the State of
New York for a terminal operator's and diesel motor fuel license. There can
be no assurance about the prospect of obtaining the approval of such
licenses. The Company has been advised by counsel that pending the
conclusion of ATI's bankruptcy proceeding, ATI will continue to maintain such
licenses, and thus that ATI will be able to continue operating the Company's
terminal and diesel motor fuel businesses. However, there can be no
assurance that at the conclusion of such proceeding, if the result were a
liquidation of ATI (and therefore a termination of such licenses), that the
Company would by that time have received its own licenses or would have been
able to contract with another entity to operate such businesses. The
occurrence of any of these circumstances could have a material and adverse
effect on these businesses and on the Company.
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 stockholders 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.
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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.
Wholesale Distribution and Storage
HQ Terminal, owns a deep water terminal in Yonkers, New York near the
New York City border. The five million gallon terminaling facility allows
for the wholesale distribution of fuel oil, gasoline and diesel fuel and also
provides storage facilities for other petroleum companies through warehousing
agreements know as thru-puts. The Company's own product requirements are
often supplied through this facility.
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.
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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 thru-put 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 "Description of Business--Certain Licenses Relating to the
Company's Business."
Gasoline
HQ Gasoline operates 25 retail gasoline stations throughout eastern New
York State under the trade names "ATI" and "Gulf." 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 25 facilities are combination convenience store/gasoline
pumping facilities. The balance of the outlets are combination automotive
repair shop/gasoline pumping facilities. Nine of the 25 gasoline stations
are leased from ATI. See "Certain Relationships and Related Transactions"
and "Risk Factors."
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 broadened the Company's marketing
region by providing the Company with customer accounts (including various
service stations and fleet garages) located in the Bronx, Queens, Brooklyn,
and Manhattan, as well as Nassau, Suffolk and Westchester counties.
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In December 1996, the Company terminated its lease of 4 of its 25
stations with 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 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
$20,000 to $550,000 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" and "Risk Factors--ATI Bankruptcy."
Retail Fuel Oil
The Company's retail fuel oil distribution business was conducted by HQ
Propane's subsidiary, Rockland Fuel Oil, Inc., until May 16, 1997, when the
Company entered into an agreement with an independent third party distributor
for the sale of its retail fuel oil customer list and related business. The
terms of the sale were $200,000 at closing, $200,000 on the first
anniversary, and $127,000 on the second anniversary, with interest on
outstanding amounts at a rate of 6% per annum. Rockland continues to own a
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.
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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 has 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 customer base each year includes 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
delivers propane to each of its customers an average of approximately six
times during the year, depending upon weather conditions and historical
consumption patterns. Most of HQ Propane's customers receive their propane
pursuant to an automatic delivery system, without the customer having to make
an affirmative purchase decision each time propane is needed. In addition,
HQ Propane provides 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 making process before making an affirmative purchase decision. HQ
gasoline's ability to market under the trademarks "Gulf" 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 business. 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 vary 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-related 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.
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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 sales 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 nine
months ended May 31, 1997.
The Company met substantially all of its gasoline product requirements
through Gulf Oil, BP and ATI for the nine months ended May 31, 1997. Gulf
Oil supplied approximately 30%, and ATI provided approximately 65%, of such
requirements during such period. All of the fuel oil and diesel fuel product
requirements of the Company's customers during such period were met by ATI.
Upon the issuance of its diesel motor fuel license 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.
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More specifically, HQ Propane intends 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.
Competition
The Company's business is highly competitive. In addition to
competition from alternative energy sources, HQ Propane competes with propane
distributors offering a broad range of services and prices, from full service
distributors similar to HQ Propane, to those offering delivery only.
Competition with other companies in the propane industry is based primarily
on customer service and price. Longstanding customer relationships are
typical in the retail propane industry. Many companies in the industry,
including HQ Propane, deliver propane to their customers based upon weather
conditions and historical consumption patterns without the customers having
to make an affirmative purchase decision each time propane is needed. In
addition, most companies, including HQ Propane, provide propane equipment
repair service on a 24 hour a day basis, which tends to build customer
loyalty. As a result, HQ Propane may experience difficulty in acquiring new
retail customers due to existing relationships between potential customers
and other propane distributors. 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 branded stations are
not as sensitive to price and, therefore, typically maintain a price
consistent with other brand name competitors.
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Certain Licenses Relating to the Company's Business
HQ Propane's principal terminal facility is currently being 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 has 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. There can be no assurance about
the prospect of obtaining the approval of such licenses. The $.0025 per
gallon fee charged by ATI for these services would be eliminated
simultaneously with the issuance of HQ Propane's terminal operator's license
and its diesel motor fuel license. See "Certain Relationships and Related
Transactions."
On June 10, 1997, ATI filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code. See "Certain Relationships
and Related Transactions" and "Legal Proceedings." The Company has been
advised by counsel that pending the conclusion of ATI's bankruptcy
proceeding, ATI will continue to maintain such licenses, and thus that ATI
will be able to continue operating the Company's terminal and diesel motor
fuel businesses. However, there can be no assurance that at the conclusion
of such proceeding, if the result were a liquidation of ATI (and therefore a
termination of such licenses), that the Company would by that time have
received its own licenses or would have been able to contract with another
entity to operate such businesses. The occurrence of any of these
circumstances could have a material and adverse effect on these businesses
and on the Company.
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 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 19 of the 22 gasoline stations presently leased by the Company.
(Three of the 25 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.
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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 "Description of
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 $325,000 over
the next fourteen months in order to meet EPA and State regulations for
underground storage tanks by December, 1998.
Employees
As of September 30, 1997, the Company had a total of 28 employees, of
which 18 were office, clerical and customer service personnel, 4 were
drivers, 3 were mechanics, and 3 were executive officers of the Company. All
of the Company's employees are full-time employees and none is seasonally
employed. Seven employees are represented by the International Brotherhood
of Teamster and Chauffeurs Union, Local 456 under a contract which expires on
December 31, 1997. Management believes that its relations with both its
union and nonunion employees are satisfactory.
DESCRIPTION OF PROPERTY
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 September 30, 1997, the Company leased the following stations
from ATI (See "Certain Relationships and Related Transactions"):
Station Name and Number 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
(8) West Hurley #315 1150 Route 28
Kingston, NY 12461
(9) Pine Plains #411 Route 199
Pine Plains, NY 12540
Five of the above leases expire on August 31, 1998, two expire on
August 31, 2018, and the other two expire on November 28, 2006 with an option
for an additional ten year term expiring on November 28, 2016. The aggregate
annual rental amount under these leases is $195,976 for the fiscal year
ending August 31, 1996, $187,272 for the fiscal year ending August 31, 1997,
and $213,633 for the fiscal year ending August 31, 1998. For the four leases
expiring on August 31, 2018 or November 28, 2006, as the case may be, the
aggregate rental amount will range from $89,150 in the fiscal year ending
August 31, 1999 to $88,800 in the fiscal year ending August 31, 2018.
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
September 30, 1997, there has been no further action in this case.
On June 10, 1997, ATI filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has
continued in possession of its property and in the management of its affairs
as a debtor-in-possession under the applicable provisions of the Code. In
connection with the bankruptcy proceeding, the Company has asserted (and ATI
has acknowledged) pre-petition claims arising under the note receivable from
ATI in the approximate amount of $2,963,563 and pre-petition liens on certain
leasehold interests. The proceeding is before the United States Bankruptcy
Court, Southern District of New York, and is referenced as "A. TARRICONE,
INC., 97B21488." As the voluntary petition was only recently filed by ATI,
and as the proceeding is in an early stage, it would be difficult to
determine at this time the likelihood of recovery by the Company of such
indebtedness. In any event, there can be no assurance that the indebtedness
and the liens asserted by the Company in this proceeding will be recognized
or given full effect, that the same will not be challenged, modified or
reduced, or that all or any portion of such indebtedness will be repaid to
the Company. Furthermore, the Company has determined that its asserted
pre-petition liens may not have been properly "perfected," in which case the
Company would be deemed an unsecured creditor (rather than a secured
creditor) in the proceeding. The Company intends to pursue all appropriate
avenues (if any) to protect its interests in this regard. If it were
ultimately determined by the court that the Company's status in the
proceeding is that of an unsecured creditor, the Company's legal basis for
recovery would be materially, adversely affected. Additionally, all
executory contracts between ATI and the Company are susceptible to rejection,
at the election of ATI, under the applicable provisions of the Code.
Furthermore, any transfers from ATI to the Company on account of antecedent
debt (of ATI to the Company) during the one-year period prior to the date of
filing of ATI's voluntary petition may be subject to avoidance under the
applicable provisions of the Code. The occurrence of any such circumstances
may have a material adverse effect on the Company.
HQ Propane's principal terminal facility is currently being 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. See
"Description of Business--Certain Licenses Relating to the Company's
Business." There can be no assurance about the prospect of obtaining the
approval of such licenses. The Company has been advised by counsel that
pending the conclusion of ATI's bankruptcy proceeding, ATI will continue to
maintain such licenses, and thus that ATI will be able to continue operating
the Company's terminal and diesel motor fuel businesses. However, there can
be no assurance that at the conclusion of such proceeding, if the result were
a liquidation of ATI (and therefore a termination of such licenses), that the
Company would by that time have received its own licenses or would have been
able to contract with another entity to operate such businesses. The
occurrence of any of these circumstances could have a material and adverse
effect on these businesses and on the Company.
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.
MANAGEMENT
The directors and executive officers of the Company as of October 9,
1997, are as follows:
Name Age Position with the Company
Claire E. Tarricone 40 President and Director
Anthony J. Tarricone 36 Vice President, Secretary and Director
Joseph A. Tarricone 35 Vice President, Treasurer and Director
Edwin Goldwasser 65 Director
The following is a brief description of the professional experience and
background of the directors and executive officers of the Company:
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. 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.
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, 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 stockholders
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 stockholders for damages for breaches of their fiduciary duty as
Directors. As a result of such provision, stockholders 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 stockholder 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
the National Association of Securities Dealers, Inc. reporting changes in the
number of shares of the Company's Common Stock beneficially owned by them.
Such persons are required 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 and 1997, except that each of Claire
Tarricone, Anthony Tarricone and Joseph Tarricone filed one report after the
applicable filing deadline.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information for each of the Company's
fiscal years ended August 31, 1997, 1996 and 1995 concerning compensation of
(i) all individuals serving as the Company's Chief Executive Officer during
the fiscal year ended August 31, 1997 and (ii) each other executive officer
of the Company whose total annual salary and bonus equaled or exceeded
$100,000 in the fiscal year ended August 31, 1997 or either of the two
previous fiscal years (to the extent that such person was the Chief Executive
Officer and/or an executive officer, as the case may be, during any part of
such fiscal year).
Annual Long-Term
Compensation Compensation Award
RestricteSecurities
Stock Underlying
Name and Principal Year Salary ($) Bonus Other (2) Awards Options
Position
(1) ($) (#)
Claire E. Tarricone 1997 $54,600 -------- $ 9,297 -------- 420,000(3)
President 1996 $54,600 -------- $15,034 -------- 100,000(3)
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 were 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 were granted
independent of the aforesaid plan. In addition, on August 12, 1997,
Ms. Tarricone was granted 20,000 options under the plan with an exercise
price of $0.63 per share.
Compensation of Directors
Directors of the Company are not compensated for their services,
although the Company reimburses directors for their expenses of attending
meetings of the board of directors.
Stock Incentive Plan
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 stockholder
approval. The stockholders 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, Termination of Employment, and Change in Control
Arrangements
The Company has entered into five year Employment Agreements with each
of Claire E. Tarricone, Anthony J. Tarricone and Joseph A. Tarricone. The
Employment Agreements automatically extend for an additional one year at the
end of each 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, August 31, 1996 and August 31,
1997. 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.
Indemnification of Directors and Officers
Under the Nevada General Corporation Law, as amended, a director,
officer, employee or agent of a Nevada corporation may be entitled to
indemnification by the corporation under certain circumstances against
expenses, judgments, fines and amounts paid in settlement of claims brought
against them by a third person or by or in right of the corporation.
The Company is obligated under its Articles of Incorporation to
indemnify any of its present or former directors who served at the Company's
request as a director, officer or member of another organization against
expenses, judgments, fines and amounts paid in settlement of claims brought
against them by a third person or by or in right of the corporation if such
director acted in good faith or in a manner such director reasonably believed
to be in, or not opposed to, the best interests of the Company and, with
respect to any criminal action or proceeding, if such director had no reason
to believe his or her conduct was unlawful. However with respect to any
action by or in the right of the Company, the Articles of Incorporation
prohibit indemnification in respect of any claim, issue or matter as to which
such director is adjudged liable for negligence or misconduct in the
performance is his or her duties to the Company, unless otherwise ordered by
the relevant court. The Company's Articles of Incorporation also permit it
to indemnify other persons except against gross negligence or willful
misconduct.
The Company is obligated under its bylaws to indemnify its directors,
officers and other persons who have acted as a representatives of the Company
at its request to the fullest extent permitted by applicable law as in effect
from time to time, except for costs, expenses or payments in relation to any
matter as to which such officer, director or representative is finally
adjudged derelict in the performance of his or her duties, unless the Company
has received an opinion from independent counsel that such person was not so
derelict.
In addition, pursuant to indemnification agreements that the Company
has entered into with each of its directors, the Company is obligated to
indemnify its directors to the fullest extent permitted by applicable
corporate law and its Articles of Incorporation. The indemnification
agreements also provide that, upon the request of a director and provided
that director undertakes to repay amounts that turn out not to be
reimbursable, that director is entitled to reimbursement of litigation
expenses in advance of the final disposition of the legal proceeding.
The Nevada General Corporation Law, as amended, also permits a
corporation to limit the personal liability of its officers and directors for
monetary damages resulting from a breach of their fiduciary duty to the
corporation and its stockholders. The Company's Articles of Incorporation
limit director liability to the maximum extent permitted by the Nevada
General Corporation Law, which presently permits limitation of director
liability except (i) for a director's acts or omissions that involve
intentional misconduct, fraud or a knowing violation of law and (ii) for a
director's willful or grossly negligent violation of a Nevada statutory
provision that imposes personal liability on directors for improper
distributions to stockholders. As a result of the inclusion in the Company's
Articles of Incorporation of this provision, the Company's stockholders may
be unable to recover monetary damages against directors as a result of their
breach of their fiduciary duty to the Company and its stockholders. This
provision does not, however, affect the availability of equitable remedies,
such as injunctions or rescission based upon a breach of fiduciary duty by a
director.
The Company currently maintains liability insurance in the amount of
$1,000,000 for the benefit of its officers and directors.
The foregoing indemnification obligations are broad enough to permit
indemnification with respect to liabilities arising under the Securities
Act. Insofar as the Company may otherwise be permitted to indemnify its
directors, officers and controlling persons against liabilities arising under
the Securities Act or otherwise, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 7, 1992, ATI distributed all of the capital stock of HQ
Propane to its sole stockholders, Claire E. Tarricone, Anthony J. Tarricone
and Joseph A. 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 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 $2,963,563 on May 31,
1997. On February 28, 1995 and July 31,1995, ATI granted/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 granted/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. On November 30, 1995 and March 22, 1996, ATI granted/
transferred 2 station leaseholds having an appraised fair market value of
$1,365,000 in partial satisfaction of the ATI Note. On November 29, 1996 and
February 28, 1997, ATI granted/transferred 4 additional station leaseholds
having an appraised fair market value of $690,000 in partial satisfaction of
the ATI Note. See "Risk Factors--ATI Bankruptcy."
On June 10, 1997, ATI filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has
continued in possession of its property and in the management of its affairs
as a debtor-in-possession under the applicable provisions of the Code. In
connection with the bankruptcy proceeding, the Company has asserted (and ATI
has acknowledged) pre-petition claims arising under the note receivable from
ATI in the approximate amount of $2,963,563 and pre-petition liens on certain
leasehold interests. The proceeding is before the United States Bankruptcy
Court, Southern District of New York, and is referenced as "A. TARRICONE,
INC., 97B21488." As the voluntary petition was only recently filed by ATI,
and as the proceeding is in an early stage, it would be difficult to
determine at this time the likelihood of recovery by the Company of such
indebtedness. In any event, there can be no assurance that the indebtedness
and the liens asserted by the Company in this proceeding will be recognized
or given full effect, that the same will not be challenged, modified or
reduced, or that all or any portion of such indebtedness will be repaid to
the Company. Furthermore, the Company has determined that its asserted
pre-petition liens may not have been properly "perfected," in which case the
Company would be deemed an unsecured creditor (rather than a secured
creditor) in the proceeding. The Company intends to pursue all appropriate
avenues (if any) to protect its interests in this regard. If it were
ultimately determined by the court that the Company's status in the
proceeding is that of an unsecured creditor, the Company's legal basis for
recovery would be materially, adversely affected. Additionally, all
executory contracts between ATI and the Company are susceptible to rejection,
at the election of ATI, under the applicable provisions of the Code.
Furthermore, any transfers from ATI to the Company on account of antecedent
debt (of ATI to the Company) during the one-year period prior to the date of
filing of ATI's voluntary petition may be subject to avoidance under the
applicable provisions of the Code. The occurrence of any such circumstances
may have a material adverse effect on the Company.
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 21 of the service stations comprising its HQ Gasoline Division from
ATI until August 31, 1998 and paid rent for the service stations in the
approximate amount of $54,000 per month. Additionally, until March 5, 1996,
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 (see the
immediately succeeding paragraph). The Company currently leases 9 service
stations from ATI at a reduced rent payment in the approximate amount of
$19,000 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 SmallCap stock market for the five trading days
immediately preceding the date of the exercise of the warrant. The warrants
provide that 59,425 were immediately vested on March 5, 1996, an additional
59,425 vested on March 5, 1997, and the balance become vested in three 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 $.01 per gallon for gasoline station
sales.
HQ Propane cannot operate its principal terminal facility until such
time as the pending applications for a terminal operator's license and diesel
license from the State of New York have been approved. See "Description of
Business--Certain Licenses Relating to the Company's Business." Accordingly,
ATI has continued to operate the terminal facility on behalf of HQ Propane.
Upon the issuance of such licenses, HQ Propane will assume operations of its
facilities directly. ATI also supplies the Company's operating divisions
with fuel oil and diesel fuel, and previously supplied the Company with
gasoline, at ATI's cost plus one quarter of one cent ($.0025) per gallon
purchased, which aggregated $51,112 during the fiscal year ended August 31,
1994; $42,494 during the fiscal year ended August 31, 1995; $38,671 during
the fiscal year ended August 31, 1996; and $22,500 during the nine months
ended May 31, 1997.
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 was 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 stockholders are required to purchase the shares
of the Company owned by the deceased or disabled stockholder 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.
See "Executive Compensation--Employment Contracts, Termination of
Employment and Change in Control Arrangements" for a description of the
Employment Agreements between the Company and Claire E. Tarricone, Anthony J.
Tarricone and Joseph A. Tarricone.
See "Executive Compensation--Indemnification of Directors and Officers"
for a description of indemnification agreements between the Company and each
of its executive officers.
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 October 5, 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 and executive officer 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 Title Of Class No. of Percentage of General
of Beneficial Shares Class Owned Voting
Owner Owned (1) Power(2)
Claire E. Common Stock 1,162,184(3) 24.39%(3) 23.56%(3)
Tarricone
33 Hubbells Drive
Mt. Kisco, NY
10549
Anthony J. Common Stock 1,162,183(4) 24.91%(4) 24.05%(4)
Tarricone
33 Hubbells Drive
Mt. Kisco, NY
10549
Joseph A. Common Stock 1,142,183(5) 24.59%(5) 23.73%(5)
Tarricone
33 Hubbells Drive
Mt. Kisco, NY
10549
Alan Cianflone Series A 84,010 50.0% 1.95%
42 Virginia Lane Cumulative
Thornwood, NY Convertible
10594 Redeemable
Preferred Stock
Jack Troccoli Series A 84,010 50.0% 1.95%
40 Reservoir Court Cumulative
Carmel, NY 10512 Convertible
Redeemable
Preferred Stock
Infinity Series B 560,126(6) 100.0% 41.91%(6)
Investors, Ltd. Cumulative
27 Wellington Road Convertible
Cork, Ireland Redeemable
Preferred Stock
Elizabeth R. Common Stock 2,535,488 37.38%(7) 36.86%(7)
Mandel
885 Arapahoe
Avenue
Boulder, CO 80302
Boulder Financial Common Stock 315,000 6.94%(8) 6.69%(8)
Group
885 Arapahoe Ave.
Boulder, CO 80302
Laurence Hughes Common Stock 420,000 9.45%(9) 9.10%(9)
49 Mountain Road
Pleasantville, NY
10570
Edwin Goldwasser Common Stock - 0 - (8) (8)
7616 Mansfield
Hollow Drive
Delray Beach, FL
33446
All Executive 3,248,850 60.11% 58.30%
Officers and
Directors as a
group (4 persons)
_____________________
(1) Based upon 4,226,091 shares of Common Stock outstanding as of October
5, 1997.
(2) Based on 4,226,091 common and 168,020 Series A Cumulative Convertible
Redeemable Preferred Shares outstanding as of September 30, 1997. Each of
the 168,020 shares of Series A Cumulative Convertible Redeemable Preferred
Stock is entitled to vote, together with the holders of the Company's
Common Stock, based upon the number of shares of Common Stock into which
such shares are convertible.
(3) Includes 420,000 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. 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 320,000 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. 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 320,000 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. 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
convertible into 2,170,488 shares of Common Stock. Infinity has the right
under the Restructuring Agreement to acquire an additional 1,000,000
options from the Tarricones if certain conditions regarding the timing of
this offering are not met.
(7) Includes (i) option to purchase all of the Shares from Infinity
exercisable within 60 days, (ii) warrants to purchase 315,000 shares of
Common Stock held by Boulder Financial Group of which Ms. Mandel is an
officer, director and stockholder.
(8) Consists of warrants to purchase 315,000 shares of Common Stock.
(9) Includes 220,000 shares of Common Stock that may be purchased pursuant
to presently exercisable stock options.
(10) 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.
SELLING STOCKHOLDERS
Infinity Investors Ltd. ("Infinity") will have acquired the shares of
Common Stock offered by this prospectus in connection with the conversion of
the Series B Preferred Stock. As of October 5, 1997, Infinity owned 560,126
shares of Series B Preferred Stock and did not own any shares of Common Stock.
The maximum aggregate number of shares of Common Stock into which the
Series B Preferred Stock issued to Infinity is convertible and which Infinity
may offer and sell pursuant to this prospectus is 2,170,488 Shares, based on
a conversion price of $2.00 per share. In accordance with Rule 416 under the
Securities Act, this registration statement also covers such indeterminate
number of additional shares of common Stock as may become issuable upon the
conversion of the Series B Preferred Stock to prevent dilution resulting from
stock splits, stock dividends or similar transactions or by reason of changes
in the conversion price as aforesaid. Because Infinity may sell all or a
portion of the common Stock at any time and from time to time after the date
hereof, no estimate can be made of the number of shares of Common Stock that
Infinity may retain upon completion of the offering. The number of Shares
that may actually be sold by Infinity will be determined by it, and may
depend upon a number of factors, including, among other things, the market
price of the Common Stock.
The Shares are subject to an Option Agreement dated September 24, 1997
between Infinity and Elizabeth R. Mandel. See "Description of
Business--Recent Developments." Accordingly, all or a substantial portion of
the Shares may be transferred to Ms. Mandel. In addition, Infinity may have
otherwise sold, transferred or disposed of all or a portion of its Shares
since the date on which it provided the information regarding its ownership
of the Shares in transactions exempt from the registration requirements of
the Securities Act. Additional information concerning selling stockholders
may be set forth from time to time in prospectus supplements to this
Prospectus. See "Plan of Distribution."
The Company has agreed to file the Registration Statement to which this
Prospectus forms a part for the purpose of registering the potential resale
of the Shares and to maintain the effectiveness of such Registration
Statement until the Shares are sold and all steps have been taken to remove
any legends or restrictions on transfer thereon or until the Shares have
otherwise are available for resale pursuant to Rule 144(k) promulgated under
the Securities Act, in each case, as contemplated by a certain Restructuring
Agreement dated September 24, 1997 by and among the Company, Infinity
Investors Limited, Claire E. Tarricone, Anthony J. Tarricone and Joseph A.
Tarricone (the "Restructuring Agreement). In addition, the Company and
Infinity agreed to indemnify each other and certain affiliated parties from
and against any losses or claims arising out of, among other things, (1) any
alleged untrue statement of a material fact or (2) any material omission
contained or referred to in the Registration Statement. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company, pursuant
to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. All of the registration and filing fees, printing expenses,
blue sky fees, if any, fees and disbursements of counsel for the Company, and
certain fees and disbursements of one counsel for Infinity will be paid by
the Company; provided, however, that fees and disbursements of experts and
counsel retained by Infinity and any underwriting discounts and selling
commissions will be borne by Infinity.
Except as specifically set forth herein, Infinity does not have, and
within the past three years has not had, any position, office or other
material relationship with the Company or any of its predecessors or
affiliates.
DESCRIPTION OF SECURITIES
General
The authorized capital stock of the Company consists of 50,000,000
shares of Common Stock, par value $.001 per share ("Common Stock"), and
5,000,000 shares of Preferred Stock, par value $.01 per share ("Preferred
Stock"). As of October 10, 1997, 4,226,091 shares of Common Stock and
728,146 shares of Preferred Stock were outstanding, of which 168,020 shares
are designated as Series A Preferred Stock and 560,126 are designated
Series B Preferred Stock.
Common Stock
Holders of Common Stock are entitled to one vote per share on each
matter submitted to the stockholders. Holders of Common Stock do not have
cumulative voting rights, which means that the holders of a majority of the
Company's Common Stock and voting Preferred Stock are able to elect all of
the Company's directors. Holders of Common Stock share equally in dividends
and distributions that may be declared by the Company's Board of Directors
out of funds legally available for that purpose after dividends and
distributions have been paid in full to the holders of any series of
Preferred Stock that the Company's Board of Directors has determined shall
have a preference in the payment of dividends and distributions. Upon
liquidation or dissolution of the Company, holders of Common Stock will share
equally in the assets of the Company remaining after the payment of the
Company's debts and liabilities and of the liquidation preference of, and
accrued dividends on, any series of Preferred Stock. The Common Stock is not
convertible or redeemable and holders of Common Stock do not have
subscription rights or preemptive rights. The shares of Common Stock
currently outstanding are, and the shares to be sold in connection with this
offering will be, duly authorized, validly issued, fully paid and
non-assessable.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock in one or more series. The Company's Board of Directors is authorized
to designate one or more series of Preferred Stock and to determine the
number of shares, price, preferences, rights and limitations of each series
of Preferred Stock, without any action by the Company's stockholders. The
issuance of Preferred Stock or the issuance of rights to acquire Preferred
Stock, may have the effect of delaying or preventing a change in control of
the Company or an unsolicited takeover bid.
The board of directors has designated and issued Series A Preferred
Stock and Series B Preferred Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The Series A 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 Series A 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 Series A 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 Series A 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. The
Company is not required to redeem from any holder during any twelve (12)
month period a number of shares of Series A Preferred Stock greater than
twenty percent (20%) of the shares of Series A Preferred Stock then held by
the applicable holder, nor is the Company required to redeem shares of Series
A Preferred Stock from any holder more than once during any twelve (12) month
period. Each share of Series A Preferred Stock entitles 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 business on the day immediately prior to the
date of such vote, and with respect to such votes, a holder of shares of
Series A Preferred Stock has full voting rights and powers equal to the
voting rights and powers of a holder of shares of Common Stock, is entitled
to a notice of any stockholders' meeting in accordance with the By-laws of
the Company, and is entitled to vote with holders of Common Stock together as
a single class.
The Series B Preferred Stock, as amended, has a par value of $0.001 per
share and bears a cumulative cash dividend at a rate of 12% per annum on a
stated value of $7.75 per share, payable quarterly after payment of dividends
on the Series A Preferred Stock, when, as and if declared by the board of
directors of the Company. The Series B Preferred Stock is convertible into
Common Stock based on the stated value plus accrued and unpaid dividends at a
conversion price of $2.00 per share of Common Stock, subject to adjustment in
certain events. The Preferred Stock is redeemable at the option of the
Company, in whole or in part, at any time at a redemption price equal to 129%
of the stated value per share, plus accrued and unpaid dividends, subject to
adjustment. Except as required by applicable law, shares of Series B
Preferred Stock do not entitle the holder to any voting rights, but such
holder is entitled to notice of any stockholder meetings in accordance with
the by-laws of the Company.
Warrants and Options
As of October 10, 1997, the Company has agreed to issue warrants and
options to purchase up to an aggregate of 2,152,125 shares of Common Stock,
of which warrants and options to purchase an aggregate of 1,973,850 shares of
Common Stock have been issued.
The following table sets forth the outstanding options and warrants of
the Company as of October 10, 1997:
Amount Term Issue Date Exercise Price ($)
297,125 5 yrs. 03/05/96 60% of market
10,000 5 yrs. 11/04/96 .3125
15,000 5 yrs. 11/05/96 1.000
1,200,000 5 yrs. 11/14/96 .3125
225,000 5 yrs. 01/10/97 .3125
90,000 5 yrs. 02/18/97 .3125
315,000 5 yrs. 02/27/97 .4100
209,000 5 yrs. 08/12/97 .6300
All of the foregoing warrants and options have been issued pursuant to
agreements that contain anti-dilutive provisions providing for adjustment of
the exercise price and the number and type of securities issuable upon
exercise of the warrants or options should any one or more of certain
specified events occur.
Anti-Takeover Provisions
The Company's by-laws provide that directors may not be removed without
cause, which limits the ability of stockholders to effect a change in control
of the Company.
Sections 78.378 through 78.3793 of the Nevada General Corporation Law
may affect attempts to acquire control of the Company. In general under
those sections, an entity that acquires "control shares" of an "issuing
corporation" may vote the control shares only if approved by the holders of a
majority of the voting power of the issuing corporation, excluding (i) the
acquirer of the control shares, (ii) officers of the issuing corporation and
(iii) those directors of the issuing corporation who are also employees of
the issuing corporation. An issuing corporation is a corporation that is
organized in Nevada, does business in Nevada, directly or through a
subsidiary, and has at least 200 stockholders, at least 100 of whom are
Nevada residents. Control shares are shares that when added to shares
already owned by an entity, would give that entity voting power in the
election of directors of any of three thresholds: one-fifth, one-third and a
majority. The effect of these sections is to condition the acquisition of
voting control of a corporation on the approval of a majority of the
pre-existing disinterested stockholders. An issuing corporation may exclude
itself from the coverage of these sections by inserting a provision to that
effect in its articles of incorporation or by-laws on or before the tenth day
after the relevant acquisition is made.
Sections 78.411 through 78.444 of the Nevada General Corporation Law
may also affect attempts to acquire control of the Company. In general those
sections restrict "business combinations" (defined to include, among other
transactions, mergers, disposition of assets or shares and recapitalizations)
between a Nevada corporation having at least 200 stockholders and an
"interested stockholder" (defined as a stockholder who is the beneficial
owner of 10% or more of the voting power of the covered corporation's
outstanding securities). If occurring within three years from when a
stockholder becomes an interested stockholder, a business combination between
that corporation and that interested stockholder may be consummated only if
either the business combination or the purchase of shares that caused that
stockholder to become an interested stockholder has been approved by the
board of directors of that corporation prior to the date of such purchase.
If occurring after three years from when that stockholder becomes an
interested stockholder, a business combination between that corporation and
that interested stockholder may be consummated only if certain statutory
requirements concerning the compensation to be received by that corporation's
stockholders are satisfied or if the business combination is made in
accordance with that corporation's articles of incorporation and either (i)
the business combination or the purchase of shares that caused that
stockholder to become an interested stockholder has been approved by that
corporation's board of directors prior to the date of such purchase or (ii)
the business combination has been approved by the vote of holders of stock
representing a majority of the voting power not beneficially owned by the
interested stockholder at a meeting called for that purpose not earlier than
three years after the date of the purchase of shares that caused that
stockholder to become an interested stockholder. A corporation may elect in
its original articles of incorporation not to be subject to these sections or
the stockholders representing a majority of the voting power not beneficially
owned by the interested stockholder may adopt an amendment to the
corporation's articles of incorporation to make that election, but the
amendment will take effect 18 months after the stockholder vote and will not
apply to any combination with an interested stockholder who was such on the
effective date of the amendment. The Company has not made such an election.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Interwest
Transfer Company whose address is P.O. Box 17136, Salt Lake City, Utah
84117.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock became listed on the NASDAQ SmallCap Stock
Market under the symbol "HSNR". The following table sets forth the range of
high and low bid prices for the Company's Common Stock from September 1, 1995
through August 31, 1997, 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 1996
First Quarter 6 19/32 5
Second Quarter 6 31/64 4 5/16
Third Quarter 7 4 5/16
Fourth Quarter 6 13/32 1 5/32
Fiscal 1997
First Quarter 1 5/16 3/64
Second Quarter 9/16 5/64
Third Quarter 1 5/64 9/32
Fourth Quarter 1 5/16
As of October 9, 1997, there were 168 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 & Company.
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.
PLAN OF DISTRIBUTION
Sales of the Shares may be made from time to time by Infinity, or,
subject to applicable law, by pledgees, donees, distributees, transferees or
other successors in interest. Such sales may be made on the NASDAQ SmallCap
Stock Market, in another over-the-counter market, on a national securities
exchange (any of which may involve crosses and block transactions), in
privately negotiated transactions or otherwise or in a combination of such
transactions at prices and at terms then prevailing or at prices related to
the then current market price, or at privately negotiated prices. In
addition, any Shares covered by this Prospectus which qualify for sale
pursuant to Section 4(1) of the Securities Act or Rule 144 promulgated
thereunder may be sold under such provisions rather than pursuant to this
Prospectus. Without limiting the generality of the foregoing, the Shares may
be sold in one or more of the following types of transactions: (a) a block
trade in which the broker-dealer so engaged will attempt to sell the Shares
as agent but may position and resell a portion of the block as principal to
facilitate the transaction; (b) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this
Prospectus; (c) an exchange distribution in accordance with the rules of such
exchange; (d) ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and (e) face-to-face transactions between sellers
and purchasers without a broker-dealer. In effecting sales, brokers or
dealers engaged by Infinity may arrange for other brokers or dealers to
participate in the resales.
In connection with the execution and delivery of the Restructuring
Agreement, Infinity granted to Elizabeth Mandel ("Mandel") an option to
purchase all of the Shares. Under the terms of the option, Mandel has the
option to acquire all of the Shares for a price of $2.00 per share until the
18-month anniversary of the effective date of the registration statement of
which this prospectus forms a part (the "Effective Date"), subject to earlier
termination in the event that Mandel fails to purchase at least an aggregate
of 250,000 Shares on or prior to the 90th day following the Effective Date
and an aggregate of 400,000 Shares on or prior to the last day of each
succeeding 90-day period commencing 90 days after the Effective Date.
In connection with distributions of the Shares or otherwise, Infinity
may enter into hedging transactions with broker-dealers. In connection with
such transactions, broker-dealers may engage in short sales of the Shares
registered hereunder in the course of hedging the positions they assume with
Selling Stockholders. Infinity may also sell Shares short and deliver the
Shares to close out such short positions. Infinity may also enter into
option or other transactions with broker-dealers which require the delivery
to the broker-dealer of the Shares registered hereunder, which the
broker-dealer may resell pursuant to this Prospectus.
Infinity may also pledge the Shares registered hereunder to a broker or
dealer and upon a default, the broker or dealer may effect sales of the
pledged Shares pursuant to this Prospectus.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from Selling Stockholders in amounts to
be negotiated in connection with the sale. Such brokers or dealers and any
other participating brokers or dealers may be deemed to be "underwriters"
within the meaning of the Securities Act in connection with such sales and
any such commission, discount or concession may be deemed to be underwriting
discounts or commissions under the Securities Act.
Information as to whether underwriters who may be selected by Infinity,
or any other broker-dealers, is acting as principal or agent for Infinity,
the compensation to be received by underwriters who may be selected by
Infinity, or any broker-dealer, acting as principal or agent for Infinity and
the compensation to be received by other broker-dealers, in the event the
compensation of such other broker-dealers is in excess of usual and customary
commissions, will, to the extent required, be set forth in a supplement to
this Prospectus (the "Prospectus Supplement"). Any dealer or broker
participating in any distribution of the Shares may be required to deliver a
copy of this Prospectus, including the Prospectus Supplement, if any, to any
person who purchases any of the Shares from or through such dealer or broker.
The Company has advised Infinity that during such time as they may be
engaged in a distribution of the Shares included herein they are required to
comply with Regulation M promulgated under the Exchange Act. With certain
exceptions, Regulation M precludes any selling shareholder, any affiliated
purchasers and any broker-dealer or other person who participates in such
distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the Common Stock.
It is anticipated that Infinity will offer all of the Shares for sale.
Further, because it is possible that a significant number of Shares could be
sold at the same time hereunder, such sales, or the possibility thereof, may
have a depressive effect on the market price of the Company's Common Stock.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby
will be passed upon for the company and Infinity by Piper & Marbury L.L.P.,
New York, New York.
EXPERTS
The audited financial statements of the Company at August 31, 1996 and
1995, and for each of the two years in the period ended August 31, 1996,
incorporated in this prospectus and registration statement, to the extent and
for the periods indicated in its report, have been audited by Goldman &
Murphy, LLP, independent public accountants, and are incorporated herein in
reliance upon the authority of said firm as experts in accounting and
auditing in giving said report.
No dealer, salesperson or other individual has been authorized to give
any information or to make any representations not contained in, or
incorporated by reference in, this prospectus, in connection with the
offering covered by this prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by the
Company, Infinity, or any selling agent. This prospectus does not constitute
an offer to sell, or a solicitation of an offer to buy, the Common Stock in
any jurisdiction where, or to any person to whom, it is unlawful to make such
offer or solicitation. Neither the delivery of this prospectus nor any sale
made hereunder shall, under any circumstances, create an implication that
there has not been any change in the facts set forth in this prospectus or
incorporated by reference herein or in the affairs of the Company since the
date hereof.
Page
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE(S)
Consolidated Financial Statements for the
Nine-Months Ended May 31, 1997 and May 31, 1996 (Unaudited):
Consolidated Balance Sheets as of May 31, 1997
and August 31, 1996...............................F-2 to F-3
Consolidated Statements of Operations for the nine-month periods
ended May 31, 1997 and May 31, 1996......................F-4
Consolidated Statements of Stockholders' Equity for the
nine-month period ended May 31, 1997.....................F-5
Consolidated Statements of Cash Flows for the nine-month periods
ended May 31, 1997 and 1996.......................F-6 to F-7
Selected Notes to the Consolidated Financial StatementsF-8 to F-10
Consolidated Financial Statements for the
Fiscal Years Ended August 31, 1996 and 1995 (Audited):
Independent Auditors' Report............................F-11
Consolidated Balance Sheets as of August 31, 1996 and 1995F-12 to F-13
Consolidated Statements of Operations for
the years ended August 31, 1996 and 1995................F-14
Consolidated Statements of Stockholders'
Equity for the years ended August 31, 1996 and 1995.....F-15
Consolidated Statements of Cash Flows for
the years ended August 31, 1996 and 1995................F-16
Notes to the Consolidated Financial Statements..F-17 to F-33
Page
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Nine Months
Ended Year Ended
May 31, 1997 August 31,
1996
(Unaudited) (Audited)
A S S E T S
CURRENT ASSETS
Cash and Cash Equivalents.............. $ 0 $ 2,061,474
Accounts Receivable - Trade, Net of
Allowances for $2,084,291 1,628,070
Uncollectible Receivables of $227,869..
Rent Receivable........................ 0 122,497
Other Receivable....................... 14,756 4,798
Inventory.............................. 297,526 251,450
Prepaid Expenses....................... 209,329 195,361
Prepaid Income Taxes................... 6,558 6,558
TOTAL CURRENT ASSETS.................. 2,612,461 4,270,208
NET DEFERRED TAX ASSET................ 612,406 612,406
PROPERTY, PLANT AND EQUIPMENT - NET
Land .................................. 894,000 894,000
Property, Plant and Equipment ......... 11,715,092 10,952,437
TOTAL PROPERTY, PLANT AND EQUIPMENT -
NET................................... 12,609,092 11,846,437
OTHER ASSETS
Note Receivable........................ 377,902 80,000
Note Receivable - Related Party........ 2,963,563 1,355,516
Intangible Assets - Net................ 1,650,429 1,098,629
Deposits............................... 2,045 2,045
TOTAL OTHER ASSETS.................... 4,993,939 2,536,250
TOTAL ASSETS.......................... $ 20,827,897 $ 19,265,301
See Selected Notes to Consolidated Financial Statements
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<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Nine Months Year Ended
Ended August 31,
May 31, 1997 1996
(Unaudited) (Audited)
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts Payable - Trade...................... $ 838,087 $ 545,595
Cash Overdraft................................ 97,244 -0-
Current Portion of Long-Term Debt............. 325,189 284,802
Customer Credit Balances Payable.............. 67,251 105,791
Accrued Expenses.............................. 111,674 171,740
Sales Tax Payable............................. 20,555 17,371
Deferred Revenue - Service Contracts.......... 451,262 13,760
Security Deposits Payable..................... 253,995 259,558
Income Taxes Payable.......................... 9,855 10,454
Note Payable - Officer........................ 77,900 80,000
Note Payable.................................. 189,000 -0-
Pension Payable............................... 15,288 5,097
TOTAL CURRENT LIABILITIES.................... 2,457,298 1,494,168
LONG-TERM LIABILITIES
Private Placement Notes....................... 318,426 321,426
Long-Term Debt................................ 2,334,641 2,348,565
TOTAL LONG-TERM LIABILITIES.................. 2,653,067 2,669,991
TOTAL LIABILITIES............................ 5,110,365 4,164,159
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 567,085 and 572,246 Shares Issued
and Outstanding as of May 31, 1997 and August 31, 1996, Respectively
($4,434,908 aggregate liquidation preference)
................................................... 567 572
Common Stock, $.001 Par Value, 50,000,000 Shares Authorized,
4,073,601 and 3,491,340 Shares Issued and Outstanding as of
May 31, 1997 and August 31, 1996, Respectively
................................................. 4,074 3,492
Paid in Capital: Preferred................... 3,802,633 3,815,328
Common (As restated in 1995) (Note 17)........ 5,486,788 4,896,947
Retained Earnings (Note 17)................... 5,359,301 5,320,634
TOTAL STOCKHOLDERS' EQUITY (Note 17)......... 14,653,363 14,036,973
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (Note 17) $ 20,827,897
$19,265,301
See Selected Notes to Consolidated Financial Statements
Page __
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Nine Months Ended
May 31, 1997 May 31, 1996
Sales...........................................$14,610,917 $12,032,368
Cost of Sales...................................11,315,668 8,495,314
GROSS PROFIT.................................... 3,295,249 3,537,054
Selling, General & Administrative Expenses...... 2,646,056 2,059,844
Management Fee, Related Party................... 270,000 270,000
Net Rental Expense (Income)..................... (431,801) (309,343)
Royalty Fee..................................... 78,750 64,524
Depreciation & Amortization..................... 575,432 461,992
INCOME FROM OPERATIONS....................... 156,812 990,037
OTHER INCOME AND (EXPENSES)
Interest Income.............................. 85,446 43,834
Interest Expense............................. (272,742) (295,433)
Other Income................................. 13,513 18,345
NET INCOME BEFORE TAXES...................... (16,970) 756,783
PROVISION FOR INCOME TAXES:
Current...................................... 0 257,307
Deferred..................................... 0 6,984
NET INCOME BEFORE EXTRAORDINARY ITEM (Note 17) (16,970) 492,492
EXTRAORDINARY ITEM-Gain from the sale of customer list
less applicable income taxes of.............. 113,815 0
NET INCOME .................................. $ 96,845 $ 492,492
Net Income Per Share (Note 20)
Primary EPS.................................. ($0.04) $0.13
Fully Diluted EPS............................ ($0.04) $0.13
Weighted Average Number of Common and Common
Equivalent Shares Outstanding:.....PEPS 4,756,895 3,342,874
FDEPS................. 4,947,112 3,342,874
See Selected Notes to Consolidated Financial Statements
Page __
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK TOTAL
$.001 PAR VALUE $.001 PAR VALUEPAID IN RETAINED STOCKHOLDERS'
ISSUED AMOUNT ISSUED AMOUNT CAPITAL EARNINGS EQUITY
Balances at
August 31, 1996 572,246 $572 3,491,340 $3,492 $8,712,275 $5,320,634 $14,036,973
Cash Dividends
Declared: Preferred,
Series A
$0.2250 per share 0 0 0 0 0 (56,706) (56,706)
Cash Dividends Declared:
Preferred, Series B 0 0 0 0 0 (1,472) (1,472)
Employee Compensation January 1997,
$.50 per share....... 0 0 20,000 20 9,980 0 10,000
Common Shares issued
for acquisition on
Sept. 1, 1996 at
$1.9375 per share 0 0 200,000 200 387,300 0 387,500
Conversion of Preferred Shares to
Common...........(5,161) (5) 162,261 162 1,315 0 1,472
Deferred Expense
Stock Warrants 0 0 0 0 78,750 O 78,750
Common Shares issued to an employee
for future services 0 200,000 200 99,800 0 0 100,000
Net Income -
May 31, 1997 0 0 0 0 0 96,845 96,845
Balances at
May 31, 1997 567,085 567 4,073,601 4,074 9,289,420 5,359,301 14,653,362
Page __
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
May 31, 1997 May 31, 1996
Cash Flows from Operating Activities:
Net Income................................... $ 96,845 $ 492,493
Adjustments to Reconcile Net Income to Net Cash Used in
Operating Activities Depreciation and Amortization 575,432
461,992
Amortization of Deferred Expense - Trademark. 78,750
Bad Debts Provisions......................... 0
(Increase) Decrease in Accounts Receivable. (343,685) (396,782)
(Increase) Decrease in Stock Subscription Receivable 0
(4,500,000)
(Increase) Decrease In Inventory............. (46,076) (53,118)
(Increase) Decrease in Prepaid Expenses...... (13,968) (221,550)
(Increase) Decrease in Deposits.............. 0 (325)
Increase (Decrease) in Accounts Payable - Trade &
Accrued Expenses............................. 232,426 (14,947)
Increase (Decrease) in Sales Taxes........... 3,184 6,131
Increase (Decrease) in Customer Credit Balances Payable(38,540) (4,251)
Increase (Decrease) in Pension Plan Payable. 10,191
Increase (Decrease) in Excise and Other Taxes Payable (599)
Increase (Decrease) in Deferred Revenues..... 437,502 (6,798)
Increase (Decrease) in Income Taxes Payable.. 17,791
Increase (Decrease) in Note Payable - Officer 186,900
(Increase) Decrease in Deferred Registration Cost
(Increase) Decrease in Discount on Notes Payable
12,363
Increase (Decrease) in Security Deposits Payable (5,563)
TOTAL ADJUSTMENTS............................1,075,954 (4,699,494)
Net Cash Provided (Used) By Operations.......1,172,799 (4,207,001)
Cash Flows From Investing Activities:
Intangible Assets............................ (627,966)
Acquisition of Property and Equipment........(1,261,921) (1,876,569)
Acquisition of Land..........................
Advances in Note Receivable - ATI............(1,607,987) 1,189,082
Repayment in Note Receivable - ATI........... 0
Net Cash Provided (Used) by Investing Activities (3,497,874)
(687,487)
Cash Flows From Financing Activities:
Preferred Dividends.......................... (58,178) (56,707)
Increase(Decrease) in Long Term Debt......... 260,489 0
Payments of Long Term Debt................... (237,024) 223,546
Proceeds From Capital Contribution........... 201,070 4,744,512
Increase(Decrease) in Cash Overdraft......... 97,244 0
Net Cash provided by Financing Activities....... 263,601 4,911,351
Net Increase (Decrease) in Cash.................(2,061,474) 16,863
Cash and Cash Equivalent at Beginning of Period 2,061,474 0
Cash and Cash Equivalent at End of Period.... $0 $16,863
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Year for:
Interest Expense.............................$ 272,742 $ 295,433
Income Taxes................................. 0 0
Acquisition of Property & Equipment..........1,261,921 436,569
Acquisition of Land.......................... 0 0
Non Cash Transaction:
Acquisition of Property & Equipment..........$ 387,500 0
Acquisition of Land.......................... 0 0
<PAGE>
Selected Notes to Consolidated Financial Statements
Nine Months Ended May 31, 1997
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed financial statements are not audited for the
interim period, but include all adjustments (consisting of only normal
recurring accruals) which management considers necessary for the fair
presentation of results at May 31, 1997.
Moreover, these financial statements do not purport to contain complete
disclosures in conformity with generally accepted accounting principles and
should be read in conjunction with the Company's audited financial statements
at, and for the fiscal year ended, August 31,1996 contained in the Company's
Annual Report on Form 10-KSB dated January 15, 1997.
The results reflected for the nine month period ended May 31, 1997 are
not necessarily indicative of the results for the entire fiscal year ending
August 31, 1997.
Note 2 - OPTIONS AND WARRANTS
The following table sets forth the options and warrants of the Company
as of May 31, 1997:
Amount Term Issue Date Exercise Price ($)
297,125 5 yrs. 03/05/96 60% of market
10,000 5 yrs. 11/04/96 .3125
15,000 5 yrs. 11/05/96 1.000
1,200,000 5 yrs. 11/14/96 .3125
225,000 5 yrs. 01/10/97 .3125
90,000 5 yrs. 02/18/97 .3125
400,000 5 yrs. 02/27/97 .4100
Note 3 - COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of net income (loss) per
common share for Halstead Energy Corp. as contained in the consolidated
statement of operations for the nine months ended May 31, 1997:
Nine Months Ended
May 31,
1997 1996
Net Income (loss) applicable to
Common Stock 96,845 492,492
Preferred Stock Dividends:
Declared (58,178) (56,706)
Undeclared (cumulative) (263,694) -0-
Interest expense reduction 14,937 -0-
Net income (loss) applicable to
Common Stock (210,090) 435,786
Weighted average shares of Common
Stock outstanding 3,928,036 3,342,874
Common Stock Equivalents (3)1,387,600 0
Less - Shares assumed to be repurchased
under the modified treasury stock method(558,741) 0
Other potentially dilutive securities: 0 0
Weighted average shares of Common
Stock outstanding and Common Stock
equivalents 4,756,895 3,342,874
Primary Earnings Per Share ($0.04) $0.13
Net Income (loss) applicable to
Common Stock 96,845 492,492
Preferred Stock Dividends:
Declared (58,178) (56,706)
Undeclared (cumulative) (263,694) -0-
Interest expense reduction 14,937 -0-
Net income (loss) applicable to
Common Stock (210,090) 435,786
Weighted average shares of Common
Stock outstanding 3,928,036 3,342,874
Common Stock Equivalents (3)1,387,600 0
Less - Shares assumed to be repurchased
under the modified treasury stock method(558,741) 0
Other potentially dilutive securities: 0 0
Weighted average shares of Common
Stock outstanding and Common Stock
equivalents 4,756,895 3,342,874
Fully-Diluted Earnings Per Share($0.04) $0.13
(1) Assumes conversion of 168,020 shares of Series A Preferred Stock into
168,020 shares of Common Stock and also assumes conversion of Series B
Preferred Stock into 22,197 shares of common stock based on 4.99%. Limit
of the outstanding amount of common shares of 4,073,601 for a total of
203,273 shares minus the shares previously issued of 18,815 and 162,261
respectively.
(2) For fully diluted earnings per share the converted preferred stock is
antidilutive and conversion is not assumed because the amount of the
dividend paid or declared for the current period per common share
obtainable on conversion exceeds the earnings per share amount without
conversion.
(3) Only options and warrants that have had their exercise price below the
closing market price for three consecutive months are included as common
stock equivalents.
Note 4 - NOTE RECEIVABLE - RELATED PARTY
On June 10, 1997, A. Tarricone, Inc. (ATI) filed a voluntary petition
for reorganization pursuant to Chapter 11 of the Bankruptcy Code (the
"Code"). ATI has continued in possession of its property and in the
management of its affairs as a debtor-in-possession under the applicable
provisions of the Code. In connection with the bankruptcy proceeding, the
Company has asserted (and ATI has acknowledged) pre-petition claims arising
under the note receivable from ATI in the approximate amount of $2,963,563
and pre-petition liens on certain leasehold interests. The proceeding is
before the United States Bankruptcy Court, Southern District of New York, and
is referenced as "A. TARRICONE, INC., 97B21488." As the voluntary petition
was only recently filed by ATI, and as the proceeding is in an early stage,
it would be difficult to determine at this time the likelihood of recovery by
the Company of such indebtedness. In any event, there can be no assurance
that the indebtedness and the liens asserted by the Company in this
proceeding will be recognized or given full effect, that the same will not be
challenged, modified or reduced, or that all or any portion of such
indebtedness will be repaid to the Company. Furthermore, the Company has
determined that its asserted pre-petition liens may not have been properly
"perfected," in which case the Company would be deemed an unsecured creditor
(rather than a secured creditor) in the proceeding. The Company intends to
pursue all appropriate avenues (if any) to protect its interests in this
regard. If it were ultimately determined by the court that the Company's
status in the proceeding is that of an unsecured creditor, the Company's
legal basis for recovery would be materially, adversely affected.
Additionally, all executory contracts between ATI and the Company are
susceptible to rejection, at the election of ATI, under the applicable
provisions of the Code. Furthermore, any transfers from ATI to the Company
on account of antecedent debt (of ATI to the Company) during the one-year
period prior to the date of filing of ATI's voluntary petition may be suject
to avoidance under the applicable provisions of the Code. The occurrence of
any such circumstances may have a material adverse effect on the Company.
<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
for errors 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 - 13
- ------------------------------------------------------------------------------
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 Equivalents.............. $ 2,061,474 $ -0-
Accounts Receivable - Trade, Net of
Allowances for
Uncollectible Receivables of $227,869 1,628,070 1,349,351
and $189,817,
respectively (Note 2)..................
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)...... 612,406 716,162
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 EQUIPMENT -
NET................................... 11,846,437 10,518,042
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
<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 $15,287,915
See Notes to Consolidated Financial Statements
Page __
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
August 31,
1996 1995
As Restated As Restated
Sales...........................................$ 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
Page __
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK TOTAL
$.001 PAR VALUE $.001 PAR VALUEPAID 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 $14,036,973
See Notes to Consolidated Financial Statements
Page __
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31,
1996 1995
As Restated As Restated
Cash Flows from Operating Activities:
Net Income (Note 17).........................$ 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 Activi 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 (see 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 (see Note 14(D)).
On June 8, 1995 the company issued preferred stock to acquire White Plains
Fuel, Inc., valued at $1,064,169 (see Note 14(B)).
See Notes to Consolidated Financial Statements
Page __
<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.
(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).
(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 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
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
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. See "Risk
Factors--ATI Bankruptcy."
August 31,
1996 1995
Note Receivable - Related Party$ 1,355,576$ 1,192,386
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
(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 of 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 (see Note 7).
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 of 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.
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
Note 12 - RELATED PARTY TRANSACTIONS
(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 stockholders, 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. This agreement was terminated subsequent to fiscal 1996.
(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
________________________
(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.
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.
(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 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
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 Purposes2,395,322
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)
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) $984,477
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) 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
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 stockholders.
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)).
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.
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.
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 SmallCap Market.
Page __
<PAGE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained
in this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its
date. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities other than the registered securities to
which it relates. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy such securities in any circumstances in which
such offer or solicitation is unlawful.
Until ____________, 1997, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may
be required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as Underwriters and with respect
to their unsold allotments or subscriptions.
TABLE OF CONTENTS
Page
Prospectus Summary 3
Risk Factors 4
Use of Proceeds 9
Management's Discussion and 9
Analysis of Financial
Condition and Results of
Operations
Description of Business 14
Description of Property 20
Legal Proceedings 21
Management 22
Executive Compensation 23
Certain Relationships and
Related Transactions 26
Security Ownership of Certain
Beneficial Owners and
Management 28
Selling Stockholders 30
Description of Securities 30
Market for Common Equity and
Related Stockholder Matters 33
Plan of Distribution 34
Index to Consolidated Financial F-1
Statements
Page __
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Under Section 78.751 of the Nevada General Corporation Law, as amended,
a director, officer, employee or agent of a Nevada corporation may be
entitled to indemnification by the corporation under certain circumstances
against expenses, judgments, fines and amounts paid in settlement of claims
brought against them by a third person or by or in right of the corporation.
The Company is obligated under its Articles of Incorporation to
indemnify any of its present or former directors who served at the Company's
request as a director, officer or member of another organization against
expenses, judgments, fines and amounts paid in settlement of claims brought
against them by a third person or by or in right of the corporation if such
director acted in good faith or in a manner such director reasonably believed
to be in, or not opposed to, the best interests of the Company and, with
respect to any criminal action or proceeding, if such director had no reason
to believe his or her conduct was unlawful. However with respect to any
action by or in the right of the Company, the Articles of Incorporation
prohibit indemnification in respect of any claim, issue or matter as to which
such director is adjudged liable for negligence or misconduct in the
performance is his or her duties to the Company, unless otherwise ordered by
the relevant court. The Company's Articles of Incorporation also permit it
to indemnify other persons except against gross negligence or willful
misconduct.
The Company is obligated under its bylaws to indemnify its directors,
officer and other persons who have acted as a representatives of the Company
at its request to the fullest extent permitted by applicable law as in effect
from time to time, except for costs, expenses or payments in relation to any
matter as to which such officer, director or representative is finally
adjudged derelict in the performance of his or her duties, unless the Company
has received an opinion from independent counsel that such person was not so
derelict.
In addition, pursuant to indemnification agreements that the Company
has entered into with each of its directors, the Company has agreed to
indemnify its directors to the fullest extent permitted by applicable
corporate law and its Articles of Incorporation. The indemnification
agreements also provide that, upon the request of a director and provided
that director undertakes to repay amounts that turn out not to be
reimbursable, that director is entitled to reimbursement of litigation
expenses in advance of the final disposition of the legal proceeding.
The Nevada General Corporation Law, as amended, also permits a
corporation to limit the personal liability of its officers and directors for
monetary damages resulting from a breach of their fiduciary duty to the
corporation and its stockholders. The Company's Articles of Incorporation
limit director liability to the maximum extent permitted by The Nevada
General Corporation Law, which presently permits limitation of director
liability except (i) for a director's acts or omissions that involve
intentional misconduct, fraud or a knowing violation of law and (ii) for a
director's willful or grossly negligent violation of a Nevada statutory
provision that imposes personal liability on directors for improper
distributions to stockholders. As a result of the inclusion in the Company's
Articles of Incorporation of this provision, the Company's stockholders may
be unable to recover monetary damages against directors as a result of their
breach of their fiduciary duty to the Company and its stockholders. This
provision does not, however, affect the availability of equitable remedies,
such as injunctions or rescission based upon a breach of fiduciary duty by a
director.
The Company currently maintains liability insurance in the amount of
$1,000,000 for the benefit of its officers and directors.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses, other than underwriting discounts and
commissions, in connection with the Offering are as follows:
SEC Registration Fee.............................. $ 1,500*
Nasdaq Fees....................................... *
Blue Sky Fees and Expenses........................ 20,000*
Printing Expenses................................. *
Legal Fees and Expenses........................... 15,000*
Accounting Fees and Expenses...................... 5,000*
Transfer Agent Fees and Expenses.................. 100*
Miscellaneous..................................... *
================
$ *
================
__________
*Estimated.
Item 26. Recent Sales of Unregistered Securities.
The following securities of the Company were sold by the Company during
the past three years without being registered under the Securities Act:
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. The securities issued in this private
transaction were exempt from registration under Section 4(2) of the
Securities Act.
The Company received $974,998.50 from the proceeds of the private sale
pursuant to Regulation D of 557,142 shares of Common Stock at a price of
$1.75 per share. Included as additional paid in capital were $35,000 of
legal expenses associated with the private placement memorandum and
commission expenses of $48,750.
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 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 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 SmallCap stock market for the five trading days immediately preceding
the date of the exercise of the warrant. The warrants provide that 59,425
were immediately vested on March 5, 1996, an additional 59,425 vested on
March 5, 1997, and the balance become vested in three equal annual
installments. The market price at issuance was $4.30 per share. The
securities issued in this private transaction were exempt from registration
under Section 4(2) of the Securities Act.
On 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 to potential
foreign investors pursuant to Regulation S. The Company received proceeds,
net of commissions of $630,000, equal to $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 Common Stock.
On September 5, 1996, the Company acquired the customer list of Dino
Oil, Inc. in exchange for 200,000 shares of the Company's Common Stock at
$1.9375 per share, $100,000 cash and certain costs of $56,957.
In March 1995 and March 1996, the Company issued 1,925 and 2,250 shares of
Common Stock, respectively, at a price of $2.50 and $5.38 per share, as
employee compensation.
In January 1997, the Company issued 200,000 shares of Common Stock to
an employee at a price of $0.50 per share. The Company also issued 22,500
shares of Common Stock in August 1996 and an additional 22,500 shares of
Common Stock in September 1997, in each case at a price of $2.00 per share, to
Donnie and Vito Tarricone in private transactions.
Item 27. Exhibits.
Exhibit
Number Description
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 of Amendment and Restatement to 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***
4.4 Halstead Energy Corp. Amended and Restated 1996 Stock
Option Plan****
5 Opinion of Piper & Marbury L.L.P. (contains Consent of
Counsel)
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.**
10.12 Consulting and Warrant Compensation Agreement between the
Company and Boulder Financial Group.****
10.13 Restructuring Agreement, dated September 24, 1997, by and
among the Company, Infinity Investors Limited, Claire E.
Tarricone, Anthony J. Tarricone and Joseph A. Tarricone.
10.14 12% Subordinated Promissory Note of the Company dated
September 24, 1997.
21.1 Subsidiaries of the Small Business Issuer**
23.1 Consent of Piper & Marbury L.L.P. (contained in Exhibit 5)
23.2 Consent of Goldman & Murphy, L.L.P.
___________________________
* 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 on July 15, 1996.
**** Incorporated by reference to the Company's Registration Statement on
Form S-8 filed with the SEC on September 10, 1997.
__________________________
Item 28. Undertakings.
(a) The undersigned registrant hereby undertakes to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement to:
(i) include any prospectus required by section 10(a)(3) of
Securities Act of 1933, as amended (the "Securities Act");
(ii) reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the high or low end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii) include any additional or changed material
information on the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.
PROVIDED HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii)
do not apply if the information required to be included in
a post-effective amendment by those paragraphs is contained
in periodic reports filed by the Company pursuant to
Section 13 or Section 15(d) of the Exchange Act of 1934
that are incorporated by reference in the Registration
Statement.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise,
the Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(c) The Company hereby undertakes that it will:
(1) For determining any liability under the Securities
Act, treat the information omitted from the form of Prospectus
filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of Prospectus filed by the
Company under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the
time the Securities and Exchange Commission declared it effective.
(2) For determining any liability under the Securities
Act, treat each post-effective amendment that contains a form of
Prospectus as a new registration statement for the securities
offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of
those securities.
Page __
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
City of Mount Kisco, State of New York, on October 15, 1997.
HALSTEAD ENERGY CORP.
By /s/ Claire E. Tarricone
---------------------------------
Claire E. Tarricone
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
and on the dates stated.
/s/ Claire E. Tarricone President and Director October 15, 1997
Claire E. Tarricone
/s/ Anthony J. Tarricone Vice President, Secretary October 15, 1997
Anthony J. Tarricone and Director
/s/ Joseph A. Tarricone Vice President, Treasurer October 15, 1997
Joseph A. Tarricone and Director
Page __
<PAGE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
HALSTEAD ENERGY CORP.
__________
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Page __
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
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 of Amendment and Restatement to 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***
4.4 Halstead Energy Corp. Amended and Restated 1996 Stock
Option Plan****
5 Opinion of Piper & Marbury L.L.P. (contains Consent of
Counsel)*****
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.**
10.12 Consulting and Warrant Compensation Agreement between the
Company and Boulder Financial Group.****
10.13 Restructuring Agreement, dated September 24, 1997, by and
among the Company, Infinity Investors Limited, Claire E.
Tarricone, Anthony J. Tarricone and Joseph A. Tarricone.*****
10.14 12% Subordinated Promissory Note of the Company dated
September 24, 1997.*****
21.1 Subsidiaries of the Small Business Issuer**
23.1 Consent of Piper & Marbury L.L.P.
(contained in Exhibit 5)*****
23.2 Consent of Goldman & Murphy, L.L.P.
___________________________
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's Registration Statement on Form
SB-2 filed with the SEC on November 19, 1993.
** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's Annual Report on Form 10-KSB filed
with the SEC on December 14, 1996.
*** Previously filed with the Commission as Exhibits to, and
incorporated herein by reference from, the Company's Quarterly Report on
Form 10-QSB filed with the SEC on July 15, 1996.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's Registration Statement on Form S-8
filed with the SEC on September 10, 1997.
***** To be filed by amendment.
EXHIBIT 23.2
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 Prospectus.
GOLDMAN & MURPHY, LLP
/s/ Goldman & Murphy, LLP
Valley Stream, New York
October 10, 1997
